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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DECEMBER 8, 1998
Date of report (Date of earliest event reported)
CHILDREN'S BROADCASTING CORPORATION
(Exact Name of Registrant as Specified in Charter)
MINNESOTA 0-21534 41-1663712
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification Number)
724 FIRST STREET NORTH, MINNEAPOLIS, MINNESOTA 55401
(Address of Principal Executive Offices, including Zip Code)
(612) 338-3300
(Registrant's Telephone Number, including Area Code)
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ITEM 5 OTHER EVENTS
(a) Ongoing Corporate Operations
Following the sale of its remaining broadcasting assets and after
using a portion of the proceeds from such sale to repay its
indebtedness, Children's Broadcasting Corporation (the "Company")
will seek to reposition itself through acquisitions in the
television commercial production industry. The Company believes that
the expanded number of television channels, advances in digital
technology and the demand for effective advertising concepts and
efficient delivery of production services represents a potential
opportunity for the Company in the television commercial production
field.
The Company initially entered this market by acquiring a major
ownership interest in Harmony Holdings, Inc. ("Harmony"), a company
which engages primarily in the production of television commercials.
As of the date of this report, the Company beneficially owned 49.0%
of Harmony's common stock. The Company plays a significant role in
Harmony's management, has provided Harmony with cash advances of
$675,000 and has guaranteed a $5 million line of credit extended to
Harmony. As noted in its filings with the Securities and Exchange
Commission, the Company may determine to increase its ownership
position in Harmony should opportunities exist on favorable terms.
In 1998, Harmony had sales of over $50 million in the television
commercial production industry. Harmony deals with such major
advertisers as Acura, Anheuser Busch, AT&T, Bank of America, Blue
Cross, Coca Cola, Canon, Disney, Kellogg's, Kodak, McDonald's, Nike,
Nintendo, Reebok, Sears, Sony, State Farm and Visa. It works with
such major advertising agencies as Leo Burnett, Bozell Worlwide,
Foote, J. Walter Thompson, DDB Needham, Young & Rubicam and Fallon
McElliot.
The Company intends to build on Harmony's expertise and established
reputation for quality to consolidate additional commercial
production companies, enabling the resulting entity to realize
benefits from economies of scale, centralization of accounting,
marketing and sales functions, and the ability to receive more
competitive rates from support service providers. The Company has
not yet determined whether it will seek a consolidation or business
combination with Harmony, or whether it will pursue such efforts in
parallel with its ownership interest in Harmony.
The Company believes there is an excess capacity in small commercial
production companies with limited resources and limited access to
major advertising account executives, making them unable to
adequately respond to growing demands for high quality and high
profile commercial productions. The Company believes there are
compelling arguments for consolidation in this industry in favor of
a larger scale production organization.
The Company intends to explore the consolidation of small and medium
commercial production companies in an effort to increase its
commercial production director pool from 30 to 100 directors. The
Company believes that it can substantially increase gross revenues,
and ultimately profits, through the acquisition of private
production firms which may have between 6 and 12 directors producing
commercial productions with budgets between $15 and $35 million. The
Company intends to organize prospective acquisitions under branded
subsidiaries to:
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* Effectively represent, retain and manage a roster of creative
talent;
* Maintain brand identity as reflected by that director roster;
and
* Retain the highest level of quality and customer service at
all levels of production.
The Company believes its acquisition strategy will result in
distinct competitive advantages, including:
* Overhead Cost Efficiencies - Utilizing centralized accounting
and other services headquartered in Minneapolis, overhead
costs can be reduced while providing increased controls.
* Sales and Marketing Efficiencies - The Company believes that
improved controls can be instituted on a national sales basis
through the use of an in-house multi-subsidiary sales force,
thus eliminating independent sales representatives and giving
the Company greater control over the sales function.
* Maximization of Revenues - Through careful assemblage of
companies to insure a wide variety of directorial expertise
(e.g., table-top, auto, action, comedy, etc.), the potential
for achieving business across subsidiaries is greatly
increased. The Company will seek to be a "one-stop" shop for
major advertising agencies, while maintaining the unique brand
identity of each subsidiary.
* Increased Leverage with Support Services - With a broader base
of operations and increased production volume, the Company
believes it can become a preferred customer among all levels
of equipment and rental companies and other related support
services, potentially reducing costs.
* Control of Available Talent - By becoming one of the largest
sources of commercial production expertise, the Company
believes it will be in a position to be an industry leader in
setting director compensation and standardizing bidding
practices.
The Company believes that it can provide a community for creative
talent that provides a highly effective sales organization,
executive producers and efficient, cost-effective back-office
support. The Company believes that key talent will recognize that it
will provide an environment that fosters creativity by relieving
them of the burden of business and financing operations, while
providing a measure of financial stability with the possibility of a
long-term interest in their career that traditional, independent
production houses typically do not provide.
Because the commercial production industry is fragmented and
consists of a number of privately-held companies, there is little
published or authoritative information to compare competitors or
determine industry dominance. The Company believes that Harmony is
among the largest exclusively commercial production companies in the
industry. A number of companies have financial resources, billings
and creative rosters greater than Harmony. These competitors include
Propaganda Films (a subsidiary of Polygram) and Industrial Light and
Magic (Star Wars). The commercial production subsidiaries of these
companies may, however, be smaller in comparison to their other
businesses. Because commercial production is not the main focus of
such companies, the Company believes that these companies are not
currently contemplating the consolidation of commercial production
companies. There can be no assurance that such competitors or others
will not
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try to consolidate commercial productions companies. No assurance
can be given that such consolidation, if it occurs, will be
advantageous or profitable. As of the date hereof, 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 be advantageous or profitable.
(b) Cautionary Statement
The Company is filing herewith a Cautionary Statement pursuant to
the Private Securities Litigation Reform Act of 1995 (the
"Litigation Reform Act") for use as a readily available written
document to which reference may be made in connection with
forward-looking statements, as defined in the Litigation Reform Act.
ITEM 7 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
99.1 Cautionary Statement
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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 hereunto duly authorized on December 9, 1998.
CHILDREN'S BROADCASTING CORPORATION
By: /s/ James G. Gilbertson
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James G. Gilbertson
Chief Operating Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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99.1 Cautionary Statement
EXHIBIT 99.1
CAUTIONARY STATEMENT
CHILDREN'S BROADCASTING CORPORATION (THE "COMPANY"), OR PERSONS ACTING
ON BEHALF OF THE COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING
STATEMENTS ON BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S
SECURITIES, FROM TIME TO TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING
STATEMENTS" AS DEFINED UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 (THE "LITIGATION REFORM ACT"). THIS CAUTIONARY STATEMENT, WHEN USED IN
CONJUNCTION WITH AN IDENTIFIED FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF
QUALIFYING FOR THE "SAFE HARBOR" PROVISIONS OF THE LITIGATION REFORM ACT AND IS
INTENDED TO BE A READILY AVAILABLE WRITTEN DOCUMENT THAT CONTAINS FACTORS WHICH
COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS.
THESE FACTORS ARE IN ADDITION TO ANY OTHER CAUTIONARY STATEMENTS, WRITTEN OR
ORAL, WHICH MAY BE MADE, OR REFERRED TO, IN CONNECTION WITH ANY SUCH
FORWARD-LOOKING STATEMENT.
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT
ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS.
STRATEGY TO SELL REMAINING RADIO STATIONS; LIMITED REVENUES. In October
1998, we signed a purchase agreement with Radio Unica for the sale of our three
remaining radio stations for approximately $29.3 million. We ceased broadcasting
our Aahs World Radio programming format in January 1998 in anticipation of the
sale of such radio stations to another party. Before we discontinued
broadcasting our children's radio format, we obtained most of our revenue from
the sale of local advertising and air time and network revenue. The cessation of
such broadcasting has negatively impacted our revenue. The sale of stations to
Radio Unica is subject to various contingencies, including customary closing
conditions and regulatory approvals. If we are unable to consummate the sale of
stations to Radio Unica and additional financing is not available, we will be
forced to liquidate some or all of our assets.
LIQUIDITY; POTENTIAL INABILITY TO REPAY EXISTING INDEBTEDNESS. At the
end of each of the past four quarters, we had the following working capital
deficits:
September 30, 1998 $32.4 million
June 30, 1998 $30.7 million
March 31, 1998 $28.4 million
December 31, 1997 $25.7 million
While we have obtained working capital through our credit agreement
with Foothill, such loan facilities mature on September 30, 2000. As of the date
of this report, we owed Foothill approximately $11.3 million. A first priority
lien in favor of Foothill on substantially all of our assets (and those of our
subsidiaries) secures our remaining indebtedness. Interest under the facilities
is payable at the prime rate plus 5.75%. Our credit agreement with Foothill
contains financial covenants which require us, among other things, to maintain
specified financial ratios. In the event of default, our assets would be at
risk. There can be no assurance that we will be able to repay or refinance our
remaining indebtedness to Foothill. We intend to repay Foothill in full upon
consummation of the sale of assets to Radio Unica. If the sale of assets to
Radio Unica is not consummated, our highly-leveraged position and requirements
for payments to Foothill may require us to liquidate all or a portion of our
assets.
In addition to our indebtedness to Foothill, we guarantee Harmony's
$5.0 million revolving line of credit and we recently advanced Harmony an
aggregate of $675,000. In connection with the audit report on Harmony's
financial statements as of and for the year ended June 30, 1998, BDO Seidman,
LLP, Harmony's independent
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auditors, expressed substantial doubt about Harmony's ability to continue as a
going concern because of its recurring losses, negative working capital and
negative cash flow from operations. As of June 30, 1998 and for the year then
ended, Harmony incurred a net loss of $4.5 million, had a working capital
deficit of $689,000 and incurred negative cash flow from operations of $1.2
million. As of September 30, 1998 and for the quarter then ended, Harmony
incurred a net loss of $508,000, had a working capital deficit of $1.8 million
and incurred cash flow from operations of $33,000. In November 1998, Harmony
announced its intention to discontinue a subsidiary which represented $1.6
million of its operating loss for the year ended June 30, 1998 and $600,000 of
its operating loss for the quarter ended September 30, 1998. No assurance can be
given that the discontinuation of such subsidiary will allow Harmony to meet the
requirements of its line of credit or to repay its indebtedness to us. If
Harmony defaults on its line of credit, we may be forced to satisfy its
obligations thereunder. If such default occurs before consummation of our sale
of assets to Radio Unica, we may be required to liquidate all or a portion of
our assets.
EXPANSION INTO NEW BUSINESS. We intend, either directly or through
Harmony, to further expand our television commercial production business and
holdings through acquisitions and the hiring of creative talent. This expansion
is subject to all of the risks inherent in the establishment of a new business
enterprise. Our likelihood of success must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the expansion into a new business enterprise. As
of the date of this report, we do not have any understandings, commitments or
agreements with respect to any such acquisitions. No assurance can be given that
we will consummate future acquisitions or that any acquisitions, if consummated,
will ultimately be advantageous or profitable.
HISTORY OF OPERATING LOSSES. Since inception, we experienced
substantial net losses as a result of our efforts to develop a national
children's radio network. We have not generated positive cash flow sufficient to
fund our ongoing operations and have had frequent working capital shortages. For
each of the last three quarters, we incurred the following net losses:
September 30, 1998 $4.1 million
June 30, 1998 $3.9 million
March 31, 1998 $3.7 million
For each of the last two years, we incurred the following net losses:
December 31, 1997 $14.6 million
December 31, 1996 $9.9 million
We expect to continue to incur operating losses throughout 1998. In
connection with the audit reports on our financial statements as of and for the
years ended December 31, 1997 and 1996, BDO Seidman, LLP, our independent
auditors, expressed substantial doubt about our ability to continue as a going
concern because of our recurring losses, negative working capital and negative
cash flow from operations. As of September 30, 1998, we had an accumulated
deficit of $52.6 million and had used approximately $46.4 million of cash to
fund our losses.
ABC/DISNEY LITIGATION. On September 30, 1998, a jury in the United
States District Court for the District of Minnesota ruled in our favor in
connection with litigation for breach of contract and misappropriation of trade
secrets that we had commenced against ABC/Disney. We are seeking to have
judgment entered by the Court upon that verdict in the amount of $20.0 million
against ABC and $10.0 million against Disney. We are also seeking additional
amounts for taxes, pre-judgment interest and exemplary damages for willful and
malicious misappropriation of trade secrets. As of the date of this report, the
entry of judgment is pending before the Court. No assurance can be given that
the Court will enter judgment in such amounts. If ABC/Disney decides to appeal,
defending such appeal would consume our resources, including personnel costs and
litigation costs. We have issued shares of common stock to legal counsel for
legal fees incurred in connection with the ABC/Disney litigation. We
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may issue additional shares of our common stock to such counsel. The resale of
such shares may result in dilution to our other shareholders.
VOLATILITY OF MARKET PRICE OF COMMON STOCK. The market price of our
common stock has been subject to significant fluctuations in response to
numerous factors, including variations in our annual or quarterly financial
results, changes by financial research analysts in their estimates of our
earnings, conditions in the economy in general or in the radio industry in
particular, unfavorable publicity or changes in applicable laws and regulations
(or interpretations thereof) affecting us or the radio industry. During the
first 11 months of 1998, the market price of our 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 our common stock will be able to sell such stock
at or above the prices at which they purchase it.
IMPACT OF SALE OF SHARES; SHARES ELIGIBLE FOR FUTURE SALE. As of the
date of this report, we had 6,600,642 shares of common stock outstanding and had
warrants and options outstanding to purchase an additional 3,034,998 shares of
common stock, exercisable at prices ranging from $3.06 to $13.00 per share. We
have periodically registered shares of our common stock for resale on the public
market. The sale of such shares, and the sale of additional shares which may
become eligible for sale in the public market from time to time upon the
exercise of warrants and options, may be dilutive to existing shareholders and
could have the effect of depressing the market price of our common stock.
DILUTION DUE TO CONVERSION OF PREFERRED STOCK. In June 1998, we issued
606,061 shares of Series B Convertible Preferred Stock to the selling
shareholders. The shares of this series have a stated value of $3.30 per share
and they may be converted into shares of common stock in certain circumstances.
The number of shares of common stock to be delivered upon conversion of a share
of this series is the stated value, divided by the lesser of (x) 110% of the
average best bid price of the common stock for the five consecutive trading days
ending on the day preceding the conversion date, or (y) 94% of the average of
the three lowest closing prices of the common stock during the 60 calendar day
period ending on the day preceding the conversion date; provided, however, that
such initial conversion price is subject to adjustment from time to time in
certain instances. Notwithstanding the foregoing, if the common stock is not
traded on the New York Stock Exchange, the American Stock Exchange, the Nasdaq
National Market or the Nasdaq SmallCap Market on the conversion date, then the
percentage specified in clause (y) above will be 84%. Under the amended
securities purchase agreement between us and the selling shareholders, we agreed
that the percentage in clause (y) of the conversion formula would be 80%
effective February 1, 1999 and such percentage would be 75% effective May 1,
1999. While we have the absolute right to redeem the shares of this series at
$4.0425 per share through January 31, 1999, there can be no assurance that we
will be able to redeem all or any portion of such shares. The sale of the shares
of common stock which may become eligible for sale in the public market from
time to time upon conversion of shares of this series may be dilutive to
existing shareholders and could have the effect of depressing the market price
of our common stock.
CONFLICTS OF INTEREST. In January 1996, we entered into a five-year
lease with 724 Associates, a partnership consisting of Christopher T. Dahl, our
President, Chief Executive Officer and Chairman of the Board, Richard W.
Perkins, one of our directors, and Stephen L. Wallack, one of our shareholders,
for approximately 6,000 square feet of office space at 724 First Street North,
Minneapolis, Minnesota. In November 1996, we entered into a five-year lease with
5501 Building Company, a partnership consisting of Messrs. Dahl and Perkins, for
approximately 12,000 square feet of office space at 5501 Excelsior Boulevard,
Minneapolis, Minnesota. We lease these facilities to house our executive offices
at an aggregate annual rental of $186,000. Both of our executive offices are
adjacent to the offices of Community Airwaves Corporation and Media Management,
L.L.C. Community Airwaves is owned and controlled by Messrs. Dahl, Perkins and
Russell Cowles II, either directly or through trusts. Media Management is owned
by Messrs. Dahl and Perkins. Mr. Cowles, a former director-elect, is a
beneficiary and trustee of the John Cowles Family Trust, one of our
shareholders. Under the terms of each lease, we are obligated to pay our
proportionate share of repairs and maintenance.
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From July 1993 through July 1998, we received administrative, legal and
accounting services from Radio Management Corporation, an entity owned by
Messrs. Dahl, Perkins and Cowles. Since July 1998, we have received such
services from Media Management. Media Management provides corporate, legal,
accounting and financial services to us, Community Airwaves and Harmony. We pay
a set monthly fee of $75,000 for the services listed above. All outside services
directly attributable to us are billed directly to us. We paid Radio Management
Corporation an aggregate of $750,000 for such services during the fiscal year
ended December 31, 1996 and an aggregate of $900,000 for such services during
the fiscal year ended December 31, 1997. The salaries of two of our officers,
Messrs. Riley and Gilbertson, are paid by Media Management. Such arrangements
present conflicts of interest in connection with the pricing of services
provided.
FCC REGULATION. The Federal Communications Commission must approve the
transfer of ownership of our three remaining radio stations to Radio Unica.
There can be no assurance that we will receive such approval. Without such
approval the pending sale of assets will not be consummated.
ANTI-TAKEOVER PROVISIONS. The Board of Directors, without any action by
our 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. We are 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, deny
shareholders the receipt of a premium on their common stock and depress the
market price of our common stock.
In February 1998, the Board of Directors declared a dividend of one
common share purchase right for each share of our common stock outstanding as of
the close of business on February 27, 1998. Each right will entitle the
registered holder to purchase from us, 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 us 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 our Board of Directors 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 the date of this report, approximately
23.3% of our outstanding common stock was beneficially owned by our current
officers and directors. Accordingly, such persons may be able to significantly
influence our business and affairs. This concentration of ownership may have the
effect of delaying, deferring or preventing a change in control.
NO ASSURANCE AS TO LIQUIDITY ON THE NASDAQ STOCK MARKET. Our common
stock is currently listed on the Nasdaq National Market. In the event that our
common stock becomes delisted, the market price of our common stock may decline.
Harmony's common stock is currently listed on the Nasdaq SmallCap Market. On
October 14, 1998, Harmony received a notice from Nasdaq that, based on the net
tangible assets reported in Harmony's public filings, its common stock will be
delisted from the Nasdaq SmallCap Market. It is Harmony's obligation to
establish for Nasdaq that its net tangible assets can be brought into compliance
with applicable listing requirements. Harmony submitted a plan of compliance to
Nasdaq which was found unacceptable by Nasdaq, raising the possibility that
Harmony's common stock will be delisted from the Nasdaq SmallCap Market. We have
been advised that Harmony intends to appeal Nasdaq's decision as to its
eligibility for continued listing. In the event that Harmony's common stock
becomes delisted, the liquidity and market value of our investment in Harmony
may be adversely affected.
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ABSENCE OF DIVIDENDS. We have never declared or paid any cash dividends
on our common stock and do not intend to declare or pay cash dividends on our
common stock in the foreseeable future. We presently expect to retain our
earnings to finance our business. The declaration or payment of dividends, if
any, on our common stock in the future is subject to the discretion of the Board
of Directors and will depend on our earnings, financial condition, capital
requirements and other relevant factors. The declaration or payment of dividends
is also subject to our credit agreement with Foothill. Without Foothill's prior
written consent, we cannot declare or pay any cash dividends.
