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PROSPECTUS
Final Prospectus
Pursuant to Rule 424(b)(3)
File No. 333-60637
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1,580,500 SHARES
CHILDREN'S BROADCASTING CORPORATION
COMMON STOCK
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Subject to the provisions of this paragraph, this Prospectus relates to
1,580,500 shares of Common Stock (the "Shares"), par value $0.02 per share (the
"Common Stock"), of Children's Broadcasting Corporation (the "Company") that may
be offered for sale for the account of certain shareholders of the Company as
stated herein under the heading "Selling Shareholders." The Shares are issuable
upon the conversion of Series B Convertible Preferred Stock ("this Series") and
the exercise of warrants held by the Selling Shareholders. This Prospectus
covers an indeterminate number of Shares which may be issued to certain of the
Selling Shareholders based on factors beyond the control of the Company, such as
the future market price of the Common Stock, which may affect the conversion
price of shares of this Series. Accordingly, the actual number of Shares may be
higher or lower than the number specified above. No period of time has been
fixed within which the Shares may be offered or sold. The Company's Common
Stock is traded on the Nasdaq National Market under the symbol "AAHS." On
August 11, 1998, the average of the high and low sale prices of the Common
Stock on the Nasdaq National Market was $2.95 per share. Current market
quotations are listed in THE WALL STREET JOURNAL and many other newspapers of
general circulation.
The Selling Shareholders have advised the Company that sales of the Shares
by them, or by their pledgees, donees, transferees or other successors in
interest, may be made from time to time in the over-the-counter market, through
negotiated transactions or otherwise at market prices prevailing at the time of
sale or at negotiated prices. The Shares may be sold by one or more of the
following methods: (a) a block trade in which the broker or dealer so engaged
will attempt to sell the Shares as agent but may purchase and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; and (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. Sales may be made
pursuant to this Prospectus to or through broker-dealers who may receive
compensation in the form of discounts, concessions or commissions from the
Selling Shareholders or the purchasers of Common Stock for whom such
broker-dealer may act as agent or to whom they may sell as principal, or both
(which compensation as to a particular broker-dealer may be in excess of
customary commissions). One or more supplemental prospectuses will be filed
pursuant to Rule 424 under the Securities Act of 1933, as amended (the
"Securities Act"), to describe any material arrangements for the sales of the
Shares when such arrangements are entered into by any of the Selling
Shareholders and any other broker-dealers that participate in the sale of the
Shares.
The Selling Shareholders and any broker-dealers or other persons acting on
their behalf in connection with the sale of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit realized by them on the resale of the Shares as
principals may be deemed to be underwriting commissions under the Securities
Act. As of the date hereof, there are no special selling arrangements between
any broker-dealer or other person and any Selling Shareholder.
The Company will not receive any part of the proceeds of any sales of
Shares pursuant to this Prospectus. Pursuant to the terms of registration
rights granted to the Selling Shareholders, the Company will pay all the
expenses of registering the Shares, except for selling expenses incurred by the
Selling Shareholders in connection with this offering, including any fees and
commissions payable to broker-dealers or other persons, which will be borne by
the Selling Shareholders. In addition, such registration rights provide for
certain other usual and customary terms, including indemnification by the
Company of the Selling Shareholders against certain liabilities arising under
the Securities Act.
THE SHARES INVOLVE CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7
OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS AUGUST 12, 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company pursuant to the Exchange
Act may be inspected and copied at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a Web site that contains reports,
proxy statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov. In addition, the
Company's Common Stock is quoted on the Nasdaq National Market. Reports, proxy
statements and other information concerning the Company can be inspected and
copied at the Public Reference Room of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information, exhibits and undertakings set forth in the
Registration Statement, certain parts of which are omitted as permitted by the
rules and regulations of the Commission. For further information, reference is
hereby made to the Registration Statement which may be inspected and copied in
the manner and at the sources described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company (File No. 0-21534)
with the Commission pursuant to the Exchange Act are incorporated into this
Prospectus by reference:
(a) The Company's Annual Report on Form 10-KSB for the year ended December
31, 1997, filed on March 31, 1998, as amended by Form 10-KSB/A, filed
on June 29, 1998.
(b) The Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1998, filed on May 15, 1998, as amended by Form 10-QSB/A,
filed on June 4, 1998.
(c) The description of the Company's Common Stock contained in its
Registration Statement on Form S-2 (No. 33-80721) filed on December
21, 1995, as amended by Amendment Nos. 1, 2, 3 and 4, filed on
February 1, February 20, February 27 and February 28, 1996,
respectively.
(d) The Company's Current Report on Form 8-K filed on July 6, 1998,
relating to (i) the Company's issuance of 606,061 shares of Series B
Convertible Preferred Stock in a private transaction and (ii) the
Company's acquisition of additional shares of common stock of Harmony
Holdings, Inc.
(e) The Company's Current Report on Form 8-K filed on June 5, 1998,
relating to the Company obtaining an additional term note payable
advance of $2.0 million from Foothill Capital Corporation.
(f) The Company's Current Report on Form 8-K filed on May 7, 1998,
relating to the Company signing a purchase agreement with Salem
Communications Corporation for the sale of two of the Company's radio
stations for $2.7 million.
(g) The Company's Current Report on Form 8-K filed on April 22, 1998,
relating to the Company signing a purchase agreement with Catholic
Radio Network, LLC for the sale of ten of the Company's radio stations
for $57.0 million.
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(h) The Company's Current Report on Form 8-K filed on February 20, 1998,
relating to (i) the declaration of a dividend of one common share
purchase right for each share of Common Stock outstanding as of
February 27, 1998, (ii) the announcement that the Company has signed
letters of intent to sell seven radio stations, and (iii) the election
of a new board member.
(i) The Company's Current Report on Form 8-K filed on January 28, 1998,
relating to the announcement that Global Broadcasting Company, Inc.
had not closed upon the purchase of the Company's radio stations
within the time provided under the purchase agreement between the
parties.
(j) The Company's Current Report on Form 8-K filed on January 7, 1998,
relating to the Company's shareholders approving the sale of all of
the Company's owned and operated radio stations to Global Broadcasting
Company, Inc. for $72.5 million in cash (subject to adjustment).
(k) The Company's Definitive Schedule 14A (Proxy Statement) filed on July
8, 1998, relating to the Company's Annual Meeting of Shareholders
scheduled for August 18, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering hereunder shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents.
Any statement contained herein or in a document all or any portion of which
is incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide, without charge, to each person to whom this
Prospectus is delivered, upon written or oral request of any such person, a copy
of any or all of the foregoing documents (other than exhibits to such documents
which are not specifically incorporated by reference in such documents).
Written requests for such copies should be directed to the Company at 724 First
Street North, Minneapolis, Minnesota 55401, Attention: Chief Financial Officer.
Telephone requests may be directed to the office of the Chief Financial Officer
of the Company at (612) 338-3300.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION AND
CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS," AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "LITIGATION REFORM ACT"),
THAT INVOLVE RISKS AND UNCERTAINTIES. PURCHASERS OF THE COMPANY'S COMMON STOCK
ARE CAUTIONED THAT THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE FACTORS DISCUSSED HEREIN
UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Children's Broadcasting Corporation (the "Company") formerly broadcast
children's radio programming, known as Aahs World Radio-SM*-, via satellite to
markets representing approximately 40% of the United States population. The
Company ceased broadcasting its Aahs World Radio programming format in January
1998 in anticipation of the sale of its radio stations to Global Broadcasting
Company, Inc. ("Global") in a transaction approved by the Company's shareholders
in January 1998. Global, however, failed to complete the purchase of the
Company's radio stations. The Company subsequently pursued other transactions
for the sale of its stations, resulting in the purchase agreements described
below.
The Company's growth strategy included the acquisition of AM radio
broadcast licenses ("RBLs") in the top 15 United States markets. Pursuant to
that strategy, the Company acquired RBLs which serve the New York City, Los
Angeles, Chicago, Philadelphia, Detroit and Dallas/Fort Worth markets, including
licenses in the top four markets and seven of the top ten markets in the United
States.
Prior to the discontinuation of broadcasting of Aahs World Radio, the
primary sources of the Company's revenue had been from the sale of local
advertising and air time and network revenue. 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 their RBLs, until the
sale of such stations is consummated as described below. The Company does not
anticipate any significant revenue from the continued operation of such
stations.
PROPOSED SALE OF ASSETS
In April 1998, the Company signed a purchase agreement with Catholic Radio
Network, LLC for the sale of ten of the Company's radio stations for $57.0
million (subject to adjustment). The Company has also signed purchase
agreements with Salem Communications Corporation and 1090 Investments, L.L.C.
for the sale of its three remaining radio stations for an aggregate of $4.7
million (subject to adjustment). The sale of assets is part of management's
strategy to reposition the Company by selling its broadcasting assets and, using
the net cash realized, to make one or more acquisitions in the television
commercial production industry. As of this date, the Company has not identified
any acquisition targets. Pending any such acquisition, the proceeds from the
sale of assets will be invested in investment-grade, short-term,
interest-bearing securities. The sale of assets is subject to customary closing
conditions and shareholder and regulatory approvals.
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* The Company has applied for a service mark for Aahs World Radio.
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ONGOING CORPORATE OPERATIONS
The Company has acquired a major ownership interest in Harmony Holdings,
Inc. ("Harmony"), a company which engages primarily in the production of
television commercials. Harmony operates through its three main operating
subsidiaries: Harmony Pictures, Inc., Curious Pictures Corporation and The
End, Inc. Harmony reported approximately $64.8 million in revenue for its
1997 fiscal year. The Company plays a significant role in the management of
Harmony and has become a guarantor of Harmony's $5.0 million revolving line
of credit. The Company may determine to increase its ownership position in
Harmony should an opportunity exist at a price favorable to the Company.
The Company intends, either directly or through Harmony, to further
expand its television commercial production business and holdings through
acquisitions and the hiring of creative talent. As of the date of this
Prospectus, the Company does not have any understandings, commitments or
agreements with respect to any such acquisitions. No assurance can be given
that the Company will consummate future acquisitions or that any
acquisitions, if consummated, will ultimately be advantageous or profitable
for the Company.
THE ABC/DISNEY LITIGATION
Prior to the cessation of broadcasting Aahs World Radio, the Company's
core 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 Networks, Inc. ("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 also 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 and proprietary business information to
ABC Radio and The Walt Disney Company ("Disney") (collectively,
"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 in 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 has denied ABC Radio's counterclaim in all
respects, and has moved to have the counterclaim dismissed as untimely. The
ABC/Disney suit is scheduled for trial in August 1998. The Company intends
to pursue to its conclusion the ABC/Disney litigation. This litigation has
consumed, and will continue to consume, certain resources of the Company,
including personnel costs and litigation costs.
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FOOTHILL FINANCING
From its inception in 1995 until its termination by ABC/Disney in July
1996, the ABC/Disney relationship did not result in any significant national
advertising sales or increase in the Company's network affiliate base. As a
result, the Company's financial position deteriorated. To meet its working
capital requirements and to facilitate acquisitions pursuant to its growth
strategy, the Company entered into a credit agreement with Foothill Capital
Corporation ("Foothill") in November 1996. The credit agreement, as amended,
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 $26.0 million. 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. Upon consummation of the sale of assets, the Company intends to
repay the Foothill indebtedness in full. If the sale of assets is not
consummated, the Company's highly-leveraged position and the requirements for
payments under the Foothill loan facilities may require it to liquidate all or a
portion of its assets.
GENERAL
The Company was incorporated under the Minnesota Business Corporation Act
on February 7, 1990. All references to the Company herein include its
subsidiaries, unless otherwise noted. The Company's executive office is located
at 724 First Street North, Minneapolis, Minnesota 55401, and its telephone
number is (612) 338-3300.
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RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS,
IN CONNECTION WITH AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
WHEN USED BELOW AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING DOCUMENTS
INCORPORATED HEREIN BY REFERENCE, THE WORDS "BELIEVES," "ANTICIPATES" AND
"INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY "FORWARD-LOOKING
STATEMENTS," AS DEFINED IN THE LITIGATION REFORM ACT. SUCH STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED. POTENTIAL PURCHASERS OF THE COMPANY'S
COMMON STOCK ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
STRATEGY TO SELL RADIO STATIONS; CESSATION OF AAHS WORLD RADIO-SM-; LIMITED
REVENUES. In April 1998, the Company signed a purchase agreement with Catholic
Radio Network, LLC for the sale of ten of the Company's radio stations for
$57.0 million (subject to adjustment). The Company has also signed purchase
agreements with Salem Communications Corporation and 1090 Investments, L.L.C.
for the sale of its three remaining radio stations for an aggregate of $4.7
million (subject to adjustment). The Board of Directors has unanimously
approved the sale of assets, subject to shareholder approval. The Company
ceased broadcasting its Aahs World Radio programming format in January 1998 in
anticipation of the sale of its radio stations to Global. Prior to the
discontinuation of broadcasting of Aahs World Radio, the primary sources of the
Company's revenue had been from the sale of local advertising and air time and
network revenue. The cessation of such broadcasting has negatively impacted the
Company's broadcast revenue. Any sale of stations will be subject to various
contingencies, including regulatory approvals, shareholder approval and
customary closing conditions. There can be no assurance that shareholder
approval for the sale of 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 some or all of its assets, curtail
its operations and suspend its expansion plans.
LIQUIDITY; SUBSTANTIAL LEVERAGE. As of March 31, 1998, the Company's
consolidated indebtedness approximated 95% of the sum of its shareholders'
equity and consolidated indebtedness. The Company had working capital
deficits of $28.4 million, $25.7 million and $5.5 million at March 31, 1998,
December 31, 1997 and December 31, 1996, respectively. The Company entered
into a credit agreement with Foothill in November 1996, most recently amended
in May 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 $26.0 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. Interest under the facilities is payable at the prime rate plus
5.75%. 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 $13.9 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. Pursuant to the May 1998 amendment to the credit agreement, the
Company received a forbearance of all principal payments, totaling $6.5
million, and certain covenant requirements through September 30, 1998.
However, there can be no assurance that the Company will be able to repay or
refinance such indebtedness when due, or that the Company would be able to
sell all or any portion of its assets or raise additional capital to make
required payments on maturing indebtedness. An inability to make payments
when due or to comply with covenants and restrictions associated with such
indebtedness could give Foothill the right to foreclose on properties
securing payment obligations, which would have a material adverse effect upon
the Company.
In addition, if Harmony defaults on its $5.0 million revolving line of
credit, the Company may be forced to satisfy Harmony's obligations thereunder.
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EXPANSION INTO NEW BUSINESS. The Company intends, either directly or
through Harmony, to further expand its television commercial production business
and holdings through acquisitions and the hiring of creative talent. This
expansion is subject to all of the risks inherent in the establishment of a new
business enterprise. The likelihood of success of the Company must be
considered in light of the problems, expenses, difficulties, complications and
delays frequently encountered in connection with the expansion into a new
business enterprise. As of the date of this Prospectus, the Company does not
have any understandings, commitments or agreements with respect to any such
acquisitions. No assurance can be given that the Company will consummate future
acquisitions or that any acquisitions, if consummated, will ultimately be
advantageous or profitable for 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 REPAY EXISTING INDEBTEDNESS. The Company's ability
to repay its outstanding indebtedness at maturity may 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. Substantially all of the Company's
assets have been pledged to secure the Company's indebtedness to Foothill. The
failure of the Company to repay such indebtedness on a timely basis, or a
default under its credit agreement with Foothill, could give rise to an
acceleration of such indebtedness and, potentially, could result in the loss of
the Company's assets.
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 quarter ended March 31, 1998 and the two years ended
December 31, 1997 and 1996, the Company incurred net losses of $3.7 million,
$14.6 million and $9.9 million, respectively. Despite the discontinuation of
broadcasting 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 March 31, 1998, the Company had an accumulated deficit
of $44.5 million and had used approximately $27.1 million of cash to fund its
losses.
ABC/DISNEY LITIGATION. Prior to the cessation of broadcasting of Aahs
World Radio, the Company's core 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 also 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 and
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.
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The Company filed a lawsuit in the fall of 1996 in 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 scheduled for
trial in August 1998. The Company intends to pursue to its conclusion the
ABC/Disney litigation. This litigation has consumed, and will continue to
consume, certain resources of the Company, including personnel costs and
litigation costs.
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 $6.63 on January 13
and 14, 1997 to a low of $3.19 on April 7, 1997. During the first seven months
of 1998, the market price of the Company's Common Stock ranged from a high of
$4.31 on January 7, 1998 to a low of $2.81 on January 28, 1998. There can be no
assurance that purchasers of the Company's Common Stock can sell such stock at
or above the prices at which it was purchased.
IMPACT OF SALE OF SHARES; SHARES ELIGIBLE FOR FUTURE SALE. As of July
31, 1998, the Company had 6,869,004 shares of Common Stock outstanding and
had warrants and options outstanding to purchase an additional 3,103,438
shares of Common Stock, exercisable at prices ranging from $2.00 to $13.80
per share. The Company has periodically registered shares of its Common
Stock for resale on the public market. Including the Shares registered
hereby, the Company has registered 2,814,530 shares of its Common Stock for
resale on the public market during 1997 and 1998. Such shares were issued
primarily in connection with acquisitions. Other issuances included warrants
to Foothill and shares to litigation counsel. The sale of such shares and the
sale of additional shares of Common Stock which may become eligible for sale
in the public market from time to time upon the exercise of warrants and
options may be dilutive to existing holders of Common Stock and could have
the effect of depressing the market price of the Company's Common Stock.
DILUTION DUE TO CONVERSION OF PREFERRED STOCK. In June 1998, the
Company issued 606,061 shares of its Series B Convertible Preferred Stock to
certain of the Selling Shareholders. The shares of this Series have a stated
value of $3.30 per share (the "Stated Value") and they may be converted into
shares of Common Stock in certain circumstances. The number of shares of
Common Stock to be delivered upon conversion of a share of this Series is the
Stated Value, divided by the lesser of (x) 110% of the average best bid price
of the Common Stock for the five consecutive trading days ending on the day
preceding the conversion date, or (y) 94% of the average of the three lowest
closing prices of the Common Stock during the 60 calendar day period ending
on the day preceding the conversion date; provided, however, that such
initial conversion price is subject to adjustment from time to time in
certain instances. Notwithstanding the foregoing, if the Common Stock is not
traded on the New York Stock Exchange, the American Stock Exchange, the
Nasdaq National Market or the Nasdaq SmallCap Market on the conversion date,
then the percentage specified in clause (y) above will be 84%. The Company
has the right to redeem all or any part of the outstanding unconverted shares
of this Series, upon payment in cash of the sum equal to 122.5% of the Stated
Value for each outstanding unconverted share of this Series. The sale of the
shares of Common Stock which may become eligible for sale in the public
market from time to time upon conversion of shares of this Series may be
dilutive to existing holders of Common Stock and could have the effect of
depressing the market price of the Company's Common Stock.
9
<PAGE>
CONFLICTS OF INTEREST. 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 the Chairman of the Board of Directors, President and
Chief Executive Officer of the Company, Christopher T. Dahl, at a total annual
rent of approximately $114,000, and the studio site is leased from a partnership
consisting of Mr. Dahl and another director of the Company, Richard W. Perkins,
at an annual rent of approximately $132,000.
In January 1996, the Company entered into a five-year lease with 724
Associates, a partnership consisting of Messrs. Dahl, Perkins and Stephen L.
Wallack, a shareholder of the Company, for 6,000 square feet of office space
at 724 First Street North, 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 Community Airwaves
Corporation ("CAC") and Radio Management, L.L.C. ("RMLLC"). CAC is owned and
controlled by Messrs. Dahl, Perkins and Russell Cowles II, either directly or
through trusts. RMLLC is owned by Messrs. Dahl and Perkins. Mr. Cowles, a
former director-elect of the Company, is a beneficiary and trustee of the
John Cowles Family Trust, a 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.
From July 1993 through July 1998, the Company received administrative,
legal and accounting services from Radio Management Corporation ("RMC"), an
entity owned by Messrs. Dahl, Perkins and Cowles. Since July 1998, the
Company has received such services from RMLLC. RMLLC is a company owned by
the Chairman of the Board, President and Chief Executive Officer of the
Company and another director. RMLLC provides corporate, legal, accounting and
financial services to the Company, CAC and Harmony. 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 $750,000 for such services during the fiscal
year ended December 31, 1996 and an aggregate of $900,000 for such services
during the fiscal year ended December 31, 1997. The salaries of two officers
of the Company, Messrs. Riley and Gilbertson, are paid by RMLLC. 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 "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.
10
<PAGE>
In February 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. As of July 31, 1998, approximately 16.6% of the
Company's outstanding Common Stock was 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. If the sales of the
Company's radio stations are not consummated, the Company believes that its
Common Stock will no longer be eligible for listing on the Nasdaq National
Market. On June 19, 1998, the Company received a notice from Nasdaq that,
based on the Company's net tangible assets as reported in its Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1998, its Common Stock
will be delisted from the Nasdaq National Market. It is the Company's
obligation to establish for Nasdaq that its net tangible assets can be
brought into compliance with applicable listing requirements. The Company
has submitted a plan of compliance to Nasdaq which was found not acceptable
to the Nasdaq staff because compliance would not be achieved until September
1998 or October 1998. Nasdaq, therefore, has indicated that the Company's
stock would be delisted. The Company believes, however, that it can
establish that its tangible net worth is far in excess of the Nasdaq
requirements and that this will be realized upon the sale of its radio
stations. The Company expects that its net tangible assets will be
approximately $34.3 million upon the sale of the radio stations. The Company
has requested an oral hearing before Nasdaq concerning the proposed delisting
of its Common Stock. Nasdaq has scheduled the hearing for August 13, 1998.
The Company understands that delisting will not occur until after a decision
is rendered from that hearing. If the shareholders fail to approve the sale
of assets, the Company believes that Nasdaq will cause its Common Stock to
be delisted. In the event that the Common Stock becomes delisted, the market
price of the Common Stock may decline.
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.
11
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth, as of July 31, 1998, the name of each
Selling Shareholder, certain beneficial ownership information with respect to
the Selling Shareholders, and the number of Shares that may be sold from time to
time by each pursuant to this Prospectus. There can be no assurance that the
shares offered hereby will be sold.
<TABLE>
<CAPTION>
Percentage of
OUTSTANDING
SHARES SHARES SHARES
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED (1) SHARES OWNED UPON OWNED UPON
PRIOR TO OFFERED COMPLETION OF COMPLETION OF THE
SELLING SHAREHOLDER OFFERING HEREBY THE OFFERING OFFERING
- ------------------------------------------- -------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C>
Talisman Capital Opportunity Fund Ltd. 771,500(2)(3) 771,500(2)(3) 0 0
Dominion Capital Limited 385,750(3)(4) 385,750(3)(4) 0 0
Sovereign Partners LP 385,750(3)(4) 385,750(3)(4) 0 0
Pyramid Partners, L.P. 101,038(5) 25,000(6) 76,038 1.1
William M. Toles 75,000(6) 12,500(6) 62,500 *
</TABLE>
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* Represents less than one percent.
(1) The 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 over which the person
has or shares voting or investment power or securities which the person has
the right to acquire within 60 days of July 31, 1998.
(2) Includes 50,000 shares purchasable upon exercise of warrants.
(3) The actual number of shares of Common Stock issuable upon conversion of
shares of Series B Convertible Preferred Stock and the exercise of warrants
is subject to adjustment and could be materially more or less than such
estimated amount depending on factors that cannot be predicted at this
time, such as the future market price of the Common Stock.
(4) Includes 25,000 shares purchasable upon the exercise of warrants.
(5) Includes 87,500 shares purchasable upon the exercise of warrants.
(6) Represents shares purchasable upon the exercise of warrants.
In June 1998, the Company closed on the transaction contemplated by its
Securities Purchase Agreement with Talisman Capital Opportunity Fund Ltd.,
Dominion Capital Limited and Sovereign Partners LP, dated June 25, 1998.
Pursuant to such agreement, the Company issued an aggregate of 606,061 shares
of its Series B Convertible Preferred Stock to certain of the Selling
Shareholders. As required by the Registration Rights Agreement by and between
the Company and certain of the Selling Shareholders, dated June 25, 1998,
this Prospectus includes 200% of the number of shares of Common Stock into
which shares of this Series may be converted based on the following formula.
The number of shares of Common Stock issuable upon conversion to each Selling
Shareholder has been estimated, for purposes of this Prospectus, by dividing
the dollar amount of Series B Convertible Preferred Stock purchased by such
Selling Shareholder by $2.772 per share (84% of $3.30 per share). In
connection with such transaction, the Company also issued five-year warrants
to Talisman Opportunity Fund Ltd., Dominion Capital Limited and Sovereign
Partners LP for the purchase of 50,000, 25,000 and 25,000 shares,
respectively, of the Company's Common Stock, at a per share exercise price of
$3.7734375. This Prospectus includes the shares of Common Stock which may be
obtained upon exercise of such warrants.
12
<PAGE>
In connection with the July 1997 acquisition by the Company of shares of
common stock of Harmony, the Company borrowed an aggregate of $1.25 million from
three parties: Rodney P. Burwell, a former director of the Company, Pyramid
Partners, L.P., an entity of which Perkins Capital Management, Inc. ("PCM") is
the managing partner, and William M. Toles, a shareholder of the Company. Mr.
Perkins, a director of the Company, is President and Chief Executive Officer of
PCM. Messrs. Perkins and Toles are members of the Board of Directors of
Harmony. Their loans are evidenced by notes bearing interest at 10% per year,
initially payable on July 25, 1998, and recently amended to be payable on
October 25, 1998. Five-year warrants to purchase an aggregate of 125,000
shares of Common Stock at $4.00 per share were issued to those lenders in
July 1997. On June 11, 1998, in connection with the recent amendment to such
notes, (i) the interest rate on the note issued to Mr. Burwell was increased
to 20% per year effective July 25, 1998, (ii) an additional five-year warrant
to purchase 25,000 shares of Common Stock at $3.0625 per share was issued to
Pyramid Partners, L.P. and (iii) an additional five-year warrant to purchase
12,500 shares of Common Stock at $3.0625 per share was issued to Mr. Toles.
This prospectus includes the shares of Common Stock which may be obtained
upon exercise of such recently issued warrants.
The Company has agreed to bear all expenses (other than selling commissions
and fees) in connection with the registration and sale of the Shares being
offered by the Selling Shareholders in over-the-counter market transactions or
in negotiated transactions. See "Plan of Distribution." The Company has filed
with the Commission a Registration Statement on Form S-3 under the Securities
Act with respect to the resale of the Shares from time to time in
over-the-counter market transactions or in negotiated transactions. This
Prospectus forms a part of such Registration Statement.
USE OF PROCEEDS
The Shares offered hereby will be sold by the Selling Shareholders. The
Company will not receive any of the proceeds from the sale of the Shares by the
Selling Shareholders. See "Selling Shareholders."
PLAN OF DISTRIBUTION
The Shares offered hereby may be offered by the Selling Shareholders
from time to time. The Company will receive no proceeds from the sale of the
Shares. Sales may be effected by the Selling Shareholders in transactions on
The Nasdaq Stock Market, in negotiated transactions, or in a combination of
such methods of sale, at prices relating to prevailing market prices or at
negotiated prices. The Selling Shareholders may effect such transactions by
selling the Shares to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts or commissions from the Selling
Shareholders and/or the purchasers of the Shares for whom such broker-dealers
may act as agents or to whom they sell as principal, or both (which
compensation as to a particular broker-dealer may be in excess of customary
commissions).
The Selling Shareholders and any persons who participate in the sale of
the Shares from time to time, may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act. Any commissions paid or
discounts or concessions allowed to any such persons and any profits received
on resale of the Shares, may be deemed to be underwriting compensation under
the Securities Act.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available.
The Company has agreed to indemnify the Selling Shareholders and their
control persons with respect to certain liabilities in connection with the sale
of the Shares pursuant to this Prospectus, including liabilities under the
Securities Act and the Exchange Act. In addition, the Selling Shareholders have
agreed to indemnify the Company, its directors, officers, agents and control
persons against certain liabilities incurred as a result of information provided
by the Selling Shareholders for use in this Prospectus. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted pursuant to the foregoing provisions, the Company has been informed
that,
13
<PAGE>
in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
LEGAL MATTERS
The validity of the Shares offered hereby and certain legal matters
pertaining to the Company, including matters incorporated herein by reference
relating to the regulation of the Company by the FCC and related matters, were
passed upon on behalf of the Company by Lance W. Riley, Esq., Secretary and
General Counsel to the Company.
EXPERTS
The consolidated financial statements as of December 31, 1996 and December
31, 1997 of Children's Broadcasting Corporation, incorporated by reference in
this Prospectus, have been audited by BDO Seidman, LLP, independent certified
public accountants, as set forth in their reports thereon (which contain an
explanatory paragraph with respect to substantial doubt about the Company's
ability to continue as a going concern and management's plans described in Note
2 to the consolidated financial statements). Such consolidated financial
statements are incorporated by reference herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
14
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER DESCRIBED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SELLING SHAREHOLDERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE UNDER THIS PROSPECTUS SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR SINCE THE DATE OF ANY DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES, OR AN OFFER OR SOLICITATION IN ANY STATE TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH STATE.
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TABLE OF CONTENTS
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<TABLE>
Page
----
<S> <C>
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents
by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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1,580,500 SHARES
CHILDREN'S BROADCASTING
CORPORATION
COMMON STOCK
--------------------
PROSPECTUS
--------------------
August 12, 1998
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