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PROSPECTUS
FINAL PROSPECTUS
PURSUANT TO RULE 424(b)(3)
FILE NO. 333-53327
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421,528 SHARES
CHILDREN'S BROADCASTING CORPORATION
COMMON STOCK
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This Prospectus relates to 421,528 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." Certain of the Shares are issuable upon the exercise of warrants
held by the Selling Shareholders. 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 June 4, 1998, the average of
the high and low sale prices of the Common Stock on the Nasdaq National Market
was $3.13 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 JUNE 9, 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 5, 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 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.
(d) 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 AM
radio broadcast licenses and certain related assets for $2.7 million.
(e) 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 AM radio
broadcast licenses and certain related assets for $57.0 million.
(f) 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.
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.
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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.
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 AM radio
broadcast licenses ("RBLs"), until the sale of such stations is consummated as
described below. The Company does not anticipate any significant revenue
from 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 media,
entertainment or advertising-related areas. 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 described above
is subject to customary closing conditions and shareholder and regulatory
approvals.
ONGOING CORPORATE OPERATIONS
The Company believes that opportunities exist to profitably utilize the
experience gained in the development of radio programming. The Company has
retained select members of the Aahs World Radio creative and marketing staffs
and is developing other programming products, including syndicated general
market radio programs. To that end, the Company recently established a new
division, CBC Media, which has entered into a sales and equity partnership
agreement with MediaAmerica, the nation's largest independent advertising sales
organization. CBC Media currently has four projects in development and, during
the third quarter of 1998, expects
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to announce the launch of its first syndicated program hosted by a rock
music industry star. The program will air for four hours every Monday through
Friday.
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* The Company has applied for a service mark for Aahs World Radio.
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In addition to utilizing the Aahs World Radio intellectual property and
creative talent, the Company has begun to diversify into other media,
entertainment and advertising-related businesses. The Company has acquired a
major ownership interest in Harmony Holdings, Inc. ("Harmony"), a company
which produces television commercials, music videos and related media.
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.
Although the Company has no current plans to do so, it may determine to
increase its ownership position in Harmony should an opportunity exist at a
price favorable to the Company.
The Company intends to seek to further diversify through acquisition of
media, entertainment or advertising-related businesses. 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. Further, the Company has not foreclosed the possibility of
buying other radio stations in the future.
THE 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, 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 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 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 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 has denied ABC Radio's counterclaim in all
respects, and has moved to have the counterclaim dismissed as untimely. Motions
by both parties for summary judgment are currently pending, but the Company
believes that the ABC/Disney suit is likely to proceed to trial in late 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 to
date, 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.
On May 21, 1998, the credit agreement with Foothill was amended effective
April 17, 1998. Pursuant to the amendment, the Company obtained a
term note payable advance of $2.0 million, of which the Company received
proceeds totaling $1.0 million, paid a loan origination fee of $200,000,
and established an interest reserve of $800,000 to be used for payment of future
interest. Also, pursuant to the amendment, the variable interest rate was
increased by 1% on the entire outstanding loan balance, and the Company received
a forbearance of all principal payments and certain covenant requirements
through September 30, 1998. As additional consideration for the amendment, the
Company issued Foothill an additional warrant to purchase 200,000 shares of the
Company's Common Stock.
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.
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 most recent amendment to the credit agreement,
the Company received a forbearance of all principal payments 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.
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
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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. 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 Radio's counterclaim in all respects, and
has moved to have the counterclaim dismissed as untimely. Motions by both
parties for summary judgment are currently pending, but the Company believes
that the ABC/Disney suit is likely to proceed to trial in late 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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In May 1998, the Company paid 150,000 shares of its Common Stock as a
retainer to Hessian & McKasy, P.A. for legal fees incurred and to be incurred
in connection with the ABC/Disney litigation. The resale of such shares may
result in dilution to the Company's shareholders. See "Selling Shareholders."
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 five 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 May 15,
1998, the Company had approximately 6,673,516 shares of Common Stock outstanding
and had warrants and options outstanding to purchase additional Common Stock
totaling approximately 2,865,938 common shares exercisable at prices ranging
from $2.00 to $13.80 per share. In February 1997, the 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. In June 1997, the Commission declared
effective the Company's Registration Statement on Form S-3, which registered
approximately 320,000 common shares. 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 a former
director-elect of the Company, 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.
9
<PAGE>
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.
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 May 15, 1998, approximately 16.9% 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. 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. On May 19, 1998, the
Company received notice from The Nasdaq Stock Market that the Company does not
meet the net tangible asset requirements for continued listing on the Nasdaq
National Market. The Company has responded to such notice and has presented its
plans to achieve eligibility for continued listing. Although the Company
believes it will be able to comply with the net tangible asset requirements, it
is possible that The Nasdaq Stock Market may disagree with the Company's
position. As a result, it is possible that the Common Stock may be delisted or
that the Company may seek to relist the Common Stock on the Nasdaq SmallCap
Market or on an exchange. In the event that the Common Stock becomes delisted
or relisted on another market, 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.
10
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, 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
Selling Shareholder Offering Hereby the Offering the Offering
- -------------------------- ------------ ------- ------------- -------------
<S> <C> <C> <C> <C>
Hessian & McKasy, P.A. 150,000 150,000 0 0
Nelson Broadcasting, Inc. 161,528 86,528 75,000 1.1
Harvey Bibicoff 82,500 57,000 25,500 *
Rodney P. Burwell 201,250(2) 50,000 151,250 2.2
Pyramid Partners, L.P.(3) 62,500 50,000 12,500 *
William M. Toles 62,500 25,000 37,500 *
Richard Alan Incorporated 3,000 3,000 0 0
- --------------
*Less than one percent.
</TABLE>
(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
the date hereof.
(2) Includes (i) 111,250 shares owned directly by Mr. Burwell and (ii) 90,000
shares purchasable upon exercise of options and warrants.
(3) Pyramid Partners, L.P. is an entity controlled by Perkins Capital
Management, Inc., of which Richard W. Perkins, a director of the Company,
is President.
Up to 150,000 shares of Common Stock may be sold from time to time for the
account of Hessian & McKasy, P.A. ("HMPA") pursuant to a retainer agreement with
the Company. In May 1998, the Company paid 150,000 shares as a retainer to HMPA
for legal fees incurred and to be incurred in connection with the ABC/Disney
litigation. Under the retainer agreement, HMPA will periodically invoice the
Company for legal fees and costs incurred in connection with the litigation.
The Company will determine at such time whether it desires to pay the billing in
cash with the Company's funds or whether it will authorize HMPA to sell shares
in satisfaction of the invoice. The number of shares which may be sold will be
equal to the amount of the particular billing divided by the bid price of the
Company's stock on the Nasdaq National Market as of the date the Company
notifies HMPA of its authorization to pay a particular legal fee billing in
shares. In the event of the sale of shares by HMPA to satisfy billings, any
shortfall in proceeds received from such sale shall be added to the Company's
obligation to such firm and carried forward to a future billing. In the event
the proceeds from the sale of shares by HMPA exceed the amount of the billing
for which such shares are to be sold, such excess shall be credited to future
legal fees due such firm. In lieu of selling shares following the submission of
a billing to the Company, HMPA may elect to retain shares in satisfaction of a
billing, in which case the market risk from the sale of such shares would be
borne by the firm. Lance W. Riley, the Company's Secretary and General Counsel,
has an of counsel relationship with HMPA.
11
<PAGE>
This Prospectus includes 86,528 shares owned by Nelson Broadcasting, Inc.
Such shares are issuable or were issued in connection with its sale to the
Company of an RBL and certain other broadcasting equipment in the Chicago
metropolitan area. This Prospectus also includes 57,000 shares owned by Harvey
Bibicoff. Such shares were issued in connection with Mr. Bibicoff's sale to the
Company of 600,000 shares of common stock of Harmony and options to purchase
550,000 shares of common stock of Harmony at an exercise price of $1.50 per
share (collectively the "Harmony Transaction"). This Prospectus includes shares
underlying warrants issued to (i) Pyramid Partners, L.P., an entity controlled
by Perkins Capital Management, Inc., of which Richard W. Perkins, a director of
the Company, is President, (ii) Rodney P. Burwell, a former director of the
Company, and (iii) William M. Toles, a shareholder of the Company. Such
warrants were issued in consideration of loans aggregating $1.25 million from
such persons to the Company which partially financed the Harmony Transaction.
This Prospectus also includes 3,000 shares, originally issued to Mr. Bibicoff in
connection with the Harmony Transaction, which Mr. Bibicoff transferred to
Richard Alan Incorporated.
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, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
12
<PAGE>
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.
13
<PAGE>
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.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents
by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
421,528 SHARES
CHILDREN'S BROADCASTING
CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JUNE 9, 1998
