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 March 31, 1999 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
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(Exact name of small business issuer as specified in its charter)
Minnesota 41-1663712
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5501 Excelsior Blvd., Minneapolis, MN 55416
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(Address of principal executive office, including zip code)
(612) 925-8840
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(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 May 13, 1999, there were outstanding 6,503,142 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 - March 31, 1999 and December 31, 1998.
Consolidated Statements of Operations -- Three months ended March
31, 1999 and 1998.
Consolidated Statements of Cash Flows -- Three months ended March
31, 1999 and 1998.
Notes to Consolidated Financial Statements -- March 31, 1999.
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>
Children's Broadcasting Corporation
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,708,953 $ 253,905
Accounts receivable 894,455 39,000
Allowance for doubtful accounts (38,833) (39,000)
Unbilled accounts receivable 516,491 --
Accounts receivable - affiliates 349,473 280,438
Radio station assets available for sale -- 11,391,402
Other accounts receivable 273,724 331,527
Prepaid expenses 486,526 279,816
------------ ------------
Total current assets 8,190,789 12,537,088
Note receivable 15,000,000 15,000,000
Investment in & notes receivable from Harmony 7,227,208 5,421,322
Property and equipment, net 167,511 120,385
Goodwill, net 1,135,441 --
Deferred debt issue costs -- 742,737
------------ ------------
Total assets $ 31,720,949 $ 33,821,532
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 589,296 $ 2,205,212
Accounts payable - affiliates 44,831 363,727
Accrued interest 5,429 143,505
Accrued income taxes 3,297,750 328,000
Deferred revenue -- 2,675,556
Other accrued expenses 2,609,948 1,227,637
Line of credit -- 434,974
Long-term debt - current portion 159,187 10,665,792
------------ ------------
Total current liabilities 6,706,440 18,044,403
Long-term debt , less current maturities 821,505 848,111
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Total liabilities 7,527,945 18,892,514
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Commitments and Contingencies -- --
Redeemable convertible preferred stock -- 2,448,486
Shareholders' equity
Common stock 131,444 129,015
Authorized shares - 50,000,000
Issued & outstanding shares - voting: 6,386,701
1999 and 6,261,701 - 1998
Issued and outstanding shares - nonvoting:
189,041 - 1999 and 1998
Additional paid-in capital 46,008,134 45,773,584
Accumulated deficit (21,841,575) (33,292,504)
Stock subscriptions receivable (105,000) (129,563)
------------ ------------
Total Shareholders' Equity 24,193,004 12,480,532
------------ ------------
Total Liabilities & Shareholders' Equity $ 31,720,949 $ 33,821,532
============ ============
</TABLE>
<PAGE>
Children's Broadcasting Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 1998
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<S> <C> <C>
Revenues:
Production contract revenues $ 1,144,300 $ --
Broadcast related revenues 86,902 835,995
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Total revenues 1,231,202 835,995
Cost of Production 965,464 --
------------ ------------
Gross profit $ 265,738 $ 835,995
Operating expenses:
Production divisions
Selling 36,943 --
General and administrative 263,081 --
Broadcast related expenses 180,315 1,284,981
------------ ------------
Income (loss) from operations, before
corporate depreciation and amortization (214,601) (448,986)
Corporate 540,095 1,207,726
Depreciation and amortization 102,825 546,891
------------ ------------
Income (loss) from operations (857,521) (2,203,603)
Gain on sale of radio station assets 16,545,507 --
Equity loss in Harmony (634,251) (472,841)
Interest expense net of interest income (502,806) (1,002,405)
------------ ------------
Net income (loss) before income taxes 14,550,929 (3,678,849)
Income tax provision (3,100,000) --
------------ ------------
Net income (loss) $ 11,450,929 $ (3,678,849)
============ ============
Basic net income (loss) per share $ 1.76 $ (0.55)
============ ============
Weighted average number of shares outstanding 6,492,000 6,656,000
============ ============
</TABLE>
<PAGE>
Children's Broadcasting Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 11,450,929 $ (3,678,849)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Provision for doubtful accounts (167) (126,309)
Depreciation & amortization 102,825 546,891
Gain on sale of radio stations (16,545,507) --
Net barter activity -- 16,708
Amortization and write-off of deferred debt issue costs 742,737 176,934
Equity loss in Harmony 634,251 472,841
Non-cash interest payment related to sale of stations 92,008 --
Issuance of common stock for payment of interest -- 27,710
Decrease (increase) in:
Accounts receivable (48,862) 822,534
Other receivables (264,592) 19,013
Prepaid expenses (193,780) 46,449
Increase (decrease) in:
Accounts payable (1,934,812) 360,624
Accrued interest (8,362) 62,546
Other accrued expenses 2,381,884 65,714
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Net cash used in operating activities (3,591,448) (1,187,194)
------------ ------------
Investing activities:
Sale/purchase of property & equipment (74,564) (26,705)
Investment in & notes receivable from Harmony (2,440,137) --
Sale/purchase of intangible assets -- (122,906)
Proceeds from sale of radio stations 14,034,415 --
------------ ------------
Net cash provided by (used in) investing activities 11,519,714 (149,611)
------------ ------------
Financing activities:
Payment of debt (33,211) (60,195)
Proceeds from debt financings -- 1,511,000
Redemption of convertible preferred stock (2,450,002) --
Repurchase of common stock (11,505) --
Proceeds from issuance of common stock -- 5,000
Proceeds from stock subscriptions receivable 21,500 --
------------ ------------
Net cash provided by financing activities (2,473,218) 1,455,805
------------ ------------
Increase (decrease) in cash and cash equivalents 5,455,048 119,000
Cash and cash equivalents at beginning of period 253,905 545,258
------------ ------------
Cash and cash equivalents at end of period $ 5,708,953 $ 664,258
============ ============
</TABLE>
<PAGE>
Children's Broadcasting Corporation
Notes to Consolidated Financial Statements (unaudited)
March 31, 1999
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 S-B. 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 three-month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-KSB for the
year ended December 31, 1998.
Note 2 Significant Transactions during 1999
The following significant transactions occurred during 1999 and are considered
non-recurring:
A. In January and February 1999, the Company advanced Harmony Holdings,
Inc. ("Harmony") $2,375,000 in cash pursuant to unsecured note
receivable agreements which bore interest at 10% and are due on demand.
Additionally, in February 1999, all notes with Harmony were amended to
provide for interest at 14%. It is management's belief that 14%
reflects the interest rate that would be charged to Harmony by other
<PAGE>
junior and unsecured lenders. Notes outstanding with Harmony aggregated
$3.05 million as of May 11, 1999.
B. In January 1999, the Company closed on the sale of the radio broadcast
licenses and certain other assets of its radio stations KAHZ(AM),
Dallas, KIDR(AM), Phoenix, and WJDM(AM), New York, to Radio Unica Corp.
("Radio Unica"). The Company received gross proceeds of $29.25 million
for the stations' assets which had a net book value of approximately
$11.4 at the time of the sale. The Company incurred approximately $1.5
million of transaction costs including bonuses paid to management,
employees and Media Management, LLC.
C. In January 1999, the Company redeemed all of its 606,061 shares of
Series B Convertible Preferred Stock which were issued in June 1998.
The preferred stock was redeemed at $4.04 per share, or $2.45 million,
utilizing a portion of the proceeds from the Radio Unica transaction
(Note 2B).
D. In January 1999, the Company entered into an agreement regarding the
production of a picture titled "True Rights" based on a screenplay
written by Meg Thayer. In exchange for providing certain financing of
the production, the Company received a 33.33% equity interest in the
screenplay, production of "True Rights' and any other material relating
thereto. Also, the Company shall receive 30.0% of the net proceeds from
the distribution and exploitation of "True Rights" in all media and all
sources worldwide after the Company receives, on a parri passu basis
with other investors, the sum equal to 125% of its respective
contribution to the production of "True Rights". The Company's
financing obligation totaled $126,000 and was paid in full during the
filming of the project.
E. In February 1999, the Company incorporated a new subsidiary, Buffalo
Rome Films, Inc. ("Buffalo Rome"). Buffalo Rome will seek out
independent film opportunities and is currently engaged in discussions
regarding an independent film.
F. On March 4, 1999, the Company acquired all of the issued and
outstanding common stock of Chelsea Pictures, Inc. ("Chelsea") for
consideration totaling approximately $1,135,000, representing 125,000
shares of common stock with a value of $250,000 and the assumption of
approximately $885,000 liabilities net of assets. Chelsea is a
television commercial production company with principal operations in
New York. The acquisition has been accounted for as a purchase,
whereby, all assets purchased and liabilities assumed were recorded at
their fair market value. Additional consideration for the transaction
may consist of issuance of up to an aggregate of 75,000 additional
shares of the Company's common stock. Any future issuance is dependent
on Chelsea meeting certain performance goals, and the value of shares
issued will be treated as an adjustment to the purchase price at the
time of issuance.
The unaudited pro forma results of operations which follow assume that
the acquisition of Chelsea had occurred at January 1, 1998. In addition
to combining the historical results operations of the Company and the
acquired business, the pro forma calculations include adjustments for
the estimated effect on the historical results of operations for
depreciation, interest and issuances of common stock related to the
business acquisition.
Three months ended
------------------
3/31/99 3/31/98
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Revenues $ 2,752,300 $ 4,087,568
Gross profit 432,012 1,189,194
Loss from operations (1,080,583) (2,202,304)
Net income 11,314,614 (3,671,148)
Net income per share 1.71 (0.54)
Weighted average number of
shares outstanding 6,617,000 6,781,000
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the
acquisition occurred on January 1, 1998 or of future results of
operations of the consolidated entities.
G. In April 1999, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of its common stock, representing
approximately 7.6% of the then outstanding common stock, over a period
of 12 months. Repurchases have been and will be made in accordance with
Exchange Act Rule 10b-18, and will be subject to the availability
<PAGE>
of stock, trading price, market conditions and the Company's financial
performance. The repurchased shares will be canceled and returned to
the Company's authorized capital stock. As of May 11, 1999, the Company
had repurchased an aggregate of 72,600 shares at a prices ranging from
$1.63 to $1.88 per share.
H. In April 1999, the Company made a purchase of 225,000 shares of
Harmony's common stock at a price of $1.03 per share including
commissions. This purchase increased the Company's ownership in Harmony
to approximately 52.1%. For reporting purposes, the Company will
prepare consolidated financial statements under the purchase method of
accounting for the acquisition of a majority interest in a subsidiary.
Note 3 Investment in Harmony
With the purchase of 225,000 shares of Harmony's common stock (see Note 2H), the
Company holds a majority interest in Harmony through the ownership of 3,907,962
shares of Harmony's common stock. As of May 11, 1999, the Company's investment
represented 52.1% of Harmony's outstanding common stock. Harmony's most recent
fiscal year end was June 30, 1998. Harmony's operations are summarized as
follows for the quarter and six months ended December 31, 1998:
*Three Months Six Months
Ended 12/31/98 Ended 12/31/98
-------------- --------------
Contract revenues $14,079,885 $31,384,284
Cost of production 12,305,295 26,828,754
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Gross profit 1,774,590 4,555,530
Operating expenses 2,999,589 6,174,572
Restructuring cost &
impairment of assets 3,532,495 3,532,495
Loss from
operations (4,757,494) (5,151,540)
Interest expense (82,800) (187,285)
------------ -----------
Loss before
income taxes (4,840,294) (5,338,825)
Income taxes -- 9,601
----------- -----------
Net loss $(4,840,294) $(5,348,426)
----------- -----------
* Harmony shut down its Harmony Pictures division during the quarter
ended December 31, 1998, resulting in a one-time restructuring cost of
$3,532,495.
Harmony's financial information as of March 31, 1999 is not yet
available. The Company has utilized an estimate of Harmony's results of
operations in its computation of the Company's equity loss in Harmony for the
quarter ended March 31, 1999.
Note 4 Reclassifications
<PAGE>
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation. These reclassifications have no effect on
the accumulated deficit or net income or loss previously reported.
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 Company currently engages in the television commercial production
and related media business. During 1998, the Company focused on the sale of the
radio stations it had acquired pursuant to its former business strategy. The
last of such were sold on January 14, 1999. In exchange for its radio stations,
the Company obtained approximately $55.0 million in cash and a note receivable
for $15 million, yielding 10% per annum, due April 2000. The Company intends to
reposition itself through additional 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 create
potential opportunities for the Company in television commercial production.
Since July 1997, the Company has utilized its resources to increase
its ownership interest in Harmony to 52.1%. Harmony produces television
commercials, music videos and related media. In July 1998 and February 1999, the
Company incorporated two new subsidiaries; Populuxe Pictures, Inc. ("Populuxe"),
and Buffalo Rome. Populuxe is based in New York and currently is comprised of
two directors along with an executive staff. Populuxe produces television
commercials and related media. Buffalo Rome will seek out independent film
opportunities and is currently engaged in discussions regarding an independent
film. In January 1999, the Company acquired a 33.3% equity interest in the
screenplay, production of, and any other material relating to the film "True
Rights"(see Note 2D). In March 1999, the Company acquired the stock of Chelsea,
which is based in New York and engages in the production of television
commercials, independent films and related media.
Results of Operations:
Three Months ended March 31, 1999 compared to Three Months ended March
31, 1998.
<PAGE>
The Company's total revenues increased $395,000 or 47% from $836,000 in
first quarter of 1998 to $1,231,000 in the first quarter of 1999. During in the
first quarter of 1999, Chelsea and Populuxe, two of the Company's new production
companies, provided $1,144,000 of this revenue while the remaining revenues were
related to the broadcasting entities the Company held until mid-January 1999.
Populuxe is a start-up company which is building a new base of talent and
directors with which to produce revenues. Management believes that revenues will
increase over time as this base becomes fully developed. The Company began
operating Chelsea in March 1999. Chelsea currently has a base of talent and
directors from which to draw, but intends to continue to build that base to
increase revenues.
Cost of production is directly related to revenues and includes all
direct costs incurred in connection with the production of television
commercials including film, crews, location fees and commercial directors' fees.
Cost of production as a percentage of production contract revenues was 84% at
the production companies during the first quarter of 1999. Management believes
the cost of production as a percentage of revenues will decrease as the
production companies retain more directors and these directors become more
established.
Selling expenses at Populuxe and Chelsea consist of sales commissions,
advertising and promotional expenses, travel and other expenses incurred in the
securing of television commercial contracts. These expenses were $37,000 during
the first quarter of 1999.
General and administrative expenses at the Populuxe and Chelsea consist
of overhead costs such as office rent and expenses, executive, general and
administrative payroll, and related items. These expenses were $263,000 during
the first quarter of 1999.
Expenses related to the Company's broadcasting entities held until
mid-January 1999 were $180,000. These expenses decreased $1,105,000 from
$1,285,000 in the first quarter of 1998. These expenses decreased as the radio
stations were sold and the network discontinued producing programming.
Corporate charges were $540,000 in the first quarter of 1999 compared
to $1,208,000 in the first quarter of 1998, representing a decrease of 55%. This
decrease is attributable in part to a decrease of $76,000 in legal, accounting,
and outside service fees which were elevated in the first quarter if 1998 due to
the activity related to the sale of the radio stations. Additionally, there was
a decrease in litigation expenses of $619,000 as the trial against ABC/Disney
was concluded in the last quarter of 1998. A less costly appeals process
continues at this time.
Depreciation and amortization decreased $444,000 in the first quarter
of 1999 compared to the first quarter of 1998. The decrease in depreciation and
amortization is a result of the Company's sale of its radio stations.
<PAGE>
A net gain of $16,546,000 was realized in the first quarter of 1999
from the sale of three of the Company's radio stations to Radio Unica.
Net interest expense for the first quarter of 1999 was $503,000, a
decrease of $500,000 compared to the same period in 1998, as a result of the
payoff of the Foothill debt and all but $981,000 of the Company's other debt in
January 1999. Interest expense was offset primarily by the $375,000 interest
earned from the $15.0 million note receivable due from CRN in April 2000.
A tax provision of $3,100,000 was recorded in the first quarter of
1999. This represents approximately $700,000 of federal income tax and
$2,400,000 of state taxes estimated to be due as a result of the sale of the
radio stations.
Net income of $11,451,000 was realized in the first quarter of 1999
compared to a net loss of $3,679,000 in the first quarter of 1998. This increase
of $15,130,000 is due primarily to the sale of the radio stations and the
reduction of operating losses.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was
$1,484,000 at March 31, 1999 compared to a deficit of $5,507,000 at December 31,
1998. This increase in working capital is due to the sale of three radio
stations to Radio Unica and the payoff of related debt.
In January 1999, the Company closed on the sale of the radio broadcast
licenses and certain other assets of its radio stations KAHZ(AM), Dallas,
KIDR(AM), Phoenix, and WJDM(AM), New York, to Radio Unica. The Company received
gross proceeds of $29.25 million for the stations' assets which had a net book
value of approximately $11.4 million at the time of the sale. The Company
recognized approximately $1.5 million in transaction costs including bonuses
paid to management, employees and Media Management, LLC, recorded a tax
provision of $3.1 million, and paid off all but $981,000 of its remaining debt.
Utilizing the proceeds from the Radio Unica transaction, the Company
redeemed 606,061 shares of Series B Convertible Preferred Stock which were
issued in June 1998. An aggregate of $2.45 million was used to redeem this stock
at $4.04 per share.
In January and February 1999, the Company advanced Harmony $2,375,000
in cash pursuant to unsecured note receivable agreements which are due on demand
and bear an interest rate of 14% annually (see Note 2A). As of May 11, 1999, the
Company had note receivable agreements with Harmony totaling $3.05 million. In
April 1999, the Company purchased 225,000 shares of Harmony's common stock for
$231,750. This purchase increased the Company's ownership in Harmony to 52.1%
(see Note 2H and Note 3).
In March 1999, the Company acquired all of the issued and outstanding
common stock of Chelsea for consideration totaling approximately $1,135,000,
representing 125,000 shares of common stock
<PAGE>
with a value of $250,000 and the assumption of approximately $885,000
liabilities net of assets. Additional consideration for the transaction may
consist of issuance of up to an aggregate of 75,000 additional shares of the
Company's common stock. Any future issuance is dependent on Chelsea meeting
certain performance goals, and the value of shares issued will be treated as an
adjustment to the purchase price at the time of issuance. Of the assumed
liabilities, the Company placed $605,000 in an escrow account to be used to pay
the directors working on jobs in production at the time of the transaction. To
date, director fees of approximately $332,000 have been paid from that escrow
account leaving a balance of approximately $273,000 in the account.
In April 1999, the Company's Board of Directors authorized the
repurchase of up to 500,000 additional shares of its common stock. As of May 11,
1999, the Company has repurchased an aggregate of 72,600 shares of common stock
at prices ranging from $1.63 to $1.88 per share (see Note 2G).
The Company intends, either directly or through Harmony, to further
expand its television commercial production business and holdings through
acquisitions of commercial production companies in an effort to increase its
commercial production director pool. The Company believes that it can
substantially increase gross revenues, and ultimately profits, through the
acquisition of private production companies. 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 believes it has adequate capital to initiate this new
acquisition strategy and business plan over the course of the next 12 months.
The Company believes that a number of potential acquisitions similar in nature
to its most recent acquisition exist. However, should a potential acquisition be
greater than the Company's current cash sources, the Company may need to obtain
additional financing. If the Company is not able to obtain adequate financing,
or financing on acceptable terms, it could possibly cause a delay in the
implementation of its full business plan until such time it is able to collect
on its $15.0 million note receivable due from CRN in April 2000. If for any
reason there is a delay in collecting on the CRN note, the Company may be forced
to slow the pace of or discontinue its future acquisitions or other projects. In
the interim, the Company has begun to execute the initial phase of its business
plan to acquire production companies through the acquisition of Chelsea in March
1999. There can be no assurance that the Company will consummate any additional
acquisition or that any acquisition, if consummated, will ultimately be
advantageous or profitable for the Company.
Consolidated cash was $5,709,000 at March 31, 1999 and $254,000 at
December 31, 1998, a increase of $5,455,000.
Cash used in operating activities during the three months ended March
31, 1999 was $3,591,000 and the operating cash flows reflected
<PAGE>
are net of account increases occurring as a result of acquisitions. Accounts
receivable at March 31, 1999 increased $49,000 from December 31, 1998, other
receivables at March 31, 1999 increased $265,000, and prepaid expenses at March
31, 1999 increased $194,000 from December 31, 1998. Accounts payable At March
31, 1999 decreased $1,935,000 from December 31, 1998, accrued interest at March
31, 1999 decreased $8,000, and other accrued expenses at March 31, 1999
increased $2,382,000 from December 31, 1998.
During the three months ended March 31, 1999, net cash obtained through
investing activities was $11,520,000 and was provided primarily by the sale of
the radio stations to Radio Unica net of proceed utilized for the direct payment
of outstanding debt. As of March 31, 1999, advances made to Harmony under note
receivable agreements were $2,440,000. Proceeds from the sale of radio stations
totaled $14,034,000, net of advance payments received prior to December 31,
1998.
Cash used in financing activities amounted to $2,473,000 during the
three months ended March 31, 1999. This represents the redemption of the
convertible preferred stock for $2,450,000 and the cash used to repay debt.
Year 2000 Readiness Disclosure
The term "Year 2000" is used to describe general problems that may
result from improper processing of dates and date-sensitive calculations by
computers or other machinery as the year 2000 is approached and reached. This
problem stems from the fact that many of the world's computer hardware and
software applications have historically used only the last two digits to refer
to a year. As a result, many of these computer programs do not or will not
properly recognize a year that begins with "20" instead of the familiar "19". If
not corrected, this could result in a system failure or miscalculations which
may cause disruptions in operations, including among other things, a temporary
inability to process transactions, send invoices, or engage in similar business
activities.
State of Readiness
To operate its business, the Company relies on certain information
technology ("IT") and non-technology systems, including its payroll, accounts
payable, banking and general ledger systems. The Company does not maintain any
proprietary IT systems and has not made any modifications to any of the IT
systems provided to it by outside vendors. The Company has hired an outside IT
consultant to assess the readiness of its hardware and software. This assessment
has been completed and it is anticipated that remediation needed to bring our
systems into compliance, including the replacement of the Company's voicemail
system, will be completed by July 31, 1999.
The Company also relies upon certain suppliers and service providers,
over which it can assert little control. The Company is in
<PAGE>
the process of contacting critical suppliers and service providers to assess the
readiness of such parties and to determine the extent to which the Company may
be vulnerable to such parties' failure to resolve their own Year 2000 issues.
This effort is expected to be completed by July 31, 1999.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company anticipates that it may incur up to approximately $40,000
in costs to bring the internal telecommunications system into Year 2000
compliance. Based on the results of the Company's assessment, the Company
believes that any future expenses that may be incurred, will not have a material
adverse effect on the Company's business, operating results or financial
condition.
RISKS OF YEAR 2000 ISSUES
The Company recognizes that Year 2000 issues constitute a material
known uncertainty. The Company also recognizes the importance of ensuring that
Year 2000 issues will not adversely affect its operations. The Company believes
that the processes described above will be effective to manage the risks
associated with the problem. However, there can be no assurance that the
processes can be completed on the timetable described above or that remediation
will be fully effective. The failure to identify and remediate Year 2000 issues,
or the failure of key vendors, suppliers and service providers or other critical
third parties who do business with the Company to timely remediate their Year
2000 issues could cause an interruption in the business operations of the
Company. At this time, however, the Company does not possess information
necessary to estimate the overall potential financial impact of Year 2000
compliance issues.
Seasonality and Inflation
In the past, the Company's revenues generally followed 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.
Presently, the Company has not determined the impact of seasonality on its
future revenues. The Company does not believe inflation has affected the results
of its operations, and does not anticipate that inflation will have an impact on
its future operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In September 1998, the Company went to trial against ABC Radio
Networks, Inc. ("ABC Radio") and The Walt Disney Company ("Disney")
(collectively, "ABC/Disney"). On September 30, 1998, the jury entered a
verdict in favor of the Company and awarded the Company $20 million in
damages for breach of contract by ABC Radio, $10 million for
misappropriation of a trade secret
<PAGE>
by ABC Radio and $10 million for misappropriation of a trade secret by
Disney. On January 15, 1999, although the United States District Court
for the District of Minnesota upheld the jury's findings as to
liability, it set aside the jury's verdict on causation and damages.
The Company filed a Notice of Appeal on February 12, 1999 and the
Company intends to pursue its appeal of the judgment.
Item 2. Changes in Securities.
a. Not applicable.
b. Not applicable.
c. On March 4 1999, the Company issued 125,000 shares of the
Company's Common Stock to Steve Wax, the former sole
shareholder of Chelsea. This issuance was in connection with
the Company's acquisition of Chelsea, in which the Company
acquired all of the issued and outstanding common stock of
Chelsea for consideration totaling approximately $1,135,000,
representing 125,000 shares of common stock with a value of
$250,000 and the assumption of approximately $885,000
liabilities net of assets. Additional consideration for the
transaction may consist of issuance of up to an aggregate of
75,000 additional shares of the Company's common stock. Any
future issuance is dependent on Chelsea meeting certain
performance goals, and the value of shares issued will be
treated as an adjustment to the purchase price at the time of
issuance.
<PAGE>
The above issuance was 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 purchaser of
the securities described above acquired it for his own account
and not with a view to any distribution thereof to the public.
At its issuance, the foregoing securities were restricted as
to sale or transfer, unless registered under the Act, and the
certificate representing such securities contained a
restrictive legend, 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 recipient
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. 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.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
27 Financial Data Schedule
b. Current Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K
(File No. 0-21534) with the Securities and Exchange Commission during the
quarter for which this report is filed:
1. The Company's Current Report on Form 8-K filed on
January 28, 1999, relating to the judgment entered in
<PAGE>
the Company's case against ABC Radio Network, Inc.
and The Walt Disney Company.
2. The Company's Current Report on Form 8-K filed on
February 4, 1999, relating to the Company's sale of
the last of its three radio stations to Radio Unica
Corp. for $29.25 million.
3. The Company's Current Report on Form 8-K filed on
March 8, 1999, relating to the Company's acquisition
of Chelsea Pictures, Inc.
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 May 17, 1999.
CHILDREN'S BROADCASTING CORP.
BY: /s/ James G. Gilbertson
---------------------------------
James G. Gilbertson
ITS: Chief Operation Officer and
Chief Financial Officer
EXHIBIT INDEX
27 Financial Data Schedule
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
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<DEPRECIATION> (152,945)
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0
0
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<INCOME-TAX> 3,100,000
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