<PAGE>
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 June 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 _________
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 August 8, 1997, there were outstanding 6,342,891 shares of common
stock, $.02 par value, of the registrant.
<PAGE>
INDEX
CHILDREN'S BROADCASTING CORPORATION
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- June 30, 1997 and December
31, 1996.
Consolidated Statements of Operations -- Three and six months
ended June 30, 1997 and 1996.
Consolidated Statements of Cash Flows -- Six months ended June
30, 1997 and 1996.
Notes to consolidated financial statements -- June 30, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
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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
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Children's Broadcasting Corporation
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
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<S> <C> <C>
Assets
Current assets:
Cash and Cash Equivalents $2,693,054 $3,370,038
Accounts Receivable 1,667,150 1,589,680
Allowance For Bad Debts (119,651) (93,500)
Prepaid Expenses 390,365 190,398
Trade Activity, Net (14,519) 37,612
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Total Current Assets 4,616,399 5,094,228
Property & Equipment, Net 4,851,788 4,274,931
Broadcast Licenses, Net 20,042,948 16,724,653
Intangible Assets, Net 2,796,073 2,513,539
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Total Assets $32,307,208 $28,607,351
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----------- -----------
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts Payable $1,667,222 $1,266,492
Accrued Interest 124,453 84,146
Other Accrued Expenses 916,391 1,000,194
Line of Credit 506,006 164,162
Long-Term Debt - Current Portion 13,944,834 8,033,758
Obligation Under Capital Lease - Current Portion 29,140 34,705
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Total Current Liabilities 17,188,046 10,583,457
Long-Term Debt - Net of Current Portions 2,676,596 1,365,992
Obligation Under Capital Lease 62,646 70,790
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Total Liabilities 19,927,288 12,020,239
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Shareholders' Equity:
Common Stock, $.02 Par Value:
Authorized shares - 50,000,000
Issued & outstanding shares - Voting: 6,128,850
1997 and 5,440,817-- 1996;
Issued and Outstaning Shares - 189,041 nonvoting -
1997 and 1996 126,358 115,966
Additional Paid-In Capital 44,893,233 42,775,092
Stock Subscription Receivable (400,000) -
Accumulated Deficit (32,239,671) (26,303,946)
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Total Shareholders' Equity 12,379,920 16,587,112
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Total Liabilities & Shareholders' Equity $32,307,208 $28,607,351
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</TABLE>
<PAGE>
Children's Broadcasting Corporation
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1997 1996 1997 1996
Restated Restated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Owned, Operated and LMA Stations $1,108,460 $1,082,178 $2,052,715 $1,940,658
Network 308,452 249,289 514,918 606,832
----------- ----------- ----------- -----------
Revenues $1,416,912 $1,331,467 2,567,633 2,547,490
Operating Expenses:
Owned, Operated and LMA Stations:
General and Administrative 771,485 524,774 1,529,125 994,212
Technical and Programming 303,609 222,073 543,882 421,875
Selling 555,083 341,642 896,598 682,169
----------- ----------- ----------- -----------
1,630,177 1,088,489 2,969,605 2,098,256
Network:
General and Administrative 144,205 222,156 295,025 448,140
Programming 219,931 212,997 426,911 431,127
Selling 494,738 215,279 949,326 428,070
Marketing 31,816 123,718 151,056 243,949
Magazine - 62,396 - 125,541
----------- ----------- ----------- -----------
890,690 836,546 1,822,318 1,676,827
Corporate 1,103,896 514,712 1,991,196 956,889
Depreciation & Amortization 544,472 559,320 1,003,035 1,091,085
Write off of Deferred Warrant Expenses - 1,662,378 - 1,662,378
----------- ----------- ----------- -----------
Total Operating Expenses 4,169,235 4,661,445 7,786,154 7,485,435
Loss From Operations (2,752,323) (3,329,978) (5,218,521) (4,937,945)
Interest Expense (Net of Interest Income) 403,208 38,811 717,204 306,717
Net Loss ($3,155,531) ($3,368,789) ($5,935,725) ($5,244,662)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
($0.51) ($0.63) ($0.99) ($1.16)
Net Loss Per Share
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted Average Number of Shares Outstanding 6,133,000 5,427,000 6,019,500 4,583,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
Children's Broadcasting Corporation
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Amended
Six Months Ended
June 30
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1997 1996
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<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss ($5,935,725) ($5,244,662)
Adjustments to Reconcile Net Loss to Net
Cash Used In Operating Activities:
Depreciation & Amortization 1,003,035 1,091,085
Amortization and Write off of Deferred Warrant Expense - 1,971,629
Trade Activity 52,131 (144,785)
Interest Expense on Seller Note Payable 51,619
Decrease (Increase) in:
Accounts Receivable (51,319) (132,343)
Prepaid Expenses (151,280) 338,133
Inventory - (3,214)
Increase (Decrease) in:
Accounts Payable 611,914 (234,372)
Accrued Interest 40,307 (251,969)
Other Accrued Expenses (83,803) (91,129)
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Net Cash Used in Operations (4,463,121) (2,701,627)
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Cash Flows from Investing Activities:
Sale/Purchase of Property & Equipment (533,398) (675,866)
Sale/Purchase of Intangible Assets (1,772,140) (8,538,434)
----------- -----------
Net Cash Used in Investing Activities (2,305,538) (9,214,300)
----------- -----------
Cash Flows from Financing Activities:
Increase/(Decrease) of Line of Credit 341,844 -
Payment of Capital Lease Obligation (13,709) (69,307)
Payment of Debt (312,079) (4,811,139)
Proceeds from Debt Financings 6,015,000 900,000
Proceeds from Issuance of Common Stock 60,619 19,850,826
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Net Cash Provided by Financing Activities 6,091,675 15,870,380
----------- -----------
Increase/(Decrease) in Cash (676,984) 3,954,453
Cash - Beginning of Period 3,370,038 587,292
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Cash - End of Period $2,693,054 $4,541,745
----------- -----------
----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest $597,534 $500,046
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</TABLE>
Supplemental Disclosure of Noncash Investing and Financing Activities:
During the six months ended June 30, 1997:
The Company recognized revenues of $401,617 and expenses of $453,748
through barter activity.
In connection with the purchase of the 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 issued 38,776 shares of common stock valued at $211,184 for
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 the radio broadcast license and certain other assets
in Tulsa (see note B).
The Company issued 37,500 shares ofcommon stock valued at $154,688 for a
brokerage fee in relation to securing the 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 the radio broadcast license and certain other
assets in Phoenix (see Note E).
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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 six month period ended June 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 six 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 June 30, 1997). The Company expects that the
seller will satisfy the subscription note receivable through transfer
of the station assets pursuant to the aforementioned
<PAGE>
asset purchase agreement sometime in the second half of 1997.
C. In February and April 1997, the Company issued an aggregate of 38,776
shares of common stock valued at $211,184 to satisfy payment due for
attorney fees related to the ABC/Disney litigation.
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 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 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. 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 sale is subject to satisfactory completion of the
purchaser's due diligence, shareholder approvals, and customary closing
conditions including but not limited to approval of the Federal
Communications Commission. The transaction is expected to close by
February 1998. Upon completion of this transaction, the Company expects
that it will report a significant taxable gain and anticipates
recognizing the tax benefit from utilizing its net operating loss
carryforwards. This benefit, which will represent a reduction in the
taxes payable upon completion of the sale, is estimated to be
approximately $8,100,000 as of December 31, 1996 and continues to be
subject to a full valuation allowance as of this interim date due to
the uncertainity associated with the culmination of this transaction.
G. In July 1997, the Company entered into an amended and restated loan and
security agreement with Foothill Capital Corporation ("Foothill"). Per
the agreement, Foothill advanced the Company an additional $5,400,000
($2,400,000 of which was advanced in late June in anticipation of
successfully completing the agreement shortly thereafter) at the existing
interest rate of 2.75% above prime. Pursuant to the 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. Repayment of the
loan is scheduled to begin January 1, 1998.
H. In July 1997, the Company acquired an equity interest in Harmony
Holdings, Inc. ("Harmony") by purchasing 1,369,231
<PAGE>
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, $1,250,000 was
obtained from individual lenders, evidenced by notes bearing interest
rates of 10% per annum, payable in July 1998, $2,400,000 was obtained
pursuant to the amended and restated loan and security agreement with
Foothill and $110,000 originated from the Company's working capital.
NOTE 3--RESTATEMENT OF PRIOR YEAR'S INTERIM FINANCIAL STATEMENTS
The Company has restated the net loss per share and weighted average number of
shares outstanding for the three and six months ended June 30, 1996. The effect
of the restatement is as follows:
Three Months Ended June 30, 1996
--------------------------------
As Previously As
Reported Restated
---------------- ------------
Net loss per share ($0.91) ($0.63)
--------- ---------
Weighted average number
of shares outstanding 3,736,000 5,427,000
--------- ---------
Six Months Ended June 30, 1996
--------------------------------
As Previously As
Reported Restated
---------------- ------------
Net loss per share ($1.43) ($1.16)
--------- ---------
Weighted average number
of shares outstanding 3,736,000 4,583,000
--------- ---------
<PAGE>
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 has developed a radio programming format, Aahs World
Radio(sm), designed and directed toward pre-teen children and their parents.
The Company has 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, 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.
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 assets. The transaction is expected to be
completed by February 1998. The Company's business plan following the sale of
such assets is to continue creating and distributing children's programming
content responsive to today's pre-teens and their parents. The Company intends
to develop ancillary audio streams for Aahs programming and to continue to serve
its network affiliates.
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.
RESULTS OF OPERATIONS:
<PAGE>
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTHS
ENDED 30, 1996.
REVENUE:
Owned, Operated and LMA Station Revenues:
Total revenues from the Company's owned, operated and LMA stations
increased 2% from $1,082,000 in the second quarter of 1996 to $1,108,000 for the
same period in 1997. Revenues during the first half of 1997 increased 6% from
$1,941,000 in 1996 to $2,053,000 in the same period of 1997. Cash revenues from
the Company's properties acquired during or after the first half of 1996
accounted for an increase of $297,000 while cash revenue for the previously
existing properties decreased $209,000. Trade/Barter revenues increased $24,000
in the first half of 1997 compared to the first half of 1996.
Network:
Total revenues of $308,000 were produced by the network during the
second quarter of 1997, an increase of $59,000 or 24% compared to the second
quarter of 1996. Revenues for the first half of 1997 decreased $92,000 or 15%
to compared to the same period in 1996. This decrease in network revenues in
the first half of 1997 was due in part to the down time experienced as the
Company began rebuilding its national sales department after the cancellation of
the ABC/Disney joint operations agreement in the last half of 1996. The Company
has rehired a national sales staff similar in size to its staff prior to the
ABC/Disney agreement.
OPERATING EXPENSES:
Owned, Operated and LMA Station Expenses:
General and administrative expenses increased 47% to $771,000 for the
second quarter of 1997 from $525,000 in the same period of 1996. These expenses
increased $535,000 or 54% for the first six months of 1997 compared to the same
period in 1996. Of this increase, $297,000 was related to the properties
acquired during or after the first half of 1996. At previously existing
properties, compensation increased $114,000, bad debt expense increased $56,000,
property taxes increased $14,000, utilities and telephone expenses increased
$15,000 and billboard expense increased $39,000.
Technical and programming expenses increased to $304,000 in the second
quarter of 1997 from $222,000 during the same period in 1996. During the first
six months of 1997, these expenses increased 29% 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 half of 1996.
Sales expenses were $555,000 in the second quarter of
<PAGE>
1997 compared to $342,000 in the second quarter 1996. Sales expense for the
first half of 1997 increased 31% from $682,000 in 1996 to $897,000 in 1997.
An increase of $143,000 was related to the properties acquired during or
after the first half of 1996 and an increase of $173,000 was related to
trade/barter activity at all the stations. The stations which the Company
operated for the full six months of both 1996 and 1997 experienced a decrease
in sales personnel compensation of $153,000 and an increase in promotion and
advertising expense of $52,000.
Network Expenses:
General and administrative expenses decreased $78,000 in the second
quarter of 1997 to $144,000 as compared to $222,000 for the second quarter of
1996. These expenses decreased 34% during the first six months of 1997 as
compared to the same period in 1996 primarily due to the elimination of the
monthly fee related to the joint operating agreement with ABC/Disney which has
since been terminated.
Programming expenses increased $7,000 to $220,000 in the second
quarter of 1997 compared to $213,000 in the same period of 1996, and decreased
$4,000 to $427,000 in the first six months of 1997 from $431,000 during the
first six months of 1996. The overall decrease was due to the elimination of
the line charges related to past programming.
Sales expenses increased 130% from $215,000 in the second quarter of
1996 to $495,000 in the same period of 1997. Sales expenses increased 122% from
$428,000 in during the first half of 1996 to $949,000 in the same period of
1997. These sales expenses relate to both advertising sales and affiliate
relations sales. Expenses have 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 which assists the newly acquired owned and operated stations in
their sales efforts.
Marketing expenses were $32,000 during the second quarter of 1997
compared to $124,000 in that same period in 1996, a decrease of 74%. During
the first six months of 1997, marketing expenses decreased $93,000 or 38%
compared to the same period of 1996. The Company began developing this
department in 1996 and although expenses have been about $20,000 per month
the Company anticipates expenses will increase to levels of approximately
$40,000 per month as it becomes fully operational. During the first half of
1997, activities in this category included advertising, research and
promotion.
Corporate charges were $1,104,000 in the second quarter of 1997
compared to $515,000 in the second quarter of 1996, representing an increase
of 114%. Corporate charges increased 108% in the first six months of 1997
compared to the same period in 1996. This increase is attributable to an
increase in outside
<PAGE>
service fees including $221,000 of legal and accounting fees related to
stock, trademark, employee matters, SEC filings and audits and $150,000 of
management fees. Additionally, during the first half of 1997, the Company
incurred $661,000 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 registered 200,000 shares of common
stock to be used to finance this litigation, of which 38,776 shares had been
issued as of June 30, 1997.
Depreciation and amortization decreased to $544,000 in the second
quarter of 1997 from $559,000 in the second quarter of 1996. For the first
six months, depreciation and amortization of $1,003,000 was $88,000 or 8%
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 $511,000
in the first six 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 half of 1996.
Net interest expense for the second quarter of 1997 was $403,000,
an increase of $364,000 over the second quarter of 1996. Net interest
expense for the first half of 1997 increased 134% from $307,000 to $717,000,
due to the additional interest incurred related to the Foothill Capital
Corporation ("Foothill") financing in 1997.
The net loss decreased 6% in the second quarter of 1997 to
$3,156,000 down $213,000 from the second quarter of 1996. For the first six
months, net loss of $5,936,000 was $691,000 or 13% higher than the same
period in 1996. Consistent with its business plan and network strategy, the
Company will seek to expand its coverage of the United States through
affiliation or potential acquisition of additional radio stations. The
Company recognizes the recent announcement to sell its owned and operated
stations may impact this plan, and will cause a decrease in coverage at the
time the stations are sold. The Company expects to incur operating losses
throughout 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its working capital, was a negative
$12,572,000 at June 30, 1997 compared to negative working capital of $5,489,000
at December 31, 1996. The Company's negative net working capital position
through the second 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 Credit Agreement with Foothill
as of December 31, 1996 and June 30, 1997. The failure to meet these covenants
was principally due to the Company's continued operating losses. Foothill
waived its rights
<PAGE>
pursuant to the December 31, 1996, March 31, 1997 and June 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 June 30, 1997, aggregating
$13,679,500, have been entirely classified as current obligations, even
though $7,299,500 of this amount is not scheduled to be repaid until after
June 30, 1998. The Company has discussed with Foothill past waivers and will
continue discussing the possibility of reviewing the covenant requirements in
an effort to avoid future violations. Exclusive of this reclassification, the
Company's net working capital decreased $6,136,000 from $864,000 at December
31, 1996 to a deficit of $5,272,000 at June 30, 1997. This decrease was 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), as well as the increase in debt resulting from the
amended and restated loan and security agreement with Foothill (see Note G).
At present, the Company has experienced a cash working capital loss of
approximately $500,000 per month. The Company 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. While the
pending sale by the Company of all of its stations may adversely impact future
revenue if consummated, the Company has formulated plans to decrease its
expenses to offset any possible loss of revenue. Such sale will, however,
provide the Company with sufficient working capital to meet its cash
requirements. 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 in the later months of 1997 or early 1998 if the planned
sale of the stations is delayed or does not occur. If the Company 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.
Part of the Company's strategy for development and expansion of its
network has included acquiring and/or operating radio properties in key U.S.
markets. Financing would be required to fund future operations and the
expansion of its radio network or other 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 believes, however, that the financing it
received from Foothill will be sufficient to operate the Company
<PAGE>
through the pending sale of its stations. 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 $2,693,000 at June 30, 1997 and $3,370,000 at
December 31, 1996, a decrease of $677,000.
Accounts receivable at June 30, 1997 increased $51,000 from December 31,
1996 and prepaid expenses at June 30, 1997 increased $200,000 from December
31, 1996. Accounts payable at June 30, 1997 increased $401,000 from December
31, 1996, accrued interest increased $40,000 from December 31, 1996 to June
30, 1997 and other accrued expenses decreased $84,000 during that same
period. The $4,462,000 cash used for operations was provided by the proceeds
received through the additional Foothill financing.
During the first half of 1997, $2,306,000 of cash was used for investing
activities. This cash was used primarily to purchase the radio broadcast
license and certain other assets in the Chicago market.
Cash obtained through financing activities amounted to $6,091,000 during
the first half of 1997. This cash represents the proceeds received from the
release of the $4,000,000 holdback from Foothill, an additional $2,400,000
obtained from Foothill pursuant to the amended and restated loan and security
agreement, and the use of the line of credit related to the Foothill
financing, 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 4.
<PAGE>
Not applicable
ITEM 5.
The Company has accepted from Global Broadcasting Company, Inc. ("Global"),
the escrow deposit required under the asset purchase agreement. The deposit was
delivered in the form of a $3,500,000 note, which is secured by assets of
Global. The Company is selling its 14 owned and operated AM radio stations for
the aggregate sale price of $72,500,000. The purchase price is payable in cash
at closing, which is anticipated to occur in approximately six months. The
Company retains all intellectual property, programming and its affiliate network
of stations, as well as its lawsuit against The Walt Disney Company and ABC
Radio Networks. It remains the Company's present intention to continue its
mission to create and distribute children's programming content responsive to
today's kids and families.
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 June 6,
1997 (File No. 0-21534), relating to the Company acquiring
and AM radio broadcast license and certain other
broadcasting equipment in the Phoenix metropolitan area.
(2) The Company's Current Report on Form 8-K filed on June 9,
1997 (File No. 0-21534), relating to the Company signing a
letter of intent to sell to Global Broadcasting Company,
Inc. all of its owned and operated AM radio stations for an
aggregate purchase price of $72,500,000.
<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 August 12, 1997.
CHILDREN'S BROADCASTING
CORPORATION
By: /s/ James G. Gilbertson
-------------------------------
Treasurer (Chief Operating
Officer and Chief Financial
Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- --------------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,693,054
<SECURITIES> 0
<RECEIVABLES> 1,667,150
<ALLOWANCES> 119,651
<INVENTORY> 0
<CURRENT-ASSETS> 4,616,399
<PP&E> 6,806,070
<DEPRECIATION> 1,954,282
<TOTAL-ASSETS> 32,307,208
<CURRENT-LIABILITIES> 17,188,046
<BONDS> 0
0
0
<COMMON> 126,358
<OTHER-SE> 12,253,562
<TOTAL-LIABILITY-AND-EQUITY> 32,307,208
<SALES> 2,567,633
<TOTAL-REVENUES> 2,567,633
<CGS> 0
<TOTAL-COSTS> 4,791,923
<OTHER-EXPENSES> 3,711,435
<LOSS-PROVISION> 119,651
<INTEREST-EXPENSE> 717,204
<INCOME-PRETAX> (5,935,725)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,935,725)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> 0
</TABLE>
