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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarterly period ended September 30, 1997 or
------------------
[ ] Transition report under to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition period from to
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Commission File No. 0-21534
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Children's Broadcasting Corporation
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(Exact name of small business issuer as specified in its charter)
Minnesota 41-1663712
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
724 First Street North-4th Floor, Minneapolis, MN 55401
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(Address of principal executive office, including zip code)
(612) 338-3300
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Issuer's telephone number, including area code
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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As of November 11, 1997, there were outstanding 6,402,891 shares of
common stock, $.02 par value, of the registrant.
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INDEX
CHILDREN'S BROADCASTING CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- September 30, 1997 and December 31, 1996.
Consolidated Statements of Operations -- Three and nine months ended
September 30, 1997 and 1996.
Consolidated Statements of Cash Flows -- Nine months ended September 30,
1997 and 1996.
Notes to consolidated financial statements -- September 30, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
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PART I.FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31
1997 1996
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ASSETS
Current assets:
Cash and Cash Equivalents $ 1,710,253 $ 3,370,038
Accounts Receivable 1,786,805 1,589,680
Allowance For Bad Debts (92,893) (93,500)
Prepaid Expenses 258,255 190,398
Trade Activity, Net 7,236 37,612
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TOTAL CURRENT ASSETS 3,669,656 5,094,228
Property & Equipment, Net 4,822,167 4,274,931
Broadcast Licenses, Net 19,781,224 16,724,653
Investment in Harmony 6,511,068 -
Intangible Assets, Net 3,012,326 2,513,539
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TOTAL ASSETS $ 37,796,441 $ 28,607,351
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LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 1,824,782 $ 1,266,492
Accrued Interest 181,130 84,146
Other Accrued Expenses 602,332 1,000,194
Escrow Payment Payable 796,000 -
Line of Credit 346,630 164,162
Short-Term Debt - Directors and Shareholders 1,250,000 -
Long-Term Debt - Current Portion 20,265,292 8,033,758
Obligation Under Capital Lease - Current
Portion 26,352 34,705
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TOTAL CURRENT LIABILITIES 25,292,518 10,583,457
Long-Term Debt - Net of Current Portions 2,589,008 1,365,992
Obligation Under Capital Lease 55,732 70,790
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TOTAL LIABILITIES 27,937,258 12,020,239
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Shareholders' Equity:
Common Stock, $.02 Par Value:
Authorized shares - 50,000,000
Issued and outstanding shares - Voting:
6,213,850 -- 1997 and 5,609,239 -- 1996;
Issued and Outstaning Shares - 189,041
nonvoting - 1997 and 1996 128,058 115,966
Additional Paid-In Capital 45,194,033 42,775,092
Stock Subscription Receivable (400,000) -
Accumulated Deficit (35,062,908) (26,303,946)
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TOTAL SHAREHOLDERS' EQUITY 9,859,183 16,587,112
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 37,796,441 $ 28,607,351
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CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
1997 1996 1997 1996
RESTATED RESTATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Owned, Operated and LMA Stations $ 1,069,321 $ 957,596 $ 3,122,036 $ 2,898,254
Network 612,125 427,425 1,127,043 1,034,257
----------- ----------- ----------- -----------
REVENUES $ 1,681,446 $ 1,385,021 4,249,079 3,932,511
OPERATING EXPENSES:
Owned, Operated and LMA Stations:
General and Administrative 747,702 599,946 2,276,826 1,594,158
Technical and Programming 293,805 259,711 837,687 681,586
Selling 317,780 391,169 1,214,378 1,073,338
----------- ----------- ----------- -----------
1,359,287 1,250,826 4,328,892 3,349,082
Network:
General and Administrative 134,390 238,508 429,415 686,648
Programming 236,230 220,140 663,141 651,267
Selling 366,158 268,249 1,315,484 696,319
Marketing (6,060) 60,030 144,996 303,979
Magazine - - - 125,542
----------- ----------- ----------- -----------
730,718 786,927 2,553,036 2,463,755
Corporate 1,149,382 446,118 3,140,578 1,403,007
Depreciation & Amortization 549,770 483,061 1,552,805 1,574,146
Write off of Deferred Warrant Expenses - - - 1,662,378
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 3,789,157 2,966,932 11,575,311 10,452,368
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (2,107,711) (1,581,911) (7,326,232) (6,519,857)
Interest (Expense) Net of Interest Income (546,395) 144,794 (1,263,599) (161,923)
Equity Income/(Loss) in Harmony (169,132) - (169,132) -
NET LOSS ($2,823,238) ($1,437,117) ($8,758,963) ($6,681,780)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER SHARE ($0.44) ($0.26) ($1.43) ($1.38)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 6,384,500 5,646,000 6,142,500 4,940,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
4
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CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($8,758,963) ($6,681,780)
Adjustments to Reconcile Net Loss to Net
Cash Used In Operating Activities:
Depreciation & Amortization 1,552,805 1,574,146
Loss/(Income) In Equity Basis Investee 169,132 -
Amortization and Write off of Deferred Warrant Expense - 1,978,890
Trade Activity 30,376 (93,059)
Interest Expense on Bridge Loan Warrants - 309,251
Interest Expense on Seller Note Payable 81,113 -
Decrease (Increase) in:
Accounts Receivable (197,732) (511,585)
Prepaid Expenses (48,663) 430,971
Inventory - (4,839)
Increase (Decrease) in:
Accounts Payable 769,474 (61,775)
Accrued Interest 96,984 (299,745)
Other Accrued Expenses (397,862) 2,489
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NET CASH USED IN OPERATIONS (6,703,336) (3,357,036)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Sale/Purchase of Property & Equipment (693,634) (1,313,760)
Sale/Purchase of Intangible Assets (2,086,582) (10,430,304)
Investment in Harmony Holdings (5,636,700) -
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NET CASH USED IN INVESTING ACTIVITIES (8,416,916) (11,744,064)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(Decrease) of Line of Credit 182,468 -
Payment of Capital Lease Obligation (23,411) (73,607)
Payment of Debt (352,663) (5,654,135)
Proceeds from Debt Financings 13,538,454 900,000
Proceeds from Issuance of Common Stock 115,619 20,227,075
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NET CASH PROVIDED BY FINANCING ACTIVITIES 13,460,467 15,399,333
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Increase/(Decrease) in Cash (1,659,785) 298,233
Cash - Beginning of Period 3,370,038 587,292
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CASH - END OF PERIOD $1,710,253 $ 885,525
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Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest $1,240,315 $ 548,544
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</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 1997:
The Company recognized revenues of $577,901 and expenses of $608,277 through
barter activity.
In connection with the purchase of a radio broadcast license and certain
other assets in the Chicago market, the Company issued a note payable to the
seller of $1,400,000 and a non-competition agreement of $320,495 (see Note A).
The Company issued 65,377 shares of common stock to satisfy $201,735 of
principal and $100,307 of interest due through November 1997 on the note
payable described above (see Note A).
The Company's litigation attorneys sold 38,776 shares of common stock valued
at $211,184 in payment of attorney fees related to the ABC/Disney litigation
(see Note C).
The Company issued 82,051 shares of common stock valued at $400,000 related
to the acquisition of a radio broadcast license and certain other assets in
Tulsa (see note B).
The Company issued 37,500 shares of common stock valued at $154,688 for a
payment of fees in relation to securing financing from Foothill Capital
Corporation (see Note D).
The Company issued 268,607 shares of common stock valued at $1,000,000
related to the acquisition of a radio broadcast license and certain other
assets in Phoenix (see Note E).
In connection with its investment in Harmony Holdings, Inc. (Harmony), the
Company issued 60,000 shares of common stock valued at $247,500 to an
individual director of Harmony. Additionally, a portion of the Harmony escrow
payment remained payable at September 30, 1997 totaling $796,000 (see Note H).
5
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CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation SB. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals with the exception
of the adjustments discussed in Note 2) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-KSB for the year ended December 31,
1996.
NOTE 2--SIGNIFICANT TRANSACTIONS DURING 1997
The following significant transactions occurred during the first nine months
of 1997 and are considered non-recurring:
A. In January 1997, the Company purchased the radio broadcast license and
certain other assets of radio station WAUR-AM in the Chicago market. The
consideration for the acquisition aggregated $3,900,000 consisting of
cash payments totaling $2,000,000, a $1,400,000 note payable over six
years bearing an interest rate of prime plus one percent per annum 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. Additionally, in March 1997, the
Company issued 65,377 shares of common stock valued at $302,042 to
satisfy $201,735 of principal and $100,307 of interest due through
November 1997 on the note payable. The Company has the option of paying
the $1,400,000 note in either stock or cash.
B. 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 in the Tulsa market 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 (11.25% at September 30, 1997). The Company expects that
the seller will satisfy the subscription note receivable through transfer
of the station assets pursuant to the aforementioned
6
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asset purchase agreement during the final quarter of 1997.
C. The Company issued 200,000 shares of its common stock to
its litigation counsel in connection with the ABC/Disney litigation. The
Company also registered such shares for resale. A number of these shares
have been sold by the litigation counsel to satisfy a portion of this
litigation expense.
D. In March 1997, the Company issued 37,500 shares of common stock to
Southcoast Capital in consideration for their part in securing the
financing agreement the Company entered into with Foothill Capital
Corporation.
E. In May 1997, the Company purchased the radio broadcast license and
certain other related assets of radio station KIDR-AM in the Phoenix
market. Consideration for the acquisition consisted of the issuance of
268,607 shares of the Company's common stock valued at $1,000,000.
F. In July 1997, the Company signed a definitive purchase agreement (the
"Agreement") to sell all of its owned and operated AM radio stations to
Global Broadcasting Company, Inc. ("Global") for the aggregate sale price
of $72,500,000 (the "Transaction"). Such purchase agreement calls for a
total of $3,500,000 to be deposited into escrow prior to closing. The
purchaser satisfied the escrow requirement in the form of a note secured
by certain assets of Global. The Company estimates that after deducting
expenses of the Transaction, taxes and repayment of indebtedness, it
will have approximately $47,000,000 of net assets, of which approximately
$37,000,000 will be cash. The sale is subject to shareholder approval and
customary closing conditions including, but not limited to, approval of
the Federal Communications Commission.
On November 11, 1997, Global delivered to the Company evidence of the
commitments by its lender to finance the Transaction. Global and the
Company had entered into an agreement whereby Global was required to
produce such evidence by such date or replace the escrow note with cash.
Had such steps not been taken, the Agreement's "no-shop" provision would
have been automatically amended to allow the Company to solicit contingent
transactions.
The Transaction is expected to close in the first quarter of 1998. Upon
completion of the Transaction, the Company expects that it will report a
significant taxable gain and anticipates recognizing a related benefit
from the utilization of its net operating loss carryforwards. This benefit,
estimated to be approximately $8,100,000 as of December 31, 1996,
continues to be subject to a full valuation allowance as of this interim
date.
G. In July 1997, the Company entered into an amended and restated loan and
security agreement (the "Loan Agreement") with Foothill Capital
Corporation ("Foothill"). Pursuant to the
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Loan Agreement, Foothill advanced the Company an additional $5,400,000
($2,400,000 of which was advanced in late June and $3,000,000 was
advanced in July) at the existing interest rate of 2.75% above prime.
Also pursuant to the Loan Agreement, the Company issued Foothill a
warrant to purchase 100,000 shares of its common stock at a purchase
price of $5.29 per share. In September 1997, the Company executed an
amendment to the Loan Agreement pursuant to which Foothill agreed to
advance the Company another $5,800,000. Of this advance, the Company
received $3,600,000 in September, and the remaining $2,200,000 in
October. Repayment of the loan is scheduled to begin March 1998.
H. In July 1997, the Company acquired an equity interest in Harmony
Holdings, Inc. ("Harmony") by purchasing 1,369,231 shares of Harmony's
common stock and options to acquire an additional 550,000 shares of
Harmony's common stock exercisable at $1.50 per share. Consideration for
the acquisition aggregated $4,007,500, consisting of cash payments
totaling $3,760,000 and 60,000 shares of the Company's common stock valued
at $247,500. Of such cash consideration, (i) $1,250,000 was obtained
from three individual lenders, two of which are directors of the Company
and the third is a less than five percent shareholder of the Company,
evidenced by notes bearing interest rates of 10% per annum, payable in
July 1998, (ii) $2,400,000 was obtained pursuant to the Loan Agreement
with Foothill and (iii) $110,000 originated from the Company's working
capital. In September 1997, the Company purchased an additional 786,686
shares of Harmony's common stock and options to acquire an additional
200,000 shares of Harmony's common stock exercisable at $1.50 per share.
Consideration for the acquisition was $2,614,052 in cash obtained through
the amended Loan Agreement with Foothill. Payment of $1,818,000 was made in
September 1997 and the remaining $796,000 was paid on October 6, 1997.
The Company's investment represented 33.9% of the outstanding common stock
of Harmony at September 30, 1997 (40.7% assuming the Company's options
were exercised). The aggregate purchase price paid of $6,680,200
(including transaction costs totaling $58,648) includes $4,370,000 in
excess of the Company's prorata share of the fair market value of
Harmony's net tangible assets. This excess purchase price relates to
Harmony's intangible asset value, principally technical know-how, industry
reputation and customer lists, and is being amortized on a straight line
basis over a seven year estimated useful life.
Harmony's operation and the Company's equity in the earnings (loss) of
Harmony are summarized as follows for the three months ended September
30, 1997:
Contract Revenues $11,379,000
8
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Cost of Production 9,123,000
-----------
Gross Profit 2,256,000
Operating Expenses 2,826,000
-----------
Loss from Operations (570,000)
Interest Income 16,000
-----------
Loss Before Income Taxes (554,000)
Income Taxes 43,000
-----------
Net Loss (597,000)
-----------
-----------
Company's Prorata Share of
Harmony's Net Loss 98,407
Amortization Expense for the
Excess of the Investment Cost Over
the Underlying Net Assets of Harmony 70,725
-----------
Company's Equity Loss in Harmony $ 169,132
-----------
-----------
The consolidated balance sheet of Harmony is summarized as follows as of
September 30, 1997:
Current Assets $ 7,275,000
Non-Current Assets 4,857,000
-----------
Total Assets $12,132,000
-----------
-----------
Current Liabilities $ 5,535,000
Stockholders' Equity 6,597,000
-----------
Total Liabilities and Stockholders' Equity $12,132,000
-----------
-----------
I. On October 31, 1997, the Company notified its affiliate radio stations
that it would cease producing and distributing its full-time Aahs World
Radio-SM- programming format as of midnight January 30, 1998. Concurrent
with the announcement of this termination of network affiliation
agreements and the cessation of full-time network programming, the
Company initiated certain reductions in its workforce related to the
operation of the network. The Company plans to retain members of the Aahs
World Radio
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creative staff and intends to continue to explore other methods of
distribution of audio programming such as SDARS (Satellite Digital Audio
Radio Service), and also to develop and enhance its Internet website
real-time audio presence and other programming products including
syndicated programs.
NOTE 3--RESTATEMENT OF PRIOR YEAR'S INTERIM FINANCIAL STATEMENTS
The Company has restated its net loss per share and weighted average number
of shares outstanding for the three and nine months ended September 30, 1996.
The effect of the restatement is as follows:
Three Months Ended September 30, 1996
-------------------------------------
As Previously As
Reported Restated
--------- ----------
Net loss per share ( $0.33) ( $0.26)
--------- ----------
Weighted average number
of shares outstanding 4,470,500 5,646,000
--------- ----------
Nine Months Ended September 30, 1996
------------------------------------
As Previously As
Reported Restated
--------- ----------
Net loss per share ( $1.52) ( $1.38)
--------- ----------
Weighted average number
of shares outstanding 4,470,500 4,940,000
--------- ----------
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ITEM 2.
This discussion and analysis contains certain forward-looking terminology
such as "believes," "expects," "anticipates," 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. Please refer to
the Company's annual report on Form 10-KSB for the fiscal year ended December
31, 1996 for additional factors known to the Company that may cause actual
results to vary.
GENERAL
The Company developed a radio programming format, Aahs World Radio(sm),
designed and directed toward pre-teen children and their parents. The
Company developed 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 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.
In July 1997, the Company signed a definitive purchase agreement to sell
all of its owned and operated AM radio stations including such stations'
radio broadcast licenses and certain other related assets. The transaction
is expected to be completed in the first quarter of 1998.
On October 31, 1997, the Company notified its affiliated radio stations
that it would cease producing and distributing its full-time Aahs World Radio
programming format as of midnight January 30, 1998. Concurrent with the
termination of network affiliation agreements and the cessation of full-time
network programming, the Company also began to effect certain reductions in
its workforce related to the operation of the network. The Company plans to
retain members of the Aahs World Radio creative staff and intends to continue
to explore other methods of distribution of audio programming such as SDARS
(Satellite Digital Audio Radio Service), and also to develop and enhance its
Internet website real-time audio presence and other programming products
including syndicated programs.
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
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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.
RESULTS OF OPERATIONS:
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996.
REVENUE:
Owned, Operated and LMA Station Revenues:
Total revenues from the Company's owned, operated and LMA stations
increased 12% from $958,000 in the third quarter of 1996 to $1,069,000 for
the same period in 1997. Revenues during the first three quarters of 1997
increased 8% from $2,898,000 during the first three quarters of 1996 to
$3,122,000. Cash revenues from the Company's properties acquired during or
after the first three quarters of 1996 accounted for an increase of $550,000
while cash revenue for the previously existing properties decreased $340,000.
Trade/Barter revenues increased $14,000 in the first three quarters of 1997
compared to the first three quarters of 1996.
Network:
Total revenues of $612,000 were produced by the network during the
third quarter of 1997, an increase of $185,000 or 43% compared to the third
quarter of 1996. Revenues for the first three quarters of 1997 increased
$93,000 or 9% to compared to the same period in 1996. This increase in
network revenues in 1997 was due in part to the rehiring of a national sales
staff after the cancellation of the ABC/Disney joint operations agreement in
the last half of 1996. Additionally, the Company increased its national
market coverage from 32.9% at September 30, 1996 to 37.2% at September 30,
1997. Subsequently, the Company notified its affiliated radio stations that
it would cease distributing its full-time Aahs World Radio programming format
as of midnight January 30, 1998.
OPERATING EXPENSES:
Owned, Operated and LMA Station Expenses:
General and administrative expenses increased 25% to $748,000 for
the third quarter of 1997 from $600,000 in the same period of 1996. These
expenses increased $683,000 or 43% for the first nine months of 1997 compared
to the same period in 1996. Of this increase, $463,000 was related to the
properties acquired during or after the first three quarters of 1996 and an
increase of $28,000 was related to trade/barter activity at all the stations.
At previously existing properties, compensation increased $107,000, property
taxes increased $17,000, legal fees increased $14,000, utilities and
telephone expenses increased $13,000 and billboard expense increased $51,000.
At the same time, rental expenses
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decreased $11,000 and travel and lodging expenses decreased $10,000.
Technical and programming expenses increased to $294,000 in the
third quarter of 1997 from $260,000 during the same period in 1996. During
the first nine months of 1997, these expenses increased 23% over the same
period in 1996. This increase can be directly attributed to the acquisition
of radio broadcast licenses and related assets during or after the first
three quarters of 1996.
Sales expenses were $318,000 in the third quarter of 1997 compared
to $391,000 in the third quarter 1996. Sales expense for the first three
quarters of 1997 increased 13% from $1,073,000 in 1996 to $1,214,000 in 1997.
An increase of $237,000 was related to the properties acquired during or
after the first nine months of 1996 and an increase of $112,000 was related
to trade/barter activity at all the stations. The stations which the Company
operated for the full nine months of both 1996 and 1997 experienced a
decrease in sales personnel compensation of $239,000 due to the elimination
of members of the sales staff, and an increase in promotion and advertising
expense of $32,000.
Network Expenses:
General and administrative expenses decreased $105,000 in the third
quarter of 1997 to $134,000 as compared to $239,000 for the third quarter of
1996. These expenses decreased 37% during the first nine months of 1997
compared to the same period in 1996, primarily due to the elimination of the
monthly fee related to the joint operations agreement with ABC/Disney which
has since been terminated.
Programming expenses increased $16,000 to $236,000 in the third
quarter of 1997 compared to $220,000 in the same period of 1996, and
increased $12,000 to $663,000 during the first nine months of 1997 from
$651,000 during the first nine months of 1996. Although program and material
expenses decreased $29,000, compensation expense and line charges increased a
total of $41,000.
Sales expenses increased 37% from $268,000 during the third quarter
of 1996 to $366,000 during the same period of 1997. Sales expenses increased
89% from $696,000 during the first nine months of 1996 to $1,315,000 during
the same period of 1997. These sales expenses are related to both
advertising sales and affiliate relations sales. Expenses increased as
the Company rebuilt its advertising sales staff, providing supplemental
training, and increasing travel. Additionally, in the last quarter of 1996,
the network implemented a sales development team to assist the newly acquired
owned and operated stations in their sales efforts.
Marketing expenses decreased $66,000 during the third
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quarter of 1997 compared to the same period of 1996. During the first nine
months of 1997, marketing expenses decreased $159,000 or 52% compared to the
same period of 1996. During the first nine months of 1997, activities in
this category included advertising, research and promotion.
Corporate charges were $1,149,000 in the third quarter of 1997
compared to $446,000 in the third quarter of 1996, representing an increase
of 158%. Corporate charges increased 124% in the first nine months of 1997
compared to the same period in 1996. This increase is attributable to an
increase in outside service fees including $305,000 of legal and accounting
fees related to stock, trademark, employee matters, SEC filings and audits
and $225,000 of management fees. Additionally, during the first nine months
of 1997, the Company incurred $1,194,000 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 issued 200,000
shares of its common stock to its litigation counsel in connection with this
litigation. The Company also registered such shares for resale and, as of
September 30, 1997, a number of shares had been sold by the litigation
counsel to satisfy a portion of this expense.
Depreciation and amortization increased to $550,000 in the third
quarter of 1997 from $483,000 in the third quarter of 1996. For the first
nine months, depreciation and amortization of $1,553,000 was $21,000 or 1%
lower than the same period in 1996. No amortization of deferred expenses was
recorded in 1997 due to the cancellation of the ABC/Disney warrant, the value
of which had been amortized during the first half 1996. Depreciation and
amortization expense, exclusive of the ABC/Disney warrant, increased $579,000
in the first nine months of 1997 as compared to the same period of 1996, due
to the acquisition of radio broadcast licenses and certain other assets
during and after the first nine months of 1996.
Net interest expense for the third quarter of 1997 was $546,000, an
increase of $691,000 over the third quarter of 1996. Net interest expense
for the first nine months of 1997 increased from $162,000 to $1,264,000, due
to the additional interest incurred related to the 1997 Foothill financings.
The net loss increased 96% in the third quarter of 1997 to
$2,823,000 from $1,437,000 in the third quarter of 1996. For the first nine
months, net loss of $8,759,000 was 31% higher than the same period in 1996.
The Company expects to incur operating losses throughout 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its working capital,
14
<PAGE>
was a negative $21,623,000 at September 30, 1997 compared to negative working
capital of $5,489,000 at December 31, 1996. A portion of the Company's
negative net working capital position through the third quarter of 1997 was
the result of the reclassification of the long-term portion of the Foothill
Term Loan as the Company did not meet certain restrictive financial covenants
contained in its Loan Agreement with Foothill as of December 31, 1996 and
September 30, 1997. The failure to meet these covenants was principally due
to the Company's continued operating losses. Foothill waived its rights
pursuant to the December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997 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 if 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 September 30,
1997, aggregating $19,950,000, have been entirely classified as current
obligations, even though $7,500,000 of this amount is not scheduled to be
repaid until after September 30, 1998. Exclusive of this reclassification,
the Company's net working capital decreased $14,987,000 from $864,000 at
December 31, 1996 to a deficit of $14,123,000 at September 30, 1997. This
decrease was primarily the result of the Company's use of cash to purchase a
radio broadcast license and certain other assets in the Chicago market and
the debt associated with that purchase (see Note A), the purchase of a 40.7%
interest in Harmony (see Note H), as well as the increase in debt resulting
from the Loan Agreement with Foothill (see Note G).
The Company has experienced and continues to experience a cash working
capital loss of approximately $700,000 per month. While the pending sale by
the Company of all of its stations is expected to adversely impact future
revenue, the Company has formulated plans to decrease its expenses to offset
a loss of revenue. Additionally, on October 31, 1997, the Company notified
its affiliated radio stations that it would cease producing and distributing
its full-time Aahs World Radio programming format as of midnight January 30,
1998. Concurrent with the announcement of this termination of network
affiliation agreements and the notice of cessation of full-time network
programming, the Company initiated certain reductions in its workforce
related to the operation of the network. 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 sale of the
Company's radio station assets is expected to provide the Company with
sufficient working capital to meet its cash requirements. If the planned
sale of the stations is delayed or does not occur, the Company believes it
will need to obtain additional financing in 1998. The Company believes that
the financing it received from Foothill will be sufficient to operate the
Company through January
15
<PAGE>
1998, at which time the Company intends to use the proceeds of the
Transaction to satisfy the Foothill indebtedness. Because the Foothill
financings require the Company to grant liens and security interests on
substantially all of the assets of the Company, this financing may limit the
Company's ability to incur additional indebtedness in the event that the
transaction does not close. If the Company does not close the Transaction
and is not able to obtain adequate financing or financings on acceptable
terms, it could (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 may be materially adverse to the Company's operations
and prospects.
Consolidated cash was $1,710,000 at September 30, 1997 and $3,370,000 at
December 31, 1996, a decrease of $1,660,000.
Accounts receivable at September 30, 1997 increased $198,000 from
December 31, 1996 and prepaid expenses at June 30, 1997 increased $68,000
from December 31, 1996. Accounts payable at September 30, 1997 increased
$558,000 from December 31, 1996, accrued interest increased $97,000 from
December 31, 1996 to September 30, 1997, and other accrued expenses decreased
$398,000 during that same period. The $6,703,000 cash used for operations
was provided by the proceeds received in the amended Loan Agreement with
Foothill.
During the first nine months of 1997, $8,417,000 of cash was used for
investing activities. This cash was used primarily to purchase a radio
broadcast license and certain other related assets in the Chicago market and
a 40.7% equity interest in Harmony Holdings, Inc.
Cash obtained through financing activities amounted to $13,460,000 during
the first nine months of 1997. This cash represents the proceeds received
from the release of the $4,000,000 holdback from Foothill, an additional
$8,250,000 obtained from Foothill pursuant to the amended Loan Agreement and
the use of the line of credit related to the Foothill financing, and the
$1,250,000 loan from two of the Company's directors and a shareholder to
finance a portion of the Harmony transactions, 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.
PART II. OTHER INFORMATION
ITEM 1. THROUGH 5.
16
<PAGE>
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 FINANCIAL DATA SCHEDULE
(b) The Company filed the following documents with the Commission
(File No. 0-21534) during the quarter for which this report is
filed:
(1) The Company's Current Report on Form 8-K filed on July 18,
1997, relating to the Company signing a definitive asset
purchase agreement with Global Broadcasting Company, Inc.
for the sale of all of the Company's AM radio broadcast
licenses and certain other broadcasting equipment for $72.5
million.
(2) The Company's Current Report on Form 8-K filed on August 1,
1997, relating to the Company acquiring a 27.4% beneficial
interest in Harmony Holdings, Inc.
(3) The Company's Current Report on Form 8-K filed on September
30, 1997, and amended by Form 8-K/A filed on October 1,
1997, relating to the Company acquiring a 40.7% beneficial
interest in Harmony Holdings, Inc.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 14, 1997.
CHILDREN'S BROADCASTING
CORPORATION
By: /s/ James G. Gilbertson
-----------------------------
Treasurer (Chief Operating
Officer and Chief Financial
Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,710,253
<SECURITIES> 0
<RECEIVABLES> 1,786,805
<ALLOWANCES> 92,893
<INVENTORY> 0
<CURRENT-ASSETS> 3,669,656
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,796,441
<CURRENT-LIABILITIES> 25,292,518
<BONDS> 0
0
0
<COMMON> 128,058
<OTHER-SE> 9,731,125
<TOTAL-LIABILITY-AND-EQUITY> 37,796,441
<SALES> 1,681,446
<TOTAL-REVENUES> 1,681,446
<CGS> 0
<TOTAL-COSTS> 3,789,157
<OTHER-EXPENSES> 715,527
<LOSS-PROVISION> 92,893
<INTEREST-EXPENSE> 546,395
<INCOME-PRETAX> (2,823,238)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,823,238)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> 0
</TABLE>
