SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
|_| TRANSACTION REPORT UNDER 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. |X|
The issuer's revenues for its most recent fiscal year were $5,854,441.
The aggregate market value of the voting stock held by non-affiliates
of the issuer as of March 9, 1998 was approximately $19,176,854.
The number of shares of the common stock of the issuer outstanding as
of March 9, 1998 was 6,649,865.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
TABLE OF CONTENTS
Page
PART I ......................................................................1
ITEM 1 DESCRIPTION OF BUSINESS...............................................1
ITEM 2 DESCRIPTION OF PROPERTY...............................................5
ITEM 3 LEGAL PROCEEDINGS.....................................................5
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................6
PART II ......................................................................7
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS..............7
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................9
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................17
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................51
PART III .....................................................................52
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT....................52
ITEM 10 EXECUTIVE COMPENSATION...............................................54
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......56
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................58
ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K...............................59
SIGNATURES....................................................................62
EXHIBIT INDEX.................................................................63
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements under the captions "Description of Business," "Legal
Proceedings," "Market for Common Equity and Related Shareholder Matters,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-KSB constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements may be identified by the use of
terminology such as "may," "will," "expect," "anticipate," "estimate," "should,"
or "continue" or the negative thereof or other variations thereon or comparable
terminology. Such forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or from those results presently anticipated or projected.
Such factors are set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Cautionary
Statements."
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
Children's Broadcasting Corporation (the "Company") formerly broadcast
24-hour children's radio programming, known as Aahs World Radio(sm)*, via
satellite to markets representing approximately 40% of the U.S. population.
Pursuant to its former growth strategy, the Company acquired AM radio broadcast
licenses ("RBLs") in 14 U.S. markets. Notwithstanding the growth of the
Company's network, the Company's network operations and revenue from owned and
operated stations was below levels needed to offset operating expenses. On
November 3, 1997, the Company announced that it would terminate its network
affiliation agreements and cease distributing its full-time Aahs World Radio
programming format effective January 30, 1998. The primary sources of the
Company's revenue, prior to the discontinuation of Aahs World Radio, were from
the sale of local advertising and air time and network revenue. Concurrent with
the announcement of the termination of network affiliation agreements and the
cessation of full-time network programming, the Company began to effect certain
reductions in its workforce related to the operation of the network. It is the
Company's intention to continue to operate the radio stations formerly
broadcasting Aahs World Radio, spending the minimum required to preserve the
value of the RBLs. The Company does not anticipate any revenue from continued
operation of such stations.
In June 1997, the Company received an unsolicited offer from Global
Broadcasting Company, Inc. ("Global") to purchase all of the Company's owned and
operated radio stations for $72.5 million in cash. The Board of Directors
unanimously approved the sale of assets, subject to shareholder approval, which
was obtained in January 1998. On January 27, 1998, the Company announced that
Global had failed to close on the purchase of the Company's radio stations
within the time provided under the purchase agreement between the parties. The
Company's strategy is to sell its radio stations and, pursuant thereto, it
engaged Star Media Group, Inc. to act as a broker in connection with the sale of
its stations. Any sale of stations will be subject to various contingencies,
including reaching definitive agreements, regulatory approvals, shareholder
approval and customary closing conditions.
The Company believes that opportunities exist to profitably utilize the
Aahs World Radio intellectual property and brand, as well as the expertise
gained in the development of children's radio programming. The Company plans to
retain members of the Aahs World Radio creative staff and intends to develop
other programming products, including syndicated radio programs. To that end the
Company recently established a new division, CBC Media, which is in the process
of developing programs for network syndication. The Company may reexamine its
strategy regarding the continued production of radio programming and may decide
to sell, or discontinue, such operations depending upon its assessment of the
prospects for profitability of such products.
The Company intends to pursue to its conclusion the litigation against
ABC Radio Networks, Inc. ("ABC Radio") and The Walt Disney Company
(collectively, "ABC/Disney"). Personnel and financial resources will be used to
this end. See "Legal Proceedings."
The Company was incorporated under the Minnesota Business Corporation
Act on February 7, 1990. All references to the Company herein include its
subsidiaries, unless otherwise noted. The Company's executive office is located
at 724 First Street North, Fourth Floor, Minneapolis, Minnesota 55401, and its
telephone number is (612) 338-3300. Its World Wide Web site address is:
www.netradioaahs.net.
* The Company has filed for registration of its Aahs World Radio service mark.
<PAGE>
STRATEGY TO EXPLORE OTHER MEDIA OPPORTUNITIES
In addition to utilizing network intangibles, the Company has begun to
diversify into other media, entertainment and advertising-related businesses.
During 1997, the Company acquired a minority ownership interest in Harmony
Holdings, Inc. ("Harmony"). The Company may determine to increase its 42.4%
beneficial ownership position in Harmony should an opportunity exist at a price
favorable to the Company.
Harmony produces television commercials, music videos and related media.
Harmony's services are usually directed towards advertising agencies located in
the major markets of New York, Los Angeles, Chicago, Detroit, Dallas and San
Francisco as well as regional markets.
The Company intends to seek to further diversify through acquisition of
media, entertainment or advertising-related business. Further, the Company has
not foreclosed the possibility of buying other radio stations in the future.
Pending any such acquisitions, the proceeds from any sale of stations will be
invested in investment-grade, short-term, interest-bearing securities and the
Company will rely on the interest income generated thereby. Such interest income
may be insufficient to meet the Company's operating expenses.
RADIO STATION ASSETS
The Company owned the following radio stations as of December 31, 1997:
OWNED AND OPERATED RADIO STATIONS METRO RANK(1) FREQUENCY LICENSE TERM
- --------------------------------------- ------------- --------- ------------
New York, NY (WJDM(AM))(2)............. 1 1660 N/A
New York, NY (WJDM(AM))(3)............. 1 1530 06/01/98
Los Angeles, CA (KPLS(AM))............. 2 830 12/01/05
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 08/01/05
Houston, TX (KTEK(AM))................. 11 1110 08/01/05
Minneapolis, MN (WWTC(AM))............. 16 1280 04/01/05
Minneapolis, MN (KYCR(AM))............. 16 1570 04/01/05
Phoenix, AZ (KIDR(AM))................. 20 740 06/01/05
Denver, CO (KKYD(AM)).................. 23 1340 04/01/05
Kansas City, KS (KCNW(AM))............. 27 1380 06/01/05
Milwaukee, WI (WZER(AM))............... 31 540 12/01/04
- --------------------
(1) 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.
(2) This station operates on an Expanded Band frequency pursuant to a
construction permit issued by the Federal Communications Commission
("FCC").
(3) This station is programmed by a third party pursuant to a Local
Programming and Marketing Agreement ("LMA") which continues through May
2001.
REGULATION
FCC REGULATION
Radio stations are subject to the jurisdiction of the FCC under the
Communications Act of 1934 (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
<PAGE>
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 1996 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 after a formal hearing, may the FCC accept other applications for the
forfeited facilities.
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,
operates, controls or has a five percent voting interest in or is an officer or
director of any other broadcasting company. Christopher T. Dahl, Richard W.
Perkins and Russell Cowles II hold ownership interests, directorships and/or
offices in the Company and in Community Airwaves Corporation ("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.
In October 1997, the FCC granted two 12.5 MHZ nationwide licenses for
the SDARS spectrum in the 2320-2345 band, which is proposed to be used to
provide CD-quality nationwide radio service. In July 1997, the FCC began issuing
a total of 128 licenses in the Wireless Communications Service, of 5 MHZ each in
12 Regional Economic Area Groupings and 10 MHZ each in 52 Major Economic Areas,
in the 2305-2320 and 2345-2350 MHZ bands, which may be used for a variety of
purposes, including SDARS, at the licensee's option; however, a forum has been
established to consider a variety of uses other than SDARS for the Wireless
Communications Service, such as wireless local loop service and high-speed data
delivery. The Company is unable to predict the effect, if any, that SDARS 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 more than 20% 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.
<PAGE>
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.
RBLs are granted for a maximum term of eight years and are subject to
renewal upon application to the FCC. 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.
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 regulations. 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.
TRADEMARKS, SERVICE MARKS AND COPYRIGHTS
The Company claims trademark and service mark rights to and ownership
in a number of marks including, but not limited to, RADIO AAHS(R), RADIO AAHS(R)
(words plus design of unicorn), CHILDREN'S SATELLITE NETWORK(TM), ALL THE GOOD
STUFF RADIO DOES(R), THE ALL-AMERICAN ALARM CLOCK(R), ALPHABET SOUP(R), GREAT
MUSIC FOR GREAT KIDS(R), JUST KIDS(R), RADIO AAHS AIRFORCE(R), THE EDUCATIONAL,
SENSATIONAL RADIO AAHS(R), AAHS(TM), AAHSIE(TM), AVENUE 'A'(SM), FASCINATING
FACTS(SM), THE FUN AND ONLY(TM), NEWS AAHS IT WAS(SM), PLANET AAHS RECORDS(R),
PLAYING ALL DAY WITH RADIO AAHS(TM), RADIO AAHS(TM) (with new logo design),
KA'ZOO(TM), RADIO AAHS(R) COUNTDOWN, STORYTIME THEATER(TM), AAHS WORLD
RADIO(SM), and AAHS WORLD RADIO AIRFORCE(TM).
EMPLOYEES
The Company had 219 employees, 70 of whom were full-time, at the end of
its last fiscal year. The Company terminated its network affiliation agreements
and ceased distributing its full-time Aahs World Radio programming effective
January 30, 1998. As a result, the Company effected certain reductions in its
workforce related to the operation of the network. As of March 9, 1998, the
Company had 95 employees, 48 of whom were full-time. The services of the Chief
Operating Officer/Chief Financial Officer and the General Counsel are rendered
by James G. Gilbertson and Lance W. Riley, respectively, on a shared basis with
CAC. Executive officers of the Company and certain other corporate employees are
employed by Radio Management Corporation ("RMC") and their services are provided
to the Company and 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.
<PAGE>
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 RMC and CAC, both of which are owned by
Messrs. Dahl, Perkins and Cowles. The facilities are leased from a partnership
consisting of Messrs. Dahl, Perkins and a shareholder of the Company at an
annual rent of $54,000 for a term of five years through December 2001.
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 for a term
of five years through October 2001, and the studio site is leased from a
partnership consisting of Messrs. Dahl and Perkins at an annual rent of
approximately $132,000 for a term of five years through October 2001.
The Company currently leases 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 3,400 square feet. The facility is leased at an annual rent of
$36,000 for a term of three years ending August 1999. The New York studio
facility in Elizabeth, New Jersey, consists of approximately 1,700 square feet.
The facility is leased at a monthly rent of $1,675 on a month-to-month basis.
The Company also leases an office facility in New York City which consists of
approximately 1,200 square feet and is leased at an annual rent of $42,000 for a
term of five years ending April 2002. The Dallas/Fort Worth studio facility
consists of approximately 2,000 square feet. The facility is leased at an annual
rent of $37,000 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 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 for a term of five years ending
November 1999. The Chicago studio facility consists of approximately 1,000
square feet. The facility is leased at a monthly rent of $1,400 for a term of
three years ending March 2000. The Phoenix studio facility consists of
approximately 1,000 square feet. The facility is leased at a monthly rent of
$1,140 for a term of three years ending June 2000.
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
approximately $44,400 for a term of nine years ending October 1999. The New York
1530 frequency tower site is leased at an annual rent of $5,200 for a term of 15
years ending March 2000. The New York Expanded Band frequency tower site is
leased at an annual rent of $27,000 for a term of 15 years ending December 2012.
The Milwaukee tower site is leased at an annual rent of $2,100 for a term of
five years ending February 2000. The Chicago tower site is leased at an annual
rent of $18,000 for a term of ten years ending December 2006.
ITEM 3 LEGAL PROCEEDINGS
The Company's former business strategy was to derive revenue from the
sale of network advertising time to national advertisers and from local
advertising sales from Company-owned or operated stations. The Company's
strategy, in entering into an operations agreement with ABC Radio, was to use
the resources and reputation of ABC Radio to market Aahs World Radio, attract
national advertising and further build the Company's network through
affiliations. The Company sought out and developed strategic relationships in
order to enhance and reinforce its brand, and to allow the Company to explore
business opportunities at minimal cost to it and without detracting from
management's focus upon the Company's core business. In 1995, the Company
developed such a relationship with ABC Radio, pursuant to which ABC Radio
agreed, through representations and agreements, that ABC Radio would commit its
affiliate development and national advertising sales staffs and other resources
to assist and augment the Company's efforts to market the Aahs World Radio
format to
<PAGE>
broadcasters and advertisers. Throughout the course of its relationship with ABC
Radio, the Company disclosed significant confidential proprietary business
information to ABC/Disney. In June 1996, ABC Radio announced to the Company that
ABC Radio was terminating its relationship with the Company and that ABC Radio
would join with Disney to immediately commence competing directly with the
Company in the field of children's radio broadcasting. ABC/Disney thereupon
rolled out its Radio Disney programming at several locations throughout the
country. The Company filed a lawsuit in the fall of 1996 with the United States
District Court for the District of Minnesota against ABC/Disney. The suit seeks
injunctive relief and to recover substantial monetary damages based on alleged
wrongful conduct by ABC/Disney, including acts and omissions of fraud, business
interference, breach of contractual and fiduciary obligations and
misappropriation of the Company's confidential and proprietary business
information, trade secrets and business opportunities. In September 1997, ABC
Radio asserted its own counterclaim for breach of contractual obligations,
seeking to recover an unspecified amount of damages said only "to exceed
$75,000.00" for an alleged failure by the Company to pay certain commissions and
fees allegedly earned during the course of the parties' relationship. The
Company denies ABC Radio's counterclaim in all respects, and has moved to have
the counterclaim dismissed as untimely. The ABC/Disney suit is likely to proceed
to trial in 1998.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information with respect to the Company's
executive officers as of March 18, 1998. Each executive officer has been
appointed to serve until his or her successor is duly appointed by the Board of
Directors or his or her earlier removal or resignation from office. See
"Directors; Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act."
NAME AGE POSITION
- ---- --- --------
Christopher T. Dahl 54 Chairman of the Board, President and Chief
Executive Officer
James G. Gilbertson 36 Chief Operating Officer, Chief Financial Officer
and Treasurer
Lance W. Riley 47 Secretary and General Counsel
Gary W. Landis 44 Executive Vice President of Programming
Barbara A. McMahon 42 Executive Vice President of Affiliate Relations
Rick E. Smith 36 Executive Vice President of National Sales
<PAGE>
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER 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 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 National
Market. Share prices have been adjusted to reflect the Company's one-for-two
reverse stock split (share combination) effected on January 23, 1996. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
PERIOD HIGH LOW
------ ---- ---
1996
First Quarter..................... $ 13 3/8 $ 8 1/2
Second Quarter.................... 10 3/8 7
Third Quarter..................... 7 7/8 5 1/4
Fourth Quarter.................... 5 5/8 3 1/4
1997
First Quarter..................... $ 6 5/8 $ 3 1/4
Second Quarter.................... 5 7/8 3 3/16
Third Quarter..................... 5 1/16 3 3/8
Fourth Quarter.................... 4 5/8 3 5/16
As of March 18, 1998, the Company had 505 shareholders of record and
approximately 2,526 beneficial owners.
The Company has never declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay cash dividends on its Common Stock
in the foreseeable future. The Company presently expects to retain its earnings
to finance its business. The declaration or payment by the Company of dividends,
if any, on its Common Stock in the future is subject to the discretion of the
Board of Directors and will depend on the Company's earnings, financial
condition, capital requirements and other relevant factors. The declaration or
payment by the Company of dividends is also subject to the Company's credit
agreement with Foothill Capital Corporation ("Foothill"). Without Foothill's
prior written consent, the Company cannot declare or pay any cash dividends.
SALES OF UNREGISTERED SECURITIES IN 1997
The Company issued 200,000 shares of its Common Stock during 1996, to
be periodically released from a trust account during 1997, to Hessian & McKasy,
P.A. (f/k/a Hessian, McKasy & Soderberg, P.A.), its litigation counsel in
connection with the ABC/Disney suit. All of such shares were released during
1997. On January 23, 1997, the Company issued 82,051 shares of its Common Stock
to Oklahoma Sports Properties, Inc., an unrelated third party. This issuance was
made in connection with the asset purchase agreement pursuant to which the
Company was to acquire the RBL of radio station KMUS(AM), Muskogee, Oklahoma. As
of March 15, 1998, the acquisition of such RBL had not been consummated. On
February 24, 1997, the Company issued 65,377 shares of its Common Stock to
Nelson Broadcasting, Inc., an unrelated third party. This issuance was made in
connection with the asset purchase agreement pursuant to which the Company
acquired the RBL of radio station WAUR(AM) in Sandwich, Illinois. On February
28, 1997, the Company issued 37,500 shares of its Common Stock to Southcoast
Capital Corporation, an entity that provided broker services in connection with
the Company obtaining its credit agreement with Foothill. On July 25, 1997, the
Company issued a warrant, originally
<PAGE>
exercisable at $5.29 per share and subsequently repriced to $3.68 per share, for
100,000 shares of its Common Stock to Foothill. Such warrant expires November
25, 2001. This issuance was made in connection with the credit agreement with
Foothill, which, through various amendments, has provided the Company with
financing of $24.0 million. On September 25, 1997, the Company issued a warrant,
exercisable at $3.76 per share, for 200,000 shares of its Common Stock to
Foothill. This warrant also expires on November 25, 2001. This issuance was made
in connection with the first amendment to the credit agreement with Foothill. On
May 28, 1997, the Company issued 268,607 shares of its Common Stock to
Bonneville International Corporation, an unrelated third party. This issuance
was made in connection with the asset purchase agreement pursuant to which the
Company acquired the RBL of radio station KIDR(AM) in Phoenix, Arizona. On July
22, 1997, the Company issued 60,000 shares of its Common Stock to Harvey
Bibicoff, the former chairman of Harmony. This issuance was made in connection
with the stock purchase agreement by and between the Company, Harmony and Mr.
Bibicoff, pursuant to which the Company acquired 600,000 shares of common stock
of Harmony, together with options to purchase 550,000 shares of common stock of
Harmony at an exercise price of $1.50 per share, from Mr. Bibicoff. On July 25,
1997, the Company issued five-year warrants, exercisable at $4.00 per share, for
50,000, 50,000 and 25,000 shares of its Common Stock to Pyramid Partners, L.P.,
Rodney P. Burwell and William M. Toles, respectively. Pyramid Partners, L.P. is
an entity whose managing partner is Perkins Capital Management, Inc. ("PCM").
PCM is an entity controlled by Mr. Perkins, a director of the Company and a
director of Harmony. Mr. Burwell is a former director of the Company and Mr.
Toles is a director of Harmony. These issuances were made in connection with the
financing provided by such persons for the Company's purchase of shares of
common stock of Harmony. Pyramid Partners, L.P., Messrs. Burwell and Toles
provided the Company with $500,000, $500,000 and $250,000, respectively, for
such stock purchase.
All of the above issuances were made in reliance upon the exemption
provided in Section 4(2) of the Securities Act of 1933, as amended (the "Act"),
which provides an exemption for transactions not involving a public offering.
The purchasers of the securities described above acquired them for their own
accounts and not with a view to any distribution thereof to the public. At their
issuance, the foregoing securities were restricted as to sale or transfer,
unless registered under the Act, and certificates representing such securities
contained restrictive legends stating that the securities were not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Act, or an exemption from such registration. In addition,
the recipients of such securities received or had access to material information
concerning the Company, including but not limited to the Company's reports on
Form 10-KSB, Form 10-QSB and Form 8-K, as filed with the Securities and Exchange
Commission (the "Commission"). No underwriting commissions or discounts were
paid with respect to the issuances of the securities described above.
<PAGE>
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
In June 1997, Children's Broadcasting Corporation (the "Company")
received an unsolicited offer from Global Broadcasting Company, Inc. ("Global")
to purchase all of the Company's owned and operated radio stations for $72.5
million in cash. The Board of Directors unanimously approved the sale of assets,
subject to shareholder approval, which was obtained in January 1998. On January
27, 1998, the Company announced that Global had failed to close on the purchase
of the Company's radio stations within the time provided under the purchase
agreement between the parties. On January 30, 1998, the Company discontinued
operation of Aahs World Radio, its 24-hour children's radio programming, which
it began broadcasting by satellite in late 1992. The primary sources of the
Company's broadcast revenue, prior to the discontinuation of Aahs World Radio,
were from the sale of local advertising and air time and network revenue. The
cessation of such broadcasting will negatively impact the Company's broadcast
revenue. The Company's strategy is to sell its radio stations and, pursuant
thereto, it engaged Star Media Group, Inc. to act as a broker in connection with
the sale of its stations. Any sale of stations will be subject to various
contingencies, including reaching definitive agreements, regulatory approvals,
shareholder approval and customary closing conditions. There can be no assurance
that the Company will be successful in obtaining satisfactory offers to purchase
any of its stations or that shareholder approval for the sale of substantially
all of the Company's assets will be obtained. If the Company is unable to
consummate the sale of any of its stations and additional financing is not
available, it will be forced to liquidate.
Radio stations frequently barter unsold advertising time for products
or services, such as hotels, restaurants and other goods used primarily 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
results in any given period.
In connection with their audit reports on the Company's financial
statements as of and for the years ended December 31, 1997 and 1996, BDO
Seidman, LLP, the Company's independent auditors, expressed substantial doubt
about the Company's ability to continue as a going concern because of its
recurring losses, negative working capital and negative cash flow from
operations.
RESULTS OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
REVENUE:
Owned, Operated and LMA Station Revenues:
Total revenues from the Company's owned and operated stations, as well
as stations covered by Local Programming and Marketing Agreements ("LMAs"),
increased $81,000 from $4,061,000 in 1996 to $4,142,000 in 1997. Barter revenues
increased $16,000 while non-barter revenues increased $65,000. Non-barter
revenue increased $624,000 from stations acquired during 1996 and 1997 while
non-barter revenues at previously existing stations decreased $559,000.
<PAGE>
Network Revenues:
Total revenues of $1,712,000 were produced by the network in 1997, an
increase of $118,000 or 7% over 1996 revenues. This increase in network revenues
was due in part to the rehiring of a national sales staff after the cancellation
of the joint operations agreement with ABC Radio, Inc. ("ABC Radio") and The
Walt Disney Company (collectively, "ABC/Disney") in the last half of 1996.
Although the Company increased its national market coverage throughout 1997, the
Company subsequently ceased distribution of its full-time Aahs World Radio
programming format at the end of January 1998.
OPERATING EXPENSES:
Owned, Operated and LMA Station Expenses:
General and administrative expenses increased 26% to $3,132,000 for
1997 from $2,493,000 in 1996. This increase was due to the addition of the
Detroit and New York stations in June 1996, the Philadelphia station in October
1996, and the Chicago and Phoenix stations in 1997.
Technical and programming expenses increased $161,000 in 1997 from
$969,000 in 1996 to $1,130,000. This increase was also due to the additions of
three stations during 1996 and two stations in 1997.
Sales expenses decreased from $1,575,000 in 1996 to $1,465,000 in 1997,
a decrease of 7%. Sales personnel compensation decreased $294,000 due to the
elimination of members of the Company's sales staff in anticipation of the sale
of its stations to Global. Sales advertising expense increased $129,000 and
barter expenses increased $55,000 in order to fulfill contracts with various
advertising clients.
Network Expenses:
General and administrative expenses decreased $328,000 in 1997 to
$557,000 as compared to $885,000 for 1996 due to the elimination of $225,000 in
expense related to the joint operations agreement with ABC/Disney which has
since been terminated, the reduction of bad debt expense by $78,000, and the
reduction of property and casualty insurance of $25,000.
Programming expenses decreased $5,000 in 1997 due to a decrease in line
charges and programming materials of $59,000 and an increase in salaries, talent
fees, and outside news of $54,000.
Sales expenses increased 52% from $1,106,000 in 1996 to $1,678,000 in
1997. These sales expenses relate 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 $255,000 or 49% during 1997. Activities in
this category included advertising, research, television spot production and
promotion. Many of these activities were put on hold in anticipation of the sale
of the Company's stations to Global.
Corporate charges were $6,013,000 in 1997 compared to $2,774,000 in
1996, representing an increase of 117%. This increase is attributable to an
increase in outside service fees including legal and accounting fees related to
stock, trademark, employee matters, SEC filings and audits, as well as $150,000
of management fees. Additionally, the Company incurred $2,836,000 of expenses
relating to the ABC/Disney litigation. Such litigation is anticipated to
continue to utilize the Company's working capital. The Company issued 200,000
shares of its Common Stock during 1996, to be periodically released from a trust
account during 1997, to its litigation counsel
<PAGE>
in connection with this litigation. The Company also registered such shares for
resale, and as of December 31, 1997, all such shares had been sold by the
litigation counsel to satisfy $833,000 of this expense.
Depreciation, amortization and the write-off of deferred expenses of
$2,137,000 in 1997 was $1,652,000 or 44% lower than 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 and written off during the first
half of 1996. Depreciation and amortization expense, exclusive of the ABC/Disney
warrant, increased $636,000 in 1997 due to the acquisition of AM radio broadcast
licenses ("RBLs") and certain other assets during 1996 and 1997.
Net interest expense for the year increased $2,167,000 as a result of
the additional interest incurred related to the financing provided in 1997 by
Foothill Capital Corporation ("Foothill").
The net loss increased 48% in 1997 to $14,588,000 from $9,868,000 in
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its working capital, was a
deficit of $25,706,000 at December 31, 1997 compared to a deficit of $5,489,000
at December 31, 1996. A portion of the Company's negative net working capital
position for 1997 was the result of the reclassification of the long-term
portion of the Foothill term loan as the Company has historically not met
certain restrictive financial covenants contained in its credit agreement with
Foothill. The failure to meet these covenants was principally due to the
Company's continued operating losses. Foothill has waived its rights pursuant to
these violations through December 31, 1997. 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, 1997,
aggregating $22,500,000, have been entirely classified as current obligations,
even though $12,000,000 of this amount is not scheduled to be repaid until after
December 31, 1998.
The Company experienced a cash working capital loss of $2,825,000
during 1997. The Company has entered into an agreement with a broker in
connection with the sale of its radio stations. While the sale by the Company of
some or all of its stations is expected to adversely impact future broadcast
revenue, the Company has implemented plans to decrease its expenses to offset a
loss of revenue. Additionally, the Company ceased producing and distributing its
full-time Aahs World Radio programming format as of January 30, 1998. Concurrent
with the announcement of this termination of network programming, the Company
initiated certain reductions in its workforce related to the operation of the
network.
In January 1998, the Company received proceeds totaling $611,000 and
paid debt issue costs of $39,000 through the issuance of a note payable to
Harmony Holdings, Inc. ("Harmony") with a face amount of $650,000. The note
payable bears interest at 15%, is unsecured and due upon demand.
The Company entered into a second amendment to its credit agreement
with Foothill on March 13, 1998 pursuant to which the Company obtained
$1,000,000 of additional financing. In connection with this additional
financing, the rate of interest payable on all of the Company's indebtedness to
Foothill was adjusted to 4.75% over prime. Additionally, the Company provided
Foothill with warrants to purchase 100,000 shares of its Common Stock at $3.68
per share and repriced previously issued warrants to purchase 100,000 shares of
Common Stock from $5.29 per share to $3.68 per share. Principal is scheduled to
be repaid during 1998 as follows:
April 16, 1998 $500,000
June 30, 1998 $6,000,000
September 30, 1998 $2,000,000
December 31, 1998 $2,000,000
<PAGE>
The sale of the Company's radio stations is expected to provide the
Company with sufficient working capital to meet its cash requirements. If any
such sale 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 in connection with the second amendment to the credit
agreement will be sufficient to operate the Company through April 16, 1998.
Because the credit agreement with Foothill requires the Company to grant liens
and security interests on substantially all of its assets, the Company's ability
to incur additional indebtedness in the event it does not sell one or more radio
stations may be limited. If the Company is not able to obtain adequate financing
or financing on acceptable terms, it could be forced to reduce or terminate its
operations, curtail acquisitions or other projects, sell or lease its current
assets under unfavorable circumstances, delay certain capital projects or
potentially default on obligations to creditors, all of which may be materially
adverse to the Company's operations and prospects.
Consolidated cash was $545,000 at December 31, 1997 and $3,370,000 at
December 31, 1996, a decrease of $2,825,000.
Accounts receivable at December 31, 1997 decreased $309,000 from
December 31, 1996. Prepaid expenses at December 31, 1997 decreased $82,000 from
December 31, 1996, while other receivables increased $143,000 over the same
periods. Accounts payable at December 31, 1997 increased $422,000 from December
31, 1996, accrued interest increased $241,000 from December 31, 1996 to December
31, 1997, and other accrued expenses increased $203,000 during that same period.
The $9,233,000 cash used for operations was provided by the proceeds received
pursuant to the credit agreement with Foothill.
During 1997, $8,992,000 in cash was used for investing activities. This
cash was used to purchase a RBL and certain other related assets in the Chicago
market, a 42.4% beneficial ownership position in the equity of Harmony and
working capital. The Company's beneficial interest in Harmony includes a
put/call option (the "Harmony Option") to purchase an aggregate of 225,000
shares of common stock of Harmony from an existing investor for an aggregate of
$562,500. Pursuant to the Harmony Option, the Company became obligated to
purchase such shares from the investor on January 31, 1998. The Company extended
its purchase obligation to March 31, 1998. At March 31, 1998, the Company did
not have sufficient funds to meet its obligation under the Harmony Option and
was negotiating an extension agreement with the investor. If the Company is
unable to negotiate such an extension, it is likely that the investor will
commence litigation against the Company to compel the purchase of the shares
and/or for damages. A finding of liability against the Company could have a
material adverse effect upon the Company.
Cash obtained through financing activities aggregated $15,401,000
during 1997. This cash represents the proceeds received from the release of
$4,000,000 subject to holdbacks of the original Foothill financing in place at
December 31, 1996, an additional $10,200,000 obtained from Foothill pursuant to
the first amendment to the credit agreement, the use of line of credit related
to the Foothill financing, loans aggregating $1,250,000 from a limited
partnership indirectly controlled by a director of the Company, another director
of the Company and a shareholder of the Company to finance a portion of the
purchase of equity in Harmony, and proceeds from the issuance of Common Stock,
less 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.
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failure of miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
Management has not completed its assessment of the effect the Year 2000
issue will have on its operations. Management's current plans include contacting
its significant software vendors and obtaining a formal representation that the
Company's current computer programs are Year 2000 compliant. Additionally,
management will also consider the impact of the Year 2000 issue on significant
third-party relationships and the potential effect on the Company's operations.
As such assessment is incomplete, management does not have a reasonable basis to
determine the effect the Year 2000 issue may have on its operations and can give
no assurance that it will not have a material impact on its future operating
results or financial condition.
CAUTIONARY STATEMENT
STRATEGY TO SELL RADIO STATIONS; CESSATION OF AAHS WORLD RADIO(SM);
LIMITED REVENUES. In June 1997, the Company received an unsolicited offer from
Global to purchase all of the Company's owned and operated radio stations for
$72.5 million in cash. The Board of Directors unanimously approved the sale of
assets, subject to shareholder approval, which was obtained in January 1998. On
January 27, 1998, the Company announced that Global had failed to close on the
purchase of the Company's radio stations within the time provided under the
purchase agreement between the parties. On January 30, 1998, the Company
discontinued operation of Aahs World Radio, its 24-hour children's radio
programming, which it began broadcasting by satellite in late 1992. The primary
sources of the Company's broadcast revenue, prior to the discontinuation of Aahs
World Radio, were from the sale of local advertising and air time and network
revenue. The cessation of such broadcasting will negatively impact the Company's
broadcast revenue. The Company's strategy is to sell its radio stations and,
pursuant thereto, it engaged Star Media Group, Inc. to act as a broker in
connection with the sale of its stations. Any sale of stations will be subject
to various contingencies, including reaching definitive agreements, regulatory
approvals, shareholder approval and customary closing conditions. There can be
no assurance that the Company will be successful in obtaining satisfactory
offers to purchase any of its stations or that shareholder approval for the sale
of substantially all of the Company's assets will be obtained. If the Company is
unable to consummate the sale of any of its stations and additional financing is
not available, it will be forced to liquidate.
LIQUIDITY; SUBSTANTIAL LEVERAGE. As of December 31, 1997, the Company's
consolidated indebtedness approximated 83% of the sum of its shareholders'
equity and consolidated indebtedness. The Company had working capital deficits
of $25.7 million and $5.5 million at December 31, 1997 and December 31, 1996,
respectively. The Company entered into a credit agreement with Foothill in
November 1996, most recently amended in March 1998, which has provided the
Company with working capital and funding for the acquisition of both RBLs and
shares of common stock of Harmony, through loan facilities aggregating $24.0
million. Such facilities mature on September 30, 2000. The Company's
indebtedness to Foothill is secured by a first priority lien on substantially
all of the assets of the Company and its subsidiaries. The facilities must be
repaid quarterly in 11 installments of principal beginning in April 1998.
Interest under the facilities is payable at the prime rate plus 4.75%. The
credit agreement with Foothill contains a number of financial covenants which,
among other things, require the Company to maintain specified financial ratios.
Based on current interest rates, the debt service obligations associated with
the credit agreement with Foothill necessitate payments of principal and
interest of approximately $13.2 million in 1998. In the event that the Company
should default on its obligations under the credit agreement with Foothill, 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
<PAGE>
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.
ADDITIONAL FINANCING REQUIREMENTS. The Company will be unable to meet
its debt service obligations with Foothill and unable to fund current operations
without the proceeds from the sale of one or more of its radio stations. There
can be no assurance that such proceeds will be available to the Company when
required, or if available, that the amount of such proceeds would be 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.
POTENTIAL INABILITY TO REFINANCE EXISTING INDEBTEDNESS. The Company's
ability to repay its outstanding indebtedness at maturity may depend on its
ability to refinance such indebtedness, which could be adversely affected
without the proceeds from the sale of one or more of its radio stations or if
the Company does not have access to capital markets for the sale of additional
equity or debt through public offerings or private placements on terms
reasonably satisfactory to the Company. In addition, the failure of the Company
to meet its obligation under the Harmony Option could have a material adverse
effect upon the Company and could threaten its ability to continue operations
and successfully negotiate a sale of its radio stations.
HISTORY OF OPERATING LOSSES. Since inception, the Company experienced
substantial net losses as a result of its efforts to develop a national
children's radio network. The Company has not generated positive cash flow
sufficient to fund its ongoing operations and has had frequent working capital
shortages. For the two years ended December 31, 1997 and 1996, the Company
incurred net losses of $14.6 million and $9.9 million, respectively. Despite the
discontinuation of Aahs World Radio, the Company expects to continue to incur
operating losses throughout 1998. In connection with their audit reports on the
Company's financial statements as of and for the years ended December 31, 1997
and 1996, BDO Seidman, LLP, the Company's independent auditors, expressed
substantial doubt about the Company's ability to continue as a going concern
because of its recurring losses, negative working capital and negative cash flow
from operations. As of December 31, 1997, the Company had an accumulated deficit
of $40.9 million and had used approximately $9.2 million of cash to fund its
losses.
ABC/DISNEY LITIGATION. The Company's former business strategy was to
derive revenue from the sale of network advertising time to national advertisers
and from local advertising sales from Company-owned or operated stations. The
Company's strategy, in entering into an operations agreement with ABC Radio, was
to use the resources and reputation of ABC Radio to market Aahs World Radio,
attract national advertising and further build the Company's network through
affiliations. The Company sought out and developed strategic relationships in
order to enhance and reinforce its brand, and to allow the Company to explore
business opportunities at minimal cost to it and without detracting from
management's focus upon the Company's core business. In 1995, the Company
developed such a relationship with ABC Radio, pursuant to which ABC Radio
agreed, through representations and agreements, that ABC Radio would commit its
affiliate development and national advertising sales staffs and other resources
to assist and augment the Company's efforts to market the Aahs World Radio
format to broadcasters and advertisers. Throughout the course of its
relationship with ABC Radio, the Company disclosed significant confidential
proprietary business information to ABC/Disney. In June 1996, ABC Radio
announced to the Company that ABC Radio was terminating its relationship with
the Company and that ABC Radio would join with Disney to immediately commence
competing directly with the Company in the field of children's radio
broadcasting. ABC/Disney thereupon rolled out its Radio Disney programming at
several locations throughout the country. The Company filed a lawsuit in the
fall of 1996 with the United States District Court for the District of Minnesota
against ABC/Disney. The suit seeks injunctive relief and to recover substantial
monetary damages based on alleged wrongful conduct by ABC/Disney, including acts
and omissions of fraud, business interference, breach of contractual and
fiduciary obligations and misappropriation of the Company's confidential and
proprietary business information, trade secrets and business opportunities. In
September 1997, ABC Radio asserted its own counterclaim for breach of
contractual obligations, seeking to recover an unspecified amount of damages
said only "to exceed $75,000.00" for an alleged failure by the Company to pay
certain commissions and fees allegedly earned during the course of the parties'
relationship. The Company denies ABC
<PAGE>
Radio's counterclaim in all respects, and has moved to have the counterclaim
dismissed as untimely. The ABC/Disney suit is likely to proceed to trial in
1998.
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, changes by financial research analysts in their
estimates of the earnings of the Company, 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 1997, the market
price of the Company's Common Stock ranged from a high of $6.625 on January 13
and 14, 1997 to a low of $3.1875 on April 7, 1997. There can be no assurance
that purchasers of the Company's Common Stock can sell such stock at or above
the prices at which it was purchased.
IMPACT OF SALE OF SHARES; SHARES ELIGIBLE FOR FUTURE SALE. The Company
had approximately 6,649,865 shares of Common Stock outstanding as of December
31, 1997, and had warrants and options outstanding to purchase additional Common
Stock totaling approximately 3,072,942 common shares exercisable at prices
ranging from $2.00 to $13.80 per share. On February 11, 1997, the Securities and
Exchange Commission declared effective the Company's Registration Statement on
Form S-3, as amended, which registered approximately 500,000 common shares and
the Company's Registration Statement on Form S-4, as amended, which registered
5,000,000 common shares and $5.0 million 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.
CONFLICTS OF INTEREST. The Company leases certain broadcast and office
facilities from the Chairman of the Board, President and Chief Executive
Officer, Christopher T. Dahl, and another director of the Company, Richard W.
Perkins. The Company also leases the WWTC(AM) and KYCR(AM) radio transmission
tower site from Mr. Dahl. The Company also shares with Community Airwaves
Corporation ("CAC"), a corporation owned by Messrs. Dahl, Perkins and another
director, Russell Cowles II, certain management services which are provided by
another entity, Radio Management Corporation, which is owned by Messrs. Dahl,
Perkins and Cowles. The management services consist of administrative, legal and
accounting services. Such arrangements present conflicts of interest in
connection with the pricing of services provided.
FCC REGULATION. Although the RBLs 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 Federal Communications
Commission ("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 Telecommunications 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. 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
<PAGE>
"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.
On February 14, 1998, the Board of Directors declared a dividend of one
common share purchase right (a "Right") for each share of the Company's Common
Stock outstanding as of the close of business on February 27, 1998. Each Right
will entitle the registered holder to purchase from the Company, after the
Distribution Date (as defined in the Rights Agreement), common shares at an
initial price of $18.00. The Rights have certain anti-takeover effects. The
Rights will cause substantial dilution to a person or group that attempts to
acquire the Company without conditioning the offer on a substantial number of
Rights being acquired or redeemed. The Rights should not interfere with any
merger or other business combination approved by the Board of Directors of the
Company since the Board of Directors may, at its option and in its sole and
absolute discretion, redeem the Rights as provided in the Rights Agreement.
CONTROL BY MANAGEMENT. Approximately 22.1% 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. The Common
Stock is currently listed on the Nasdaq National Market. 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 never declared or paid any cash
dividends on its Common Stock and does not intend to declare or pay cash
dividends on its Common Stock in the foreseeable future. The Company presently
expects to retain its earnings to finance its business. The declaration or
payment by the Company of dividends, if any, on its Common Stock in the future
is subject to the discretion of the Board of Directors and will depend on the
Company's earnings, financial condition, capital requirements and other relevant
factors. The declaration or payment by the Company of dividends is also subject
to the Company's credit agreement with Foothill. Without Foothill's prior
written consent, the Company cannot declare or pay any cash dividends.
<PAGE>
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CHILDREN'S BROADCASTING CORPORATION
Independent Auditors' Report..................................................18
Consolidated Financial Statements
Balance Sheets.......................................................19
Statements of Operations.............................................20
Statement of Shareholders' Equity....................................21
Statements of Cash Flows.............................................22
Notes to Consolidated Financial Statements....................................24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Children's Broadcasting Corporation
We have audited the accompanying consolidated balance sheets of Children's
Broadcasting Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years 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 audits.
We conducted our audits 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 audits provide 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, 1997 and 1996, and the consolidated
results of its operations and cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company's recurring
losses, negative working capital 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 1997 and 1996
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
Milwaukee, Wisconsin
February 24, 1998, except
for Notes 2, 9, 13 and 16 which are dated
March 13, 1998
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS (Notes 2 and 9)
Current assets:
Cash and cash equivalents $ 545,258 $ 3,370,038
Accounts receivable, net of allowance for
doubtful accounts of $472,000 and $93,500, respectively 1,224,756 1,533,792
Accounts receivable - affiliates (Note 14) 142,868 --
Prepaid expenses 108,174 190,398
------------ ------------
Total current assets 2,021,056 5,094,228
Investment in Harmony (Note 4) 6,281,728 --
Property and equipment, net (Notes 3, 5 and 10) 4,708,327 4,274,931
Broadcast licenses, net (Note 3 and 6) 19,679,154 16,724,653
Intangible assets, net (Note 6) 1,550,100 2,048,119
Deferred debt issue costs (Note 9) 1,173,209 465,420
------------ ------------
Total assets $ 35,413,574 $ 28,607,351
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,688,832 $ 1,222,125
Accounts payable - affiliates (Note 14) -- 44,367
Accrued interest 324,994 84,146
Other accrued expenses 1,203,331 1,000,194
Line of credit (Note 8) 453,838 164,162
Short-term debt - directors and shareholders (Note 7) 1,172,500 --
Long-term debt - current portion (Note 9) 22,857,386 8,033,758
Obligation under capital lease - current portion (Note 10) 26,367 34,705
------------ ------------
Total current liabilities 27,727,248 10,583,457
Long-term debt, less current maturities (Note 9) 2,508,819 1,365,992
Obligation under capital lease (Note 10) 48,836 70,790
------------ ------------
Total liabilities 30,284,903 12,020,239
------------ ------------
Commitments and Contingencies (Notes 2 and 11) -- --
Shareholders' equity (Note 12 and 13):
Common stock 132,997 115,966
Additional paid-in capital 46,387,536 42,775,092
Accumulated deficit (40,862,299) (26,303,946)
Stock subscriptions receivable (529,563) --
------------ ------------
Total shareholders' equity 5,128,671 16,587,112
------------ ------------
Total liabilities and shareholders' equity $ 35,413,574 $ 28,607,351
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Owned, operated and LMA stations $ 4,142,112 $ 4,061,055
Network 1,712,329 1,593,883
------------ ------------
Total revenues 5,854,441 5,654,938
Operating expenses:
Owned, operated and LMA stations:
General and administrative 3,131,507 2,492,992
Technical and programming 1,129,853 968,550
Selling 1,464,575 1,574,869
------------ ------------
5,725,935 5,036,411
Network:
General and administrative 557,106 884,652
Programming 880,658 885,227
Selling 1,678,216 1,105,817
Merchandising 268,796 523,719
Magazine -- 125,542
------------ ------------
3,384,776 3,524,957
Corporate 5,112,591 2,023,936
Corporate expenses paid to affiliated
management company 900,090 750,000
Amortization and write-off of deferred expenses -- 2,288,141
Depreciation and amortization 2,136,720 1,500,504
------------ ------------
Total operating expenses 17,260,112 15,123,949
------------ ------------
Loss from operations (11,405,671) (9,469,011)
Equity loss in Harmony (540,994) --
Interest expense (2,602,200) (604,296)
Interest expense - officers and directors (54,658) (28,808)
Interest income 90,599 234,236
Other income (expense) (45,429) --
------------ ------------
Net loss $(14,558,353) $ (9,867,879)
============ ============
Basic and diluted net loss per share $ (2.33) $ (1.99)
============ ============
Weighted average number of shares outstanding 6,246,000 5,149,000
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional Stock Total
----------------------- Paid-in Subscriptions Accumulated Shareholders'
Shares Amount Capital Receivable Deficit Equity
---------- ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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(AM), Elizabeth, New Jersey 270,468 5,409 2,494,591 -- -- 2,500,000
Issuance of common stock in connection with
acquisition of WPWA(AM) - 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
Issuance of common stock upon exercise of
options and warrants 138,050 2,761 284,359 (129,563) -- 157,557
Issuance of common stock for installment
payments of note payable 65,377 1,307 300,734 -- -- 302,041
Issuance of common stock in connection with
obtaining finance company credit agreement 37,500 750 153,937 -- -- 154,687
Issuance of common stock in connection with
pending acquisition of KMUS(AM),
Muskogee, Oklahoma 82,051 1,641 398,359 (400,000) -- --
Issuance of common stock in connection with
acquisition of KIDR(AM), Phoenix, Arizona 268,607 5,372 994,628 -- -- 1,000,000
Issuance of common stock in connection with
investment in Harmony 60,000 1,200 246,300 -- -- 247,500
Issuance of common stock for payment of attorney
fees in connection with pending litigation 200,000 4,000 828,627 -- -- 832,627
Issuance of warrants in connection with debt
financing -- -- 405,500 -- -- 405,500
Net loss -- -- -- -- (14,558,353) (14,558,353)
---------- ----------- ------------ ----------- ------------ ------------
Balance at December 31, 1997 6,649,865 $ 132,997 $ 46,387,536 $ (529,563) $(40,862,299) $ 5,128,671
========== =========== ============ =========== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(14,558,353) $ (9,867,879)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for doubtful accounts 378,500 22,000
Depreciation and amortization 2,136,720 1,500,504
Net barter activity 34,845 (14,177)
Amortization and write-off of deferred expenses -- 2,288,141
Amortization of deferred debt issue costs 480,565 85,313
Write-off of other intangible assets 119,260 --
Equity loss in Harmony 540,994 --
Issuance of common stock for payment of
attorney fees 832,627 --
Issuance of common stock for payment of
interest 100,306 --
Decrease (increase) in:
Accounts receivable (104,309) (713,183)
Other receivables (142,868) 49,576
Prepaid expenses 82,224 517,291
Inventory -- 74,046
Increase (decrease) in:
Accounts payable - trade 422,341 516,750
Accrued interest 240,848 (217,243)
Other accrued expenses 203,137 266,823
------------ ------------
Net cash used in operating activities (9,233,163) (5,492,038)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (637,420) (607,471)
Acquisition of radio broadcasting
licenses and certain related assets (1,717,959) (10,309,654)
Investment in other intangible assets (61,840) (261,056)
Investment in Harmony (6,575,222) --
------------ ------------
Net cash used in investing activities (8,992,441) (11,178,181)
------------ ------------
FINANCING ACTIVITIES:
Increase in line of credit 289,676 164,162
Repayment of long-term debt (387,406) (977,237)
Repayment of capital lease obligation (36,767) (29,205)
Proceeds from issuance of short-term debt 1,250,000 --
Proceeds from issuance of common stock 157,557 19,960,840
Payment of deferred debt issue costs (107,336) --
Proceeds from issuance of long-term debt 14,235,100 8,400,000
Repayment of short-term debt -- (5,450,000)
Redemption of preferred stock -- (2,615,595)
------------ ------------
Net cash provided by financing activities 15,400,824 19,452,965
------------ ------------
Increase (decrease) in cash and cash equivalents (2,824,780) 2,782,746
Cash and cash equivalents at beginning of year 3,370,038 587,292
------------ ------------
Cash and cash equivalents at end of year $ 545,258 $ 3,370,038
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 2,361,352 $ 696,347
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<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, 1997:
The Company recognized revenues of $703,824 and expenses of $738,669
through barter activity.
The Company issued 268,607 shares of common stock valued at $1,000,000,
incurred a note payable of $1,400,000, and a covenant not-to-compete
liability with an estimated net present value of $320,495 related to the
acquisition of radio broadcast licenses and property and equipment.
The Company incurred capital lease liabilities totaling $6,475 related to
the acquisition of property and equipment.
The Company issued 65,377 shares of common stock valued at $302,041 for
the payment of 1997 principal and interest installments totaling $201,735
and $100,306, respectively, for the note payable outstanding to the seller
of WAUR(AM).
The Company issued 37,500 shares of common stock and warrants to purchase
425,000 shares of common stock valued at $154,687 and $405,500,
respectively, in connection with obtaining short and long-term debt.
The Company issued 60,000 shares of common stock valued at $247,500 in
connection with its investment in Harmony.
The Company issued 200,000 shares of common stock valued at $832,627 for
payment of attorney fees.
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.
<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 radio programming in the
United States. Prior to January 1998, the Company had
developed, produced and distributed programming that was
entertaining and informative and directed to the interests and
radio listening patterns of pre-teenage children and their
families. The Company's Aahs World Radio(sm) format provided
24-hour programming featuring music, stories, call-in
segments, quizzes and current events features. The programming
varied by time of day in order to attract that component of
its prospective audience most likely to be listening. The
programming originated at the Company's flagship station,
WWTC(AM) in Minneapolis, Minnesota and was distributed via
satellite to a network of radio stations around the country,
which included stations owned or operated by the Company as
well as affiliated stations owned by third parties.
In November 1997, the Company announced that it was
terminating its network affiliation agreements and that it
would cease distributing its full-time Aahs World Radio
programming format effective January 30, 1998. The Company
retained certain members of the Aahs World Radio staff and
intends to continue to explore other forms of distribution of
audio programming, including syndicated radio programs.
Additionally, the Company is attempting to sell its owned and
operated stations.
The Company's owned and operated radio stations are operated
in individual subsidiaries. Additionally, the broadcasting
licenses are held by a second tier of subsidiaries to these
operating subsidiaries. At December 31, 1997, the Company's
owned and operated radio stations and the related operating
and radio broadcast license holding subsidiaries are as
follows:
Radio Broadcast
License Holding
Operating Subsidiary Subsidiary Radio Station
-------------------- --------------- ---------------------------
Children's Radio of:
Chicago, Inc. WAUR-AM, Inc. WAUR(AM), Sandwich, IL
Dallas, Inc. KAHZ-AM, Inc. KAHZ(AM), Fort Worth, TX
Denver, Inc. KKYD-AM, Inc. KKYD(AM), Denver, CO
Detroit, Inc. WCAR-AM, Inc. WCAR(AM), Livonia, MI
Golden Valley, Inc. KYCR-AM, Inc. KYCR(AM), Golden Valley, MN
Houston, Inc. KTEK-AM, Inc. KTEK(AM), Alvin, TX
Kansas City, Inc. KCNW-AM, Inc. KCNW(AM), Fairway, KS
Los Angeles, Inc. KPLS-AM, Inc. KPLS(AM), Orange, CA
Milwaukee, Inc. WZER-AM, Inc. WZER(AM), Jackson, WI
Minneapolis, Inc. WWTC-AM, Inc. WWTC(AM), Minneapolis, MN
New York, Inc. WJDM-AM, Inc. WJDM(AM), Elizabeth, NJ
Philadelphia, Inc. WPWA-AM, Inc. WPWA(AM), Chester, PA
Phoenix, Inc. KIDR-AM, Inc. KIDR(AM), Phoenix, AZ
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Long Lived Assets:
The Company accounts for long-lived assets in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of". The
standard establishes 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. This standard did not have an impact on
the Company's financial position or results of operations.
Investment in Harmony:
Investment in Harmony (Note 4) is accounted for under the
equity method of accounting. The equity method of accounting
is used to account for investments made when the Company has
the ability to exercise significant influence over the
operating and financial policies of an investee, generally
involving a 20% to 50% interest in those investees.
Under the equity method, original investments are recorded at
cost, increased for subsequent investments in and advances to
the investee, and adjusted for the Company's share of
undistributed earnings and losses of the investee.
Additionally, the excess of the Company's pro rata share of
the investees net assets is amortized over the estimated
useful life of the underlying assets.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 net barter accounts receivable is included in
accounts receivable on the accompanying balance sheet.
The following represents the barter activity for the
respective years:
<TABLE>
<S> <C> <C>
Barter accounts receivable, net - January 1, 1996 $ 23,435
Barter revenues 640,903
Barter expenses (626,726)
----------
Barter accounts receivable, net - December 31, 1996 37,612
Barter revenues 703,824
Barter expenses (738,669)
----------
Barter accounts receivable, net - December 31, 1997 $ 2,767
==========
</TABLE>
Net Loss Per Share:
In February 1997, The Financial Accounting Standards Board
("FASB") issued SFAS No. 128, Earnings Per Share ("EPS"). SFAS
No. 128 requires dual presentation of basic EPS and diluted
EPS on the face of all income statements issued after December
15, 1997, for all entities with complex capital structures.
The adoption of SFAS No. 128 had no effect on the Company's
financial statements. Basic EPS is computed as net income
available to common shareholders divided by the weighted
average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur
from common shares issuable through stock options and
warrants. As the Company's stock options and warrants are
antidilutive for all periods presented only basic EPS is
presented. At December 31, 1997, outstanding options and
warrants to purchase 3,072,942 shares of the Company's common
stock were not included in the computation of diluted EPS as
their effect would be antidilutive.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Stock Based Compensation:
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.
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.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No.
130 requires that an enterprise report, by major components
and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS 131 establishes annual
and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of these
statements will not impact the Company's financial position,
results of operations or cash flows and any effect will be
limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
Reclassifications:
Certain amounts in the 1996 financial statements have been
reclassified to conform with the 1997 presentation. These
reclassifications have no effect on the accumulated deficit or
net loss previously reported.
NOTE 2: CONTINUED EXISTENCE AND MANAGEMENT'S PLAN
During 1997, the Company incurred a net loss of $14,558,353 and a
negative cash flow from operations of $9,233,163, resulting in a
working capital position of negative $25,706,192 and an accumulated
deficit totaling $40,862,299 at December 31, 1997. Given these
circumstances, the Company's continuing covenant defaults under its
principle debt agreement (Note 9), and the Company's expected
working capital losses in 1998, additional capital will be
necessary to sustain the Company's operations.
In response to this situation, management entered into a sales
agreement in July 1997 with Global Broadcasting Company, Inc.
("Global") for the sale of all of the Company's owned and operated
radio stations for consideration totaling $72,500,000; however, in
January 1998, the Company announced that Global did not close the
transaction within the time frame provided by the agreement. As of
February 24, 1998, the Company has not taken any action against
Global and is currently considering other options for the
disposition of its radio station properties. The Company has
entered into a brokerage agreement for this purpose and is also
attempting to secure additional bridge financing to sustain
operations until the completion of a station sale transaction. On
March 13, 1998, the Company was able to obtain an advance of
$900,000 subject to an amendment to the Credit Agreement (Note 9);
however, management believes additional funds will be necessary to
sustain operations.
Management believes the amount of cash required by the Company's
operations will decline in 1998 as a result of certain workforce
reductions enabled by the cessation of network operations (Note 1).
Further, management believes that this decline in operating cash
requirements when combined with proceeds from potential bridge
financing and from station sale transactions resulting from its
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: CONTINUED EXISTENCE AND MANAGEMENT'S PLAN (CONTINUED)
brokerage relationships will allow for adequate funding of the
Company's cash requirements through December 31, 1998, although no
assurance regarding the success of these efforts can be provided at
this time. Additionally, management will continue to seek waivers
for the expected continuing covenant defaults under its principle
debt agreement as they occur.
In the event that management's plans as described above are not
successful, the Company could be forced to reduce or terminate its
operations, curtail acquisitions or other projects, sell or lease
its current assets under unfavorable circumstances, delay certain
capital projects or potentially default on obligations to
creditors. The actions described above may not be sufficient to
prevent the Company from liquidating if it is unsuccessful in
consummating the sale of any of its stations and additional
financing is not obtained. 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 ("LMA")
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, 1997 and 1996. Additionally, the LMA provides the Company
with the option to purchase the radio broadcast license and
certain other assets of the radio station for consideration
aggregating $550,000. In September 1997, the Company exercised
this option and entered into an asset purchase agreement dated
November 1997. The purchase is required to close within 30
days of obtaining FCC approval which had not occurred as of
February 24, 1998.
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 (less a discount at 9.25% of
$427,716) 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 present value of the payments
due under the agreement.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS
(CONTINUED)
WJDM(AM), Elizabeth, New Jersey (Continued):
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 which terminates in May 2001, 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.
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 January 1997, the Company completed its acquisition of 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 (less a discount at 9.5% of $179,505) 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. The purchase price and
related acquisition expenses incurred of $20,546 were
allocated based on the fair market value of the assets
acquired consisting of a broadcast license of $3,370,045,
property and equipment of $50,500 and a covenant not to
compete of $320,495.
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
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS
(CONTINUED)
KMUS(AM), Muskogee, Oklahoma (Continued):
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 December 31, 1997) and is
secured by the KMUS(AM) station assets. 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.
KIDR(AM), Phoenix, Arizona:
In May 1997, the Company acquired the radio broadcast licenses
and certain other assets of the radio station KIDR(AM). The
consideration for the acquisition consisted of the issuance of
268,607 shares of common stock valued at $1,000,000. The
purchase price and related acquisition expenses incurred of
$75,000 were allocated based upon the fair market value of the
assets acquired consisting of a broadcast license of $636,617
and property and equipment totaling $438,383.
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, 1996. 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 issuances of common stock related to the
business acquisitions.
1996
------------
Revenues $ 6,086,647
Loss from operations (9,787,680)
Net loss (10,149,348)
Net loss per share (1.82)
Weighted average number of shares outstanding 5,570,000
The unaudited proforma results do not purport to be indicative of
the results of operations which actually would have resulted had
the acquisition occurred on January 1, 1996 or of future results of
operations of the consolidated entities. Proforma results of
operations were not included for the acquisitions of the broadcast
licenses and certain other assets of WAUR(AM), KMUS(AM), and
KIDR(AM) as each was considered an acquisition of productive assets
rather than a continuing business.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INVESTMENT IN HARMONY
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 and expiring at various dates
from May to October 2001. 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. The cash consideration was obtained from
the following sources, short-term debt due to directors and
shareholders aggregating $1,250,000 (Note 7), an additional
advance of $2,400,000 under the finance company credit
agreement (Note 9) and a use of working capital totaling
$110,000. In September 1997, the Company purchased an
additional 819,500 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 and expiring in
February 2000. Consideration for the acquisition was
$2,731,650 in cash obtained from an additional advance under
the finance company credit agreement (Note 9).
The Company's investment represents 33.7% of the outstanding
common stock of Harmony at December 31, 1997 (42.4% assuming
the Company's options and outstanding puts (Note 11) were
exercised). The aggregate purchase price paid of $6,739,150
and transaction costs totaling $83,572 were allocated based on
the estimated fair market value of the assets acquired,
consisting of common stock of $6,149,150 and stock options
valued at $590,000. The excess of the purchase price over the
Company's pro rata share of Harmony's net tangible assets
totaled $3,924,000. 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 produces television commercials, music videos and
related media. Harmony's services are usually directed towards
advertising agencies located in the major markets of New York,
Los Angeles, Chicago, Detroit, Dallas, San Francisco and in
regional markets. Harmony's most recent fiscal year end was
June 30, 1997 and its operations and the Company's equity in
the earnings (loss) of Harmony are summarized as follows.
Year Ended Six Months Ended
June 30, 1997 December 31, 1997
------------- -----------------
Contract revenues $ 64,830,918 $ 22,720,236
Cost of production 52,174,372 18,254,490
------------ ------------
Gross profit 12,656,546 4,456,746
Operating expenses 11,185,011 5,738,909
------------ ------------
Income (loss) from operations 1,471,535 (1,273,163)
Interest income 39,655 17,251
------------ ------------
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INVESTMENT IN HARMONY (CONTINUED)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, 1997 December 31, 1997
------------- -----------------
<S> <C> <C>
Income (loss) before income taxes 1,511,190 (1,255,912)
Income taxes 178,763 23,142
------------ ------------
Net income (loss) $ 1,332,427 $ (1,279,054)
============ ============
Company's pro rata share of Harmony's
Net income (loss) $ -- $ (328,962)
Amortization expense for the excess of
the investment cost over the underlying
net assets of Harmony -- (212,032)
------------ ------------
Company's equity income (loss) in Harmony $ -- $ (540,994)
============ ============
</TABLE>
The consolidated balance sheet of Harmony is summarized as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1997
------------- -----------------
<S> <C> <C>
Current assets $ 9,504,622 $ 6,153,550
Non-current assets 5,000,424 4,851,971
------------ ------------
Total assets $ 14,505,046 $ 11,005,521
============ ============
Current liabilities 6,748,258 5,007,537
Stockholders' equity 7,756,788 5,997,984
------------ ------------
Total liabilities and stockholders' equity $ 14,505,046 $ 11,005,521
============ ============
</TABLE>
Harmony is included in The Nasdaq Stock Market's National Market under
the symbol "HAHO". At December 31, 1997, the aggregate value of the
Harmony common stock held by the Company totaled $4,377,462.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Life
1997 1996 In Years
--------------- ------------ -----------
<S> <C> <C> <C>
Land $ 680,079 $ 568,462
Buildings 757,956 742,962 30
Studio and broadcast equipment 2,639,768 2,162,022 5-10
Towers 1,208,718 943,328 13
Office equipment 1,200,704 1,102,632 5
Leasehold improvements 379,969 211,998 5
Equipment under capital leases 177,290 172,391 5
--------------- ------------
7,044,484 5,903,795
Less accumulated depreciation 2,336,157 1,628,864
--------------- ------------
Property and equipment, net $ 4,708,327 $ 4,274,931
=============== ============
</TABLE>
Depreciation expense, including that on equipment under capital
leases, was $711,927 and $586,901 for the years ended December 31,
1997 and 1996, respectively.
Accumulated depreciation on the equipment under capital leases was
$92,025 and $65,567 at December 31, 1997 and 1996, respectively.
NOTE 6: INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Life
1997 1996 In Years
--------------- ------------ ----------
<S> <C> <C> <C>
Broadcast license $ 21,684,545 $ 17,671,494 20
Less accumulated amortization 2,005,391 946,841
--------------- ------------
Broadcast licenses, net $ 19,679,154 $ 16,724,653
=============== ============
Trademarks and tradenames $ 442,790 $ 443,380 6
Non-compete agreement 1,940,250 1,619,755 2-10
Other 148,322 645,195 5
--------------- ------------
2,531,362 2,708,330
Less accumulated amortization 981,262 660,211
--------------- ------------
Intangible assets, net $ 1,550,100 $ 2,048,119
=============== ============
</TABLE>
Amortization expense related to the intangible assets totaled
$1,424,793 and $913,603 for the years ended December 31, 1997 and
1996, respectively.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: SHORT-TERM DEBT - DIRECTORS AND SHAREHOLDERS
In July 1997, the Company received proceeds aggregating $1,250,000
with the issuance of promissory notes payable and warrants to
purchase 125,000 shares of the Company's common stock. The notes
payable are due to the following parties: a partnership controlled
by a Company director, a Company director individually and a less
than five-percent shareholder. The proceeds were utilized to
purchase 480,770 shares of the common stock of Harmony (Note 4).
The notes payable bear interest at a rate of 10%, are secured by
the purchased common stock of Harmony, and mature in July 1998.
The warrants vested immediately upon grant and are exercisable at
$4.00 per share over a term of five years. The value of the
warrants was determined to be $137,500. The notes payable are
included on the accompanying balance sheet less the remaining
unamortized deferred warrant value of $77,500 at December 31,
1997.
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.
NOTE 8: LINE OF CREDIT
At December 31, 1997 and 1996, the Company had outstanding
short-term borrowings totaling $453,838 and $164,162 under a
discretionary line of credit pursuant to the finance company
credit agreement (Note 9). The line of credit is limited to the
lesser of $500,000 or a percentage of accounts receivable. At
December 31, 1997, the maximum credit available was approximately
$453,838 which was fully utilized. Interest is charged at a
variable rate (12.25% at December 31, 1997).
NOTE 9: LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Term note payable bearing interest at a
variable rate (12.25% at December 31,
1997). The note payable is due in
variable quarterly installments of
principle beginning April 16, 1998 with
monthly payments of interest through
November 2000 when the remaining balance
is payable in full. Due to the recurring
requirement to meet certain restrictive
financial covenants, which historically
have not been met, this entire
indebtedness is classified as current at
December 31, 1997 and 1996. $ 22,500,000 $ 7,885,000
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: LONG-TERM DEBT (CONTINUED)
1997 1996
------------- ------------
Note payable bearing interest at a
variable rate (9.5% at December 31,
1997), payable in quarterly installments
of principle and interest through
November 2002, and secured by broadcast
license and other assets of radio station
WAUR(AM), Sandwich, Illinois.
Additionally, the note payable
installment payments may be satisfied
with the issuance of common stock of the
Company subject to certain trading volume
restrictions. 1,198,265 -
Covenant not-to-compete, non-interest
bearing, payable in quarterly
installments of $37,500 through June
2006, less unamortized discount at 9.25%
($320,161 and $390,514 at December 31,
1997 and 1996, respectively). 954,839 1,034,486
Covenant not-to-compete, non-interest
bearing, payable in quarterly
installments of $12,500 through January
2006, less unamortized discount at 9.5%
($157,021 at December 31, 1997). 305,479 -
Note payable due to a bank, bearing
interest at 9.25%, payable in monthly
installments of principal and interest
totaling $2,164 through September 2021,
and secured by the real property of
station KKYD(AM) in Denver. 246,716 249,414
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 a Company director. 101,315 120,471
Various installment notes payable,
bearing interest from 0% to 8.5% and due
at various maturities through September
2001. 59,591 110,379
------------ -----------
25,366,205 9,399,750
Less current portion 22,857,386 8,033,758
------------ -----------
Long-term debt, less current portion $ 2,508,819 $ 1,365,992
============ ===========
</TABLE>
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: LONG-TERM DEBT (CONTINUED)
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
included a $11,500,000 term note payable, of which advances
totaling $3,615,000 and $7,885,000 were received during 1997 and
1996, respectively, a $1,000,000 line of credit (Note 8), and a
$4,000,000 acquisition facility which was unused at December 31,
1996. In July and September 1997, the Credit Agreement was amended
and restated pursuant to additional term note payable advances
received by the Company totaling $5,420,100 and $5,800,000,
respectively. The provisions of the Credit Agreement remained
substantially unchanged as a result of the July and September 1997
amendments and restatement except that the $4,000,000 acquisition
facility was canceled and the available line of credit (Note 8)
was reduced from $1,000,000 to $500,000 in favor of the increased
term note payable.
In connection with the original Credit Agreement and subsequent
amendments, the Company has incurred debt issuance costs
aggregating $1,593,420. These costs included finance company fees
which reduced the proceeds of the term note payable advances
($985,000), the value of assigned to warrants granted to the
finance company ($268,000), the value of the 37,500 shares of the
Company common stock issued to the transaction broker ($154,687),
and other transaction costs ($185,733). The debt issuance costs
have been deferred on the accompanying balance sheet and are being
amortized utilizing the interest method over the remaining life of
the Credit Agreement. At December 31, 1997 and 1996, the
unamortized value of these costs totaled $1,173,209 and $465,420,
respectively.
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, must maintain a minimum Harmony
common stock pledge of $2,600,000, and may not make capital
expenditures in excess of $750,000 annually during 1998 to 2000.
As of December 31, 1997, the Company had not met certain of the
covenant requirements; however, on March 13, 1998, the Finance
Company waived its rights pursuant to these violations in
connection with an amendment to the Credit Agreement (Note 16).
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, a pledge of
1,407,961 shares of Harmony common stock, and by a guarantee of
its subsidiaries.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt including classification of
the entire term note payable to the finance company (aggregating
$22,500,000 at December 31, 1997) as a current obligation, are as
follows:
Year ending December 31:
1998 $ 22,857,386
1999 375,522
2000 437,003
2001 398,270
2002 433,981
Thereafter 864,043
-------------
$ 25,366,205
=============
The Company believes that the carrying value of the debt
approximates its fair market value at December 31, 1997 and 1996,
as the Company's borrowing rate has not changed substantially
since the issuance of the majority of its debt.
NOTE 10: OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain computer equipment under capital leases
expiring through October 2002. Future minimum lease payments for
each of the next five years are as follows:
Year ending December 31:
1998 $ 37,301
1999 31,306
2000 15,200
2001 12,929
2002 656
-------------
Total minimum lease payments 97,392
Less amount representing interest 22,189
-------------
Present value of net minimum lease payments 75,203
Less current portion 26,367
-------------
Long-term portion $ 48,836
=============
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: COMMITMENTS AND CONTINGENCIES
Operating Leases and Other Commitments:
The Company leases office, broadcast space and a transmitter
site from related parties, including a Company director. Other
commitments include office equipment, satellite transmission
rights, local programming and marketing agreements, license
agreements and similar type contracts.
Future minimum lease and other commitment payments are as
follows for the years ending December 31:
Related Third
Parties Parties Total
------------- ------------ ------------
1998 $ 309,374 $ 468,059 $ 777,433
1999 313,000 342,687 655,687
2000 324,000 138,205 462,205
2001 280,000 103,496 383,496
2002 - 60,549 60,549
------------- ------------ ------------
$1,226,374 $1,112,996 $2,339,370
============= ============ ============
Total rent expense was $878,363 and $792,069 for the years
ended December 31, 1997 and 1996, respectively, and rent
expense to related parties totaled $288,608 and $244,518,
respectively.
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, 1997. A contribution expense will be
recorded for the fair market value of the shares on the date
the shares are actually issued.
Pending Litigation:
Following the termination of the ABC Radio Network's Joint
Operations Agreement (the "Agreement") (Note 13) 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
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Pending Litigation (Continued):
sought. Additionally, ABC has subsequently filed a
counterclaim against the Company alleging that CBC owed
certain fees to ABC pursuant to the Agreement. The Company
denies that any fees are due ABC. ABC seeks an unspecified
amount of damages. Management believes that should ABC prevail
upon its counter-claim, the resulting damages would not have a
material impact on the Company. In connection with this
lawsuit, the Company issued 200,000 shares of the Company's
common stock for payment of the legal fees aggregating
$832,627.
Additionally, the Company has entered an agreement with its
primary counsel for this litigation. Under the agreement
counsel has agreed to make twenty-five percent of their fees
contingent upon the successful outcome of this lawsuit in
exchange for seven and one half percent of any settlement or
judgement in favor of the Company. At December 31, 1997, the
fees deferred under this agreement totaled approximately
$265,000.
Transaction Commissions:
The Company has two active brokerage agreements 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, 1997 and 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 were no Company
contributions in 1997 or 1996.
Harmony Common Stock Put Option:
In connection with the Company's investment in Harmony, the
Company agreed to purchase an additional 225,000 shares of
Harmony common stock for a cash payment of $562,500 at the
option of the seller. In February 1998, the seller exercised
this put option and accordingly the Company is required to
purchase the aforementioned shares no later than March 31,
1998.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Land Purchase Agreement:
In August 1997, the Company entered an agreement to purchase
land for the improvement of its KPLS(AM) broadcast signal.
Under the agreement, the Company may purchase approximately
sixty acres of land for a cash payment of $3,210,000.
Additionally, the Company must make escrow deposits of $5,000
per month until the transaction is closed which must occur by
August 1998. However, the closing may be extended for
approximately six months at the Company's option for a cash
payment of $20,000.
NOTE 12: REDEEMABLE CONVERTIBLE PREFERRED STOCK
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
9). 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 13: SHAREHOLDERS' EQUITY
Common Stock:
The Company has authorized 50,000,000 shares of common stock
at $.02 par value. The Company has issued 6,460,824 voting
shares of which 6,460,824 and 5,609,239 are outstanding at
December 31, 1997 and 1996, respectively, and 189,041
nonvoting shares of which all are outstanding at December 31,
1997 and 1996.
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 employees 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
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SHAREHOLDERS' EQUITY (CONTINUED)
Incentive and Non-Qualified Stock Options Plans (Continued):
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 vest over varying periods or upon
the occurrence of specific events and expire through April
2003.
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 generally vest over a five-year period and expire
through January 2005.
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
options are generally valued at the fair market value of the
stock on the date of 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 1997 and 1996.
A summary of the status of the Company's stock option plans as
of December 31, 1997 and 1996 and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------ -----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
---------------------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,343,806 $ 5.74 570,316 $ 6.71
Granted........................... 199,250 3.52 831,015 5.24
Exercised......................... (123,000) 2.00 (21,782) 7.94
Forfeited......................... (47,655) 5.86 (35,743) 7.36
---------- ---------
Outstanding at end of year........ 1,372,401 5.76 1,343,806 5.74
========== =========
Options exercisable at year end... 518,393 6.71 436,425 6.33
Weighted-average fair value of
options granted during the year $ 2.21 $ 2.56
</TABLE>
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SHAREHOLDERS' EQUITY (CONTINUED)
Incentive and Non-Qualified Stock Options Plans (Continued):
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Contractual Life Price at 12/31/97 Price
----------------- ------------- ---------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
$ 2.00 to 4.99 575,526 4.1 years $ 3.53 181,076 $ 3.54
5.00 to 7.99 466,125 3.6 years 6.40 98,625 7.41
8.00 to 12.76 330,750 2.6 years 8.71 238,692 8.83
--------- -------
2.00 to 12.76 1,372,401 3.6 years 5.76 518,393 6.71
========= =======
</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>
1997 1996
------------------------------- ------------------------
Weighted-
Weighted- Average
Average Exercise
Performance Options Shares Exercise Price Shares Price
-------------------------------- ------------ -------------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 160,625 $ 7.70 183,125 $ 7.43
Granted......................... - - 2,500 8.38
Exercised....................... - - - -
Forfeited....................... (1,875) 8.38 (25,000) 7.26
----------- -------------- ---------- --------
Outstanding at end of year...... 158,750 7.59 160,625 7.60
============ ============== ========== ========
Options exercisable at year end 50,000 7.70 50,000 7.70
Weighted-average fair value of
options granted during the year $ - $ 4.02
</TABLE>
As of December 31, 1997 the performance options outstanding
under the Plans have exercise prices between $7.26 and $8.38
and a weighted-average remaining contractual life of 2.2
years.
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
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SHAREHOLDERS' EQUITY (CONTINUED)
Incentive and Non-Qualified Stock Options Plans (Continued):
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 1997 and 1996, respectively: no
dividend yield for each year; weighted average estimated
option life 5.0 and 2.5 years; expected volatility of 69.3 and
70.2 percent; and risk-free interest rates of 6.3 and 6.0
percent.
Under the accounting provisions of FASB Statement 123, the
Company's net loss and loss per share would have been reduced
to the pro forma amounts indicated below:
1997 1996
--------------- --------------
Net loss:
As reported $ (14,558,353) $ (9,867,879)
Pro forma (15,155,046) (11,996,781)
Net loss per share
As reported (2.33) (1.99)
Pro forma (2.43) (2.40)
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. No
warrants were issued under this program in 1997 or 1996.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: 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.
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 Radio AAHS format to their
inventory, assisting the Company in marketing the format
to broadcasters and advertisers. The agreement also
provided for a cooperative effort in developing sales,
marketing and research programs. In consideration for
entering into the 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-Scholes
option-pricing model. Approximately $606,000 was charged
to operations during the period January to July 1996. 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 Fees:
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 became
exercisable in June 1997 and expire in June 2002.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SHAREHOLDERS' EQUITY (CONTINUED)
Brokerage Fees (Continued):
In March 1997 and in connection with obtaining the Credit
Agreement (Note 9), the Company issued 37,500 shares of
common stock with an aggregate value of $154,687 as a
brokerage commission.
Finance Company Credit Agreement:
In connection with the original completion and subsequent
amendments of the Credit Agreement (Note 9), the Company
granted the finance company warrants to purchase 350,000
shares of the Company's common stock at exercise prices
ranging from $3.76 to $5.29. The warrants became
immediately exercisable and expire through September 2002.
The warrants also 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 related exercise price.
Additionally, on March 13, 1998, the Credit Agreement was
amended (Note 16). In connection with this subsequent
amendment, the Company granted the finance company a
warrant to purchase 100,000 shares of the Company's common
stock for $3.68 per share and amended the exercise price
on a previously granted warrant for 100,000 shares of the
Company's common stock from $5.29 to $3.68 per share.
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, 1996 2,261,145 2,247,144 $2.40 - $13.80
Granted:
Brokerage fee 125,000 - 11.00
Short-term debt 57,500 57,500 13.00
Credit Agreement 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
----------- ------------ --------------
</TABLE>
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<S> <C> <C> <C>
Balance at December 31, 1996 1,290,591 1,151,590 $2.40 - $13.80
Granted:
Credit Agreement 100,000 100,000 5.29
Credit Agreement 200,000 200,000 3.76
Short-term debt 125,000 125,000 4.00
Exercised:
Other (15,050) (15,050) 2.40
Became exercisable - 125,000 11.00
------------ ----------- --------------
Balance at December 31, 1997 1,700,541 1,686,540 $2.40 - $13.80
============ =========== ==============
</TABLE>
Included in the table above are warrants issued in connection
with the finance company Credit Agreement, bridge loans and
other short-term notes payable. The value of these warrants is
charged to interest expense over the term of the related debt
agreement and during the years ended December 31, 1997 and
1996, the Company incurred interest expense aggregating
approximately $103,859 and $238,000, 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.
NOTE 14: RELATED PARTY TRANSACTIONS
The Company has a management services contract with a
privately held affiliate (the "Management Company") related to
the Company through common control. The contract, which
expires in December 1999 and is renewable annually thereafter,
requires that the Company pay the Management Company a fee of
$75,000 per month for services received. The management fees
totaled $900,090 and $750,000 in 1997 and 1996, respectively.
The Management Company also provides services to another
privately held affiliate related to the Company through common
control. The management fee is based on estimated usage of the
Management Company's services by each company. Management
reviews the allocation periodically and believes that the
allocation method is reasonable.
Additionally, at December 31, 1997 and 1996, accounts
receivable (payable) aggregating $142,868 and $(44,367),
respectively, were outstanding from (to) several affiliates
related to Company through common control. These accounts
result primarily from the allocation of shared expenses.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: INCOME TAXES
At December 31, 1997, the Company has net operating loss
carryforwards as follows for income tax purposes:
Net Operating Loss
Carryforward Expires Carryforward
-------------------- ------------------
2001 $45,778
2002 23,703
2004 24,057
2005 58,988
2006 19,053
2007 1,009,553
2008 3,314,683
2009 4,256,245
2010 5,923,651
2011 7,257,593
2012 (approximate) 13,000,000
-----------
$34,933,304
===========
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:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Statutory rate (benefit) (34.0)% (34.0)%
Operating losses generating no
current tax benefit 34.0% 26.7
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:
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $12,943,000 $ 8,086,000
Excess of subsidiary stock tax basis
over the amount for financial reporting 3,814,000 3,814,000
Other items not yet deductible for tax
purposes 466,000 69,000
------------ -----------
Total long-term deferred tax asset 17,223,000 11,969,000
</TABLE>
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: INCOME TAXES (CONTINUED)
<TABLE>
<S> <C> <C>
Deferred tax liability:
Amortization and the excess of broadcasting
license financial reporting basis over the
amounts for taxes 3,356,000 3,592,000
------------ ------------
Total net long-term deferred tax asset 13,867,000 8,377,000
Valuation allowance for net deferred tax
assets (13,867,000) (8,377,000)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
</TABLE>
As the Company has posted consistent losses since inception,
realization of the tax benefit related to these net deferred tax
asset is uncertain. Accordingly, no deferred tax asset has been
recorded to reflect their potential value. The net change in the
deferred tax valuation allowance was an increase of $5,490,000 and
$2,836,000 in 1997 and 1996, respectively.
NOTE 16: SUBSEQUENT EVENTS
Note Payable - Harmony:
In January 1998, the Company received proceeds totaling
$611,000 and paid debt issue costs of $39,000 through the
issuance of a note payable to Harmony (Note 4) with a face
amount of $650,000. The note payable bears interest at 15%, is
unsecured and due upon demand.
Shareholder Rights Plan:
In February 1998, the Company adopted a Shareholder Rights
Plan designed to enable the Company and its board to develop
and preserve long-term values for shareholders and to protect
shareholders in the event an attempt is made to acquire
control of Company through certain coercive or unfair tactics
or without an offer of fair value to all shareholders. The
plan provides for distribution of a common share purchase
right to each shareholder of record of the Company's common
stock on February 27, 1998. Under the plan, these rights to
purchase common shares will generally be exercisable a certain
number of days after a person or group acquires or announces
an intention to acquire 20% or more of the Company's common
stock. Each right entitles the holder, after the rights become
exercisable, to receive shares of Company common stock having
a market value of two times the exercise price of the right or
securities of the acquiring entity at one-half their market
value at that time.
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: SUBSEQUENT EVENTS
Amendment of the Credit Agreement:
On March 13, 1998, the Credit Agreement (Note 9) was amended
pursuant to an additional term note payable advance of
$1,000,000 of which the Company received proceeds totaling
$900,000 and paid a loan fee of $100,000. The provisions of
the Credit Agreement remained substantially unchanged as a
result of the amendment, except that the variable interest
rate was increased by 1% to 13.25% at March 13, 1998, a
principle installment of $500,000 due March 31, 1998 was
deferred until April 16, 1998, and the Company received a
waiver of certain debt covenants which the Company had not met
as of December 31, 1997. As additional consideration for the
amendment, the Company issued the finance company an
additional warrant to purchase 100,000 shares of the Company's
common stock and amended the exercise price of a previously
granted warrant (Note 13).
<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 years ended December 31, 1994 and 1995, 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 such 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 were 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 were no reportable events (as defined in
Regulation S-K, Item 304(a)(1)(v)).
<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
MANAGEMENT
<TABLE>
<CAPTION>
Name Age Position
-------------------- --- --------------------------------------------------
<S> <C> <C>
Christopher T. Dahl 54 Chairman of the Board of Directors, President and Chief
Executive Officer
James G. Gilbertson 36 Chief Operating Officer, Chief Financial Officer and
Treasurer
Lance W. Riley 47 General Counsel and Secretary
Gary W. Landis 44 Executive Vice President of Programming
Barbara A. McMahon 42 Executive Vice President of Affiliate Relations
Rick E. Smith 36 Executive Vice President of National Sales
Richard W. Perkins 67 Director
Russell Cowles II 61 Director
Michael R. Wigley 44 Director
</TABLE>
CHRISTOPHER T. DAHL has been Chairman of the Board, President and Chief
Executive Officer of the Company since its inception in February 1990. Mr. Dahl
is Chairman and Chief Executive Officer of CAC and a director of RMC. 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. Mr. Dahl is also Chairman of the Board of
Harmony.
JAMES G. GILBERTSON has served as the Company's Chief Operating Officer
since April 1996 and its Chief Financial Officer since July 1992. From June 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 LLP. Mr. Gilbertson is also an
executive officer of Harmony.
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.
Mr. Riley has been Of Counsel with the firm of Hessian & McKasy, P.A. (f/k/a
Hessian, McKasy & Soderberg, P.A.) since 1994. Prior to joining the Company, Mr.
Riley was partner in the firm of Courey, Albers, Gilbert and Riley P.A. Mr.
Riley is also an officer of Harmony.
GARY W. LANDIS has 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.
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
<PAGE>
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.
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 PCM, a registered investment advisor. Mr. Perkins is also a
director of CAC and RMC as well as the following publicly held companies:
Bio-Vascular, Inc., a medical products manufacturer; CNS, Inc., a consumer
products manufacturer; Lifecore Biomedical, Inc., a medical device manufacturer;
Nortech Systems, Inc., an electronic sub-systems manufacturer; Eagle Pacific
Industries, Inc., a manufacturer of plastic pipe; Quantech LTD., a developer of
immunological tests; and Harmony.
RUSSELL COWLES II was elected in 1994 as a director of the Company,
subject to either obtaining a waiver from the FCC of the application of its
cross-ownership rules or the amendment of such rules to remove existing
restrictions. In March 1998, following his sale of interests which implicated
the FCC's cross-ownership rules, Mr. Cowles assumed his role as a director. Mr.
Cowles has served as a Trustee of the Cowles Family Voting Trust since 1984. 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 and RMC.
MICHAEL R. WIGLEY was elected to the Company's Board of Directors in
February 1998, to fill the vacancy created by the resignation of Rodney P.
Burwell and to serve until the next Annual Meeting of Shareholders. Mr. Wigley
is President and Chief Executive Officer of Great Plains Companies, Inc. ("Great
Plains"), a building material and supply company based on Roseville, Minnesota.
He has served as its President since 1989. Mr. Wigley is also Chairman and Chief
Executive Officer of four subsidiaries of Great Plains, as well as Chairman and
Chief Executive Officer of Great Plains Properties, Inc. and TerrDek Lighting,
Inc., two independent privately-held companies. He co-founded the Minnesota
branch of McKinsey & Company, where he managed various teams of consultants from
1986 to 1989. Mr. Wigley holds a M.B.A. from Harvard University and a M.S. in
Civil Engineering from Stanford University.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
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 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 solely on a review
of copies of reports filed with the Commission during 1997, all applicable
Section 16(a) filing requirements were satisfied.
<PAGE>
ITEM 10 EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid to
or accrued by each of the Company's executive officers receiving in excess of
$100,000 (the "Named Executive Officers") for services rendered to the Company
during the fiscal years ended December 31, 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS
------------------- ----------------------
NAME AND SECURITIES UNDERLYING
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS
------------------ ---- --------- -------- ----------------------
<S> <C> <C> <C> <C>
Christopher T. Dahl 1997 210,000 - 37,500(1)
President and 1996 210,000 56,500 150,000(2)(3)
Chief Executive 1995 210,000 12,500 41,250(4)
Officer
James G. Gilbertson 1997 123,500 - 25,000(1)
Chief Operating 1996 123,500 55,875 100,000(3)(5)
Officer 1995 97,500 17,500 25,000(6)(7)
Gary W. Landis 1997 125,000 - 12,500(1)
Executive Vice 1996 125,000 12,500 75,000(3)(8)
President of 1995 125,000 -- 45,000(9)
Programming
Lance W. Riley 1997 118,750 - 12,500(1)
General Counsel 1996 110,833 42,500 75,000(3)(8)
and Secretary 1995 95,000 15,000 40,000(10)
Denny J. Manrique(11) 1997 122,655 6,000 9,000(1)
Executive Vice 1996 117,023 1,000 43,000(12)
President of Sales 1995 101,082 -- --
Development
</TABLE>
- ---------------
(1) Option grants at $3.50 per share pursuant to the Company's 1994 Stock
Option Plan.
(2) Option grant of 50,000 shares at $5.88 per share and 75,000 shares at
$3.50 per share pursuant to the Company's 1994 Stock Option Plan.
(3) Non-qualified grant of options for 25,000 shares at $5.88 per share.
(4) Non-qualified grant of options for 41,250 shares at $7.70 per share.
(5) Option grant of 25,000 shares at $5.88 per share and 50,000 shares at
$3.50 per share pursuant to the Company's 1994 Stock Option Plan.
(6) Option grant of 12,500 shares at $7.26 per share pursuant to the
Company's 1991 Stock Option Plan.
(7) Option grant of 12,500 shares at $7.26 per share pursuant to the
Company's 1994 Stock Option Plan.
(8) Option grant of 25,000 shares at $5.88 per share and 25,000 shares at
$3.50 per share pursuant to the Company's 1994 Stock Option Plan.
(9) Option to purchase 17,500 shares at $7.26 per share pursuant to the
Company's 1994 Stock Option Plan and non-qualified grants of options
for 27,500 shares at $9.50 per share.
<PAGE>
(10) Option grant of 25,000 shares at $7.25 per share pursuant to the
Company's 1991 Stock Option Plan and non-qualified options of 15,000
shares at $9.50 per share.
(11) Mr. Manrique's employment with the Company terminated on February 1,
1998.
(12) Option grant of 25,000 shares at $8.38 per share and 18,000 shares at
$3.50 per share pursuant to the Company's 1994 Stock Option Plan.
The following table sets forth the number of securities underlying
options granted in1997, the percent the grant represents of the total options
granted to employees during such fiscal year, the per share exercise price of
the options granted, and the expiration date of the options for the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN FISCAL EXERCISE PRICE
NAME GRANTED YEAR ($/SHARE)(1) EXPIRATION DATE
--------------------------------- ------------------ ------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Christopher T. Dahl.............. 37,500 19.9 3.50 6/2/02
James G. Gilbertson.............. 25,000 13.3 3.50 6/2/02
Gary W. Landis................... 12,500 6.6 3.50 6/2/02
Lance W. Riley................... 12,500 6.6 3.50 6/2/02
Denny J. Manrique................ 9,000 4.8 3.50 6/2/02
</TABLE>
- ---------------
(1) Fair market value on the date of grant, in accordance with the
Company's 1994 Stock Option Plan.
The following table sets forth certain information regarding options
exercised by the Named Executive Officers during 1997 and the number and value
of unexercised in-the-money options for the Named Executive Officers at December
31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT FISCAL
AT FISCAL YEAR END YEAR END($)(1)
SHARES -------------------- --------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED($) UNEXERCISABLE UNEXERCISABLE
----------------------------- ----------- ----------- -------------------- --------------------
<S> <C> <C> <C> <C>
Christopher T. Dahl.......... 25,000 45,313 80,625/198,125 107,188/286,563
James G. Gilbertson.......... 10,750 18,141 57,917/129,583 71,458/191,042
Gary W. Landis............... - - 48,542/103,958 35,729/95,521
Lance W. Riley............... - - 45,208/107,292 35,729/95,521
Denny J. Manrique............ - - 25,406/26,594 25,725/68,775
</TABLE>
- ---------------
(1) Market value of underlying securities at fiscal year end minus the
exercise price.
<PAGE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information as of March 15, 1998,
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, Smith and Ms. McMahon is 724 First Street
North, Minneapolis, Minnesota 55401.
SHARES PERCENT
BENEFICIALLY OF
OWNED (1) CLASS
---------------- ---------
Perkins Capital Management, Inc............. 1,609,771(2) 25.1%
730 East Lake Street
Wayzata, Minnesota 55391
Heartland Advisors, Inc..................... 1,455,100(3) 22.7%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Christopher T. Dahl......................... 574,236(4) 8.8%
Richard W. Perkins.......................... 487,709(5) 7.3%
Foothill Capital Corporation................ 450,000(6) 6.3%
11111 Santa Monica Boulevard
Los Angeles, California 90025
Russell Cowles II........................... 283,139(7)(8) 4.4%
John Cowles Family Trust ................... 214,041(8) 3.3%
Sherburne and Coughlin, Ltd.
708 South 3rd Street, Suite 510
Minneapolis, Minnesota 55415
James G. Gilbertson......................... 78,583(9) 1.2%
Gary W. Landis.............................. 51,250(10) *
Lance W. Riley.............................. 47,917(10) *
Barbara A. McMahon.......................... 45,600(10) *
Rick E. Smith............................... 39,550(10) *
Michael R. Wigley........................... 6,250(10) *
All Directors and Executive Officers
as a Group (12 persons)................ 1,614,233(11) 22.1%
- ---------------
* Less than 1%
(1) Securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations of the Commission and, accordingly, may include
securities owned by or for, among others, the spouse, children or
certain other relatives of such person as well as other securities as
to which the person has or shares voting or investment power or has the
option or right to acquire Common Stock within 60 days.
(2) Based upon statements filed with the Commission, PCM is a registered
investment adviser of which Richard W. Perkins, a director of the
Company, is President. As set forth in Schedule 13G filed with the
Commission on February 11, 1998, PCM has the sole right to sell such
shares and has sole voting power over 70,286 of such shares. Mr.
Perkins and PCM disclaim any beneficial interest in such shares.
Excludes shares beneficially owned by Mr. Perkins.
<PAGE>
(3) As set forth in Schedule 13G filed with the Commission on January 23,
1998. Such shares are held in investment advisory accounts. As a
result, various persons have the right to receive or the power to
direct the receipt of dividends from, or the proceeds from the sale of,
such shares. Includes 590,000 shares held by Heartland Value Fund, a
series of Heartland Group, Inc., a registered investment company.
Includes 1,257,100 shares over which Heartland Advisors, Inc. claims
sole voting power, and 1,455,100 shares over which sole dispositive
power is claimed.
(4) Includes 113,750 shares purchasable upon the exercise of options and
warrants.
(5) Includes (i) 239,690 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) 235,625 shares purchasable upon the exercise of options and
warrants by Mr. Perkins and (iv) 5,625 shares purchasable upon the
exercise of warrants by Perkins Capital Management, Inc. Profit Sharing
Plan and Trust and Perkins Foundation. Mr. Perkins has the sole right
to sell such shares and has sole voting power over 239,690 of such
shares. Mr. Perkins' beneficial ownership excludes shares held for the
accounts of clients of PCM.
(6) Represents shares purchasable upon the exercise of warrants.
(7) Includes 12,500 shares purchasable upon the exercise of warrants. Mr.
Cowles beneficially owns (i) 189,041 shares owned by the John Cowles
Family Trust and (ii) 25,000 shares purchasable by the John Cowles
Family Trust upon the exercise of warrants.
(8) The shares owned by the John Cowles Family Trust are non-voting shares.
(9) Includes 63,333 shares purchasable upon the exercise of options.
(10) Represents shares purchasable upon the exercise of options or warrants.
(11) Includes 646,400 shares purchasable upon exercise of options and
warrants.
<PAGE>
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 Messrs. Dahl and 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 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 Chairman of the
Board, President and Chief Executive Officer of the Company and two other
directors of the Company. 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 $900,000 and $750,000 for such services during 1997 and
1996, respectively. The salaries of two officers of the Company, Messrs. Riley
and Gilbertson, are paid by RMC. 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.
Loans and Financing Transactions
In July 1997, the Company borrowed an aggregate of $1,250,000 from
three parties: Rodney P. Burwell, a former Company director, Pyramid Partners,
L.P., an entity of which PCM is the managing partner, and William M. Toles, a
shareholder of the Company. Messrs. Burwell, Perkins and Toles are members of
the Board of Directors of Harmony. Their loans are evidenced by notes bearing
interest at 10% per year, payable in July 1998. Additionally, an aggregate of
125,000 warrants to purchase Common Stock at $4.00 per share were issued to
these lenders.
In January 1998, the Company received proceeds of $611,000 and paid
debt issuance costs of $39,000 through the issuance of a note payable to Harmony
with a face amount of $650,000. The note payable bears interest at 15%, is
unsecured and due upon demand.
<PAGE>
ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation, as amended and restated
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996 (File
No. 0-21534) filed on March 31, 1997).
3.2 Amended and Restated Bylaws (incorporated by reference to the
Company's Registration Statement on Form S-18 (File No.
33-44412) filed on December 5, 1991).
4.1 Rights Agreement between the Company and Norwest Bank
Minnesota, National Association, as Rights Agent, dated as of
February 19, 1998 (incorporated by reference to the Company's
Registration Statement on Form 8-A (File No. 0-21534) filed on
February 20, 1998).
10.1 1991 Incentive Stock Option Plan (incorporated by reference to
the Company's Registration Statement on Form S-18 (File No.
33-44412) filed on December 5, 1991).
10.2 Lease between the Company and 5501 Building Company dated
November 1, 1996 (incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 0-21534) filed on March 31, 1997).
10.3 Lease between the Company and 724 Associates dated November 1,
1996 (incorporated by reference to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996
(File No. 0-21534) filed on March 31, 1997).
10.4 Management Services Agreement between the Company and Radio
Management Corporation dated February 22, 1997 (incorporated
by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996 (File No. 0-21534)
filed on March 31, 1997).
10.5 1994 Stock Option Plan (incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996 (File No. 0-21534) filed on March 31,
1997).
10.6 1994 Director Stock Option Plan (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).
10.7 Attribution Agreement between the Company, Community Airwaves
Corporation, DCP Broadcasting Corporation and Christopher T.
Dahl dated February 15, 1995 (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).
10.8 Letter Agreement between the Company and Brenner Securities
Corporation dated November 7, 1995, relating to the provision
of certain financial services (incorporated by reference to
the Company's Registration Statement on Form S-2 (File No.
33-80721) filed on December 21, 1995).
10.9 Stock Purchase Agreement between the Company and John Quinn,
dated January 19, 1996 (incorporated by reference to the
Company's Registration Statement on Form S-2 (File No. 33-
80721) filed on December 21, 1995).
10.10 Asset Purchase Agreement between the Company and Wolpin
Broadcasting Company, dated January 30, 1996 (incorporated by
reference to the Company's Registration Statement on Form S-2
(File No. 33-80721) filed on December 21, 1995).
10.11 Real Estate Purchase Agreement between Company and
Weber/Wolpin Realty Company, dated January 30, 1996
(incorporated by reference to the Company's Registration
Statement on Form S-2 (File No. 33-80721) filed on December
21, 1995).
<PAGE>
10.12 Loan and Security Agreement between the Company and Foothill
Capital Corporation, dated November 25, 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).
10.13 Common Stock Purchase Warrant issued by the Company to
Foothill Capital Corporation, dated November 7, 1996
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996 (File
No. 0-21534) filed on March 31, 1997).
10.14 Asset Purchase Agreement between the Company and Lloyd B.
Roach re WPWA(AM), Chester, Pennsylvania, dated June 18, 1996
(incorporated by reference to the Company's Registration
Statement on Form S-3 (File No. 333-14483) filed on October
18, 1996).
10.15 Asset Purchase Agreement between the Company and Nelson
Broadcasting, Inc. re WAUR(AM), Sandwich, Illinois, dated
September 11, 1996 (incorporated by reference to the Company's
Registration Statement on Form S-3 (File No. 333-14483) filed
on October 18, 1996).
10.16 Asset Purchase Agreement between the Company and Bonneville
International Corporation re KIDR(AM), Phoenix, Arizona, dated
May 20, 1997 (incorporated by reference to the Company's
Registration Statement on Form S-3 (File No. 333-28315) filed
on June 3, 1997).
10.17 Promissory Note issued by the Company to Pyramid Partners,
L.P. on July 22, 1997 (incorporated by reference to the
Company's Current Report on Form 8-K (File No. 0-21534) filed
on August 1, 1997, relating to the Company acquiring a 27.4%
beneficial interest in Harmony Holdings, Inc.).
10.18 Promissory Note issued by the Company to Rodney P. Burwell on
July 22, 1997 (incorporated by reference to the Company's
Current Report on Form 8-K (File No. 0-21534) filed on August
1, 1997, relating to the Company acquiring a 27.4% beneficial
interest in Harmony Holdings, Inc.).
10.19 Promissory Note issued by the Company to William M. Toles on
July 22, 1997 (incorporated by reference to the Company's
Current Report on Form 8-K (File No. 0-21534) filed on August
1, 1997, relating to the Company acquiring a 27.4% beneficial
interest in Harmony Holdings, Inc.).
10.20 Registration Rights Agreement by and among the Company and
Harmony Holdings, Inc., dated July 22, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K (File
No. 0-21534) filed on August 1, 1997, relating to the Company
acquiring a 27.4% beneficial interest in Harmony Holdings,
Inc.).
10.21 Amended and Restated Loan and Security Agreement by and
between the Company and Foothill Capital Corporation, dated as
of July 1, 1997 (incorporated by reference to the Company's
Current Report on Form 8-K (File No. 0-21534) filed on August
1, 1997, relating to the Company acquiring a 27.4% beneficial
interest in Harmony Holdings, Inc.).
10.22 Put/Call Agreement between the Company and Glenn B. Laken,
dated September 25, 1997 (incorporated by reference to the
Company's Current Report on Form 8-K/A (File No. 0-21534)
filed on October 1, 1997, relating to the Company acquiring a
40.7% beneficial interest in Harmony Holdings, Inc.).
10.23 Letter Agreement between the Company and Foothill Capital
Corporation, dated September 25, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K/A (File
No. 0- 21534) filed on October 1, 1997, relating to the
Company acquiring a 40.7% beneficial interest in Harmony
Holdings, Inc.).
10.24 Amendment No. 1 to the Amended and Restated Loan and Security
Agreement by and between the Company and Foothill Capital
Corporation, dated as of September 24, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K/A (File
No. 0-21534) filed on October 1, 1997, relating to the Company
acquiring a 40.7% beneficial interest in Harmony Holdings,
Inc.).
10.25 Common Stock Purchase Warrant issued by the Company to
Foothill Capital Corporation, dated September 25, 1997
(incorporated by reference to the Company's Current Report on
Form 8-K/A
<PAGE>
(File No. 0-21534) filed on October 1, 1997, relating to the
Company acquiring a 40.7% beneficial interest in Harmony
Holdings, Inc.).
10.26 Amendment No. 2 to the Amended and Restated Loan and Security
Agreement by and between the Company and Foothill Capital
Corporation, dated as of March 13, 1998.
10.27 Common Stock Purchase Warrant issued by the Company to
Foothill Capital Corporation, dated as of March 13, 1998.
10.28 Promissory Note issued by the Company to Harmony Holdings,
Inc., dated January 7, 1998.
10.29 Amended and Restated Common Stock Purchase Warrant issued by
the Company to Foothill Capital Corporation, dated March 13,
1998.
16.1 Letter on Change in Certifying Accountant (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).
21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
(1) The Company's Current Report on Form 8-K filed on November 3,
1997, relating to the Company's announcement that it has
notified its affiliate radio stations that it will terminate
its network affiliation agreements and cease distributing its
full-time Aahs World Radiosm programming format effective
January 30, 1998.
(2) The Company's Current Report on Form 8-K/A filed on October 1,
1997, relating to the Company acquiring a 40.7% beneficial
interest in Harmony Holdings, Inc.
<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 31, 1998.
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 Director March 31, 1998
- ------------------------- (principal executive officer)
Christopher T. Dahl
/s/ James G. Gilbertson Chief Operating Officer and Treasurer March 31, 1998
- ------------------------- (principal accounting and financial officer)
James G. Gilbertson
/s/ Richard W. Perkins Director March 31, 1998
- -------------------------
Richard W. Perkins
/s/ Michael R. Wigley Director March 31, 1998
- -------------------------
Michael R. Wigley
Director
- -------------------------
Russell Cowles II
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1 Articles of Incorporation, as amended and restated
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996 (File
No. 0-21534) filed on March 31, 1997).
3.2 Amended and Restated Bylaws (incorporated by reference to the
Company's Registration Statement on Form S-18 (File No.
33-44412) filed on December 5, 1991).
4.1 Rights Agreement between the Company and Norwest Bank
Minnesota, National Association, as Rights Agent, dated as of
February 19, 1998 (incorporated by reference to the Company's
Registration Statement on Form 8-A (File No. 0-21534) filed on
February 20, 1998).
10.1 1991 Incentive Stock Option Plan (incorporated by reference to
the Company's Registration Statement on Form S-18 (File No.
33-44412) filed on December 5, 1991).
10.2 Lease between the Company and 5501 Building Company dated
November 1, 1996 (incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 0-21534) filed on March 31, 1997).
10.3 Lease between the Company and 724 Associates dated November 1,
1996 (incorporated by reference to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996
(File No. 0-21534) filed on March 31, 1997).
10.4 Management Services Agreement between the Company and Radio
Management Corporation dated February 22, 1997 (incorporated
by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996 (File No. 0-21534)
filed on March 31, 1997).
10.5 1994 Stock Option Plan (incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996 (File No. 0-21534) filed on March 31,
1997).
10.6 1994 Director Stock Option Plan (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).
10.7 Attribution Agreement between the Company, Community Airwaves
Corporation, DCP Broadcasting Corporation and Christopher T.
Dahl dated February 15, 1995 (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).
10.8 Letter Agreement between the Company and Brenner Securities
Corporation dated November 7, 1995, relating to the provision
of certain financial services (incorporated by reference to
the Company's Registration Statement on Form S-2 (File No.
33-80721) filed on December 21, 1995).
10.9 Stock Purchase Agreement between the Company and John Quinn,
dated January 19, 1996 (incorporated by reference to the
Company's Registration Statement on Form S-2 (File No. 33-
80721) filed on December 21, 1995).
10.10 Asset Purchase Agreement between the Company and Wolpin
Broadcasting Company, dated January 30, 1996 (incorporated by
reference to the Company's Registration Statement on Form S-2
(File No. 33-80721) filed on December 21, 1995).
10.11 Real Estate Purchase Agreement between Company and
Weber/Wolpin Realty Company, dated January 30, 1996
(incorporated by reference to the Company's Registration
Statement on Form S-2 (File No. 33-80721) filed on December
21, 1995).
<PAGE>
10.12 Loan and Security Agreement between the Company and Foothill
Capital Corporation, dated November 25, 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).
10.13 Common Stock Purchase Warrant issued by the Company to
Foothill Capital Corporation, dated November 7, 1996
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996 (File
No. 0-21534) filed on March 31, 1997).
10.14 Asset Purchase Agreement between the Company and Lloyd B.
Roach re WPWA(AM), Chester, Pennsylvania, dated June 18, 1996
(incorporated by reference to the Company's Registration
Statement on Form S-3 (File No. 333-14483) filed on October
18, 1996).
10.15 Asset Purchase Agreement between the Company and Nelson
Broadcasting, Inc. re WAUR(AM), Sandwich, Illinois, dated
September 11, 1996 (incorporated by reference to the Company's
Registration Statement on Form S-3 (File No. 333-14483) filed
on October 18, 1996).
10.16 Asset Purchase Agreement between the Company and Bonneville
International Corporation re KIDR(AM), Phoenix, Arizona, dated
May 20, 1997 (incorporated by reference to the Company's
Registration Statement on Form S-3 (File No. 333-28315) filed
on June 3, 1997).
10.17 Promissory Note issued by the Company to Pyramid Partners,
L.P. on July 22, 1997 (incorporated by reference to the
Company's Current Report on Form 8-K (File No. 0-21534) filed
on August 1, 1997, relating to the Company acquiring a 27.4%
beneficial interest in Harmony Holdings, Inc.).
10.18 Promissory Note issued by the Company to Rodney P. Burwell on
July 22, 1997 (incorporated by reference to the Company's
Current Report on Form 8-K (File No. 0-21534) filed on August
1, 1997, relating to the Company acquiring a 27.4% beneficial
interest in Harmony Holdings, Inc.).
10.19 Promissory Note issued by the Company to William M. Toles on
July 22, 1997 (incorporated by reference to the Company's
Current Report on Form 8-K (File No. 0-21534) filed on August
1, 1997, relating to the Company acquiring a 27.4% beneficial
interest in Harmony Holdings, Inc.).
10.20 Registration Rights Agreement by and among the Company and
Harmony Holdings, Inc., dated July 22, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K (File
No. 0-21534) filed on August 1, 1997, relating to the Company
acquiring a 27.4% beneficial interest in Harmony Holdings,
Inc.).
10.21 Amended and Restated Loan and Security Agreement by and
between the Company and Foothill Capital Corporation, dated as
of July 1, 1997 (incorporated by reference to the Company's
Current Report on Form 8-K (File No. 0-21534) filed on August
1, 1997, relating to the Company acquiring a 27.4% beneficial
interest in Harmony Holdings, Inc.).
10.22 Put/Call Agreement between the Company and Glenn B. Laken,
dated September 25, 1997 (incorporated by reference to the
Company's Current Report on Form 8-K/A (File No. 0-21534)
filed on October 1, 1997, relating to the Company acquiring a
40.7% beneficial interest in Harmony Holdings, Inc.).
10.23 Letter Agreement between the Company and Foothill Capital
Corporation, dated September 25, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K/A (File
No. 0- 21534) filed on October 1, 1997, relating to the
Company acquiring a 40.7% beneficial interest in Harmony
Holdings, Inc.).
10.24 Amendment No. 1 to the Amended and Restated Loan and Security
Agreement by and between the Company and Foothill Capital
Corporation, dated as of September 24, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K/A (File
No. 0-21534) filed on October 1, 1997, relating to the Company
acquiring a 40.7% beneficial interest in Harmony Holdings,
Inc.).
10.25 Common Stock Purchase Warrant issued by the Company to
Foothill Capital Corporation, dated September 25, 1997
(incorporated by reference to the Company's Current Report on
Form 8-K/A
<PAGE>
(File No. 0-21534) filed on October 1, 1997, relating to the
Company acquiring a 40.7% beneficial interest in Harmony
Holdings, Inc.).
10.26 Amendment No. 2 to the Amended and Restated Loan and Security
Agreement by and between the Company and Foothill Capital
Corporation, dated as of March 13, 1998.
10.27 Common Stock Purchase Warrant issued by the Company to
Foothill Capital Corporation, dated as of March 13, 1998.
10.28 Promissory Note issued by the Company to Harmony Holdings,
Inc., dated January 7, 1998.
10.29 Amended and Restated Common Stock Purchase Warrant issued by
the Company to Foothill Capital Corporation, dated March 13,
1998.
16.1 Letter on Change in Certifying Accountant (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).
21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP.
27.1 Financial Data Schedule.
EXHIBIT 10.26
AMENDMENT NUMBER TWO TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER TWO TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT ("Amendment"), is entered into as of March 13, 1998, between FOOTHILL
CAPITAL CORPORATION, a California corporation ("Foothill"), with a place of
business located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles,
California 90025-3333, and CHILDREN'S BROADCASTING CORPORATION, a Minnesota
corporation ("Borrower"), with its chief executive office located at 724 First
Street, Fourth Floor, Minneapolis, Minnesota 55401.
WHEREAS, Borrower and Foothill are parties to that certain Amended and
Restated Loan and Security Agreement, dated as of July 1, 1997, as amended by
that certain Amendment Number One to Amended and Restated Loan and Security
Agreement dated as of September 24, 1997 (collectively, the "Loan Agreement");
WHEREAS, Borrower has requested that Foothill make an additional term
loan in the amount of $1,000,000 (the "Supplemental Term Loan No. 2"), and the
proceeds of such Supplemental Term Loan No. 2 will be used in part to pay
Foothill the amendment fee described in Section 7(d) of this Amendment. In
addition, Borrower will use the balance of the proceeds of the Supplemental Term
Loan No. 2 for general working capital purposes;
WHEREAS, Borrower and Foothill have agreed to combine the term loans
previously made by Foothill to Borrower and the Supplemental Term Loan No. 2
into a single term loan that will repaid by Borrower in accordance with the
terms of this Amendment; and
WHEREAS, Borrower and Foothill desire to amend the Loan Agreement as
provided in this Amendment, it being understood that no repayment of the
obligations under the Loan Agreement is being effected hereby, but merely an
amendment and restatement in accordance with the terms hereof. All capitalized
terms used herein and not defined herein shall have the meanings ascribed to
them in the Loan Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, Foothill and Borrower hereby agree as follows:
1. Section 1.1 of the Loan Agreement hereby is amended by (a) deleting
the following defined terms in their entireties: "Amendment Date", "Term Loan"
and "Term Loan Commitment", and (b) inserting following defined terms in
alphabetical order:
"Amendment Date" means the date of the making of the Additional
Supplemental Term Loan No. 2 on or after the first date written above.
"Fourth Warrant" means a warrant agreement respecting 100,000 shares of
Borrower's common stock, in form and substance reasonably satisfactory to
Foothill.
"Supplemental Term Loan No. 2" shall have the meaning ascribed to such
term in the recitals of this Amendment.
"Term Loan" has the meaning ascribed to such term in Section 2.2(a)
hereof.
"Term Loan Commitment" means $23,500,000.
2. Section 2.1(b) is hereby amended and restated in its entirety as
follows:
<PAGE>
(b) Anything to the contrary in Section 2.1(a) above notwithstanding,
Foothill may create reserves against the Maximum Revolving Amount
without declaring an Event of Default if there occurs a material
increase in Dilution or if Foothill determines that there has occurred
a Material Adverse Change. Notwithstanding the previous sentence, it is
hereby agreed among the parties hereto, that Foothill may establish, in
its discretion, and from time to time, an accumulating interest payment
reserve, funded on a monthly basis, in an aggregate amount, as
determined by Foothill in its reasonable discretion from time to time,
sufficient to fully fund the estimated interest payment to be due
Foothill on Borrower's Obligations as of the end of such month; and all
collections received by Foothill pursuant to Section 2.8 of this
Agreement shall be accumulated and held by Foothill until such time as
the estimated interest payment is fully funded into the reserve, and
any collections received by Foothill during such month after the full
funding of the reserve, shall be credited by Foothill to Borrower's
account; and in the event that the actual interest payment for a given
month is less than the reserve amount accumulated during such month,
the difference shall be carried forward by Foothill as the initial
reserve amount for the next succeeding month's accumulation of
collections to the reserve to fund the next month's estimated interest
payment, such interest payment reserve and the accumulation of
collections to be effective and commence as of the Amendment Date.
3. Section 2.2 of the Loan Agreement is hereby amended and restated in
its entirety as follows:
2.2 TERM LOAN.
(a) Foothill previously has made the Term Loan to Borrower. As
of the Amendment Date, Foothill has agreed to make the Supplemental Term Loan
No. 2 to Borrower in accordance with the terms hereof. Collectively, the
Supplemental Term Loan No. 2 and the prior term loans made by Foothill to
Borrower shall be known as the "Term Loan."
(b) The outstanding principal balance and all accrued and
unpaid interest under the Term Loan shall be due and payable upon the
termination of this Agreement, whether by its terms, by prepayment, by
acceleration, or otherwise. All amounts outstanding under the Term Loan shall
constitute Obligations. Unless sooner terminated as provided herein, Borrower
shall repay the Term Loan in quarterly installments and such installments shall
be due and payable on the following dates in the following amounts:
<PAGE>
DATE INSTALLMENT
---- -----------
4/16/98 $ 500,000
6/30/98 $6,000,000
9/30/98 $2,000,000
12/31/98 $2,000,000
3/31/99 $2,000,000
6/30/99 $2,000,000
9/30/99 $2,000,000
12/31/99 $2,000,000
3/31/00 $2,000,000
6/30/00 $2,000,000
9/30/00 $1,000,000
4. Section 2.6(a) of the Loan Agreement is hereby amended and restated
in its entirety as follows:
"Interest Rate. From and after the Amendment Date, all Obligations
shall bear interest at a per annum rate of 4.75 percentage points above
the Reference Rate."
5. Section 2.6(c) of the Loan Agreement is hereby amended and restated
in its entirety as follows:
"Default Rate. Upon the occurrence and during the continuation of an
Event of Default, all Obligations shall bear interest at a per annum
rate of 7.75 percentage points above the Reference Rate."
6. Section 7.17 of the Loan Agreement is hereby amended to delete the
proviso at the end of such Section, and to replace such proviso with the
following:
;provided, however, that in no event shall any advance under the
Supplemental Term Loan No. 2 be used to finance, in whole or in part,
directly or indirectly, any Permitted Unrestricted Subsidiary
Acquisition or to advance, by way of loan, investment or guaranty, or
otherwise, any monies or credit to or for the benefit, directly or
indirectly, of Harmony.
7. Conditions Precedent to Effectiveness of Amendment. The
effectiveness of this Amendment and the obligation of Foothill to make the
Supplemental Term Loan No. 2 is subject to the completion, to the satisfaction
of Foothill and its counsel, of each of the following conditions on or before
the Amendment Date:
(a) Foothill shall have received executed consents and
reaffirmations from each Guarantor, in form and substance satisfactory to
Foothill;
(b) Foothill shall have received the Fourth Warrant and such
Fourth Warrant shall have been duly executed, and be in full force and effect;
<PAGE>
(c) Foothill shall have received, in form and substance
reasonably satisfactory to Foothill, an amendment and restatement of the Second
Warrant to Purchase 100,000 Shares of the Common Stock of Children's
Broadcasting Corporation dated July 1, 1997, resetting the warrant exercise
price from $5.29 to $3.68 per share, and such Amended and Restated Warrant shall
have been duly executed, and be in full force and effect; and
(d) Foothill shall have received an amendment fee of $100,000
which shall be earned in full and non-refundable as of the date hereof. The
payment of such amendment fee shall be paid on the Amendment Date out of the
proceeds of the Supplemental Term Loan No. 2.
8. Forbearance. Foothill acknowledges receipt of the Borrower's letter
to Mr. Keith Alexander of Foothill dated March 3, 1998 in which the Borrower
acknowledges and enumerates certain Events of Default that have occurred and are
continuing under the Loan Agreement (the "Current Defaults"). Foothill hereby
agrees to forebear from taking any action or exercising any of its remedies
under the Loan Agreement with respect to the Current Defaults during the period
from the Amendment Date through and including April 16, 1998; provided, however,
that such forbearance shall apply only to the Current Defaults, shall not apply
to any other Event of Default continuing as of the Amendment Date, or to any
Event of Default that may occur after the Amendment Date. Further, this
forbearance shall not constitute a waiver by Foothill of any of its rights or
remedies under the Loan Agreement, but shall only constitute a limited
forbearance. Furthermore, nothing contained in this letter shall diminish,
prejudice or waive any of Foothill's rights or remedies under the Loan Agreement
or applicable law, and Foothill hereby reserves all such rights and remedies.
9. Representations and Warranties. Borrower hereby represents and
warrants to Foothill that (a) the execution, delivery, and performance of this
Amendment, are within its corporate powers, have been duly authorized by all
necessary corporate action, and are not in contravention of any law, rule, or
regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of its charter or
bylaws, or of any contract or undertaking to which it is a party or by which any
of its properties may be bound or affected, and (b) the Loan Agreement, as
amended by this Amendment, constitute Borrower's legal, valid, and binding
obligation, enforceable against Borrower in accordance with its terms.
10. Further Assurances. Borrower shall execute and deliver all
agreements, documents, and instruments, in form and substance satisfactory to
Foothill, and take all actions as Foothill may reasonably request from time to
time, to perfect and maintain the perfection and priority of Foothill's security
interests in the Collateral, and to fully consummate the transactions
contemplated under the Loan Agreement and this Amendment.
11. Effect on Loan Agreement. The Loan Agreement, as amended hereby,
shall be and remain in full force and effect in accordance with its respective
terms and hereby is ratified and confirmed in all respects. The execution,
delivery, and performance of this Amendment shall not operate as a waiver of or,
except as expressly set forth herein, as an amendment, of any right, power, or
remedy of Foothill under the Loan Agreement, as in effect prior to the date
hereof.
12. Miscellaneous.
a. Upon the effectiveness of this Amendment, each reference in
the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of
like import referring to the Agreement shall mean and refer to the Loan
Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in
the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof"
or words of like import referring to the Agreement shall mean and refer to the
Loan Agreement as amended by this Amendment.
c. This Amendment shall be governed by and construed in
accordance with the laws of the State of California.
<PAGE>
d. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Keith Alexander
-----------------------------
Title: Vice President
-------------------------
CHILDREN'S BROADCASTING CORPORATION, a Minnesota
corporation
By /s/ James G. Gilbertson
-----------------------------
Title: Chief Operating Officer
-------------------------
<PAGE>
CONSENT, RATIFICATION, AND REAFFIRMATION BY GUARANTORS
Each of the undersigned Guarantors hereby consents to the execution,
delivery, and performance of the foregoing Amendment Number Two to Amended and
Restated Loan and Security Agreement and agrees, ratifies, and reaffirms that
its obligations as a guarantor with respect to the Loan Documents, as heretofore
amended, and as amended by the foregoing amendment, remain in full force and
effect and are not impaired, diminished, or discharged in any respect.
Dated as of the date first set forth above:
CHILDREN'S RADIO OF LOS ANGELES, INC.,
Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF NEW YORK, INC.,
New Jersey corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF MINNEAPOLIS, INC.,
Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF GOLDEN VALLEY, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF MILWAUKEE, INC.,
a Minnesota corporation
<PAGE>
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF DENVER, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF KANSAS CITY, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF DALLAS, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF HOUSTON, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF PHILADELPHIA, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
<PAGE>
CHILDREN'S RADIO OF DETROIT, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF CHICAGO, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
CHILDREN'S RADIO OF PHOENIX, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
WWTC-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
KYCR-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
<PAGE>
WZER-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
KKYD-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
KCNW-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
KAHZ-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
KTEK-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
WPWA-AM, INC.,
a Minnesota corporation
<PAGE>
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
WCAR-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
WJDM-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
KPLS-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
WAUR-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
KIDR-AM, INC.,
a Minnesota corporation
By /s/ James G. Gilbertson
------------------------------
Title: Chief Operating Officer
--------------------------
EXHIBIT 10.27
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 100,000 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 March 13, 1998 up to and
including November 25, 2001, One Hundred Thousand (100,000) fully paid and
nonassessable shares of the Common Stock of the Company at the price of Three
and 68/100 Dollars ($3.68) 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 Amended and Restated Loan and Security Agreement dated July
1, 1997, as amended by that certain Amendment Number One to Amended and Restated
Loan Agreement, dated September 25, 1997 and that certain Amendment Number Two
to Amended and Restated Loan Agreement dated March 13, 1998 (collectively, 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).
(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
<PAGE>
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.
(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
<PAGE>
(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 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
<PAGE>
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 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.
<PAGE>
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.
9. Registration Rights.
(a) If at any time after March 13, 1998 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
<PAGE>
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 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 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.
<PAGE>
(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.
(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.
<PAGE>
(h) The Company shall not after March 13, 1998 (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)
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:
<PAGE>
(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 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 Six Million Six Hundred
Forty Nine Thousand Eight Hundred Sixty Five (6,649,865) shares were issued and
outstanding as of the close of business on March 9, 1998, 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.
12. Put Option.
(a) Put Option of the Warrant Holder. At any time on or after March 13,
1999 and during the term hereof (the "Put Exercise Period"), the holder shall
have the right (but not the obligation) to require the Company to repurchase
("put") this Warrant from the holder at an aggregate purchase price, equal to
the product of (i) the positive difference (if any) between (A) the Warrant
Exercise Price as of September 25, 1997 plus Two Dollars ($2.00), subject to
adjustments pursuant to Section 12(b) hereof (as adjusted from time to time, the
"Put Option Per Share Price"), minus (B) the average Market Price of one (1)
share of Common Stock for the ten (10)
<PAGE>
consecutive trading days ending on the date of the Put Notice (as defined
below), multiplied by (ii) the number of Shares issuable upon exercise of this
Warrant as of the date of the Put Notice. Such put right shall be exercisable by
written notice (the "Put Notice") given to the Company during the Put Exercise
Period. The Company shall effect the repurchase of this Warrant pursuant to the
Put Notice by paying the purchase price therefor in cash to the holder not more
than five (5) business days after receipt by the Company of the Put Notice; and
at such time the holder shall deliver to the Company the Warrant to be
repurchased, properly endorsed for transfer.
(b) Adjustment of the Put Option Per Share Price. Upon each adjustment
in the Warrant Price pursuant to Section 5 hereof, the Put Option Per Share
Price shall be adjusted to that price determined by multiplying the Put Option
Per Share Price in effect immediately prior to such date of adjustment, by a
fraction (i) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such adjustment, and (ii) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such adjustment.
<PAGE>
IN WITNESS WHEREOF, Children's Broadcasting Corporation has caused this
Warrant to be signed by its duly authorized officer this 13th day of March,
1998.
Children's Broadcasting Corporation
By /s/ James G. Gilbertson
------------------------------------
Name: James G. Gilbertson
Its: Chief Operating Officer
<PAGE>
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:
--------------------------------------
<PAGE>
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:
-----------------------------------------
EXHIBIT 10.28
PROMISSORY NOTE
$ 650,000.00 MINNEAPOLIS, MINNESOTA
JANUARY 7, 1998
FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY
ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to
pay to the order of HARMONY HOLDINGS, INC. the sum of Six Hundred Fifty Thousand
and no/100 Dollars ($650,000.00) with interest on the unpaid balance of this
Note shall accrue at the rate of 15% per annum from the date hereof through the
due date, and shall accrue on the basis of actual days based on a 365-day year.
The undersigned reserves the right to prepay all or any part of the principal of
this Note at any time without penalty.
Notwithstanding any provision to the contrary contained in this Note,
the undersigned shall not be required to pay, and the holder of this Note (the
"Holder") shall not be permitted to collect, any amount of interest in excess of
the maximum amount of interest permitted by law ("Excess Interest"). If any
Excess Interest is provided for or determined by a court of competent
jurisdiction to have been provided for in this Note, then in such event: 1) the
provisions of this paragraph shall govern and control; 2) the undersigned shall
not be obligated to pay any Excess Interest; 3) and Excess Interest that the
Holder may have received hereunder shall be, at the Holder's option, (a) applied
as a credit against the outstanding principal balance of this Note or the
accrued and unpaid interest (not to exceed the maximum amount permitted by law),
(b) refunded to the payor thereof, or (c) any combination of the foregoing; 4)
the interest rate provided for herein shall be automatically reduced to the
maximum lawful rate allowed from time to time under applicable law (the "Maximum
Rate"), and this Note shall be deemed to have been and shall be, reformed and
modified to reflect such reduction; and 5) the undersigned shall not have any
action against the Holder for any damages arising out of the payment or
collection of any Excess Interest. Notwithstanding the foregoing, if for any
period of time interest on this Note is calculated at the Maximum Rate rather
than the applicable rate under this Note, and thereafter the Maximum Rate
exceeds the applicable rate, the rate of interest payable on this Note shall
become the Maximum Rate until the Holder shall have received the amount of
interest which the Holder would have received during such period on this Note
had the rate of interest not been limited to the Maximum Rate during such
period.
The makers, endorsers and guarantors hereof waive presentment for
payment, notice of non-payment, protest and notice of protest, and consent that
the time of payment may be extended without notice. If any part of the principal
or interest of this note is not paid when due, then the whole principal sum
shall immediately become due and payable at the option of the holder without
notice. And the maker and all other parties liable hereon agree to pay the cost
of collection of this note, including a reasonable attorney fee.
CHILDREN'S BROADCASTING
CORPORATION
BY: /s/ James G. Gilbertson
----------------------------------
ITS: Chief Operating Officer
----------------------------------
STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)
On this 7th day of January, 1998 before me personally came James G.
Gilbertson to me personally known to be the Chief Operating Officer of
Children's Broadcasting Corporation and who executed the foregoing instrument
and duly acknowledged that he executed the same.
/s/ Jill J. Theis
- ----------------------------
Notary Public
EXHIBIT 10.29
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.
AMENDED AND RESTATED WARRANT
TO PURCHASE 100,000 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 March 13, 1998 up to and
including November 25, 2001, One Hundred Thousand (100,000) fully paid and
nonassessable shares of the Common Stock of the Company at the price of Three
and 68/100 Dollars ($3.68) per share (the "Warrant Exercise Price"), subject to
the antidilution provisions of Section 5 of this Warrant. Reference is made to
this Amended and Restated Warrant (hereafter, the "Warrant") in the Amended and
Restated Loan and Security Agreement dated July 1, 1997, as amended by that
certain Amendment Number One to Amended and Restated Loan Agreement dated
September 25, 1997 and that certain Amendment Number Two to Amended and Restated
Loan Agreement dated March 13, 1998 (collectively, the "Loan Agreement"), by and
between the Company and Foothill. The original warrant being amended and
restated herein was issued on July 1, 1997 pursuant to the Loan Agreement as in
effect at that time. 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).
(b) This Warrant may not be sold, transferred, assigned, hypothecated or
divided except as provided in Section 7 hereof.
<PAGE>
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.
(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;
<PAGE>
(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 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
<PAGE>
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 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.
<PAGE>
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.
9. Registration Rights.
(a) If at any time after March 13, 1998 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
<PAGE>
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 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 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.
<PAGE>
(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.
(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.
<PAGE>
(h) The Company shall not after March 13, 1998 (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)
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:
<PAGE>
(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 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 Six Million Six Hundred
Forty Nine Thousand Eight Hundred Sixty Five (6,649,865) shares were issued and
outstanding as of the close of business on March 9, 1998 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 13th day of March,
1998.
Children's Broadcasting Corporation
By /s/ James G. Gilbertson
----------------------------------
Name: James G. Gilbertson
Its: Chief Operating Officer
<PAGE>
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:
------------------------------------------
<PAGE>
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:
------------------------------------------
EXHIBIT 21.1
SUBSIDIARIES
Name State of Incorporation
- ------------------------------------------ --------------------------
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
Children's Radio of Phoenix, Inc. Minnesota
Children's Radio of Tulsa, Inc. Minnesota
KAHZ-AM, Inc. Minnesota
KCNW-AM, Inc. Minnesota
KIDR-AM, Inc. Minnesota
KKYD-AM, Inc. Minnesota
KMUS-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
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-3 (No. 333-28315) pertaining
to the registration of 318,607 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 24, 1998 except for notes
2, 9, 13 and 16 which are dated March 13, 1998, with respect to the consolidated
financial statements included in the Annual Reports (Forms 10- KSB) for the
years ended December 31, 1996 and December 31, 1997.
/s/ BDO Seidman, LLP
Milwaukee, Wisconsin
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 545,258
<SECURITIES> 0
<RECEIVABLES> 1,696,756
<ALLOWANCES> 472,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,021,056
<PP&E> 7,044,484
<DEPRECIATION> 2,336,157
<TOTAL-ASSETS> 35,413,574
<CURRENT-LIABILITIES> 27,727,248
<BONDS> 25,441,408
0
0
<COMMON> 132,997
<OTHER-SE> 4,995,674
<TOTAL-LIABILITY-AND-EQUITY> 35,413,574
<SALES> 5,854,441
<TOTAL-REVENUES> 5,854,441
<CGS> 0
<TOTAL-COSTS> 17,260,112
<OTHER-EXPENSES> 2,702,287
<LOSS-PROVISION> 472,000
<INTEREST-EXPENSE> 2,656,858
<INCOME-PRETAX> (14,558,353)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,558,353)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,558,353)
<EPS-PRIMARY> (2.33)
<EPS-DILUTED> (2.33)
</TABLE>
