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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21534
CHILDREN'S BROADCASTING CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MINNESOTA 41-1663712
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
724 FIRST STREET NORTH, MINNEAPOLIS, MINNESOTA 55401
(Address of Principal Executive Offices, including Zip Code)
(612) 338-3300
(Issuer's Telephone Number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($.02 PAR VALUE)
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes /X/
No / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
The issuer's revenues for its most recent fiscal year were $5,654,938.
The aggregate market value of the voting stock held by non-affiliates of
the issuer as of March 25, 1997 was approximately $18,140,184.
The number of shares of the common stock of the issuer outstanding as of
March 25, 1997 was 6,029,393.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the document listed below have been incorporated by
reference to the indicated part of this Form 10-KSB.
DOCUMENT INCORPORATED BY REFERENCE PART OF FORM 10-KSB
Proxy Statement for 1997 Item 10 of Part III
Annual Meeting of Shareholders
to be held July 16, 1997
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TABLE OF CONTENTS
Page
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CAUTIONARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . 7
ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . 20
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . 21
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 21
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . 56
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934. . . . . . . . . . . . . . . . . . . 56
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . 58
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 58
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . 60
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . 61
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CAUTIONARY STATEMENT
CHILDREN'S BROADCASTING CORPORATION (THE "COMPANY"), OR PERSONS ACTING ON
BEHALF OF THE COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING
STATEMENTS ON BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S
SECURITIES, FROM TIME TO TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING
STATEMENTS" AS DEFINED UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 (THE "LITIGATION REFORM ACT"). THIS CAUTIONARY STATEMENT, WHEN USED IN
CONJUNCTION WITH AN IDENTIFIED FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF
QUALIFYING FOR THE "SAFE HARBOR" PROVISIONS OF THE LITIGATION REFORM ACT AND IS
INTENDED TO BE A READILY AVAILABLE WRITTEN DOCUMENT THAT CONTAINS FACTORS WHICH
COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS.
THESE FACTORS ARE IN ADDITION TO ANY OTHER CAUTIONARY STATEMENTS, WRITTEN OR
ORAL, WHICH MAY BE MADE, OR REFERRED TO, IN CONNECTION WITH ANY SUCH FORWARD-
LOOKING STATEMENT.
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON
THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS.
ACQUISITIONS. One of the Company's strategies used to expand its
national network of radio stations broadcasting Aahs World Radio-TM*- is to
acquire AM radio broadcast licenses ("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 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.
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,
the Company incurred net losses of $6,108,000 and $9,868,000, 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 for 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 credit facilities (the "Facilities") established through
an agreement (the "Credit Agreement") with Foothill Capital Corporation
("Foothill"). 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 its
recurring losses and negative cash flow from operations. As of December 31,
1996, the Company had an accumulated deficit of $26,304,000 and has used
approximately $17,834,000 of cash to fund its losses.
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* Children's Broadcasting Corporation has applied for a trademark for
Aahs World Radio-TM-.
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The Company recently raised a total of $12,500,000 of capital through the
Credit Agreement with Foothill. 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 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.
RECENT FINANCING. The Company entered into the Credit Agreement with
Foothill to address the Company's working capital requirements through the
creation of three 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. Approximately $4,000,000 of the loan
proceeds were initially held back by Foothill pending performance by the
Company of certain post-closing conditions. At March 15, 1997, the remaining
proceeds available under the Term Loan totaling $1,500,000 are being held
back by Foothill subject to the Company's completion of certain post-closing
conditions which management expects to occur in the second quarter of 1997.
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 financial 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.
SUBSTANTIAL LEVERAGE; ADDITIONAL FINANCING REQUIREMENTS. As of December
31, 1996, the Company's consolidated indebtedness approximated 49% of the sum
of its shareholders' equity and consolidated indebtedness, assuming
performance by the Company of certain post-closing conditions resulting in
full funding under the Facilities. 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 registered pursuant to the
Company's Registration Statement on Form S-4 (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
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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. 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. 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 March 24,
1997, the Company had 29 affiliates. In cases where the Company deems it
appropriate, it intends to seek affiliates by entering into affiliation
agreements or local marketing agreements ("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, the Company's network generated revenue
totaling $1,594,000. 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 format. For the years ended December 31, 1995 and 1996,
approximately 42% and 38% respectively, of the Company's revenue was derived
from its radio stations which do not carry the Aahs World Radio format:
KTEK-AM, Houston, Texas, KCNW-AM, Kansas City, Kansas, WZER-AM, Milwaukee,
Wisconsin and KYCR-AM, Minneapolis, Minnesota. For the years in the two year
period ended December 31, 1996, the Company derived approximately 13% and 12%
respectively, of its revenue from KTEK-AM; approximately 9% and 9%
respectively, of its revenue from KCNW-AM; approximately 11% and 8%
respectively, of its revenue from WZER-AM; and approximately 9% and 9%
respectively, of its revenue from KYCR-AM. If the Company converts any of
these stations to the Aahs World Radio format, its revenue may be negatively
affected until a new advertising base is developed for the Aahs World Radio
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
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RBLs which would enable it to broadcast in each of the top 15 United States
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
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 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 the Aahs World 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. 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. On November 15,
1996, the Securities
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and Exchange Commission (the "Commission") declared effective the Company's
Registration Statement on Form S-3 which registered 200,000 shares of Common
Stock on behalf of the Company's 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 Radio.
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 Radio
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 has 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 12 weeks of 1997, the
Company's Common Stock has ranged from $6.63 on January 13, 1997 to $3.25 on
March 18, 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. The Company had
approximately 5.8 million shares of Common Stock outstanding as of December 31,
1996, and had warrants and options outstanding to purchase additional Common
Stock outstanding totaling approximately 2.6 million common shares exercisable
at prices ranging from $2.00 to $13.80 per share. On July 11, 1996, the
Commission declared effective the Company's Registration Statement on Form S-3
which registered for a secondary offering 1.6 million common shares. On
November 15, 1996, the Commission declared effective the Company's Registration
Statement on Form S-3, as amended, which registered for a secondary offering 1.1
million common shares. On February 11, 1997, the Commission declared effective
the Company's Registration Statement on Form S-3, as amended, which registered
0.5 million common shares and the Company's Registration Statement on Form S-4,
as amended, which registered 5.0 million common shares and $5,000,000 of Debt
Securities. The sale of such shares 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.
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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.
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.
CONTROL BY PRINCIPAL SHAREHOLDERS. Approximately 34% 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
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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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
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 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
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.
The Company's growth strategy includes the acquisition of 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 recently completed 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
United States' population and has a presence in the top four markets and
seven of the top ten markets in the United States.
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 it
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 address is:
www.netradioaahs.net.
MARKET OVERVIEW
Children represent a significant market for advertisers and
broadcasters. The continued rise in birth rates coupled with the
increasingly significant purchasing power of children, has resulted in
additional advertising expenditures being committed to this market segment.
Today, there are over 49 million children in the U.S. under the age of 13,
representing approximately 19% of the total population. The number of U.S.
births has grown steadily, exceeding 4 million in 1991, a trend that has
continued through the mid-1990s. Independent research indicates that
children have approximately $20 billion of income each year, spend
approximately $17 billion and directly influence expenditures by adults in
excess of $150 billion annually.
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Television commands a dominant share of total measured media directed
toward children. In 1996, television attracted approximately $700 million of
the $1 billion estimated to have been spent on advertising targeting
children. Spending by national advertisers for television commercials
targeting children has grown at an average annual rate of over 19% since
1983. This growth coincides with the appearance of new TV networks which
provide children's programming. While children's programming was limited to
Saturday mornings in the past, at present there are three primary television
networks dedicated to children's programming: Fox Children's Network,
Nickelodeon and The Cartoon Network. Major advertisers to children on
television include Kelloggs, Mattel, Hasbro and M&M/Mars.
Other forms of advertising such as magazine, newspaper, billboard and
point of purchase accounted for the remaining $300 million of advertising to
children in 1996. Some of the major magazine publications to kids include
Sports Illustrated for Kids, Disney Adventure Magazine, Nickelodeon and
Sesame Street. The top five spending categories in children's magazines are
sporting goods, toys and games, publishing and media, food and direct
response. These major advertisers include Disney, General Mills, Campbell
Soup, Time Warner and Kelloggs.
Prior to the Company's development of Aahs World Radio, there was no
full-time radio service specifically designed for pre-teenage children.
Pre-teens represent approximately 19% of the population, and parents of
pre-teens represent another 26% of the total population, bringing the
Company's potential listening audience to approximately 45% of the U.S.
population. In Minneapolis, where the Company's programming has been
available for over five years, research conducted by Arbitron in late 1993
shows that 91% of children listen to radio. In addition, this research has
also shown that one-third of all listening to Aahs World Radio programming is
by a child or children in the company of at least one parent or other adult.
By providing appealing programming for pre-teens and their parents, the
Company believes it will attract an increasing share of the advertising
expenditures directed toward children.
COMPANY STRATEGY
The Company seeks to attract listeners and advertisers to the Aahs World
Radio 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.
- PROGRAMMING. The Company develops programming which appeals to
children and their parents, as well as to teachers and other influential
adults. By integrating its programming into a 24-hour format, the Company
believes it will be able to build a base of loyal listeners and consequently
enhance the network's appeal to advertisers. In developing its programming,
the Company is guided by focus research, parent surveys, listener feedback
and consultation with educators and other professionals.
- BRAND DEVELOPMENT. The Company seeks to reinforce its listenership
through the development of its brand identity. The Company integrates its
mascot and a cast of other cartoon characters into its programming as well as
complimentary products and services to reinforce the Aahs World Radio brand.
Additionally, the Company utilizes strategic relationships to expand its
brand identity.
- NATIONAL NETWORK. The Company's programming and related branding
efforts are aimed at attracting and sustaining a loyal audience that is
attractive to national advertisers. The Company anticipates that it will
generate significant revenue in the future from the sale of network
advertising time to national advertisers. By increasing the percentage of
the U.S. market covered by Aahs World Radio affiliates, the Company believes
that revenue will
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increase because the increased number of listeners will attract more national
advertisers and the increased advertising demand is expected to increase the
rates the Company will be able to charge for advertising time.
- OWNED AND OPERATED STATIONS. In building a national network, the
Company aims to own and operate radio stations in key U.S. markets. By
owning its stations, the Company is able to (i) generate additional revenue
from the sale of local advertising time, while incurring minimal incremental
operating costs, (ii) promote to potential advertisers and affiliates the
Company's long term commitment to broadcasting the Aahs World Radio format
and (iii) enhance the Company's flexibility to alter the mix of national and
local advertising sales in these key markets. The Company makes its
acquisition decisions based on three factors: (i) the strategic importance of
the particular market and the station, (ii) the cost of the station and
(iii) the Company's availability of capital.
PROGRAMMING
Aahs World Radio 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 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 can be
appealing as well and contributes to the "personality" of the format and to
its differentiation from competing formats.
The programming format is designed to shift throughout the day to
reflect the changing composition of its audience. In order to maximize the
appeal and value of its programming and advertising to the "mix" of adults
and kids, day-part specific programs have been developed which overly the
basic music format. During the weekdays the format includes the following
programs:
- THE ALL-AMERICAN ALARM CLOCK-REGISTERED TRADEMARK-: Aahs World
Radio weekday programming begins with this wake-up show targeted to an
audience comprised of both kids and adults. Aahs World Radio Brain Games,
Aahs World-TM-News, weather reports, birthday greetings and a cast of comic
characters provide the context for a blend of morning music especially
selected to be entertaining for the kids and "ear friendly" for
adults.
- RADIOACTIVE: The four hour mid-day programming on Aahs World Radio
begins with a pop music driven program complete with a variety of
informational and interactive features to get kids involved with their world.
And since it is still mid-morning in the western time zones, the program is
specifically designed to round-out the morning drive while taking the Midwest
and Eastern listeners through the late morning hours with programming that
can only be delivered by Aahs World Radio.
- AVENUE `A'-SM-: Broadcast as a featured element within RadioActive,
Avenue `A' was created to exclusively target the network's youngest
listeners. The ninety minute program consists
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of a mix of catchy children's songs that are not heard at any other times of
the day. In addition, Avenue `A' is populated by a cast of colorful
characters guaranteed to entertain everyone who chooses to listen in. Also
integrated into Avenue `A' is our prime time edition of StoryTime Theater,
when listeners are treated to stories which include fairy tales, classic
adventures, old time radio and great sagas from history. StoryTime Theater
is also repeated each weekday during the late evening hours.
- Absolute K-Aahs-SM-: As the late afternoon passes and the sun begins
to set, the audience composition moves from a mix of adults and kids to an
audience comprised almost exclusively of older kids. Absolute K-Aahs is
targeted to 8-12 years olds with a contemporary presentation featuring some
much of the same hit music offered by other formats but in a context that
kids find more acceptable as well their parents.
- THE BIG SHOW: This high energy afternoon show is targeted to
carpooling parents and kids, and includes a mix of news, amusing features and
music. To balance the presentation of programming in this transitional
day-part, the host of the program is also joined each afternoon by a
different member of the Aahs World Radio AirForce-TM-** ("AirForce"), a group
of announcers ranging in age from 11 to 16.
- THE LATE NIGHT EXPRESS: During the late evening and overnight
hours, Aahs World Radio continues to fulfill its obligations to be there
whenever the radio is turned on by providing an audio "nightlight" for kids
just bedding down or for those who just need a friendly voice in the night.
The weekend officially begins on Friday evening when the traditional
format music rotation is suspended in favor of music programmed by the
network's most active and involved listeners with five continuous hours of
call-in requests and dedications. Saturday morning programming begins early
with a special Saturday edition of The All-American Alarm Clock-Registered
Trademark-followed by Just Kids-Registered Trademark-, which is hosted by
three members of the AirForce. Other weekend features include:
- LIVE FROM UNIVERSAL STUDIOS - HOLLYWOOD AND LIVE FROM UNIVERSAL
STUDIOS - FLORIDA: "Live From Universal Studios - Hollywood" airs every
Saturday from Universal City, California and "Live from Universal Studios -
Florida" broadcasts from Orlando, Florida every Sunday.
- JUST KIDS-REGISTERED TRADEMARK-: This Saturday morning clubhouse
for kids features great music, science and craft projects, news features,
plus interesting and informative guests from astronauts to zoologists.
- AAHS WORLD RADIO COUNTDOWN: This show is presented four times each
weekend and features the top twenty most requested songs from the past week.
- OOHS AND AAHS-SM-: This is the network's version of an oldies show
which airs three times each weekend.
- THE KINETIC CITY SUPER CREW: This science mystery show, produced
by the American Association for the Advancement of Science, also airs twice
each weekend.
- THE WEEKEND JAM: Heard every Saturday evening right after the Aahs
World Radio Countdown. The Weekend Jam is programmed to appeal to
a general audience but especially the more urban and minority dominated
markets around the country.
- -----------------------
**Children's Broadcasting Corporation has applied for a trademark for Aahs
World Radio AirForce-TM-.
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Through the AirForce, kids play an active role in the formulation and
delivery of Aahs World Radio programming. AirForce members work on air,
answer studio request lines and interact with listeners from across the
country providing sustained kid-to-kid communications between the Company and
its audience. Led by the Company's 15-year old Vice President of Fun, the
AirForce has been a focus of national media attention and various members
have appeared on NBC's "Today Show," "Entertainment Tonight," and "The Oprah
Winfrey Show," as well as in feature stories in Newsweek Magazine, the Los
Angeles Times and other nationally-recognized publications. Each of the 20
members of the AirForce undergoes thorough and ongoing training following a
series of auditions, which also include interviews with the child's parents.
Individuals are selected based on what unique contributions the Company
anticipates that he or she can make to the on-air product. Rather than
requiring AirForce members to conform to specific criteria, programming is
created and implemented that complements the talents and qualities of the
individual while still meeting the needs of the overall programming
philosophy and direction.
New programs are constantly being considered for development. Since the
format's inception, more than 20 different long-form (duration greater than
five minutes) and short-form (duration of five minutes or less) programs have
been integrated into the network. Programming ideas come from parents, kids,
staff members, air talent, AirForce members, network affiliates and market
research. These concepts are reviewed by programming management for
entertainment value, sales potential, demographic targeting appeal and
acceptable production costs. A new program's pilot phase can take weeks or
months, depending upon the complexity of the project. The Company currently
has six programs in development.
BRAND DEVELOPMENT
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 its 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. The
following are summaries of the non-programming branding efforts of the
Company:
- AAHS WORLD RADIO AT UNIVERSAL STUDIOS: The Aahs World Radio live
productions from Universal Studios in California and Florida provide exposure
for Aahs World Radio to the weekend visitors to these studios.
- COMMUNITY PROMOTIONS: The Company utilizes its characters in
walk-around roles at public events such as community promotions. By making
character costumes available to affiliates, the Company is able to present a
consistent, physical and interactive image in markets around the country.
- INTERNET SITE (www.netradioaahs.net): Pursuant to three-year
agreements with NetRadio Network, Inc. and Precision Tapes, Inc., the Company
distributes its Aahs World Radio format worldwide 24-hours a day on the
Internet.
- MERCHANDISING: The Company intends to expand its licensing of
trademarks and related intellectual property to manufacturers and
distributors of merchandise, so as to maximize the effectiveness of its
branding efforts. The Company believes that by entering into license
agreements, it will further enhance its brand identity without incurring
costs itself or distracting management's focus from its core business. The
Company would also receive licensing fees from the sale of any such
merchandise. The Company recently entered into a license agreement with
Endless Games to develop a Brain Game board game for children.
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- MAGAZINE PUBLICATION: In March 1995, the Company began publication
of a national music and entertainment magazine for children, RADIO AAHS
MAGAZINE, marketed with a companion compact disc or cassette, which was
distributed by Warner Music Enterprises, a publisher of six other magazines.
The Company believes this represents the first combination of national radio
network broadcasting with an associated magazine and music CD. Time Warner
has since dissolved Warner Music Enterprises, and the Company is currently in
discussions with other magazine publishers regarding the reestablishment of a
Radio AAHS Magazine. The publication of the magazine was suspended in March
1996, and there can be no assurance that the Company will be successful in
creating a venture with another magazine publisher, or that its magazine will
continue to be published.
- PLANET AAHS RECORDS-REGISTERED TRADEMARK-: The Company created its
own record label, Planet AAHS Records-Registered Trademark- and intends to
publish compilations of children's music under this label, further
reinforcing the Company's brand identity.
NATIONAL NETWORK
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 LMAs which the Company may complete or
into which the Company might enter.
Prior to the Company's development of the Aahs World Radio 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 the development of a national radio network
will enable it to expand the listenership of the Aahs World Radio format and
to increase national advertising revenue. The Company intends to gain
listenership by increasing the coverage of the Aahs World Radio network
through affiliation agreements and acquisitions of RBLs primarily in the top
100 U.S. markets. The Company currently distributes its programming to
markets representing approximately 40% of the U.S.
The Company believes that the majority of its revenue will ultimately be
derived from the sale of network advertising time to national advertisers
once the network reaches a minimum of 50% coverage of the nation's
population. The Company believes that its present national advertising
customers will spend a greater proportion of their advertising budgets with
the Company, and that national advertisers who are not presently customers of
the Company will become customers of the Company as it continues to expand
the network's coverage of the U.S.
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The following stations currently comprise the Aahs World Radio network:
<TABLE>
Owned or Operated Aahs World Radio Affiliates (1) Metro Rank(2) Frequency License Renewal
- ------------------------------------------------- ------------- --------- ---------------
<S> <C> <C> <C>
New York, NY (WJDM-AM)(3). . . . . . . . . . . . 1 1660 NA
Los Angeles, CA (KPLS-AM). . . . . . . . . . . . 2 830 12/01/97
Chicago, IL (WAUR-AM). . . . . . . . . . . . . . 3 930 12/01/04
Philadelphia, PA (WPWA-AM) . . . . . . . . . . . 4 1590 08/01/98
Detroit, MI (WCAR-AM). . . . . . . . . . . . . . 6 1090 10/01/04
Dallas/Fort Worth, TX (KAHZ-AM). . . . . . . . . 7 1360 08/01/97
Minneapolis, MN (WWTC-AM). . . . . . . . . . . . 16 1280 04/01/97
Denver, CO (KKYD-AM) . . . . . . . . . . . . . . 23 1340 04/01/97
Kansas City, KS (KCAZ-AM). . . . . . . . . . . . 27 1480 06/01/97
Third Party Aahs World Radio Affiliates Metro Rank(2) Frequency
- --------------------------------------- ------------- ---------
Washington, D.C. (WKDL-AM) . . . . . . . . . . . 8 1050
St. Louis, MO (WFUN-FM). . . . . . . . . . . . . 17 95.5
Baltimore, MD (WKDB-AM). . . . . . . . . . . . . 18 1570
Phoenix, AZ (KIDR-AM). . . . . . . . . . . . . . 20 740
Salt Lake City, UT (KKDS-AM) . . . . . . . . . . 35 1060
Indianapolis, IN (WSYW-AM) . . . . . . . . . . . 36 810
Orlando, FL (WZKD-AM). . . . . . . . . . . . . . 39 950
Memphis, TN (WOWW-AM). . . . . . . . . . . . . . 42 1430
Greenville, SC (WRAH-AM) . . . . . . . . . . . . 59 1360
Tulsa, OK (KXTD-AM). . . . . . . . . . . . . . . 60 1530
Mobile, AL (WBLX-AM) . . . . . . . . . . . . . . 61 660
Albuquerque, NM (KDZZ-AM). . . . . . . . . . . . 69 1520
Des Moines, IA (KKSO-AM) . . . . . . . . . . . . 90 1390
Lafayette, LA (KDYS-AM). . . . . . . . . . . . . 121 1520
Wilmington, NC (WAHH-AM) . . . . . . . . . . . . 154 1340
Anchorage, AK (KYAK-AM). . . . . . . . . . . . . 164 650
Wheeling, WV (WOHZ-AM) . . . . . . . . . . . . . 210 1600
Eau Claire, WI (WEIO-AM) . . . . . . . . . . . . 222 1050
Manassas, VA (WKDV-AM)(4). . . . . . . . . . . . NA 1460
Ventura/Thousand Oaks, CA (KAHS-AM)(5) . . . . . NA 1590
</TABLE>
____________________
(1) The Company also owns or operates other stations which currently do not
broadcast the Aahs World Radio format but which may be converted to that
format in the future.
(2) Source: BIA -- Investing in Radio -- Market Report -- 1995 -- Spring.
Rankings based on total population attributable to given metropolitan
area. The signal of any listed station may not cover households in
certain portions of the market.
(3) The station operates on an Expanded Band frequency pursuant to a Special
Temporary Authority of the FCC.
(4) The Manassas station is included in the Washington, D.C. radio market.
(5) The Ventura/Thousand Oaks station is included in the Los Angeles radio
market.
The Company's programming and affiliation agreements provide for a
maximum of 10 minutes of advertising time each hour. Under the agreements,
the Company is allocated two minutes each hour from each affiliate station to
sell to national advertisers. The Company recently introduced a new
affiliate agreement allowing the Company the option of allocating three
minutes each hour to sell to national advertisers. The affiliate station has
the remaining eight minutes to sell to advertisers in its local market.
Network advertising time can be sold to national advertisers at significantly
higher rates than local advertising time.
The Company's affiliation agreements grant stations the exclusive right
to broadcast Aahs World Radio programming in the market in which the
affiliate's station broadcasts. In certain markets, Aahs World Radio may be
broadcast from more than one radio station pursuant to a single affiliation
agreement. The Company retains the right to make all network programming
decisions. The affiliate is responsible for
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maintaining all station licenses necessary to broadcast the Aahs World Radio
format, as well as for constructing, operating and maintaining all of the
technical and other facilities necessary to receive and broadcast the
Company's programming and allotted advertising time. The affiliation
agreements generally provide for terms of one to three years.
To gain affiliates, the Company maintains an affiliate relations
department to market to prospective affiliates and to service affiliates once
they have signed an affiliation agreement. Generally, the Company markets to
a targeted group of prospective affiliates in the top 100 markets. These
prospective affiliates receive information about Aahs World Radio via a
monthly newsletter, phone contact, unique concept mailings and presentations.
The Company employees trade advertising in a limited manner to maintain
exposure to the broadcast industry.
Network support for Aahs World Radio affiliates includes a live 24-hour
programming feed distributed by satellite from its network studios located in
Minneapolis which can be localized through automated or cued station inserts
and pre-designed station promotional material including station identifiers.
The Company also provides affiliates with a continuously updated how-to
manual of promotions and sponsored events.
OWNED AND OPERATED STATIONS
In addition to expanding its network delivery system through
affiliation, the Company's business strategy includes exploring opportunities
to acquire RBLs in the top 100 U.S. markets. While it is less capital
intensive to have a presence in a particular market through a network
affiliate, the Company may seek to acquire an RBL in a particular market if a
favorable acquisition opportunity is presented, or the Company deems it to be
in its best interests to secure any particular market from the risk of the
loss of an affiliate. Each of the Company's owned or operated radio stations
has seven minutes of local advertising and three minutes of national
advertising per programming hour. As the Company increases its number of
owned and operated stations, it expands its radio network, increases its
inventory of local advertising time to sell and enjoys economies of scale
because the programming it develops in Minneapolis is distributed to its
other stations at an insignificant incremental cost.
In analyzing the strategic suitability of a potential acquisition, the
Company considers such factors as: (i) the demographics, historical and
projected rates of growth of the market and other factors relating to
population, retail sales and the local economy; (ii) the competition in the
market; (iii) whether the station has a desirable dial position and broadcast
signal to reach a sufficient audience to allow it to compete in the market;
(iv) the projected level of performance which the Company estimates can be
achieved within 12 to 24 months; and (v) agency and advertiser concentration
in the market. The Company generally seeks to acquire the assets and RBLs of
radio stations, but does not rely on the existing advertiser or listener base
of acquired stations because of the conversion to the Aahs World Radio
format. The Company believes it is able to identify radio stations which
offer the potential to become strong links in its network. The Company
believes that the AM radio market offers a significant opportunity for
expansion of its network because many AM radio station owners are looking for
the opportunity to revitalize their operations, reduce operating costs and
improve profitability.
The Company owns and operates radio stations in the top three population
centers of the United States, New York, Los Angeles and Chicago. The Company
currently owns and operates WJDM in the New York market, KPLS in the Los
Angeles market and WAUR in the Chicago market. The Company believes it is
desirable to own and operate stations in these three markets because: (i) the
Company will be able to maintain coverage, assuring advertisers that their
commercial messages will always be carried in these key markets; and (ii)
presence in these markets will demonstrate the Company's level of commitment
to the Aahs World Radio format, and consequently, will help the Company with
national sales and affiliate recruitment. The Company's strategy to own or
operate stations in the top markets parallels the strategy of many broadcast
networks, including NBC, ABC, CBS and Fox.
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ACQUISITIONS
Since 1995, the Company has made the following acquisitions of RBLs in
major markets:
WAUR-AM, SANDWICH, ILLINOIS. In January 1997, the Company acquired the
RBL of WAUR-AM in the Chicago market. The purchase price was paid by the
issuance of approximately $291,000 in Common Stock, a promissory note of
$1,400,000 to be paid over six years, a non-competition agreement of $500,000
to be paid over ten years, and approximately $1,700,000 in cash.
WPWA-AM, CHESTER, PENNSYLVANIA. In September 1996, the Company acquired
the RBL of WPWA-AM in the Philadelphia market. The purchase price was paid
by issuance of approximately $500,000 in Common Stock and $820,000 cash.
WJDM-AM, ELIZABETH, NEW JERSEY. In June 1996, the Company acquired the
stock of Radio Elizabeth, Inc. which operates radio station WJDM-AM in the
New York market. The purchase price was paid by the issuance of
approximately $2,500,000 in Common Stock, the Company's assumption and
payment at closing of approximately $518,000 of the seller's debt, $7,062,000
cash, and a non-competition and consulting agreement of $1,500,000 to be paid
over a ten year period.
WCAR-AM, LIVONIA, MICHIGAN. In June 1996, the Company acquired the RBL
of WCAR-AM in the Detroit market. The purchase price of $1,500,000 was paid
in cash.
KKYD-AM, DENVER, COLORADO. In November 1995, the Company acquired the
RBL of KKYD-AM, Denver, Colorado. The purchase price was paid by the
issuance of approximately $365,000 in Common Stock, the Company's assumption
of approximately $521,000 of the seller's debt, and $47,000 cash.
SALES AND MARKETING
The Company's primary source of revenue is the sale of radio advertising
time. The Company's national advertising customers include, among others,
Target, Nickelodeon, Buena Vista, Fox and Southland. The Company's own sales
force sells the Aahs World Radio network ad-time inventory directly to
advertisers and their agencies. Sales efforts are aimed at advertising
agencies, national advertisers, sports franchises, non-profit groups and
foundations. Local advertising time is sold to advertisers whose businesses
are in each station's market.
The leading audience measurement services only tabulate radio listening
for persons aged 12 and over. The Company's primary audience is persons 12
and under. In a 1994 study commissioned by WWTC in Minneapolis, Arbitron,
the principal radio audience measurement service, found that 91% of children
under 12 in the Minneapolis radio market listen to the radio. The same study
revealed that 22% of all children in the Minneapolis market listened to WWTC
each week. A similar study performed in 1992 by AccuRatings, another
independent audience measurement service, found that Aahs World Radio ranked
first in retaining new listeners and as the ninth overall favorite station
out of the 26 stations included in the survey, all of which, except for Aahs
World Radio, seek primarily to attract adult audiences. While these surveys
have helped the Company demonstrate to advertisers the appeal of the Aahs
World Radio format, there are no audience surveys that measure the listening
behavior of the Company's core audience on a regular basis.
The Company continues to seek means to provide information to
prospective advertisers as to the size and composition of the Aahs World
Radio format audience, despite the absence of conventional ratings. One way
is by engaging in promotional selling, where an advertiser's spots call for a
direct response from the listener, such as a call-in request for information
or some premium. The Company also manages an inbound direct-response
telephone system which gives callers an opportunity to respond to questions
by pushing buttons on the phone, or, as appropriate, to talk to an operator.
This phone system allows the Company to collect and tabulate responses to an
advertiser's campaign. During 1996 the Company received approximately
3,000,000 phone calls from listeners. Use of this system has enabled the
Company to build a database of Aahs
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World Radio listeners. The Company conducts studies to ascertain listening
habits, programming preferences and other information of significance to
advertisers and prospective advertises through the use of this database.
The Company generally develops local marketing and sales techniques at
WWTC in Minneapolis. Once the techniques have been proven effective, the
Company can implement them at its other stations, and can share them with
affiliates. Among these techniques are major local event sponsorships and
local remote "on location" broadcasts, which may include AAHSIE-TM-. In
addition, the Company has designed local sales programs for its owned and
operated stations, as well as affiliated stations. For example, one local
sales program, AAHS-TM- Direct, provides advertisers with an annual
advertising schedule that includes a mix of radio spots, billboard postings
and display space in certain print media.
The Company maintains a program of communications with the advertising
community, and present and prospective affiliates. The Company utilizes
outdoor advertising and certain print media to promote itself to advertisers
generally, and has used various printed communications to keep advertisers
abreast of Company developments. The Company has implemented a targeted mail
campaign to develop its affiliate roster, and thereby increase the national
coverage of the Aahs World Radio format. By increasing national coverage the
Company expects to generate additional revenue.
The Company's public relations department actively seeks to obtain
favorable coverage of Aahs World Radio events and advancements. The Company
sponsors local promotions in those markets where it owns or operates
stations. The promotions are designed to increase community awareness of
Aahs World Radio.
STRATEGIC RELATIONSHIPS
The Company has sought out and developed strategic relationships in
order to enhance and reinforce its brand, and to allow the Company to exploit
business opportunities at minimal cost to it and without detracting from
management's focus upon the Company's core business. 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.
PROGRAMMING DISTRIBUTION
The Company transmits all of its programming from Minneapolis, Minnesota
by means of communications satellite, utilizing services provided pursuant to
contracts with unaffiliated third parties. The first step in the
transmission process is sending a signal from WWTC to an "uplink facility"
via microwave. The uplink facility transmits Aahs World Radio programming to
a communications satellite, which transmits the signal to receiving antennas
at each Aahs World Radio affiliate. The Company has contracted with CBS
Television Stations, a division of CBS, Inc., doing business as Teleport
Minnesota, for the provision of uplink services.
At present there are approximately 40 domestic communications satellites
available for the transmission of broadcast signals, as well as one uplink
facility in the Minneapolis-St. Paul area. If satellite transmission were
interrupted or terminated due to the failure or unavailability of the uplink
facility or a satellite, such termination or interruption could have a
material adverse effect on the Company. However, the Company believes, given
the number of communications satellites and available uplink facilities, that
termination of the Company's transmission as a result of failure or
unavailability of such services is unlikely.
COMPETITION
The Company competes for listeners and advertising revenue. Television
networks and other organizations offering television programming for
pre-teens represent the Company's largest source of competition. In addition
to ABC, NBC, CBS and FOX, a number of basic cable television networks (such
as USA, the Family Channel, Nickelodeon and the Cartoon Network), pay
television networks (such as the
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Disney Channel), superstations (such as WWOR and WGN) and public television
stations provide programming targeting the pre-teen audience. The Company
also competes with radio media targeting adults and young adults, syndicated
children's radio programs, magazines, newspapers and other leisure-time
activities including home video, movie theaters and video games. While
competitive non-radio product is generally consumed in the home, Aahs World
Radio may be consumed in a variety of locations, including automobiles. Aahs
World Radio offers advertisers an alternative, at advertising rates
considerably below television advertising rates. Additionally, the cost to
produce a radio advertisement is small in comparison to the cost to produce
an advertisement for television.
Aahs World Radio format is the largest 24-hour national radio network
that programs exclusively to the pre-teen audience. ABC/Disney recently began
providing programming aimed primarily at the pre-teen market. ABC/Disney, as
well as many competing media companies, are well-established and have
substantially greater financial resources than the Company. Other entities,
including those with greater financial resources, could create or carry
children's programming in competition with the Company. No assurance can be
given that the Company will compete successfully with such established media
competitors. The Company believes, however, its strong lead in developing
the children's radio network provides a competitive barrier to others who may
attempt to enter this particular field.
See "Cautionary Statement -- ABC/Disney Litigation" and "-- Competition."
REGULATION
FCC REGULATION
Radio stations are subject to the jurisdiction of the FCC under the
Communications Act, which empowers the FCC to issue, renew, revoke and modify
broadcasting licenses, approve transfers of licenses, regulate the apparatus
used by stations, establish areas served by particular stations, assign
frequencies, consider concentrations of broadcast control, adopt such
regulations as may be necessary to carry out the provisions of the
Communications Act and impose penalties for violations of such regulations,
including forfeiture of licenses.
The Telecommunications Act of 1996 (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 (which will continue to be measured by commercial contour overlap) to
permit the following: (1) in markets of 14 or fewer stations: up to 5 total
(but no more than half of the stations in the market) and no more than 3 in
the same service (AM or FM); (2) 15 to 29 stations: up to 6 total, 4 in the
same service; (3) 30 to 44 stations: up to 7 total, 4 in the same service;
and (4) over 45 stations: up to 8 total, 5 in the same service.
The 1996 Act authorized the FCC to override these limits if it
determines that the result would be an increase in the number of stations in
operation. The 1996 Act also made changes to the licensing scheme for radio
stations. Radio standard license terms were extended to 8 years, subject to
short-term renewal sanctions where appropriate. A license terminates
automatically if a station is silent for one year. The 1996 Act also
provided that a station license renewal application must be granted if the
FCC finds (a) that the station has served the public interest, (b) the
licensee has not committed any serious violations of the Communications Act
or FCC rules, and (c) other violations of the Communications Act or rules,
taken together, would not constitute a pattern of abuse. Only if the
standards are not met, and renewal is denied, may the FCC accept other
applications for the forfeited facilities. These procedures apply
retroactively to all renewal applications filed after May 1, 1995.
Under the FCC's attribution rules, interests of parties who have an
attributable interest in the Company are counted among the Company's
interests in the application of the multiple ownership rules. The FCC
requires the attribution of RBLs held by a broadcasting company to its
officers, directors and certain holders of its voting securities. Under FCC
rules, with certain exceptions, attribution of RBLs occurs when any five
percent voting shareholder or officer or director of a broadcasting company
directly or indirectly owns,
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operates, controls or has a five percent voting interest in or is an officer
or director of any other broadcasting company. Christopher T. Dahl and
Richard W. Perkins hold ownership interests, directorships and/or offices in
the Company and in CAC which holds RBLs. Consequently, the RBLs of all
companies in which they have attributable interests are aggregated for the
purposes of calculating the limitations imposed by the application of the
multiple ownership rules. Such ownership could, under current FCC
regulations, limit the markets in which the Company could acquire additional
RBLs.
On March 3, 1997, by REPORT AND ORDER in FCC IB Docket 95-91, the
Federal Communications Commission adopted service rules for the satellite
Digital Audio Radio Service (satellite DARS), which is promised to provide
CD-quality nationwide radio service. The service rules apply to two groups of
satellite DARS operators: two 12.5 MHz licenses in the 2320-2345 MHz band,
which commencing April 1, 1997 will be available for bidding in a closed
auction of four applications that have been pending for several years; and
two licenses of 5-10 MHz in the Wireless Communications Service (WCS) bands
of 2305-2320 MHz and 2345-2350 MHz, which will be available for bidding by
the public at an auction scheduled to commence April 15, 1997. The Company is
unable to predict the effect, if any, that this form of radio service may
have on its future operations.
The FCC's technical limitations and interference standards determine the
number of stations that can be granted licenses. In making initial licensing
determinations and in reviewing applications for renewal or transfer of
existing licenses under the Communications Act, the FCC considers a number of
factors relating to the applicant and each party having an attributable
interest in the applicant in order to make a judgment as to whether or not
the public interest, convenience and necessity will be served by granting or
renewing the application. These factors include financial and character
qualifications, employment practices, past record of public service
programming and past record of compliance with FCC regulations. The FCC also
restricts ownership interests in broadcast stations by a corporation of which
any officer or director is an alien or of which more than twenty percent of
its capital stock is owned or voted by aliens or their representatives or by
any corporation organized under the laws of a foreign company.
The FCC has deregulated many aspects of the radio industry. The FCC has
eliminated or reduced its regulation of radio with regard to licensee
responsibilities for the ascertainment of community needs, non-entertainment
programming standards, commercial advertising limitations and the recording
of certain informational items on a programming log. Several aspects of the
FCC's regulatory system (for example, equal time requirements and equal
employment opportunity requirements) remain unaffected by these actions.
Even though the FCC has eliminated certain programming guidelines, it
continues to monitor radio and television stations to ensure that programming
is responsive to the issues confronting a licensee's community. However,
licensees are afforded substantial discretion in making programming
determinations.
Radio broadcasting licenses are granted for a maximum term of eight
years and are subject to renewal upon application to the FCC. The renewal
schedule of broadcasting licenses for the Company's owned or operated radio
stations is as follows:
KPLS-AM December 1, 1997
KAHZ-AM August 1, 1997
KCNW-AM June 1, 1997
KTEK-AM August 1, 1997
KYCR-AM April 1, 1997
WZER-AM December 1, 2004
WWTC-AM April 1, 1997
KKYD-AM April 1, 1997
KCAZ-AM June 1, 1997
WAUR-AM December 1, 2004
WPWA-AM August 1, 1998
WCAR-AM October 1, 2004
WJDM-AM (1530) June 1, 1998
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Petitions to deny license renewals by which various issues may be raised
before the FCC, can be filed by interested parties, including members of the
public, and the FCC may itself determine to conduct a hearing in the absence
of a formal request by other parties. The FCC is required to hold hearings
on renewal applications if it is unable to determine that renewal of a
license would serve the public interest, convenience and necessity or if a
substantial and material question of fact is raised in the renewal
application. In recent years, a number of competing applications and formal
and informal objections have been filed with respect to broadcast renewal
applications. However, the vast majority of all license renewal applications
filed with the FCC on behalf of radio stations throughout the country are
granted for the maximum statutory term.
In June 1996, the Company acquired the stock of REI, licensee of radio
station WJDM-AM, Elizabeth, New Jersey, which also holds an STA to construct
an Expanded Band facility to broadcast at 1660 at 10,000 watts. The FCC
recently concluded its rulemaking proceeding relating to Expanded Band
allocations, confirming REI as one of the stations receiving such an
allocation. The Company's obtaining of a permanent license to broadcast on
the Expanded Band frequency is subject to the filing by the Company of a Form
301 with the FCC and approval by the FCC of such application. The Company
has reviewed the FCC file maintained by REI and based upon that review and
correspondence between the FCC and REI's counsel contained in that file, the
Company believes that it will ultimately receive an allocation of an Expanded
Band frequency.
The foregoing is only a brief summary of certain provisions of the
Communications Act, the 1996 Act and the regulations of the FCC. Reference
is made to the Communications Act, the 1996 Act, FCC regulations and the
public notices promulgated by the FCC for further information. Legislation
has been introduced from time to time which would amend the Communication Act
in various respects and the FCC from time to time considers new regulations
or amendments to its existing regulation. The Company cannot predict whether
any such legislation will be enacted or new or amended FCC regulations
adopted or what their effect would be on the Company.
FRANCHISE REGULATION
The Federal Trade Commission ("FTC") regulates franchises under the
"Franchise Rule," a regulation which sets forth standards for mandating
disclosure of information before the sale of a franchise or business
opportunity. Additionally, several states regulate various aspects of
franchising. The Company has structured its local station affiliation
agreements in such a way as to prevent, in the Company's opinion, their
characterization as franchise or business opportunity arrangements under
various state laws and the FTC Franchise Rule, and thus avoid the cost,
delays and other burdens associated with registration and disclosure
compliance obligations associated with franchising or business opportunity
sales. It is possible that a state agency, the FTC or a court could find
that the affiliation agreements constitute franchising or business
opportunity sales, in which case the Company could face various sanctions and
private litigation. In addition, the affiliation agreements may be subject
to state laws in various states regulating the basis and terms upon which
dealership and similar agreements may be terminated or not renewed or
regulating other aspects of producer-dealer relations. These statutes could
impede the Company's ability to terminate a particular affiliation agreement,
materially alter the nature and terms of the Company's relationships with its
affiliates, or affect other aspects of the Company's dealings with its
affiliates. Other such laws may be enacted in the future by both the state
and federal governments.
TRADEMARKS AND COPYRIGHTS
The Company claims trademark rights to and ownership in a number of
marks including, but not limited to, RADIO AAHS-REGISTERED TRADEMARK-, RADIO
AAHS-REGISTERED TRADEMARK- (words plus design of unicorn), CHILDREN'S
SATELLITE NETWORK-TM-, ALL THE GOOD STUFF RADIO DOES-REGISTERED TRADEMARK-,
THE ALL-AMERICAN ALARM CLOCK-REGISTERED TRADEMARK-, ALPHABET SOUP-REGISTERED
TRADEMARK-, GREAT MUSIC FOR GREAT KIDS-REGISTERED TRADEMARK-, JUST
KIDS-REGISTERED TRADEMARK-, RADIO AAHS AIRFORCE-REGISTERED TRADEMARK-, THE
EDUCATIONAL, SENSATIONAL RADIO AAHS-REGISTERED TRADEMARK-, AAHS-TM-,
AAHSIE-TM-, AVENUE `A'-SM-, FASCINATING FACTS-SM-, THE FUN AND ONLY-TM-, NEWS
AAHS IT WAS-SM-, PLANET AAHS RECORDS-REGISTERED TRADEMARK-, PLAYING ALL DAY
WITH RADIO AAHS-TM-, RADIO AAHS-TM- (with new logo design), KA'ZOO-TM-, RADIO
AAHS-REGISTERED TRADEMARK- COUNTDOWN, Storytime THEATER-SM-, AAHS WORLD
RADIO-TM-, AAHS WORLD RADIO AIRFORCE-TM-.
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The Company intends to continue to use these names and marks and to
develop other distinctive marks for the radio programming developed by the
Company. In addition, the Company intends to protect its radio programming
under the copyright laws. No assurance can be given, however, that the
Company will be successful in obtaining federal trademark or copyright
protection for any of the marks or its programming which are the subject of
pending applications.
EMPLOYEES
As of December 31, 1996, the Company had 204 employees, 107 of whom are
full-time. The services of the Chief Operating Officer and Chief Financial
Officer and General Counsel are rendered by James G. Gilbertson and Lance W.
Riley, respectively, on a shared basis with Community Airwaves Corporation
("CAC"). Executive officers of the Company and certain other corporate
employees are employed by RMC and their services are provided to the Company
and to CAC under contract for a fee. None of the Company's employees are
represented by unions. The Company believes its relations with employees are
satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located at 724 First Street North,
Fourth Floor, Minneapolis, Minnesota. The facility consists of approximately
3,000 square feet and is shared with Radio Management Corporation and
Community Airwaves Corporation, both of which are owned by the Company's
President and a director, Christopher T. Dahl, another director, Richard W.
Perkins, and a shareholder of the Company, Russell Cowles II. The facilities
are leased from a partnership consisting of Mr. Dahl, Mr. Perkins and an
unaffiliated third party at an annual rent of $54,000.
The studios and tower site of WWTC and KYCR are located in St. Louis
Park, Minnesota. The studio facility consists of approximately 12,000 square
feet. The tower site includes four 200-foot towers, a transmitter building
and a storage garage on approximately 16 acres. The tower site is leased
from Mr. Dahl at a total annual rent of approximately $114,000, and the
studio site is leased from a partnership consisting of Mr. Dahl and Mr.
Perkins at an annual rent of approximately $132,000.
The Company currently lease studio facilities in the following markets,
for the purpose of housing certain of its radio stations, upon the general
terms set forth below.
The Los Angeles studio facility consists of approximately 3,422 square
feet. The facility is leased at an annual rent of $36,136 and the
lease is for a term of three years ending August 1999.
The New York studio facility consists of approximately 1,700 square
feet. The facility is leased at a monthly rent of $1,675 and the
lease is on a month-to-month basis.
The Dallas/Fort Worth studio facility consists of approximately 2,000
square feet. The facility is leased at an annual rent of $35,700 and
the lease is for a term of five years ending May 1998.
The Houston studio facility consists of approximately 2,700 square
feet. The facility is leased at an annual rent of $29,700 and the lease
is for a term of five years ending July 2001.
The Milwaukee studio facility consists of approximately 2,400 square
feet. The facility is leased at an annual rent of $21,360 and the lease
is for a term of five years ending November 1999.
The Chicago studio facility consists of 322 square feet. The facility
is leased at a monthly rent of $600 and the lease is for a term of six
months ending May 1997.
The Company currently leases broadcast tower sites in the
following markets, for the purpose of transmitting its broadcast signals,
upon the general terms set forth below.
The Los Angeles tower site is leased at an annual rent of $40,000 and
the lease is for a term of nine years ending October 1999.
The New York tower site is leased at an annual rent of $4,500 and the
lease is for a term of fifteen years ending March 2000.
The Dallas/Fort Worth tower site is leased at a monthly rent of $125
and the lease is on a month-to-month basis.
The Milwaukee tower site is leased at an annual rent of $2,100 and the
lease is for a term of five years ending February 2000.
The Chicago tower site is leased at an annual rent of $18,000 and the
lease is for a term of ten years ending December 2006.
ITEM 3. LEGAL PROCEEDINGS
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 the Aahs World
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 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. On November 15, 1996, the
Commission declared effective the Company's Registration Statement on Form
S-3 which registered 200,000 shares of Common Stock on behalf of the
Company's litigation counsel.
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Except as described above, the Company is not a party to any material
proceedings. From time to time the Company is a party to litigation which is
incidental to its business, including administrative proceedings before the
FCC in connection with the licensing of radio stations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the
Company's most recently completed fiscal year.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been included in the Nasdaq National
Market under the symbol "AAHS" since February 1996, on the Nasdaq SmallCap
Market since May 1993 and on the over-the-counter Bulletin Board ("OTC") from
the completion of the Company's public offering in 1992 until that time. The
following table sets forth the approximate high and low closing prices for
the Common Stock for the periods indicated as reported by the Nasdaq Stock
Market. Share prices have been adjusted to reflect the Company's one-for-two
reverse stock split (share combination) effected on January 23, 1996.
Period High Low
------ ---- ------
1995
First Quarter. . . . . . . . . . . . $13 $ 7 1/2
Second Quarter . . . . . . . . . . . 14 10
Third Quarter. . . . . . . . . . . . 15 1/4 9 1/4
Fourth Quarter . . . . . . . . . . . 14 1/4 7 3/4
1996
First Quarter. . . . . . . . . . . . $14 $ 8 1/2
Second Quarter . . . . . . . . . . . 10 1/2 6 1/4
Third Quarter. . . . . . . . . . . . 7 7/8 4 5/8
Fourth Quarter . . . . . . . . . . . 5 7/8 3 1/4
As of March 3, 1997, the Company had 512 shareholders of record.
The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
The holders of the Company's Common Stock are entitled to such dividends
as may be declared from funds legally available for such purpose by the
Company's Board of Directors in its sole discretion. The Company has never
paid a dividend on its common stock and does not anticipate that dividends
will be paid in the foreseeable future. To the extent any operating profits
are realized, the Company intends to retain the same for operating purposes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis contains certain forward-looking terminology
such as "believes," "anticipates," "expects," and "intends," or comparable
terminology. 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 securities are cautioned not to place
undue reliance on such forward-looking statements which are qualified in
their entirety by the cautions and risks described herein.
GENERAL
The Company has developed a radio programming format, Aahs World Radio,
designed and directed toward pre-teen children and their parents. The
Company is developing a network of radio stations, both by acquisition of
radio stations and the entry into affiliation agreements with
independently-owned radio stations, for the purpose of distributing the
Company's Aahs World Radio format. 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
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network revenue. A substantial portion of the Company's local advertising
revenue is derived from Company-owned stations not broadcasting the Aahs
World Radio format. This source will continue to remain a substantial source
of revenue for 1997. Network expenses are expected to continue to exceed
network revenues through 1997, as the Company must maintain its affiliate
support staff and national programming staff. While these costs are not
expected to materially increase during this period, they will remain a
substantial part of the Company's overall expenses.
Radio stations frequently barter unsold advertising time for products or
services, such as hotels, restaurants and other goods used principally for
promotional, sales and other business activities. Barter revenues and
expenses are included in the financial presentation below. The revenue and
expenses related to barter do not have a material effect on the Company's
operating profit in a given period.
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 its recurring losses and negative cash flow from
operations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Owned, Operated and LMA Station Revenues:
Total revenues from the Company's owned, operated and LMA stations
increased $13,000 from $4,048,000 in 1995 to $4,061,000 in 1996. Barter
revenues decreased $407,000 while non-barter revenues increased $420,000.
This non-barter revenue increase resulted from the stations the Company
acquired in 1996 (New York, Detroit and Philadelphia) which totaled $152,000,
an increase in sales totaling $145,000 from the Kansas City and Minneapolis
Aahs World Radio formatted stations, and an increase in sales totaling
$123,000 from three of the four non-Aahs World Radio formatted stations
(Houston, Kansas City, and Minneapolis).
Network Revenues:
Total revenues of $1,594,000 were produced by the network in 1996,
an increase of $535,000 or 51% over 1995 revenues. This increase in network
revenues is the result of the expanded coverage of the network and the
continued acceptance of its format as a viable medium on which to advertise.
Owned, Operated and LMA Station Expenses:
General and administrative expenses increased 19% to $2,493,000 for
1996 from $2,104,000 in 1995. Of this increase, $245,000 was due to the
addition of the Detroit and New York stations in June 1996 and the
Philadelphia station in October 1996 and $128,000 was attributable to
increase in compensation expense at previously existing stations.
Technical and programming expenses decreased $88,000 in 1996 from
$1,057,000 in 1995 to $969,000. The technical expenses have decreased as
equipment has been upgraded, requiring less maintenance and repair, and
programming expenses have been reduced as the Aahs World Radio formatted
stations are able to depend more fully on the network to provide their
programming needs.
Sales expenses decreased from $1,795,000 in 1995 to $1,575,000 in
1996, a decrease of 12%, due primarily to the 40% reduction of barter
expenses during that time period. The $32,000 increase in non-barter
expenses for the period is due to the addition of the Detroit, New York and
Philadelphia stations in 1996.
Network Expenses:
General and administrative expenses increased $134,000 in 1996 to
$885,000 as compared to $751,000 for 1995 due primarily to $225,000 of
expense incurred related to the joint operating agreement with ABC/Disney
which has now been terminated. Compensation expense decreased $50,000 in 1996
and bad debt expense decreased approximately $100,000.
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Programming expenses increased $248,000 to $885,000 in 1996
compared to $637,000 in 1995 due primarily to the $192,000 increase in line
charges related to the implementation of an integrated telephone system
designed to enhance programming and encourage active listener participation.
There has also been a $75,000 increase in programming salaries and talent
fees and a $17,000 reduction in programs and materials expense as the network
is able to produce these internally.
Sales expenses increased 17% from $943,000 in 1995 to $1,106,000 in
1996. These sales expenses relate to both advertising sales and affiliate
relations sales. Although sales expenses decreased during the mid year due
to the reduction of advertising sales salaries as well as the reduction of
travel and lodging expenses as a result of the Company utilizing the ABC
advertising team under its joint operating agreement, expenses increased
during the latter part of the year as the Company began rebuilding its
advertising sales efforts, including hiring staff, providing supplemental
training, and increasing travel. Additionally, in the last quarter of 1996,
the network implemented a sales development team which assists the newly
acquired owned and operated stations in their sales efforts.
Marketing expenses were $524,000 during 1996 compared to $21,000 in
1995. The Company began developing this department in 1996 and anticipates
expenses will remain at current levels of approximately $38,000 per month as
it becomes fully operational. During 1996, activities in this category
included advertising, research, television spot production and promotion.
Corporate charges were $2,774,000 in 1996 compared to $1,465,000 in
1995, representing an increase of 89%. This increase is attributable to an
increase in outside service fees including $135,000 of investor/media
relations expenses, $137,000 of legal and accounting fees related to stock,
trademark, employee matters, SEC filings and audits, $150,000 of management
fees, and $86,000 of compensation expense. Additionally, as of December 31,
1996 the Company incurred $400,000 of expenses relating to the ABC/Disney
litigation. Such litigation is anticipated to be costly and may continue to
reduce the Company's working capital. The Company has filed a Form S-3
registering 200,000 shares of common stock to be used to finance this
litigation.
Depreciation and amortization increased to $1,501,000 in 1996 from
$937,000 in 1995, due in part to the acquisition of the assets of the Denver
station acquired in November 1995, the acquisition of the assets of the
Detroit and New York stations acquired in June 1996 and the acquisition of
the assets of the Philadelphia station in September 1996.
In July 1996, the operations agreement with ABC/Disney was
effectively canceled and the unamortized value initially ascribed to that
warrant, aggregating $2,288,000 was expensed in 1996 (see note 12 to the
financial statements).
Net interest expense for the year decreased $809,000 as a result of
the repayment of debt from the proceeds of the public offering.
The net loss increased 62% in 1996 to $9,868,000 from $6,108,000 in
1995. Consistent with its business plan and network strategy, the Company
anticipates that its coverage of the United States will continue to expand
during the upcoming year either through affiliation or acquisition of
additional radio stations. The Company expects to incur operating losses as
such network expansion increases, and that the losses will continue
throughout 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its working capital, was
negative $5,489,000 at December 31, 1996 compared to negative working capital
of ($4,421,000) at December 31, 1995. The decrease in net working capital
during 1996, was primarily the result of the reclassification of the
long-term portion of the Term Loan as the Company did not meet certain
restrictive financial covenants contained in the Credit Agreement as of
December 31, 1996. The failure to meet these covenants was principally due to
the holdback of $4,000,000 by Foothill to be released upon the Company's
fulfillment of certain post-closing conditions. On March 27, 1997, Foothill
waived its rights pursuant to the December 31, 1996 violations. Pursuant to
generally accepted accounting principles (EITF No. 86-30), if similar
restrictive covenants must be met at future interim periods, the debt must
continue to be classified as current unless it is probable that the Company
will satisfy the covenants in the future or Foothill agrees to waive its
rights to such potential future covenant violations. Foothill would not
provide the Company with such a waiver and accordingly, the principal
balances outstanding at December 31, 1996 aggregating $7,885,000 have been
entirely classified as current obligations, even though $6,353,000 of this
amount is not scheduled to be repaid until after December 31, 1997. The
Company is scheduled to meet with Foothill to discuss the possibility of
reviewing the covenant requirements in an effort to avoid future violations.
Exclusive of this $6,353,000 reclassification, the Company's net working
capital increased from December 31, 1995 to December 31, 1996 by $5,285,000.
This increase was the result of the Company receiving net proceeds from a
public offering of common stock, repaying approximately $4,500,000 of short
term debt and related accrued interest and purchasing RBLs in three markets.
At present, the Company has experienced a cash working capital loss of
approximately $500,000 per month. The Company
23
<PAGE>
expects this loss per month to decrease as it heads into stronger revenue
months. Typically, the first quarter is the weakest sales quarter for
broadcast entities. The Company anticipates that its network advertising and
owned and operated station revenues will continue to fall short of expenses
from operations throughout 1997. The Company believes it will need to obtain
additional financing by the fall of 1997. During 1996, management engaged
investment bankers to explore strategic alternatives (see "Description of
Business -- Strategic Relationships"). If the Company is not able to obtain
proper financing or financing on terms acceptable to the Company, it may (a)
be forced to reduce or terminate its operations, (b) curtail acquisitions or
other projects, (c) sell or lease current assets, (d) delay certain capital
projects or (e) potentially default on obligations to creditors, all of which
would be materially adverse to the Company's operations and prospects.
The Company purchased the assets of a radio station in the Chicago
market in January 1997. This acquisition required approximately $1.6 million
of capital at the time of closing.
The Company entered into an agreement with Foothill Capital Corporation
("Foothill") in November 1996 to address the Company's working capital
requirements. The transaction provided the Company with working capital
through (a) a $11,500,000 term loan collateralized by the assets of the
Company, payable over four years at a rate of 2.75% above prime, (b) a
$1,000,000 line of credit secured by the Company's accounts receivable and
(c) a $4,000,000 acquisition facility secured by future assets acquired by
the Company. 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. Additionally, at March 15, 1997, the remaining proceeds
available under the Term Loan totaling $1,500,000 are being held back by
Foothill subject to the Company's completion of certain post-closing
conditions which management expects to occur in the second quarter of 1997.
Part of the Company's strategy for development and expansion of its
network includes acquiring and/or operating radio properties in key U.S.
markets. Financing will be required to fund future operations and the
expansion of its radio network through acquisitions. There can be no
assurance that any such financing will be available to the Company when
required, or if available, that it would be on terms acceptable or favorable
to the Company. The Company is hopeful, however, the above described
financing from Foothill will provide the financing needed to implement its
strategy. Because the Foothill financing required the Company to grant liens
and security interests to the lender in substantially all of the assets of
the Company, this financing may limit the Company's ability to incur
additional indebtedness in connection with future financings in the event
future funding is required by the Company. The Foothill financing also
requires the Company to meet various operating covenants and there can be no
assurance that the Company will be able to perform in accordance with such
covenants. Any additional capital the Company may require may necessitate
the sale of equity securities, which could result in significant dilution to
the Company's shareholders. Failure of the Company to obtain additional
financing when required could materially and adversely affect its acquisition
and operational strategy.
Consolidated cash was $3,370,000 at December 31, 1996 and $587,000 at
December 31, 1995, an increase of $2,783,000. The change in cash can be
attributed to the cash raised at the completion of the public offering of
common stock and through the Foothill financing less the cash used to
purchase stations in the Detroit, New York and Philadelphia markets and to
pay back debt.
The Company's children's radio concept is unproven from a commercial
viability standpoint. The Company is highly leveraged and substantially all
of its assets are subject to the security interest of Foothill. As of
December 31, 1996, the Company's consolidated indebtedness approximated 49%
of the sum of its shareholders' equity and consolidated indebtedness,
assuming performance by the Company of certain post-closing conditions
resulting in full funding under the Facilities. 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
registered pursuant to the Company's Registration Statement on Form S-4 (the
"Debt Securities"), would increase this degree of leverage and, therefore,
could further increase 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
24
<PAGE>
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.
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. Further, approximately $1,500,000
of the loan proceeds continues to be held back by Foothill pending
performance by the Company of certain post-closing conditions. 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.
Accounts receivable at December 31, 1996 increased $713,000 from
$877,000 at December 31, 1995. Prepaid expenses at December 31, 1996
decreased $517,000 from December 31, 1995 while other receivables and
inventory increased a total of $124,000. Accounts payable at December 31,
1996 increased $517,000 to $1,267,000 compared to the $750,000 balance at
December 31, 1995. Other accrued expenses at December 31, 1996 increased
$267,000 from December 31, 1995 and accrued interest decreased $217,000 in
1996. The increased amount of cash used for operations was a result of using
the monies received through the Company's public offering of common stock to
pay down interest and fund an increase in the Company's cash operating
requirements.
During 1996, $11,178,000 of cash was used for investing activities.
This cash was used to purchase stations in the New York, Detroit and
Philadelphia markets.
Cash obtained through financing activities amounted to $19,453,000
during 1996. This cash represents the monies received from the Company's
public offering of common stock less the repayment of debt.
SEASONALITY AND INFLATION
The Company's revenues generally follow retail sales trends, with the
fall season (September through December) reflecting the highest revenues for
the year, due primarily to back-to-school and holiday season retail
advertising and the first quarter reflecting the lowest revenues for the
year. The Company does not believe inflation has affected the results of its
operations, and does not anticipate that inflation will have an impact on its
future operation.
25
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CHILDREN'S BROADCASTING CORPORATION
Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . . . . .27
Consolidated Financial Statements
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . . .30
Statement of Shareholder's Equity . . . . . . . . . . . . . . . . . . . .31
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . .32
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .35
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Children's Broadcasting Corporation
We have audited the accompanying consolidated balance sheet of Children's
Broadcasting Corporation as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows
for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Children's
Broadcasting Corporation at December 31, 1996, and the consolidated results
of its operations and cash flows for the year then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company's recurring
losses and negative cash flow from operations raise substantial doubt about
its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 2. The 1996 financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ BDO SEIDMAN, LLP
Milwaukee, Wisconsin
February 28, 1997, except for Note 8 which is dated March 27, 1997
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Children's Broadcasting Corporation
We have audited the accompanying consolidated balance sheet of Children's
Broadcasting Corporation as of December 31, 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows
for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Children's
Broadcasting Corporation at December 31, 1995, and the consolidated results
of its operations and cash flows for the year then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company's recurring
losses and negative cash flow from operations raise substantial doubt about
its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 2. The 1995 financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
January 31, 1996
28
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
ASSETS (NOTES 2 AND 8) 1996 1995
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 3,370,038 $ 587,292
Accounts receivable, net of allowance for
doubtful accounts of $93,500 and $71,490, respectively . 1,496,180 804,997
Accounts receivable - other . . . . . . . . . . . . . . . . -- 49,576
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . 190,398 707,689
Barter activity, net. . . . . . . . . . . . . . . . . . . . 37,612 23,435
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . -- 74,046
------------ -----------
Total current assets. . . . . . . . . . . . . . . . . . 5,094,228 2,247,035
Deferred expenses. . . . . . . . . . . . . . . . . . . . . . . . -- 2,288,141
Property and equipment, net (Notes 4 and 9). . . . . . . . . . . 4,274,931 3,083,769
Broadcast licenses, net (Note 5) . . . . . . . . . . . . . . . . 16,724,653 4,969,573
Intangible assets, net (Note 5). . . . . . . . . . . . . . . . . 2,513,539 738,220
------------ -----------
Total assets . . . . . . . . . . . . . . . . . . . . . $28,607,351 $13,326,738
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . $ 1,266,492 $ 749,742
Accrued interest. . . . . . . . . . . . . . . . . . . . . . 84,146 301,389
Other accrued expenses. . . . . . . . . . . . . . . . . . . 1,000,194 733,371
Line of credit (Note 7) . . . . . . . . . . . . . . . . . . 164,162 --
Short-term debt (Note 6). . . . . . . . . . . . . . . . . . -- 3,650,000
Short-term debt - officers and directors (Note 6) . . . . . -- 900,000
Long-term debt - current portion (Note 8) . . . . . . . . . 8,033,758 297,365
Obligation under capital lease - current portion (Note 9) . 34,705 36,173
------------ -----------
Total current liabilities. . . . . . . . . . . . . . . 10,583,457 6,668,040
Long-term debt, less current portion (Note 8) . . . . . . . . 1,365,992 872,338
Obligation under capital lease (Note 9). . . . . . . . . . . . . 70,790 52,847
------------ -----------
Total liabilities. . . . . . . . . . . . . . . . . . . 12,020,239 7,593,225
Commitments and Contingencies (Notes 2 and 10):
Redeemable convertible preferred stock series
1993-A (Note 11). . . . . . . . . . . . . . . . . . . . . . -- 2,246,838
Shareholders' equity (Note 12):
Common stock. . . . . . . . . . . . . . . . . . . . . . . . 115,966 62,683
Additional paid-in capital. . . . . . . . . . . . . . . . . 42,775,092 19,491,302
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (26,303,946) (16,067,310)
------------ -----------
Total shareholders' equity . . . . . . . . . . . . . . 16,587,112 3,486,675
------------ -----------
Total liabilities and shareholders' equity . . . . . . $ 28,607,351 $13,326,738
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
29
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Revenues:
Owned, operated and LMA stations. . . . . . . . . . . . . . $ 4,061,055 $ 4,047,534
Network . . . . . . . . . . . . . . . . . . . . . . . . . . 1,593,883 1,059,011
----------- -----------
Total revenues . . . . . . . . . . . . . . . . . . 5,654,938 5,106,545
Operating expenses:
Owned, operated and LMA stations:
General and administrative . . . . . . . . . . . . . . 2,492,992 2,103,673
Technical and programming. . . . . . . . . . . . . . . 968,550 1,056,692
Selling. . . . . . . . . . . . . . . . . . . . . . . . 1,574,869 1,794,676
----------- -----------
5,036,411 4,955,041
Network:
General and administrative . . . . . . . . . . . . . . 884,652 750,548
Programming. . . . . . . . . . . . . . . . . . . . . . 885,227 636,811
Selling. . . . . . . . . . . . . . . . . . . . . . . . 1,105,817 942,650
Merchandising. . . . . . . . . . . . . . . . . . . . . 523,719 21,223
Magazine . . . . . . . . . . . . . . . . . . . . . . . 125,542 138,926
----------- -----------
3,524,957 2,490,158
Stock option and stock award compensation . . . . . . . . . -- 24,991
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . 2,023,936 853,968
Corporate expenses paid to affiliated
management company . . . . . . . . . . . . . . . . . . 750,000 600,000
Amortization and write-off of deferred expenses . . . . . . 2,288,141 103,086
Litigation settlements. . . . . . . . . . . . . . . . . . . -- 10,570
Depreciation and amortization . . . . . . . . . . . . . . . 1,500,504 936,822
Loss on exchange of assets. . . . . . . . . . . . . . . . . -- 31,423
----------- -----------
Total operating expenses . . . . . . . . . . . . . . . 15,123,949 10,006,059
----------- -----------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . (9,469,011) (4,899,514)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . (604,296) (1,065,060)
Interest expense - officers and directors. . . . . . . . . . . . (28,808) (157,877)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . 234,236 14,674
----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(9,867,879) $(6,107,777)
----------- -----------
----------- -----------
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . $ (1.99) $ (2.22)
----------- -----------
----------- -----------
Weighted average number of shares outstanding. . . . . . . . . . 5,149,000 2,815,500
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
30
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 . . . . . . . . . . . . . . . . 2,709,041 $ 54,180 $12,824,299 $ (9,808,059) $ 3,070,420
Issuance of common stock upon exercise of options. . . . . . 7,250 145 16,985 -- 17,130
Issuance of common stock to employees as compensation. . . . 3,375 67 26,055 -- 26,122
Issuance of stock warrants in connection with
bridge loan financing. . . . . . . . . . . . . . . . . . . -- -- 860,858 -- 860,858
Issuance of common stock upon conversion
of debt and accrued interest . . . . . . . . . . . . . . . 378,985 7,580 3,134,769 -- 3,142,349
Issuance of stock options to directors as compensation . . . -- -- 43,125 -- 43,125
Issuance of common stock in connection with
purchase of KKYD - Denver, Colorado. . . . . . . . . . . . 35,573 711 364,296 -- 365,007
Issuance of stock warrants in connection
with marketing agreement . . . . . . . . . . . . . . . . . -- -- 2,220,915 -- 2,220,915
Accretion of redeemable convertible preferred stock. . . . . -- -- -- (151,474) (151,474)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- (6,107,777) (6,107,777)
------------ --------- ----------- ------------ ------------
Balance at December 31, 1995 . . . . . . . . . . . . . . . . 3,134,224 62,683 19,491,302 (16,067,310) 3,486,675
Net proceeds from public offering of
common stock . . . . . . . . . . . . . . . . . . . . . . . 2,200,000 44,000 19,740,497 -- 19,784,497
Issuance of common stock upon exercise of options
and warrants . . . . . . . . . . . . . . . . . . . . . . . 39,536 793 175,550 -- 176,343
Issuance of common stock in connection with acquisition
of WJDM, Elizabeth, New Jersey . . . . . . . . . . . . . . 270,468 5,409 2,494,591 -- 2,500,000
Issuance of common stock in connection with acquisition
of WPWA - Chester, Pennsylvania. . . . . . . . . . . . . . 79,052 1,581 498,419 -- 500,000
Issuance of common stock in connection with acquisition
of WAUR-AM - Sandwich, Illinois. . . . . . . . . . . . . . 75,000 1,500 289,420 -- 290,920
Issuance of stock warrants in connection with bridge
loan financing . . . . . . . . . . . . . . . . . . . . . . -- -- 85,313 -- 85,313
Accretion of redeemable convertible preferred stock. . . . . -- -- -- (368,757) (368,757)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- (9,867,879) (9,867,879)
------------ --------- ----------- ------------ ------------
Balance at December 31, 1996 . . . . . . . . . . . . . . . . 5,798,280 $115,966 $42,775,092 $(26,303,946) $16,587,112
------------ --------- ----------- ------------ ------------
------------ --------- ----------- ------------ ------------
</TABLE>
See accompanying notes to the consolidated financial statements.
31
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,867,879) $(6,107,777)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on sale of assets. . . . . . . . . . . . . . . . . -- 31,423
Provision for doubtful accounts . . . . . . . . . . . . 22,000 -
Depreciation and amortization . . . . . . . . . . . . . 1,500,504 936,822
Net barter activity . . . . . . . . . . . . . . . . . . (14,177) 11,927
Stock option and stock award compensation . . . . . . . -- 24,991
Amortization and write-off of deferred expenses . . . . 2,288,141 103,086
Interest expense on bridge loan warrants. . . . . . . . 85,313 697,350
Decrease (increase) in:
Accounts receivable . . . . . . . . . . . . . . . . (713,183) (138,480)
Other receivables . . . . . . . . . . . . . . . . . 49,576 (6,586)
Prepaid expenses. . . . . . . . . . . . . . . . . . 517,291 (352,382)
Inventory . . . . . . . . . . . . . . . . . . . . . 74,046 372
Increase (decrease) in:
Accounts payable - trade. . . . . . . . . . . . . . 516,750 183,573
Accrued interest. . . . . . . . . . . . . . . . . . (217,243) 424,906
Other accrued expenses. . . . . . . . . . . . . . . 266,823 15,700
----------- -----------
Net cash used in operating activities . . . . . (5,492,038) (4,175,075)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . . . . . (607,471) (194,285)
Proceeds from disposal of property and equipment. . . . . . . -- 27,154
Sale of radio station . . . . . . . . . . . . . . . . . . . . -- 700,000
Acquisition of radio broadcasting
licenses and certain related assets. . . . . . . . . . . . (10,309,654) (46,730)
Investment in other intangible assets . . . . . . . . . . . . (261,056) (39,267)
----------- -----------
Net cash used in investing activities . . . . . . . (11,178,181) 446,872
----------- -----------
FINANCING ACTIVITIES:
Increase in line of credit. . . . . . . . . . . . . . . . . . 164,162 --
Repayment of long-term debt . . . . . . . . . . . . . . . . . (977,237) (528,456)
Repayment of capital lease obligation . . . . . . . . . . . . (29,205) (41,912)
Proceeds from issuance of common stock. . . . . . . . . . . . 19,960,840 17,130
Proceeds from issuance of debt. . . . . . . . . . . . . . . . 8,400,000 4,625,000
Repayment of short-term debt. . . . . . . . . . . . . . . . . (5,450,000) --
Redemption of Preferred Stock . . . . . . . . . . . . . . . . (2,615,595) --
----------- -----------
Net cash provided by financing activities . . . . . 19,452,965 4,071,762
----------- -----------
Increase in cash and cash equivalents. . . . . . . . . . . . . . 2,782,746 343,559
Cash and cash equivalents at beginning of year . . . . . . . . . 587,292 243,733
----------- -----------
Cash and cash equivalents at end of year . . . . . . . . . . . . $ 3,370,038 $ 587,292
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest. . . . . . . . . . . . $ 696,347 $ 66,642
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
32
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1996:
The Company recognized revenues of $640,903 and expenses of $626,726
through barter activity.
The Company issued 424,520 shares of common stock valued at $3,290,920
and incurred a covenant not-to-compete liability with an estimated net
present value of $1,072,284 related to the acquisition of radio
broadcast licenses and property and equipment.
The Company incurred capital lease liabilities totaling $45,680 and a
note payable of $250,000 related to the acquisition of property and
equipment.
The Company's redeemable convertible preferred stock accreted $368,757
during the year.
See accompanying notes to the consolidated financial statements.
33
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1995:
The Company recognized revenues of $1,027,587, incurred expenses of
$1,039,514 and sold $10,467 of goods through barter activity.
The Company granted 3,375 shares to a key employee of the Company under a
1994 agreement. The Company accrued $23,944 during 1994 for this grant and
incurred an additional $17,400 of expense in 1995.
The Company granted options to purchase 11,250 shares of common stock to
directors of the Company. An expense of $43,125 was recognized due to the
exercise price of the option being below market price on the date of grant.
The Company issued warrants to purchase 593,541 shares of common stock in
conjunction with obtaining Bridge Loan financing. A value of $860,858 was
assigned to these warrants.
The Company's redeemable convertible preferred stock accreted $151,474
during the year.
The Company converted $3,142,349 of debt and accrued interest to equity.
Warrants to purchase 1,088,684 shares of common stock, valued at $2,220,915,
were issued in exchange for a joint operations agreement.
The litigation settlements accrued for during 1994 were reclassed to long-
term debt as a result of the amendment signed during 1995.
The Company issued 35,573 shares of its common stock valued at $365,007 and
assumed notes payable of the seller totaling $520,838 in connection with the
acquisition of radio broadcast licenses and certain related assets.
The Company incurred capital lease liabilities totaling $62,514 and a note
payable of $17,115 in exchange for equipment.
See accompanying notes to the consolidated financial statements.
34
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business:
Children's Broadcasting Corporation (the "Company") 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 Radio
AAHS 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 in Minneapolis, and is distributed via
satellite to a network of radio stations around the country,
which includes stations owned or operated by the Company as
well as affiliated stations owned by third parties.
Consolidated Financial Statements:
The financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All references to the
Company in these financial statements relate to the
consolidated entity. All significant intercompany accounts and
transactions are eliminated in consolidation.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Property, Equipment and Intangible Assets:
Property, equipment and intangible assets are stated at cost.
Depreciation and amortization are computed using the straight-
line method and are charged to expense based upon the estimated
useful lives of the assets. Expenditures for additions and
improvements are capitalized, while repairs and maintenance are
expensed as incurred.
Revenue:
The Company reports revenue net of commissions withheld by
advertising agencies.
Barter Transactions:
Included in revenues and expenses are nonmonetary transactions
arising from on-air advertising time bartered by the Company
for certain goods and services.
35
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Barter Transactions (continued):
Revenue from such "barter" transactions is based on the fair
market value of the goods and services received, and is
recognized when the related advertisements are broadcast.
Expense or capitalization related to the usage of such goods
and services is recognized when they are used or placed in
service.
The following represents the barter activity for the respective
years:
Barter activity, net - January 1, 1995 $ 45,829
Barter revenues 1,027,587
Barter expenses (1,039,514)
Sale of station WDCT (10,467)
-----------
Barter activity, net - December 31, 1995 23,435
Barter revenues 640,903
Barter expenses (626,726)
-----------
Barter activity, net - December 31, 1996 $ 37,612
-----------
-----------
Net Loss Per Share:
Net loss per share is computed based on the weighted average
number of shares outstanding during the period. Outstanding
options and warrants are not considered as their effect would
be anti-dilutive.
Reverse Stock Split:
On January 11, 1996, the Company's Board of Directors approved
a one-for-two reverse stock split of the Company's common stock
effective January 23, 1996, and simultaneously approved an
increase of the par value of the common stock to $.02 per
share. Accordingly, all share, per share, weighted average
share, stock option and stock warrant information has been
restated to reflect the split.
Income Taxes:
The Company accounts for income taxes using the liability
method. Deferred income taxes are provided for temporary
differences between financial reporting and tax basis of assets
and liabilities.
36
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of accounts
receivable. Accounts receivable arise from sale of on-air
advertising time to the Company's customer base located
throughout the network broadcast area. The Company performs
ongoing credit evaluations of its customers' financial
condition, and generally requires no collateral from its
customers. The Company's credit losses are subject to general
economic conditions of the various retail and services provider
industries represented in its customer base.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
New Pronouncements:
Effective January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of". The new standard
establishes new guidelines regarding when impairment losses on
long-lived assets, which include property and equipment,
certain identifiable intangible assets and goodwill, should be
recognized and how impairment losses should be measured. The
adoption of this standard did not have an impact on the
Company's financial position or results of operations.
Effective January 1, 1996, the Company adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 establishes a new, fair value-
based method of measuring stock-based compensation, but does
not require an entity to adopt the new method for preparing its
basic financial statements. For entities not adopting the new
method for preparing basic financial statements, SFAS No. 123
requires disclosures in the footnotes of pro forma net earnings
and earnings per share information as if the fair value-based
method had been adopted.
Reclassifications:
Certain amounts in the 1995 financial statements have been
reclassified to conform with the 1996 presentation. These
reclassifications have no effect on the accumulated deficit or
net loss previously reported.
37
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: CONTINUED EXISTENCE AND MANAGEMENT'S PLAN
During 1996, the Company incurred a net loss of $9,867,879 and
a negative cash flow from operations of $5,492,038, resulting
in a working capital position of negative $5,489,229 and an
accumulated deficit totaling $26,303,946 at December 31, 1996.
Given these circumstances and the Company's expected working
capital losses in 1997, additional capital will be necessary to
sustain the Company's operations.
In this regard, management has continued its efforts to secure
the funding holdbacks of the finance company term note payable
which totaled $4,000,000 at December 31, 1996. In February
1997, the Company received an additional $2,500,000 of the term
loan while $1,500,000 continues to be held back at February 28,
1997 (Note 8). During 1996, management also engaged investment
bankers to explore strategic alternatives. These investment
bankers continue to hold discussions with various potential
strategic partners with a view toward entering into various
joint venture, sale or merger transactions.
Management believes the amount of cash required by the
Company's operations will decline in 1997 as a result of
increased advertiser acceptance of its children's radio format.
Further, management believes that this decline in operating
cash requirements when combined with proceeds from the finance
company term loan and from potential transactions resulting
from its investment banker relationships will allow for
adequate funding of the Company's cash requirements through
December 31, 1997, although no assurance regarding the success
of these efforts can be provided at this time.
In the event that management's plans as described above are not
successful, the Company may be forced to curtail acquisitions
or other projects, sell or lease current assets, delay certain
capital projects, or be forced to reduce its operations. The
consolidated financial statements do not contain any
adjustments which might be necessary if the Company is unable
to continue as a going concern.
NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS
KKYD-AM, Denver, Colorado:
In October 1994, the Company signed an agreement to operate
KKYD-AM radio station under a Local Programming and Marketing
Agreement (LMA) for a period of five years beginning November
1, 1994. Under the LMA, monthly payments of $7,900 are made by
the Company to cover the operating expenses of the station.
The Company operated the station under the LMA agreement until
November 1, 1995, when the Company executed a previously signed
asset purchase agreement. The consideration for the
acquisition aggregated $932,575 consisting of cash payments
totaling $46,730, the assumption of two notes payable of the
seller in the amounts of $465,000 and $55,838, and the issuance
of 35,573 shares of common stock valued at $365,007. The
$932,575 purchase price was allocated based upon the estimated
fair market value of the assets acquired, consisting of a
broadcast license of $819,495 a covenant not-to-compete of
$55,838 and property and equipment totaling $57,242.
38
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS
(CONTINUED)
KCAZ-AM, Mission, Kansas:
In September 1994, the Company signed an agreement to operate
KCAZ-AM radio station under an LMA for a period of five years
beginning October 1, 1994. Under the LMA, monthly payments of
$8,200 are made by the Company to cover the operating expenses
of the station. If these payments are not sufficient to cover
operating expenditures, additional amounts are paid. No
additional amounts were paid during the years ended
December 31, 1996 and 1995.
WJDM-AM, Elizabeth, New Jersey:
In June 1996, the Company acquired all of the issued and
outstanding shares of common stock of Radio Elizabeth, Inc.
which holds the radio broadcast license for WJDM-AM and a
special temporary authorization for an expanded band radio
frequency. The consideration for the acquisition aggregated
$11,580,000 consisting of 270,468 shares of common stock valued
at $2,500,000, cash payments totaling $7,580,000 and payments
totaling $1,500,000 pursuant to a ten year covenant not-to-
compete agreement. The $11,580,000 purchase price and related
acquisition expenses incurred of $227,784 were allocated based
upon the fair market value of the assets acquired, consisting
of broadcast licenses of $10,179,984, property and equipment
aggregating $140,000, and a covenant not-to-compete of
$1,072,284 based upon the net preset value of the payments due
under the agreement.
During the period February to June 1996, the Company operated
the station on behalf of the seller pursuant to a LMA.
Additionally, the Company has agreed to allow the seller to
continue operation over the existing licensed frequency
pursuant to a LMA for so long as dual broadcast operations over
the original and expanded band frequencies are allowed by the
FCC, up to a maximum of five years, for nominal consideration.
WCAR-AM, Livonia, Michigan:
In June 1996, the Company acquired the radio broadcast license
and certain other assets of the radio station WCAR-AM for
$1,500,000 in cash. The purchase price and acquisition
expenses incurred of $70,920 were allocated based upon the fair
market value of the assets acquired consisting of a broadcast
license of $1,251,360 and property and equipment totaling
$319,560.
39
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS
(CONTINUED)
WPWA-AM, Chester, Pennsylvania:
In September 1996, the Company acquired the radio broadcast
licenses and certain other assets of the radio station WPWA-AM.
The consideration for the acquisition aggregated $1,320,000
consisting of 79,052 shares of common stock valued at $500,000
and cash payments totaling $820,000. The purchase price and
related acquisition expenses incurred of $17,750 were allocated
based upon the fair market value of the assets acquired
consisting of a broadcast license of $923,200 and property and
equipment totaling $414,550.
WAUR-AM, Sandwich, Illinois:
In September 1996, the Company entered into an asset purchase
agreement to acquire the radio broadcast license and certain
other assets of the radio station WAUR-AM. The consideration
for the acquisition aggregated $3,900,000 consisting of cash
payments totaling $2,000,000, a $1,400,000 note payable and
payments totaling $500,000 pursuant to a ten year covenant not-
to-compete agreement. During 1996, the Company satisfied a
portion of the purchase price by issuing 75,000 shares of its
common stock valued at $290,920 and making a cash payment of
$81,000. Subsequently, the acquisition was completed in
January, 1997.
KMUS-AM, Muskogee, Oklahoma:
On December 31, 1996, the Company entered into an asset
purchase agreement to acquire the radio broadcast license and
certain other assets of the radio station KMUS-AM for $400,000
payable with 82,051 shares of common stock. In January 1997,
the Company issued 82,051 shares of common stock to the seller
in exchange for a subscription note receivable of $400,000
which bears interest at a variable rate (11.0% at January 11,
1997). The Company expects that the seller will satisfy the
subscription note receivable through transfer of the station
assets pursuant to the aforementioned asset purchase agreement.
40
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS
(CONTINUED)
The unaudited pro forma results of operations which follow assume that
the acquisitions of WJDM-AM, WCAR-AM and WPWA-AM had occurred at
January 1, 1995. In addition to combining the historical results of
operations of the Company and the acquired businesses, the pro forma
calculations include adjustments for the estimated effect on the
historical results of operations for depreciation, interest and
issuance of common stock related to the business acquisitions.
1996 1995
------------ -----------
Revenues $ 6,086,647 $ 5,926,900
Loss from operations (9,787,680) (5,484,798)
Net Loss (10,149,348) (6,693,061)
Net loss per share (1.82) (1.56)
Weighted average number of
shares outstanding 5,570,000 4,287,500
The unaudited proforma results do not purport to be
indicative of the results of operations which actually would
have resulted had the acquisitions occurred on January 1, 1995
or of future results of operations of the consolidated entities.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1996 1995 IN YEARS
---------- ---------- -----------
<S> <C> <C> <C>
Land . . . . . . . . . . . . . . . $ 568,462 $ 241,966
Buildings. . . . . . . . . . . . . 742,962 215,313 30
Studio and broadcast equipment . . 2,162,022 1,745,346 5-10
Towers . . . . . . . . . . . . . . 943,328 741,668 13
Office equipment . . . . . . . . . 1,102,632 909,491 5
Leasehold improvements . . . . . . 211,998 150,269 5
Equipment under capital leases . . 172,391 126,711 5
---------- ----------
5,903,795 4,130,764
Less accumulated depreciation. . . 1,628,864 1,046,995
---------- ----------
Property and equipment, net. . . . $4,274,931 $3,083,769
---------- ----------
---------- ----------
</TABLE>
Depreciation expense, including that on equipment under capital
leases, was $586,901 and $510,035 for the years ended
December 31, 1996 and 1995, respectively.
Accumulated depreciation on the equipment under capital leases
was $65,567 and $37,975 at December 31, 1996 and 1995,
respectively.
41
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1996 1995 IN YEARS
----------- ---------- -----------
<S> <C> <C> <C>
Broadcast license. . . . . . . . . $17,671,494 $5,301,609 20
Less accumulated amortization. . . 946,841 332,036
----------- ----------
Broadcast licenses, net. . . . . . $16,724,653 $4,969,573
----------- ----------
----------- ----------
Trademarks and tradenames. . . . . $ 443,380 $ 443,380 6
Non-compete agreement. . . . . . . 1,619,755 547,471 2-10
Other. . . . . . . . . . . . . . . 1,110,615 132,542 5
----------- ----------
3,173,750 1,123,393
Less accumulated amortization. . . 660,211 385,173
----------- ----------
Intangible assets, net . . . . . . $ 2,513,539 $ 738,220
----------- ----------
----------- ----------
</TABLE>
Amortization expense related to the intangible assets totaled
$913,603 and $426,787 for the years ended December 31, 1996 and
1995, respectively.
NOTE 6: SHORT-TERM DEBT
Short-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Bridge Loan Series I, interest at 10%. . . . . . . -- $1,250,000
Bridge Loan Series II, interest at 10% . . . . . . -- 400,000
Note payable, interest at 8% . . . . . . . . . . . -- 500,000
Note payable to a director of the Company,
interest at 10%. . . . . . . . . . . . . . . . . -- 900,000
Note payable, interest at 10%. . . . . . . . . . . -- 500,000
Note payable, interest at 10%. . . . . . . . . . . -- 1,000,000
---------- ----------
$ -- $ 4,550,000
---------- ----------
---------- ----------
</TABLE>
In January 1996, the Company borrowed $750,000 pursuant to a
promissory note with interest at 6%. Additionally, in March
1996, the Company borrowed $150,000 from a director of the
Company pursuant to a promissory note with interest at 10%. All
amounts due under short-term notes payable were repaid in March
1996 after the completion of a public offering of the Company's
common stock.
42
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: LINE OF CREDIT
In November 1996, the Company obtained a discretionary line of
credit pursuant to the finance company credit agreement (Note 8).
The line of credit is limited to the lessor of $1,000,000 or a
percentage of accounts receivable. At December 31, 1996, the
maximum credit available was approximately $780,000 of which
$615,838 was unused. Interest is charged at a variable rate
(11.0% at December 31, 1996).
NOTE 8: LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Term note payable pursuant to the finance
company credit agreement, interest at a
variable rate (11.0% at December 31, 1996),
payable in monthly installments of $220,100
plus applicable interest beginning June 1997
through November 2000 when the remaining
balance is payable in full. Due to the
recurring requirement to meet certain
restrictive financial covenants, this entire
indebtedness is classified as current at
December 31, 1996. . . . . . . . . . . . . . . . . . . $7,885,000 $ --
Covenant not-to-compete, non-interest bearing,
payable in quarterly installments of $37,500
through June 2006, less unamortized discount
at 9.25% ($390,514 at December 31, 1996).. . . . . . . 1,034,486 --
Note payable due to a bank, interest at 9.25%,
payable in monthly installments of principle
and interest totaling $2,164 through
September 2021, secured by the real property
of station KKYD-AM in Denver.. . . . . . 249,414 --
Note payable bearing interest at 9%, payable in
annual installments totaling $30,000 through May
2000 when the remaining balance is payable in full.
The note payable is secured by substantially all
corporate assets and real property owned by the
majority shareholder.. . . . . . . . . . . . . . . . . 120,471 138,047
Various unsecured installment notes payable,
bearing interest from 0% to 8.5% and due at various
maturities through September 2001. . . . . . . . . . . 103,903 183,467
Various secured installment notes payable, bearing
interest from 8.4% to 9.25% and due at various
maturities through November 1997.. . . . . . . . . . . 6,476 27,660
</TABLE>
43
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Covenants not-to-compete bearing interest at 7%.
The obligations were repaid after completion of
the finance company note payable . . . . . . . . . . . -- 420,529
Note payable bearing interest at 9.75%. The note
payable was repaid after completion of the finance
company note payable.. . . . . . . . . . . . . . . . . -- 400,000
---------- ----------
9,399,750 1,169,703
Less current portion . . . . . . . . . . . . . . . . . 8,033,758 297,365
---------- ----------
Long-term debt, less current portion . . . . . . . . . $1,365,992 $ 872,338
---------- ----------
---------- ----------
</TABLE>
In November 1996, the Company entered into an agreement with a
finance company (the "Credit Agreement") under which three credit
facilities (the "Facilities") were established. The Facilities
include a $11,500,000 term note payable, a $1,000,000 line of
credit (Note 7), and a $4,000,000 acquisition facility which was
unused at December 31, 1996. The Facilities mature on November
26, 2000 and are subject to certain restrictive covenants. The
restrictive covenants include, but are not limited to, the
following: the Company may incur additional indebtedness or liens
on its assets only under specified circumstances, must maintain
the principle nature of its business, cannot dispose of
significant assets, must maintain stockholders equity of at least
$14,100,000, must maintain working capital of at least $2,000,000,
and may not make capital expenditures in excess of $1,250,000
during 1997. As of December 31, 1996, the Company had not met
certain of the covenant requirements; however, on March 27, 1997,
the finance company waived its rights pursuant to these
violations. Pursuant to generally accepted accounting principles
(EITF No. 86-30), if similar restrictive covenants must be met at
future interim periods, the debt must continue to be classified
as current unless it is probable that the Company will satisfy
the covenants in the future or the finance company agrees to
waive its rights to such potential future covenant violations.
The finance company would not provide the Company with
such a waiver and accordingly, the Company has reflected all
related outstanding debt as a current liability on the
accompanying consolidated balance sheet. The Company's
indebtedness under the Facilities is secured by substantially all
the assets of the Company and its subsidiaries, by a pledge of
its subsidiaries' stock and by a guarantee of its subsidiaries.
Approximately $4,000,000 of the term note payable proceeds were
held back by the finance company pending performance by the
Company of certain post-closing conditions. In February 1997,
the Company satisfied certain of these conditions and received an
additional advance of $2,500,000 while $1,500,000 continues to be
held back at February 28, 1997.
44
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt, including classification
of the entire term note payable to the finance company
(aggregating $7,885,000 at December 31, 1996) as a current
obligation, are as follows:
Year ending December 31:
1997 . . . . . . . . . . $8,033,758
1998 . . . . . . . . . . 141,241
1999 . . . . . . . . . . 134,752
2000 . . . . . . . . . . 173,113
2001 . . . . . . . . . . 109,040
Thereafter . . . . . . . 807,846
----------
$9,399,750
----------
----------
The Company believes that the carrying value of the debt
approximates its fair market value at December 31, 1996, as the
Company's borrowing rate has not changed substantially since the
issuance of the debt.
NOTE 9: OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain computer equipment under capital
leases expiring through October 2001. Future minimum lease
payments for each of the next five years are as follows:
Year ending December 31:
1997 . . . . . . . . . . . . . . . . . . . $ 49,012
1998 . . . . . . . . . . . . . . . . . . . 35,593
1999 . . . . . . . . . . . . . . . . . . . 29,754
2000 . . . . . . . . . . . . . . . . . . . 13,627
2001 . . . . . . . . . . . . . . . . . . . 11,955
-----------
Total minimum lease payments. . . . . . . . . . 139,941
Less amount representing interest . . . . . . . (34,446)
-----------
Present value of net minimum lease payments . . 105,495
Less current portion. . . . . . . . . . . . . . (34,705)
-----------
Long-term portion . . . . . . . . . . . . . . . $ 70,790
-----------
-----------
NOTE 10: COMMITMENTS AND CONTINGENCIES
Operating Leases and Other Commitments:
The Company leases office, broadcast space and a transmitter
site from related parties, including the Company's majority
shareholder. Other commitments include office equipment,
satellite transmission rights, local programming and marketing
agreements, license agreements and similar type contracts.
45
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Operating Leases and Other Commitments: (Continued)
Future minimum lease and other commitment payments are as follows
for the years ending December 31:
RELATED THIRD
PARTIES PARTIES TOTAL
---------- ---------- ----------
1997 $ 284,000 $ 534,145 $ 818,145
1998 300,000 384,467 684,467
1999 313,000 269,006 582,006
2000 324,000 79,651 403,651
2001 280,000 65,751 345,751
---------- ---------- ----------
$1,501,000 $1,333,020 $2,834,020
---------- ---------- ----------
---------- ---------- ----------
Total rent expense was $792,069 and $571,765 for the years
ended December 31, 1996 and 1995, respectively. Rent expense
to related parties during those same years was $244,518 and
$148,403, respectively.
Litigation Settlements:
In February 1995, the Company settled two separate employment
disputes. One settlement requires the Company to pay $67,000
in cash and allow the exercise of options to purchase 2,500
shares of the Company's common stock. The second settlement
requires the Company to pay $40,000 in cash, to deliver common
stock with a total value of $117,000 as of the settlement date
and to issue a $77,000 note, payable over two years.
During 1995, the Company completed performance of the first
settlement agreement. The second agreement was amended to
require the Company to issue two $42,000 non-interest bearing
notes payable over two years beginning April for 1995, to issue
an $85,000 note with interest at 8.5% interest payable over
three years beginning August 1, 1995 and a $78,500 note with
interest at 8% payable over five years beginning October 1,
1995. Additional expense of $10,570 was recognized during 1995
ad a result of this amendment.
AAHS Children's Foundation:
In December 1994, the AAHS Children's Foundation was
incorporated and the Company's board of directors authorized
the contribution of 25,000 shares of the Company's common stock
to capitalize the Foundation. No shares have been issued as of
December 31, 1996. A contribution expense will be recorded for
the fair market value of the shares on the date the shares are
actually issued.
46
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Pending Litigation:
Following the termination of the ABC Radio Network's Joint
Operations Agreement (Note 12) by ABC, the Company filed a
lawsuit against The Walt Disney Company and ABC for 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. There can be no
assurance that the Company will prevail in this litigation or
recover any of the damages sought. Additionally, the Company
authorized the issuance of up to 200,000 shares of the
Company's common stock for payment of the legal fees associated
with this litigation, none of which were issued at December 31,
1996.
Transaction Commissions:
During 1996, the Company has entered into agreements with two
brokers whereby the brokers will receive a commission in the
event of the completion of certain defined financing, radio
station sale, and strategic partnership transactions with
specified parties. As of December 31, 1996, no amounts were
due under the agreements.
401(k) Savings/Profit-Sharing Plan
The Company has a 401(k) plan available to all employees
meeting certain service requirements. Eligible employees may
contribute a portion of their annual salary to the plan,
subject to certain limitations. The Company may make matching
contributions and also may provide profit-sharing contributions
at the discretion of its board of directors. Employees become
fully vested in the Company contributions after five years of
service. There have been no Company contributions in 1996 or
1995.
NOTE 11: REDEEMABLE CONVERTIBLE PREFERRED STOCK
47
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
On August 23, 1994, the Company issued 290,213 shares of
redeemable convertible preferred stock in partial payment for
acquiring certain assets and liabilities of Orange County
Broadcasting Corporation. This stock was redeemed in November
1996 for consideration totaling $2,615,595 utilizing funds
received in connection with the Company's finance company note
payable (Note 8). For financial reporting purposes, the
preferred stock had been discounted from its stated value of $10
per share at the redemption date, originally five years from the
date of issuance to its present value using a discount rate of
7%. Prior to the redemption, this balance had been accreted to
its stated value over the original five-year nonredeemable period.
NOTE 12: SHAREHOLDERS' EQUITY
Common Stock:
The Company has authorized 50,000,000 shares of common stock at
$.02 par value. The Company has issued 5,609,239 voting shares
of which 5,609,239 and 2,945,183 are outstanding at December
31, 1996 and 1995, respectively, and 189,041 nonvoting shares
of which all are outstanding at December 31, 1996 and 1995,
respectively.
Public Securities Offering:
In March 1996, the Company issued 2,200,000 shares of its
common stock at a price of $10 per share resulting in proceeds
net of commission and other direct expenses (aggregating
$2,215,503) of $19,784,497. Additionally, the direct public
offering expenses include payment of $100,000 to a corporation
related through common control as a bonus to that company for
the contributions its employee made towards the successful
completion of the offering.
Incentive and Non-Qualified Stock Options Plans:
The Company established a stock option plan in 1991 to provide
incentives to employees whereby 100,000 shares of the Company's
common stock have been granted. The options are exercisable on
the date of grant and are generally valued at the fair market
value of the stock on the date of grant. The options expire on
various dates through January 2005.
During 1991, the Company also established a plan to grant non-
qualified stock options to key employees and directors of the
Company. These options become exercisable through 1996 and
expire through July 2003.
48
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
Incentive and Non-Qualified Stock Options Plans (Continued)
In March 1994, the board adopted the 1994 Stock Option Plan
whereby 1,000,000 shares of the Company's common stock have
been reserved. The options can be either incentive stock
options or nonstatutory options and are generally valued at the
fair market value of the stock on the date of grant. The
options vest over a three year period and expire through
December 2001.
In May 1994 the board adopted the 1994 Director Stock Option
Plan whereby 125,000 shares of the Company's common stock have
been reserved. The plan provides for automatic grants of non-
qualified options to purchase 3,750 shares to outside directors
upon first becoming a director and an additional 3,750 shares
upon each anniversary of the original grant. The shares become
exercisable one year from the date of grant and expire five
years thereafter.
In May 1996 the Board adopted the 1996 employee stock purchase
plan whereby 400,000 shares of the Company's common stock have
been reserved. The reserved shares may be purchased at their
fair market value during specified offering periods. No shares
were issued under the plan during 1996.
A summary of the status of the Company's stock option
plans as of December 31, 1996 and 1995 and changes during the
years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ---------------------------
Weighted-Average Weighted-Average
Plan Option Shares Exercise Price Shares Exercise Price
- ----------- ---------- ------------------ ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 570,316 $ 6.71 363,816 $5.70
Granted 831,015 5.24 213,750 8.29
Exercised (21,782) 7.94 (7,250) 2.36
Forfeited (35,743) 7.36 -- --
--------- -------
Outstanding at end of year 1,343,806 5.74 570,316 6.71
--------- -------
--------- -------
Options exercisable at year end 436,425 6.33 325,400 5.79
Weighted-average fair value of
options granted during the year $2.56 $4.50
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- --------------- ----------- ----------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.00 to 4.99 525,781 3.9 years $3.22 143,766 $2.35
5.00 to 7.99 479,775 3.9 years 6.43 108,525 7.45
8.00 to 12.76 338,250 3.5 years 8.71 184,134 8.77
----------- -----------
2.00 to 12.76 1,343,806 3.8 years 5.74 436,425 6.33
----------- -----------
----------- -----------
</TABLE>
Included in the table above are certain options outstanding which are
performance based which become exercisable on the achievement of
certain goals reached, but no later than 2005. A summary of these
performance based options is presented below:
<TABLE>
<CAPTION>
1996 1995
---------------------------- -----------------------------
Weighted-Average Weighted-Average
Performance Options Shares Exercise Price Shares Exercise Price
- ------------------- -------- ------------------ ---------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 183,125 $7.43 8,750 $7.70
Granted 2,500 8.38 183,125 7.43
Exercised -- -- -- --
Forfeited (25,000) 7.26 (8,750) 7.70
-------- ----------
Outstanding at end of year 160,625 7.60 183,125 7.43
-------- ----------
-------- ----------
Options exercisable at year end 50,000 7.70 -- --
Weighted-average fair value of
options granted during the year $4.02 $4.93
</TABLE>
As of December 31, 1996, the performance options outstanding under
the Plans have exercise prices between $7.26 and $8.38 and a weighted-
average remaining contractual life of 4.9 years.
49
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
Incentive and Non-Qualified Stock Options Plans (Continued)
FASB Statement 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information regarding
net income and earnings per share as if compensation cost for
the Company's stock option plans had been determined in
accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively:
dividend yield for each year; expected volatility of 70.2 and
66.1 percent; risk-free interest rates of 6.0 and 7.2 percent.
Under the accounting provisions of FASB Statement 123, the
Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
1996 1995
----------- -----------
Net loss:
As reported $(9,867,879) $(6,107,777)
Pro forma (11,996,781) (7,070,490)
Net loss per share:
As reported (1.99) (2.22)
Pro forma $ (2.40) $ (2.56)
Affiliate Warrant Program:
In 1994, the Company implemented a program whereby the Company
could grant warrants to affiliates carrying its programming and
has reserved 375,000 shares of its common stock for issuance
under this program. Warrants are to be granted to affiliates
based upon number of persons within the affiliate's area
(coverage). Warrants are issued to purchase 500 shares of
common stock for a specified coverage area. The warrants vest
in one-third increments upon the first three anniversary dates
of entry into an affiliation agreement, contingent upon such
affiliates having carried the Company programming for at least
18 hours per day for the preceding year as specified in the
affiliation agreement. The warrants expire two years following
full vesting. This program qualifies as a performance based
warrant program under which performance expense will be
measured at each anniversary date. During 1995, warrants have
been issued to purchase 25,000 shares of common stock under
this program at an exercise price of $8.00.
50
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
Sponsor Partnership Warrant Program:
In 1994, the Company reserved 250,000 shares of its common
stock under a program to grant warrants to qualified sponsors
committing to a three year advertising program. This
commitment must be renewed in years two and three in order for
the warrants to vest. This program qualifies as a performance
based warrant program under which an expense will be measured
as the warrants vest. No warrants have been issued under this
program.
Short Term Debt Conversion:
During 1995, Bridge Loan Series I Notes totaling $1,250,000
were converted into 156,250 shares of common stock, and Bridge
Loan Series II Notes totaling $1,100,000 were converted into
137,500 shares of common stock by exercising warrants with a
stated exercise price of $8.00. The accrued interest on these
Bridge Loan Notes of approximately $240,000 was converted into
30,003 shares of common stock based on a conversion price of
$8.00 per share. In addition, unsecured promissory notes
totaling $525,000 and accrued interest of $27,320 were
converted into 55,232 shares of common stock based on a
conversion price of $10.00 per share.
Warner Music Agreement:
In June 1994, the Company entered into an agreement with Warner
Music Enterprises, Inc. under which the Company granted an
exclusive license to manufacture, market and distribute a Radio
AAHS Magazine and compact disc. Upon signing this agreement,
the Company granted Warner Music Enterprises, Inc. warrants to
purchase 100,000 shares of the Company's common stock at $7.64
per share. In November 1995, Time Warner announced the closing
of Warner Music Enterprises, the division responsible for
producing the Radio AAHS magazine resulting in the 1996
cancellation of the warrants.
ABC Radio Networks Joint Operations Agreement:
In November 1995, the Company entered into an agreement with
ABC Radio Networks, Inc. pursuant to which ABC's affiliate
development and national advertising sales staffs were to add
the AAHS format to their inventory, assisting the Company in
marketing the format to broadcasters and advertisers. The ABC
Agreement also provided for a cooperative effort in developing
sales, marketing and research programs. In consideration for
entering into the Joint Operations Agreement and providing
services to the Company, ABC received a payment of $25,000 per
month and a warrant to purchase 1,088,684 non-voting shares of
common stock. The value of these warrants was determined to be
approximately $2,221,000 using the Black Sholes Pricing Model.
Approximately $606,000 and $96,500 was charged to operations
during the period January to July 1996 and in
51
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
ABC Radio Networks Joint Operations Agreement (continued):
1995, respectively. In July 1996, ABC notified the Company of
its intent to terminate the agreement and the remaining balance
of $1,518,500 was written-off and the warrant was canceled.
Brokerage Fee:
In July 1996 and in connection with the acquisition of WJDM-AM,
Elizabeth, New Jersey (Note 3), the Company granted warrants to
purchase 125,000 shares of the Company's common stock at an
exercise price of $11.00 per share as a brokerage commission.
The warrants become exercisable in June 1997 and expire in June
2002.
Finance Company Credit Agreement:
Upon completion of the Finance Company Credit Agreement (Note
8), the Company granted the finance company warrants to
purchase 50,000 shares of the Company's common stock at an
exercise price of $4.40 per share. The warrants became
immediately exercisable and expire in November 2001.
Additionally, these warrants are convertible into a variable
number of shares of common stock which, upon conversion, allows
the finance company to receive a benefit of an amount equal to
the amount obtainable if the options were exercised without
payment of the $220,000 exercise price.
The following table summarizes the warrants to purchase shares
of the Company's common stock:
<TABLE>
<CAPTION>
EXERCISE
WARRANTS PRICE
OUTSTANDING EXERCISABLE PER SHARE
----------- ----------- -------------
<S> <C> <C> <C>
Balance at January 1, 1995 842,670 731,336 2.40 - 13.80
Granted:
Bridge Loan Series II 90,000 90,000 8.00
Extension - Bridge Loan Series I 62,500 62,500 8.00
Extension - Bridge Loan Series II 37,500 37,500 8.00
Debt conversion - Bridge Loan
Series I 62,500 62,500 10.00
Debt conversion - Bridge Loan
Series II 55,000 55,000 10.00
Affiliates 25,000 16,666 8.00
Other 5,000 5,000 8.00
Note payable, interest at 8% 68,333 68,333 11.50
Extension - Note payable, interest at 8% 8,333 8,333 11.50
</TABLE>
52
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
EXERCISE
WARRANTS PRICE
OUTSTANDING EXERCISABLE PER SHARE
----------- ----------- --------------
<S> <C> <C> <C>
ABC Radio Networks, Inc. 1,088,684 1,088,684 10.26
Note payable, 10%, to a company director 84,375 84,375 10.00
Note payable, interest at 10% 37,500 37,500 12.00
Note payable, interest at 10% 87,500 87,500 11.00
Exercised:
Debt conversion -
Bridge Loan Series I (156,250) (156,250) 8.00
Debt conversion -
Bridge Loan Series II (137,500) (137,500) 8.00
Became exercisable - 105,667 7.64
----------- ----------- --------------
Balance at December 31, 1995 2,261,145 2,247,144 $2.40 - $13.80
Granted:
Brokerage fee 125,000 - 11.00
6% promissory notes 57,500 57,500 13.00
Finance company note payable 50,000 50,000 4.40
Exercised:
Private placements warrants (12,500) (12,500) 4.00
Other (1,870) (1,870) 2.40
Canceled:
ABC Radio Networks, Inc. (1,088,684) (1,088,684) 7.63
Warner Music Enterprises (100,000) (100,000) 7.63
----------- ----------- --------------
Balance at December 31, 1996 1,290,591 1,151,590 $2.40 - $13.80
----------- ----------- --------------
----------- ----------- --------------
</TABLE>
Included in the table above are warrants issued in connection
with bridge loans and other short-term notes payable. The value
of these warrants was charged to interest expense over the term
of the related debt agreement and during the years ended December
31, 1996 and 1995, the Company incurred interest expense
aggregating approximately $238,000 and $726,000, respectively.
The value of the warrants related to the issuance of new debt was
determined based on the difference between the stated interest
rate and the Company's estimated effective borrowing rate.
Additionally, the value of the warrants related to debt
conversions and extensions was determined based on the difference
between the exercise or conversion price and the fair market
value of the Company's common stock, or by comparison to the
value of similar warrants issued by the Company at approximately
the same date.
53
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: RELATED PARTY TRANSACTIONS
Certain corporate expenses are shared with and paid by a related
corporation under common control. The portion of these expenses
allocated to the Company are then reimbursed by the Company to
the related party. During the years ended December 31, 1996 and
1995, $750,000 and $600,000, respectively, of such charges were
allocated to and paid by the Company and are reflected as
corporate expenses in the consolidated statement of operations.
The allocation is based on estimated usage of the product or
service by each company. Management reviews the allocation
periodically and believes that the allocation method is
reasonable.
NOTE 14: INCOME TAXES
At December 31, 1996, the Company has net operating loss
carryforwards of approximately $21,850,000 for income tax
purposes that expire in years 2007 through 2011. An ownership
change under Section 382 of the Internal Revenue Code occurred as
a result of the 1996 public stock offering which will limit the
amount of these net operating losses available each year.
A reconciliation of the statutory federal income tax rate
(benefit) and the effective tax rate as a percentage of income
(loss) before taxes on income is as follows:
1996 1995
------ ------
Statutory rate (benefit) (34.0)% (34.0)%
Operating losses generating no
current tax benefit 26.7 34.0
Deferred warrant costs associated
with the terminated ABC
marketing agreement 7.3 --
------ ------
Effective tax rate -- % -- %
------ ------
------ ------
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities as of December 31 are as
follows:
1996 1995
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 8,086,000 $ 5,236,000
Other items not yet deductible for
tax purposes 291,000 305,000
----------- -----------
Total net deferred tax asset 8,377,000 5,541,000
Valuation allowance for deferred
tax assets (8,377,000) (5,541,000)
----------- -----------
Net deferred tax assets $ -- $ --
----------- -----------
----------- -----------
As the Company has posted consistent losses since inception,
realization of the tax benefit related to these carryforwards is
uncertain. Accordingly, no deferred tax asset
54
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: INCOME TAXES (CONTINUED)
has been recorded to reflect their potential value. The net change
in the deferred tax valuation allowance was an increase of
$2,836,000 and $2,270,000 in 1996 and 1995, respectively.
55
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 27, 1996, the Board of Directors engaged BDO Seidman, LLP as the
Company's new independent accountant for the fiscal year ending December 31,
1996. During the two most recent fiscal years and through June 27, 1996, the
Company did not consult with BDO Seidman, LLP on items which (1) involved the
application of accounting principles to a specified transaction, either
completed or proposed, or involved the type of audit opinion that might be
rendered on the Company's financial statements, or (2) concerned the subject
matter of a disagreement or reportable event with the former auditor (as
described in Regulation S-K, Item 304(a)(2).
On June 27, 1996, the Company dismissed Ernst & Young LLP as its
independent accountant. Except for 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 Company's consolidated
financial statements as of and for the years ended December 31, 1994 and
1995, the reports of Ernst & Young LLP on the financial statements for the
past two fiscal years contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or
accounting principles. The Company's Audit Committee and Board of Directors
participated in and approved the decision to change independent accountants.
In connection with its audits for the years ended December 31, 1994 and 1995,
and through June 27, 1996, there have been no disagreements with Ernst &
Young LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of Ernst & Young LLP would have caused them
to make reference thereto in their report on the financial statements for
such years. During the years ended December 31, 1994 and 1995, and through
June 27, 1996, there have been no reportable events (as defined in Regulation
S-K, Item 304(a)(1)(v)).
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
MANAGEMENT
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Christopher T. Dahl 53 Chairman of the Board of Directors and President
James G. Gilbertson 35 Chief Operating Officer, Chief Financial Officer and Treasurer
Lance W. Riley 46 General Counsel and Secretary
Gary W. Landis 43 Executive Vice President of Programming
Melvin E. Paradis 58 Executive Vice President of Operations
Barbara A. McMahon 41 Executive Vice President of Affiliate Relations
Rick E. Smith 35 Executive Vice President of National Sales
Denny J. Manrique 47 Executive Vice President of Sales Development
Richard W. Perkins 66 Director
Rodney P. Burwell 58 Director
Mark A. Cohn 39 Director
Russell Cowles II 60 Director - elect
</TABLE>
CHRISTOPHER T. DAHL has been President and a Director of the Company since
its inception in February 1990. Mr. Dahl is Chairman and Chief Executive
Officer of CAC. Prior to founding CAC in 1986, Mr. Dahl managed his private
investments. From 1969 to 1979, he was the founder and President of a group
of companies involved in photofinishing, retail photo sales, home sewing
notions, toy distribution and retail craft stores. He was employed by
Campbell-Mithun and Knox Reeves Advertising from 1965 through 1969.
JAMES G. GILBERTSON has served as the Company's Chief Operating Officer
since April 1996, and its Chief Financial Officer since July 1992 and became
an Executive Vice President in March 1994. From June
56
<PAGE>
1988 to July 1992, he was the Chief Financial Officer of Parker
Communications, which operated a group of radio stations. From 1985 to June
1988, he was Controller of the radio division of Palmer Communications
located in Des Moines, Iowa. Prior to joining Palmer Communications, Mr.
Gilbertson was a practicing certified public accountant with the firm of
Ernst & Young.
LANCE W. RILEY became the General Counsel and Secretary of the Company in
March 1994. Mr. Riley has been practicing law since 1977. His primary area
of practice is radio broadcasting and he held the position of Chairman of the
Communications Law Section of the Minnesota Bar Association from 1990 to
1994. Prior to joining the Company, Mr. Riley was partner in the firm of
Courey, Albers, Gilbert and Riley.
GARY W. LANDIS served as the Company's Vice President of Programming since
December 1992 and became an Executive Vice President in July 1994. From 1985
to 1992, Mr. Landis served as Vice President of Programming for Westwood One,
the second largest radio network company in the U.S. Between 1982 and 1985,
Mr. Landis served as Director of Programming for the RKO Radio Networks.
MELVIN E. PARADIS became the Company's Executive Vice President of
Operations in January 1996. He has been the President of Community Airwaves
Corporation since 1992 and the Chief Operating Officer of that company since
1987. Mr. Paradis has also owned and managed other radio stations for
several years.
BARBARA A. MCMAHON joined the Company in June 1993 to oversee the growth
of the network through affiliates and was promoted to Executive Vice
President of Affiliate Relations in June 1996. During the years 1980 through
1989, Ms. McMahon served as Director for NBC Radio Networks, Mutual
Broadcasting and RKO Radio Networks.
RICK E. SMITH became the Company's Executive Vice President of National
Sales in October 1996. From September 1994 to April 1995 he served as
Affiliate Relations Manager and then assumed the position of Marketing
Manager. Mr. Smith served as Vice President of Sales and Marketing for
Uncle B's Bakery, a national food manufacturer, from 1989 to 1994.
DENNY J. MANRIQUE served as Vice President of Children's Radio Network
from 1989 until it was acquired by the Company in 1990. From 1990 through
1994, Mr. Manrique operated an independent marketing firm which provided
sales representation services to the Company. Mr. Manrique was employed as
Vice President of Sales in January 1995 and was promoted to Executive Vice
President of Sales Development in October 1996.
RICHARD W. PERKINS has been a director of the Company since its inception.
For more than five years, Mr. Perkins has been President and Chief Executive
Officer of Perkins Capital Management, Inc., a registered investment advisor.
Mr. Perkins is also a director of CAC as well as the following publicly held
companies: Bio-Vascular, Inc., a medical products manufacturer; CNS, Inc., a
consumer products manufacturer; Discus Acquisition Corporation, a
manufacturer of metal products; Garment Graphics, Inc., a manufacturer of
printed software; Lifecore Biomedical, Inc., a medical device manufacturer;
Nortech Systems, Inc., an electronic sub-systems manufacturer; Eagle Pacific
Industries, Inc., a manufacturer of plastic pipe; and Quantech LTD., a
developer of immunological tests.
RODNEY P. BURWELL has been a director of the Company since June 1992.
Since 1979, Mr. Burwell has served as Chairman of Xerxes Corporation, a
manufacturer of fiberglass tanks. Mr. Burwell also owns and operates hotels
in Wisconsin and Colorado. Mr. Burwell is also a director of the Vaughn
Company.
MARK A. COHN joined the Company's Board of Directors in July 1994.
Mr. Cohn is a co-founder of and has served as Chief Executive Officer of
Damark International, Inc., a direct marketer of brand name and general
merchandise products, since Damark's inception in 1986. From 1981 to 1984,
Mr. Cohn held various marketing and operations positions, including Director
of Marketing Operations, with C.O.M.B., Co., a retailer of discount,
discontinued and close-out merchandise through stores and direct mail
catalogs.
RUSSELL COWLES II was elected in 1994 as a director of the Company subject
to either the obtaining of a waiver from the FCC of the application of its
cross-ownership rules or the amendment of such rules to
57
<PAGE>
remove existing restrictions. Mr. Cowles has thus not yet assumed his role
as a director. Mr. Cowles has served as a Trustee of the Cowles Family
Voting Trust since 1984. The Voting Trust holds a majority share of the
voting stock of Cowles Media Corporation, a newspaper, magazine and book
publisher and information service provider. Mr. Cowles was previously
employed in the production, distribution, financial and planning departments
of the Minneapolis STAR TRIBUNE and worked in the engineering and production
departments of radio and television broadcasting stations. Mr. Cowles is
also a director of CAC.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and persons who own more than 10% of a
registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Such officers, directors and shareholders are
required by the Commission to furnish the Company with copies of all such
reports.
To the Company's knowledge, based soley on a review of copies of reports
filed with the Commission during 1996, all applicable Section 16(a) filing
requirements were complied with, except that one report on Form 3 setting
forth the event of Barbara A. McMahon becoming an executive officer was not
filed on a timely basis.
ITEM 10. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference
from the information set forth under the caption "Executive Compensation" in
the Company's 1997 Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information as of March 3, 1997
regarding the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each director, nominee for director and executive officer
of the Company and (iii) the executive officers of the Company and directors
as a group, and as to the percentage of the outstanding shares held by them
on such date. Any shares which are subject to an option or a warrant
exercisable within 60 days are reflected in the following table and are
deemed to be outstanding for the purpose of computing the percentage of
Common Stock owned by the option or warrant holder but are not deemed to be
outstanding for the purpose of computing the percentage of Common Stock owned
by any other person. Unless otherwise noted, each person identified below
possesses sole voting and investment power with respect to such shares. The
business address of Messrs. Dahl, Gilbertson, Riley, Landis, Paradis, Smith,
Manrique and Ms. McMahon is 724 First Street North, Minneapolis, Minnesota
55401.
58
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF PERCENT
SHARES OF OF
NAME AND ADDRESS COMMON STOCK CLASS
- ---------------- ------------ -------
<S> <C> <C>
Heartland Advisors, Inc. . . . . . . . . . . 1,104,600(1) 18.6%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Perkins Capital Management, Inc. . . . . . . 706,638(2) 11.7%
730 East Lake Street
Wayzata, Minnesota 55391
Christopher T. Dahl. . . . . . . . . . . . . 554,502(3) 9.1%
Richard W. Perkins . . . . . . . . . . . . . 471,459(4) 7.6%
730 East Lake Street
Wayzata, Minnesota 55391
Russell Cowles II. . . . . . . . . . . . . . 283,139(5) 4.8%
c/o Sherburne and Coughlin, Ltd.
708 South 3rd Street, Suite 510
Minneapolis, Minnesota 55415
John Cowles Family Trust . . . . . . . . . . 214,042(6) 3.6%
Sherburne and Coughlin, Ltd.
708 South 3rd Street, Suite 510
Minneapolis, Minnesota 55415
Rodney P. Burwell. . . . . . . . . . . . . . 68,750(7) 1.2%
7901 Xerxes Avenue South, Suite 201
Minneapolis, Minnesota 55431
James G.Gilbertson . . . . . . . . . . . . . 56,917(8) 1.0%
Gary W. Landis . . . . . . . . . . . . . . . 31,249(9) *
Lance W. Riley . . . . . . . . . . . . . . . 32,083(9) *
Mark A. Cohn . . . . . . . . . . . . . . . . 27,500(10) *
7101 Winnetka Avenue North
Minneapolis, Minnesota 55428
Barbara A. McMahon . . . . . . . . . . . . . 25,000(9) *
Melvin E. Paradis. . . . . . . . . . . . . . 37,915(11) *
Rick E. Smith. . . . . . . . . . . . . . . . 17,600(9)
Denny J. Manrique. . . . . . . . . . . . . . 15,388(9)
All Officers, Directors and Nominees
as a Group (12 persons) . . . . . . . . 2,328,140(12) 34.4%
</TABLE>
_______________
* Less than 1%
(1) As set forth in Schedule 13G filed with the Commission on February 10,
1997, includes 966,600 shares over which Heartland Advisors, Inc. claims
sole voting power, and 1,104,600 shares over which sole dispositive power
is claimed.
(2) Based upon statements filed with the Commission, PCM is a registered
investment adviser of which Mr. Richard W. Perkins, a director of the
Company, is President, Chief Executive Officer, a director and the
controlling shareholder. PCM has the right to sell the shares but does
not have voting power over the shares. Mr. Perkins and PCM disclaim any
beneficial interest in such shares. Excludes shares beneficially owned by
Mr. Perkins.
(3) Includes: (i) 410,486 shares owned directly and (ii) 144,016 shares
purchasable upon exercise of options and warrants.
(4) Includes: (i) 189,691 shares owned directly by Mr. Perkins, (ii) 6,769
shares beneficially owned by Mr. Perkins through Perkins Capital
Management, Inc. Profit Sharing Plan and Trust and Perkins Foundation,
(iii) 269,374 shares purchasable upon exercise of options and warrants by
Mr. Perkins and (iv) 5,625 shares purchasable upon exercise of warrants by
Perkins Capital Management, Inc. Profit Sharing Plan and Trust and Perkins
Foundation. Mr. Perkins beneficial ownership excludes shares held for the
accounts of clients of Perkins Capital Management, Inc. ("PCM").
(5) Includes: (i) 56,597 shares owned directly and (ii) 12,500 shares
purchasable upon exercise of warrants. Mr. Cowles beneficially owns:
(i) 189,042 shares owned by the John Cowles Family Trust and (ii) 25,000
shares purchasable by the John Cowles Trust upon exercise of warrants.
The shares owned by the John Cowles Family Trust are non-voting shares.
(6) The shares owned by the John Cowles Family Trust are non-voting shares.
(7) Includes: (i) 25,000 shares owned directly by Mr. Burwell and (ii) 43,750
shares purchasable upon exercise of options and warrants.
(8) Includes: (i) 4,500 shares owned directly by Mr. Gilbertson and (ii)
52,417 shares purchasable upon exercise of options.
(9) Includes options for the purchase of 32,083 shares, 31,249 shares, 17,600
shares, 15,388 shares, and 25,000 shares for Messrs. Riley, Landis, Smith,
Manrique and Ms. McMahon, respectively.
(10) Includes: (i) 12,500 shares owned directly by Mr. Cohn and (ii) 15,000
shares purchasable upon exercise of options and warrants.
(11) Includes: (i) 2,500 shares owned directly and (ii) 35,415 shares
purchasable upon exercise of warrants.
59
<PAGE>
(12) Includes: (i) 1,494,347 shares and owned directly by all officers,
directors and director nominees and (ii) 833,793 shares purchasable upon
exercise of options and warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASES
The studios and tower site of WWTC-AM and KYCR-AM are located in St. Louis
Park, Minnesota. The studio facility consists of approximately 12,000 square
feet. The tower site includes four 200-foot towers, a transmitter building
and a storage garage on approximately 16 acres. The tower site is leased
from Mr. Dahl at a total annual rent of approximately $114,000, and the
studio site is leased from a partnership consisting of Mr. Dahl and Mr. Perkins
at an annual rent of approximately $132,000.
In January 1996, the Company entered into a five-year lease with 724
Associates, a partnership consisting of Messrs. Dahl, Perkins and Stephen L.
Wallack, a shareholder of the Company, for 3,000 square feet of office space at
724 North First Street, Minneapolis, Minnesota. These facilities are leased at
annual rental of $54,000 and house the Company's executive offices. The
executive offices are adjacent to the offices of CAC and RMC. CAC is owned and
controlled by Messrs. Dahl, Perkins and Cowles, either directly or through
trusts. RMC is owned by Messrs. Dahl, Perkins and Cowles. Mr. Cowles is a
beneficiary and trustee of the John Cowles Family Trust, and the Trust is a
principal shareholder of the Company. Under the terms of each of the leases,
the Company is obligated to pay its proportionate share of repairs and
maintenance. These arrangements were approved by the Related Party Transaction
Committee of the Company's Board of Directors, which is comprised of
disinterested directors, and the Company believes such arrangements were on
terms at least as favorable as could have been obtained from unaffiliated third
parties.
MANAGEMENT SERVICES FROM AN AFFILIATE
Since July 1993, the Company has received administrative, legal and
accounting services from RMC. RMC is a company owned by the Company's
President, another director and a shareholder. RMC provides corporate,
legal, accounting and financial services to the Company and CAC. CAC is a
separate private company also owned by the individuals listed above. The
Company pays a set monthly fee of $75,000 for the services listed above. All
outside services directly attributable to the Company are billed directly to
the Company. The Company paid RMC an aggregate of $600,000 for such services
during the fiscal year ended December 31, 1995 and an aggregate of $750,000
for such services during the fiscal year ended December 31, 1996. The
salaries of two officers of the Company, Lance W. Riley and James G.
Gilbertson, are paid by RMC. These arrangements were approved by the Related
Party Transaction Committee of the Company and Board of Directors, which is
comprised of disinterested directors, and the Company believes such
arrangements were on terms at least as favorable as could have been obtained
from unaffiliated third parties.
LOANS AND FINANCING TRANSACTIONS
Between April 1994 and November 1995, the Company borrowed from Messrs.
Dahl, Perkins, Cowles and Cohn in the form of bridge financings. The Company
borrowed $100,000 from Mr. Dahl at an interest rate of 10% per annum. The
Company subsequently repaid the loan balance in full. The Company also
borrowed a total of $1,950,000 from Mr. Perkins, at annual interest rates
ranging from 8% to 10%. In connection with these borrowings, warrants were
granted to Mr. Perkins to purchase 171,875 shares of Common Stock at prices
ranging from $8.00 to $10.00 per share. Mr. Cowles participated in the
bridge financings as well by lending to the Company a total of $200,000 at an
annual interest rate of 10%. Mr. Cowles also received warrants from the
Company to purchase 27,500 shares of Common Stock at $8.00 per share.
Finally, the Company borrowed $100,000 from Mr. Cohn at an annual rate of
10%. Mr. Cohn received warrants from the Company to purchase 15,000 shares
of Common Stock at $8.00 per share.
The Company completed the conversion of an aggregate of $2,875,000 of
outstanding bridge financing Promissory Notes into Common Stock of the Company
effective September 30, 1995. $2,400,000 of the $2,875,000 of Promissory Notes
converted was from the Company's 1994 bridge financings. Holders of the
Promissory Notes from the Company's 1994 bridge financings agreed to surrender
the Notes in satisfaction
60
<PAGE>
of the exercise price of warrants which were issued as part of such bridge
financings. Most of the Note holders who chose to convert also chose to
convert interest accrued through September 30, 1995 at the same $8.00 per
share conversion price applicable to the exercised warrants. In addition to
receiving shares of Common Stock pursuant to the exercised warrants, and as
an incentive to convert their indebtedness into equity, the holders of the
surrendered 1994 bridge Promissory Notes also received new warrants to
purchase 1,250 shares of Common Stock for each $25,000 of debt converted,
which new warrants will be exercisable for five years at $10.00 per share.
The remaining $525,000 of indebtedness converted was from the Company's
previous 1995 bridge financing. Messrs. Perkins, Cohn and Cowles
participated in the conversion with respect to $300,000, $100,000 and
$200,000, respectively. As a result of such conversions, they received
shares of Common Stock and additional warrants for the purchase of 15,000,
5,000 and 10,000 shares, respectively.
POTENTIAL CONFLICT OF INTEREST WITH COMMUNITY AIRWAVES
CAC may acquire additional radio stations in the future. Under current
FCC regulations, radio stations owned by CAC are attributed to the Company
and radio stations owned by the Company are attributed to CAC for the purpose
of determining whether a station may be acquired in a particular market under
the FCC's duopoly rules. The Company does not believe that any such
purchases will conflict with its present acquisition strategy, which is to
have affiliates or acquire properties in the top 100 U.S. metropolitan
markets. CAC has advised the Company that its strategy is to acquire and
operate stations in smaller markets. An acquisition by CAC in any market
would, however, be attributed to the Company and could further limit the
stations which the Company can acquire under existing FCC regulations. The
Company is a party to an Attribution Agreement with CAC under which the
Company is required to obtain the consent of CAC for the acquisition of any
FM radio station or any AM radio station located outside the top 125 U.S.
markets.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation, as amended and restated
* 3.2 Amended and Restated Bylaws
* 10.1 1991 Incentive Stock Option Plan
10.2 Lease between the Company and 5501 Building Company dated
November 1, 1996
10.3 Lease between the Company and 724 Associates dated
November 1, 1996
10.4 Management Services Agreement between the Company and Radio
Management Corporation dated February 22, 1997
10.5 1994 Stock Option Plan
** 10.6 1994 Director Stock Option Plan
** 10.7 Attribution Agreement between the Company, Community Airwaves
Corporation, DCP Broadcasting Corporation and Christopher T. Dahl
dated February 15, 1995
*** 10.8 Letter Agreement between the Company and Brenner Securities
Corporation dated November 7, 1995, relating to the provision of
certain financial services
*** 10.9 Stock Purchase Agreement dated January 19, 1996, between the
Company and John Quinn
*** 10.10 Asset Purchase Agreement dated January 30, 1996, between the
Company and Wolpin Broadcasting Company
*** 10.11 Real Estate Purchase Agreement dated January 30, 1996, between
Company and Weber/Wolpin Realty Company
61
<PAGE>
**** 10.12 1996 Employee Stock Purchase Plan
+ 10.13 Loan and Security Agreement dated November 25, 1996, between the
Company and Foothill Capital Corporation
10.14 Common Stock Purchase Warrant between Foothill Capital
Corporation and the Company dated November 7, 1996
++ 16 Letter on Change in Certifying Accountant
21 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
___________________
* Incorporated by reference to the Company's Registration Statement on Form
S-18 (File No. 33-44412) filed on December 5, 1991.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994 (File No. 0-21534) filed on
March 31, 1995, as amended by Form 10-KSB/A filed on October 4, 1995.
*** Incorporated by reference to the Company's Registration Statement on
Form S-2 (File No. 33-80721) filed on December 21, 1995.
**** Incorporated by reference to the Company's Definitive Schedule 14A (Proxy
Statement) (File No. 0-21534) filed on August 22, 1996, relating to the
Company's Annual Meeting of Shareholders held on September 30, 1996.
+ Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-21534) filed on December 20, 1996, relating to the Company closing on
a $16,500,000 loan from Foothill Capital Corporation.
++ Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-21534) filed on July 3, 1996, relating to changes in the Company's
certifying accountant.
(b) Reports on Form 8-K
(1) The Company's Current Report on Form 8-K filed on October 3,
1996, relating to the Company filing a lawsuit in United
States District Court for the District of Minnesota against
The Walt Disney Company and ABC Radio Networks, Inc.
(2) The Company's Current Report on Form 8-K filed on
October 17, 1996, relating to the Company filing Form
10-QSB/A regarding the write-off of a deferred warrant
expense resulting from the termination by ABC Radio
Networks, Inc. of its joint operations agreement with the
Company.
(3) The Company's Current Report on Form 8-K/A filed on
November 12, 1996, relating to acquisition of Radio
Elizabeth, Inc.
(4) The Company's Current Report on Form 8-K filed on
November 12, 1996, relating to the Company signing a
commitment letter for a $15,000,000 loan from Foothill
Capital Corporation.
(5) The Company's Current Report on Form 8-K filed on
December 20, 1996, relating to the Company closing on a
$16,500,000 loan from Foothill Capital Corporation.
62
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota on March 28, 1997.
CHILDREN'S BROADCASTING CORPORATION
By /s/ Christopher T. Dahl
-----------------------------------
Christopher T. Dahl
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
----------- ------- ------
<S> <C> <C>
/s/ Christopher T. Dahl President, Chief Executive Officer and March 28, 1997
- ---------------------------------- Director (principal executive officer)
Christopher T. Dahl
/s/ James G. Gilbertson Chief Operating Officer and Treasurer March 28, 1997
- ---------------------------------- (principal accounting and financial officer)
James G. Gilbertson
Director
- ----------------------------------
Rodney P. Burwell
/s/ Richard W. Perkins
- ---------------------------------- Director March 28, 1997
Richard W. Perkins
/s/ Mark A. Cohn
- ---------------------------------- Director March 28, 1997
Mark A. Cohn
</TABLE>
63
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ---------- -----------
3.1 Articles of Incorporation, as amended and restated
* 3.2 Amended and Restated Bylaws
* 10.1 1991 Incentive Stock Option Plan
10.2 Lease between the Company and 5501 Building Company dated
November 1, 1996
10.3 Lease between the Company and 724 Associates dated
November 1, 1996
10.4 Management Services Agreement between the Company and Radio
Management Corporation dated February 22, 1997
10.5 1994 Stock Option Plan
** 10.6 1994 Director Stock Option Plan
** 10.7 Attribution Agreement between the Company, Community Airwaves
Corporation, DCP Broadcasting Corporation and Christopher T. Dahl
dated February 15, 1995
*** 10.8 Letter Agreement between the Company and Brenner Securities
Corporation dated November 7, 1995, relating to the provision of
certain financial services
*** 10.9 Stock Purchase Agreement dated January 19, 1996, between the
Company and John Quinn
*** 10.10 Asset Purchase Agreement dated January 30, 1996, between the
Company and Wolpin Broadcasting Company
*** 10.11 Real Estate Purchase Agreement dated January 30, 1996, between
Company and Weber/Wolpin Realty Company
**** 10.12 1996 Employee Stock Purchase Plan
+ 10.13 Loan and Security Agreement dated November 25, 1996, between the
Company and Foothill Capital Corporation
10.14 Common Stock Purchase Warrant between Foothill Capital
Corporation and the Company dated November 7, 1996
++ 16 Letter on Change in Certifying Accountant
21 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
64
<PAGE>
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
___________________
* Incorporated by reference to the Company's Registration Statement on Form
S-18 (File No. 33-44412) filed on December 5, 1991.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994 (File No. 0-21534) filed on
March 31, 1995, as amended by Form 10-KSB/A filed on October 4, 1995.
*** Incorporated by reference to the Company's Registration Statement on Form
S-2 (File No. 33-80721) filed on December 21, 1995.
**** Incorporated by reference to the Company's Definitive Schedule 14A (Proxy
Statement) (File No. 0-21534) filed on August 22, 1996, relating to the
Company's Annual Meeting of Shareholders held on September 30, 1996.
+ Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-21534) filed on December 20, 1996, relating to the Company closing on
a $16,500,000 loan from Foothill Capital Corporation.
++ Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-21534) filed on July 3, 1996, relating to changes in the Company's
certifying accountant.
65
<PAGE>
EXHIBIT 3.1
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
CHILDREN'S BROADCASTING CORPORATION
The undersigned officer, on behalf of Children's
Broadcasting Corporation, a Minnesota corporation (the "Corporation"), hereby
certifies that an amendment to the Corporation's Articles of Incorporation has
been duly approved by the Company's Board of Directors and shareholders in
accordance with Sections 302A.135 and 302A.139 of the Minnesota Statutes.
Accordingly, Article IV is amended in its entirety to read as follows:
ARTICLE IV
CAPITAL
The aggregate number of shares of stock which this
corporation shall have the authority to issue is fifty million (50,000,000)
shares with a par value of two cents ($.02) per share.
IN WITNESS WHEREOF, the Corporation has caused these
Articles of Amendment to the Articles of Incorporation to be executed this 3rd
day of October, 1996.
CHILDREN'S BROADCASTING CORPORATION
By /s/J. G. Gilbertson
---------------------------------
Its Chief Operating Officer
---------------------------------
71
<PAGE>
ARTICLES OF AMENDMENT
OF
CD BROADCASTING CORPORATION OF MINNEAPOLIS
RESTATING AND AMENDING THE
ARTICLES OF INCORPORATION
The undersigned, President of CD Broadcasting Corporation of
Minneapolis, a corporation subject to Chapter 302A, hereby certifies that the
Articles of Amendment set forth below, containing the restatement of the
Articles of Incorporation with amendments thereto, were adopted by unanimous
written authorization of the directors and shareholders pursuant to Sections
302A.239 and 302A.441, Minnesota Statutes:
ARTICLE I.
NAME
The name of this corporation shall be Children's
Broadcasting Corporation.
ARTICLE II.
REGISTERED OFFICE
The registered office of this corporation is located at 215
South Eleventh Street, Minneapolis, MN 55403.
ARTICLE III.
The names and addresses of the members of the Board of
Directors at the time of the adoption of these Amended and Restated Articles
are:
NAME ADDRESS
------ ---------
Christopher T. Dahl 5404 Interlachen Blvd.
Edina, MN 55436
Richard W. Perkins 1485 Fox Street
Orono, MN 55391
ARTICLE IV.
CAPITAL
The aggregate number of shares of stock which this
corporation shall have the authority to issue is ten million shares with a par
value of One Cent ($0.01) per share.
72
<PAGE>
ARTICLE V.
CLASSES AND SERIES OF STOCK
In addition to, and not by way of limitation of, the powers
granted to the Board of Directors by Minnesota Statutes, Chapter 302A, the Board
of Directors of this corporation shall have the power and authority to fix by
resolution any designation, class, series, voting power, preference, right,
qualification, limitation, restriction, dividend, time and price of redemption,
and conversion right with respect to any stock of the corporation. Upon
adoption of such resolution, a statement shall be filed with the Secretary of
State in compliance with Section 302A.401, Minnesota Statutes, before the
issuance of any shares for which the resolution creates rights or preferences
not set forth in these Articles; provided, however, where the shareholders have
received notice of the creation of shares with rights or preferences not set
forth in the Articles before the issuance of the shares, the statement may be
filed any time within one year after the issuance of the shares.
ARTICLE VI.
SHAREHOLDER VOTING
No shareholder of this corporation shall be entitled to any
cumulative voting rights.
The shareholders of the corporation shall take action by the
affirmative vote of the holders of a majority of the shares present and entitled
to vote, except where a larger proportion is required by law, these Articles of
Incorporation or a shareholder control agreement.
The affirmative vote of a majority of the voting power of
all shares entitled to vote shall be required to authorize the sale, lease,
exchange or other disposition of all or substantially all of the property and
assets of the corporation, including its goodwill, to amend the Articles of
Incorporation, to adopt or reject an agreement of merger or to authorize the
dissolution of the corporation.
ARTICLE VII.
PREEMPTIVE RIGHTS
No shareholder of this corporation shall have any
preferential, preemptive, or other rights of subscription to any shares of any
class or series of stock of this corporation allotted or sold or to be allotted
or sold, whether now or hereafter authorized, or to any obligations or
securities convertible into
73
<PAGE>
any class or series of stock of this corporation.
ARTICLE VII.
DIRECTOR LIABILITY
A director of the corporation shall not be personally liable
to the corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for (i) liability based on a breach of the
duty of loyalty to the corporation or the shareholders; (ii) liability for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) liability based on the payment of an improper
dividend or an improper repurchase of the corporation's stock under Minnesota
Statutes, Section 302A.559, or on violations of federal or state securities
laws; (iv) liability for any transaction from which the director derived an
improper personal benefit; or (v) liability for any act or omission occurring
prior to the date this Article becomes effective. If Minnesota Statutes,
Chapter 302A, hereafter is amended to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the corporation in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by the amended Chapter
302A. Any repeal of this provision as a matter of law or any modification of
this Article by the shareholders of the corporation shall be prospective only,
and shall not adversely affect any limitation on the personal liability of a
director of the corporation existing at the time of such repeal or modification.
ARTICLE IX.
BOARD OF DIRECTORS VOTE
The affirmative vote of a majority of the Board of Directors
of the corporation present at a meeting is required for an action of the Board.
ARTICLE X.
BOARD ACTION WITHOUT A MEETING
Any action required or permitted to be taken at any meeting
of the Board of Directors may be taken without a meeting by written action
signed by a majority of the Board of Directors then in office, except as to
those matters which require shareholder approval, in which case the written
action shall be signed by all members of the Board of Directors then in office.
Whenever written action is taken by less than all of the directors, all
directors shall be notified immediately of the text and the effective date.
Failure to provide the notice to the other directors shall not invalidate the
written action.
The undersigned has been authorized and directed to sign and
file these Articles of Amendment in the manner required by law.
/s/ Christopher T. Dahl
----------------------------------
President
74
<PAGE>
State of Minnesota
Office of the Secretary of State
NOTICE OF CHANGE OF
REGISTERED OFFICE -- REGISTERED AGENT OR BOTH
BY
- -------------------------------------------------------------------------------
NAME OF CORPORATION CHILDREN'S BROADCASTING CORPORATION
- -------------------------------------------------------------------------------
Pursuant to Minnesota Statutes, Section 302A.123, 303.10, or 317.19 the
undersigned hereby certifies that the Board of Directors of the above named
Corporation has resolved to change the corporation's registered office or
agent:
- -------------------------------------------------------------------------------
F AGENT'S NAME (FILL IN THIS BOX ONLY IF YOU ALREADY HAVE
R AN AGENT. DO NOT LIST THE CORPORATE NAME
O IN THIS BOX.)
M ----------------------------------------------------------------------
ADDRESS
(NO. & STREET) 215 South Eleventh Street
----------------------------------------------------------------------
CITY COUNTY ZIP
Minneapolis Hennepin MN 55403
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
T AGENT'S NAME (FILL IN THIS BOX ONLY IF YOU ALREADY HAVE AN
O AGENT. DO NOT LIST THE CORPORATE NAME IN THIS BOX.)
------------------------------------------------------------------------
ADDRESS
(NO. & STREET) 5501 Excelsior Boulevard
------------------------------------------------------------------------
CITY COUNTY ZIP
Saint Louis Park Hennepin MN 55416
- -------------------------------------------------------------------------------
The new address may not be a post office box. It must be a street address,
pursuant to Minnesota Statutes, Section 302A.011, Subd.3
This change is effective on the day it is filed with the
Secretary of State, unless you indicate another date, no
later than 30 days after filing with the Secretary of State,
in this box:
----------------------------------
----------------------------------
I certify that I am authorized to execute this certificate and I further
certify that I understand that by signing this certificate I am subject to the
penalties of perjury as set forth in section 609.48 as if I had signed this
certificate under oath.
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NAME OF OFFICER OR OTHER AUTHORIZED SIGNATURE
AGENT OF CORPORATION
Christopher T. Dahl
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TITLE OR OFFICE DATE
President January 23, 1992
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Do not write below this line. For Secretary of State's use only.
- -------------------------------------------------------------------------------
RECEIPT NUMBER FILE DATA
- -------------------------------------------------------------------------------
STATE OF MINNESOTA
DEPARTMENT OF STATE
683411 FILED
JAN 28, 1990
/s/ Joan Anderson Growe
-----------------------
Secretary of State
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<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CERTIFICATE OF DESIGNATION OF STOCK
The undersigned, being the duly appointed Secretary of
Children's Broadcasting Corporation, hereby certifies that the Board of
Directors of the Corporation, acting pursuant to Chapter 302A, Minnesota
Statutes, took action by unanimous resolution on November 18, 1991 to designate
378,083 shares of non-voting Common Stock of the Corporation, pursuant to which
resolution said stock was issued on April 16, 1992.
The undersigned further certifies that the following
resolution has been duly adopted by the Board of Directors of the Corporation
with respect to the establishment and designation of non-voting stock:
DESIGNATION OF NON-VOTING STOCK
RESOLVED, in accordance with the Articles of Incorporation of the
Corporation and pursuant to Minnesota Statutes, Chapter 302A, the Board of
Directors hereby establishes and designates from the Corporation's
unauthorized and unissued shares, 378,083 shares of common stock without
voting rights (except as hereinafter provided), which shares shall in all
respects, except for voting, be equal and have the same rights as, the
common stock of the Corporation, such non-voting common stock hereinafter
referred to as "Nonvoting Common Stock". Notwithstanding the foregoing,
such non-voting stock shall have full voting rights at such time as the
transfer of such shares is legally permitted pursuant to the terms of an
agreement dated August 1, 1991 between this Corporation, Russell Cowles II,
Marguerite A. Cowles and First Bank Minneapolis, N.A., Trustees of the John
Cowles Family Trust for the benefit of Russell Cowles, II.
RESOLVED FURTHER, that the President and Secretary of the Corporation are
authorized and directed to take such further action as shall be necessary
or required to issue said Non-Voting Common Stock and they, or any of them,
are authorized and directed to file a certificate of designation pursuant
to Section 302A.401, Subd. 3 of the Minnesota Business Corporation Act with
the Minnesota Secretary of State.
I certify that I am authorized to execute this instrument
and I further certify that I understand that by signing this amendment I am
subject to the penalties of perjury as set forth in Section 609.48 as if I had
signed this Amendment under oath.
----------------------------------------
Leah E. Hauge
Secretary of
CHILDREN'S BROADCASTING CORPORATION
76
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State of Minnesota
Office of the Secretary of State
CERTIFICATE OF CHANGE OF REGISTERED OFFICE
BY
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NAME OF CORPORATION CHILDREN'S BROADCASTING CORPORATION [REMAINDER ILLEGIBLE]
- -------------------------------------------------------------------------------
Pursuant to Minnesota Statutes, Section 302A.123, or 317.19, the undersigned
hereby certifies that the Board of Directors of the above named Minnesota
Corporation has resolved to change the corporation's registered office:
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F ADDRESS
R (NO. & STREET) 5501 Excelsior Blvd.
O -----------------------------------------------------------------------
M CITY COUNTY ZIP
St. Louis Park Hennepin MN 55416
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
T AGENT'S NAME
O -----------------------------------------------------------------------
ADDRESS (FILL IN THIS BOX ONLY IF YOU ALREADY HAVE AN
(NO. & STREET) AGENT. DO NOT LIST THE CORPORATE NAME IN THIS BOX.)
5501 Excelsior Boulevard
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CITY COUNTY ZIP
Saint Louis Park Hennepin MN 55416
- -------------------------------------------------------------------------------
The effective date of the change will be the 1st day of January, 1992 or the day
of filing of this certificate with the Secretary of State, whichever is later.
I swear that the foregoing is true and accurate and that I have the authority to
sign this document on behalf of the corporation.
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NAME OF OFFICER OR OTHER AUTHORIZED AGENT OF CORPORATION SIGNATURE
-------------------------------------------------------------------------
TITLE OR OFFICE DATE
-------------------------------------------------------------------------
STATE OF MINNESOTA ) The foregoing instrument was
)ss. acknowledged before me
County of____________________ )
on this ___ day of __________, 19__.
(Notarial ___________________________________
Seal) (Notary Public)
- -------------------------------------------------------------------------------
RECEIPT NUMBER FILE DATA
- -------------------------------------------------------------------------------
STATE OF MINNESOTA
DEPARTMENT OF STATE
915846 FILED
OCT [illegible], 1993
/s/ [ILLEGIBLE]
---------------------------
[ILLEGIBLE]
SC-00014-05
77
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF CONVERTIBLE PREFERRED STOCK SERIES 1993-A
OF CHILDREN'S BROADCASTING CORPORATION
Children's Broadcasting Corporation, a corporation organized and
existing under the laws of Minnesota (the "Corporation"), does hereby certify:
That pursuant to authority vested in it by the provisions of the
Articles of Incorporation, the Board of Directors of the Corporation, at a
meeting of the Board held on December 8, 1993, at which meeting a quorum of
directors was present and acting throughout, did adopt the following
resolution authorizing the creation and issuance of a series of Preferred
Stock designated as Convertible Preferred Stock Series 1993-A:
RESOLVED, that the Corporation hereby designates 290,213 shares of its
authorized but unissued Preferred Stock, par value $.01, as Convertible
Preferred Stock, Series 1993-A, which shall have the following designations,
preferences, rights, qualifications, limitations and restrictions in addition
to those set forth in the Articles of Incorporation, as amended, of the
Corporation:
1. DESIGNATION; NUMBER OF SHARES; STATED VALUE; DIVIDENDS.
Two Hundred Ninety Thousand Two Hundred Thirteen (290,213) shares of
Preferred Stock shall be designated Convertible Preferred Stock 1993-A
(hereinafter sometimes referred to as the "Convertible Preferred Stock" or as
this "Series"). Shares of this Series shall have a stated value of $10.00
per share ("Stated Value"). Except as provided herein, shares of this Series
shall not be entitled to dividends or other distributions and shall be
non-participating for all purposes.
2. REDEMPTION AT OPTION OF HOLDERS.
(a) Commencing with the second day following the fifth anniversary of
the date of issuance (the "Redemption Commencement Date"), the Corporation
shall, subject to the requirements of the Minnesota Business Corporation
Act, from time to time, redeem all shares of this Series tendered to the
Corporation for redemption at the option of the holders of the Convertible
Preferred Stock. The redemption price shall be the Stated Value. Such
redemption shall be effected on the terms and conditions hereinafter
provided.
(b) Each holder of shares of this Series who elects to require the
Corporation to purchase all or any of such holder's shares shall surrender
to the Corporation's transfer agent (or other fiduciary designated in
writing by the Corporation as agent for redemption) certificates of this
Series then outstanding as soon as practicable following
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the Redemption Date (hereinafter defined). The "Redemption Date" shall
mean a date which is eight (8) calendar months following the giving of
written notice (the "Redemption Notice") by such holder to the Corporation.
The Redemption Notice may be given up to eight months prior to the
Redemption Commencement Date and at any time after the Redemption
Commencement Date. A Redemption Notice shall contain the holder's demand
for redemption and be given to the Company at its principal executive
offices last set forth in the Corporation's 10-Q/10-QSB report filed with
the Securities and Exchange Commission or, if no such report has been
filed, to the Corporation's registered office in the state of its
incorporation, as certified to or disclosed by the secretary of state of
such state. Such notice shall be deemed given if in writing and sent
postage prepaid by certified or registered first class mail or by
nationwide overnight courier. Once given, a Redemption Notice may not be
withdrawn; however, a holder may elect to convert, in accordance with
paragraph 3 hereof, any or all of the shares of this Series prior to the
Redemption Date.
(c) The Corporation shall, on or before the Redemption
Date, deposit with its transfer agent (or such other agent for redemption
selected by the Corporation) as a trust fund, a sum sufficient to redeem
the shares of this Series subject to redemption, with irrevocable
instructions and authority to such transfer agent or other redemption agent
to give or complete the notice of redemption thereof and to pay to the
respective holders of such shares, as evidenced by a list of such holders
who have duly exercised such rights of redemption, certified by an officer
of the Corporation, the redemption price upon surrender of their respective
share certificates. Such deposit shall be deemed to constitute full
payment of such shares to their holders; and from and after the date of
such deposit, notwithstanding that any certificates for such shares shall
not have been surrendered for cancellation by holders who have given a
Redemption Notice, the shares represented thereby shall no longer be deemed
outstanding, and all rights of such holders of the shares of Convertible
Preferred Stock shall cease and terminate, except the right to receive the
redemption price, without interest, as of the Redemption Date.
3. CONVERSION.
(a) The holder of any shares of this Series may at any time, prior to a
Redemption Date applicable to such holder, elect to convert all or any portion
of the shares of this Series into fully paid and non-assessable shares of
Common Stock at the initial rate of one (1) share of Common Stock for each
share of this Series, subject to adjustment pursuant to the provisions of
subparagraph (c) of this paragraph 3. Such right of conversion shall be
exercised by the surrender of the shares so to be converted to the Corporation
at any time during normal business hours at the principal executive offices of
the Corporation or at the office of any agent for conversion from time to
time designated by it for conversion of ("Conversion Agent") the shares of
this Series accompanied by written notice of such holder's election to convert
and (if so required by the Corporation or the Conversion Agent) by instruments
of transfer, in form satisfactory to the Corporation and to the Conversion
Agent, duly executed by the registered holder or by his duly authorized
attorney, and transfer tax stamps or funds therefor, if required pursuant to
subparagraph (h) of this paragraph 3.
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<PAGE>
(b) As promptly as practicable after the surrender for conversion of any
shares of this Series in the manner provided in subparagraph (a) of this
paragraph 3 and the payment in cash of any amount required by the provisions
of subparagraphs (a) and (h) of this paragraph 3, the Corporation will deliver
or cause to be delivered at the principal executive offices of the Corporation
or at the office of the Conversion Agent to or upon the written order of the
holder of such shares, certificates representing (i) the number of full shares
of Common Stock issuable upon such conversion, and (ii) if less than the full
number of shares evidenced by the Convertible Preferred Stock certificate are
being converted, a new certificate for the remaining number of shares thereof
issued in such name or names as such holder may direct. Such conversion shall
be deemed to have been immediately prior to the close of business on the date
of such surrender of the shares, and all rights of the holder of such shares
as a holder of such shares shall cease at such time and the person or persons
in whose name or names the certificates for such shares of Common Stock are to
be issued shall be treated for all purposes as having become the record holder
or holders thereof at such time and such conversion shall be at the conversion
rate in effect at such time; provided, however, that any such surrender and
payment on any date when the stock transfer books of the Corporation shall be
closed shall constitute the person or persons in whose name or names the
certificates for such shares of Common Stock are to be issued as the record
holder or holders thereof for all purposes immediately prior to the close of
business on the next succeeding day on which such stock transfer books are
opened and such conversion shall be at the conversion rate in effect at such
time on such succeeding day.
(c) The initial conversion rate shall be one (1) share of Common Stock per
share of this Series (equivalent to a conversion price of $10.00 per share).
The conversion rate shall be subject to adjustment as follows:
(i) In case the Corporation shall (A) pay a dividend or make a distri-
bution in shares of its capital stock (whether shares of Common Stock or of
capital stock of any other class), (B) subdivide its outstanding shares of
Common Stock, (C) combine its outstanding shares of Common Stock into a
smaller number of shares, (D) issue by reclassification of its shares of
Common Stock (whether by merger or consolidation or otherwise) any shares
of capital stock of the Corporation or (E) take any action with the same
effect as any of the foregoing, the conversion privilege and the conversion
rate in effect immediately prior to such action shall be adjusted so that
the holder of any shares of this Series thereafter surrendered for
conversion shall be entitled to receive (subject to further adjustments
pursuant to subparagraphs (c)(ii) and (c)(iii) hereof) the number of shares
of capital stock of the Corporation (or of the corporation surviving or
resulting from any merger or consolidation) which he would have owned
immediately following such action had such share been converted immediately
prior thereto. An adjustment made pursuant to this subparagraph (c)(i)
shall become effective retroactively immediately after the record date in
the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or reclassification. If, as a result of an adjustment made
pursuant to this subparagraph (c)(i), the holder of
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<PAGE>
any shares thereafter surrendered for conversion shall become entitled to
receive shares of two or more classes of capital stock of the Corporation,
the Board of Directors (whose determination shall be conclusive) shall
determine the allocation of the adjusted conversion rate between or among
shares of such classes of capital stock.
(ii) In case the Corporation shall issue rights or warrants to all
holders of its Common Stock entitling them to subscribe for or purchase
shares of Common Stock at a price per share less than the current market
price per share (as determined pursuant to subparagraph (c)(iv) below) on
the record date mentioned below, other than pursuant to a dividend
reinvestment plan, the conversion rate shall be adjusted so that the same
shall equal the rate determined by multiplying the conversion rate in effect
immediately prior to the date of issuance of such rights or warrants by a
fraction of which the numerator shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or warrants plus
the number of additional shares of Common Stock offered for subscription
or purchase, and of which the denominator shall be the number of shares of
Common Stock outstanding on the date of issuance of such rights or warrants
plus the number of shares in which the aggregate offering price of the total
number of shares so offered would purchase at such current market price.
Such adjustment shall become effective retroactively immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants. For the purposes of this paragraph 3(c)(ii), the
issuance of rights or warrants to subscribe for or purchase stock or
securities convertible into shares of Common Stock shall be deemed to be
the issuance of rights or warrants to purchase the shares of Common Stock
into which such stock or securities are convertible at an aggregate offering
price equal to the aggregate offering price of such stock or securities plus
the minimum aggregate amount (if any) payable upon conversion of such stock
or securities into Common Stock.
(iii) In case the Corporation shall distribute to all holders of its
Common Stock evidences of its indebtedness or assets (excluding any cash
dividend paid from retained earnings of the Corporation) or rights or
warrants to subscribe to securities of the Corporation (excluding those
referred to in subparagraph (c)(ii) above), then in each such case the
conversion rate shall be adjusted so that the same shall equal the rate
determined by multiplying the conversion rate in effect immediately prior
to the date of such distribution by a fraction of which the numerator shall
be the current market price per share (determined as provided in
subparagraph (c)(iv) below) of the Common Stock on the record date mentioned
below, and of which the denominator shall be such current market price per
share of Common Stock less the then fair market value (as determined by the
Board of Directors of the Corporation, whose determination shall be
conclusive) of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights or warrants applicable to one
share of Common Stock. Such adjustment shall become effective retroactively
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<PAGE>
immediately after the record date for the determination of stockholders
entitled to receive such distribution.
(iv) For the purpose of any computation under subparagraphs (c)(ii)
and (c)(iii) above, the current market price per share of Common Stock on
any date shall be deemed to be the average of the daily closing prices for
30 consecutive trading days commencing 45 trading days before the day in
question. The "closing price" on any day shall mean the reported last sale
price on such day or, in case no such reported sales takes place on such
day, the average of the reported closing bid and asked prices, in each case
on the New York Stock Exchange, or, if the Common Stock is not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading, or, if
not listed or admitted to trading on any national securities exchange, then
in the over-the-counter market as reported on NASDAQ or a similar reporting
service, or, if no such quotations are available, the fair market price as
determined by the Corporation (whose determination shall be conclusive).
(v) In any case in which this subparagraph (c) shall require that an
adjustment be made retroactively immediately following a record date, the
Corporation may elect to defer (but only until five business days following
the mailing by the Corporation of the certificate of independent public
accountants described in subparagraph (c)(vii) below) issuing to the holder
of any shares converted after such record date (x) the shares of Common
Stock and other capital stock of the Corporation issuable upon such
conversion over and above (y) the shares of Common Stock and other capital
stock of the Corporation issuable upon such conversion only on the basis of
the conversion rate prior to adjustment.
(vi) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease of at least 1% in
such rate; provided, however, that any adjustments which by reason of this
subparagraph (c)(vi) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment; and, provided further,
that the provisions of this paragraph 3 (other than this subparagraph
(c)(vi)) not later than such time as may be required in order to preserve
the tax-free nature of a distribution to the holders of shares of Common
Stock. All calculations under this paragraph 3 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be.
Anything in this paragraph 3 to the contrary notwithstanding, the
Corporation shall be entitled to make such increases in the conversion
rate in addition to those required by this subparagraph (c) as it in its
discretion shall determine to be advisable in order that any stock
dividends, subdivision of shares, distribution of rights to purchase stock
or securities, or distribution of securities convertible into or
exchangeable for stock hereafter made by the Corporation to its stockholders
shall not be taxable.
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(vii) Whenever the conversion rate is adjusted as herein provided, the
Corporation shall promptly (x) file with the Conversion Agent a certificate
of a firm of independent public accountants selected by the Board of
Directors (who may be the regular accountants employed by the Corporation)
setting forth the conversion rate after such adjustment and setting forth a
brief statement of the facts requiring such adjustment, which certificate
shall be conclusive evidence of the correctness of such adjustment, and (y)
mail or cause to be mailed a notice of such adjustment to the holders of
shares of this Series at their last addresses as they shall appear upon the
books of the Corporation.
(viii) The term "Common Stock" shall mean the Corporation's voting
Common Stock, par value $.01 per share, as the same exists at the date of
filing of this Certificate of Designation, Preferences and Rights of the
Convertible Preferred Stock, or any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from par value to no par value, or
from no par value to par value. In the event that at any time as a result
of an adjustment made pursuant to subparagraph (c)(i) above, the holder of
any share thereafter surrendered for conversion shall become entitled to
receive any shares of the Corporation other than shares of its Common Stock,
thereafter the conversion rate of such other shares so receivable upon
conversion of any share shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions
with respect to Common Stock contained in subparagraphs (c)(i) through
(c)(vii) above, and the provisions of subparagraphs (a) through (c) and
subparagraphs (e) through (k) of this paragraph 4 with respect to the
Common Stock shall apply on like or similar terms to any such other shares.
(d) No fractional shares of stock shall be issued upon the conversion of
any share or shares of this Series. If more than one such share of this
Series shall be surrendered for conversion at the same time by the same
holder, the number of full shares which shall be issuable upon the conversion
thereof shall be computed on the basis of the aggregate number of shares so
surrendered. If any fractional interest in a share of Common Stock would,
except for the provisions of this subparagraph (e), be deliverable upon the
conversion of any share or shares, the Corporation shall in lieu of
delivering the fractional share therefor, adjust such fractional interest by
payment to the holder of such surrendered share or shares of an amount in
cash equal (computed to the nearest cent) to the current market value of such
fractional interest on the last business day prior to the date of conversion,
computed on the basis of the last reported sale price on such day or, in case
no such reported sale takes place on such day, the average of the reported
closing bid and asked prices, in each case on the New York Stock Exchange, or,
if the Common Stock is not listed or admitted to trading on such Exchange, on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading, or, if not listed or admitted to trading on any
national securities exchange, then in the over-the-counter market as reported
by NASDAQ or a similar reporting service, or if no such quotations are
available, the fair market price as determined by the Corporation (whose
determination shall be conclusive).
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(e) If either of the following shall occur, namely: (i) any consolidation
or merger to which the Corporation is a party, other than a consolidation or a
merger in which consolidation or merger the Corporation is a continuing
corporation and which does not result in any reclassification of, or change
(other than a change in par value or from par value to no par value or from
no par value to par value, or as a result of a subdivision or combination) in,
outstanding shares of the Common Stock, or (ii) any sale or conveyance to
another corporation of the property of the Corporation as an entirety or
substantially as an entirety in consideration for property or securities of
such other corporations; then the holder of each share of Convertible
Preferred Stock then outstanding shall have the right to convert such share
into the kind and amount of shares of stock and other securities and property
receivable upon such consolidation, merger, sale or conveyance by a holder of
the number of shares of Common Stock issuable upon conversion of such share
immediately prior to such consolidation, merger, sale or conveyance, subject
to adjustments which shall be as nearly equivalent as may be practicable to
the adjustments provided for in this paragraph 3. In any such event,
effective provision shall be made in the articles or certificate of
incorporation of the resulting or surviving corporation or other corporation
issuing or delivering such shares of stock or other securities or property or
otherwise, so that the provisions set forth herein for the protection of the
conversion rights of the Convertible Preferred Stock shall thereafter be
applicable, as nearly as reasonably may be, to any such other shares of stock
and other securities and property deliverable upon conversion of the
Convertible Preferred Stock remaining outstanding or other convertible stock
or securities received by the holders in place thereof; and any such resulting
surviving corporation or other corporation issuing or delivering such shares
or other securities or property shall expressly assume the obligation to
deliver, upon the exercise of the conversion privilege, such shares of stock
or other securities or property as the holders of the Convertible Preferred
Stock remaining outstanding, or other convertible stock or securities received
by the holders of the Convertible Preferred Stock remaining outstanding, or
other convertible stock or securities received by the holders in place
thereof, shall be entitled to receive, pursuant to the provisions hereof, and
to make provision for the protection of the conversion right as above
provided. In case shares, securities or other property other than Common Stock
shall be issuable or deliverable upon conversion as aforesaid, then all
references to Common Stock in this paragraph 3(e) shall be deemed to apply,
so far as provided and as nearly as is reasonable, to any such shares of stock
and other securities and property. The provisions of this subparagraph (e)
shall similarly apply to successive consolidations, mergers, sales or
conveyances.
(f) The Corporation covenants that it will at all times reserve and keep
available, solely for the purpose of issue upon conversion of the shares of
this Series, such number of shares of Common Stock as shall be issuable upon
the conversion of all such outstanding shares; provided, that nothing
contained herein shall be construed to preclude the Corporation from
satisfying its obligations in respect of the Conversion of the shares by
delivery of purchased shares of Common Stock which are held in the treasury
of the Corporation. For the purpose of this subparagraph (f), the full
number of shares of Common Stock issuable upon the conversion of all
outstanding shares of this
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Series shall be computed as if at the time of computation of such number
of shares of Common Stock all outstanding shares of this Series were
held by a single holder.
The Corporation will endeavor to list the shares of Common Stock
required to be delivered upon conversion of shares prior to such
delivery on NASDAQ or each national securities exchange upon which the
outstanding Common Stock is listed at the time of such delivery.
The Corporation covenants that all shares of Common Stock which shall be
issued upon conversion of the shares will upon issue be fully paid and
non-assessable and not subject to any preemptive rights.
(g) Before taking any action which would cause an adjustment
reducing the conversion price per share of this Series below the then
par value of the Common Stock, the Corporation will take any corporate
action which may, in the opinion of its counsel, be necessary in order
that the Corporation may validly and legally issue fully paid and non-
assessable shares of Common Stock at the conversion rate as so adjusted.
If as a result of conversion of the shares of this Series it becomes
necessary to authorize additional shares of Common Stock, the
Corporation covenants that it will take such action at such time as is
necessary by amendment of the Corporation's Articles of Incorporation.
(h) The Corporation shall pay any and all issue or other taxes
payable in respect of any issue or delivery of shares of Common Stock
upon conversion. However, if any such certificate is to be issued in a
name other than that of the holder of the share or shares converted, the
person or persons requesting the issuance thereof shall pay to the
Corporation the amount of any tax which may be payable in respect of any
transfer involved in such issuance or shall establish to the
satisfaction of the Corporation that such tax has been paid.
(i) Notwithstanding anything elsewhere contained in this
Certificate, any funds which at any time shall have been deposited by
the Corporation or on its behalf with any paying agent for the purpose
of paying dividends on or the redemption price of any shares of this
Series and which shall not be required for such purposes because of the
conversion of such shares, as provided in this paragraph 3, shall be,
upon delivery to the paying agent of evidence satisfactory to it of such
conversion, after such conversion be repaid to the Corporation by the
paying agent.
(j) In case:
(i) the Corporation shall take any action which would require
an adjustment in the conversion rate pursuant to subparagraph (c)
of this paragraph 3; or
(ii) the Corporation shall authorize the granting to the
holders of its Common Stock of rights or warrants to subscribe for
or purchase any shares of
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stock of any class or of any other rights and notice thereof shall
be given to holders of Common Stock; or
(iii) there shall be any capital reorganization or
reclassification of the Common Stock (other than a subdivision or
combination of the outstanding Common Stock and other than a change in
par value or from par value to no par value or from no par value to par
value of the Common Stock), or any consolidation or merger to which the
Corporation is a consolidation or merger to which the Corporation is a
party and for which approval of any stockholders of the Corporation is
required, or any sale or transfer of all or substantially all of the
assets of the Corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed with any conversion agent,
and shall cause to be given to the holders of the shares of this Series
at least ten business days prior to the applicable date hereinafter
specified, a notice setting forth (x) the date on which a record is to be
taken for the purpose of any distribution or grant to holders of Common
Stock, or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such distribution or
grant are to be determined or (y) the date on which such reorganization,
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective, and the date
as of which it is expected that holders of Common Stock of record shall
be entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, transfer dissolution, liquidation or
winding-up. Failure to give such notice or any defect therein shall not
affect the legality or validity of the proceedings described in clauses
(i) through (iv) of this subparagraph (j).
4. VOTING.
The shares of this Series shall not have any voting powers either general
or special, except as provided by law. In exercising any voting rights
conferred by law, each share of Convertible Preferred Stock shall be entitled
to one vote.
5. LIQUIDATION RIGHTS.
Upon the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, the holders of the shares of
this Series shall be entitled to receive, before any payment or distribution
of the assets of the Corporation or proceeds thereof (whether capital or
surplus) shall be made to or set apart for the holders of the Common Stock or
any other class or series of stock, the amount of $10.00 per share. If, upon
any liquidation, dissolution or winding-up of the Corporation, the assets of
the Corporation, or proceeds thereof, distributable among the holders of
shares of the Convertible Preferred Stock and any other class or series of
Preferred Stock ranking on a parity with the Convertible Preferred Stock as
to payments upon
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<PAGE>
liquidation, dissolution or winding-up shall be insufficient to pay in full
the preferential amount aforesaid, then such assets or the proceeds thereof,
shall be distributed among such holders ratably in accordance with the
respective amounts which would be payable on such shares if all amounts
payable thereon were paid in full. For the purposes of this paragraph 5, the
voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all the
property or assets of the Corporation to, or a consolidation or merger of the
Corporation with, one or more other corporations (whether or not the
Corporation is the corporation surviving such consolidation or merger) shall
not be deemed to be a liquidation, dissolution or winding-up, voluntary or
involuntary.
6. NO PURCHASE, RETIREMENT OR SINKING FUND.
The shares of this Series shall not be subject to the operation of
any purchase, retirement or sinking fund.
7. STATUS.
Shares of this Series which have been issued and reacquired in any manner
by the Corporation shall, upon compliance with any applicable provisions of
the Minnesota Business Corporation Act, have the status of authorized and
unissued shares of Preferred Stock and may be reissued as a part of this
Series or as part of a new series of Preferred Stock to be established by
the Board of Directors or as part of any other series of Preferred Stock
the terms of which do not prohibit such reissue; provided, however, that
such shares may not be reissued as shares of this Series.
8. PRIORITY.
The Common Stock and all other series of Preferred Stock
of the Corporation, now or hereafter issued, shall rank junior to the
Convertible Preferred Stock as to payment of dividends and as to
distributions of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary.
9. RELATIVE RIGHTS OF CONVERTIBLE PREFERRED STOCK.
So long as any of the Convertible Preferred Stock is outstanding, the
Corporation will not:
(a) Declare, or pay, or set apart for payment, or make any
distribution in cash or other property on any other class or series of stock
of the Corporation ranking junior to the Convertible Preferred Stock either
upon liquidation, dissolution or winding-up, and will not redeem, purchase or
otherwise acquire any shares of any such junior class or series if at the
time of making such declaration, payment, distribution, redemption, purchase
or acquisition the Corporation shall be in default with respect to any
obligation to redeem shares of Convertible Preferred Stock which shall have
been tendered for redemption; and
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(b) Without the affirmative vote or consent of the holders of at
least a majority of all the Convertible Preferred Stock at the time
outstanding, voting separately as a class, given in person or by proxy,
either in writing or by resolution adopted either at an annual meeting or
special meeting called for the purpose, (i) authorize, create, or issue, or
increase the authorized or issued amount, of any class or series of stock
ranking on a par with or prior to the Convertible Preferred Stock, upon
liquidation, dissolution or winding-up or (ii) amend, alter or repeal
(whether by merger, consolidation or otherwise) any of the provisions of the
Corporation's Articles of Incorporation, or of the Certificate of
Designation, Preferences and Rights of the Convertible Preferred Stock, so as
to materially and adversely affect the preferences, special rights,
privileges or powers of the Convertible Preferred Stock; provided, however,
that the creation and issuance of other series of Preferred Stock ranking
junior to the Convertible Preferred Stock shall not be deemed to materially
and adversely affect such preferences, rights, privileges or powers.
IN WITNESS WHEREOF, CHILDREN'S BROADCASTING CORPORATION has caused
its corporate seal to be hereunto affixed and this Certificate of Designation
of Preferences and Rights to be signed by its President and attested by its
Secretary this 21st day of August, 1994.
CHILDREN'S BROADCASTING
CORPORATION
[Corporate Seal] By /s/ Christopher T. Dahl
-----------------------------
Christopher T. Dahl,
Chief Executive Officer
60-568 5080
Attest:
/s/ Lance W. Riley
- ------------------------------
Lance W. Riley, Secretary
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State of Minnesota
SECRETARY OF STATE
CERTIFICATE OF MERGER
I, JOAN ANDERSON GROWE, SECRETARY OF STATE OF MINNESOTA, CERTIFY THAT:
THE DOCUMENTS REQUIRED TO EFFECTUATE A MERGER BETWEEN THE ENTITIES LISTED
BELOW AND DESIGNATING THE SURVIVING ENTITY HAVE BEEN FILED IN THIS OFFICE ON
THE DATE NOTED ON THIS CERTIFICATE; AND THE QUALIFICATION OF THE INDIVIDUAL
MERGING ENTITIES TO DO BUSINESS IN MINNESOTA IS TERMINATED ON THE EFFECTIVE
DATE OF THIS MERGER.
MERGER FILED PURSUANT TO MINNESOTA STATUTES, CHAPTER: 302A
STATE OF FORMATION AND NAME OF MERGING ENTITIES:
MN: CBC MERGER CORP.
MN: CHILDREN'S BROADCASTING CORPORATION
STATE OF FORMATION AND NAME OF SURVIVING ENTITY:
MN: CHILDREN'S BROADCASTING CORPORATION
EFFECTIVE DATE OF MERGER: AUGUST 23, 1994
NAME OF SURVIVING ENTITY AFTER EFFECTIVE DATE OF MERGER:
CHILDREN'S BROADCASTING CORPORATION
THIS CERTIFICATE HAS BEEN ISSUED ON: AUGUST 23, 1994
/s/ Joan Anderson Growe
--------------------------------------------
[SEAL OF STATE OF MINNESOTA]
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ARTICLES OF MERGER
BETWEEN
CHILDREN'S BROADCASTING CORPORATION AND CBC MERGER CORP.
Pursuant to Section 302A.621 of the Minnesota Business Corporation Act, the
undersigned officer of Children's Broadcasting Corporation, Inc., a Minnesota
corporation (hereinafter referred to as the "Surviving Corporation"), which is
the owner of all of the outstanding capital stock of CBC Merger Corp., a
Minnesota corporation (hereinafter referred to as the "Subsidiary Corporation"),
hereby executes and files these Articles of Merger:
FIRST: The Plan of Merger is attached hereto as Exhibit A.
SECOND: The number of outstanding shares of each class and series of the
Subsidiary Corporation and the number of shares of each class and series owned
by the Surviving Corporation are as follows:
Number of Number of Shares
Designation of Outstanding Shares of Owned by Surviving
Class & Series Subsidiary Corporation Corporation
- ----------------- ----------------------- ------------------
Common Stock one (1) one (1)
no par value
THIRD: The Surviving Corporation is the sole shareholder of the Subsidiary
Corporation and there are no other shareholders to which to mail a copy of the
Plan of Merger.
FOURTH: The Plan of Merger has been duly approved by the Surviving
Corporation under Minnesota Statutes Section 302A.621.
FIFTH: The merger shall be effective on filing with the Minnesota
Secretary of State.
Dated: August 22 , 1994.
CHILDREN'S BROADCASTING
CORPORATION
By /s/ Christopher T. Dahl
----------------------------------------
Christopher T. Dahl
Its President and Chief Executive Officer
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of this 22 day of August, 1994, by
and between Children's Broadcasting Corporation, a Minnesota corporation (the
"Survivor") and CBC Merger Corp., a Minnesota Corporation (the "Subsidiary").
WHEREAS, Subsidiary is a wholly-owned subsidiary of the Survivor, and
Survivor and Subsidiary desire that the Subsidiary merge with and into the
Survivor, and that the Survivor shall continue as the surviving corporation of
such merger, upon the terms and subject to the conditions set forth herein and
in accordance with Section 302A.621 of the Minnesota Business Corporation Act
(the "MBCA").
WHEREAS, the respective Boards of Directors have approved this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, the parties hereto agree to merge as follows:
ARTICLE 1
MERGER
1.1 MERGER. Subject to the terms and conditions of this Agreement, the
Subsidiary shall be merged with and into the Survivor (the "Merger") in
accordance with Sections 302A.601 and 302A.621 of the MBCA, and the separate
existence of the Subsidiary shall cease and the Survivor shall be the surviving
corporation and continue its corporate existence under the laws of the State of
Minnesota.
1.2 EFFECT OF THE MERGER. At the Effective Time of the Merger (as
hereinafter defined), the Survivor shall possess and succeed all the rights,
privileges, immunities and franchises, of a public as well as of a private
nature, of the Subsidiary; all property, real, personal and mixed, and all debts
due on any account, including subscriptions for shares, and all other chooses in
action, and every other interest of or belonging to or due to each of the
Subsidiary shall vest in the Survivor without any further act or deed; the title
to any real estate or any interest therein vested in the Subsidiary shall revert
to the Survivor by reason of the Merger; the Survivor shall be responsible and
liable for all the liabilities and obligations of the Subsidiary the Survivor; a
claim of or against or a pending proceeding by or against the Subsidiary may be
prosecuted as if the Merger had not taken place, or the Survivor may be
substituted in the place of the Subsidiary; and neither the rights of creditors
nor any liens upon the property of the Subsidiary or the Survivor shall be
impaired by the Merger.
1.3 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective as of
the date and time (the "Effective Time of the Merger") the Articles of Merger of
the Subsidiary and the Survivor are filed with the Minnesota Secretary of State.
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ARTICLE 2
NAME, ARTICLES OF INCORPORATION, BYLAWS,
DIRECTORS AND OFFICERS OF THE SURVIVOR
2.1 NAME OF SURVIVING CORPORATION. The name of the surviving corporation
shall be "Children's Broadcasting Corporation."
2.2 ARTICLES OF INCORPORATION. The Articles of Incorporation of the
Survivor shall be the articles of incorporation of the surviving corporation
from and after the Effective Time of the Merger until amended thereafter as
provided therein or by law.
2.3 BYLAWS. The Bylaws of the Survivor shall be the Bylaws of the
surviving corporation from and after the Effective Time of the Merger until
amended thereafter as provided therein or by law.
2.4 DIRECTORS AND OFFICERS. The directors and officers of the Survivor at
the Effective Time of the Merger shall be the directors and officers,
respectively, of the surviving corporation from and after the Effective Time of
the Merger and shall hold office in accordance with the Articles of
Incorporation and Bylaws of the Survivor.
ARTICLE 3
CANCELLATION OF SUBSIDIARY SHARES
3.1 CANCELLATION OF ALL SUBSIDIARY SHARES. At the Effective Time of the
Merger, each share of the Subsidiary's Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger shall, by virtue of the
Merger and without any action on the part of the holder thereof, be canceled.
The Common Stock of the Subsidiary so canceled shall cease to exist as such. No
shares of the Survivor stock shall be issued in respect thereto.
ARTICLE 4
GENERAL
4.1 TERMINATION AND ABANDONMENT. This Agreement may be terminated and the
Merger and other transactions herein provided for abandoned at any time prior to
the Effective Time of the Merger if the board of directors of the Survivor
determines that the consummation of the transactions provided for herein would
not, for any reason, be in the best interests of the Survivor and its
shareholders.
4.2 AMENDMENT. This Agreement may be amended at any time prior to the
Effective Time of the Merger with the mutual consent of the boards of Directors
of the Subsidiary and the Survivor.
4.3 DEFERRAL. Consummation of the transactions herein provided for may be
deferred by the board of directors of the Subsidiary and the Survivor, or any
authorized officer thereof for a reasonable period of time if the board of
directors of either corporation determines that such deferral would be in the
best interests of the Subsidiary, the Survivor or their respective shareholders.
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4.4 HEADINGS. The headings set forth herein are inserted for convenience
or reference only and are not intended to be part of, or to affect the meaning
or interpretation of, this Agreement.
4.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, and all of which, when
taken together, shall constitute one and the same instrument.
4.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota without giving effect to the
principles of conflicts of law thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused
this Agreement to be executed on its behalf and attested by its officers
hereunto duly authorized, all as of the day and year first above written.
SUBSIDIARY:
CBC Merger Corp.
By /s/ Christopher T. Dahl
-----------------------
Its President
-------------------
Attest:
/s/ Lance W. Riley
- -------------------
Secretary
SURVIVOR:
Children's Broadcasting Corporation
By /s/ Christopher T. Dahl
----------------------------
Christopher T. Dahl
Its President and Chief
Executive Officer
Attest:
/s/ Lance W. Riley
- -------------------
Lance W. Riley, Secretary
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ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
CHILDREN'S BROADCASTING CORPORATION
The undersigned officer, on behalf of Children's Broadcasting
Corporation, a Minnesota corporation (the "Corporation"), hereby certifies
that an amendment to the Corporation's Articles of Incorporation has been
duly approved by the Company's Board of Directors and shareholders in
accordance with Sections 302A.135 and 302A.139 of the Minnesota Statutes.
Accordingly, Article IV is amended in its entirety to read as follows:
ARTICLE IV
CAPITAL
The aggregate number of shares of stock which this corporation shall
have the authority to issue is twenty-five million (25,000,000) shares with a
par value of one cent ($0.01) per share.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to the Articles of Incorporation to be executed this 31st day of
October, 1994.
CHILDREN'S BROADCASTING CORPORATION
By: /s/ Christopher T. Dahl
----------------------------------
Its: President
-----------------------------
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ARTICLES OF AMENDMENT
TO
RESTATED ARTICLES OF INCORPORATION
OF
CHILDREN'S BROADCASTING CORPORATION
CHILDREN'S BROADCASTING CORPORATION, a corporation organized
and existing under the laws of the State of Minnesota (herein referred to as the
"Corporation"), in accordance with the provisions of Minnesota Statutes, Section
302A.139, does hereby certify that:
1. Effective as of January 11, 1996, pursuant to the authority conferred upon
the Board of Directors by Minnesota Statutes, Section 302A.402,
Subdivision 3, the Board of Directors authorized and adopted in writing
resolutions providing for a one (1) for two (2) "Combination," and the
following is a true copy of such resolutions:
RESOLVED, that there is hereby declared a Reverse Stock Split or
Combination, pursuant to which every two (2) shares of issued and
outstanding voting or nonvoting Common Stock, $.01 par value per
share, and every two (2) shares of authorized but unissued voting
or nonvoting Common Stock, $.01 par value per share, existing on
the Combination Effective Date, shall be converted into one (1)
share of Common Stock, $.02 par value per share; and every two
(2) shares of Common Stock, $.01 par value per share issuable or
reserved for issuance upon conversion of convertible preferred
stock or upon exercise of outstanding stock options and stock
purchase warrants, shall, as of the Combination Effective Date,
be converted automatically into one (1) share of Common Stock,
$.02 par value per share.
FURTHER RESOLVED, that in order to effect the Combination,
Article IV of the Corporation's Restated Articles of
Incorporation is amended in its entirety as follows:
Article IV
Capital
The aggregate number of shares of stock which
this corporation shall have the authority to issue is
twelve million five hundred thousand (12,500,000)
shares with a par value of two cents ($.02) per share.
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FURTHER RESOLVED, that such Combination shall be effected
automatically on January 23, 1996, or such later date when the
Amendment shall be filed with the Minnesota Secretary of state
without further action by the Board of Directors or shareholders.
FURTHER RESOLVED, that the appropriate officers are hereby
authorized and directed to prepare, execute, acknowledge and file on
the Combination Effective Date the Articles of Amendment to the
Restated Articles of Incorporation of this Corporation together with
any other document or instrument necessary in connection with such
Combination; and to request shareholders to exchange their stock
certificates representing shares of Common Stock held prior to the
Combination for new certificates representing shares of Common Stock
issued as a result of the Combination.
FURTHER RESOLVED, that, promptly following the Combination
Effective Date, the Corporation shall furnish the shareholders with
the necessary materials and instructions to effect the exchange of
their stock certificates in accordance with the Combination.
FURTHER RESOLVED, that shareholders who after the Combination
would otherwise be entitled to receive fractional shares of Common
Stock, will, upon surrender of their stock certificates representing
shares of Common Stock owned as of the Combination Effective Date,
receive a cash payment in lieu thereof equal to the value of such
fractional shares determined by reference to the average closing bid
price of the Common Stock for a period of ten trading days
immediately preceding the Combination Effective Date, as reported by
the NASDAQ SmallCap Market.
FURTHER RESOLVED, that certificates representing shares of
Common Stock outstanding immediately prior to the Combination
Effective Date which are subsequently presented for transfer will not
be transferred on the books and records of the Corporation until the
certificates representing such shares of Common Stock have been
exchanged of record for certificates representing shares of Common
Stock reflecting the Combination.
FURTHER RESOLVED, that in the event any certificate representing
shares of Common Stock outstanding prior to the Combination is not
presented for exchange upon request by the Corporation, any dividends
that may be declared after the Combination Effective Date with
respect
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to the Common Stock represented by such certificate will be
withheld by the Corporation until such certificate has been properly
presented for exchange.
FURTHER RESOLVED, that the appropriate officers of the
Corporation, be and they hereby are authorized and directed, upon
filing of the Amendment pursuant to Minnesota Statutes, Section
302A.402, to proceed promptly to carry out the foregoing Actions and
to execute and file all documents and instruments and to take such
other actions as such officers deem necessary and appropriate to
complete the Combination in accordance with Minnesota Statutes,
Chapter 302A.
FURTHER RESOLVED, that the effective date of the above
Resolutions shall be as of January 11, 1996.
2. The foregoing amendment to Article IV of the Restated Articles of
Incorporation will not adversely affect the rights or preferences of
the holders of outstanding shares of any class or series of the
Corporation's stock and will not result in the percentage of
authorized shares that remains unissued after the Combination
exceeding the percentage of authorized shares that were unissued
before the Combination.
3. The amendment to Article IV of the Restated Articles of Incorporation
was adopted pursuant to Chapter 302A.
IN WITNESS WHEREOF, Children's Broadcasting Corporation has caused these
Articles of Amendment to be signed by its President this 18th day of January,
1996.
CHILDREN'S BROADCASTING
CORPORATION
By: /s/ Christopher T. Dahl
--------------------------------
Christopher T. Dahl
President
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CHILDREN'S BROADCASTING CORPORATION
CERTIFICATE OF DESIGNATION OF STOCK
The undersigned, being duly appointed Secretary of Children's Broadcasting
Corporation (the "Corporation), hereby certifies that the Board of Directors of
the Corporation, acting pursuant to the authority contained in Article V of the
Articles of Incorporation of the Corporation and the provisions of Chapter 302A,
Minnesota Statutes, took action by unanimous resolution on November 28, 1995,
and duly adopted the following resolutions to establish and designate 2,177,368
shares of Common Stock of the Corporation as Class A Common Stock.
DESIGNATION OF CLASS A COMMON STOCK
RESOLVED, in accordance with Article V of the Articles of Incorporation of
the Corporation and pursuant to Minnesota Statutes, Chapter 302A, the Board
of Directors hereby establishes, designates and reserves from the
Corporation's unauthorized and unissued shares of Common Stock, Class A
Common Stock in the amount and the voting powers and other special rights
as follows:
SECTION 1. DESIGNATION AND AMOUNT. The shares of such class of Common
Stock shall be designated as "Class A Common Stock" and the number of
shares constituting such class shall be 2,177,368.
SECTION 2. ALL OTHER RIGHTS. Other than with respect to voting and
conversion as set forth in Sections 3 and 4 below, the Class A Common
Stock shall in all respects be equal and have the same rights as the
Common Stock of the Corporation.
SECTION 3. VOTING RIGHTS. Except as otherwise required by law, each
outstanding share of Class A Common Stock shall not be entitled to vote
on any matter on which the shareholders of the Corporation shall be
entitled to vote and shares of Class A Common Stock shall not be included
in determining the number of shares voting or entitled to vote on any such
matter, provided that, notwithstanding the foregoing, holders of shares of
Class A Common Stock shall be entitled to vote as a separate class on any
amendment to the Certificate of Designation of Stock establishing such
class and on any amendment, repeal or modification of any provision of the
Articles of Incorporation of the Corporation that adversely affects the
powers, preferences or special rights of holders of Class A Common Stock.
Upon a conversion to Common Stock in accordance
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with Section 4 below, the holders of Class A Common Stock shall have full
voting rights with respect to the shares of Common Stock issued by virtue
of the conversion.
Section 4. Conversion.
(a) CONVERSION RIGHTS. Subject to the provisions of this Section 4, each
holder of Class A Common Stock shall be entitled to convert, at any
time and from time to time, at its option, any or all of the shares of
Class A Common Stock held by such holder into an equivalent number of
shares of voting Common Stock, provided that if pursuant to any
federal law, rule, regulation or regulatory policy such conversion
would cause the broadcast or other media interests of the holder to be
attributed to the Corporation, or the broadcast or other media
interest of the Corporation to be attributed to the holder and, as a
result of the attribution of such broadcast or other media interests,
(i) the holder would be foreclosed from the ownership of voting
securities of the Corporation, or (ii) the Corporation would be
foreclosed from the ownership of its broadcast or media interests or
from the acquisition of any additional broadcast or media interests,
the Class A Common Stock shall not be convertible, except in such
amount as would not cause such broadcast or media interests to be so
attributable.
(b) CONVERSION PROCEDURES. Each conversion of shares of Class A Common
Stock into shares of Common Stock shall be effected by the surrender
of the certificate or certificates representing the shares to be
converted (the "Converting Shares") at the principal office of the
Corporation (or such other office or agency of the Corporation as the
Corporation may designate by written notice to the holders of Class A
Common Stock) at any time during its usual business hours, together
with written notice by the holder of such Converting Shares, stating
that such holder desires to convert the Converting Shares, stating
that such holder desires to convert the Converting Shares, or a stated
number of the shares represented by such certificate or certificates,
into an equal number of shares of Common Stock (the "Converted
Shares"). Such notice shall also state the name or names (with
addresses) and denominations in which the certificate or certificates
for Converted Shares are to be issued and shall include instructions
for the delivery thereof. Promptly after such surrender and the
receipt of such written notice, the Corporation will issue and deliver
in accordance with the surrendering holder's instructions the
certificate or certificates evidencing the Converted Shares issuable
upon such conversion, and the Corporation will deliver to the
converting holder a certificate (which shall contain such legends as
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were set forth on the surrendered certificate or certificates)
representing any shares which were represented by the certificate or
certificates that were delivered to the Corporation in connection with
such conversion, but which were not converted; provided, however, that
the Corporation shall issue shares to persons other than those
indicated on the certificate or certificates representing the
Converting Shares only in compliance with the Securities Act of 1933,
as amended, and any other applicable state or federal securities law.
Such conversion, to the extent permitted by law, shall be deemed to
have been effected as of the close of business on the date on which
such certificate or certificates shall have been surrendered and such
notice shall have been received by the Corporation, and at such time
the rights of the holder of the Converting Shares as such holder shall
cease and the person or persons in whose name or names the certificate
or certificates for the Converted Shares are to be issued upon such
conversion shall be deemed to have become the holder or holders or
record of the Converted Shares.
(c) RESERVATION OF SHARES. The Corporation shall at all times reserve and
keep available out of its authorized but unissued shares of Common
Stock or its treasury shares, solely for the purpose of issuance upon
the conversion of shares of Class A Common Stock, such number of
shares of Common Stock as are then issuable upon the conversion of all
outstanding shares of Class A Common Stock.
FURTHER RESOLVED, that the President and the Secretary of the Corporation
are authorized and directed to take such further action as shall be
necessary or required to carry into effect the intent of the foregoing
resolution and they, or any of them, are authorized and directed to file a
certificate of designation pursuant to Section 302A.401, Subd. 3 of the
Minnesota Business Corporation Act with the Minnesota Secretary of State.
IN WITNESS WHEREOF, Children's Broadcasting Corporation has caused this
Certificate of Designation to be signed by Lance W. Riley, its Secretary,
this 27th day of February, 1996.
CHILDREN'S BROADCASTING
CORPORATION
/s/ Lance W. Riley
----------------------------
Lance W. Riley, Secretary
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EXHIBIT 10.2
OFFICE/WAREHOUSE LEASE
THIS INDENTURE of lease, made effective this 1st day of November, 1996, by
and between 5501 BUILDING COMPANY, a partnership (hereinafter referred to as
"Lessor"), and CHILDREN'S BROADCASTING CORPORATION (hereinafter referred to as
"Lessee").
DEFINITIONS
"PREMISES" - That certain real property located in the City of Minneapolis,
County of Hennepin and State of Minnesota and legally described on Exhibit "A"
attached hereto and made a part hereof, including all buildings and site
improvements located thereon.
"BUILDING" - That certain office/warehouse building containing
approximately 12,000 square feet located upon the Premises and commonly
described as the 5501 Building.
"DEMISED PREMISES" - That certain portion of the Building located at 5501
Excelsior Boulevard and designated as Exhibit B, consisting of approximately
12,000 square feet (12,000 square feet of office space and zero square feet of
warehouse space), as measured from the outside walls of the Demised Premises to
the center of the partition wall, as shown on the floor plan attached hereto as
Exhibit "B" and made a part hereof. The Demised Premises includes a non-
exclusive easement for access to common area, as hereinafter defined, and all
licenses and easements appurtenant to the Demised Premises.
"COMMON AREAS" - The term "common area" means the entire areas as
designated on Exhibit "B" and to be used for the non-exclusive use by Lessee and
other lessees in the Building, including, but not limited to, corridors,
lavatories, driveways, truck docks, parking lots and landscaped areas, if any.
Subject to reasonable rules and regulations to the promulgated by Lessor, the
common areas are hereby made available to Lessee and its employees, agents,
customers and invitees for reasonable use in common with other lessees, their
employee, agents, customer and invitees.
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W I T N E S S E T H :
1. TERM. For and in consideration of the rents, additional rents, terms,
provisions and covenants herein contained, Lessor hereby lets, leases and
demises to Lessee the Demised Premises for the term of sixty (60) months
commencing on the 1st day of July, 1996 (sometimes called "the Commencement
Date") and expiring the 31st day of July, 2001 (sometimes called
"Expiration Date"), unless sooner terminated as hereinafter provided.
2. BASE RENT. Lessor reserves and Lessee shall pay Lessor, a total rental of
Six Hundred Seventy-two Thousand and no/100 Dollars ($672,000), payable in
advance, in monthly installments of Ten Thousand and No/100's Dollars
($10,000.00), commencing on the Commencement Date and continuing on the
first day of each and every month thereafter for the next succeeding twelve
months through June, 1997, and Eleven Thousand and no/100 Dollars
($11,000.00) on the first day of each and every month thereafter for the
next succeeding 24 months through June 30, 1999, and Twelve Thousand and
No/100s Dollars ($12,000.00) on the first day of each and every month for
the next succeeding months during the balance of the term (sometimes called
"Base Rent"). In the event the Commencement Date falls on a date other
than the first of a month the rental for that month shall be prorated and
adjusted accordingly.
3. ADDITIONAL RENT. Lessee shall pay to Lessor throughout the term of this
Lease the following:
(a) Lessee shall pay a sum equal to one hundred percent (100%) of the Real
Estate Taxes. The term "Real Estate Taxes" shall mean all real estate
taxes, all assessments and any taxes in lieu thereof which may be
levied upon or assessed against the Premises of which the Demised
Premises are a part. Lessee, in addition to all other payments to
Lessor by Lessee required hereunder shall pay to Lessor, in each year
during the term of this Lease and any extension or renewal thereof,
Lessee's proportionate share of such real estate taxes and assessments
paid in the first instance by Lessor.
Any tax year commencing during any lease year shall be deemed to
correspond to such lease year. In the event the taxing authorities
include in such real estate taxes and assessments the value of any
improvements made by Lessee, or of machinery, equipment, fixtures,
Inventory or other personal property or assets of Lessee, then Lessee
shall pay all the taxes attributable to such items in addition to its
proportionate share of said
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aforementioned real estate taxes and assessments. A photostatic copy
of the tax statement submitted by Lessor to Lessee shall be
sufficient evidence of the amount of taxes and assessments assessed
or levied against the Premises of which the Demised Premises are a
part as well as the items taxed.
(b) A sum equal to one hundred percent (100%) of the annual aggregate
operating expenses incurred by Lessor in the operation, maintenance
and repair of the Premises. The term "Operating Expenses" shall
include, but not be limited to, maintenance, repair, replacement and
care of all heating, lighting, plumbing and air conditioning fixtures,
equipment and systems, roofs, parking and landscaped area, signs, snow
removal, non-structural repair and maintenance of the exterior of the
Building, insurance premiums, management fees, wages and fringe
benefits of personnel employed for such work, cost of equipment
purchased and used for such purposes, and the cost or portion thereof
properly allocable to the Premises (amortized over such reasonable
period as Lessor shall determine together with the interest at the
rate of eighteen percent (18%) per annum on the unamortized balance)
of any capital improvements made to the Building by Lessor after the
Base Year which result in a reduction of Operation Expenses or made to
the Building by Lessor after the date of this lease that are required
under any governmental law or regulation that was not applicable to
the Building at the time it was constructed.
(c) The payment of the sums set forth in this Article 3 shall be in
addition to the Base Rent payable pursuant to Article 2 of this Lease.
All sums due hereunder shall be due and payable within thirty (30)
days of delivery of written certification by Lessor setting forth the
computation of the amount due from Lessee. In the event the lease
term shall begin or expire at any time during the calendar year, the
Lessee shall be responsible for his pro-rata share of Additional Rent
under subdivisions a. and b. during this Lease and/or occupancy time.
Prior to commencement of this Lease, and prior to the commencement of
each calendar year thereafter commencing during the term of this Lease
or any renewal or extension thereof, Lessor may estimate for each
calendar year (i) the total amount of Real Estate Taxes; (ii) the
total amount of Operating Expenses; (iii) Lessee's share of Real
Estate Taxes for such calendar year; (iv) Lessee's share of Operating
Expenses for such calendar year; and (v) the computation of the annual
and monthly rental payable during such calendar year as a result of
increases or decreases in Lessee's
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share of Real Estate Taxes and Operating Expenses. Said estimates
will be in writing and will be delivered or mailed to Lessee at the
Premises.
The amount of Lessee's share of Real Estate Taxes and Operating
Expenses for each calendar year, so estimated, shall be payable as
Additional Rent, in equal monthly installments, in advance, on the
first day of each month during such calendar year at the option of
Lessor. In the event that such estimate is delivered to Lessee before
the first day of January of such calendar year said amount, so
estimated, shall be payable as additional rent in equal monthly
installments, in advance, on the first day of each month over the
balance of such calendar year, with the number of installments being
equal to the number of full calendar months remaining in such
calendar year.
Upon completion of each calendar year during the term of this Lease or
any renewal or extension thereof, Lessor shall cause its accountants
to determine the actual amount of the Real Estate Taxes and Operating
Expenses payable in such calendar year and Lessee' share thereof and
deliver a written certification of the amounts thereof to Lessee. If
Lessee has underpaid its share of Real Estate Taxes or Operating
Expenses for such calendar year, Lessee shall pay the balance of its
share of same within ten (10) days after the receipt of such
statement. If Lessee has overpaid its share of Real Estate Taxes or
Operating Expenses for such calendar year, Lessor shall either (i)
refund such excess, or (ii) credit such excess against the most
current monthly installment or installments due Lessor for its
estimate of Lessee's share of Real Estate Taxes and Operating Expenses
for the next following calendar year. A pro-rata adjustment shall be
made for a fractional calendar year occurring during the term of this
Lease or any renewal or extension thereof based upon the number of
days of the term of the Lease during said calendar year as compared to
three hundred sixty-five (365) days and all additional sums payable by
Lessee or credits due Lessee as a result of the provisions of this
Article 3 shall be adjusted accordingly.
4. COVENANT TO PAY RENT. The covenants of Lessee to pay the Base Rent and the
Additional Rent are each independent of any other covenant, condition,
provision or agreement contained in this Lease. All rents are payable to
Lessor at:
5501 Building Company
5501 Excelsior Boulevard
Minneapolis, Minnesota 55416
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5. UTILITIES. Lessor shall provide mains and conduits to supply water, gas,
electricity and sanitary sewage to the Premises. Lessee shall pay, when
due, all charges for sewer usage or rental, garbage disposal, refuse
removal, water, electricity, gas, fuel, oil, L.P. gas, telephone and/or
other utility services or energy source furnished to the Demised Premises
during the term of this Lease, or any renewal or extension thereof. If
Lessor elects to furnish any of the foregoing utility services or other
services furnished or caused to be furnished by lessor shall not exceed the
rate Lessee would be required to pay to a utility company or service
company furnishing any of the foregoing utilities or services. The charges
thereof shall be deemed Additional Rent in accordance with Article 3.
6. CARE AND REPAIR OF DEMISED PREMISES. Lessee shall, at all times throughout
the term of this Lease, including renewals and extensions, and at its sole
expense, keep and maintain the Demised Premises in a clean, safe, sanitary
and first class condition and in compliance with all applicable laws,
codes, ordinances, rules and regulations. Lessee's obligations hereunder
shall include, but not be limited to, the maintenance, repair and
replacement, if necessary, of all lighting and plumbing fixtures and
equipment, fixtures, motors and machinery, all interior walls, partitions,
doors and windows, including the regular painting thereof, all exterior
entrances, windows, doors and docks and the replacement of all broken
glass. When used in this provision, the term "repairs" shall include
replacements or renewals when necessary, and all such repairs made by the
Lessee shall be equal in quality and class to the original work. The
Lessee shall keep and maintain all portions of the Demised Premises and the
sidewalk and areas adjoining the same in a clean and orderly condition,
free of accumulation of dirt, rubbish, snow and ice.
If Lessee fails, refuses or neglects to maintain or repair the Demised
Premises as required in this Lease after notice shall have been given
Lessee, in accordance with Article 36 of this Lease, Lessor may make such
repairs without liability to Lessee for nay loss or damage that may accrue
to Lessee's merchandise, fixtures or other property or to Lessee;s business
by reason thereof, and upon completion thereof, Lessee shall pay to Lessor
all costs plus fifteen (15%) for overhead incurred by Lessor in making such
repairs upon presentation to Lessee of bill therefor.
Lessor shall repair, at its expense, the structural portions of the
Building, provided however where structural repairs are required to be made
by reason of the acts of Lessee, the costs thereof shall be borne by Lessee
and payable by Lessee to Lessor upon demand.
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The Lessor shall be responsible for all outside maintenance of the Demised
Premises, including grounds and parking areas. All such maintenance which
is the responsibility of the Lessor shall be provided as reasonably
necessary to the comfortable use and occupancy of Demised Premises during
business hours, except Saturdays, Sundays and holidays, upon the condition
that the Lessor shall not be liable for damages for failure to do so due to
causes beyond its control.
7. SIGNS. Any sign, lettering, picture, notice or advertisement installed on
or in any part of the Premises and visible from the exterior of the
Building, or visible form the exterior of the Demised Premises, shall be
approved and installed by Lessor at Lessee's sole cost and expense. Signs
to be maintained by Lessor at Lessee's expense. In the event of a
violation of the foregoing by Lessee, Lessor may remove the same without
any liability and may charge the expense incurred by such removal to
Lessee.
8. ALTERATIONS, INSTALLATION, FIXTURES. Except as hereinafter provided,
Lessee shall not make any alteration, additions or improvements in or to
the Demised Premises or add, disturb in any way, change any plumbing or
wiring therein without the prior written consent of the Lessor. In the
event alterations are required by any governmental agency by reason of the
use and occupancy of the Demised Premises by Lessee, Lessee shall make such
alterations at its own expense after first obtaining Lessor's approval of
plans and specifications therefor and furnishing such indemnifications as
Lessor may reasonable require against liens, costs, damages and expenses
arising of such alterations. Alterations or additions by Lessee must be
built in compliance with all laws, ordinances and governmental regulations
and affecting the Premises and Lessee shall warrant to Lessor that all such
alterations, additions or improvements shall be in strict compliance with
all relevant laws, ordinances, governmental regulations and insurance
requirements. Construction of such alterations or additions shall commence
only once Lessee has obtained and exhibited to Lessor the requisite
approvals, licenses and permits and indemnification against liens. All
alterations, installations, physical additions or improvements to the
demised Premises made by Lessee shall at once become the property of Lessor
and shall be surrendered to Lessor upon the termination of this Lease;
provided, however, that this clauses shall not apply to movable equipment
or furniture owned by Lessee which may be removed by Lessee at the end of
the term of this Lease in the event that Lessee is not then in default.
9. POSSESSION. Except as hereinafter provided Lessor shall deliver possession
of Demised Premises to Lessee in the condition required by this Lease on or
before the Commencement Date, but delivery of possession prior to or later
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than such Commencement Date shall not affect the expiration date of this
Lease. The rentals herein reserved shall commence on the date actual
possession of the Demised Premises is delivered by Lessor to Lessee. Any
occupancy by Lessee prior to the beginning of the term of this Lease shall
in all respects be the same as that of a Lessee under this Lease. Lessor
shall have no responsibility or liability for loss or damage to fixtures,
facilities or equipment installed or left on the Demised Premises. If
Demised Premises is not ready for occupancy by Commencement Date and
possession is later than Commencement Date, rent shall begin on the date of
actual possession.
10. SECURITY AND DAMAGE DEPOSIT. Lessee contemporaneously with the execution
of this Lease, deposited with Lessor the sum of Zero Dollars ($---0---),
receipt of which is hereby acknowledged by Lessor, which deposit is to be
held by Lessor, without liability for interest as a security and damage
deposit for the faithful performance by Lessee during the term hereof or
any extension hereof. Prior to the time of when Lessee shall be entitled
to the return of this security deposit, Lessor may commingle such deposit
with Lessor's own funds and to use such security deposit for such purposes
as Lessor may determine. In the event of the failure of Lessee to keep and
perform any of the terms, covenants and conditions of this Lease to be kept
and performed by Lessee during the term hereof or extension hereof, then
Lessor, either with or without terminating this Lease may (but shall not be
required to) apply such portion of said deposit as may be necessary to
compensate or repay Lessor for all losses or damages sustained or to be
sustained by Lessor due to such breach on the part of Lessee, including,
but not limited to, overdue and unpaid rent, any other amounts payable by
Lessee to Lessor pursuant to the provisions of this Lease, damages or
deficiencies in the reletting of Demised Premises, and reasonable
attorney's fees incurred by Lessor. Should the entire deposit or any
portion thereof, be appropriated and applied by Lessor, in accordance with
provisions of this paragraph, Lessee upon written demand by Lessor shall
remit forthwith to Lessor a sufficient amount of cash to restore said
security deposit to the original sum deposited, and Lessee's failure to do
so within five (5) days after receipt of such demand shall constitute a
breach of this Lease. Said security deposit shall be returned to Lessee,
less any deposit thereof as the result of the provisions of this paragraph,
at the end of the term of this Lease, or any renewal thereof or upon the
earlier termination of this Lease. Lessee shall have no right to
anticipate return of said deposit withholding any amount required to be
paid pursuant to the provision of this Lease or otherwise.
In the event Lessor shall sell the Premises, or shall otherwise convey or
dispose of its interest in this Lease, Lessor may assign said security
deposit or any
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balance thereof to Lessor's assignee, whereupon Lessor shall be released
from all liability for the return or repayment of such security
deposit and Lessee shall look solely to the said assignee for the return
and reimbursement of said security deposit. Said security deposit shall
not be assigned or encumbered by Lessee without the written consent of
Lessor, and any assignment or encumbrance without such consent shall not
bind Lessor. In the event of any rightful and permitted assignment of this
Lease by Lessor said security deposit shall be deemed to be held by Lessor
as a deposit made by the assignee, and Lessor shall have no further
liability with respect to the return of said security deposit to the
Lessee.
11. USE. The Demised Premises shall be used and occupied by Lessee strictly
for the purposes of an office so long as such use is in compliance with all
applicable laws, ordinances and governmental regulations affecting the
Building and Premises. The Demised Premises shall not be used in such
manner that, in accordance with any requirement of law or of any public
authority, Lessor shall be obliged on account of the purpose or manner of
said use to make any addition or alteration to or in the Building. The
Demised Premises shall not be used in any manner which will increase the
rates required to be paid for public liability or for fire and extended
coverage insurance covering the Premises. Lessee shall occupy the Demised
Premises conduct its business and control its agents, employees, invitees
and visitors in such a way as is lawful, and reputable and will not permit
or create any nuisance, noise, odor, or otherwise interfere with, annoy or
disturb any other tenant in the Building in its normal business operations
or Lessor in its management of the Building. Lessee's use of the Demised
Premises shall conform to all the Landlord's rules and regulations relating
to the use of the Premises. Outside storage on the Premises of any type of
equipment, property or materials owned or used on the Premises by Lessee or
its customers and suppliers shall not be permitted.
12. ACCESS TO DEMISED PREMISES. The Lessee agrees to permit the Lessor and the
authorized representatives of the Lessor to enter the Demised Premises at
all times during usual business hours for the purpose of inspecting the
same and making any necessary repairs to the Demised Premises and
performing any work therein that may be necessary to comply with any laws,
ordinances, rules, regulations or requirements of any public authority or
of the Board of Fire Underwriters or any similar body or that the Lessor
may deem necessary to prevent waste or deterioration in connection with the
Demised Premises. Nothing herein shall imply any duty upon the part of the
Lessor to do any such work which, under any provision of this Lease, the
Lessee may be required to perform and the performance thereof by the Lessor
shall not constitute a waiver
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of the Lessee's default in failing to perform the same. The Lessor may,
during the progress of any work in the Demised Premises, keep and store
upon the Demised Premises all necessary materials, tools and equipment.
The Lessor shall not in any event be liable for inconvenience, annoyance,
disturbance, loss of business, or other damage of the Lessee by reason
of making repairs or the performance of any work in the Demised Premises,
or on account of bringing materials, supplies and equipment into or
through the Demised Premises during the course thereof and the obligations
of the Lessee under this Lease shall not thereby be affected in any matter
whatsoever.
Lessor reserves the right to enter upon the Demised Premises at any time in
the event of an emergency and at reasonable hours to exhibit the Demised
Premises to prospective purchasers or others; and to exhibit the Demised
Premises to prospective tenants and to display "For Rent" or similar signs
on windows and doors in the Demised Premises during the last one hundred
eighty (180) days of the term of this Lease, all without hindrance or
molestation by Lessee.
13. EMINENT DOMAIN. In the event of any eminent domain or condemnation
proceeding or private sale in lieu thereof in respect to the Premises
during the term thereof, the following provisions shall apply:
(a) If the whole of the of the Premises shall be acquired or condemned by
eminent domain for any public or quasi-public use or purpose, then the
term of this Lease shall cease and terminate as of the date possession
shall be taken in such proceeding and all rentals shall be paid up to
that date.
(b) If any part constituting less than the whole of the Premises shall be
acquired or condemned or aforesaid, and in the event that such partial
taking or condemnation shall materially affect the Demised Premises so
as to render the Demised Premises unsuitable for the business of the
Lessee, in the reasonable opinion of the Lessor, then the term of this
Lease shall cease and terminate as of the date possession shall be
taken by the condemning authority and rent shall be paid to the date
of such termination.
In the event of a partial taking or condemnation of the Premises which
shall not materially affect the Demised Premises so as to render the
Demised Premises unsuitable for the business of the Lessee, in the
reasonable opinion of the Lessor, this Lease shall continue in full
force and affect but with a proportionate abatement of the Base Rent
and Additional Rent based on the portion, if any, of the Demised
Premises taken. Lessor
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reserves the right, at its option, to restore the Building
and the Demised Premises to substantially the same condition as
they were prior to such condemnation. In such event, Lessor shall
give written notice to Lessee, within thirty (30) days following
the date possession shall be taken by the condemning authority, of
Lessor's intention to restore. Upon Lessor's notice of election
to restore, Lessor shall commence restoration and shall restore the
Building and the Demised Premises with reasonable promptness, subject
to delays beyond Lessor's control and delays in the making of
condemnation or sale proceeds adjustments by Lessor; and Lessee shall
have no right to terminate this Lease except as herein provided. Upon
completion of such restoration, the rent shall be adjusted based upon
the portion, if any, of the Demised Premises restored.
(c) In the event of any condemnation or taking as aforesaid, whether whole
or partial, the Lessee shall not be entitled to any part of the award
paid for such condemnation and Lessor is to receive the full amount of
such award, the Lessee hereby expressly waiving any right or claim to
any part thereof.
(d) Although all damages in the event of any condemnation shall belong to
the Lessor whether such damages are awarded as compensation for
diminution of value of the leasehold or to the fee of the Demised
Premises, Lessee shall have the right to claim and recover from the
condemning authority, but not from Lessor, such compensation as may be
separately awarded and recoverable by Lessee in Lessee's own right on
account of any and all damage to Lessee's business by reason of the
condemnation and for or on account of any cost or loss to which Lessee
might be put in removing Lessee's merchandise, furniture, fixtures,
leasehold improvements and equipment.
14. DAMAGE OR DESTRUCTION. In the event of any damage or destruction to the
Premises by fire or other cause during the term hereof, the following
provisions shall apply:
(a) If the Building is damaged by fire or any other cause to such extent
that the cost of restoration, as reasonably estimated by Lessor, will
equal or exceed thirty percent (30%) of the replacement value of the
Building (exclusive of foundations) just prior to the occurrence of
the damage, then Lessor may, no later than the sixtieth (60th) day
following the damage, give Lessee written notice of Lessor's election
to terminate this Lease.
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(b) If the cost of restoration as estimated by Lessor will equal or exceed
fifty percent (50%) of said replacement value of the Building and if
the Demised Premises are not suitable as a result of said damage for
the purposes for which they are demised hereunder, in the reasonable
opinion of Lessee, then Lessee may, no later than the sixtieth (60th)
day following the damage, give Lessor a written notice of election to
terminate this Lease.
(c) If the cost or restoration as estimated by Lessor shall amount to less
than thirty percent (30%) of said replacement value of the Building,
or if despite the cost, Lessor does not elect to terminate this Lease,
Lessor shall restore the Building and the Demised Premises with
reasonable promptness, subject to delays beyond Lessor's control and
delays in the making of insurance adjustments by Lessor; and Lessee
shall not have the right to terminate this Lease., Lessor shall not be
responsible for restoring or repairing leasehold improvements of the
Lessee.
(d) In the event of either of the elections to terminate, this Lease shall
be deemed to terminate on the date of the receipt of the notice of
election and all rentals shall be paid up to that date. Lessee shall
have no claim against Lessor for the value of any unexpired term of
this Lease.
(e) In any case where damage to the Building shall materially affect the
Demised Premises so as to render them unsuitable in whole or in part
for the purposes of which they are demised hereunder, then, unless
such destruction was wholly or partially caused by the negligence or
breach of the terms of this Lease by Lessee, its employees,
contractors or licensees, a portion of the rent based upon the amount
of the extent to which the Demised Premises are rendered unsuitable
shall be abated until repaired or restored. If the destruction or
damage was wholly or partially caused by negligence or breach of the
terms of this Lease by Lessee as aforesaid and if Lessor shall elect
to rebuild, the rent shall not abate and the Lessee shall remain
liable for the same.
15. CASUALTY INSURANCE.
(a) Lessor shall at all times during the term of this Lease, at its
expense, maintain a policy or policies of insurance with premiums paid
in advance issued by an insurance company licensed to do business in
the State of Minnesota insuring the Building against loss or damage by
fire, explosion or other insurable hazards and contingencies for the
full replacement value, provided that Lessor shall not be obligated to
insure any furniture,
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equipment, machinery, goods or supplies not covered by this Lease
which Lessee may bring upon the Demised Premises or any additional
improvements which Lessee may construct or install on the Demised
Premises.
(b) Lessee shall not carry any stock of goods or do anything in or about
the Demised Premises which will in any way impair or invalidate the
obligation of the insurer under any policy of insurance required by
this Lease.
(c) Lessor hereby waives and releases all claims, liabilities and causes
of action against Lessee and its agents, servant and employees for
loss or damage to, or destruction of, the Premises or any portion
thereof, including the buildings and other improvements situated
thereon, resulting from fire, explosion or other perils included in
standard extended coverage insurance, whether caused by the negligence
of any of said persons or otherwise. Likewise, Lessee hereby waives
and releases all claims, liabilities and causes of action against
Lessor and its agents, servants and employees for loss or damage to,
or destruction of, any of the improvements, fixtures, equipment,
supplies, merchandise and other property, whether that of Lessee or of
others in, upon or about the Premises resulting from fire, explosion
or the other perils included in standard extended coverage insurance,
whether caused by the negligence of any of said persons otherwise.
The waiver shall remain in force whether or not the Lessee's insurance
shall consent thereto.
(d) In the event that the use of the Demised Premises by Lessee increases
the premium rate for insurance carried by Lessor on the improvement of
which the Demised Premises are a part, Lessee shall pay Lessor, upon
demand, the amount of such premium increase. If Lessee installs any
electrical equipment that overload the power lines to the Building or
its wiring, Lessee shall, at its own expense, make whatever changes
are necessary to comply with the requirements of the insurance
underwriter, insurance rating bureau and governmental authorities have
jurisdiction.
16. PUBLIC LIABILITY INSURANCE. Lessee shall during the term hereof keep in
full force and effect at its own expense a policy or policies of public
liability insurance with respect to the Demised Premises and the business
of Lessee, on terms and with companies approved in writing by Lessor, in
which both Lessee and Lessor shall be covered by being named as insured
parties under reasonable limits of liability not less than: One Million
Dollars ($1,000,000) for injury or death to any one person: One Million
Dollars ($1,000,000) for injury or death to more than one person; and Five
Hundred and Fifty Thousand Dollars
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($550,000) with respect to damage to property. Such policy or policies
shall provide that ten (10) days written notice must be given to Lessor
prior to cancellation thereof. Lessee shall furnish evidence satisfactory
to Lessor at the time this Lease is executed, and from time to time, that
such coverage is in full force and effect.
17. DEFAULT OF TENANT.
(a) In the event of any failure of Lessee to pay any rental due hereunder
within ten (10) days after the same shall be due, or any failure to
perform any other of the term, condition or covenant of this Lease to
be observed or performed by Lessee for more than thirty (30) days
after written notice of such failure shall have been given to Lessee,
or if Lessee or an agent of Lessee shall falsify any report required
to be furnished to Lessor pursuant to the terms of this Lease, or if
Lessee or any guarantor of this Lease shall become bankrupt or
insolvent, or file any debtor proceedings or any person shall take or
have against Lessee or any guarantor of this Lease in any court
pursuant to any statute either of the United States or of any state a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of all or a portion of Lessee's
or any such guarantor's property, or if Lessee or any such guarantor
makes an assignment for the benefit of creditors, or petitions for or
enters into an arrangement, or if Lessee shall abandon the Demised
Premises or suffer this Lease to be taken under any writ of execution,
then in any such event Lessee shall be in default hereunder, and
Lessor, in addition to other rights of remedies it may have, shall
have the immediate right of re-entry and may remove all persons and
property from the Demised Premises and such property may be removed
and stored in a public warehouse or elsewhere at the cost of and for
the account of the Lessee, all without service of notice or resort to
legal process and without being guilty of trespass, or becoming liable
for any loss or damage which may be occasioned thereby.
(b) Should Lessor elect to re-enter the Demised Premises as herein
provided, or should it take possession of the Demised Premises
pursuant to legal proceedings or pursuant to any notice provided for
by law, it may either terminate this Lease or it may from time to
time, without terminating this Lease, make such alterations, and
repairs as may be necessary in order to relet the Demised Premises and
relet the Demised Premises or any part thereof for such term or terms
(which may be for a term extending beyond the term of this Lease) and
at such rental or rentals and upon such other terms and conditions as
Lessor in its sole discretion may deem advisable.
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Upon each such subletting all rentals received by the Lessor from
such reletting shall be applied first to the payment of any
indebtedness other than rent due hereunder from Lessee to Lessor;
second, to the payment of any costs and expenses of such reletting,
including brokerage fees, attorney's fees and costs; third, to the
payment of accrued and unpaid rent hereunder, and the remainder,
if any, shall be held by Lessor and applied in payment of future
rent as the same may become due and payable hereunder. If such
rentals received from such reletting during any month are less than
that to be paid during that month by Lessee hereunder, Lessee, upon
demand, shall pay any such deficiency to Lessor. No such re-entry
or taking possession of the Demised Premises by Lessor shall be
construed as an election on Lessor's part to terminate this Lease
unless a written notice of such intention be given to Lessee or
unless the termination thereof be decreed by a court of competent
jurisdiction. Notwithstanding any such reletting without
termination, Lessor may at any time after such re-entry and reletting
elect to terminate this Lease for such previous breach. Should
Lessor at any time terminate this Lease for any such breach, in
addition to any other remedies it may have, it may recover from Lessee
all damages it may incur by reason of such breach, including the cost
of recovering the Demised Premises, the cost of reletting the Demises
premises, reasonable attorney's fees, and including the worth at the
time of such termination of the excess, if any, of the amount of rent
and charges equivalent to rent reserved in this Lease for the
remainder of the stated term over the then reasonable rental value of
the Demised Premises for the remainder of the stated term, all of
which amounts shall be immediately due and payable from Lessee to
Lessor.
(c) Lessor may, at its option, instead of exercising any other rights or
remedies available to it in this Lease or otherwise by law, statute or
equity, spend such money as is reasonable necessary to cure any
default of Lessee herein and the amount so spent, and costs incurred,
including attorney's fees in curing such default, shall be paid by
Lessee, as Additional Rent, upon demand.
(d) In the event suit shall be brought for recovery of possession of the
Demised Premises, for the recovery of rent or any other amount due
under the provisions of this Lease or because of the breach of any
other covenant herein contained on the part of the Lessee to be kept
or performed, and a breach shall be established, Lessee shall pay to
Lessor all expenses incurred therefore, including a reasonable
attorney's fee, together with interest on all
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such expenses at the rate of eighteen percent (18%) per annum from
the date of such breach of the covenants of this Lease.
(e) Lessee hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Lessee
being evicted or dispossessed for any cause, or in the event of Lessor
obtaining possession of the Demised Premises, by reason of the
violation by Lessee of any of the covenants or conditions of this
Lease, or otherwise. Lessee also waives any demand for possession of
the Demised Premises, and any demand for payment of rent and any
notice of intent to re-enter the Demised Premises, or of intent to
terminate this Lease, other than the notices provided in this Article,
and waives any and every other notice or command prescribed by any
applicable statutes or laws.
(f) No remedy herein or elsewhere in this Lease or otherwise by law,
statute or equity, conferred upon or reserved to Lessor or Lessee
shall be exclusive of any other remedy, but shall be cumulative, and
may be exercised from time to time and as often as the occasion may
arise.
18. COVENANTS TO HOLD HARMLESS. Unless the liability for damage or loss is
caused by the negligence of Lessor, its agents or employees, Lessee shall
hold harmless Lessor from any liability for damages to any person or
property in or upon the Demised Premises and the Premises, including the
person and property of Lessee and its employees and all persons in the
Building at its or their invitation or sufferance, and from all damages
resulting from Lessee's failure to perform the covenants of this Lease.
All property kept, maintained or stored on the Demised Premises shall be so
kept, maintained or stored at the sole risk of Lessee. Lessee agrees to
pay all sums of money in respect of any labor, service, materials, supplies
or equipment furnished or alleged to have been furnished to Lessee in or
about the Premises, and not furnished on order of Lessor, which may be
secured by any Mechanic's Materialmen's or other lien to be discharged at
the time performance of any obligation secured thereby matures, provided
that Lessee may contest such lien, but if such lien is reduced to final
judgement and if such judgement or process thereon is not stayed, or if
stayed and said stay expires, then and in each such event, Lessee shall
forthwith pay and discharge said judgement. Lessor shall have the right to
post and maintain on the Demised Premises, notices of non-responsibility
under the laws of the State in which the Demised premises are located.
19. NON-LIABILITY. Subject to the terms and conditions of Article 14 hereof,
Lessor shall not be liable for any damage to property of Lessee or of
others
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located on the Premises, nor for the loss of or damage to any property
of Lessee or of other by theft or otherwise. Lessor shall not be liable
for any injury or damage to persons or property resulting from fire,
explosion, falling plaster, steam, gas, electricity, water, rain or snow or
leaks from any part of the Premises or from the pipes, appliances or
plumbing works or from the roof, street or subsurface or from any other
place or by dampness or by any other cause of whatsoever nature. Lessor
shall not be liable for any such damage caused by other Lessees or persons
in the Premises, occupants of adjacent property, other occupants of the
buildings, or the public or caused by operations in construction of any
private, public or quasi-public work. Lessor shall not be liable for any
latent defect in the Demised Premises. All property of Lessee kept or
stored on the Demised Premises shall be so kept or stored at the risk of
Lessee only and Lessee shall hold Lessor harmless from any claims arising
out of damage to the same, including subrogation claims by Lessee's
insurance carrier.
20. SUBORDINATION. This Lease shall be subordinated to any mortgages that may
now exist or that may hereafter be placed upon the Demised Premises and to
any and all advances made thereunder, and to the interest upon the
indebtedness evidenced by such mortgages, and to all renewals, replacements
and extensions thereof. In the event of execution by Lessor after the date
of this Lease of any such mortgage, renewal, replacement or extension,
Lessee agrees to execute a subordination agreement with the holder thereof
which agreement shall provide that:
(a) Such holder shall not disturb the possession and other rights of
Lessee under this Lease so long as Lessee is not in default hereunder.
(b) In the event of acquisition of title to the Demised Premises by such
holder, such holder shall accept the Lessee as Lessee of the Demised
Premises under the terms and conditions of this Lease and shall
perform all the obligations of Lessor hereunder, and
(c) The Lessee shall recognize such holder as Lessor hereunder. Lessee
shall, upon receipt of a request from Lessor therefor, execute and
deliver to Lessor or to any proposed holder of a mortgage or trust
deed or any proposed purchaser of the Premises, a certificate in
recordable form certifying that this Lease is in full force and
effect, and that there are no offsets against rent nor defenses to
Lessee's performance under this Lease, or setting forth any such
offsets or defenses claimed by Lessee, as the case may be.
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21. ASSIGNMENT OR SUBLETTING. Lessee agrees to use and occupy the Demised
Premises throughout the entire term hereof for the purpose herein specified
and for no other purposes, in the manner and to substantially the extent
intended, and not to transfer or assign this Lease or sublet said Demised
Premises, or any part thereof, whether by voluntary act, operation of law,
otherwise, without obtaining the prior consent of Lessor in each instance.
Lessee shall seek such consent of Lessor by a written request thereof
setting forth such information as Lessor may deem necessary. Lessor agrees
not to withhold consent unreasonably. Consent to any assignment or
subletting shall not relieve Lessee of its obligations hereunder. Consent
by Lessor to an assignment of this Lease or to any subletting of the
Demised Premises should not be a waiver of Lessor's rights under this
Article as to any subsequent assignment or subletting. Lessor's rights to
assign this Lease are and should remain unqualified. No such assignment or
sublease or other transfer of this Lease shall be effective unless the
assignee, sublessee or transferee shall at the time of such assignment,
sublease or transfer, assume in writing for the benefit of Lessor, its
successors or assigns, all of the terms, covenants and conditions of this
Lease thereafter to be performed by Lessee and shall agree in writing to be
bound thereby. Should Lessee sublease in accordance with the terms of this
Lease, fifty percent (50%) of any increase in rental received by Lessee
over the per square foot rental rate which is being paid by Lessee shall be
forwarded to and retained by Lessor, which increase shall be in addition to
the Base Rent and Additional Rent due Lessor under this Lease.
22. ATTORNMENT. In the event of a sale or assignment of Lessor's interest in
the Premises, or the Building in which the Demised Premises are located, or
this Lease, or if the Premises come into custody or possession of a
mortgagee or any other party whether because of a mortgage foreclosure, or
otherwise, Lessee shall attorn to such assignee or other party and
recognize such party as Lessor hereunder; provided, however, Lessee's
peaceable possession will not be disturbed so long as Lessee faithfully
performs its obligations under this Lease. Lessee shall execute, on
demand, any attornment agreement required by any such party to be executed,
containing such provisions and such other provisions as such party may
require.
23. NOVATION IN THE EVENT OF SALE. In the event of the sale of the Demised
Premises, Lessor shall be and hereby is relieved of all of the covenants
and obligations created hereby accruing from and after the date of sale,
and such sale shall result automatically in the purchaser assuming and
agreeing to carry out all the covenants and obligations of Lessor herein.
Notwithstanding the foregoing provisions of this Article, Lessor, in the
event of a sale of the Demised
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Premises, shall cause to be included in this agreement of sale and
purchase a covenant whereby the purchaser of the Demised Premises assumes
and agrees to carry out all the covenants and obligations of Lessor herein.
The Lessee agrees at any time and from time to time upon not less than ten
(10) days prior written request by the Lessor to execute, acknowledge and
deliver to the Lessor a statement in writing certifying that this Lease is
in full force and effect and stating any modifications hereto, and the
dates to which the basic rent and other charges have been paid in advance,
if any, it being intended that any such statement delivered pursuant to
this paragraph may be relied upon by any prospective purchaser of the fee
or mortgagee or assignee of any mortgage upon the fee of the Demised
Premises.
24. SUCCESSORS AND ASSIGNS. The terms, covenants and conditions hereof shall
be binding upon and inure to the successors and assigns of the parties
hereto.
25. UNIFORM COMMERCIAL CODE. The Lessee grants to the Lessor a lien upon all
personal property of the Lessee in the Demised Premises during said term to
secure payment of the rent payable hereunder, and agrees that no such
property shall be removed from the Demised Premises without the consent of
the Lessor while any installments of rent are past due, and during any
other default in the conditions hereof.
To the extent this Lease grants Lessor, or recognizes in Lessor any lien or
rights greater than provided by the laws of the State in which the Premises
are located pertaining to "Landlord's Liens", this Lease is intended and
does constitute a security agreement within the meaning of the Uniform
Commercial Code as adopted in said State, and Lessor, in addition to the
rights prescribed herein shall have the rights, titles, liens and interests
in and to Lessee's property now or hereafter located in or upon the Demised
Premises which are granted a "secured party" as the term is defined under
such Uniform Commercial Code to secure the payment to Lessor of amounts and
monies due under this Lease. Lessee will execute, on request of Lessor,
and will deliver to Lessor a financing statement for the purpose of
perfecting Lessor's security interest under this Lease or the Lessor may
file this Lease as a security agreement.
26. QUIET ENJOYMENT. Lessor warrants that it has full right to execute and to
perform this Lease and to grant the estate demised, and that Lessee, upon
payment of the rents and other amounts due and the performance of all the
terms, conditions, covenants and agreements on Lessee's part to be observed
and performed under this Lease, may peaceable and quietly enjoy the Demised
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Premises for the business uses permitted hereunder, subject, nevertheless,
to the terms and conditions of this Lease.
27. RECORDING. Lessee shall not record this Lease without the written consent
of Lessor. However, upon the request of either party hereto, the other
party shall join in the execution of a Memorandum Lease for the purposes of
recordation. Said Memorandum Lease shall describe the parties, the Demised
Premises and the term of the Lease and shall incorporate this Lease by
reference. The Article 28 shall not be construed to limit Lessor's right
to file this Lease.
28. OVERDUE PAYMENTS. All monies due under this Lease from Lessee to Lessor
shall be due on demand, unless otherwise specified, and if not paid when
due, shall incur a late fee payment calculated at five percent (5%) of the
current monthly Base Rent amount due.
29. SURRENDER. On the Expiration Date or upon the termination hereof upon a
day other than the Expiration Date, Lessee shall peaceably surrender the
Demised Premises broom-clean in good order, condition and repair,
reasonable wear and tear only excepted. On or before the Expiration Date
or upon termination of this Lease on a day other than the Expiration Date,
Lessee shall, at its expense, remove all trade fixtures, personal property
and equipment and signs from the Demised Premises and any property not
removed shall be deemed to have been abandoned. Any damage caused in the
removal of such items shall be immediately repaired by Lessee and at its
expense. All alterations, additions, improvements and fixtures (other than
trade fixtures) which shall have been made or installed by Lessor or Lessee
upon the Demised Premises and all floor covering so installed shall remain
upon and be surrendered with the Demised Premises as a part thereof,
without disturbance, molestation or injury, and without charge, at the
expiration or termination of this Lease. If the Demised Premises are not
surrendered on the Expiration Date or the date of termination, Lessee shall
indemnify and hold Lessor harmless against any loss or liability, claims,
without limitation, made by any succeeding lessee founded on or related to
such delay. Lessee shall promptly surrender all keys for the Demised
Premises to Lessor at the place then fixed for payment of rent and shall
inform Lessor of combinations of any locks and safes on the Demised
Premises.
30. HOLDING OVER. In the event Lessee remains in possession of the Demised
Premises after the Expiration Date of this Lease and without the execution
of a new Lease, it shall be deemed to be occupying said Demised Premises as
a Lessee from month to month, subject to all the conditions, provisions and
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obligations of this Lease insofar as the same can be applicable to a month-
to-month tenancy, provided however that the Base Rent required to be paid
by Lessee during any holdover period shall be in an amount equal to 150% of
the most recent Base Rent amount due pursuant to the terms of the Lease per
month, plus all Additional Rent as set forth in Article 3 of this Lease.
31. ABANDONMENT. In the event Lessee shall remove its fixtures, equipment or
machinery or shall vacate the Demised Premises or any part thereof prior to
the Expiration Date of this Lease, or shall discontinue or suspend the
operation of its business conducted on the Demised Premises for a period of
more than thirty (30) consecutive days (except during any time when the
Demised Premises may be rendered untenantable by reason of fire or other
casualty), then in any such event Lessee shall be deemed to have abandoned
the Demised Premises and Lessee shall be in default under the terms of this
Lease.
32. CONSENTS BY LESSOR. Whenever provision is made under this Lease for Lessee
securing the consent or approval by Lessor, such consent or approval shall
only be in writing.
33. NOTICES. Any notice required or permitted under this Lease shall be deemed
sufficiently given or secured if sent by registered or certified return
receipt mail to Lessee at the street address of the Demised Premises and to
Lessor at the address then fixed for the payment of rent as provided in
Article 4 of this Lease, and either party may by like written notice at any
time designate a different address to which notices shall subsequently be
sent or rent to be paid.
34. RULES AND REGULATIONS. Lessee shall observe and comply with the rules and
regulations hereinafter set forth in "Exhibit C", and with such further
reasonable rules and regulations as Lessor may prescribe, on written notice
to Lessee for the safety, care and cleanliness of the Building.
35. INTENT OF PARTIES. Except as otherwise provided herein, the Lessee
covenants and agrees that if it shall at any time fail to pay any such cost
or expense, or fail to take out, pay for, maintain or deliver any of the
insurance policies above required, or fail to make any other payment or
perform any other act on its part to be made or performed as in this Lease
provided, then the Lessor may, but shall not be obligated so to do, and
without notice to or demand upon the Lessee and without waiving or
releasing the Lessee from any obligations of the Lessee in this Lease
contained, pay any such cost or expense, effect any such insurance coverage
and pay premiums therefor and may make any other payment or perform any
other act on the part of the Lessee to be
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made and performed as in this Lease provided, in such manner and to
such extent as the Lessor may deem desirable, and in exercising any
such right, to also pay all necessary and incidental costs and expenses,
employ counsel and incur and pay reasonable attorney's fees. All sums
so paid by Lessor and all necessary and incidental costs and expenses
in connection with the performance of any such act by the Lessor together
with interest thereon at the rate of eighteen percent (18%) per annum
from the date of making of such expenditure by Lessor, shall be deemed
Additional Rent hereunder, and shall be payable to Lessor upon demand.
Lessee covenants to pay any such sum or sums with interest as aforesaid
and the Lessor shall have the same rights and remedies in the event of
the non-payment thereof by Lessee as in the case of default by Lessee
in the payment of the Base Rent payable under this Lease.
36. GENERAL. The Lease does not create the relationship of principal and agent
or of partnership or of joint venture or of any association between Lessor
and Lessee, the sole relationship between the parties hereto being that of
Lessor and Lessee.
No waiver of any default of Lessee hereunder shall be implied from any
omission by Lessor to take any action on account of such default if such
default persists or is repeated, and no express waiver shall affect any
default other than the default specified in the express waiver and only for
the time and to the extent therein stated. One or more waivers by Lessor
shall not then be construed as a waiver of a subsequent breach of the same
covenant, term or condition. The consent to or approval by Lessor of any
act by Lessee requiring Lessor's consent or approval shall not waive or
render unnecessary Lessor's consent to or approval of any subsequent
similar act by Lessee. Each form and each provision of this Lease
performable by Lessee shall be construed to be both a covenant and a
condition. No action required or permitted to be taken by or on behalf of
Lessor under the terms or provisions of this Lease shall be deemed to
constitute an eviction or disturbance of Lessee's possession of the Demised
Premises. All preliminary negotiations are merged into and incorporated in
this Lease. The laws of the State of Minnesota shall govern the validity,
performance and enforcement of this Lease.
(a) This Lease and the Exhibits, if any, attached hereto and forming a
part hereof, constitute the entire agreement between Lessor and Lessee
affecting the Demised Premises and there are no other agreements,
either oral or written, between them other than are herein set forth.
No subsequent alteration, amendment, change or addition to this Lease
shall be binding
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upon Lessor or Lessee unless reduced to writing and executed in the
same form and manner in which this Lease is executed.
(b) If any agreement, covenant or condition of this Lease or the
application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or
the application of such agreement, covenant or condition to person or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and each agreement,
covenant or condition of this Lease shall be valid and be enforced to
the fullest extent permitted by law.
37. CAPTIONS. The captions are inserted only as a matter of convenience and
reference, and in no way define, limit or describe the scope of this Lease,
the intent of the parties, or any provision of the Lease.
38. NOTIFICATION TO LESSEE. Owner of the Premises, hereby notifies Lessee that
the entity/person authorized to manage the Premises is CTD Properties,
Contract Manager. Said organization has been appointed to act as the agent
in the leasing, management and operation of the Building for the owner and
is authorized to accept service of process and receive and give receipts
for notices and demands. Lessor serves the right to change the identity or
status of its duly authorized agents upon written notice to Lessee.
39. EXHIBITS. Reference is made to Exhibits A through E, inclusive, which
Exhibits are attached hereto and made a part hereof.
Exhibit Description
------- -----------
Exhibit A Legal Description
Exhibit B Demised Premises
Exhibit C Building Rules and Regulations
Exhibit D Improvements
Exhibit E Signs
IN WITNESS WHEREOF, the Lessor and the Lessee have caused these presents to
be executed in form and manner sufficient to bind them at law, as of the day and
year first written above written.
LESSEE: LESSOR:
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CHILDREN'S BROADCASTING
CORPORATION 5501 BUILDING COMPANY
BY /S/JAMES G. GILBERTSON /S/CHRISTOPHER T. DAHL
-------------------------------- ---------------------------------
ITS CFO CHRISTOPHER T. DAHL
-----------------------------
CHILDREN'S RADIO GROUP, INC.
BY /S/JAMES G. GILBERTSON
--------------------------------
ITS CFO
-----------------------------
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STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)
On this 1st day of November, 1996, personally came before me, a Notary
Public within and for said County, James G. Gilbertson, COO, of Children's
Broadcasting Corporation, to me well known, and who executed the foregoing
instrument, and acknowledged that he executed the same on behalf of the
corporation.
/s/Christine A. Hein
-----------------------------------
Notary Public
STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)
On this 1st day of November, 1996, personally came before me, a Notary
Public within and for said County, James G. Gilbertson, COO, of Children's Radio
Group, Inc. to me well known, and who executed the foregoing instrument, and
acknowledged that he executed the same on behalf of the corporation.
/s/Christine A. Hein
-----------------------------------
Notary Public
STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)
On this 1st day of November, 1996, personally came before me, a Notary
Public within and for said County, Christopher T. Dahl, to me well known, and
who executed the foregoing instrument, and acknowledged that he executed the
same on behalf of the 5501 Building Company.
/s/Christine A. Hein
-----------------------------------
Notary Public
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EXHIBIT 10.3
OFFICE/WAREHOUSE LEASE
THIS INDENTURE of lease, made effective this 1st day of November, 1996, by
and between 724 ASSOCIATES, a partnership (hereinafter referred to as "Lessor"),
and CHILDREN'S BROADCASTING CORPORATION (hereinafter together referred to as
"Lessee").
DEFINITIONS
"PREMISES" - That certain real property located in the City of Minneapolis,
County of Hennepin and State of Minnesota and legally described on Exhibit "A"
attached hereto and made a part hereof, including all buildings and site
improvements located thereon.
"BUILDING" - That certain office/warehouse building containing
approximately 42,000 square feet located upon the Premises and commonly
described as the 724 First Street North Building.
"DEMISED PREMISES" - That certain portion of the Building located at 724
First Street North and designated as Exhibit B, consisting of approximately
4,000 square feet (4,000 square feet of office space and zero square feet of
warehouse space), as measured from the outside walls of the Demised Premises to
the center of the partition wall, as shown on the floor plan attached hereto as
Exhibit "B" and made a part hereof. The Demised Premises include a non-
exclusive easement for access to common area, as hereinafter defined, and all
licenses and easements appurtenant to the Demised Premises.
"COMMON AREAS" - The term "common area" means the entire areas as
designated on Exhibit "B" and to be used for the non-exclusive use by Lessee and
other lessees in the Building, including, but not limited to, corridors,
lavatories, driveways, truck docks, parking lots and landscaped areas, if any.
Subject to reasonable rules and regulations to the promulgated by Lessor, the
common areas are hereby made available to Lessee and its employees, agents,
customers and invitees for reasonable use in common with other lessees, their
employee, agents, customer and invitees.
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W I T N E S S E T H :
1. TERM. For and in consideration of the rents, additional rents, terms,
provisions and covenants herein contained, Lessor hereby lets, leases and
demises to Lessee the Demised Premises for the term of sixty (60) months
commencing on the 1st day of January, 1996 (sometimes called "the
Commencement Date") and expiring the 31st day of December, 2001 (sometimes
called "Expiration Date"), unless sooner terminated as hereinafter
provided.
2. BASE RENT. Lessor reserves and Lessee shall pay Lessor, a total rental of
One Hundred Eighty-four Thousand and no/100 Dollars ($184,000), payable in
advance, in monthly installments of Two Thousand Six Hundred Sixty-six and
66/100 Dollars ($2,666.66), commencing on the Commencement Date and
continuing on the first day of each and every month thereafter for the next
succeeding twelve months through December, 1996, and Three Thousand and
no/100 Dollars ($3,000.00) on the first day of each and every month
thereafter for the next succeeding 24 months, and Three Thousand Three
Hundred and Thirty-three and 33/100s Dollars ($3,333.33) on the first day
of each and every month for the next succeeding 24 months during the
balance of the term (sometimes called "Base Rent"). In the event the
Commencement Date falls on a date other than the first of a month the
rental for that month shall be prorated and adjusted accordingly.
3. ADDITIONAL RENT. Lessee shall pay to Lessor throughout the term of this
Lease the following:
(a) Lessee shall pay a sum equal to one hundred percent (100%) of the
Real Estate Taxes. The term "Real Estate Taxes" shall mean all real
estate taxes, all assessments and any taxes in lieu thereof which may
be levied upon or assessed against the Premises of which the Demised
Premises are a part. Lessee, in addition to all other payments to
Lessor by Lessee required hereunder shall pay to Lessor, in each year
during the term of this Lease and any extension or renewal thereof,
Lessee's proportionate share of such real estate taxes and
assessments paid in the first instance by Lessor.
Any tax year commencing during any lease year shall be deemed to
correspond to such lease year. In the event the taxing authorities
include in such real estate taxes and assessments the value of any
improvements made by Lessee, or of machinery, equipment, fixtures,
Inventory or other
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personal property or assets of Lessee, then Lessee shall pay all the
taxes attributable to such items in addition to its proportionate
share of said aforementioned real estate taxes and assessments. A
photostatic copy of the tax statement submitted by Lessor to Lessee
shall be sufficient evidence of the amount of taxes and assessments
assessed or levied against the Premises of which the Demised Premises
are a part as well as the items taxed.
(b) A sum equal to one hundred percent (100%) of the annual aggregate
operating expenses incurred by Lessor in the operation, maintenance
and repair of the Premises. The term "Operating Expenses" shall
include, but not be limited to, maintenance, repair, replacement and
care of all heating, lighting, plumbing and air conditioning
fixtures, equipment and systems, roofs, parking and landscaped area,
signs, snow removal, non-structural repair and maintenance of the
exterior of the Building, insurance premiums, management fees, wages
and fringe benefits of personnel employed for such work, cost of
equipment purchased and used for such purposes, and the cost or
portion thereof properly allocable to the Premises (amortized over
such reasonable period as Lessor shall determine together with the
interest at the rate of eighteen percent (18%) per annum on the
unamortized balance) of any capital improvements made to the Building
by Lessor after the Base Year which result in a reduction of
Operation Expenses or made to the Building by Lessor after the date
of this lease that are required under any governmental law or
regulation that was not applicable to the Building at the time it was
constructed.
(c) The payment of the sums set forth in this Article 3 shall be in
addition to the Base Rent payable pursuant to Article 2 of this
Lease. All sums due hereunder shall be due and payable within thirty
(30) days of delivery of written certification by Lessor setting
forth the computation of the amount due from Lessee. In the event
the lease term shall begin or expire at any time during the calendar
year, the Lessee shall be responsible for his pro-rata share of
Additional Rent under subdivisions a. and b. during this Lease and/or
occupancy time.
Prior to commencement of this Lease, and prior to the commencement of
each calendar year thereafter commencing during the term of this
Lease or any renewal or extension thereof, Lessor may estimate for
each calendar year (i) the total amount of Real Estate Taxes; (ii)
the total amount of Operating Expenses; (iii) Lessee's share of Real
Estate Taxes
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for such calendar year; (iv) Lessee's share of Operating Expenses for
such calendar year; and (v) the computation of the annual and monthly
rental payable during such calendar year as a result of increases or
decreases in Lessee's share of Real Estate Taxes and Operating
Expenses. Said estimates will be in writing and will be delivered or
mailed to Lessee at the Premises.
The amount of Lessee's share of Real Estate Taxes and Operating
Expenses for each calendar year, so estimated, shall be payable as
Additional Rent, in equal monthly installments, in advance, on the
first day of each month during such calendar year at the option of
Lessor. In the event that such estimate is delivered to Lessee
before the first day of January of such calendar year said amount, so
estimated, shall be payable as additional rent in equal monthly
installments, in advance, on the first day of each month over the
balance of such calendar year, with the number of installments being
equal to the number of full calendar months remaining in such
calendar year.
Upon completion of each calendar year during the term of this Lease
or any renewal or extension thereof, Lessor shall cause its
accountants to determine the actual amount of the Real Estate Taxes
and Operating Expenses payable in such calendar year and Lessee'
share thereof and deliver a written certification of the amounts
thereof to Lessee. If Lessee has underpaid its share of Real Estate
Taxes or Operating Expenses for such calendar year, Lessee shall pay
the balance of its share of same within ten (10) days after the
receipt of such statement. If Lessee has overpaid its share of Real
Estate Taxes or Operating Expenses for such calendar year, Lessor
shall either (i) refund such excess, or (ii) credit such excess
against the most current monthly installment or installments due
Lessor for its estimate of Lessee's share of Real Estate Taxes and
Operating Expenses for the next following calendar year. A pro-rata
adjustment shall be made for a fractional calendar year occurring
during the term of this Lease or any renewal or extension thereof
based upon the number of days of the term of the Lease during said
calendar year as compared to three hundred sixty-five (365) days and
all additional sums payable by Lessee or credits due Lessee as a
result of the provisions of this Article 3 shall be adjusted
accordingly.
4. COVENANT TO PAY RENT. The covenants of Lessee to pay the Base Rent and the
Additional Rent are each independent of any other covenant,
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condition, provision or agreement contained in this Lease. All rents are
payable to Lessor at:
724 Associates
724 First Avenue North
Fourth Floor
Minneapolis, Minnesota 55401
5. UTILITIES. Lessor shall provide mains and conduits to supply water, gas,
electricity and sanitary sewage to the Premises. Lessee shall pay, when
due, all charges for sewer usage or rental, garbage disposal, refuse
removal, water, electricity, gas, fuel, oil, L.P. gas, telephone and/or
other utility services or energy source furnished to the Demised Premises
during the term of this Lease, or any renewal or extension thereof. If
Lessor elects to furnish any of the foregoing utility services or other
services furnished or caused to be furnished by lessor shall not exceed the
rate Lessee would be required to pay to a utility company or service
company furnishing any of the foregoing utilities or services. The charges
thereof shall be deemed Additional Rent in accordance with Article 3.
6. CARE AND REPAIR OF DEMISED PREMISES. Lessee shall, at all times throughout
the term of this Lease, including renewals and extensions, and at its sole
expense, keep and maintain the Demised Premises in a clean, safe, sanitary
and first class condition and in compliance with all applicable laws,
codes, ordinances, rules and regulations. Lessee's obligations hereunder
shall include, but not be limited to, the maintenance, repair and
replacement, if necessary, of all lighting and plumbing fixtures and
equipment, fixtures, motors and machinery, all interior walls, partitions,
doors and windows, including the regular painting thereof, all exterior
entrances, windows, doors and docks and the replacement of all broken
glass. When used in this provision, the term "repairs" shall include
replacements or renewals when necessary, and all such repairs made by the
Lessee shall be equal in quality and class to the original work. The
Lessee shall keep and maintain all portions of the Demised Premises and the
sidewalk and areas adjoining the same in a clean and orderly condition,
free of accumulation of dirt, rubbish, snow and ice.
If Lessee fails, refuses or neglects to maintain or repair the Demised
Premises as required in this Lease after notice shall have been given
Lessee, in accordance with Article 36 of this Lease, Lessor may make such
repairs without liability to Lessee for nay loss or damage that may accrue
to Lessee's
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merchandise, fixtures or other property or to Lessee;s business by reason
thereof, and upon completion thereof, Lessee shall pay to Lessor all costs
plus fifteen (15%) for overhead incurred by Lessor in making such repairs
upon presentation to Lessee of bill therefor.
Lessor shall repair, at its expense, the structural portions of the
Building, provided however where structural repairs are required to be made
by reason of the acts of Lessee, the costs thereof shall be borne by Lessee
and payable by Lessee to Lessor upon demand.
The Lessor shall be responsible for all outside maintenance of the Demised
Premises, including grounds and parking areas. All such maintenance which
is the responsibility of the Lessor shall be provided as reasonably
necessary to the comfortable use and occupancy of Demised Premises during
business hours, except Saturdays, Sundays and holidays, upon the condition
that the Lessor shall not be liable for damages for failure to do so due to
causes beyond its control.
7. SIGNS. Any sign, lettering, picture, notice or advertisement installed on
or in any part of the Premises and visible from the exterior of the
Building, or visible form the exterior of the Demised Premises, shall be
approved and installed by Lessor at Lessee's sole cost and expense. Signs
to be maintained by Lessor at Lessee's expense. In the event of a
violation of the foregoing by Lessee, Lessor may remove the same without
any liability and may charge the expense incurred by such removal to
Lessee.
8. ALTERATIONS, INSTALLATION, FIXTURES. Except as hereinafter provided,
Lessee shall not make any alteration, additions or improvements in or to
the Demised Premises or add, disturb in any way, change any plumbing or
wiring therein without the prior written consent of the Lessor. In the
event alterations are required by any governmental agency by reason of the
use and occupancy of the Demised Premises by Lessee, Lessee shall make such
alterations at its own expense after first obtaining Lessor's approval of
plans and specifications therefor and furnishing such indemnifications as
Lessor may reasonable require against liens, costs, damages and expenses
arising of such alterations. Alterations or additions by Lessee must be
built in compliance with all laws, ordinances and governmental regulations
and affecting the Premises and Lessee shall warrant to Lessor that all such
alterations, additions or improvements shall be in strict compliance with
all relevant laws, ordinances, governmental regulations and insurance
requirements. Construction of such alterations or additions shall commence
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only once Lessee has obtained and exhibited to Lessor the requisite
approvals, licenses and permits and indemnification against liens. All
alterations, installations, physical additions or improvements to the
demised Premises made by Lessee shall at once become the property of Lessor
and shall be surrendered to Lessor upon the termination of this Lease;
provided, however, that this clauses shall not apply to movable equipment
or furniture owned by Lessee which may be removed by Lessee at the end of
the term of this Lease in the event that Lessee is not then in default.
9. POSSESSION. Except as hereinafter provided Lessor shall deliver possession
of Demised Premises to Lessee in the condition required by this Lease on or
before the Commencement Date, but delivery of possession prior to or later
than such Commencement Date shall not affect the expiration date of this
Lease. The rentals herein reserved shall commence on the date actual
possession of the Demised Premises is delivered by Lessor to Lessee. Any
occupancy by Lessee prior to the beginning of the term of this Lease shall
in all respects be the same as that of a Lessee under this Lease. Lessor
shall have no responsibility or liability for loss or damage to fixtures,
facilities or equipment installed or left on the Demised Premises. If
Demised Premises is not ready for occupancy by Commencement Date and
possession is later than Commencement Date, rent shall begin on the date of
actual possession.
10. SECURITY AND DAMAGE DEPOSIT. Lessee contemporaneously with the execution
of this Lease, deposited with Lessor the sum of Zero Dollars ($---0---),
receipt of which is hereby acknowledged by Lessor, which deposit is to be
held by Lessor, without liability for interest as a security and damage
deposit for the faithful performance by Lessee during the term hereof or
any extension hereof. Prior to the time of when Lessee shall be entitled
to the return of this security deposit, Lessor may commingle such deposit
with Lessor's own funds and to use such security deposit for such purposes
as Lessor may determine. In the event of the failure of Lessee to keep and
perform any of the terms, covenants and conditions of this Lease to be kept
and performed by Lessee during the term hereof or extension hereof, then
Lessor, either with or without terminating this Lease may (but shall not be
required to) apply such portion of said deposit as may be necessary to
compensate or repay Lessor for all losses or damages sustained or to be
sustained by Lessor due to such breach on the part of Lessee, including,
but not limited to, overdue and unpaid rent, any other amounts payable by
Lessee to Lessor pursuant to the provisions of this Lease, damages or
deficiencies in the reletting of Demised Premises, and reasonable
attorney's fees incurred by Lessor. Should the entire deposit or any
portion thereof, be
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appropriated and applied by Lessor, in accordance with provisions of this
paragraph, Lessee upon written demand by Lessor shall remit forthwith to
Lessor a sufficient amount of cash to restore said security deposit to the
original sum deposited, and Lessee's failure to do so within five (5) days
after receipt of such demand shall constitute a breach of this Lease. Said
security deposit shall be returned to Lessee, less any deposit thereof as
the result of the provisions of this paragraph, at the end of the term of
this Lease, or any renewal thereof or upon the earlier termination of this
Lease. Lessee shall have no right to anticipate return of said deposit
withholding any amount required to be paid pursuant to the provision of
this Lease or otherwise.
In the event Lessor shall sell the Premises, or shall otherwise convey or
dispose of its interest in this Lease, Lessor may assign said security
deposit or any balance thereof to Lessor's assignee, whereupon Lessor shall
be released from all liability for the return or repayment of such security
deposit and Lessee shall look solely to the said assignee for the return
and reimbursement of said security deposit. Said security deposit shall
not be assigned or encumbered by Lessee without the written consent of
Lessor, and any assignment or encumbrance without such consent shall not
bind Lessor. In the event of any rightful and permitted assignment of this
Lease by Lessor said security deposit shall be deemed to be held by Lessor
as a deposit made by the assignee, and Lessor shall have no further
liability with respect to the return of said security deposit to the
Lessee.
11. USE. The Demised Premises shall be used and occupied by Lessee strictly
for the purposes of an office so long as such use is in compliance with all
applicable laws, ordinances and governmental regulations affecting the
Building and Premises. The Demised Premises shall not be used in such
manner that, in accordance with any requirement of law or of any public
authority, Lessor shall be obliged on account of the purpose or manner of
said use to make any addition or alteration to or in the Building. The
Demised Premises shall not be used in any manner which will increase the
rates required to be paid for public liability or for fire and extended
coverage insurance covering the Premises. Lessee shall occupy the Demised
Premises conduct its business and control its agents, employees, invitees
and visitors in such a way as is lawful, and reputable and will not permit
or create any nuisance, noise, odor, or otherwise interfere with, annoy or
disturb any other tenant in the Building in its normal business operations
or Lessor in its management of the Building. Lessee's use of the Demised
Premises shall conform to all the Landlord's rules and regulations relating
to the use of the Premises. Outside storage on the Premises of any type of
equipment,
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property or materials owned or used on the Premises by Lessee or its
customers and suppliers shall not be permitted.
12. ACCESS TO DEMISED PREMISES. The Lessee agrees to permit the Lessor and the
authorized representatives of the Lessor to enter the Demised Premises at
all times during usual business hours for the purpose of inspecting the
same and making any necessary repairs to the Demised Premises and
performing any work therein that may be necessary to comply with any laws,
ordinances, rules, regulations or requirements of any public authority or
of the Board of Fire Underwriters or any similar body or that the Lessor
may deem necessary to prevent waste or deterioration in connection with the
Demised Premises. Nothing herein shall imply any duty upon the part of the
Lessor to do any such work which, under any provision of this Lease, the
Lessee may be required to perform and the performance thereof by the Lessor
shall not constitute a waiver of the Lessee's default in failing to perform
the same. The Lessor may, during the progress of any work in the Demised
Premises, keep and store upon the Demised Premises all necessary materials,
tools and equipment. The Lessor shall not in any event be liable for
inconvenience, annoyance, disturbance, loss of business, or other damage of
the Lessee by reason of making repairs or the performance of any work in
the Demised Premises, or on account of bringing materials, supplies and
equipment into or through the Demised Premises during the course thereof
and the obligations of the Lessee under this Lease shall not thereby be
affected in any matter whatsoever.
Lessor reserves the right to enter upon the Demised Premises at any time in
the event of an emergency and at reasonable hours to exhibit the Demised
Premises to prospective purchasers or others; and to exhibit the Demised
Premises to prospective tenants and to display "For Rent" or similar signs
on windows and doors in the Demised Premises during the last one hundred
eighty (180) days of the term of this Lease, all without hindrance or
molestation by Lessee.
13. EMINENT DOMAIN. In the event of any eminent domain or condemnation
proceeding or private sale in lieu thereof in respect to the Premises
during the term thereof, the following provisions shall apply:
(a) If the whole of the of the Premises shall be acquired or condemned by
eminent domain for any public or quasi-public use or purpose, then
the term of this Lease shall cease and terminate as of the date
possession
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shall be taken in such proceeding and all rentals shall be paid up to
that date.
(b) If any part constituting less than the whole of the Premises shall be
acquired or condemned or aforesaid, and in the event that such
partial taking or condemnation shall materially affect the Demised
Premises so as to render the Demised Premises unsuitable for the
business of the Lessee, in the reasonable opinion of the Lessor, then
the term of this Lease shall cease and terminate as of the date
possession shall be taken by the condemning authority and rent shall
be paid to the date of such termination.
In the event of a partial taking or condemnation of the Premises
which shall not materially affect the Demised Premises so as to
render the Demised Premises unsuitable for the business of the
Lessee, in the reasonable opinion of the Lessor, this Lease shall
continue in full force and affect but with a proportionate abatement
of the Base Rent and Additional Rent based on the portion, if any, of
the Demised Premises taken. Lessor reserves the right, at its
option, to restore the Building and the Demised Premises to
substantially the same condition as they were prior to such
condemnation. In such event, Lessor shall give written notice to
Lessee, within thirty (30) days following the date possession shall
be taken by the condemning authority, of Lessor's intention to
restore. Upon Lessor's notice of election to restore, Lessor shall
commence restoration and shall restore the Building and the Demised
Premises with reasonable promptness, subject to delays beyond
Lessor's control and delays in the making of condemnation or sale
proceeds adjustments by Lessor; and Lessee shall have no right to
terminate this Lease except as herein provided. Upon completion of
such restoration, the rent shall be adjusted based upon the portion,
if any, of the Demised Premises restored.
(c) In the event of any condemnation or taking as aforesaid, whether
whole or partial, the Lessee shall not be entitled to any part of the
award paid for such condemnation and Lessor is to receive the full
amount of such award, the Lessee hereby expressly waiving any right
or claim to any part thereof.
(d) Although all damages in the event of any condemnation shall belong to
the Lessor whether such damages are awarded as compensation for
diminution of value of the leasehold or to the fee of the Demised
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Premises, Lessee shall have the right to claim and recover from the
condemning authority, but not from Lessor, such compensation as may
be separately awarded and recoverable by Lessee in Lessee's own right
on account of any and all damage to Lessee's business by reason of
the condemnation and for or on account of any cost or loss to which
Lessee might be put in removing Lessee's merchandise, furniture,
fixtures, leasehold improvements and equipment.
14. DAMAGE OR DESTRUCTION. In the event of any damage or destruction to the
Premises by fire or other cause during the term hereof, the following
provisions shall apply:
(a) If the Building is damaged by fire or any other cause to such extent
that the cost of restoration, as reasonably estimated by Lessor, will
equal or exceed thirty percent (30%) of the replacement value of the
Building (exclusive of foundations) just prior to the occurrence of
the damage, then Lessor may, no later than the sixtieth (60th) day
following the damage, give Lessee written notice of Lessor's election
to terminate this Lease.
(b) If the cost of restoration as estimated by Lessor will equal or
exceed fifty percent (50%) of said replacement value of the Building
and if the Demised Premises are not suitable as a result of said
damage for the purposes for which they are demised hereunder, in the
reasonable opinion of Lessee, then Lessee may, no later than the
sixtieth (60th) day following the damage, give Lessor a written
notice of election to terminate this Lease.
(c) If the cost or restoration as estimated by Lessor shall amount to
less than thirty percent (30%) of said replacement value of the
Building, or if despite the cost, Lessor does not elect to terminate
this Lease, Lessor shall restore the Building and the Demised
Premises with reasonable promptness, subject to delays beyond
Lessor's control and delays in the making of insurance adjustments by
Lessor; and Lessee shall not have the right to terminate this Lease.,
Lessor shall not be responsible for restoring or repairing leasehold
improvements of the Lessee.
(d) In the event of either of the elections to terminate, this Lease
shall be deemed to terminate on the date of the receipt of the notice
of election and all rentals shall be paid up to that date. Lessee
shall have no claim against Lessor for the value of any unexpired
term of this Lease.
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(e) In any case where damage to the Building shall materially affect the
Demised Premises so as to render them unsuitable in whole or in part
for the purposes of which they are demised hereunder, then, unless
such destruction was wholly or partially caused by the negligence or
breach of the terms of this Lease by Lessee, its employees,
contractors or licensees, a portion of the rent based upon the amount
of the extent to which the Demised Premises are rendered unsuitable
shall be abated until repaired or restored. If the destruction or
damage was wholly or partially caused by negligence or breach of the
terms of this Lease by Lessee as aforesaid and if Lessor shall elect
to rebuild, the rent shall not abate and the Lessee shall remain
liable for the same.
15. CASUALTY INSURANCE.
(a) Lessor shall at all times during the term of this Lease, at its
expense, maintain a policy or policies of insurance with premiums
paid in advance issued by an insurance company licensed to do
business in the State of Minnesota insuring the Building against loss
or damage by fire, explosion or other insurable hazards and
contingencies for the full replacement value, provided that Lessor
shall not be obligated to insure any furniture, equipment, machinery,
goods or supplies not covered by this Lease which Lessee may bring
upon the Demised Premises or any additional improvements which Lessee
may construct or install on the Demised Premises.
(b) Lessee shall not carry any stock of goods or do anything in or about
the Demised Premises which will in any way impair or invalidate the
obligation of the insurer under any policy of insurance required by
this Lease.
(c) Lessor hereby waives and releases all claims, liabilities and causes
of action against Lessee and its agents, servant and employees for
loss or damage to, or destruction of, the Premises or any portion
thereof, including the buildings and other improvements situated
thereon, resulting from fire, explosion or other perils included in
standard extended coverage insurance, whether caused by the
negligence of any of said persons or otherwise. Likewise, Lessee
hereby waives and releases all claims, liabilities and causes of
action against Lessor and its agents, servants and employees for loss
or damage to, or destruction of, any of the improvements, fixtures,
equipment , supplies, merchandise and other property, whether that of
Lessee or of others in, upon or about the
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Premises resulting from fire, explosion or the other perils included
in standard extended coverage insurance, whether caused by the
negligence of any of said persons otherwise. The waiver shall remain
in force whether or not the Lessee's insurance shall consent thereto.
(d) In the event that the use of the Demised Premises by Lessee increases
the premium rate for insurance carried by Lessor on the improvement
of which the Demised Premises are a part, Lessee shall pay Lessor,
upon demand, the amount of such premium increase. If Lessee installs
any electrical equipment that overload the power lines to the
Building or its wiring, Lessee shall, at its own expense, make
whatever changes are necessary to comply with the requirements of the
insurance underwriter, insurance rating bureau and governmental
authorities have jurisdiction.
16. PUBLIC LIABILITY INSURANCE. Lessee shall during the term hereof keep in
full force and effect at its own expense a policy or policies of public
liability insurance with respect to the Demised Premises and the business
of Lessee, on terms and with companies approved in writing by Lessor, in
which both Lessee and Lessor shall be covered by being named as insured
parties under reasonable limits of liability not less than: _______________
_______________________ Dollars ($_____________) for injury or death to any
one person: _________________________________ Dollars ($____________) for
injury or death to more than one person; and _____________________________
Dollars ($_____________) with respect to damage to property. Such policy
or policies shall provide that ten (10) days written notice must be given
to Lessor prior to cancellation thereof. Lessee shall furnish evidence
satisfactory to Lessor at the time this Lease is executed, and from time to
time, that such coverage is in full force and effect.
17. DEFAULT OF TENANT.
(a) In the event of any failure of Lessee to pay any rental due hereunder
within ten (10) days after the same shall be due, or any failure to
perform any other of the term, condition or covenant of this Lease to
be observed or performed by Lessee for more than thirty (30) days
after written notice of such failure shall have been given to Lessee,
or if Lessee or an agent of Lessee shall falsify any report required
to be furnished to Lessor pursuant to the terms of this Lease, or if
Lessee or any guarantor of this Lease shall become bankrupt or
insolvent, or file any debtor proceedings or any person shall take or
have against Lessee or any guarantor of this Lease in any court
pursuant to any statute either of the United States or of any state a
petition in bankruptcy or
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insolvency or for reorganization or for the appointment of a receiver
or trustee of all or a portion of Lessee's or any such guarantor's
property, or if Lessee or any such guarantor makes an assignment for
the benefit of creditors, or petitions for or enters into an
arrangement, or if Lessee shall abandon the Demised Premises or
suffer this Lease to be taken under any writ of execution, then in
any such event Lessee shall be in default hereunder, and Lessor, in
addition to other rights of remedies it may have, shall have the
immediate right of re-entry and may remove all persons and property
from the Demised Premises and such property may be removed and stored
in a public warehouse or elsewhere at the cost of and for the account
of the Lessee, all without service of notice or resort to legal
process and without being guilty of trespass, or becoming liable for
any loss or damage which may be occasioned thereby.
(b) Should Lessor elect to re-enter the Demised Premises as herein
provided, or should it take possession of the Demised Premises
pursuant to legal proceedings or pursuant to any notice provided for
by law, it may either terminate this Lease or it may from time to
time, without terminating this Lease, make such alterations, and
repairs as may be necessary in order to relet the Demised Premises
and relet the Demised Premises or any part thereof for such term or
terms (which may be for a term extending beyond the term of this
Lease) and at such rental or rentals and upon such other terms and
conditions as Lessor in its sole discretion may deem advisable. Upon
each such subletting all rentals received by the Lessor from such
reletting shall be applied first to the payment of any indebtedness
other than rent due hereunder from Lessee to Lessor; second, to the
payment of any costs and expenses of such reletting, including
brokerage fees, attorney's fees and costs; third, to the payment of
accrued and unpaid rent hereunder, and the remainder, if any, shall
be held by Lessor and applied in payment of future rent as the same
may become due and payable hereunder. If such rentals received from
such reletting during any month are less than that to be paid during
that month by Lessee hereunder, Lessee, upon demand, shall pay any
such deficiency to Lessor. No such re-entry or taking possession of
the Demised Premises by Lessor shall be construed as an election on
Lessor's part to terminate this Lease unless a written notice of such
intention be given to Lessee or unless the termination thereof be
decreed by a court of competent jurisdiction. Notwithstanding any
such reletting without termination, Lessor may at any time after such
re-entry and reletting elect to terminate this Lease for such
previous breach. Should Lessor at any time terminate this Lease for
any such breach, in addition to any
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other remedies it may have, it may recover from Lessee all damages it
may incur by reason of such breach, including the cost of recovering
the Demised Premises, the cost of reletting the Demises premises,
reasonable attorney's fees, and including the worth at the time of
such termination of the excess, if any, of the amount of rent and
charges equivalent to rent reserved in this Lease for the remainder
of the stated term over the then reasonable rental value of the
Demised Premises for the remainder of the stated term, all of which
amounts shall be immediately due and payable from Lessee to Lessor.
(c) Lessor may, at its option, instead of exercising any other rights or
remedies available to it in this Lease or otherwise by law, statute
or equity, spend such money as is reasonable necessary to cure any
default of Lessee herein and the amount so spent, and costs incurred,
including attorney's fees in curing such default, shall be paid by
Lessee, as Additional Rent, upon demand.
(d) In the event suit shall be brought for recovery of possession of the
Demised Premises, for the recovery of rent or any other amount due
under the provisions of this Lease or because of the breach of any
other covenant herein contained on the part of the Lessee to be kept
or performed, and a breach shall be established, Lessee shall pay to
Lessor all expenses incurred therefore, including a reasonable
attorney's fee, together with interest on all such expenses at the
rate of eighteen percent (18%) per annum from the date of such breach
of the covenants of this Lease.
(e) Lessee hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Lessee
being evicted or dispossessed for any cause, or in the event of
Lessor obtaining possession of the Demised Premises, by reason of the
violation by Lessee of any of the covenants or conditions of this
Lease, or otherwise. Lessee also waives any demand for possession of
the Demised Premises, and any demand for payment of rent and any
notice of intent to re-enter the Demised Premises, or of intent to
terminate this Lease, other than the notices provided in this
Article, and waives any and every other notice or command prescribed
by any applicable statutes or laws.
(f) No remedy herein or elsewhere in this Lease or otherwise by law,
statute or equity, conferred upon or reserved to Lessor or Lessee
shall be
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exclusive of any other remedy, but shall be cumulative, and may be
exercised from time to time and as often as the occasion may arise.
18. COVENANTS TO HOLD HARMLESS. Unless the liability for damage or loss is
caused by the negligence of Lessor, its agents or employees, Lessee shall
hold harmless Lessor from any liability for damages to any person or
property in or upon the Demised Premises and the Premises, including the
person and property of Lessee and its employees and all persons in the
Building at its or their invitation or sufferance, and from all damages
resulting from Lessee's failure to perform the covenants of this Lease.
All property kept, maintained or stored on the Demised Premises shall be so
kept, maintained or stored at the sole risk of Lessee. Lessee agrees to
pay all sums of money in respect of any labor, service, materials, supplies
or equipment furnished or alleged to have been furnished to Lessee in or
about the Premises, and not furnished on order of Lessor, which may be
secured by any Mechanic's Materialmen's or other lien to be discharged at
the time performance of any obligation secured thereby matures, provided
that Lessee may contest such lien, but if such lien is reduced to final
judgement and if such judgement or process thereon is not stayed, or if
stayed and said stay expires, then and in each such event, Lessee shall
forthwith pay and discharge said judgement. Lessor shall have the right to
post and maintain on the Demised Premises, notices of non-responsibility
under the laws of the State in which the Demised premises are located.
19. NON-LIABILITY. Subject to the terms and conditions of Article 14 hereof,
Lessor shall not be liable for any damage to property of Lessee or of
others located on the Premises, nor for the loss of or damage to any
property of Lessee or of other by theft or otherwise. Lessor shall not be
liable for any injury or damage to persons or property resulting from fire,
explosion, falling plaster, steam, gas, electricity, water, rain or snow or
leaks from any part of the Premises or from the pipes, appliances or
plumbing works or from the roof, street or subsurface or from any other
place or by dampness or by any other cause of whatsoever nature. Lessor
shall not be liable for any such damage caused by other Lessees or persons
in the Premises, occupants of adjacent property, other occupants of the
buildings, or the public or caused by operations in construction of any
private, public or quasi-public work. Lessor shall not be liable for any
latent defect in the Demised Premises. All property of Lessee kept or
stored on the Demised Premises shall be so kept or stored at the risk of
Lessee only and Lessee shall hold Lessor harmless from any claims arising
out of damage to the same, including subrogation claims by Lessee's
insurance carrier.
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20. SUBORDINATION. This Lease shall be subordinated to any mortgages that may
now exist or that may hereafter be placed upon the Demised Premises and to
any and all advances made thereunder, and to the interest upon the
indebtedness evidenced by such mortgages, and to all renewals, replacements
and extensions thereof. In the event of execution by Lessor after the date
of this Lease of any such mortgage, renewal, replacement or extension,
Lessee agrees to execute a subordination agreement with the holder thereof
which agreement shall provide that:
(a) Such holder shall not disturb the possession and other rights of
Lessee under this Lease so long as Lessee is not in default
hereunder.
(b) In the event of acquisition of title to the Demised Premises by such
holder, such holder shall accept the Lessee as Lessee of the Demised
Premises under the terms and conditions of this Lease and shall
perform all the obligations of Lessor hereunder, and
(c) The Lessee shall recognize such holder as Lessor hereunder. Lessee
shall, upon receipt of a request from Lessor therefor, execute and
deliver to Lessor or to any proposed holder of a mortgage or trust
deed or any proposed purchaser of the Premises, a certificate in
recordable form certifying that this Lease is in full force and
effect, and that there are no offsets against rent nor defenses to
Lessee's performance under this Lease, or setting forth any such
offsets or defenses claimed by Lessee, as the case may be.
21. ASSIGNMENT OR SUBLETTING. Lessee agrees to use and occupy the Demised
Premises throughout the entire term hereof for the purpose herein specified
and for no other purposes, in the manner and to substantially the extent
intended, and not to transfer or assign this Lease or sublet said Demised
Premises, or any part thereof, whether by voluntary act, operation of law,
otherwise, without obtaining the prior consent of Lessor in each instance.
Lessee shall seek such consent of Lessor by a written request thereof
setting forth such information as Lessor may deem necessary. Lessor agrees
not to withhold consent unreasonably. Consent to any assignment or
subletting shall not relieve Lessee of its obligations hereunder. Consent
by Lessor to an assignment of this Lease or to any subletting of the
Demised Premises should not be a waiver of Lessor's rights under this
Article as to any subsequent assignment or subletting. Lessor's rights to
assign this Lease are and should remain unqualified. No such assignment or
sublease or other transfer of this Lease shall be effective unless the
assignee, sublessee or
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transferee shall at the time of such assignment, sublease or transfer,
assume in writing for the benefit of Lessor, its successors or assigns, all
of the terms, covenants and conditions of this Lease thereafter to be
performed by Lessee and shall agree in writing to be bound thereby. Should
Lessee sublease in accordance with the terms of this Lease, fifty percent
(50%) of any increase in rental received by Lessee over the per square foot
rental rate which is being paid by Lessee shall be forwarded to and
retained by Lessor, which increase shall be in addition to the Base Rent
and Additional Rent due Lessor under this Lease.
22. ATTORNMENT. In the event of a sale or assignment of Lessor's interest in
the Premises, or the Building in which the Demised Premises are located, or
this Lease, or if the Premises come into custody or possession of a
mortgagee or any other party whether because of a mortgage foreclosure, or
otherwise, Lessee shall attorn to such assignee or other party and
recognize such party as Lessor hereunder; provided, however, Lessee's
peaceable possession will not be disturbed so long as Lessee faithfully
performs its obligations under this Lease. Lessee shall execute, on
demand, any attornment agreement required by any such party to be executed,
containing such provisions and such other provisions as such party may
require.
23. NOVATION IN THE EVENT OF SALE. In the event of the sale of the Demised
Premises, Lessor shall be and hereby is relieved of all of the covenants
and obligations created hereby accruing from and after the date of sale,
and such sale shall result automatically in the purchaser assuming and
agreeing to carry out all the covenants and obligations of Lessor herein.
Notwithstanding the foregoing provisions of this Article, Lessor, in the
event of a sale of the Demised Premises, shall cause to be included in this
agreement of sale and purchase a covenant whereby the purchaser of the
Demised Premises assumes and agrees to carry out all the covenants and
obligations of Lessor herein.
The Lessee agrees at any time and from time to time upon not less than ten
(10) days prior written request by the Lessor to execute, acknowledge and
deliver to the Lessor a statement in writing certifying that this Lease is
in full force and effect and stating any modifications hereto, and the
dates to which the basic rent and other charges have been paid in advance,
if any, it being intended that any such statement delivered pursuant to
this paragraph may be relied upon by any prospective purchaser of the fee
or mortgagee or assignee of any mortgage upon the fee of the Demised
Premises.
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24. SUCCESSORS AND ASSIGNS. The terms, covenants and conditions hereof shall
be binding upon and inure to the successors and assigns of the parties
hereto.
25. UNIFORM COMMERCIAL CODE. The Lessee grants to the Lessor a lien upon all
personal property of the Lessee in the Demised Premises during said term to
secure payment of the rent payable hereunder, and agrees that no such
property shall be removed from the Demised Premises without the consent of
the Lessor while any installments of rent are past due, and during any
other default in the conditions hereof.
To the extent this Lease grants Lessor, or recognizes in Lessor any lien or
rights greater than provided by the laws of the State in which the Premises
are located pertaining to "Landlord's Liens", this Lease is intended and
does constitute a security agreement within the meaning of the Uniform
Commercial Code as adopted in said State, and Lessor, in addition to the
rights prescribed herein shall have the rights, titles, liens and interests
in and to Lessee's property now or hereafter located in or upon the Demised
Premises which are granted a "secured party" as the term is defined under
such Uniform Commercial Code to secure the payment to Lessor of amounts and
monies due under this Lease. Lessee will execute, on request of Lessor,
and will deliver to Lessor a financing statement for the purpose of
perfecting Lessor's security interest under this Lease or the Lessor may
file this Lease as a security agreement.
26. QUIET ENJOYMENT. Lessor warrants that it has full right to execute and to
perform this Lease and to grant the estate demised, and that Lessee, upon
payment of the rents and other amounts due and the performance of all the
terms, conditions, covenants and agreements on Lessee's part to be observed
and performed under this Lease, may peaceable and quietly enjoy the Demised
Premises for the business uses permitted hereunder, subject, nevertheless,
to the terms and conditions of this Lease.
27. RECORDING. Lessee shall not record this Lease without the written consent
of Lessor. However, upon the request of either party hereto, the other
party shall join in the execution of a Memorandum Lease for the purposes of
recordation. Said Memorandum Lease shall describe the parties, the Demised
Premises and the term of the Lease and shall incorporate this Lease by
reference. The Article 28 shall not be construed to limit Lessor's right
to file this Lease.
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28. OVERDUE PAYMENTS. All monies due under this Lease from Lessee to Lessor
shall be due on demand, unless otherwise specified, and if not paid when
due, shall bear interest at the rate of eighteen percent (18%) per annum
until paid.
29. SURRENDER. On the Expiration Date or upon the termination hereof upon a
day other than the Expiration Date, Lessee shall peaceably surrender the
Demised Premises broom-clean in good order, condition and repair,
reasonable wear and tear only excepted. On or before the Expiration Date
or upon termination of this Lease on a day other than the Expiration Date,
Lessee shall, at its expense, remove all trade fixtures, personal property
and equipment and signs from the Demised Premises and any property not
removed shall be deemed to have been abandoned. Any damage caused in the
removal of such items shall be immediately repaired by Lessee and at its
expense. All alterations, additions, improvements and fixtures (other than
trade fixtures) which shall have been made or installed by Lessor or Lessee
upon the Demised Premises and all floor covering so installed shall remain
upon and be surrendered with the Demised Premises as a part thereof,
without disturbance, molestation or injury, and without charge, at the
expiration or termination of this Lease. If the Demised Premises are not
surrendered on the Expiration Date or the date of termination, Lessee shall
indemnify and hold Lessor harmless against any loss or liability, claims,
without limitation, made by any succeeding lessee founded on or related to
such delay. Lessee shall promptly surrender all keys for the Demised
Premises to Lessor at the place then fixed for payment of rent and shall
inform Lessor of combinations of any locks and safes on the Demised
Premises.
30. HOLDING OVER. In the event Lessee remains in possession of the Demised
Premises after the Expiration Date of this Lease and without the execution
of a new Lease, it shall be deemed to be occupying said Demised Premises as
a Lessee from month to month, subject to all the conditions, provisions and
obligations of this Lease insofar as the same can be applicable to a month-
to-month tenancy, provided however that the Base Rent required to be paid
by Lessee during any holdover period shall be in an amount equal to 150% of
the most recent Base Rent amount due pursuant to the terms of the Lease per
month, plus all Additional Rent as set forth in Article 3 of this Lease.
31. ABANDONMENT. In the event Lessee shall remove its fixtures, equipment or
machinery or shall vacate the Demised Premises or any part thereof prior to
the Expiration Date of this Lease, or shall discontinue or suspend the
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operation of its business conducted on the Demised Premises for a period of
more than thirty (30) consecutive days (except during any time when the
Demised Premises may be rendered untenantable by reason of fire or other
casualty), then in any such event Lessee shall be deemed to have abandoned
the Demised Premises and Lessee shall be in default under the terms of this
Lease.
32. CONSENTS BY LESSOR. Whenever provision is made under this Lease for Lessee
securing the consent or approval by Lessor, such consent or approval shall
only be in writing.
33. NOTICES. Any notice required or permitted under this Lease shall be deemed
sufficiently given or secured if sent by registered or certified return
receipt mail to Lessee at the street address of the Demised Premises and to
Lessor at the address then fixed for the payment of rent as provided in
Article 4 of this Lease, and either party may by like written notice at any
time designate a different address to which notices shall subsequently be
sent or rent to be paid.
34. RULES AND REGULATIONS. Lessee shall observe and comply with the rules and
regulations hereinafter set forth in "Exhibit C", and with such further
reasonable rules and regulations as Lessor may prescribe, on written notice
to Lessee for the safety, care and cleanliness of the Building.
35. INTENT OF PARTIES. Except as otherwise provided herein, the Lessee
covenants and agrees that if it shall at any time fail to pay any such cost
or expense, or fail to take out, pay for, maintain or deliver any of the
insurance policies above required, or fail to make any other payment or
perform any other act on its part to be made or performed as in this Lease
provided, then the Lessor may, but shall not be obligated so to do, and
without notice to or demand upon the Lessee and without waiving or
releasing the Lessee from any obligations of the Lessee in this Lease
contained, pay any such cost or expense, effect any such insurance coverage
and pay premiums therefor and may make any other payment or perform any
other act on the part of the Lessee to be made and performed as in this
Lease provided, in such manner and to such extent as the Lessor may deem
desirable, and in exercising any such right, to also pay all necessary and
incidental costs and expenses, employ counsel and incur and pay reasonable
attorney's fees. All sums so paid by Lessor and all necessary and
incidental costs and expenses in connection with the performance of any
such act by the Lessor together with interest thereon at the rate of
eighteen percent (18%) per annum from the date of making of
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such expenditure by Lessor, shall be deemed Additional Rent hereunder, and
shall be payable to Lessor upon demand. Lessee covenants to pay any such
sum or sums with interest as aforesaid and the Lessor shall have the same
rights and remedies in the event of the non-payment thereof by Lessee as in
the case of default by Lessee in the payment of the Base Rent payable under
this Lease.
36. GENERAL. The Lease does not create the relationship of principal and agent
or of partnership or of joint venture or of any association between Lessor
and Lessee, the sole relationship between the parties hereto being that of
Lessor and Lessee.
No waiver of any default of Lessee hereunder shall be implied from any
omission by Lessor to take any action on account of such default if such
default persists or is repeated, and no express waiver shall affect any
default other than the default specified in the express waiver and only for
the time and to the extent therein stated. One or more waivers by Lessor
shall not then be construed as a waiver of a subsequent breach of the same
covenant, term or condition. The consent to or approval by Lessor of any
tact by Lessee requiring Lessor's consent or approval shall not waive or
render unnecessary Lessor's consent to or approval of any subsequent
similar act by Lessee. Each form and each provision of this Lease
performable by Lessee shall be construed to be both a covenant and a
condition. No action required or permitted to be taken by or on behalf of
Lessor under the terms or provisions of this Lease shall be deemed to
constitute an eviction or disturbance of Lessee's possession of the Demised
Premises. All preliminary negotiations are merged into and incorporated in
this Lease. The laws of the State of Minnesota shall govern the validity,
performance and enforcement of this Lease.
(a) This Lease and the Exhibits, if any, attached hereto and forming a
part hereof, constitute the entire agreement between Lessor and
Lessee affecting the Demised Premises and there are no other
agreements, either oral or written, between them other than are
herein set forth. No subsequent alteration, amendment, change or
addition to this Lease shall be binding upon Lessor or Lessee unless
reduced to writing and executed in the same form and manner in which
this Lease is executed.
(b) If any agreement, covenant or condition of this Lease or the
application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or
the application of such
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agreement, covenant or condition to person or circumstances other
than those as to which it is held invalid or unenforceable, shall not
be affected thereby and each agreement, covenant or condition of this
Lease shall be valid and be enforced to the fullest extent permitted
by law.
37. CAPTIONS. The captions are inserted only as a matter of convenience and
reference, and in no way define, limit or describe the scope of this Lease,
the intent of the parties, or any provision of the Lease.
38. NOTIFICATION TO LESSEE. Owner of the Premises, hereby notifies Lessee that
the entity/person authorized to manage the Premises is CTD Properties,
Contract Manager. Said organization has been appointed to act as the agent
in the leasing, management and operation of the Building for the owner and
is authorized to accept service of process and receive and give receipts
for notices and demands. Lessor serves the right to change the identity or
status of its duly authorized agents upon written notice to Lessee.
39. EXHIBITS. Reference is made to Exhibits A through E, inclusive, which
Exhibits are attached hereto and made a part hereof.
Exhibit Description
------- -----------
Exhibit A Legal Description
Exhibit B Demised Premises
Exhibit C Building Rules and Regulations
Exhibit D Improvements
Exhibit E Signs
IN WITNESS WHEREOF, the Lessor and the Lessee have caused these presents to
be executed in form and manner sufficient to bind them at law, as of the day and
year first written above written.
LESSEE: LESSOR:
CHILDREN'S BROADCASTING
CORPORATION CHRISTOPHER T. DAHL
By /s/James G. Gilbertson /s/Christopher T. Dahl
--------------------------------- -----------------------------------
Its COO
------------------------------
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STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)
On this 1st day of November, 1996, personally came before me, a Notary
Public within and for said County, James G. Gilbertson, CFO of Children's
Broadcasting Corporation, to me well known to be the same persons described in
and who executed the foregoing instrument, and acknowledged that they executed
the same as their free act and deed.
/s/Christine A. Hein
------------------------------------
Notary Public
My Commission expires: 1/31/00
STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)
On this 1st day of November, 1996, personally came before me, a Notary
Public within and for said County, Christopher T. Dahl, to me well known to be
the same persons described in and who executed the foregoing instrument, and
acknowledged that they executed the same as their free act and deed.
/s/Christine A. Hein
------------------------------------
Notary Public
My Commission expires: 1/31/00
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EXHIBIT 10.4
SERVICE AGREEMENT
THIS AGREEMENT made this 22nd day of February, 1997, and effective January
1, 1997, by and between RADIO MANAGEMENT CORPORATION, a Minnesota corporation
(hereinafter "RMC"), and CHILDREN'S BROADCASTING CORPORATION, a Minnesota
corporation (hereinafter "CBC").
WHEREAS, RMC engages in the business of providing general and
administrative services for radio broadcast stations and CBC is the owner of a
number of radio broadcast facilities; and
WHEREAS, CBC intends to retain RMC to provide general and administrative
services for its radio broadcast facilities according to the terms and
provisions set forth herein.
NOW, THEREFORE, based upon the mutual premises contained herein, and other
good and valuable consideration, the parties hereby agree as follows:
1. SERVICES. During the term hereof, RMC shall perform general and
administrative services for CBC, including, but not limited to,
payroll services, general accounting services, general legal services
and such other services as the parties may mutually agree to from time
to time.
2. COMPENSATION. In consideration for the services performed by RMC
hereunder, CBC shall pay RMC $75,000.00 per month payable within
thirty (30) days from the end of each calendar month. The
compensation paid to RMC hereunder shall not include any fees or
expenses for accounting, legal or other services performed for CBC by
third parties.
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3. QUARTERLY REVIEW. The parties agree that they will review the
services provided by RMC hereunder and the compensation set forth
herein at the end of each calendar quarter during the term hereof, and
at such time the services and compensation may be adjusted upon the
mutual agreement of the parties.
4. EXPENSES. In addition to the compensation set forth in Section 2
above, CBC shall pay all reasonable and necessary expenses incurred by
RMC in connection with the services performed hereunder, including,
but not limited to, travel and lodging expenses and any other expenses
directly attributable to the services performed by RMC hereunder. RMC
shall bill CBC on a monthly basis for such expenses and CBC shall pay
the same within thirty (30) days from the date CBC receives any such
invoice.
5. INDEPENDENT CONTRACTOR. The parties hereby acknowledge that (i) RMC,
while preforming services hereunder, at all times acting as an
independent contractor and not as an employee of CBC; (ii) the
employees of RMC shall at no time be considered employees of CBC in
connection with the services performed hereunder; and (iii) RMC shall
be solely responsible for all federal, state and local income taxes,
employment taxes, self-employment taxes, workers' compensation
insurance premiums and any and all other similar taxes or payments RMC
is required to make as a result of the services RMC performs
hereunder. CBC shall approve the engagement of any officer of RMC who
shall pursuant to such engagement also serve as an officer of CBC, and
CBC shall affirm and agree to the terms of such engagement.
6. LIMITATIONS ON LIABILITY. CBC hereby agrees that in no event shall
RMC be liable to CBC for any indirect, special or consequential
damages or lost profits arising out of or in any way related to this
Agreement or the performance of services hereunder or any breach
thereof and that RMC's liability to CBC hereunder, if any, shall in no
event exceed the total compensation paid to RMC hereunder.
7. TERM. This Agreement shall remain in effect for a period of one (1)
year from the date hereof; provided, however, the term of this
Agreement shall automatically renew for successive one (1) year
periods unless terminated by either party, by written notice delivered
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to the other party, within sixty (60) days from the end of the then
current term.
8. TERMINATION. Notwithstanding Section 7 above, this Agreement shall
terminate upon the occurrence of any of the following events:
a. by RMC if CBC is more than sixty (60) days delinquent in its
payment of compensation or expenses pursuant to the Sections 2 or
3 above;
b. by either party if the other party is in default under any
provision hereunder and such default is not cured within sixty
(60) days after notice thereof is given to the defaulting party;
c. by either party if the other party becomes insolvent or seeks
protection, voluntarily or involuntarily, under any bankruptcy
law; or
d. upon the mutual agreement of both parties.
A termination of this Agreement pursuant to this Section 8 or Section
7 above shall not relieve CBC of its obligation to pay RMC
compensation or expenses for any services rendered or expenses
incurred prior to the date of termination.
9. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
RADIO MANAGEMENT CORPORATION
BY: /S/CHRISTOPHER T. DAHL
--------------------------------
ITS: PRESIDENT
-------------------------------
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CHILDREN'S BROADCASTING
CORPORATION
BY: /S/JAMES G. GILBERTSON
--------------------------------
ITS: COO
-------------------------------
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EXHIBIT 10.14
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED
FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND
SUCH LAWS COVERING THE SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, OFFER,
PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND SUCH LAWS.
WARRANT
TO PURCHASE 50,000 SHARES OF
COMMON STOCK OF
CHILDREN'S BROADCASTING CORPORATION
THIS CERTIFIES THAT, for good and valuable consideration, Foothill Capital
Corporation ("Foothill"), or its registered assigns, is entitled to subscribe
for and purchase from Children's Broadcasting Corporation, a Minnesota
corporation (the "Company"), at any time commencing November 25, 1996, up to and
including November 25, 2001, Fifty Thousand (50,000) fully paid and
nonassessable shares of the Common Stock of the Company at the price of $4.40
per share (the "Warrant Exercise Price"), subject to the antidilution provisions
of Section 5 of this Warrant. Reference is made to this Warrant in the Loan and
Security Agreement dated November 25, 1996 (the "Loan Agreement"), by and
between the Company and Foothill. The shares which may be acquired upon
exercise of this Warrant are referred to herein as the "Warrant Shares." As
used herein, the term "Holder" means Foothill, any party who acquires all or a
part of this Warrant as a registered transferee of Foothill, or any record
holder or holders of the Warrant Shares issued upon exercise, whether in whole
or in part, of the Warrant; the term "Common Stock" means and includes the
Company's presently authorized Common Stock, and shall also include any capital
stock of any class of the Company hereafter authorized which shall not be
limited to a fixed sum or percentage in respect of the rights of the Holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution, or winding up of the Company.
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised by the Holder
hereof, in whole or in part (but not as to a fractional share of Common Stock),
by written notice of exercise (in the form attached hereto) delivered to the
Company at the principal office of the Company prior to the expiration of this
Warrant and accompanied or preceded by the surrender of this Warrant along with
payment of the Warrant Exercise Price for such shares (a) in cash, by check or
by wire transfer of federal funds, (b) to the extent permitted by law, by offset
of the Obligations (as defined in the Loan Agreement), or (c) by a combination
of the methods specified in clauses (a) and (b).
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(b) This Warrant may not be sold, transferred, assigned, hypothecated or
divided except as provided in Section 7 hereof.
2. EXCHANGE AND REPLACEMENT. Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if Foothill shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. ISSUANCE OF THE WARRANT SHARES.
(a) The Company agrees that the shares of Common Stock purchased hereby
shall be and are deemed to be issued to the Holder as of the close of business
on the date on which this Warrant shall have been surrendered and the payment
made for such Warrant Shares as provided herein. Subject to the provisions of
the next section, certificates for the Warrant Shares so purchased shall be
delivered to the Holder within a reasonable time, not exceeding fifteen (15)
days after the rights represented by this Warrant shall have been so exercised,
and, unless this Warrant has expired, a new Warrant representing the right to
purchase the number of Warrant Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be delivered to the Holder
within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Nothing herein, however, shall obligate the Company to effect registrations
under federal or state securities laws, except as provided in Section 9. If
registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time as
either registrations become effective or exemptions are available, and the
Warrant shall then remain exercisable for a period of at least 45 calendar days
from the date the Company delivers to the Holder written notice of the
availability of such registrations or exemptions. The Holder agrees to execute
such documents and make such representations, warranties, and agreements as may
be required solely to comply with the exemptions relied upon by the Company, or
the registrations made, for the issuance of the Warrant Shares.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
or transfer upon exercise of the purchase rights evidenced by this Warrant a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant.
5. ANTIDILUTION ADJUSTMENTS. The provisions of this Warrant are subject
to adjustment from time to time as provided in this Section 5.
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(a) The Warrant Exercise Price shall be adjusted from time to time such
that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company payable in
Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock into a
greater number of shares; or
(iii) combine outstanding shares of Common Stock, by reclassification
or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (a) the number of shares of Common Stock outstanding
immediately prior to such event (including the maximum number of shares of
Common Stock issuable in respect of any then outstanding securities convertible
into Common Stock), multiplied by the then existing Warrant Exercise Price, by
(b) the total number of shares of Common Stock outstanding immediately after
such event (including the maximum number of shares of Common Stock issuable in
respect of any then outstanding securities convertible into Common Stock), and
the resulting quotient shall be the adjusted Warrant Exercise Price per share.
An adjustment made pursuant to this subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this subsection, the Holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive)
shall determine, in good faith, which determination shall be described in a duly
adopted board resolution certified by the Company's Secretary, the allocation of
the adjusted Warrant Exercise Price between or among shares of such classes of
capital stock or shares of Common Stock and other capital stock. All
calculations under this subsection shall be made to the nearest cent or to the
nearest 1/100 of a share, as the case may be. In the event that at any time as
a result of an adjustment made pursuant to this subsection, the Holder of any
Warrant thereafter surrendered for exercise shall become entitled to receive any
shares of the Company other than shares of Common Stock, thereafter the Warrant
Exercise Price of such other shares so receivable upon exercise of any Warrant
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to Common Stock
contained in this Section.
(b) In case the Company shall issue shares of Common Stock, or rights,
options, warrants or convertible or exchangeable securities containing the right
to subscribe for or purchase shares of Common Stock (excluding (i) shares,
rights, options, warrants, or convertible or exchangeable securities described
in subparagraphs (f) or (g) of Section 11 hereof or issued in any of the
transactions described in subparagraphs (a) or (d) of this Section 5, (ii)
shares issued upon the exercise of such rights, options or warrants or upon
conversion or exchange of such convertible or exchangeable securities, and (iii)
the Warrants and any shares issued upon exercise thereof), at a price per share
of Common Stock (determined in the case of such rights, options, warrants, or
convertible or exchangeable securities by dividing (x) the total amount
receivable by the Company in consideration of the sale and issuance of such
rights, options, warrants, or convertible or exchangeable securities, plus the
total minimum consideration payable to the Company upon exercise, conversion, or
exchange thereof by (y) the total maximum number of shares of Common Stock
covered by such rights, options, warrants, or convertible or exchangeable
securities) lower than the Market Price (as such term is defined in Section 8
hereof) per share of Common Stock on the date the Company fixes the offering
price of such shares, rights, options, warrants, or convertible or exchangeable
securities, then the Warrant Exercise Price shall be adjusted so that it shall
equal the price determined by multiplying the Warrant Exercise Price in effect
immediately prior thereto by a fraction (i) the numerator of which shall be the
sum of (A) the number of shares of Common Stock outstanding immediately prior to
such sale and issuance plus (B) the
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number of shares of Common Stock which the aggregate consideration received
(determined as provided below) for such sale or issuance would purchase at
such Market Price per share, and (ii) the denominator of which shall be the
total number of shares of Common Stock outstanding immediately after such
sale and issuance. Such adjustment shall be made successively whenever such
an issuance is made. For the purposes of such adjustment, the maximum number
of shares of Common Stock which the holder of any such rights, options,
warrants or convertible or exchangeable securities shall be entitled to
subscribe for or purchase shall be deemed to be issued and outstanding as of
the date of such sale and issuance and the consideration received by the
Company therefor shall be deemed to be the consideration received by the
Company for such rights, options, warrants, or convertible or exchangeable
securities, plus the minimum consideration or premium stated in such rights,
options, warrants, or convertible or exchangeable securities to be paid for
the shares of Common Stock covered thereby. In case the Company shall sell
and issue shares of Common Stock, or rights, options, warrants, or convertible
or exchangeable securities containing the right to subscribe for or purchase
shares of Common Stock for a consideration consisting, in whole or in part, of
property other than cash or its equivalent, then in determining the price per
share of Common Stock and the consideration received by the Company for
purposes of the first sentence of this subparagraph (b), the Board of Directors
of the Company shall determine, in good faith, the fair value of said property,
and such determination shall be described in a duly adopted board resolution
certified by the Company's Secretary. In case the Company shall sell and issue
rights, options, warrants, or convertible or exchangeable securities containing
the right to subscribe for or purchase shares of Common Stock together with one
or more other securities as a part of a unit at a price per unit, then in
determining the price per share of Common Stock and the consideration received
by the Company for purposes of the first sentence of this subparagraph (b),
the Board of Directors of the Company shall determine, in good faith, which
determination shall be described in a duly adopted board resolution certified
by the Company's Secretary, the fair value of the rights, options, warrants,
or convertible or exchangeable securities then being sold as part of such unit.
Such adjustment shall be made successively whenever such an issuance occurs, and
in the event that such rights, options, warrants, or convertible or exchangeable
securities expire or cease to be convertible or exchangeable before they are
exercised, converted, or exchanged (as the case may be), then the Warrant
Exercise Price shall again be adjusted to the Warrant Exercise Price that would
then be in effect if such sale and issuance had not occurred, but such
subsequent adjustment shall not affect the number of Warrant Shares issued upon
any exercise of Warrants prior to the date such subsequent adjustment is made.
(c) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) or Section 5(b) above, the Holder of each Warrant shall thereafter
(until another such adjustment) be entitled to purchase at the adjusted Warrant
Exercise Price the number of shares, calculated to the nearest full share,
obtained by multiplying the number of shares specified in such Warrant (as
adjusted as a result of all adjustments in the Warrant Exercise Price in effect
prior to such adjustment) by the Warrant Exercise Price in effect prior to such
adjustment and dividing the product so obtained by the adjusted Warrant Exercise
Price.
(d) In case of any consolidation or merger to which the Company is a
party, other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, or in the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a merger of a
third corporation into the Company), there shall be no adjustment under
subsection (a) of this Section above but the Holder of each Warrant then
outstanding shall have the right thereafter to convert such Warrant into the
kind and amount of shares of stock and other securities and property which the
Holder would have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale, or conveyance had such Warrant
been converted immediately prior to the effective date of such consolidation,
merger, statutory exchange, sale, or conveyance and in any such case, if
necessary, appropriate adjustment shall be made in the application of the
provisions set forth in this Section with respect to the rights and interests
thereafter of any Holders of the Warrant, to the end that the provisions set
forth in this Section shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock and other
securities and property thereafter deliverable on
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the exercise of the Warrant. The provisions of this subsection shall similarly
apply to successive consolidations, mergers, statutory exchanges, sales or
conveyances.
(e) Upon any adjustment of the Warrant Exercise Price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the Holder as shown on the books of the Company,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
6. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any
voting rights or other rights as a stockholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE WARRANT SHARES.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If in the
opinion of each such counsel the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the Holder to the Company;
provided that an appropriate legend may be endorsed on the Warrant or the
certificates for such Warrant Shares respecting restrictions upon transfer
thereof necessary or advisable in the opinion of counsel and satisfactory to the
Company to prevent further transfers which would be in violation of Section 5 of
the Securities Act of 1933, as amended (the "Act"), and applicable state
securities laws; and provided further that the prospective transferee or
purchaser shall execute such documents and make such representations,
warranties, and agreements as may be reasonably required solely to comply with
the exemptions relied upon by the Company or the Holder for the transfer or
disposition of the Warrant or Warrant Shares.
(b) If in the opinion of counsel referred to in this Section 7, the
proposed transfer or disposition of this Warrant or such Warrant Shares
described in the written notice given pursuant to this Section 7 may not be
effected without registration or qualification of this Warrant or such Warrant
Shares, the Company shall promptly give written notice thereof to the Holder.
8. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Market Price of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the term
"Market Price" with respect to shares of Common Stock of any class or series
means the last reported sale price or, if none, the average of the last reported
closing bid and asked prices on any national securities exchange, the Nasdaq
National Market or Nasdaq SmallCap Market, or if not listed on a national
securities exchange or quoted on Nasdaq, the average of the last reported
closing bid and asked prices as reported in the "pink sheets" or other standard
compilation of quotations by market makers in the over-the-counter market.
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9. REGISTRATION RIGHTS.
(a) If at any time after November 25, 1996 and on or before November 25,
2001, the Company proposes to register under the Act (except by a Form S-4 or
Form S-8 Registration Statement or any successor forms thereto) or qualify for a
public distribution under Section 3(b) of the Act, any of its equity securities
or debt with equity features, it will give written notice to all Holders of this
Warrant, any Warrants issued pursuant to Section 2 or Section 3(a) hereof, and
any Warrant Shares of its intention to do so and, on the written request of any
such Holder given within twenty (20) days after receipt of any such notice
(which request shall specify the interest in such Warrants or the Warrant Shares
intended to be sold or disposed of by such Holder and describe the nature of any
proposed sale or other disposition thereof), the Company will use its best
efforts to cause all Warrant Shares, the Holders of which shall have requested
the registration or qualification thereof, to be included in such Registration
Statement proposed to be filed by the Company; provided, however, that if a
greater number of Warrant Shares is offered for participation in the proposed
offering than in the reasonable opinion of the managing underwriter of the
proposed offering can be accommodated without adversely affecting the proposed
offering, then the amount of Warrants and Warrant Shares proposed to be offered
by such Holders for registration, as well as the number of securities of any
other selling stockholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter. For purposes of this Section 9(a), the Holders who have requested
registration of Warrant Shares to be acquired upon the exercise of Warrants not
theretofore exercised shall furnish the Company with an undertaking that they or
the underwriters or other persons to whom such Warrants will be transferred have
undertaken to exercise such Warrants and to sell, transfer or otherwise dispose
of the Warrant Shares received upon exercise of such Warrants in such
registration.
(b) Upon request made any time not earlier than November 25, 1997 and on
or before November 25, 2001, by Holders of Warrants and Warrant Shares
(together, the "Securities") representing at least fifty percent (50%) of the
Securities then outstanding, the Company will, at its expense, promptly take all
necessary steps to register or qualify all of the Warrant Shares under
Section 3(b) or Section 5 of the Act and such state laws as such Holders may
reasonably request and, if so requested by such Holders, the Company shall use
its best efforts to cause such registration to be underwritten on a firm
commitment basis; provided that the Company shall not be obligated to effect
more than one (1) such registration pursuant to this Section 9(b) unless, in
such initial registration, the Company shall have been unable to effect the
registration of all of the Warrant Shares, the Holders of which have requested
inclusion in such registration, (whether then outstanding or issuable upon the
exercise of Warrants then outstanding); in which case, the Company shall be
obligated to effect one (1) additional registration pursuant to this Section
9(b) when requested by Holders who have not sold all of their Warrant Shares.
For purposes of this Section 9(b), the Holders who have requested registration
of Warrant Shares to be acquired upon the exercise of Warrants not theretofore
exercised shall furnish the Company with an undertaking that they or the
underwriters or other persons to whom such Warrants will be transferred have
undertaken to exercise such Warrants and to sell, transfer or otherwise dispose
of the Warrant Shares received upon exercise of such Warrants in such
registration. In the event of an underwritten offering pursuant to this Section
9(b), the Holders requesting registration of the Warrant Shares being registered
(i) shall be entitled to select the underwriter; PROVIDED, that the underwriter
so selected shall be subject to approval by the Company, which approval shall
not be withheld unreasonably, and (ii) must agree to all usual and customary
underwriting terms and conditions including, but not limited to, any lock-up
period imposed on selling Holders (not to exceed 180 days); PROVIDED, HOWEVER,
that the Company shall use its reasonable best efforts to cause each Holder of a
material number of shares of Common Stock to enter into similar lock-up
agreements in respect to such offering. The Company shall keep effective and
maintain any registration, qualification, notification or approval specified in
this paragraph for such period as may be necessary for the Holders of the
Warrants and the Warrant Shares to dispose thereof and from time to time shall
amend or supplement, at the Company's expense, the prospectus used in connection
therewith to the extent necessary in order to comply with applicable law,
provided that the Company shall not be obligated to maintain any registration
for a period of more than six (6) months after effectiveness, except that a
Form S-3 Registration Statement or successor thereof shall be maintained for up
to twelve (12) months after
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effectiveness. Notwithstanding the foregoing, if a greater number of
securities is offered for participation in the proposed offering pursuant to
this Section 9(b) than in the reasonable opinion of the managing underwriter
of the proposed offering can be accommodated without adversely affecting the
proposed offering, then the securities to be included in the proposed offering
shall be included as follows: first, the amount of the Warrants and Warrant
Shares proposed to be offered by the Holders for registration; and second,
the number of other securities of the Company and of any other selling
stockholders participating in the registration shall be proportionately reduced
to a number deemed satisfactory by the managing underwriter.
(c) With respect to each inclusion of securities in a Registration
Statement pursuant to Section 9(a) or 9(b) above, the Company shall bear the
following fees, costs, and expenses: all registration, filing and NASD fees,
Nasdaq fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, reasonable fees and disbursements for one (1)
counsel for all the Holders, fees and disbursements of counsel for the
underwriter or underwriters of such securities (if the offering is underwritten
and the Company is required to bear such fees and disbursements), all internal
expenses, the premiums and other costs of policies of insurance against
liability arising out of the public offering, and legal fees and disbursements
and other expenses of complying with state securities laws of any jurisdictions
in which the securities to be offered are to be registered or qualified. Except
as set forth in the foregoing sentence, fees and disbursements of special
counsel and accountants for the selling Holders, underwriting discounts and
commissions, and transfer taxes for selling Holders and any other expenses
relating to the sale of securities by the selling Holders shall be borne by the
selling Holders.
(d) The Company hereby indemnifies each of the Holders of this Warrant and
of any Warrant Shares, and the officers and directors and each other person, if
any, who control such Holders, within the meaning of Section 15 of the Act,
against all losses, claims, damages, and liabilities caused by (1) any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (and as amended or supplemented if the
Company shall have furnished any amendments thereof or supplements thereto), any
Preliminary Prospectus or any state securities law filings; (2) any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, or liabilities are caused by any untrue statement
or omission contained in information furnished in writing to the Company by such
Holder expressly for use therein; and each such Holder by its acceptance hereof
severally agrees that it will indemnify and hold harmless the Company, each of
its officers who signs such Registration Statement, and each person, if any, who
controls the Company, within the meaning of Section 15 of the Act, with respect
to losses, claims, damages, or liabilities which are caused by any untrue
statement or omission contained in information furnished in writing to the
Company by such Holder expressly for use therein. Unless otherwise required by
applicable law or judicial interpretation thereof, the liability of any selling
Holder hereunder shall not be greater in amount than the dollar amount of the
proceeds received by such Holder upon the sale of the Securities giving rise to
such indemnification obligation.
(e) The Company shall not file or permit the filing of any registration or
comparable statement which refers to any Holder by name or otherwise as the
Holder of any securities of the Company unless such reference to such Holder is
specifically required by the Act or any similar federal statute then in force.
(f) In connection with the preparation and filing of each registration
statement under the Act pursuant to this Section 9, the Company shall give the
selling Holders under such registration statement, their underwriters, if any,
and their respective counsel and accountants, the opportunity to participate in
the preparation of such registration statement, each prospectus included therein
or filed with the Securities and Exchange Commission (the "Commission"), and
each amendment thereof or supplement thereto, and will give each of them such
access to its books and records and such opportunities to discuss the business
of the Company with its officers and the independent public accountants who have
certified its financial statements as shall be necessary, in the opinion of such
Holders' and such underwriters' respective counsel, to conduct a reasonable
investigation within the meaning of the Act.
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(g) If the indemnification provided for in Section 9(d) hereof from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities, or expenses referred to herein,
then the indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of losses, claims, damages, liabilities, or expenses in such proportion
as is appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions which resulted in such losses,
claims, damages, liabilities, or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified party, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such action. The amount paid
or payable by a party as a result of the losses, claims, damages, liabilities,
and expenses referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding. In no event shall the liability of any selling
Holder hereunder be greater in amount than the dollar amount of the proceeds
received by such Holder upon the sale of the Securities giving rise to such
contribution obligation. The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 9(g) were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in this Section 9(g). No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person or entity
who was not guilty of such fraudulent misrepresentation.
(h) The Company shall not after November 25, 1996 (the "Date of Grant"),
grant additional registration rights which conflict with the rights under this
Section 9.
10. RIGHT TO CONVERT WARRANT INTO COMMON STOCK; NET ISSUANCE.
(a) RIGHT TO CONVERT. In addition to and without limiting the rights
of the Holder under the terms of this Warrant, the Holder shall have the right
to convert this Warrant or any portion thereof (the "Conversion Right") into
shares of Common Stock as provided in this Section 10 at any time or from time
to time during the term of this Warrant. Upon exercise of the Conversion Right
and with respect to a particular number of shares subject to this Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the Holder (without
payment by the Holder of any exercise price or any cash or other consideration)
that number of shares of fully paid and nonassessable Common Stock equal to the
quotient obtained by dividing (i) the value of this Warrant (or the specified
portion hereof) on the Conversion Date (as defined in subsection (b) hereof),
which value shall be equal to (A) the aggregate Market Price of the Converted
Warrant Shares issuable upon exercise of this Warrant (or the specified portion
hereof) on the Conversion Date less (B) the aggregate Warrant Exercise Price of
the Converted Warrant Shares immediately prior to the exercise of the Conversion
Right by (ii) the Market Price of one share of Common Stock on the Conversion
Date.
Expressed as a formula, such conversion shall be computed as follows:
X= A - B
-----
Y
Where: X = the number of shares of Common Stock that may be
issued to holder
Y = the Market Price (FMV) of one share of Common
Stock
A = the aggregate FMV (i.e., FMV x Converted Warrant
Shares)
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B = the aggregate Warrant Exercise Price (i.e.,
Converted Warrant Shares x Warrant Price)
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date. For purposes of Section 9 of this
Warrant, Warrant Shares issued pursuant to the Conversion Right shall be treated
as if they were issued upon the exercise of this Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by the
Holder by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the Holder thereby intends to
exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in subsection (a) hereof
as the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"). Certificates for the shares issuable
upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder within
thirty (30) days following the Conversion Date.
(c) DETERMINATION OF MARKET PRICE. For purposes of this Section 10,
"Market Price" of a share of Common Stock shall have the meaning set forth in
Section 8 above.
11. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to the Holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the Company and
is a valid and binding obligation of the Company enforceable in accordance with
its terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and the rules of law or principles at
equity governing specific performance, injunctive relief and other equitable
remedies;
(b) The Warrant Shares have been duly authorized and reserved for issuance
by the Company and, when issued in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable;
(c) The rights, preferences, privileges and restrictions granted to or
imposed upon the Common Stock and the holders thereof are as set forth in the
articles of incorporation of the Company, as amended to the date of grant (as so
amended, the "Articles"), a true and complete copy of which has been delivered
to Foothill;
(d) The execution and delivery of this Warrant are not, and the issuance
of the Warrant Shares upon exercise of this Warrant in accordance with the terms
hereof will not be, inconsistent with the Articles or by-laws of the Company, do
not and will not contravene, in any material respect, any governmental rule or
regulation, judgment or order applicable to the Company, and do not and will not
conflict with or contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the Company is a
party or by which it is bound or require the consent or approval of, the giving
of notice to, the registration or filing with or the taking of any action in
respect of or by, any Federal, state or local government authority or agency or
other person, except for the filing of notices pursuant to federal and state
securities laws, which filings will be effected by the time required thereby;
(e) There are no actions, suits, audits, investigations or proceedings
pending or, to the knowledge of the Company, threatened against the Company in
any court or before any governmental commission, board
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or authority which, if adversely determined, will have a material adverse
effect on the ability of the Company to perform its obligations under this
Warrant;
(f) The authorized capital stock of the Company consists of Fifty Million
(50,000,000) shares of Common Stock, of which Five Million Nine Hundred Ninety-
Six Thousand Four Hundred Ten (5,996,410) shares were issued and outstanding as
of the close of business on October 31, 1996, and Two Hundred Ninety Thousand
Two Hundred Thirteen (290,213) shares of Preferred Stock, of which all such
shares were issued and outstanding as of the Date of Grant. All such
outstanding shares have been validly issued and are fully paid, nonassessable
shares free of preemptive rights;
(g) Except for the capital stock issuable pursuant to the 1991 Incentive
Stock Option Plan, the 1994 Director Stock Option Plan, the 1994 Stock Option
Plan, the 1996 Employee Stock Purchase Plan, Non-Qualified Stock Options, and
any other rights, options or warrants issuable or outstanding as of the Date of
Grant as disclosed in the Company's filings with the Commission, there are no
subscriptions, rights, options, warrants or calls relating to any shares of the
Company's capital stock, including any right of conversion or exchange under any
outstanding security or other instrument; and
(h) Except as disclosed in the Company's filings with the Commission, the
Company is not subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of its capital stock or any security
convertible into or exchangeable for any of its capital stock.
IN WITNESS WHEREOF, Children's Broadcasting Corporation has caused this
Warrant to be signed by its duly authorized officer this 25th day of November,
1996.
Children's Broadcasting Corporation
By /s/Christopher T. Dahl
----------------------------------
Christopher T. Dahl
Its President
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CHILDREN'S BROADCASTING CORPORATION
WARRANT EXERCISE NOTICE
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
The undersigned, the Holder of the foregoing Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ___________________________ shares of the Common Stock of
Children's Broadcasting Corporation to which such Warrant relates and herewith
makes payment of $____________ therefor in cash or by certified or cashier's
check and requests that the certificate for such shares be issued in the name
of, and be delivered to _________________________________________, whose address
is set forth below the signature of the undersigned. If the number of shares
purchased is less than all of the shares purchasable under the Warrant, a new
Warrant will be issued in the name of the undersigned for the remaining balance
remaining of the shares purchasable thereunder.
Name of Warrant Holder:
------------------------------------
(Please print)
Address of Warrant Holder:
------------------------------------
------------------------------------
Tax Identification No. or
Social Security No. of Warrant
Holder:
------------------------------------
Signature:
--------------------------
NOTE: THE ABOVE SIGNATURE SHOULD
CORRESPOND EXACTLY WITH THE NAME OF
THE WARRANT HOLDER AS IT APPEARS ON
THE FIRST PAGE OF THE WARRANT OR ON
A DULY EXECUTED WARRANT ASSIGNMENT.
Dated:
------------------------------
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CHILDREN'S BROADCASTING CORPORATION
WARRANT ASSIGNMENT
(TO BE SIGNED ONLY UPON TRANSFER OF WARRANT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ___________________________________________________________, the assignee,
whose address is______________________________________________________________,
and whose tax identification or social security number is ____________________,
the right represented by the foregoing Warrant to purchase ___________________
shares of the Common Stock of Children's Broadcasting Corporation to which the
foregoing Warrant relates and appoints _______________________________________
attorney to transfer said right on the books of Children's Broadcasting
Corporation, with full power of substitution in the premises. If the number
of shares assigned is less than all of the shares purchasable under the Warrant,
a new Warrant will be issued in the name of the undersigned for the remaining
balance of the shares purchasable thereunder.
Name of Warrant Holder/Assignor:
------------------------------------
(Please print)
Address of Warrant Holder/Assignor:
------------------------------------
------------------------------------
Tax Identification No. or
Social Security No. of Warrant
Holder/Assignor:
------------------------------------
Signature:
--------------------------
NOTE: THE ABOVE SIGNATURE SHOULD
CORRESPOND EXACTLY WITH THE NAME OF
THE WARRANT HOLDER AS IT APPEARS ON
THE FIRST PAGE OF THE WARRANT OR ON
A DULY EXECUTED ASSIGNMENT FORM.
Dated:
------------------------------
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EXHIBIT 10.15
CHILDREN'S BROADCASTING CORPORATION
1994 STOCK OPTION PLAN
1. PURPOSE
The purpose of this Children's Broadcasting Corporation 1994 Stock
Option Plan (the "Plan") is to promote the interests of Children's
Broadcasting Corporation, a Minnesota corporation (the "Company"), by
providing employees of the Company and certain independent contractors with
an opportunity to acquire a proprietary interest in the Company and thereby
develop a stronger incentive to contribute to the Company's continued success
and growth. In addition, the granting of stock options will assist the
Company in attracting and retaining key personnel of outstanding ability.
2. DEFINITIONS
Wherever used in the Plan, the following terms have the meanings set
forth below:
2.1 "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and the rules and regulations promulgated thereunder.
2.2 "Committee" means a committee of the Board of Directors of the
Company designated by such Board to administer the Plan and composed of not
less than two directors. Beginning on the date the Company first registers
the Stock under Section 12 of the Securities Exchange Act of 1934, each
member of the Committee must be a "disinterested person" within the meaning
of Rule 16b-3.
2.3 "Incentive Stock Option" or "ISO" means a stock option which is
intended to qualify as an incentive stock option as defined in Section 422 of
the Code.
2.4 "Non-Statutory Stock Option" or "NSO" means a stock option that is
not intended to, or does not, qualify as an incentive stock option as defined
in Section 422 of the Code.
2.5 "Option" means, where required by the context of the Plan, an ISO
or NSO granted pursuant to the Plan.
2.6 "Optionee" means a Participant in the Plan who has been granted one
or more Options under the Plan.
2.7 "Participant" means an individual described in Section 5 of this
Plan who may be granted Options under the Plan.
2.8 "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
2.9 "Stock" means the Common Stock, $.01 par value, of the Company.
2.10 "Subsidiary" means any corporation, other than the Company, in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation
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in the unbroken chain owns 50% or more of the voting stock in one of the
other corporations in such chain.
3. ADMINISTRATION
3.1 The Plan shall be administered by the Committee, which shall have
full power, subject to the provisions and restrictions of the Plan, to grant
Options, construe and interpret the Plan, establish rules and regulations
with respect to the Plan and Options granted hereunder, and perform all other
acts, including the delegation of administrative responsibilities, that it
believes reasonable and necessary.
3.2 The Committee shall have the sole discretion, subject to the
provisions of the Plan, to determine the Participants eligible to receive
Options pursuant to the Plan and the amount, type and terms of any Options
and the terms and conditions of option agreements relating to any Option.
3.3 The Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or in any Option granted hereunder in
the manner and to the extent it shall deem necessary to carry out the terms
of the Plan.
3.4 Any decision made, or action taken, by the Committee arising out of
or in connection with the interpretation and administration of the Plan shall
be final, conclusive and binding upon all Optionees.
4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER. The total number of shares of Stock reserved for issuance
upon exercise of Options under the Plan is one million (1,000,000). Such
shares shall consist of authorized but unissued Stock. If any Option granted
under the Plan lapses or terminates for any reason before being completely
exercised, the shares covered by the unexercised portion of such Option may
again be made subject to Options under the Plan.
4.2 CHANGES IN CAPITALIZATION. In the event of any change in the
outstanding shares of Stock of the Company by reason of any stock dividend,
split, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares or rights offering to purchase stock at a price
substantially below fair market value, or other similar corporate change, the
aggregate number of shares which may be subject to Options under the Plan and
the terms of any outstanding Option, including the number and kind of shares
subject to such Options and the purchase price per share thereof, shall be
appropriately adjusted by the Committee, consistent with such change and in
such manner as the Committee, in its sole discretion, may deem equitable to
prevent substantial dilution or enlargement of the rights granted to or
available for Optionees. Notwithstanding the preceding sentence, in no event
shall any fraction of a share of Stock be issued upon the exercise of an
Option.
5. ELIGIBLE PARTICIPANTS
The following persons are Participants eligible to participate in the
Plan:
5.1 INCENTIVE STOCK OPTIONS. Incentive Stock Options may be granted
only to employees of the Company or any Subsidiary, including officers and
directors who are also employees of the Company or any Subsidiary.
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5.2 NON-STATUTORY STOCK OPTIONS. Non-statutory stock options may be
granted to (i) any employee of the Company or any Subsidiary, including any
officer or director who is also an employee of the Company or any Subsidiary;
and (ii) any consultant to, or other independent contractor of, the Company
who is not a director of the Company.
6. GRANT OF OPTIONS
Subject to the terms, conditions and limitations set forth in this Plan,
the Company, by action of the Committee, may from time to time grant Options
to purchase shares of the Company's Stock to those eligible Participants as
may be selected by the Committee, in such amounts and on such other terms as
the Committee in its sole discretion shall determine. Such Options may be
(i) "Incentive Stock Options" so designated by the Committee and which, when
granted, are intended to qualify as incentive stock options as defined in
Section 422 of the Code; (ii) "Non-Statutory Stock Options" so designated by
the Committee and which, when granted, are not intended to, or do not,
qualify as incentive stock options under Section 422 of the Code; or (iii) a
combination of both. The date on which the Committee approves the granting
of an Option shall be the date of grant of such Option, unless a different
date is specified by the Committee on such date of approval. Notwithstanding
the foregoing, with respect to the grant of any Incentive Stock Option under
the Plan, the aggregate fair market value of Stock (determined as of the date
the Option is granted) with respect to which Incentive Stock Options are
exercisable for the first time by an Optionee in any calendar year (under all
such stock option plans of the Company or Subsidiaries) shall not exceed
$100,000. Each grant of an Option under the Plan shall be evidenced by a
written stock option agreement between the Company and the Optionee setting
forth the terms and conditions, not inconsistent with the Plan, under which
the Option so granted may be exercised pursuant to the Plan and containing
such other terms with respect to the Option as the Committee in its sole
discretion may determine.
7. OPTION PRICE AND FORM OF PAYMENT
7.1 The purchase price for a share of Stock subject to an Option
granted hereunder shall not be less than 100% of the fair market value of the
Stock. For purposes of this Section 7, the "fair market value" of the Stock
shall be determined as follows:
(a) if the Stock of the Company is listed or admitted to unlisted
trading privileges on a national securities exchange, the fair market
value on any given day shall be the closing sale price for the Stock,
or if no sale is made on such day, the closing bid price for such day
on such exchange;
(b) if the Stock is not listed or admitted to unlisted trading
privileges on a national securities exchange, the fair market value on
any given day shall be the closing sale price for the Stock as reported
on any NASDAQ market on such day, or if no sale is made on such day,
the closing bid price for such day as entered by a market maker for the
Stock;
(c) if the Stock is not listed on a national securities exchange,
is not admitted to unlisted trading privileges on any such exchange and
is not eligible for inclusion in any NASDAQ market, the fair market
value on any given day shall be the average of the closing
representative bid and asked prices as reported by such other publicly
available compilation of the bid and asked prices of the Stock in any
over-the-counter market on which the Stock is traded; or
(d) if there exists no public trading market for the Stock, the
fair market value on any given day shall be an amount determined in
good faith by the Committee in such manner
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as it may reasonably determine in its discretion, provided that such
amount shall not be less than the book value per share as reasonably
determined by the Committee as of the date of determination or less
than the par value of the Stock.
Notwithstanding the foregoing, in the case of an Incentive Stock Option
granted to any Optionee then owning more than 10% of the voting power of all
classes of the Company's stock, the purchase price per share of the Stock
subject to such Option shall not be less than 110% of the fair market value
of the Stock on the date of grant of the Incentive Stock Option, determined
as provided above.
7.2 Except as provided herein, the purchase price of each share of
Stock purchased upon the exercise of any Option shall be paid:
(a) in United States dollars in cash or by check, bank draft or
money order payable to the order of the Company; or
(b) at the discretion of the Committee, through the delivery of
shares of Stock valued at fair market value at the time the Option is
exercised (as determined in the manner provided under this Plan); or
(c) at the discretion of the Committee, by a combination of both
(a) and (b) above; or
(d) by such other method as may be permitted in the written stock
option agreement between the Company and the Optionee.
If such form of payment is permitted, the Committee shall determine
procedures for tendering Stock as payment upon exercise of an Option and may
impose such additional limitations and prohibitions on the use of Stock as
payment upon the exercise of an option as it deems appropriate. If the
Committee in its sole discretion so agrees, the Company may finance the
amount payable by an Optionee upon exercise of any Option upon such terms and
conditions as the Committee may determine at the time such Option is granted
under this Plan.
8. EXERCISE OF OPTIONS
8.1 MANNER OF EXERCISE. An Option, or any portion thereof, shall be
exercised by delivering a written notice of exercise to the Company and
paying to the Company the full purchase price of the Stock to be acquired
upon the exercise of the Option. Until certificates for the Stock acquired
upon the exercise of an Option are issued to an Optionee, such Optionee shall
not have any rights as a shareholder of the Company with respect to such
Stock.
8.2 LIMITATIONS AND CONDITIONS ON EXERCISE OF OPTIONS. In addition to
any other limitations or conditions contained in this Plan or that may be
imposed by the Committee from time to time or in the stock option agreement
to be entered into with respect to Options granted hereunder, the following
limitations and conditions shall apply to the exercise of Options granted
under this Plan:
8.2.1 No Incentive Stock Option may be exercisable by its terms
after the expiration of 10 years from the date of the grant thereof.
8.2.2 No Incentive Stock Option granted pursuant to the Plan to an
eligible Participant then owning more than 10% of the voting power of
all classes of the Company's
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stock may be exercisable by its terms after the expiration of five years
from the date of the grant thereof.
8.2.3 To the extent required to comply with Rule 16b-3, Stock
acquired upon exercise of an Option granted under to the Plan may not
be sold or otherwise disposed of for a period of six months from the
date of grant of the Option.
9. INVESTMENT PURPOSES
9.1 Unless a registration statement under the Securities Act of 1933 is
in effect with respect to Stock to be purchased upon exercise of Options to
be granted under the Plan, the Company shall require that an Optionee agree
with and represent to the Company in writing that he or she is acquiring such
shares of Stock for the purpose of investment and with no present intention
to transfer, sell or otherwise dispose of such shares of Stock other than by
transfers which may occur by will or by the laws of descent and distribution,
and no shares of Stock may be transferred unless, in the opinion of counsel
to the Company, such transfer would be in compliance with applicable
securities laws. In addition, unless a registration statement under the
Securities Act of 1933 is in effect with respect to the Stock to be purchased
under the Plan, each certificate representing any shares of Stock issued to
an Optionee hereunder shall have endorsed thereon a legend in substantially
the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") AND WITHOUT REGISTRATION UNDER ANY APPLICABLE STATE
SECURITIES LAWS, IN RELIANCE UPON EXEMPTION(S) CONTAINED THEREIN.
NO TRANSFER OF THESE SHARES OR ANY INTEREST THEREIN MAY BE MADE
EXCEPT PURSUANT TO EFFECTIVE REGISTRATION STATEMENTS UNDER SUCH
LAWS UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO IT THAT SUCH TRANSFER OR DISPOSITION DOES NOT
REQUIRE REGISTRATION UNDER SUCH LAWS AND, FOR ANY SALES UNDER RULE
144 OF THE ACT, SUCH EVIDENCE AS IT SHALL REQUEST FOR COMPLIANCE
WITH THAT RULE, OR APPLICABLE STATE SECURITIES LAWS.
10. TRANSFERABILITY OF OPTIONS
No Option granted under the Plan shall be transferable by an Optionee
(whether by sale, assignment, hypothecation or otherwise) other than by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined under the Code or Title I of the Employee
Retirement Income Security Act, or the rules thereunder. An Option shall be
exercisable during the Optionee's lifetime only by the Optionee or, if
permissible under applicable law, by the Optionee's guardian or legal
representative.
11. TERMINATION OF OPTIONS
11.1 GENERALLY. Except as otherwise provided in this Section 11, if an
Optionee's employment with the Company or Subsidiary is terminated
(hereinafter "Termination") other than by death or Disability (as hereinafter
defined), the Optionee may exercise any Option granted under the Plan, to the
extent the Optionee was entitled to exercise the Option at the date of
Termination, for a period of three months after the date of Termination or
until the term of the Option has expired, whichever date is earlier.
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11.2 DEATH OR DISABILITY OF OPTIONEE. In the event of the death or
Disability of an Optionee prior to expiration of an Option held by him or
her, the follow ing provisions shall apply:
11.2.1 If the Optionee is at the time of his or her Disability
employed by the Company or a Subsidiary and has been in continuous
employment (as determined by the Committee in its sole discretion) since
the date of grant of the Option, then the Option may be exercised by the
Optionee until the earlier of one year following the date of such
Disability or the expiration date of the Option, but only to the extent
the Optionee was entitled to exercise such Option at the time of his or
her Disability. For the purpose of this Section 11, the term
"Disability" shall mean a permanent and total disability as defined in
Section 22(e)(3) of the Code. The determination of whether an Optionee
has a Disability within the meaning of Section 22(e)(3) shall be made
by the Committee in its sole discretion.
11.2.2 If the Optionee is at the time of his or her death employed by
the Company or a Subsidiary and has been in continuous employment (as
determined by the Committee in its sole discretion) since the date of
grant of the Option, then the Option may be exercised by the Optionee's
estate or by a person who acquired the right to exercise the Option by
will or the laws of descent and distribution, until the earlier of one
year from the date of the Optionee's death or the expiration date of
the Option, but only to the extent the Optionee was entitled to
exercise the Option at the time of death.
11.2.3 If the Optionee dies within three months after Termination, the
Option may be exercised until the earlier of nine months following the
date of death or the expiration date of the Option, by the Optionee's
estate or by a person who acquires the right to exercise the Option by
will or the laws of descent or distribution, but only to the extent the
Optionee was entitled to exercise the Option at the time of Termination.
11.3 TERMINATION FOR CAUSE. If the employment of an Optionee is
terminated by the Company or a Subsidiary for cause, then the Committee shall
have the right to cancel any Options granted to the Optionee under the Plan.
11.4 SUSPENSION OR TERMINATION FOR MISCONDUCT. If the Committee
reasonably believes that an Optionee has committed an act of misconduct, it
may suspend the Optionee's right to exercise any Option pending a
determination by the Committee. If the Committee determines that an Optionee
has committed an act of embezzlement, fraud, dishonesty, nonpayment of an
obligation owed to the Company, breach of fiduciary duty or deliberate
disregard of the Company's rules resulting in loss, damage or injury to the
Company, or if an Optionee makes an unauthorized disclosure of any Company
trade secret or confidential information, engages in any conduct constituting
unfair competition with respect to the Company or induces any party to breach
a contract with the Company, neither the Optionee nor the Optionee's estate
shall be entitled to exercise any Option whatsoever. In making such
determination, the Committee shall act fairly and shall give the Optionee an
opportunity to appear and present evidence on the Optionee's behalf at a
hearing before the Committee.
12. CHANGE IN CONTROL PROVISIONS
12.1 IMPACT OF EVENT. Notwithstanding any other provision of the Plan
to the contrary, in the event of a Change in Control (as defined in 12.2),
any Options outstanding as of the date such Change in Control is determined
to have occurred and not then exercisable and vested shall become fully
exercisable and vested in the full extent of the original grant.
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12.2 DEFINITION OF CHANGE IN CONTROL. For purposes of the Plan, a
"Change in Control" shall mean the happening of any of the following events:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of thirty percent (30%) or more of
either (1) the then outstanding shares of Common Stock of the Company
or (2) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors; provided, however, that the following acquisitions shall not
constitute a Change in Control: (1) any acquisition directly from the
Company; (2) any acquisition by the Company; (3) any acquisition by a
Person including the participant or with whom or with which the
participant is affiliated; (4) any acquisition by a Person or Persons
one or more of which is a member of the Board or an officer of the
Company or an affiliate of any of the foregoing on the Effective Date,
(5) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by
the Company; or (6) any acquisition by any corporation pursuant to a
transaction described in clauses (A), (B) and (C) of paragraph (c) of
this Section 12.2; or
(b) During any period of twenty-four (24) consecutive months,
individuals who, as of the beginning of such period, constituted the
entire Board cease for any reason to constitute at least a majority of
the Board, unless the election, or nomination for election, by the
Company's stockholders, of each new director was approved by a vote of
at least two-thirds (2/3) of the Continuing Directors, as hereinafter
defined, in office on the date of such election or nomination for
election for the new director. For purposes hereof, "Continuing
Director" shall mean:
(i) any member of the Board at the close of business on the
Effective Date; or
(ii) any member of the Board who succeeded any Continuing
Director described in clause (1) above if such successor's
election, or nomination for election, by the Company's
stockholders, was approved by a vote of at least two-thirds (2/3)
of the Continuing Directors then still in office. The term
"Continuing Director" shall not, however, include any individual
whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such term is used in
Rule 14a-11 of Regulation 14A of the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf
of a person other than the Board.
(c) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless,
following such reorganization, merger or consolidation, (A) more than
60% of the then outstanding securities having the right to vote in the
election of directors of the corporation resulting from such
reorganization, merger or consolidation is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners of the outstanding
securities having the right to vote in the election of directors of the
Company immediately prior to such reorganization, merger or
consolidation, (B) no Person (excluding the Company, any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such reorganization, merger or consolidation and any
Person beneficially owning, immediately prior to such reorganization,
merger or consolidation, directly or indirectly, 30% or more of the
then outstanding securities having the right to vote in the election of
directors of the Company) beneficially owns, directly or indirectly,
30% or more of the then outstanding securities having the right to vote
in the
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election of the corporation resulting from such reorganization, merger or
consolidation, and (C) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger are
Continuing Directors at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation; or
(d) Approval by the stockholders of the Company of (A) a complete
liquidation or dissolution of the Company or (B) the sale or other
disposition of all or substantially all of the assets of the Company,
other than to a corporation, with respect to which following such sale
or other disposition, (1) more than 60% of the then outstanding
securities having the right to vote in the election of directors of
such corporation is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the
beneficial owners of the outstanding securities having the right to
vote in the election of directors of the Company immediately prior to
such sale or other disposition of such outstanding securities, (2) no
Person (excluding the Company and any employee benefit plan (or related
trust) of the Company or such corporation and any Person beneficially
owning, immediately prior to such sale or other disposition, directly
or indirectly, 30% or more of the outstanding securities having the
right to vote in the election of directors of the Company) beneficially
owns, directly or indirectly, 30% or more of the then outstanding
securities having the right to vote in the election of directors of such
corporation and (3) at least a majority of the members of the board of
directors of such corporation are Continuing Directors at the time of the
execution of the initial agreement or action of the Board providing for
such sale or other disposition of assets of the Company.
12.3 CHANGE IN CONTROL PRICE. For purposes of the Plan, "Change in
Control Price" means the highest price per share (i) paid in any transaction
reported on the New York Stock Exchange Composite or other national exchange
on which such shares are listed or on NASDAQ, or (ii) paid or offered in any
bona fide transaction related to a potential or actual Change in Control of
the Company at any time during the preceding sixty (60) day period as
determined by the Committee.
13. AMENDMENT AND TERMINATION OF PLAN
13.1 The Committee may at any time, and from time to time, suspend or
terminate the Plan in whole or in part or amend it from time to time in such
respects as may be in the best interests of the Company; provided, however,
that no such amendment shall be made without the approval of the shareholders
if it would: (a) materially modify the eligibility requirements for
Participants as set forth in Section 5 hereof; (b) increase the maximum
aggregate number of shares of Stock which may be issued pursuant to Options,
except in accordance with Section 4.2 hereof; (c) reduce the minimum Option
price per share as set forth in Section 7 hereof, except in accordance with
Section 4.2 hereof; (d) extend the period of granting Options; or (e)
materially increase in any other way the benefits accruing to Optionees.
13.2 No amendment, suspension or termination of this Plan shall, without
the Optionee's consent, alter or impair any of the rights or obligations
under any Option theretofore granted to him or her under the Plan.
13.3 The Committee may amend the Plan, subject to the limitations cited
above, in such manner as it deems necessary to permit the granting of
Incentive Stock Options meeting the requirements of future amendments to the
Code.
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13.4 In the event of the proposed dissolution or liquidation of the
Company, each Option will terminate immediately prior to the consummation of
such proposed action, unless otherwise provided by the Committee. The
Committee may, in the exercise of its sole discretion in such instance,
declare that any Option shall terminate as of a date fixed by the Committee
and give each Optionee the right to exercise his or her Option as to all or
any part of the Option, including Stock as to which the Option would not
otherwise be exercisable. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a
parent or subsidiary of such successor corporation, unless the Committee
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to
exercise the Option in full including Stock as to which the Option would not
otherwise be exercisable. If the Committee makes an Option fully exercisable
in lieu of assumption or substitution in the event of a merger or sale of
assets, the Committee shall notify the Optionee that the Option shall be
fully exercisable for a period of 15 days from the date of such notice, and
the Option shall terminate upon the expiration of such period.
14. MISCELLANEOUS PROVISIONS
14.1 NO RIGHT TO CONTINUED EMPLOYMENT. No person shall have any claim
or right to be granted an Option under the Plan, and the grant of an Option
under the Plan shall not be construed as giving an Optionee the right to
continued employment with the Company. The Company further expressly
reserves the right at any time to dismiss an Optionee or reduce an Optionee's
compensation with or without cause, free from any liability, or any claim
under the Plan, except as provided herein or in a stock option agreement.
14.2 TRANSFER OF STOCK AND PAYMENT OF WITHHOLDING TAXES. The Company
shall have the right to require that payment or provision for payment of any
and all withholding taxes due upon the grant or exercise of an Option
hereunder or the disposition of any Stock or other property acquired upon
exercise of an Option be made by an Optionee. Stock acquired upon exercise
of an Incentive Stock Option may not be disposed of by the Optionee before
the later of two years from the date of grant or one year from the date of
exercise, unless adequate provision is made for payment to the Company of
funds sufficient for payment of any withholding and other taxes required by
any governmental authority in respect of the disposition of such Stock. The
Company may place a legend on certificates restricting the transfer of Stock
issued pursuant to Incentive Stock Options in order to obtain compliance with
tax withholding requirements. The Committee shall have the right to establish
such other rules and regulations or impose such other terms and conditions in
any agreement relating to an Option granted hereunder with respect to tax
withholding as the Committee may deem necessary and appropriate.
14.3 GOVERNING LAW. The Plan shall be administered in the State of
Minnesota, and the validity, construction, interpretation and administration
of the Plan and all rights relating to the Plan shall be determined solely in
accordance with the laws of such state, unless controlled by applicable
federal law, if any.
15. EFFECTIVE DATE
The effective date of the Plan is March 18, 1994. No Option may be
granted on or after March 18, 2004; provided, however, that all outstanding
Options shall remain in effect until such outstanding Options have expired or
been canceled. This Plan shall become effective upon its approval and
adoption by the shareholders of the Company on or before March 18, 1995.
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EXHIBIT 21
SUBSIDIARIES
NAME STATE OF INCORPORATION
- ------------------------------------------ -----------------------------------
Children's Radio Group, Inc. Minnesota
Children's Radio of Los Angeles, Inc. Minnesota
Children's Satellite Network, Inc. Minnesota
Children's Radio of New York, Inc. New Jersey
Children's Radio of Minneapolis, Inc. Minnesota
Children's Radio of Golden Valley, Inc. Minnesota
Children's Radio of Dallas, Inc. Minnesota
Children's Radio of Houston, Inc. Minnesota
Children's Radio of Kansas City, Inc. Minnesota
Children's Radio of Milwaukee, Inc. Minnesota
Children's Radio of Denver, Inc. Minnesota
Children's Radio of Detroit, Inc. Minnesota
Children's Radio of Philadelphia, Inc. Minnesota
Children's Radio of Chicago, Inc. Minnesota
KAHZ-AM, Inc. Minnesota
KCNW-AM, Inc. Minnesota
KKYD-AM, Inc. Minnesota
KPLS-AM, Inc. Minnesota
KTEK-AM, Inc. Minnesota
KYCR-AM, Inc. Minnesota
WAUR-AM, Inc. Minnesota
WCAR-AM, Inc. Minnesota
WJDM-AM, Inc. Minnesota
WPWA-AM, Inc. Minnesota
WWTC-AM, Inc. Minnesota
WZER-AM, Inc. Minnesota
183
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EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-62402) pertaining to the 1991 Incentive Stock Option Plan,
Stock Grants and Non-Qualified Stock Option Agreements, the Registration
Statement on Form S-8 (No. 33-93546) pertaining to the 1994 Stock Option
Plan, 1994 Director Stock Option Plan and the Written Compensation Agreement
with R. David Ridgeway, the Registration Statement on Form S-8 (No.
333-21699) pertaining to the 1994 Stock Option Plan, the Registration
Statement on Form S-8 (No. 333-21701) pertaining to the 1996 Employee Stock
Purchase Plan and Non-Qualified Stock Option Agreements, the Registration
Statement on Form S-3 (No. 333-06865) pertaining to the registration of
1,614,802 shares of common stock, the Registration Statement on Form S-3 (No.
333-14483) pertaining to the registration of 1,125,580 shares of common
stock, the Registration Statement on Form S-3 (No. 333-21117) pertaining to
the registration of 493,895 shares of common stock, the Registration
Statement on Form S-4 (No. 333-18575) pertaining to the registration of
5,000,000 shares of common stock and $5,000,000 of debt securities of
Children's Broadcasting Corporation of our report dated January 31, 1996,
with respect to the consolidated financial statements included in the Annual
Report (Form 10-KSB) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 27, 1997
184
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-62402) pertaining to the 1991 Incentive Stock Option Plan,
Stock Grants and Non-Qualified Stock Option Agreements, the Registration
Statement on Form S-8 (No. 33-93546) pertaining to the 1994 Stock Option
Plan, 1994 Director Stock Option Plan and the Written Compensation Agreement
with R. David Ridgeway, the Registration Statement on Form S-8 (No.
333-21699) pertaining to the 1994 Stock Option Plan, the Registration
Statement on Form S-8 (No. 333-21701) pertaining to the 1996 Employee Stock
Purchase Plan and Non-Qualified Stock Option Agreements, the Registration
Statement on Form S-3 (No. 333-06865) pertaining to the registration of
1,614,802 shares of common stock, the Registration Statement on Form S-3 (No.
333-14483) pertaining to the registration of 1,125,580 shares of common
stock, the Registration Statement on Form S-3 (No. 333-21117) pertaining to
the registration of 493,895 shares of common stock, the Registration
Statement on Form S-4 (No. 333-18575) pertaining to the registration of
5,000,000 shares of common stock and $5,000,000 of debt securities of
Children's Broadcasting Corporation of our report dated February 28, 1997,
except for Note 8 which is dated March 27, 1997, with respect to the
consolidated financial statements included in the Annual Report (Form 10-KSB)
for the year ended December 31, 1996.
/s/ BDO Seidman, LLP
Milwaukee, Wisconsin
March 27, 1997
185
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,370,038
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<RECEIVABLES> 1,589,680
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0
0
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</TABLE>
