<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarterly period ended June 30, 1998 or
-------------
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition period from _________ to _________
Commission File No. 0-21534
-------
Children's Broadcasting Corporation
-----------------------------------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1663712
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
724 First Street North-4th Floor, Minneapolis, MN 55401
-----------------------------------------------------------
(Address of principal executive office, including zip code)
(612) 338-3300
--------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of August 13, 1998, there were outstanding 6,869,004 shares of common
stock, $.02 par value, of the registrant.
<PAGE>
INDEX
CHILDREN'S BROADCASTING CORPORATION
PART I. FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- June 30, 1998 and
December 31, 1997.
Consolidated Statements of Operations -- Three and six months
ended June 30, 1998 and 1997.
Consolidated Statements of Cash Flows -- Six months ended
June 30, 1998 and 1997.
Notes to Consolidated Financial Statements -- June 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,731,735 $545,258
Accounts receivable 489,392 1,696,756
Allowance for doubtful accounts (234,601) (472,000)
Accounts receivable - affiliates 136,438 142,868
Prepaid expenses 321,866 108,174
------------ ------------
TOTAL CURRENT ASSETS 2,444,830 2,021,056
Investment in Harmony 6,479,931 6,281,728
Property & equipment, net 4,374,417 4,708,327
Broadcast license, net 19,094,770 19,679,154
Intangible assets, net 1,582,996 1,550,100
Deferred debt issue costs 1,771,499 1,173,209
------------ ------------
TOTAL ASSETS $35,748,443 $35,413,574
------------ ------------
------------ ------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,571,935 $1,688,832
Accrued interest 394,567 324,994
Other accrued expenses 4,436,166 1,203,331
Line of credit 297,089 453,838
Short-term debt 1,250,000 1,172,500
Long-term debt - current portion 25,169,299 22,857,386
Obligation under capital lease - current portion 29,014 26,367
------------ ------------
TOTAL CURRENT LIABILITIES 33,148,070 27,727,248
Long-term debt - net of current portions 2,313,409 2,508,819
Obligation under capital lease 37,154 48,836
------------ ------------
TOTAL LIABILITIES 35,498,633 30,284,903
------------ ------------
Redeemable Convertible Preferred Stock
Authorized shares - 606,061
Issued and outstanding shares - 606,061 redeemable in
certain circumstances at $4.04 per share 1,768,250 --
Shareholders' equity:
Common stock, $.02 par value:
Authorized shares - 50,000,000
Issued & outstanding shares - voting: 6,529,963
1998 and 6,128,850--1997;
Issued and outstaning shares - 189,041 nonvoting --
1998 and 1997 134,380 132,997
Additional paid-in capital 47,336,309 46,387,536
Stock subscription receivable (529,563) (529,563)
Accumulated deficit (48,459,566) (40,862,299)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (1,518,440) 5,128,671
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $35,748,443 $35,413,574
------------ ------------
------------ ------------
</TABLE>
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------- ------------- ------------- -------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Owned, Operated and LMA Stations $ 539,496 $ 1,108,460 $ 1,284,176 $ 2,052,715
Network 63,915 308,452 155,230 514,918
------------- ------------- ------------- -------------
REVENUES $ 603,411 $ 1,416,912 $ 1,439,406 $ 2,567,633
OPERATING EXPENSES:
Owned, Operated and LMA Stations:
General and Administrative 447,211 771,485 976,587 1,529,125
Technical and Programming 213,871 303,609 467,450 543,882
Selling 107,911 555,083 216,175 896,598
------------- ------------- ------------- -------------
768,993 1,630,177 1,660,212 2,969,605
Network
General and Administrative 99,640 144,205 209,398 295,025
Programming 91,938 219,931 217,039 426,911
Selling 85,733 494,738 236,645 949,326
Marketing 10,418 31,816 18,409 151,056
------------- ------------- ------------- -------------
287,729 890,690 681,491 1,822,318
Corporate 1,319,842 1,103,896 2,527,568 1,991,196
Depreciation & Amortization 546,730 544,472 1,093,621 1,003,035
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 2,923,294 4,169,235 5,962,892 7,786,154
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (2,319,883) (2,752,323) (4,523,486) (5,218,521)
Equity Loss in Harmony 453,956 -- 926,797 --
Interest Expense (Net of Interest Income) 1,144,579 403,208 2,146,984 717,204
------------- ------------- ------------- -------------
NET LOSS ($3,918,418) ($3,155,531) ($7,597,267) ($5,935,725)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET LOSS PER SHARE ($ 0.59) ($ 0.51) ($ 1.14) ($ 0.99)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,688,000 6,133,000 6,673,000 6,019,500
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<PAGE>
CHILDREN'S BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($7,597,267) ($5,935,725)
Adjustments to reconcile net loss to net
cash from operating activities:
Provision for doubtful accounts (237,399) --
Depreciation & amortization 1,093,621 1,003,035
Amortization of deferred debt issue costs 363,335 --
Net barter activity (8,632) 52,131
Issuance of common stock for payment of attorney fees -- --
Issuance of common stock for payment of interest 79,788 51,619
Equity loss in Harmony 926,797 --
Decrease (Increase) in:
Accounts Receivable 1,215,996 (51,319)
Other Receivables 6,430 --
Prepaid Expenses (213,692) (151,280)
Increase (Decrease) in:
Accounts Payable (116,897) 611,914
Accrued Interest 69,573 40,307
Other Accrued Expenses 3,232,835 (83,803)
------------- -------------
NET CASH USED IN OPERATIONS (1,185,512) (4,463,121)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale/Purchase of Property & Equipment (52,148) (533,398)
Investment in Harmony (1,125,000) --
Sale/Purchase of Intangible Assets (156,075) (1,772,140)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (1,333,223) (2,305,538)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (9,035) (13,709)
Payment of Debt (972,450) 29,765
Proceeds from Debt Financings 2,817,447 6,015,000
Proceeds from Issuance of Convertible Preferred Stock 1,864,250 --
Proceeds from Issuance of Common Stock 5,000 60,619
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,705,212 6,091,675
------------- -------------
Increase (Decrease) in Cash 1,186,477 (676,984)
Cash - Beginning of Period 545,258 3,370,038
------------- -------------
CASH - END OF PERIOD $1,731,735 $2,693,054
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period for Interest $1,695,407 $597,534
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1998:
</TABLE>
The Company recognized revenues of $91,790 and expenses of $83,158
through barter activity.
The Company issued 66,639 shares of common stock valued at $226,532
for the payment of a principal and interest installment due in
February, May and August 1998 totaling $146,744 and $79,788
respectively, for the note payable outstanding to the seller of WAUR
(AM).
The Company incurred debt issuance costs aggregating $560,000 as a
result of the issuance and repricing of warrants related to the
Foothill financing, debt issuance cost aggregating $62,625
resulting from the issuance of warrants related to the bridge
financing to purchase Harmony stock.
<PAGE>
Children's Broadcasting Corporation
Notes to Consolidated Financial Statements (unaudited)
June 30, 1998
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation SB. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals with the exception
of the adjustments discussed in Note 2) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information,
refer to the consolidated financial statements and footnotes thereto
including in the Company's Form 10-KSB for the year ended December 31, 1997.
Note 2 Significant Transactions during 1998
The following significant transactions occurred during the first six months
of 1998 and are considered non-recurring:
A. In January 1998, the Company received proceeds totaling $611,000 and
paid debt issue costs of $39,000 through the issuance of a note payable
to Harmony Holdings, Inc. ("Harmony") with a face amount of $650,000.
The note payable bore interest at 15%, was unsecured and was due upon
demand. The Company paid Harmony $323,000 of the principal plus related
interest on the note in May 1998, and paid the remaining $327,000 of
principal plus related interest in June 1998.
B. In February 1998, the Company adopted a Shareholder Rights Plan designed
to enable the Company and its board to develop and preserve long-term
values for shareholders and to protect shareholders in the event an
attempt is made to acquire control of the Company through certain
coercive or unfair tactics or without an offer of fair value to all
shareholders. The plan provides for distribution of a common share
purchase right to each shareholder of record of the Company's common
stock on February 27, 1998. Under the plan, these rights to purchase
common shares will generally be exercisable a certain number of days
after a person or group acquires or announces an intention to acquire
20% or more of the Company's common stock. Each right entitles the
holder, after the rights become exercisable, to receive shares of the
Company's common stock having a market value of two times the exercise
price of the right or securities of the acquiring entity at one-half
their market value at that time.
C. On March 13, 1998, the Credit Agreement with Foothill Capital
Corporation ("Foothill") was amended. Pursuant to the amendment,
Foothill issued an additional term note payable advance of $1,000,000 of
which the Company received proceeds totaling $900,000 and paid a loan
fee of $100,000. The provisions of the Credit Agreement remained
substantially unchanged as a result of the amendment, except that the
variable interest rate was increased by 1%, a principal installment of
$500,000 due March 31, 1998 was deferred until April 16, 1998, and the
Company received a waiver of certain debt covenants which the Company
had not met as of March 31, 1998. As additional consideration for the
amendment, the Company issued Foothill an additional warrant to purchase
<PAGE>
100,000 shares of the Company's common stock at a purchase price of
$3.68 per share and amended the exercise price of a previously granted
warrant to purchase 100,000 shares of common stock from $5.29 per share
to $3.68 per share.
D. In April 1998, the Company signed a definitive purchase agreement with
Catholic Radio Network, LLC ("CRN") to sell the assets of ten of its
owned and operated stations including the stock of Children's Radio New
York, Inc., a subsidiary of the Company, for $57.0 million. The total
purchase price includes $52.0 million in cash and a $5.0 million
subordinated secured promissory note. The note will carry interest at
the rate of 10% per annum and will be payable in two years. The Company
will have the option to convert the note to equity in CRN after 18
months. CRN deposited $3.0 million into an escrow account, all of which
was released to the Company. The consummation of the transaction is
subject to regulatory and shareholder approvals and customary closing
conditions. The Company has received the Federal Communication
Commission's ("FCC") grants to the applications for assignment and
transfer of the licenses.
E. In April 1998, the Company signed a definitive purchase agreement with
Salem Communications Corporation to sell the assets of two of its owned
and operated stations for a total purchase price of $2.7 million cash.
On April 27, 1998, $135,000 was deposited into an escrow account. The
Company simultaneously entered into a pre-closing time brokerage
agreement regarding the stations until the transaction is consummated.
The consummation of the transaction is subject to regulatory and
shareholder approvals and customary closing conditions. The Company has
received the FCC grants to the applications for assignment and transfer
of the licenses.
F. In May 1998, the Company signed a definitive purchase agreement with
1090 Investments, LLC to sell the assets of WCAR(AM) in Detroit for a
purchase price of $2.0 million cash. Pursuant to the terms of the
agreement, the buyer deposited $100,000 into an escrow account to be
held until closing. The Company simultaneously entered into a
pre-closing time brokerage agreement to operate WCAR(AM) until the
transaction is consummated. The transaction is subject to regulatory
and shareholder approvals and customary closing conditions. The Company
has received the FCC grant to the application for assignment and
transfer of the license.
G. In May 1998, the Credit Agreement with Foothill was again amended
effective April 17, 1998. Pursuant to the amendment, the Company
obtained an additional 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 at $3.31 per share.
H. In May 1998, the Company issued 150,000 shares of its common stock to
its litigation counsel in connection with the ABC/Disney litigation.
The Company also registered such shares for resale. The litigation
counsel must obtain approval from the Company prior to selling any
shares and using the proceeds to satisfy litigation
<PAGE>
expense. As of this filing, none of these shares have been sold by the
litigation counsel.
I. In February and June 1998, the Company issued an aggregate of 66,639
shares of its common stock to satisfy three principal and interest
installments due, aggregating $226,531, to the seller of WAUR(AM).
J. In June 1998, pursuant to a Securities Purchase Agreement, the
Company issued 606,061 shares of its Series B Convertible Preferred
Stock ("this Series") to three accredited investors for which it
received gross proceeds of $2.0 million. From the gross proceeds, the
Company paid a 6.25% commission to Pacific Continental Securities Corp.
After legal and escrow fees, the transaction resulted in net proceeds to
the Company of approximately $1,860,000. The shares of this series have
a stated value of $3.30 per share. The holders may require the Company
to redeem these shares for cash in certain circumstances between three
business days and 60 days following the CRN closing. These shares may
be converted into a variable number of shares of common stock of the
Company incrementally over a period of time, in certain circumstances,
commencing October 23, 1998. However, the Company may, at any time,
redeem all or part of the outstanding unconverted shares of this Series
through cash payments of approximately $4.04 per share. In connection
with this financing, the Company issued a five-year warrant to the
investors for the purchase of an aggregate of 100,000 shares of the
Company's common stock at a per share exercise price of approximately
$3.77 (subject to adjustment). In addition, if the CRN closing does not
occur on or prior to September 30, 1998, the Company has agreed to issue
a five-year warrant to the investors for the purchase of an aggregate of
25,000 shares of the Company's common stock, at a per share exercise
price of the lesser of (i) approximately $3.77 or (ii) 80.77% of the
closing price of a share of common stock on September 30, 1998. See
Part II, Item 2.
K. In June 1998, using the proceeds of the above-referenced transaction (see
Note J), the Company exercised previously held options to purchase a
aggregate of 750,000 shares of common stock of Harmony at $1.50 per share
and repaid the remainder of the note due Harmony (see Note A).
Additionally, in July 1998, the Company made an open market purchase of
250,000 shares of common stock of Harmony at $1.73 per share. The
purchase of these additional shares of Harmony's common stock resulted of
an increase in the Company's actual ownership in Harmony to approximately
44.1%. The aggregate purchase price of $1,557,500 exceeded the Company's
pro rata share of Harmony's net tangible assets by approximately $1
million. This excess purchase price relates to Harmony's intangible asset
value, principally technical know-how, industry reputation and customer
lists, and is being amortized on a straight line basis over a seven year
estimated useful life.
L. In July 1997, the Company received proceeds aggregating $1.25 million in
exchange for the issuance of promissory notes payable and warrants to
purchase 125,000 shares of the Company's common stock to a partnership
controlled by a Company director, a Company director individually and a
less that five-percent shareholder. These notes payable were to mature
in July 25, 1998. In June 1998, the notes were amended to be payable on
October 25, 1998. In connection with the amendment, the interest rate
to be received by one lender was increased to 20% per year effective
July 25, 1998, and warrants to purchase an aggregate of 37,500 shares of
the Company's common stock at approximately $3.06 per share were issued to
the other two lenders.
<PAGE>
M. In July 1998, Harmony entered into a three-year, $5 million revolving
line of credit agreement with Heller Financial, Inc. The Company
entered into an agreement to guarantee this line of credit (see exhibit
10.1).
Note 3 Investment in Harmony
In 1997, the Company acquired an equity interest in Harmony by
purchasing 2,188,731 shares of Harmony's common stock and options to
acquire an additional 750,000 shares of Harmony's common stock. The
Company exercised its options on June 30, 1998 and purchased additional
stock on the open market in July 1998 (see Note K). Currently, the
Company's investment represents 44.1% of the outstanding common stock of
Harmony. Harmony's most recent fiscal year end was June 30, 1998.
Harmony's operations are summarized as follows for the three and nine
months ended March 31, 1998:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended 3/31/98 Ended 3/31/98
------------- -------------
<S> <C> <C>
Contract revenues $14,750,601 $37,470,837
Cost of production 11,861,074 30,115,564
----------- -----------
Gross profit 2,889,526 7,355,272
Operating expenses 3,886,887 9,625,796
----------- -----------
Income (loss) from
Operations (997,361) (2,270,524)
Interest income 4,466 21,717
----------- -----------
Income (loss) before
Income taxes (992,896) (2,248,808)
Income taxes 23,142
----------- -----------
Net income (loss) $ (992,896) $(2,271,950)
----------- -----------
</TABLE>
Harmonys financial information as of June 30, 1998 is not yet
available. The Company has utilized an estimate of Harmony's results from
operations in its computation of the equity loss in Harmony for the
quarter ended June 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis contains certain forward-looking
terminology such as "believes", "expects", "anticipates", and "intends",
or comparable terminology. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially
from those projected. Potential purchasers of the Company's securities
are cautioned not to place undue reliance on such forward-looking
statements which are qualified in their entirety by the cautions and
risks described herein.
General
The Board of Directors of Children's Broadcasting Corporation
unanimously approved the sale of the Company's assets to Global
Broadcasting Company, Inc. ("Global"), subject to shareholder approval,
for $72.5 million in cash. Shareholder approval for the sale was
obtained in January 1998. However, on January 27, 1998, the Company
announced that Global had failed to close on the purchase of the
Company's radio stations within the time provided under the purchase
agreement between the parties. On January 30, 1998, the Company
discontinued operation of Aahs World Radio, its 24-hour children's radio
programming, which it
<PAGE>
began broadcasting by satellite in late 1992. The primary sources of
the Company's broadcast revenue, prior to the discontinuation of Aahs
World Radio, were from the sale of local advertising and air time and
network revenue. The cessation of such broadcasting has negatively
impacted the Company's broadcast revenue. On April 20, 1998, the
Company signed a definitive purchase agreement with Catholic Radio
Network, LLC ("CRN") to sell the assets of ten of its owned and operated
stations including the stock of Children's Radio New York, Inc., a
subsidiary of the Company for $57.0 million. On April 29, 1998, the
Company signed a definitive purchase agreement with Salem Communications
Corporation to sell the assets of two additional owned and operated
stations for a total purchase price of $2.7 million cash. On May 7,
1998, the Company signed a definitive purchase agreement with 1090
Investments, LLC to sell the assets of its remaining station in Detroit
for a purchase price of $2.0 million cash.
Radio stations frequently barter unsold advertising time for products
or services, such as hotels, restaurants and other goods used principally
for promotional, sales and other business activities. Barter revenues
and expenses are included in the financial presentation below. The
revenue and expenses related to barter do not have a material effect on
the Company's operating profit in a given period.
Results of Operations:
Three and Six Months ended June 30, 1998 compared to Three and Six
Months ended June 30, 1997.
Revenue:
Owned, Operated and LMA Station Revenues:
Total revenues from the Company's owned, operated and LMA
stations decreased $569,000 or 51% from $1,108,000 in the second quarter
of 1997 to $540,000 in the second quarter of 1998. Revenues during the
first half of 1998 decreased 37% from $2,053,000 in 1997 to $1,284,000
in 1998. This decrease in revenue can be attributed to the cessation of
broadcasting the Aahs World Radio format and the reduction of sales
force at various stations in anticipation of the sale of the Company's
owned and operated stations.
Network:
Total revenues of $64,000 were produced by the network during
the second quarter of 1998 compared to revenues of $308,000, a decrease
of $244,000 or 79%, compared to the second quarter of 1997 revenues.
Revenues for the first half of 1998 decreased $360,000 or 70% compared
to the same period in 1997. This decrease in network revenues was due
to the cessation of broadcasting the Aahs World Radio programming on
January 30, 1998.
Operating Expenses:
Owned, Operated and LMA Station Expenses:
General and administrative expenses decreased 42% to $447,000
for the second quarter of 1998 from $771,000 in the same period of 1997.
These expenses decreased $553,000 or 36% for the first six months of
1998 compared to the same period in 1997. This decrease was due to the
Company's reduction in staff at the stations, which eliminated not only
personnel but also general
<PAGE>
office overhead expenses. Additionally, the Company has entered into
Local Marketing Agreements ("LMA's") pertaining to KTEK(AM) in Houston,
KYCR(AM) in Minneapolis, and WCAR(AM) in Detroit. These LMA's have
substantially reduced the Company's expenses at these stations.
Expenses will continue to diminish as the stations are sold.
Technical and programming expenses decreased to $214,000 in
the second quarter of 1998 from $304,000 during the same period in 1997,
a decrease of 30%. During the first six months of 1998, these expenses
decreased 14% compared to the same period in 1997. Expenses will
continue to diminish as the stations are sold.
Sales expenses totaled $108,000 in the second quarter of 1998
compared to $555,000 in the second quarter of 1997. During the first
half of 1998, these expenses decreased 76% compared to the same period
in 1997. This decrease is due to the reduction of sales personnel in
anticipation of the sale of the Company's stations. Expenses will
continue to diminish as the stations are sold.
Network Expenses:
General and administrative expenses decreased $44,000 in the
second quarter of 1998 to $100,000 as compared to $144,000 for the
second quarter of 1997. These expenses decreased 29% during the first
six months of 1998 as compared to the same period in 1997 due to the
reduction in general overhead expenses tied to the cessation of
broadcasting of Aahs World Radio programming.
Programming expenses decreased $128,000 to $92,000 in the
second quarter of 1998 compared to $220,000 in the same period of 1997,
and decreased $210,000 to $217,000 in the first half of 1998 from
$427,000 during the first half of 1997. This decrease was due to the
reduction of staff due to the discontinuation of broadcasting of Aahs
World Radio programming and in anticipation of the sale of the Company's
owned and operated stations.
Sales expenses decreased 83% from $495,000 in the second
quarter of 1997 to $86,000 in the same period of 1998. These expenses
decreased 75% from $949,000 during the first half of 1997 to $237,000 in
the same period of 1998. This decrease was due to the reduction of
sales personnel in conjunction with the discontinuation of broadcasting
the Aahs World Radio format.
Marketing expenses were $10,000 during the second quarter of
1998 compared to $32,000 in the second quarter of 1997, representing a
decrease of 69%. During the first six months of 1998, marketing
expenses decreased $133,000 or 88% compared to the same period of 1997,
due to the elimination of the Company's marketing effort in conjunction
with the cessation of broadcasting of Aahs World Radio programming on
January 30, 1998.
Corporate charges were $1,320,000 in the second quarter of
1998 compared to $1,104,000 in the second quarter of 1997, representing
an increase of 20%. Corporate charges increased 27% in the first six
months of 1998 compared to the same period in 1997. This increase is
attributable to a $713,000 increase in legal fees incurred relating to
the ABC/Disney litigation during the first half of 1998 compared to the
first half of 1997. Decreases in corporate charges of $214,000 were
realized due to a decrease in personnel expense, outside services and
travel expenses. The ABC/Disney litigation is anticipated to
<PAGE>
continue to utilize a significant portion of the Company's working
capital. Further, professional services required in connection with the
sale of the Company's owned and operated stations will reduce the
Company's working capital.
Depreciation and amortization remained steady during the
second quarter of 1998 increasing only $2,000. During the first half of
1998, these expenses increased $91,000 or 9% over the same period in
1997. The increase in depreciation and amortization has been minimal as
the Company has not been acquiring radio broadcast licenses ("RBLs") and
certain related assets as it had been in the past.
Net interest expense for the second quarter of 1998 was
$1,145,000, an increase of $742,000 over the second quarter of 1997.
Net interest expense for the first half of 1998 increased 199% from
$717,000 to $2,147,000, as a result of the interest increase associated
with the additional financing provided by Foothill Capital Corporation
("Foothill") and the interest payable to the lenders who provided $1.25
million for the purchase of stock in Harmony Holdings, Inc. ("Harmony").
The net loss increased 24% in the second quarter of 1998 to
$3,918,000 from $3,156,000 in the second quarter of 1997. During the
first six months of 1998 the net loss increased $1,661,000 to $7,597,000
from $5,936,000 in the first six months of 1997, an increase of 28%.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was a
deficit of $30,703,000 at June 30, 1998 compared to a deficit of
$25,706,000 at December 31, 1997.
During the first half of 1998, the Company used $1,186,000 cash for
in operating activities. While the sale by the Company of its stations
is expected to further reduce future broadcast revenue, the Company has
implemented measures to decrease its expenses to offset the loss of
revenue. Additionally, the Company ceased producing and distributing
its full-time Aahs World Radio programming format as of January 30,
1998. Concurrent with the announcement of this termination of network
programming, the Company initiated certain reductions in its workforce
related to the operation of the network and the stations.
In January 1998, the Company received proceeds totaling $611,000 and
paid debt issue costs of $39,000 through the issuance of a note payable
to Harmony with a face amount of $650,000. The note payable, which has
subsequently been repaid, bore an interest rate of 15%, was unsecured and
was due upon demand (see Note A).
The Company entered into second and third amendments to its Credit
Agreement with Foothill in March and May 1998, pursuant to which the
Company obtained additional term note payable advances totaling $3,000,000
of which the Company received net proceeds totaling $1,900,000, paid loan
origination fees of $300,000, and established an interest reserve of
$800,000 to be used for payment of future interest (see Notes C & G)
In June 1998, the Company issued 606,061 shares of its Series B
Convertible Preferred Stock ("this Series") to three accredited investors
for which it received gross proceeds of $2,000,000. Net proceeds to the
Company after commissions and legal fees were approximately $1,900,000.
With the proceeds, the Company
<PAGE>
exercised its stock options to acquire 750,000 shares of Harmony,
purchased 250,000 additional shares of Harmony common stock on the open
market, and repaid the above-referenced debt obligation to Harmony. The
Company current ownership in Harmony is 44.1% (see Notes J & K).
The Company believes that the financing it received from Foothill in
connection with the second and third amendments to the Credit Agreement
and the escrow releases ($3.0 million) from CRN during the second
quarter of 1998 will be sufficient to operate the Company through the
sale of the Company's radio stations. The sale of the Company's radio
stations is expected to provide the Company with sufficient working
capital to meet its cash requirements on an ongoing basis. If any such
sale is delayed or does not occur, the Company believes it will need to
obtain alternative financing. Because the Credit Agreement with
Foothill requires the Company to grant liens and security interests on
substantially all of its assets, the Company's ability to incur
additional indebtedness may be limited. In addition, the outstanding
shares of Series B Convertible Preferred Stock may have the effect of
limiting the Company's ability to engage in future equity financings.
If the Company is not able to obtain adequate financing, or financing
on acceptable terms, it could be forced to reduce or terminate its
operation, curtail future acquisitions or other projects, sell or lease
its current assets under unfavorable circumstances, delay certain
capital projects or potentially default on obligations to creditors, all
of which may be materially adverse to the Company's operation and
prospects.
Consolidated cash was $1,732,000 at June 30, 1998 and $545,000 at
December 31, 1997, an increase of $1,187,000.
Accounts receivable at June 30, 1998 decreased $970,000 from
December 31, 1997, other receivables decreased $6,000, and prepaid
expenses at June 30, 1998 increased $214,000 from December 31, 1997.
Accounts payable at June 30, 1998 decreased $117,000 from December 31,
1997, accrued interest increased $70,000 from December 31, 1997 to June
30, 1998 and other accrued expenses increased $3,233,000 during that
same period. The $1,186,000 cash used for operations was provided by
the proceeds obtained through the Foothill financing and CRN escrow
releases.
During the first half of 1998, $1,333,000 of cash was used for
investing activities. This cash was used primarily for the additional
investment in Harmony and was provided by the Securities Purchase
Agreement described above.
Cash obtained through financing activities amounted to $3,705,000
during the first half of 1998. This cash represents the $1,900,000 term
loan advance from Foothill, the $1,900,000 net proceeds obtained through
the issuance of convertible preferred stock pursuant to a Securities
Purchase Agreement, and the $5,000 obtained through the issuance of
common stock through the exercise of stock options, less the repayment
of debt.
Seasonality and Inflation
The Company's revenues generally follow retail sales trends, with
the fall season (September through December) reflecting the highest
revenues for the year, due primarily to back-to-school and holiday
season retail advertising, and the first quarter reflecting the lowest
revenues for the year. The Company does not believe inflation has
affected the results of its operations, and
<PAGE>
does not anticipate that inflation will have an impact on its future
operation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company's former business strategy was to derive revenue from
the sale of network advertising time to national advertisers and from local
advertising sales from Company-owned or operated stations. The Company's
strategy, in entering into an operations agreement with ABC Radio, was to use
the resources and reputation of ABC Radio to market Aahs World Radio, attract
national advertising and further build the Company's network through
affiliations. The Company sought out and developed strategic relationships
in order to enhance and reinforce its brand, and to allow the Company to
explore business opportunities at minimal cost to it and without detracting
from management's focus upon the Company's core business. In 1995, the
Company developed such a relationship with ABC Radio, pursuant to which ABC
Radio agreed, through representations and agreements, that ABC Radio would
commit its affiliate development and national advertising sales staffs and
other resources to assist and augment the Company's efforts to market the Aha
World Radio format to broadcasters and advertisers. Throughout the course of
its relationship with ABC Radio, the Company disclosed significatn
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
childrens 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 Companys 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. Trial will commence on August 31,
1998.
Item 2. Changes in Securities and Use of Proceeds
a. Not applicable.
b. Not applicable.
<PAGE>
c. Sales of Unregistered Securities During the Second Quarter of
1998
On May 21, 1998, the Company's Credit Agreement with Foothill was
amended effective April 17, 1998. Pursuant to the amendment, the Company
received an additional 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 a warrant to Foothill,
exercisable at $3.31 per share, to purchase 200,000 shares of the Company's
Common Stock. Such warrant expires on November 25, 2001. Through August 12,
1998, the Company had issued warrants to Foothill, exercisable at prices
ranging from $3.31 to $4.40 per share, to purchase a total of 650,000 shares
of the Company's Common Stock in connection with the Credit Agreement and the
amendments thereto.
On May 18, 1998, the Company issued 150,000 shares of its Common
Stock, to be periodically released from a trust account, to Hessian & McKasy,
P.A. ("Hessian"). Pursuant to a retainer agreement, the Company paid such
shares to Hessian as a retainer for legal fees incurred and to be incurred in
connection with the ABC/Disney litigation. Under the retainer agreement,
Hessian will
<PAGE>
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 Hessian 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 Hessian of its
authorization to pay a particular legal fee billing in shares. In the event
of the sale of shares by Hessian 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 Hessian 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, Hessian 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 Hessian. Lance W. Riley, the Company's Secretary and
General Counsel, has an of counsel relationship with Hessian. Through August
12, 1998, the Company had issued a total of 350,000 shares of its Common
stock to Hessian pursuant to the retainer agreement.
In connection with the July 1997 acquisition by the Company of
shares of common stock of Harmony Holdings, Inc. ("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 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 pruchase 12,500 shares of Common
Stock at $3.0625 per share was issued to Mr. Toles.
On June 30, 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 606,061 shares of its
Series B Convertible Preferred Stock ("this Series") to three accredited
investors for which it received gross proceeds of $2,000,000. From the gross
proceeds, the Company paid a 6.25% commission to Pacific Continental
Securities Corp. The transaction resulted in net proceeds to the Company of
approximately $1,850,000.
The shares of this Series have a stated value of $3.30 per share
(the "Stated Value") and are redeemable for cash in certain circumstances.
At any time on or before the date which is 60 days following the closing of
the transaction contemplated by the Purchase Agreement between the Company
and Catholic Radio Network, LLC, dated April 17, 1998 (the "CRN Closing"),
but in no event earlier than three business days after the CRN Closing, if the
<PAGE>
holders of at least 25% of the outstanding unconverted shares of this
Series so elect, the Company shall, to the extent that funds are legally
available therefor, redeem all of the outstanding unconverted shares of this
Series by payment in cash of the sum equal to 122.5% of the Stated Value for
each outstanding unconverted share of this Series (appropriately adjusted to
reflect stock splits, stock dividends, reorganizations, consolidations and
similar changes). If the Company so elects, it may at any time, to the
extent that funds are legally available therefor, 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 (appropriately adjusted to reflect stock splits, stock
dividends, reorganizations, consolidations and similar changes).
The shares of this Series may also be converted into shares of
Common Stock of the Company in certain circumstances. At the option of the
holder, at any time after the date 120 days following the closing date, the
shares of this Series shall, subject to the schedule presented in the
following paragraph, be convertible, into fully paid and nonassessable shares
of Common Stock, at the conversion price in effect at the time of conversion,
each share of this Series being deemed to have the stated Value for the
purpose of such conversion. The number of shares of Common Stock to be
delivered upon conversion of a share of this Series shall be 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 shall be subject to adjustment from time to time in
certain instances. The number of shares so issuable upon conversion shall be
multiplied by the number of shares of this Series to be converted, and the
product thereof shall be delivered to the holder. 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 shall be 84%.
The shares of this Series may be converted, at the option of the
holder, in accordance with the following schedule:
<TABLE>
<CAPTION>
Number of Days Percentage of Original
Elapsed Following Issuance Preferred Stock Convertible
-------------------------- ---------------------------
<S> <C>
120 20%
150 40%
180 60%
210 80%
240 100%
</TABLE>
In the case of the call for redemption of any shares of this Series,
such right of conversion shall cease and terminate as to the shares
designated for redemption on the day such shares are actually redeemed by the
Company; provided, however, that the holder may, upon giving a conversion
notice to the Company within ten business days after receipt of the Company's
notice of redemption, convert such number of shares of this Series as such
holder would have been entitled to convert had such notice of redemption not
been given by the Company. In the event that any shares of this Series have
not been redeemed or converted into
<PAGE>
Common Stock on or before June 15, 2002, such shares shall automatically be
converted.
In connection with the above-referenced financing, the Company
issued a five-year warrant to the investors for the purchase of an aggregate
of 100,000 shares of the Company's Common Stock, at a per share exercise
price of $3.7734375. In addition, if the CRN Closing does not occur on or
prior to September 30, 1998, the Company has agreed to issue a five-year
warrant to the investors for the purchase an aggregate of 25,000 shares of
the Company's Common Stock, at a per share exercise price of the lesser of
(i) $3.7734375 or (ii) 80.77% of the closing price of a share of Common
Stock on September 30, 1998.
All of the above issuances were made in reliance upon the exemption
provided in Section 4(2) of the Securities Act of 1933, as amended (the
"Act"), which provides an exemption for transactions not involving a public
offering. The purchasers of the securities described above acquired them for
their own accounts and not with a view to any distribution thereof to the
public. At their issuance, the foregoing securities were restricted as to
sale or transfer, unless registered under the Act, and certificates
representing such securities contained restrictive legends stating that the
securities were not to be offered, sold or transferred other than pursuant to
an effective registration statement under the Act, or an exemption from such
registration. In addition, the recipients of such securities received or had
access to material information concerning the Company, including but not
limited to the Company's reports on Form 10-KSB, Form 10-QSB and Form 8-K, as
filed with the Securities and Exchange Commission. Other than the commission
paid to Pacific Continental Securities Corp., no underwriting commissions or
discounts were paid with respect to the issuances of the securities described
above.
d. Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable.
Item 5. Other Information
In July 1998, Harmony entered into a three-year, $5 million
revolving line of credit agreement with Heller Financial, Inc. The
Company entered into an agreement to guarantee this line of credit
(see exhibit 10.1).
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Guaranty between and among Children's Broadcasting
Corporation and Heller Financial, Inc., dated July 30, 1998.
27 Financial Data Schedule
b. Current Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K with
the Commission (File No. 0-21534) during the quarter for which
this report is filed:
<PAGE>
1. 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.
2. 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.
3. 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 station for $57.0 million.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 13,1998.
CHILDREN'S BROADCASTING
CORPORATION
By: /s/ Patrick D. Grinde
-----------------------
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
10.1 Guaranty between and among Childrens Broadcasting Corporation
and Heller Financial, Inc., dated July 30, 1998.
27 Financial Data Schedule
<PAGE>
GUARANTY OF PAYMENT
THIS GUARANTY OF PAYMENT (this "GUARANTY") is made this July 30, 1998 by
Children's Broadcasting Corporation, a Minnesota corporation ("GUARANTOR") in
favor of Heller Financial, Inc., a Delaware corporation ("LENDER").
RECITALS
A. FINANCIAL ACCOMMODATIONS. Lender and Harmony Holdings, Inc.,
Harmony Pictures, Inc., The End, Inc., Curious Pictures Corporation, Pure
Film, Inc., Melody Films, Inc., Lexington Films, Inc., Serial Dreamer Films,
Inc., The Beginning Entertainment, Inc., The Moment Films, Inc., Gigantic
Entertainment, Inc., Furious Pictures Corporation, and Delirious Pictures
Corporation (collectively "BORROWER") are concurrently herewith entering into
that certain Loan and Security Agreement (the "LOAN AGREEMENT") of even date
herewith pursuant to which Lender shall extend financial accommodations to
Borrower.
B. INDUCEMENT. To induce Lender to extend to Borrower the financial
accommodations set forth in the Loan Agreement, Guarantor is willing to
execute and deliver this Guaranty.
C. SUBORDINATION. Pursuant to that certain Intercreditor Agreement,
dated as of July 30, 1998, entered into between Foothill Capital Corporation,
a California corporation ("FOOTHILL") and Lender, and acknowledged by
Guarantor (the "INTERCREDITOR AGREEMENT"), the obligations of Guarantor to
Lender under this Guaranty shall at all times be junior and subordinate to
the obligations of Guarantor to Foothill under the Foothill Transactional
Documents (as such term is defined in the Intercreditor Agreement).
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Guarantor hereby agrees as follows:
SECTION 1 DEFINED TERMS
All capitalized terms used herein shall have the meanings ascribed
thereto in the Loan Agreement unless otherwise defined herein.
SECTION 2 THE GUARANTY
2.1 GUARANTY OF OBLIGATIONS. Guarantor jointly and severally (if more
than one), unconditionally and absolutely, if more than one, guarantees the
full and prompt payment and performance when due, whether at maturity or
earlier, by reason of acceleration or otherwise, and at all times thereafter,
of the indebtedness, liabilities and
<PAGE>
obligations of every kind and nature of Borrower to Lender, including those
arising under or in any way relating to the Loan Agreement or any of the
other Loan Documents, howsoever created, incurred or evidenced, whether
direct or indirect, absolute or contingent, now or hereafter existing, due or
to become due, and howsoever owned, held or acquired by Lender (collectively,
the "OBLIGATIONS"). Without limitation to the foregoing, the Obligations
shall include (a) all reasonable attorneys' and paralegals' fees, costs and
expenses and all court costs and costs of appeal incurred by Lender in
collecting any amount due Lender under this Guaranty or in prosecuting any
action against Borrower, Guarantor or any other guarantor with respect to all
or any part of the Obligations, and (b) all interest, fees, costs and
expenses due Lender after the filing of a bankruptcy petition by or against
Borrower regardless of whether such amounts can be collected during the
pendency of the bankruptcy proceedings.
2.2 CONTINUING GUARANTY; GUARANTY OF PAYMENT. This Guaranty is a
continuing guaranty of the Obligations, and Guarantor agrees that the
obligations of Guarantor to Lender hereunder shall be primary obligations,
shall not be subject to any counterclaim, set-off, abatement, deferment or
defense based upon any claim that Guarantor may have against Lender, Borrower
or any other person or entity, and shall remain in full force and effect
without regard to, and shall not be released, discharged or affected in any
way by any circumstances or condition (whether or not Guarantor shall have
any knowledge thereof), including, without limitation: (a) the attempt or the
absence of any attempt by Lender to obtain payment or performance by Borrower
or any other guarantor (this being a guaranty of payment and performance and
not of collection); (b) Lender's delay in enforcing Guarantor's Obligations
hereunder, or any prior partial exercise by Lender of any right or remedy
against Guarantor hereunder; (c) the lack of validity or enforceability of,
or Lender's waiver or consent with respect to, any provision of any
instrument evidencing, securing or otherwise relating to the Obligations, or
any part thereof; (d) the failure by Lender to take any steps to perfect,
maintain and enforce its security interests, or to preserve its rights to any
security or collateral, for the Obligations; (e) any voluntary or involuntary
bankruptcy, insolvency, reorganization, arrangement, readjustment, assignment
for the benefit of creditors, composition, receivership, liquidation,
marshalling of assets and liabilities or similar events or proceedings with
respect to Borrower or Guarantor, as applicable, or any of their respective
properties (each, an "INSOLVENCY PROCEEDING"), or any action taken by Lender,
any trustee or receiver or by any court in any such proceeding; (f) in any
proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et
seq.), as amended (the "BANKRUPTCY CODE"), (i) any election by Lender under
Section 1111(b)(2) of the Bankruptcy Code, (ii) any borrowing or grant of a
security interest by Borrower as debtor-in-possession under Section 364 of
the Bankruptcy Code, (iii) the inability of Lender to enforce the Obligations
against Borrower by application of the automatic stay provisions of Section
362 of the Bankruptcy Code, or (iv) the disallowance, under Section 502 of
the Bankruptcy Code, of all or any portion of Lender's claim(s) against
Borrower for repayment of the Obligations; (g) the failure of Guarantor to
receive notice of any intended disposition of the collateral for the
Obligations; (h) any merger or consolidation of Borrower into or with any
other entity, or any sale, lease or transfer of any of the assets
<PAGE>
of Borrower or Guarantor to any other person or entity; (i) any change in the
ownership of Borrower or any change in the relationship between Borrower and
Guarantor, or any termination of any such relationship; (k) the death or
incapacity of Guarantor; and (l) any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of Borrower, Guarantor
or any other guarantor.
Guarantor hereby expressly waives and surrenders any defense to its
liability under this Guaranty based upon any of the foregoing acts,
omissions, agreements, waivers or matters. It is the purpose and intent of
this Guaranty that the obligations of Guarantor hereunder shall be absolute
and unconditional under any and all circumstances.
2.3 RIGHTS OF LENDER. Lender is hereby authorized, without notice to
or demand of Guarantor and without affecting the liability of Guarantor
hereunder, to take any of the following actions from time to time: (a)
increase or decrease the amount of, or renew, extend, accelerate or otherwise
change the time for payment of, or other terms relating to, the Obligations,
or otherwise modify, amend or change the terms of any promissory note or
other agreement evidencing, securing or otherwise relating to any of the
Obligations, including, without limitation, the making of additional advances
thereunder; (b) accept and apply any payments on or recoveries against the
Obligations from any source, and any proceeds of any security therefor, to
the Obligations in such manner, order and priority as Lender may elect; (c)
take, hold, sell, release or otherwise dispose of all or any security for the
Obligations or the payment of this Guaranty, subject to the provisions of the
Intercreditor Agreement; (d) settle, release, compromise, collect or
otherwise liquidate the Obligations or any portion thereof; (e) accept, hold,
substitute, add or release any other guaranty or endorsements of the
Obligations; and (f) subject to the provisions of the Intercreditor
Agreement, at any time after maturity of the Obligations, appropriate and
apply toward payment of the Obligations (i) any indebtedness due or to become
due from Lender to Guarantor, and (ii) any moneys, credits, or other property
belonging to Guarantor at any time held by or coming into the possession of
Lender or any affiliates thereof, whether for deposit or otherwise.
SECTION 3 GUARANTOR'S WAIVERS
3.1 STATUTES OF LIMITATION. Guarantor irrevocably waives all statutes
of limitation as a defense to any action or proceeding brought against
Guarantor by Lender, to the fullest extent permitted by law.
3.2 ELECTION OF REMEDIES. Guarantor irrevocably waives any defense
based upon an election of remedies made by Lender or any other election
afforded to Lender pursuant to applicable law, including, without limitation,
(a) any election to proceed by judicial or nonjudicial foreclosure or by deed
in lieu thereof, or any election of remedies which destroys or otherwise
impairs the subrogation rights of the Guarantor or the rights of the
Guarantor to proceed against Borrower for reimbursement, or both, (b) the
waiver
<PAGE>
by Lender, either by action or inaction of Lender or by operation of law, of
a deficiency judgment against Borrower, and (c) any election pursuant to an
Insolvency Proceeding.
3.3 RIGHTS OF SUBROGATION AND OTHER RIGHTS. Guarantor irrevocably
waives (a) all rights at law or in equity to seek subrogation, contribution,
indemnification or any other form of reimbursement or repayment from Borrower
or any other person or entity now or hereafter primarily or secondarily
liable for any of the Obligations for any disbursements made by any Guarantor
under or in connection with this Guaranty, (b) all claims of any kind or type
against Borrower as a result of any payment made by Guarantor to Lender, and
(c) any right to participate in any security now or hereafter held by Lender.
In furtherance, and not in limitation, of the foregoing, Guarantor agrees
that any payment to Lender pursuant to this Guaranty shall be deemed a
contribution to the capital of Borrower or other obligated party and shall
not constitute Guarantor a creditor of such party. Guarantor further agrees
that to the extent the waiver of its rights of subrogation as set forth
herein is found by a court of competent jurisdiction to be void or voidable
for any reason, any rights of subrogation Guarantor may have against Borrower
or against any collateral or security for any of the Obligations shall be
junior and subordinate to any rights Lender may have against Borrower and to
all right, title and interest Lender may have is such collateral or security.
3.4 DEMANDS AND NOTICES. Guarantor irrevocably waives all
presentments, demands for performance, protests, notices of protest, notices
of dishonor, notices of acceptance of this Guaranty and of the existence,
creation or incurring of new or additional Obligations, and demands and
notices of every kind that may be required to be given by any statute or rule
or law.
3.5 BORROWER INFORMATION; OTHER DEFENSES. Guarantor irrevocably waives
(a) any duty of Lender to advise Guarantor of any information known to Lender
regarding the financial condition of Borrower (it being the obligation of
Guarantor to keep informed regarding such condition), and (b) any defense
based on any claim that Guarantor's obligations exceed or are more burdensome
than those of Borrower, and any and all other defenses now or at any time
hereafter available to Guarantor at law or in equity.
SECTION 4 REPRESENTATIONS AND WARRANTIES
Guarantor represents and warrants to Lender as follows:
4.1 EXISTENCE; AUTHORITY; EXECUTION. To the extent Guarantor is a
corporation, limited liability company or limited partnership, Guarantor
hereby represents and warrants that: (a) it is duly organized, validly
existing, and in good standing under the laws of the state of its
incorporation or formation; and (b) this Guaranty has been duly and validly
authorized, executed and delivered and constitutes the binding obligation of
Guarantor, enforceable in accordance with its terms.
4.2 FINANCIAL STATEMENTS. All financial statements and other financial
information furnished or to be furnished to Lender (a) are or will be true
and correct and
<PAGE>
do or will fairly represent the financial condition of Guarantor (including
all contingent liabilities), and (b) were or will be prepared in accordance
with generally accepted accounting principles, or such other accounting
principles as may be acceptable to Lender at the time of their preparation,
consistently applied. There has been no material adverse change in
Guarantor's financial condition since the dates of the statements most
recently furnished Lender.
4.3 NO DEFAULTS. There is no existing event of default, and no event
has occurred which with the passage of time and/or the giving of notice or
both will constitute an event of default, under any agreement to which
Guarantor is a party, the effect of which event of default will impair
performance by Guarantor of the Obligations pursuant to and as contemplated
by the terms of this Guaranty, and neither the execution and delivery of this
Guaranty nor compliance with the terms and provisions hereof will violate any
presently existing provision of law or any presently existing regulation,
order, writ, injunction or decree of any court or governmental department,
commission, board, bureau, agency or instrumentality, or constitute a default
under, any agreement to which Guarantor is a party or by which Guarantor is
bound.
4.4 NO LITIGATION. There are no actions, suits or proceedings pending
or threatened against the Guarantor before any court or any governmental,
administrative, regulatory, adjudicatory or arbitrational body or agency of
any kind that will adversely affect performance by the Guarantor of its
obligations pursuant to and as contemplated by the terms and provisions of
this Guaranty.
4.5 ACCURACY. Neither this Guaranty nor any document, financial
statement, credit information, certificate or statement heretofore furnished
or required herein to be furnished to Lender by the Guarantor contains any
untrue statement of fact or omits to state a fact material to this Guaranty.
SECTION 5 EVENTS OF DEFAULT
Upon the occurrence of any of the following events, Lender may, without
notice to Borrower or Guarantor, declare any or all of the Obligations,
whether or not then due, immediately due and payable by Guarantor under the
Guaranty, and subject to the provisions of the Intercreditor Agreement Lender
shall be entitled to enforce the obligations of Guarantor hereunder:
5.1 DEFAULT BY BORROWER. Borrower shall default in the payment or
performance of any of the Obligations guarantied hereby, after giving effect
to any applicable notice and cure provisions.
5.2 FAILURE TO PERFORM. Guarantor fails to perform any of its
obligations under this Guaranty or any agreement under which security is
given therefor, or this Guaranty is revoked or terminated by Guarantor, or
any representation or warranty made or given by Guarantor to Lender proves to
be false or misleading in any material respect.
<PAGE>
5.3 INSOLVENCY PROCEEDING. The making by Guarantor of any assignment
for the benefit of creditors, or a trustee or receiver being appointed for
Guarantor or for any property of Guarantor, or Guarantor becoming insolvent
or the subject of any Insolvency Proceeding and, in the case of such a
proceeding being commenced against Guarantor, such proceeding is not
dismissed within thirty (30) days following the commencement date thereof.
5.4 DEATH OR DISSOLUTION. Guarantor dies, dissolves or liquidates, or
the business of Guarantor is suspended or terminated for any reason.
SECTION 6 MISCELLANEOUS
6.1 REVIVAL AND REINSTATEMENT. If at any time all or any part of any
payment theretofore applied by Lender to any of the Obligations is or must be
rescinded or returned by Lender for any reason whatsoever (including, without
limitation, the insolvency, bankruptcy or reorganization of Borrower), such
Obligations shall, for the purposes of this Guaranty, to the extent such
payment is or must be rescinded or returned, be deemed to have continued in
existence, notwithstanding such application by Lender, and this Guaranty
shall continue to be effective or be reinstated, as the case may be, as to
such Obligations, all as though such application by Lender had not been made.
6.2 NO MARSHALING. Lender has no obligation to marshal any assets in
favor of Guarantor, or against or in payment of (a) any of the Obligations,
or (b) any other obligation owed to Lender by Guarantor, Borrower, or any
other person.
6.3 NO MODIFICATION, WAIVER OR RELEASE WITHOUT WRITING. Except as may
otherwise be expressly set forth herein, this Guaranty may not be modified,
amended, revised, revoked, terminated, changed or varied in any way
whatsoever, nor shall any waiver of any of the provisions of this Guaranty be
binding upon Lender, except as expressly set forth in a writing duly executed
by Lender and Guarantor. No waiver by Lender of any default shall operate as
a waiver of any other default or the same default on a future occasion, and
no action by Lender permitted hereunder shall in any way affect or impair
Lender's rights or the obligations of Guarantor under this continuing
Guaranty.
6.4 ASSIGNMENT; SUCCESSORS AND ASSIGNS. Guarantor may not assign
Guarantor's obligations or liabilities under this Guaranty. Subject to the
preceding sentence, this Guaranty shall be binding upon the parties hereto
and their respective heirs, executors, successors, representatives and
assigns and shall inure to the benefit of the parties hereto and their
respective successors and assigns. Lender may assign its rights under this
Guaranty.
6.5 INTEGRATION. This Guaranty is the entire agreement of Guarantor
with respect to the subject matter of this Guaranty.
<PAGE>
6.6 RIGHTS CUMULATIVE. All of Lender's rights under this Guaranty are
cumulative. The exercise of any one right does not exclude the exercise of
any other right given in this Guaranty or any other right of Lender not set
forth in this Guaranty.
6.7 SEVERABILITY. Whenever possible each provision of this Guaranty
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Guaranty shall be prohibited by
or invalid under such law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Guaranty.
6.8 MATERIAL INDUCEMENT; CONSIDERATION. Guarantor acknowledges and
agrees that Lender is specifically relying upon the representations,
warranties, agreements and waivers contained herein and that such
representations, warranties, agreements and waivers constitute a material
inducement to Lender to accept this Guaranty and to enter into the Loan
Agreement and the transaction contemplated therein. Guarantor further
acknowledges that it expects to benefit from Lender's extension of financing
accommodations to Borrower because of its relationship to Borrower, and that
it is executing this Guaranty in consideration of that anticipated benefit.
6.9 INDEMNIFICATION. Subject to the provisions of the Intercreditor
Agreement, Guarantor agrees to indemnify, pay and hold Lender and its
officers, directors, employees, agents, and attorneys (collectively called
the "INDEMNITEES") harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, expenses and disbursements of any kind or nature whatsoever (including
the reasonable fees and disbursements of counsel for such Indemnitees in
connection with any investigative, administrative or judicial proceeding
commenced or threatened) that may be imposed on, incurred by, or asserted
against that Indemnitee, in any manner relating to or arising out of this
Guaranty or the exercise of any right or remedy hereunder or under the other
documents pertaining to the Obligations (the "INDEMNIFIED LIABILITIES");
PROVIDED that Guarantor shall have no obligation to an Indemnitee hereunder
with respect to Indemnified Liabilities arising from the gross negligence or
willful misconduct of that Indemnitee as determined by a court of competent
jurisdiction. To the extent that the undertaking to indemnify, pay and hold
harmless set forth in the preceding sentence may be unenforceable because it
is violative of any law or public policy, Guarantor shall contribute the
maximum portion that it is permitted to pay and satisfy under applicable law
to the payment and satisfaction of all Indemnified Liabilities incurred by
the Indemnitees or any of them.
6.10 COUNTERPARTS. This Guaranty may be executed in counterparts, each
of which shall be deemed an original, but all of which, when taken together,
shall be deemed one and the same agreement.
6.11 GOVERNING LAW. This Guaranty shall be governed by and construed in
accordance with the internal laws of the State of Illinois, without regard to
conflicts of law provisions.
<PAGE>
6.12 VENUE. GUARANTOR, IN ORDER TO INDUCE LENDER TO ACCEPT THIS
GUARANTY, AND FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND
SUFFICIENCY OF WHICH HEREBY IS ACKNOWLEDGED, AGREES THAT ALL ACTIONS OR
PROCEEDINGS ARISING DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT
OF, RELATED TO OR FROM THIS GUARANTY SHALL BE LITIGATED, AT LENDER'S SOLE
DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE COUNTY OF
COOK, STATE OF ILLINOIS. GUARANTOR HEREBY CONSENTS AND SUBMITS TO THE
JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY
AND STATE. GUARANTOR HEREBY IRREVOCABLY APPOINTS AND DESIGNATES CT
CORPORATION SYSTEM, WHOSE ADDRESS IS GUARANTOR, C/O CT CORPORATION SYSTEM,
208 S. LASALLE STREET, CHICAGO, ILLINOIS 60604, AS ITS DULY AUTHORIZED AGENT
FOR SERVICE OF LEGAL PROCESS AND AGREES THAT SERVICE OF SUCH PROCESS UPON
SUCH PARTY SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON SUCH PARTY. IN
THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO
BUSINESS IN CHICAGO, ILLINOIS, GUARANTOR SHALL, WITHIN TEN (10) DAYS AFTER
LENDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN CHICAGO, ILLINOIS) ON ITS
BEHALF AND WITHIN SUCH PERIOD NOTIFY LENDER OF SUCH APPOINTMENT. IF SUCH
SUBSTITUTE AGENT IS NOT TIMELY APPOINTED, LENDER SHALL, IN ITS SOLE
DISCRETION, HAVE THE RIGHT TO DESIGNATE A SUBSTITUTE AGENT UPON FIVE (5)
DAYS' NOTICE TOGUARANTOR. GUARANTOR HEREBY CONSENTS AND SUBMITS TO THE
JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY
AND STATE. GUARANTOR HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR
CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY LENDER ON THIS
GUARANTY IN ACCORDANCE WITH THIS PARAGRAPH.
6.13 WAIVER OF JURY TRIAL. GUARANTOR, AND BY ITS ACCEPTANCE OF THIS
GUARANTY, LENDER, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN
ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF
THIS GUARANTY AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS
WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY GUARANTOR, AND BY
ITS ACCEPTANCE OF THIS GUARANTY, LENDER, AND GUARANTOR ACKNOWLEDGES THAT
NEITHER LENDER NOR ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY
REPRESENTATIONS OF FACT TO INCLUDE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN
ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.
<PAGE>
6.14 WAIVERS. THE WAIVERS SET FORTH HEREIN (INCLUDING, WITHOUT
LIMITATION, SECTIONS 2.2 AND 3 ABOVE) ARE KNOWINGLY, INTENTIONALLY, AND
VOLUNTARILY MADE BY GUARANTOR, AND GUARANTOR ACKNOWLEDGES THAT NEITHER
LENDER NOR ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY REPRESENTATIONS
OF FACT TO INDUCE THESE WAIVERS OR IN ANY WAY TO MODIFY OR NULLIFY ITS
EFFECT. GUARANTOR FURTHER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED (OR HAS
HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS GUARANTY AND IN
THE MAKING OF THESE WAIVERS BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN
FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THESE WAIVERS WITH
COUNSEL.
6.15 SUBORDINATION. Anything contained in the foregoing to the contrary
notwithstanding, the Obligations of Guarantor to Lender under this Guaranty
shall at all times be junior and subordinate to the obligations of Guarantor
to Foothill under the Foothill Transactional Documents (as such term is
defined in the Intercreditor Agreement), and Lender's rights under this
Guaranty shall at all times be subject to and limited by the terms and
conditions of the Intercreditor Agreement.
Guarantor has duly executed this Guaranty as of the date and year first
above written.
CHILDREN'S BROADCASTING CORPORATION
By: /s/ James G. Gilbertson
--------------------------------------
Name: James G. Gilbertson
------------------------------------
Title: Chief Operating Officer
-----------------------------------
Address:
724 First Street North, Fourth Floor
Minneapolis, Minnesota 55401
FEIN: 41-1663712
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,731,735
<SECURITIES> 0
<RECEIVABLES> 625,830
<ALLOWANCES> (234,601)
<INVENTORY> 0
<CURRENT-ASSETS> 2,444,830
<PP&E> 7,085,482
<DEPRECIATION> (2,711,065)
<TOTAL-ASSETS> 35,748,443
<CURRENT-LIABILITIES> 33,148,070
<BONDS> 27,548,876
0
1,768,250
<COMMON> 134,380
<OTHER-SE> (1,652,820)
<TOTAL-LIABILITY-AND-EQUITY> 35,748,443
<SALES> 1,439,406
<TOTAL-REVENUES> 1,439,406
<CGS> 0
<TOTAL-COSTS> 2,341,703
<OTHER-EXPENSES> 6,694,970
<LOSS-PROVISION> (234,601)
<INTEREST-EXPENSE> 2,169,351
<INCOME-PRETAX> (7,597,267)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,597,267)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> 0
</TABLE>
