-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VcIabFGrky3lDf1K5T5aogyAscruB0eieafu+2ElvaGQRG0mHSfSU5HhoQaRfYDI uHlG1vSAfYq/z/tqyHwGxw== 0000897101-99-000336.txt : 19990402 0000897101-99-000336.hdr.sgml : 19990402 ACCESSION NUMBER: 0000897101-99-000336 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHILDRENS BROADCASTING CORP CENTRAL INDEX KEY: 0000882160 STANDARD INDUSTRIAL CLASSIFICATION: RADIO BROADCASTING STATIONS [4832] IRS NUMBER: 411663712 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-21534 FILM NUMBER: 99582737 BUSINESS ADDRESS: STREET 1: 5501 EXCELSIOR BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 6129258840 MAIL ADDRESS: STREET 1: 5501 EXCELSIOR BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 10KSB 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-21534 CHILDREN'S BROADCASTING CORPORATION (Name of Small Business Issuer in Its Charter) MINNESOTA 41-1663712 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 5501 EXCELSIOR BOULEVARD, MINNEAPOLIS, MINNESOTA 55416 (Address of Principal Executive Offices, including Zip Code) (612) 925-8840 (Issuer's Telephone Number, including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK ($.02 PAR VALUE) COMMON STOCK PURCHASE RIGHTS (Title of Class) 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 [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for its most recent fiscal year were $2,566,647. The aggregate market value of the voting stock held by non-affiliates of the issuer as of March 12, 1999 was approximately $4,788,497. The number of shares of the common stock of the issuer outstanding as of March 12, 1999 was 6,575,742. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the document listed below have been incorporated by reference to the indicated part of this Form 10-KSB. DOCUMENT INCORPORATED BY REFERENCE PART OF THE FORM 10-KSB - ---------------------------------- ----------------------- Definitive Proxy Statement for 1999 Item 10 of Part III ================================================================================ TABLE OF CONTENTS Page ---- PART I ...................................................................... 1 ITEM 1 DESCRIPTION OF BUSINESS ........................................ 1 ITEM 2 DESCRIPTION OF PROPERTY ........................................ 4 ITEM 3 LEGAL PROCEEDINGS .............................................. 4 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............ 4 PART II ..................................................................... 5 ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ....... 5 ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ...... 6 ITEM 7 FINANCIAL STATEMENTS ........................................... 13 ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ....................................... 45 PART III .................................................................... 45 ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)OF THE EXCHANGE ACT .............. 45 ITEM 10 EXECUTIVE COMPENSATION ......................................... 46 ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .................................................... 46 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................. 48 ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K ......................... 50 SIGNATURES .................................................................. 52 EXHIBIT INDEX ............................................................... 53 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements under the captions "Description of Business," "Legal Proceedings," "Market for Common Equity and Related Shareholder Matters," "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this Form 10-KSB constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as "may," "will," "expect," "anticipate," "estimate," "should," or "continue" or the negative thereof or other variations thereon or comparable terminology. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from those results presently anticipated or projected. Such factors are set forth under the caption "Management's Discussion and Analysis or Plan of Operation - Cautionary Statements." i PART I ITEM 1 DESCRIPTION OF BUSINESS GENERAL OVERVIEW Children's Broadcasting Corporation (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 $55.9 million in cash and a note receivable for $15 million. As of March 26, 1999, the Company had total assets of approximately $33.0 million including $7.0 million in cash, a $15.0 million note receivable from Catholic Radio Network, LLC ("CRN") due in April 2000, $4.7 million investment in Harmony Holdings, Inc. ("Harmony"), and notes receivable from Harmony and its subsidiaries of approximately $3.1 million. The Company has a tax liability of approximately $4.5 million resulting from the sale of the radio stations payable in varying installments through April 2000. 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 trade secret by ABC Radio and $10 million for misappropriation of 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. Certain personnel and financial resources will be used to this end. See "Legal Proceedings." The Company was incorporated under the Minnesota Business Corporation Act on February 7, 1990. All references to the Company herein include its subsidiaries, unless otherwise noted. The Company's executive office is located at 5501 Excelsior Boulevard, Minneapolis, Minnesota 55416, and its telephone number is (612) 925-8840. REPOSITIONING FOR TELEVISION COMMERCIAL PRODUCTION The Company is repositioning 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. During 1998, the Company utilized its resources to increase its ownership interest in Harmony from 33.7% to 49.1%, a company which produces television commercials, music videos and related media. As of March 26, 1999, the Company had advanced Harmony an aggregrate of approximately $3.1 million pursuant to promissory notes. The Company also guarantees a $5.0 million line of credit for Harmony. Harmony's services are usually directed towards advertising agencies located in the major markets of New York, Los Angeles, Chicago, Detriot, Dallas and San Francisco as well as regional markets. In 1998, Harmony had sales of over $50 million. 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 Worldwide, Foote, J. Walter Thompson, DDB Needham, Young & Rubicam and Fallon McElliot. In July 1998, the Company also incorporated a new subsidiary, Populuxe Pictures, Inc. ("Populuxe") 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. In March 1999, Chelsea Acquisition, Inc., a new formed subsidiary of the Company, merged into Chelsea Pictures, Inc. ("Chelsea") with Chelsea as the surviving corporation. Chelsea engages in the production of television commercials, independent films and related media. In 1998, Chelsea had revenues of approximately $13 million. In exchange for the stock of Chelsea, the Company issued to Steve Wax, Chelsea's sole shareholder, 125,000 shares of the Company's Common Stock with an additional 75,000 shares to be issued to Mr. Wax contingent upon Chelsea obtaining certain EBITDA levels. Subsequent to the merger transaction, the Company repaid approximately $887,000 of Chelsea's liabilities in existence at the time of the merger. Also, in connection with this transaction, Chelsea entered into certain employment and commercial production director agreements. 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. BUSINESS AND ACQUISITION STRATEGY. The Company intends, either directly or through Harmony, to further expand its television commercial production business and holdings through acquisitions and the hiring of creative talent to explore the consolidation of small and medium 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 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 organize prospective acquisitions under branded subsidiaries to: * 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. * Marketing and Sales Efficiencies - The Company believes that improved marketing and sales efforts can increase sales through the use of an in-house multisubsidiary marketing force, thus reducing the need for independent marketing representatives and giving the Company greater control over the marketing 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 case of operations and increased production volume, the Company believes it can become a preferred customer among all levels of 2 equipment and rental companies and other related support services, potentially reducing costs. Additionally, the potential to vertically integrate other related service companies into the Company's acquisition plans may develop another source of income for the Company. * 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 it can create a community for creative talent that provides a highly effective organization, executive producers and efficient, cost-effective back-office support. The Company believes 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 competition or determine industry dominance. The Company believes, however, that Harmony is among the largest exclusively commercial production companies in the industry. A number of companies however, may 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. There can be no assurance that such competitors or others will not try to consolidate commercial production companies. No assurance can be given that such consolidation, if it occurs, will be advantageous or profitable. The Company does not have any understandings, commitments or agreements with respect to any future acquisitions. No assurance can be given that the Company will consummate future acquisitions or that any acquisitions, if consummated, will be advantageous or profitable. SALE OF RADIO STATIONS ACQUIRED PURSUANT TO FORMER BUSINESS STRATEGY. In August 1998, the Shareholders of the Company approved the sale of substantially all of the assets related to the Company's radio stations. Pursuant to that strategy, in April 1998, the Company had entered into three purchase agreements pursuant to which the Company planned to sell its thirteen radio stations to three parties for an aggregate of $61.7 million. CRN agreed to purchase ten radio stations for $57.0 million; Salem Communications Corporation ("Salem") agreed to purchase two of the radio stations for $2.7 million and 1090 Investments, LLC ("1090") agreed to purchase one radio station for $2.0 million. The shareholders approved this plan to sell substantially all of the Company's assets in August 1998. In September 1998, the transaction with 1090 was consummated. The Company used approximately $1.7 million from the sale of the assets to 1090 to repay a portion of its indebtedness to its lender Foothill Capital Corporation ("Foothill"). Instead of purchasing ten radio stations from the Company, CRN purchased seven and effectively assigned its right to purchase three more to Radio Unica Corp ("Radio Unica"). In October 1998, the Company completed its sale to Salem and the sale of seven radio stations to CRN for $37.0 million ($22 million in cash and $15 million note receivable). The Company used $14.7 million of the cash proceeds received from the sale of the assets to CRN and Salem to repay a portion of its outstanding indebtedness to Foothill as well as to repay indebtedness incurred in connection with the Company's initial investment in Harmony in July 1997. See "Certain Relationships and Related Transactions." The transaction with Radio Unica closed in January 1999, yielding an aggregate of $29.25 million in gross cash proceeds. Upon the sale of the assets to Radio Unica, the Company fully repaid all of its indebtedness to Foothill. 3 Prior to the consummation of the transaction, Radio Unica operated the stations pursuant to local programming and marketing agreements. TRADEMARKS, SERVICE MARKS AND COPYRIGHTS The Company claims trademark and service mark rights to and ownership in a number of marks including, but not limited to, RADIO AAHS(R), RADIO AAHS(R) (words plus design of unicorn), CHILDREN'S SATELLITE NETWORK(TM), All THE GOOD STUFF RADIO DOES(R), THE ALL-AMERICAN ALARM CLOCK(R), ALPHABET SOUP(R), GREAT MUSIC FOR GREAT KIDS(R), JUST KIDS(R), RADIO AAHS AIRFORCE(R), THE EDUCATIONAL, SENSATIONAL RADIO AAHS(R), AAHS(TM), AAHSIE(TM), AVENUE A(R), FASCINATING FACTS(SM), THE FUN AND ONLY(TM), NEWS AAHS IT WAS(SM), PLANET AAHS RECORDS(R), PLAYING ALL DAY WITH RADIO AAHS(TM), RADIO AAHS(TM) (with new logo design), KA'ZOO(TM), RADIO AAHS(R) COUNTDOWN, STORYTIME THEATER(R), AAHS WORLD RADIO(SM), AAHS WORLD RADIO AIRFORCE(TM) and POPULUXE PICTURES(SM). EMPLOYEES The Company had 13 employees, all of whom were full-time, at the end of its last fiscal year. No employee is represented by a union. The Company believes its relations with employees are satisfactory. Also, see "Certain Relationships and Related Transactions." ITEM 2 DESCRIPTION OF PROPERTY As of March 23, 1999, the Company's executive offices were located at 5501 Excelsior Boulevard, Minneapolis, Minnesota. The Company pays for its executive office space through its management fee with Media Management, LLC ("MMLLC"), which is owned by Messrs. Dahl and Perkins, each a director of the Company. See "Certain Relationships and Related Transactions." The Company leases an office facility in New York City which consists of approximately 1,200 square feet and is leased at an annual rent of $42,000 for a term of five years ending April 2002. The Company is a guarantor to an office facility in New York City which is leased by Harmony, The End, Inc., a subsidiary of Harmony, and Populuxe Pictures, Inc. Chelsea leases an office facility in New York City which consists of approximately 5,000 square feet. This lease requires an annual rent of $107,000 and expires on September 30, 1999. ITEM 3 LEGAL PROCEEDINGS The Company filed a lawsuit in the fall of 1996 against ABC/Disney. On September 30, 1998, a jury in the United States District Court for the District of Minnesota (the "Court") ruled in favor of the Company in connection with litigation for breach of contract and misappropriation of trade secrets that the Company had commenced against ABC/Disney and awarded the Company $20 million for breach of contract against ABC Radio, $10 million for misappropriation of trade secret by ABC Radio and $10 million for misappropriation of trade secret against Disney. On January 15, 1999, the Court upheld the jury's findings that ABC Radio had breached its contract with the Company and that ABC/Disney both misappropriated the Company's trade secret information, the Court disagreed with the jury's conclusion that the evidence showed that those actions caused the Company's damages or that the amount of damages awarded by the jury was supported by the evidence, and set aside the jury's verdict. The Court further ruled that in the event that the decision is reversed or remanded on appeal, that the defendants be granted a new trial on the issues of causation and damages. The Company filed a Notice of Appeal in February, 1999. The Company intends to pursue its appeal of the judgment and, to this end, certain personnel and financial resources will be used. Except as described above, the Company is not a party to any material proceedings. From time to time the Company is a party to litigation which is incidental to its business, including administrative proceedings. 4 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the Company's most recently completed fiscal year. EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides information with respect to the Company's executive officers as of March 29, 1999. Each executive officer has been appointed to serve until his or her successor is duly appointed by the Board of Directors or his or her earlier removal or resignation from office. See "Directors; Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act." NAME AGE POSITION - ---- --- -------- Christopher T. Dahl 55 Chairman of the Board, President and Chief Executive Officer James G. Gilbertson 37 Chief Operating Officer/Chief Financial Officer Jill J. Theis 28 Secretary and General Counsel Mike Delgado 39 Vice President of Marketing Barbara McMahon 42 Vice President of Populuxe PART II ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Common Stock of the Company has been included in the Nasdaq National Market under the symbol "AAHS" since February 1996, on the Nasdaq SmallCap Market between May 1993 and February 1996 and on the over-the-counter Bulletin Board from the completion of the Company's public offering in 1992 until May 1993. The following table sets forth the approximate high and low closing prices for the Common Stock for the periods indicated as reported by the Nasdaq National Market. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. PERIOD HIGH LOW - ------ ---- --- 1997 First Quarter................................. $ 6 5/8 $ 3 1/4 Second Quarter................................ 5 7/8 3 3/16 Third Quarter................................. 5 /16 3 3/8 Fourth Quarter................................ 4 5/8 3 5/16 1998 First Quarter................................. $ 4 5/16 $ 2 13/16 Second Quarter................................ 4 1/16 3 Third Quarter................................. 3 5/16 2 7/8 Fourth Quarter................................ 3 11/16 2 13/16 As of March 23, 1999, the Company had approximately 439 shareholders of record and approximately 2,500 beneficial owners. The Company has never declared or paid any cash dividends on its Common Stock and does not intend to declare or pay cash dividends on its Common Stock in the foreseeable future. The Company presently expects to retain its earnings to finance its business. The declaration or payment by the Company of dividends, if any, on its Common Stock in the future is subject to the discretion of the Board of Directors and will depend on the Company's earnings, financial condition, capital requirements and other relevant factors. 5 SALES OF UNREGISTERED SECURITIES IN 1998 In February and June 1998, the Company issued an aggregate of 69,277 shares of its Common Stock to satisfy three principal and interest installments, aggregating $226,530 to the seller of radio station WAUR(AM). In June 1998, pursuant to a Securities Purchase Agreement, the Company issued 606,061 shares of its Series B Convertible Preferred Stock to the Investors (as defined below) for which the Company received gross proceeds of $2,000,000. In January 1999, the Company redeemed the preferred stock at $4.04 per share, totaling $2,450,000. Pacific Continental acted as the placement agent and for such services received commissions equal to 6.25% of the gross proceeds. In June 1998, in connection with the execution of a Securities Purchase Agreement, the Company issued five-year warrants to Talisman Capital Opportunity Fund, Dominion Capital Limited and Sovereign Partners, L.P. (collectively, the "Investors") to purchase an aggregate of up to 100,000 shares of the Company's Common Stock at a per share exercise price of approximately $3.77. In addition, the Company issued a five-year warrant to the Investors for an aggregate of up to 125,000 shares of the Company's common stock at a per share exercise price of approximately $2.68. In March 1998, the Company entered into a second amendment to its credit agreement with Foothill and pursuant to that amendment the Company issued Foothill an additional warrant to purchase 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. In May 1998, the Company entered into a third amendment to its credit facility with Foothill and pursuant to that amendment the Company issued Foothill an additional warrant to purchase 200,000 shares of the Company's common stock at $3.76 per share. In September 1998, Foothill surrendered 50,000 warrants that had been issued to Foothill in November 1996 pursuant to the original credit agreement. In June 1998, the Company issued five-year warrants, exercisable at $3.06 per share for 25,000 and 12,500 shares of its Common Stock to Pyramid Partners, L.P and William Toles, respectively. Pyramid Partners, L.P. is an entity whose managing partner is Perkins Capital Management, Inc. ("PCM"). PCM is an entity controlled by Mr. Perkins, a director of the Company and a director of Harmony. Mr. Toles is a director of Harmony and a shareholder of the Company. These issuances were made in connection with the extension of financing provided by such persons for the Company's purchase of shares of common stock of Harmony, Pyramid Partners, L.P. and Mr. Toles provided the Company with $500,000 and $250,000, respectively, for such stock purchase. The Company repaid these notes and the related interest in full on November 3, 1998. In October 1998, pursuant to an amendment to the Securities Purchase Agreement entered into in June 1998, the Company issued the Investors additional warrants to purchase an aggregate of up to 25,000 shares due to the delay in the closing with CRN. The Company also issued the Investors additional warrants to purchase an aggregate of up to 65,000 shares in connection with the extension of the Company's right to redeem its preferred stock through January 31, 1999, along with an additional warrant to purchase an aggregate of 35,000 shares if the Company did not redeem all of its preferred stock on or before December 31, 1998. Each warrant has a term of five years and may be exercised at approximately $2.68 per share. 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 SEC. ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION THIS DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," 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 6 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. RESULTS OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 REVENUE: OWNED, OPERATED AND LMA STATION REVENUES: Total revenues from the Company's owned, operated and LMA (as defined herein) stations decreased $1,799,000 or 43% from $4,142,000 in 1997 to $2,343,000 in 1998. This decrease in revenue can be attributed to the January 1998 cessation of broadcasting the Aahs World Radio format and the reduction of the sales forces at the Company's owned and operated radio stations in anticipation of their sale. Revenues declined further when the Company entered into Local Marketing Agreements ("LMA's") in connection with sale agreements for the following stations: in May 1998, radio station WCAR(AM) in Detroit with 1090, in March 1998, radio station KTEK (AM) in Houston and radio station KYCR (AM) in Minneapolis with Salem , in October and November 1998, radio station KAHZ (AM) in Dallas, radio station KIDR (AM) in Phoenix, and radio station WJDM (AM) in New York with Radio Unica. Finally, revenues ceased at the following stations upon the Company closing upon their sale: in October 1998, radio stations KCNW (AM) in Kansas City, KKYD (AM) in Denver, KPLS (AM) in Los Angeles, WAUR (AM) in Chicago, WPWA (AM) in Philadelphia, WWTC (AM) in Minneapolis, and WZER (AM) in Milwaukee to CRN , in September 1998, to 1090, and in October 1998, to Salem . At year-end, the Company's only remaining stations, later sold to Radio Unica, were being operated by the buyer under the aforementioned LMA agreement. NETWORK: Total revenues of $233,000 were produced by the network during 1998 compared to revenues of $1,712,000 produced in 1997. The decrease of $1,489,000 or 87% in network revenues is a direct result of the cessation of broadcasting the Aahs World Radio programming on January 30, 1998 and the termination of all affiliate agreements. OPERATING EXPENSES: OWNED, OPERATED AND LMA STATION EXPENSES: General and administrative expenses decreased 41% to $1,849,000 for 1998 from $3,132,000 in 1997. This decrease was due to the Company's reduction in staff at the stations, which eliminated not only personnel but also general office overhead expenses, its entry into LMAs pertaining to the stations with 1090, Salem , and Radio Unica, and the sale of the stations to 1090, Salem, and CRN. Throughout the year, expenses continued to diminish as all the stations were sold or covered by LMAs. Technical and programming expenses decreased to $846,000 in 1998 from $1,130,000 during 1997, a decrease of 25%. Throughout the year, expenses continued to diminish as all the stations were sold or covered by LMAs. Sales expenses totaled $307,000 in 1998 compared to $1,465,000 in 1997. This decrease is due to the reduction of revenues and the elimination of sales personnel in anticipation of the sale of the Company's stations. Throughout the year, expenses continued to diminish as all the stations were sold or covered by LMAs. NETWORK EXPENSES: General and administrative expenses decreased $155,000 in 1998 to $402,000 as compared to $557,000 for 1997. These expenses decreased 28% due to the reduction in general overhead expenses and personnel tied to the cessation of broadcasting of Aahs World Radio programming. Programming expenses decreased $556,000 to $325,000 in 1998 compared to $881,000 in 1997 due to the reduction of staff and elimination of production expenses as a result of the discontinuation of broadcasting the Aahs World Radio programming and the termination of affiliate agreements. 7 Sales expenses decreased 76% from $1,678,000 in 1997 to $401,000 in 1998 due to the reduction of sales personnel and revenues in conjunction with the discontinuation of broadcasting the Aahs World Radio(SM) format. Marketing expenses were $21,000 during 1998 compared to $269,000 in 1997, representing a decrease of $248,000 due to the elimination of the Company's marketing effort in conjunction with the cessation of broadcasting the Aahs World Radio programming format on January 30, 1998. Corporate charges were $5,614,000 in 1998 compared to $6,013,000 in 1997, representing a decrease of 7%. This decrease is attributable in part to a decrease of $157,000 in legal and accounting fees due to more work being performed in-house and the reduction in the overall acquisition activity of the Company, a decrease in travel expenses of $97,000, a decrease in litigation expenses of $86,000 and as the trial against ABC/Disney was concluded in the last quarter of 1998 (a less costly appeals process continues at this time), and a decrease in salaries of $62,000. Depreciation and amortization decreased $187,000 in 1998 compared to 1997. The decrease in depreciation and amortization is a result of the Company's discontinuation of its former business strategy to acquire radio broadcast licenses and related assets. Additionally, during the third and fourth quarters of 1998, a substantial amount of assets were disposed of due to the sale of ten of the Company's radio stations. A net gain of $26,375,000 was realized in 1998 due to the sale of ten of the Company's radio stations. A gain of $430,000 was realized as a result of the September 1998 sale of WCAR (AM) in Detroit to 1090, a gain of $1,608,000 was realized on the October 1998 sale of KTEK (AM) in Houston and KYCR (AM) in Minneapolis to Salem, while the remaining 24,337,000 of the gain was realized from the October 1998 sale of KCNW (AM) in Kansas City, KKYD (AM) in Denver, KPLS (AM) in Los Angeles, WAUR (AM) in Chicago, WPWA (AM) in Philadelphia, WWTC (AM) in Minneapolis, and WZER (AM) in Milwaukee to CRN.. Net interest expense for 1998 was $5,185,000 an increase of $2,619,000 over 1997 as a result of the interest increase associated with the additional financing provided by Foothill and the interest payable to the lenders who provided $1.25 million for the July 1997 purchase of Common Stock of Harmony. Interest expense was offset primarily by the $250,000 interest earned from the $15.0 million note receivable due from CRN in April 2000. Net income of $7,570,000 was realized in 1998 compared to a net loss of $14,558,000 in 1997. This increase of $22,128,000 is due to the sale of ten of the Company's radio stations in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity, as measured by its working capital, was a deficit of $4,832,000 on December 31, 1998 compared to a deficit of $25,706,000 on December 31, 1997. The reduction in the deficit from December 31, 1997 to December 31, 1998 is a result of the sales to 1090, Salem , and CRN during 1998. Further, the December 31, 1998 deficit was eliminated in January 1999, with the closing of the last three radio stations to Radio Unica. 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. The Company entered into second, third, fourth, and fifth amendments to its Credit Agreement with Foothill in March, May, and October 1998, pursuant to which the company obtained additional term note payable advances totaling $4,000,000 of which the Company received net proceeds totaling $2,500,000, paid deferred debt issue costs of $400,000 and established an interest reserve of $1,100,000 which was used for payment of 1998 interest. Additionally, pursuant to the fifth amendment, the Company paid deferred debt issue costs of $200,000 using proceeds from the sale of stations to CRN. 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. The securities purchase agreement used in this transaction was subsequently amended in October 1998. Net proceeds to the Company after commissions and legal fees were approximately $1,768,000. With the proceeds, the Company 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- 8 referenced debt obligation to Harmony. In January 1999, using the proceeds from the sale of the three stations to Radio Unica, the preferred stock was redeemed at $4.04 per share, totaling $2,450,000. In September, the Company sold WCAR (AM) in Detroit to 1090 for $2.0 million cash. Net proceeds after closing costs were used to pay interest and a portion of the principal on the Foothill term loan. In October, the Company sold the stations to Salem and to CRN for $39.6 million. The transactions included (i) a sale of seven stations to CRN for $21.9 million cash and a $15.0 million, 18 month promissory note with 10% annual interest to be paid monthly, and (ii) a sale of two radio stations to Salem Communications Corporation for $2.7 million cash. In January 1999, the Company sold the last three of its radio stations to the Radio Unica for approximately $29.25 million. The Company has used the aggregate proceeds in the following manner: a) approximately $30.7 million to repay debt and accrued interest, b) approximately $4.7 million to pay down outstanding accounts payable, c) approximately $2.5 million to redeem outstanding preferred stock, d) approximately $4.0 million related to the transactions and miscellaneous costs, e) approximately $3.1 million in advances to Harmony as evidenced by unsecured note receivable agreements which bear interest at 14% and are due upon demand, and f) approximately $0.9 million to repurchase 271,000 shares of its common stock. 100,000 of such shares were purchased through a broker and 171,000 shares were purchased from Christopher T. Dahl and Richard W. Perkins. See "Certain Relationships and Related Transactions." Upon completion of these transactions, the Company had approximately $7.0 million of cash available. In October 1998, the Company repurchased 225,000 shares of Common Stock of Harmony at $2.75 from Pyramid Partners, L.P.; Perkins & Partners, Inc. Profit Sharing Plan and Trust; and Christopher T. Dahl and State Bank of New Prague Joint Account. See "Certain Relationships and Related Transactions." The Company believes it has adequate capital to initiate its 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 form 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 its future acquisitions or other projects. In the interim, the Company has begun to execute its business plan to acquire production companies. In March 1999, the Company acquired all of the issued and outstanding common stock of Chelsea., a television commercial production company with principle operation in New York. Consideration for the transaction consisted of up to an aggregate of 200,000 shares of the Company's common stock. Of these shares, 125,000 were issued on the acquisition date, and issuance of the remaining 75,000 shares is contingent upon various performance criteria. Also, subsequent to the merger, the Company repaid $887,000 of Chelsea's liabilities in existence at the time of the transaction. Consolidated cash was $254,000 on December 31, 1998 and $545,000 on December 31, 1997, a decrease of $291,000. During 1998, $8,871,000 cash was used for operations and was provided by the proceeds obtained through the Foothill financing, the proceeds from the sale of the stations to 1090, Salem, and CRN, and by the proceeds from the issuance of convertible preferred stock. During 1998, accounts receivable decreased $1,658,000 other receivables increased $469,000 and prepaid expenses increased $172,000. Accounts payable increased $516,000 accrued interest decreased $181,000 and other accrued expenses increased $352,000 during 1998. During 1998, net cash obtained through investing activities was $5,210,000 and was provided by the sale of the stations to 1090, Salem , and CRN. As of December 31, 1998, net cash used for additional investments in Harmony was $2,526,000 and advances made to Harmony under note receivable agreements were $675,000. Proceeds and deferred revenue from the sale of radio stations was $8,657,000. Cash obtained through financing activities amounted to $3,370,000 during 1998. This represents the $3,600,000 cash proceeds from term loan advances from Foothill, the $1,768,000 net proceeds obtained through the issuance of convertible preferred stock, and the $5,000 obtained through the issuance of common stock through the exercise of stock options, less the repayment of debt and the $524,000 used to repurchase the Company's common stock. SEASONALITY AND INFLATION The Company does not believe inflation nor seasonality has affected the results of its operations, and does not anticipate that inflation nor seasonality will have an impact on its future operations. 9 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 any remediation needed to bring any systems in to compliance will be completed by July 31, 1999. The Company is aware that its current voice mail system is not Year 2000 compliant and is in the process of replacing it. It is anticipated that this remediation 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 the process of contacting any 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 in the near future. 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. The Company does not have an estimate for future expenses, if any, related to its Year 2000 compliance efforts, but estimates any such expenses 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. SPECIFIC RISKS Specific risks the Company may face with regard to Year 2000 issues may include the inability of the Company's suppliers and service providers to be Year 2000 ready which could result in delays and may affect the Company's business. CONTINGENCY PLANS The Company recognizes the need for Year 2000 contingency plans in the event that remediation is not fully successful or that remediation efforts of its suppliers are not timely completed. The Company expects to complete its contingency planning shortly. CAUTIONARY STATEMENT NEW BUSINESS VENTURE. The Company has changed its business focus from the programming of Aahs World Radio format to the television commercial production industry. Although the Company believes favorable opportunities to the Company exist in this industry, the television commercial production industry is very fragmented and there can be no assurances that the Company will be successful in completing its revised business plan or if completed, that the revised business plan will be successful. RISKS OF INVESTMENT IN HARMONY. In November 1998, Harmony announced the cessation of and its intention to shutdown Harmony Pictures, Inc., a subsidiary of Harmony ("Harmony Pictures") due to its continued losses. In February, 1999, Harmony's shares of common stock were removed from the Nasdaq SmallCap Market ("Nasdaq SmallCap") and are currently being traded on the OTC Bulletin Board. As of December 31, 1998, the Company 10 had an equity investment in Harmony of approximately $4.7 million and had advanced Harmony $675,000.00 under notes receivable. As of March 26, 1999, the Company had advanced Harmony an additional $2.4 million in cash bringing the aggregrate outstanding amount to approximately $3.1 million. There can be no assurances that the notes receivable will be repaid or that it's investment will not decrease in value or that the Company will be able to dispose of its shares should it decide to do so, any of which could have an adverse effect on the market value of the Company's shares. HISTORY OF OPERATING LOSSES. Since inception, the Company experienced substantial net losses as a result of its former efforts to develop a national children's radio network. The Company has not generated positive cash flow sufficient to fund its ongoing operations and has had frequent working capital shortages. For the two years ended December 31, 1998 and 1997, the Company incurred net income of $7.6 million and a net loss of $14.6 million and had used approximately $8.9 million and $9.2 million of cash to fund its losses, respectively. As of December 31, 1998, the Company had an accumulated deficit of $33.3 million. ADDITIONAL FINANCING REQUIREMENTS. The Company may seek other financing in connection with its business strategy to consolidate the television commercial production industry. There can be no assurance that the Company will obtain such financing when required, or if available, that the amount of such proceeds would be acceptable or favorable to the Company. Additional financing could require the sale of equity securities, which could result in significant dilution to the Company's shareholders. DEPENDENCE ON PERSONNEL. The television commercial production business is driven by its personnel and creative talent. The Company recognizes that a major part of its success in this industry will depend upon the hiring and continued engagement or employment of its directors and other key personnel. To this end, the Company has entered into various director and employment agreements which average anywhere from two to five years in length. However, there can be no assurances that the Company will be able to retain such talent, nor that such directors and employees will fulfill their obligations to the Company nor that they will seek renewal at the end of their current agreements. ABC/DISNEY LITIGATION. On September 30, 1998, a jury in the Court ruled in favor of the Company in connection with litigation for breach of contract and misappropriation of trade secrets that the Company had commenced against ABC/Disney and awarded the Company $20 million for breach of contract against ABC Radio, $10 million for misappropriation of trade secret by ABC Radio and $10 million for misappropriation of trade secret against Disney. On January 15, 1999, the Court upheld the jury's findings that ABC Radio had breached its contract with the Company and that ABC/Disney both misappropriated the Company's trade secret information, the Court disagreed with the jury's conclusion that the evidence showed that those actions caused the Company's damages or that the amount of damages awarded by the jury was supported by the evidence, and set aside the jury's verdict. The Court further ruled that in the event that the decision is reversed or remanded on appeal, that the defendants be granted a new trial on the issues of causation and damages. The Company filed a Notice of Appeal in February, 1999. The Company intends to pursue its appeal of the judgment and to this end, certain personnel and financial resources will be used. There can be no assurance that the Company will be successful on its appeal. NO ASSURANCE AS TO LIQUIDITY ON THE NASDAQ NATIONAL MARKET. The Common Stock is currently listed on the Nasdaq National Market. There can be no assurance that the Common Stock will be actively traded on such market or that, if active trading does develop, it will be sustained. VOLATILITY OF MARKET PRICE OF COMMON STOCK. The market price of the Company's Common Stock has been subject to significant fluctuations in response to numerous factors, including variations in the annual or quarterly financial results of the Company, changes by financial research analysts in their estimates of the earnings of the Company, conditions in the economy in general or in the television commercial production industry in particular, unfavorable publicity or changes in applicable laws and regulations (or judicial or administrative interpretations thereof) affecting the Company or the television commercial production industry. During 1998, the market price of the Company's Common Stock ranged from a high of $4.31 on January 7, 1998 to a low of $2.81 on January 28 and December 29, 1998. During the first ten weeks of 1999, the market price of the Company's Common Stock ranged from a high of $3.06 on January 12, 1999 to a low of $1.91 on March 10, 1999. There can be no assurance that purchasers of the Company's Common Stock can sell such stock at or above the prices at which it was purchased. 11 IMPACT OF SALE OF SHARES; SHARES ELIGIBLE FOR FUTURE SALE. The Company had approximately 6,575,742 shares of Common Stock outstanding as of March 12, 1999, and had warrants and options outstanding to purchase additional Common Stock totaling approximately 3,197,317 common shares exercisable at prices ranging from $2.40 to $13.80 per share. The sale of such shares and the sale of additional Common Stock which may become eligible for sale in the public market from time to time upon exercise of warrants and stock options could have the effect of depressing the market prices for the Company's Common Stock. CONFLICTS OF INTEREST. The Company shares with Harmony and Community Airwaves Corporation ("CAC"), a corporation owned by Messrs. Dahl, Perkins and a former director, Russell Cowles II, certain management services which are provided by another entity, MMLLC which is owned by Messrs. Dahl and Perkins. The management services consist of administrative, legal and accounting services. Such arrangements may present conflicts of interest in connection with the pricing of services provided. CONTROL BY MANAGEMENT. Approximately 23.1% of the Company's outstanding Common Stock is beneficially owned by the Company's current officers and directors. Accordingly, such persons may be able to significantly influence the Company's business and affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company. ANTI-TAKEOVER PROVISIONS. The Board of Directors, without any action by the Company's shareholders, has the authority to issue the remaining undesignated and unissued authorized shares and to fix the powers, preferences, rights and limitations of such shares or any class or series thereof, without shareholder approval. Persons acquiring such shares could have preferential rights with respect to voting, liquidation, dissolution or dividends over existing shareholders. The Company is subject to certain provisions of the Minnesota Business Corporation Act which limit the voting rights of shares acquired in "control share acquisitions" and restrict certain "business combinations." Such provisions, as well as the ability to issue undesignated shares, could have the effect of deterring or delaying a takeover or other change in control of the Company, deny shareholders the receipt of a premium on their Common Stock and depress the market price of the Company's Common Stock. On February 14, 1998, the Board of Directors declared a dividend of one common share purchase right (a "Right") for each share of the Company's Common Stock outstanding as of the close of business on February 27, 1998. Each Right will entitle the registered holder to purchase from the Company, after the Distribution Date (as defined in the Rights Agreement), common shares at an initial price of $18.00. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on a substantial number of Rights being acquired or redeemed. The Rights should not interfere with any merger or other business combination approved by the Board of Directors of the Company since the Board of Directors may, at its option and in its sole and absolute discretion, redeem the Rights as provided in the Rights Agreement. 12 ITEM 7 FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS PAGE ---- CHILDREN'S BROADCASTING CORPORATION Independent Auditors' Report ............................................. 14 Consolidated Financial Statements Balance Sheets .................................................. 15 Statements of Operations ........................................ 16 Statement of Shareholders' Equity ............................... 17 Statements of Cash Flows ........................................ 18-20 Notes to Consolidated Financial Statements ............................... 21-44 13 INDEPENDENT AUDITORS' REPORT Board of Directors Children's Broadcasting Corporation We have audited the accompanying consolidated balance sheets of Children's Broadcasting Corporation as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Children's Broadcasting Corporation at December 31, 1998 and 1997, and the consolidated results of its operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Milwaukee, Wisconsin March 4, 1999 14 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 253,905 $ 545,258 Accounts receivable, net of allowance for doubtful accounts of $39,000 and $472,000, respectively -- 1,224,756 Accounts receivable - affiliates (Note 13) 280,438 142,868 Radio station assets available for sale (Note 2) 11,391,402 -- Other accounts receivable 331,527 -- Notes receivable - affiliate (Note 13) 675,000 -- Prepaid expenses 279,816 108,174 ------------ ------------ Total current assets 13,212,088 2,021,056 Note receivable (Note 2) 15,000,000 -- Investment in Harmony (Note 4) 4,746,322 6,281,728 Property and equipment, net (Notes 3 and 5) 120,385 4,708,327 Broadcast licenses, net (Note 3 and 6) -- 19,679,154 Intangible assets, net (Note 6) -- 1,550,100 Deferred debt issue costs (Note 9) 742,737 1,173,209 ------------ ------------ Total assets $ 33,821,532 $ 35,413,574 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,205,212 $ 1,688,832 Accounts payable - affiliates (Note 13) 363,727 -- Accrued interest 143,505 324,994 Accrued income taxes 328,000 -- Deferred revenue (Note 2) 2,675,556 -- Other accrued expenses (Note 10) 1,227,637 1,203,331 Line of credit (Note 8) 434,974 453,838 Short-term debt - affiliates (Note 7) -- 1,172,500 Long-term debt - current portion (Note 9) 10,665,792 22,883,753 ------------ ------------ Total current liabilities 18,044,403 27,727,248 Long-term debt, less current maturities (Note 9) 848,111 2,557,655 ------------ ------------ Total liabilities 18,892,514 30,284,903 ------------ ------------ Commitments and Contingencies (Note 10) -- -- Redeemable convertible preferred stock (Note 11) 2,448,486 -- Shareholders' equity (Note 12): Common stock 129,015 132,997 Additional paid-in capital 45,773,584 46,387,536 Accumulated deficit (33,292,504) (40,862,299) Stock subscriptions receivable (129,563) (529,563) ------------ ------------ Total shareholders' equity 12,480,532 5,128,671 ------------ ------------ Total liabilities and shareholders' equity $ 33,821,532 $ 35,413,574 ============ ============
See accompanying notes to the consolidated financial statements. 15 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, ----------------------------- 1998 1997 ------------ ------------ Revenues: Owned, operated and LMA stations $ 2,343,410 $ 4,142,112 Network 223,237 1,712,329 ------------ ------------ Total revenues 2,566,647 5,854,441 Operating expenses: Owned, operated and LMA stations: General and administrative 1,849,498 3,131,507 Technical and programming 846,430 1,129,853 Selling 307,227 1,464,575 ------------ ------------ 3,003,155 5,725,935 Network: General and administrative 402,137 557,106 Programming 324,670 880,658 Selling 400,625 1,678,216 Marketing 21,078 268,796 ------------ ------------ 1,148,510 3,384,776 Corporate 4,714,011 5,112,591 Corporate expenses paid to affiliated management company 900,000 900,090 Depreciation and amortization 1,949,340 2,136,720 ------------ ------------ Total operating expenses 11,715,016 17,260,112 ------------ ------------ Loss from operations (9,148,369) (11,405,671) Gain on sale of radio station assets 26,374,904 -- Equity loss in Harmony (4,058,361) (540,994) Interest expense (5,364,117) (2,602,200) Interest expense - officers and directors (120,713) (54,658) Interest income 299,571 90,599 Other income (expense) - net (82,883) (45,429) ------------ ------------ Net income (loss) before income taxes 7,900,032 (14,558,353) Income tax provision (330,237) -- ------------ ------------ Net income (loss) 7,569,795 (14,558,353) Accretion of preferred stock (680,236) -- ------------ ------------ Net income (loss) available to common shareholders 6,889,559 (14,558,353) ============ ============ Basic net income (loss) per share $ 1.03 $ (2.33) ============ ============ Weighted average number of shares outstanding 6,676,000 6,246,000 ============ ============
See accompanying notes to the consolidated financial statements. 16 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998 AND 1997
COMMON STOCK ADDITIONAL STOCK TOTAL -------------------------- PAID-IN SUBSCRIPTIONS ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY ----------- ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1996 5,798,280 $ 115,966 $ 42,775,092 $ -- $(26,303,946) $ 16,587,112 Issuance of common stock upon exercise of options and warrants 138,050 2,761 284,359 (129,563) -- 157,557 Issuance of common stock for installment payments of note payable 65,377 1,307 300,734 -- -- 302,041 Issuance of common stock in connection with obtaining finance company credit agreement 37,500 750 153,937 -- -- 154,687 Issuance of common stock in connection with pending acquisition of KMUS(AM), Muskogee, Oklahoma 82,051 1,641 398,359 (400,000) -- -- Issuance of common stock in connection with acquisition of KIDR(AM), Phoenix, Arizona 268,607 5,372 994,628 -- -- 1,000,000 Issuance of common stock in connection with investment in Harmony 60,000 1,200 246,300 -- -- 247,500 Issuance of common stock for payment of attorney fees in connection with pending litigation 200,000 4,000 828,627 -- -- 832,627 Issuance of warrants in connection with debt financing -- -- 405,500 -- -- 405,500 Net loss -- -- -- -- (14,558,353) (14,558,353) ----------- ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1997 6,649,865 132,997 46,387,536 (529,563) (40,862,299) 5,128,671 Issuance of common stock in connection with note payable 69,277 1,386 225,144 -- -- 226,530 Issuance of common stock upon exercise of options 2,600 52 5,269 -- -- 5,321 Repurchase of common stock (271,000) (5,420) (882,754) -- -- (888,174) Accretion of redeemable convertible preferred stock -- -- (680,236) -- -- (680,236) Issuance of warrants in connection with debt financing -- -- 622,625 -- -- 622,625 Issuance of warrants in connection with preferred stock -- -- 96,000 -- -- 96,000 Write-off of stock subscription receivable -- -- -- 400,000 -- 400,000 Net income -- -- -- -- 7,569,795 7,569,795 ----------- ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1998 6,450,742 $ 129,015 $ 45,773,584 $ (129,563) $(33,292,504) $ 12,480,532 =========== ============ ============ ============ ============ ============
See accompanying notes to the consolidated financial statements. 17 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, ------------------------------ 1998 1997 ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 7,569,795 $(14,558,353) Adjustments to reconcile net income (loss) to net cash used in operating activities: Provision for doubtful accounts (433,000) 378,500 Depreciation and amortization 1,949,340 2,136,720 Gain on sale of radio stations (26,374,904) -- Net barter activity 2,767 34,845 Amortization and write-off of deferred debt issue costs 1,859,389 480,565 Write-off of stock subscription receivable 400,000 -- Write-off of other intangible assets -- 119,260 Equity loss in Harmony 4,058,361 540,994 Issuance of common stock for payment of attorney fees -- 832,627 Issuance of common stock and use of sale proceeds for payment of interest 392,093 100,306 Decrease (increase) in: Accounts receivable 1,658,282 (104,309) Other receivables (469,097) (142,868) Prepaid expenses (171,642) 82,224 Increase (decrease) in: Accounts payable - trade 516,380 422,341 Accrued interest (181,489) 240,848 Other accrued expenses 352,306 203,137 ------------ ------------ Net cash used in operating activities (8,871,419) (9,233,163) ------------ ------------ INVESTING ACTIVITIES: Purchase of property and equipment (246,097) (637,420) Acquisition of radio broadcasting licenses and certain related assets -- (1,717,959) Investment in other intangible assets -- (61,840) Investment in Harmony (2,526,250) (6,575,222) Advances pursuant to notes receivable-affiliate (675,000) -- Proceeds from sale of radio stations 5,981,434 -- Deferred revenue from sale of radio stations 2,675,556 -- ------------ ------------ Net cash provided by (used in) investing activities 5,209,643 (8,992,441) ------------ ------------ FINANCING ACTIVITIES: Increase (decrease) in line of credit (18,864) 289,676 Repayment of long-term debt (204,390) (424,173) Proceeds from issuance of short-term debt -- 1,250,000 Proceeds from issuance of common stock 5,321 157,557 Payment of deferred debt issue costs (32,792) (107,336) Proceeds from issuance of long-term debt 3,627,345 14,235,100 Repayment of short-term debt (1,250,000) -- Issuance of redeemable convertible preferred stock 1,768,250 -- Repurchase of common stock (524,447) -- ------------ ------------ Net cash provided by financing activities 3,370,423 15,400,824 ------------ ------------ Decrease in cash and cash equivalents (291,353) (2,824,780) Cash and cash equivalents at beginning of year 545,258 3,370,038 ------------ ------------ Cash and cash equivalents at end of year $ 253,905 $ 545,258 ============ ============
See accompanying notes to the consolidated financial statements. 18 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 3,414,837 $ 2,361,352 =========== =========== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 1998: The Company recognized revenues of $115,983 and expenses of $118,750 through barter activity. The Company utilized radio station sale proceeds totaling $18,116,023 to pay principal and interest due to lenders aggregating $17,916,023 and to pay debt issue costs of $200,000. Additionally, a note receivable of $15,000,000 was received in connection with the sale transactions. The Company paid debt issuance costs totaling $400,000 by issuing additional long-term debt. The Company issued 69,277 shares of common stock valued at $226,530 for the payment of installments due for the note payable outstanding to the seller of WAUR-AM. The Company issued warrants to purchase 662,500 shares of common stock and cancelled warrants to purchase 150,000 shares of common stock with a net value totaling $718,625 in connection with obtaining short and long-term debt, and preferred stock. At December 31, 1998, an account payable-affiliate of $363,727 remained due related to the Company's purchase of 271,000 shares of its common stock for consideration totaling $888,174. See accompanying notes to the consolidated financial statements. 19 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 1997: The Company recognized revenues of $703,824 and expenses of $738,669 through barter activity. The Company issued 268,607 shares of common stock valued at $1,000,000, incurred a note payable of $1,400,000, and a covenant not-to-compete liability with an estimated net present value of $320,495 related to the acquisition of radio broadcast licenses and property and equipment. The Company incurred notes payable totaling $6,475 related to the acquisition of property and equipment. The Company issued 65,377 shares of common stock valued at $302,041 for the payment of installments totaling $302,041 due for the note payable outstanding to the seller of WAUR(AM). The Company issued 37,500 shares of common stock and warrants to purchase 425,000 shares of common stock valued at $154,687 and $405,500, respectively, in connection with obtaining short and long-term debt. The Company issued 60,000 shares of common stock valued at $247,500 in connection with its investment in Harmony. The Company issued 200,000 shares of common stock valued at $832,627 for payment of attorney fees. The Company paid debt issue costs totaling $985,000 by issuing additional long-term debt. See accompanying notes to the consolidated financial statements. 20 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: Children's Broadcasting Corporation (the "Company") was incorporated under the Minnesota Business Corporation Act on February 7, 1990. The Company currently engages in the commercial production and related media business. The Company will seek 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 represents a potential opportunity for the Company in the television commercial production field. During 1998, the Company utilized its resources to increase its equity ownership interest in Harmony Holdings, Inc., ("Harmony") to 49.1% (Note 4). Harmony is one of the largest producers of television commercials in the broadcast television commercial industry. In 1998, the Company also developed a small production company under the name Populuxe Pictures, Inc. Populuxe currently is comprised of two directors along with an executive staff. Populuxe is in the beginning phases of initiating revenue. In February 1999, the Company incorporated a new subsidiary, Buffalo Rome Films, Inc., ("Buffalo Rome"). Buffalo Rome will seek out independent film opportunities. In March 1999, the Company acquired 100% of the stock of Chelsea Pictures, Inc. ("Chelsea") (Note 15). Chelsea engages in the production of television commercials and music videos. The Company formerly broadcast 24-hour children's radio programming, known as Aahs World Radio(SM)*, via satellite to markets representing approximately 40% of the U.S. population. Pursuant to its former growth strategy, the Company acquired AM radio broadcast licenses ("Radio Stations") in 14 U.S. markets. On November 3, 1997, the Company announced that it would terminate its network affiliation agreements and cease distributing its full-time Aahs World Radio programming format effective January 30, 1998. In 1998, the Company focused on the process of selling its previously acquired radio stations. The last of its radio stations were sold on January 14, 1999. The Company's owned and operated radio stations were operated in individual subsidiaries. Additionally, the broadcasting licenses were held by a second tier of subsidiaries to these operating subsidiaries. The radio stations and the related operating and radio broadcast license holding subsidiaries are as follows: 21 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Description of Business (Continued): Radio Broadcast License Holding Operating Subsidiary Subsidiary Radio Station ---------------------- --------------- --------------------------- Children's Radio of: Chicago, Inc. WAUR-AM, Inc. WAUR(AM), Sandwich, IL Dallas, Inc. KAHZ-AM, Inc. KAHZ(AM), Fort Worth, TX Denver, Inc. KKYD-AM, Inc. KKYD(AM), Denver, CO Detroit, Inc. WCAR-AM, Inc. WCAR(AM), Livonia, MI Golden Valley, Inc. KYCR-AM, Inc. KYCR(AM), Golden Valley, MN Houston, Inc. KTEK-AM, Inc. KTEK(AM), Alvin, TX Kansas City, Inc. KCNW-AM, Inc. KCNW(AM), Fairway, KS Los Angeles, Inc. KPLS-AM, Inc. KPLS(AM), Orange, CA Milwaukee, Inc. WZER-AM, Inc. WZER(AM), Jackson, WI Minneapolis, Inc. WWTC-AM, Inc. WWTC(AM), Minneapolis, MN New York, Inc. WJDM-AM, Inc. WJDM(AM), Elizabeth, NJ Philadelphia, Inc. WPWA-AM, Inc. WPWA(AM), Chester, PA Phoenix, Inc. KIDR-AM, Inc. KIDR(AM), Phoenix, AZ Consolidated Financial Statements: The financial statements include the accounts of the Company and all wholly-owned subsidiaries. All references to the Company in these financial statements relate to the consolidated entity. All significant intercompany accounts and transactions are eliminated in consolidation. Cash and Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Property, Equipment and Intangible Assets: Property, equipment and intangible assets are stated at cost. Depreciation and amortization are computed using the straight-line method and are charged to expense based upon the estimated useful lives of the assets. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. Long Lived Assets: The Company accounts for long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of". The standard establishes guidelines regarding when impairment losses on long-lived assets, which include property and equipment, certain identifiable intangible assets and goodwill, should be recognized and how impairment losses should be measured. The Company evaluates the existence of long-lived asset impairment on the basis of whether the asset net book value is fully recoverable from projected, undiscounted net cash flows of the related business unit. This standard did not have an impact on the Company's financial position or results of operations. 22 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investment in Harmony: Investment in Harmony (Note 4) is accounted for under the equity method of accounting. The equity method of accounting is used to account for investments made when the Company has the ability to exercise significant influence over the operating and financial policies of an investee, generally involving a 20% to 50% interest in those investees. Under the equity method, original investments are recorded at cost, increased for subsequent investments in and advances to the investee, and adjusted for the Company's share of undistributed earnings and losses of the investee. Additionally, the excess of the Company's prorata share of the investees net assets is amortized over the estimated useful life of the underlying assets. Revenue: The Company reports revenue net of commissions withheld by advertising agencies. Barter Transactions: Included in revenues and expenses are nonmonetary transactions arising from on-air advertising time bartered by the Company for certain goods and services. Revenue from such "barter" transactions is based on the fair market value of the goods and services received, and is recognized when the related advertisements are broadcast. Expense or capitalization related to the usage of such goods and services is recognized when they are used or placed in service. The net barter accounts receivable is included in accounts receivable on the accompanying balance sheet. The following represents the barter activity for the respective years: Barter accounts receivable, net - January 1, 1997 $ 37,612 Barter revenues 703,824 Barter expenses (738,669) ---------- Barter accounts receivable, net - December 31, 1997 2,767 Barter revenues 115,983 Barter expenses (118,750) ---------- Barter accounts receivable, net - December 31, 1998 $ -- ========== 23 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Income (Loss) Per Share: In February 1997, The Financial Accounting Standards Board ("FASB") issued SFAS No. 128, Earnings Per Share ("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. The adoption of SFAS No. 128 had no effect on the Company's financial statements. Basic EPS is computed as net income available to common shareholders divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and warrants. For 1998 and 1997, the Company's basic and diluted EPS were the same. At December 31, 1998 and 1997, outstanding options and warrants to purchase 3,197,317 and 3,072,942 shares of the Company's common stock, respectively, were not included in the computation of diluted EPS as their effect would be antidilutive. Additionally, the Company's convertible preferred stock outstanding at December 31, 1998 was not included in the computation of diluted EPS as its effect would be antidilutive. Income Taxes: The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax basis of assets and liabilities. Stock Based Compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), establishes a fair value method of accounting for stock-based compensation plans and for transactions in which a company acquires goods or services from non-employees in exchange for equity instruments. SFAS 123 also gives the option to account for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock issued to Employees," or SFAS 123. The Company has chosen to account for stock-based compensation utilizing the intrinsic value method prescribed in APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the measurement date over the amount an employee must pay to acquire stock. If SFAS 123 is not adopted related to stock-based employee compensation, SFAS 123 for footnote purposes requires that companies measure the cost of stock-based employee compensation at the grant date based on the value of the award and recognize this cost over the service period. The value of the stock-based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the stock as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock. 24 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of the note receivable received in connection with the CRN radio station sale transaction (Note 2) and the notes receivable-affiliate (Notes 13 and 15) which are a result of the Company's equity investment in Harmony (Note 4). The Company performs ongoing credit evaluations of CRN and Harmony. The Harmony notes are unsecured while the CRN note is secured by the sold station assets and virtually all of CRN's other property, whether owned prior to or subsequent to the sale transaction. In the event of a default by CRN of the terms of the note agreement, the Company may enforce any and all rights available under the Uniform Commercial Code and may take possession of all or part of CRN's property and offer such property for public or private sale. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Comprehensive Income: The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" as of January 1, 1998. The Company does not have any components of comprehensive income. Segment Information: The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" as of January 1, 1998. Following the provisions of this Statement, the Company will report segment assets, liabilities, sales and operating income in the same format reviewed by the Company's management. In 1997, the Company's operations consisted primarily of providing programming for a national network of radio stations, including stations owned and operated by the Company. In 1998, the Company transitioned into the commercial production and related media business, primarily through increased investment in Harmony (note 4). Reclassifications: Certain amounts in the 1997 financial statements have been reclassified to conform with the 1998 presentation. These reclassifications have no effect on the accumulated deficit or net loss previously reported. 25 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: RADIO STATION SALE TRANSACTIONS In 1997, the Company began the process of selling its owned and operated radio stations. As of January 14, 1999, all of the stations have been sold pursuant to the following transactions: 1090 Radio Station Sale Transaction: On September 8, 1998, the Company closed on the sale of the radio broadcast license and certain other assets of its radio station WCAR(AM), Livonia, MI to 1090 Investments, LLC. ("1090"). The Company received gross proceeds of $2,000,000 in cash and incurred transaction expenses totaling $138,051. The station assets had a net book value totaling $1,431,609 and the Company realized a gain on sale of $430,340. Salem Radio Station Sale Transaction: On October 30, 1998, the Company closed on the sale of the radio broadcast licenses and certain other assets of its radio stations KTEK(AM), Alvin,TX and KYCR(AM), Golden Valley, MN to Salem Communications Corporation ("Salem"). The Company received gross proceeds of $2,700,000 in cash and incurred transaction expenses totaling $229,135. The station assets had a net book value totaling $863,006 and the Company realized a gain on sale of $1,607,859. CRN Radio Station Sale Transaction: On October 30, 1998, the Company closed on the sale of the radio broadcast licenses and certain other assets of its radio stations KCNW(AM), Fairway, KS, KKYD(AM), Denver, CO, KPLS(AM) Orange, CA, WAUR(AM), Sandwich, IL, WPWA(AM), Chester, PA, WWTC(AM) Minneapolis, MN, and WZER(AM), Jackson, WI, to Catholic Radio Network LLC ("CRN"). The Company received gross proceeds of $37,000,000 ($22,000,000 in cash and $15,000,000 pursuant to a note receivable agreement) and incurred transaction expenses totaling $2,235,357. The station assets had a net book value totaling $10,427,936 and the Company realized a gain on sale of $24,336,707. The note receivable bears interest at 10% payable monthly, is secured by the sold station assets and virtually all of CRN's other property, whether owned prior to or subsequent to the sale transaction. The note is due in full on April 30, 2000. The Company believes that the carrying value of the note receivable approximates its fair market value at December 31, 1998, as market interest rates and the credit risk associated with the note has not changed since its issuance. Unica Radio Station Sale Transaction: On October 26, 1998, the Company entered into an agreement to sell the radio broadcast licenses and certain other assets of its radio stations KAHZ(AM), Fort Worth, TX, KIDR(AM), Phoenix, AZ, and WJDM(AM), Elizabeth, NJ, to Radio Unica Corp. ("Unica"). Under the agreement, the Company will receive gross proceeds of $29,250,000 in cash. The station assets had a net book value totaling $11,391,402 at December 31, 1998 and are included on the accompanying balance sheet as radio station assets held for sale. 26 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: RADIO STATION SALE TRANSACTIONS (CONTINUED) Unica Radio Station Sale Transaction (Continued): The agreement provides for the stations to be operated by Unica to the closing date under a Local Programming and Marketing Agreement ("LMA"). Unica prepaid a total of $2,500,000 of the LMA fees which are earned by the Company based on a monthly LMA fee of $200,000. Unica also prepaid $500,000 of the purchase price. The prepaid purchase price and any unused portion of the prepaid LMA fee will be credited to the sales price at closing. At December 31, 1998, deferred revenue aggregating $2,675,556 was included on the accompanying balance sheet related to these prepayments. Subsequently, on January 14, 1999, the transaction closed. Included in the transaction costs for the transactions closed in 1998 are bonuses paid to Company management, employees and the Management Company (Note 13) totaling $1,930,000. An additional bonus of approximately $800,000 was paid in 1999 on the close of the Unica radio station sale transaction. This additional bonus will be reflected as a transaction expense for the Unica radio station sale in 1999. The bonuses were approved by the Company's board of directors and were contingent upon completion of the sale transactions. NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS ("LMA") KCAZ(AM), Mission, Kansas: In September 1994, the Company signed an agreement to operate KCAZ(AM) radio station under an LMA for a period of five years beginning October 1, 1994. Under the LMA, monthly payments of $8,200 are made by the Company to cover the operating expenses of the station. If these payments are not sufficient to cover operating expenditures, additional amounts are paid. No additional amounts were paid during the years ended December 31, 1998 and 1997. Additionally, the LMA provided the Company with the option to purchase the radio broadcast license and certain other assets of the radio station for consideration aggregating $550,000. In September 1997, the Company exercised this option and entered into an asset purchase agreement dated November 1997; however, in August 1998, the Company notified the seller of its intent not to close the purchase transaction and to terminate the LMA as of November 1998. WAUR(AM), Sandwich, Illinois: In January 1997, the Company completed its acquisition of the radio broadcast license and certain other assets of the radio station WAUR(AM). The consideration for the acquisition aggregated $3,900,000 consisting of cash payments totaling $2,000,000, a $1,400,000 note payable and payments totaling $500,000 (less a discount at 9.5% of $179,505) pursuant to a ten-year covenant not-to-compete agreement. The purchase price and related acquisition expenses incurred of $20,546 were allocated based on the fair market value of the assets acquired consisting of a broadcast license of $3,370,045, property and equipment of $50,500 and a covenant not to compete of $320,495. 27 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS ("LMA") (CONTINUED) KMUS(AM), Muskogee, Oklahoma: On December 31, 1996, the Company entered into an asset purchase agreement to acquire the radio broadcast license and certain other assets of the radio station KMUS(AM) for $400,000 payable with 82,051 shares of common stock. In January 1997, the Company issued 82,051 shares of common stock to the seller in exchange for a subscription note receivable of $400,000. The Company expected that the seller would satisfy the subscription note receivable through transfer of the station assets pursuant to the aforementioned asset purchase agreement. During 1998, the seller defaulted on the subscription note receivable and sold the station assets to a third party. Accordingly, Management wrote-off the subscription note receivable in 1998 thereby incurring a $400,000 bad debt expense as the common shares associated with the subscription note receivable could not be recovered. Management is pursuing legal action against the seller. KIDR(AM), Phoenix, Arizona: In May 1997, the Company acquired the radio broadcast licenses and certain other assets of the radio station KIDR(AM). The consideration for the acquisition consisted of the issuance of 268,607 shares of common stock valued at $1,000,000. The purchase price and related acquisition expenses incurred of $75,000 were allocated based upon the fair market value of the assets acquired consisting of a broadcast license of $636,617 and property and equipment totaling $438,383. NOTE 4: INVESTMENT IN HARMONY The following schedule represents the Company's equity investments in Harmony beginning with its initial investment on July 22, 1997:
Common Stock Stock Options ---------------------------- ---------------------------- Number of Number of Date Shares Consideration Shares Consideration - --------------------------------- ----------- ------------- ----------- ------------- July 22, 1997 600,000 $ 1,747,500 550,000 $ 260,000 July 25, 1997 769,231 2,000,000 -- -- September 25, 1997 819,500 2,401,650 200,000 330,000 ----------- ----------- ----------- ----------- Balance at December 31, 1997 2,188,731 6,149,150 750,000 590,000 June 30, 1998 (exercise of stock options) 750,000 1,715,000 (750,000) (590,000) July 2, 1998 250,000 432,500 -- -- November 4, 1998 494,231 968,750 -- -- ----------- ----------- ----------- ----------- Balance at December 31, 1998 3,682,962 $ 9,265,400 -- $ -- =========== =========== =========== ===========
Consideration for the July 1997 acquisitions of outstanding common stock and stock options aggregated $4,007,500, consisting of cash payments totaling $3,760,000 and 60,000 shares of the Company's common stock valued at $247,500. The cash consideration was obtained from the following sources: short-term debt due to directors and shareholders aggregating $1,250,000 (Note 7), an additional advance of $2,400,000 under the finance company credit agreement (Note 9) and working capital totaling $110,000. 28 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: INVESTMENT IN HARMONY (CONTINUED) Consideration for the September 1998 acquisitions of outstanding common stock and stock options totaled $2,731,650 in cash obtained from an additional advance under the finance company credit agreement (Note 9). The June 1998 stock option exercise at $1.50 per share and the July 1998 purchase of outstanding common stock required consideration totaling $1,557,500 in cash obtained through the Company's issuance of redeemable convertible preferred stock (Note 11). Consideration for the November 1998 stock acquisitions of 269,231 newly issued shares and of 225,000 outstanding shares of common stock totaled $968,750 in cash obtained in through the Company's sale of its radio stations (Note 2). The November 1998 purchases of 225,000 outstanding shares occurred pursuant to an outstanding put option exercised by the seller in February 1998. The put option required that the Company purchase the shares for $2.50 per share by March 31, 1998. As the Company did not have the current financial resources to meet this obligation by March 31, 1998, the Company assigned the put option to two entities controlled by a director, and another director individually (the "assigned parties"). The assigned parties consummated the purchase of shares required by the initial put and were granted a similar option to put the shares to the Company at a price of $2.75 per share. The new put option was exercisable upon the completion of the CRN sale transaction which occurred in October 1998 (Note 2). The Company's investment represents 49.1% and 33.7% of the outstanding common stock of Harmony at December 31, 1998 and 1997, respectively. The aggregate purchase price paid of $9,265,400 and transaction costs totaling $80,276 were allocated based on the estimated fair market value of the assets acquired, consisting of common stock of $8,675,400 and stock options valued at $590,000. The excess of the purchase price over the Company's prorata share of Harmony's net tangible assets totaled $5,832,000 and $3,924,000 at December 31, 1998 and 1997, respectively. 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. At December 31, 1998 and 1997, accumulated amortization of the excess purchase price totaled $871,552 and $212,032, respectively. Harmony produces television commercials, music videos and related media. Harmony's services are usually directed towards advertising agencies located in the major markets of New York, Los Angeles, Chicago, Detroit, Dallas, San Francisco and in regional markets. The following amounts have been derived from Harmony's financial statements for the fiscal years ended June 30, 1998 and 1997 and have been recast to conform with the Company's financial statements for the years ended December 31, 1998 and 1997: 29 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: INVESTMENT IN HARMONY (CONTINUED) (Unaudited) (Unaudited) Year Ended Year Ended December 31, December 31, 1998 1997 ------------ ------------ Contract revenues $ 62,019,148 $ 58,013,312 Cost of production 51,779,753 46,835,484 ------------ ------------ Gross profit 10,239,395 11,177,828 Operating expenses 18,089,550 11,746,954 ------------ ------------ Loss from operations (7,850,155) (569,126) Interest income (expense), net (179,221) 46,180 ------------ ------------ Loss before income taxes (8,029,376) (522,946) Income taxes (8,122) 98,413 ------------ ------------ Net loss $ (8,037,498) $ (621,359) ============ ============ Company's prorata share of Harmony's net loss $ (3,398,841) $ (328,962) Amortization expense for the excess of the investment cost over the underlying net assets of Harmony (659,520) (212,032) ------------ ------------ Company's equity loss in Harmony $ (4,058,361) $ (540,994) ============ ============ The consolidated balance sheet of Harmony is summarized as follows: (Unaudited) (Unaudited) December 31, December 31, 1998 1997 ------------ ------------ Current assets $ 7,117,732 $ 6,153,550 Non-current assets 3,001,164 4,851,971 ------------ ------------ Total assets $ 10,118,896 $ 11,005,521 ============ ============ Current liabilities 10,150,060 5,007,537 Stockholders' equity (deficit) (31,164) 5,997,984 ------------ ------------ Total liabilities and stockholders' equity $ 10,118,896 $ 11,005,521 ============ ============ Harmony is a public company traded over-the-counter under the symbol "HAHO". At December 31, 1998, the aggregate value of the Harmony common stock held by the Company totaled $4,375,359. 30 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: Estimated Useful Life 1998 1997 In Years ---------- ---------- ----------- Land $ -- $ 680,079 Buildings -- 757,956 30 Studio and broadcast equipment -- 2,639,768 5-10 Towers -- 1,208,718 13 Office equipment 198,352 1,154,992 5 Vehicles 50,514 45,712 5 Leasehold improvements -- 379,969 5 Equipment under capital leases -- 177,290 5 ---------- ---------- 248,866 7,044,484 Less accumulated depreciation 128,481 2,336,157 ---------- ---------- Property and equipment, net $ 120,385 $4,708,327 ========== ========== Depreciation expense, including that on equipment under capital leases, was $670,748 and $711,927 for the years ended December 31, 1998 and 1997, respectively. Accumulated depreciation on the equipment under capital leases was $0 and $92,025 at December 31, 1998 and 1997, respectively. NOTE 6: INTANGIBLE ASSETS Intangible assets consisted of the following at December 31: Estimated Useful Life 1998 1997 In Years ----------- ----------- ----------- Broadcast license $ -- $21,684,545 20 Less accumulated amortization -- 2,005,391 ----------- ----------- Broadcast licenses, net $ -- $19,679,154 =========== =========== Trademarks and tradenames $ -- $ 442,790 6 Non-compete agreement -- 1,940,250 2-10 Other -- 148,322 5 ----------- ----------- -- 2,531,362 Less accumulated amortization -- 981,262 ----------- ----------- Intangible assets, net $ -- $ 1,550,100 =========== =========== Amortization expense related to the intangible assets totaled $1,278,592 and $1,424,793 for the years ended December 31, 1998 and 1997, respectively. 31 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: SHORT-TERM DEBT - AFFILIATES Directors and Shareholders: In July 1997, the Company received proceeds aggregating $1,250,000 with the issuance of promissory notes payable and warrants to purchase 125,000 shares of the Company's common stock. The notes payable are due to the following parties: a partnership controlled by a Company director, a Company director individually and a less than five-percent shareholder. The proceeds were utilized to purchase 480,770 shares of the common stock of Harmony (Note 4). The notes payable bear interest at a rate of 10%, are secured by the purchased common stock of Harmony. The warrants vested immediately upon grant and are exercisable at $4.00 per share over a term of five years. The value of the warrants was determined to be $137,500. The notes payable are included on the accompanying balance sheet less the remaining unamortized deferred warrant value of $77,500 at December 31, 1997. In July 1998, the notes payable were extended 4 months to October 22, 1998. As consideration for the extension, the holders were offered additional warrants to purchase the Company's common stock or an increase in the note payable interest rate from 10% to 20%. Two of the holders representing $750,000 of the outstanding debt opted to receive additional warrants to purchase an aggregate of 37,500 shares of the Company's common stock. The remaining holder of outstanding debt totaling $500,000 opted for the increased interest rate of 20%. The warrants vested immediately and are exercisable at $3.06 per share for a term of 5 years. The value of the warrants was determined to be $62,625. The debt was repaid in full in October 1998 upon closing of the CRN radio station sales transaction (Note 2). Harmony Holdings: 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 (Note 4) 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. NOTE 8: LINE OF CREDIT At December 31, 1998 and 1997, the Company had outstanding short-term borrowings totaling $434,974 and $453,838 under a discretionary line of credit pursuant to the finance company credit agreement (Note 9). Interest is charged at a variable rate (13.5% at December 31, 1998). The line of credit was terminated upon its full repayment in January 1999 (Note 9). 32 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: LONG-TERM DEBT Long-term debt consisted of the following at December 31:
1998 1997 ---------------- ---------------- Term note payable bearing interest at a variable rate (13.5% at December 31, 1998). The note payable is due in variable quarterly installments of principle beginning April 16, 1998 with monthly payments of interest through November 2000 when the remaining balance is payable in full. Due to the recurring requirement to meet certain restrictive financial covenants, which have not been met, this entire indebtedness is classified as current at December 31, 1998 and 1997. This note was subsequently paid in full in January 1999. $ 10,500,000 $ 22,500,000 Note payable bearing interest at a variable rate (8.75% at December 31, 1998). The note payable was paid in full in October 1998. -- 1,198,265 Covenant not-to-compete, non-interest bearing, payable in quarterly installments of $37,500 through June 2006, less unamortized discount at 9.25% ($255,531 and $320,161 at December 31, 1998 and 1997, respectively). 869,469 954,839 Covenant not-to-compete, non-interest bearing, less unamortized discount at 9.5% ($157,021 at December 31, 1997). The obligation was paid in full in October 1998. -- 305,479 Note payable due to a bank, bearing interest at 9.25%. The note was paid in full in October 1998. -- 246,716 Note payable bearing interest at 9%, payable in annual installments totaling $30,000 through May 2000 when the remaining balance is payable in full. The note payable is secured by substantially all corporate assets and real property owned by a Company director. 80,433 101,315 Various other installment notes payable. 64,001 134,794 ---------------- ---------------- 11,513,903 25,441,408 Less current portion 10,665,792 22,883,753 ---------------- ---------------- Long-term debt, less current portion $ 848,111 $ 2,557,655 ================ ================
33 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: LONG-TERM DEBT (CONTINUED) In November 1996, the Company entered into an agreement with a finance company (the "Credit Agreement") under which three credit facilities (the "Facilities") were established. The Facilities included a $11,500,000 term note payable, of which advances totaling $3,615,000 and $7,885,000 were received during 1997 and 1996, respectively, a $1,000,000 line of credit (Note 8), and a $4,000,000 acquisition facility which was not utilized. In July and September 1997, the Credit Agreement was amended and restated pursuant to additional term note payable advances received by the Company totaling $5,420,100 and $5,800,000, respectively. In March, May and October 1998, the Credit Agreement was further amended pursuant to additional term note payable advances of $1,000,000, $2,000,000 and $1,000,000, respectively. The provisions of the Credit Agreement remained substantially unchanged as a result of these amendments and restatements except that the $4,000,000 acquisition facility was cancelled and the available line of credit (Note 8) was reduced from $1,000,000 to $500,000 in favor of the increased term note payable. In September and October 1998, the Company repaid $1,300,000 and $14,700,000 in connection with the 1090 and CRN radio station sales transactions (Note 2), respectively. Finally, the Credit Agreement was amended again in October 1998, primarily to reschedule installment payments due and to provide the lender a security interest in the note receivable received by the Company in the CRN radio station sale transaction (Note 2). In January 1999, the Facilities were repaid in full upon completion of the Unica radio station sale transaction (Note 2). In connection with the original Credit Agreement and the 1998 and 1997 amendments, the Company has incurred debt issuance costs aggregating $1,310,000 and $1,593,420, respectively. These costs included finance company fees which reduced the proceeds of the term note payable advances ($400,000 and $985,000 in 1998 and 1997, respectively), the value of warrants granted to the finance company net of the value of cancelled previously granted warrants ($560,000 and $268,000 in 1998 and 1997, respectively), the value of the 37,500 shares of the Company common stock issued to the transaction broker ($154,687 in 1997), and other transaction costs ($287,375 and $185,733 in 1998 and 1997, respectively). The debt issuance costs have been deferred on the accompanying balance sheet and, prior to the complete facility repayment in January 1999, were being amortized utilizing the interest method over the remaining life of the Credit Agreement. Additionally, with each of the aforementioned facility repayments, the Company wrote-off deferred debt issue costs based on the proportionate share of principal repaid. At December 31, 1998 and 1997, the unamortized value of these costs totaled $742,737 and $1,173,209, respectively. The facilities were subject to certain restrictive covenants. As of December 31, 1998, the Company had not met certain of the covenant requirements; however, the violation was cured with the Company's repayment of the Facilities in full in January 1999. 34 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: LONG-TERM DEBT (CONTINUED) Future maturities of long-term debt including classification of the entire term note payable to the finance company (aggregating $10,500,000 at December 31, 1998) as a current obligation, are as follows: Year ending December 31: 1999 $10,665,792 2000 168,226 2001 105,128 2002 112,682 2003 120,799 Thereafter 341,276 ----------- $11,513,903 =========== The Company believes that the carrying value of the debt approximates its fair market value at December 31, 1998 and 1997, as the majority of the debt was repaid in full in January 1999 at its current book carrying value. NOTE 10: COMMITMENTS AND CONTINGENCIES Operating Leases and Other Commitments: The majority of the Company's substantial operating leases were assumed by the buyers in the radio station sale transactions (Note 2). Prior to the station sales, the Company leased office, broadcast space and a transmitter site from related parties, including a Company director. Other commitments included office equipment, satellite transmission rights, local programming and marketing agreements, license agreements and similar type contracts. Future minimum lease and other commitment payments are as follows for the years ending December 31: 1999 $150,952 2000 46,743 2001 42,148 2002 14,049 -------- $253,892 ======== Total rent expense was $771,728 and $878,363 for the years ended December 31, 1998 and 1997, respectively, and rent expense to related parties totaled $234,984 and $288,608, respectively. Additionally, the Company guarantees a lease of Harmony (Note 4). This lease expires in November 2008 and requires annual minimum lease payments of $111,000 resulting in a aggregate future minimum commitment of approximately $1,100,000 at December 31, 1998. 35 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED) Loan Guarantee - Affiliate: The Company guarantees Harmony's (Note 4) operating line of credit. The line of credit is available for amounts not to exceed $5,000,000 and at December 31, 1998 $2,205,384 was outstanding under the line. Pending Litigation: On September 30, 1998, a jury in the United States District Court for the District of Minnesota (the "Court") ruled in favor of the Company in connection with litigation for breach of contract and misappropriation of trade secrets that the Company had commenced against ABC Radio Networks, Inc. (ABC) and the Walt Disney Company (Disney) and awarded the Company $20 million for breach of contract against ABC, $10 million for misappropriation of trade secret by ABC and $10 million for misappropriation of trade secret against Disney. On January 15, 1999, the Court had entered judgement in the Company's case against ABC and Disney. While the Court confirmed the jury's findings that ABC had breached its contract with the Company and that ABC and Disney had misappropriated the Company's trade secret information, the Court disagreed with the jury's conclusion that the evidence showed that those wrongs led to the Company's damages or that the amount of damages awarded by the jury was supported by the evidence, and set aside the jury's verdict on causation and damages. The Court further ruled that in the event that the decision is reversed or remanded on appeal, that the defendants be granted a new trial on the issues of causation and damages. The Company filed a Notice of Appeal on February 12, 1999. At December 31, 1998 and 1997, litigation costs totaling $999,000 and $655,000, respectively, were included in other accrued liabilities on the accompanying balance sheet. Additionally, the Company has entered an agreement with its primary counsel for this litigation. Under the agreement the counsel has agreed to make twenty-five percent of their fees contingent upon the successful outcome of this lawsuit in exchange for seven and one half percent of any settlement or judgement in favor of the Company. At December 31, 1998, the fees deferred under this agreement totaled approximately $727,000. 401(k) Savings/Profit-Sharing Plan: The Company has a 401(k) plan available to all employees meeting certain service requirements. Eligible employees may contribute a portion of their annual salary to the plan, subject to certain limitations. The Company may make matching contributions and also may provide profit-sharing contributions at the discretion of its board of directors. Employees become fully vested in the Company contributions after five years of service. There were no Company contributions in 1998 or 1997. 36 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company has authorized 606,061 shares of $0.02 par value Series B redeemable convertible preferred stock ("the Series"). In June 1998, the Company issued 606,061 shares of the Series with a $3.30 per share stated value and warrants to purchase 100,000 shares of the Company's common stock. The Series was initially recorded on the Company's financial statements at $1,768,250 which represents the net proceeds received totaling $1,864,250 ($2,000,000 aggregate stated value less transaction costs totaling $135,750) discounted by $96,000 for the value of the warrants granted. The preferred stock carried the right of redemption or conversion into a variable number of shares of the Company's common stock upon expiration of the Company's right to redeem the series. Prior to an amendment to the related securities agreement, the Company had the right to redeem the Series for $4.04 per share until October 22, 1998. Subject to the amendment, the Company issued additional warrants to purchase 125,000 shares of the Company's common stock. The warrant issuance allowed the Company to extend its redemption right until January 1999. At this time, the preferred stock was redeemed at $4.04 per share, or $2,450,000, utilizing proceeds of the Unica radio station sale transaction (Note 2). During 1998, the Company recorded accretion of the preferred stock totaling $680,236. NOTE 12: SHAREHOLDERS' EQUITY Common Stock: The Company has authorized 50,000,000 shares of common stock at $.02 par value. The Company has voting shares of 6,261,701 and 6,460,824 issued and outstanding at December 31, 1998 and 1997, respectively, and nonvoting shares of 189,041 which are issued and outstanding at December 31, 1998 and 1997. Incentive and Non-Qualified Stock Options Plans: In August 1998, the Company amended the 1994 Stock Option Plan to allow the board of directors to amend the terms of options issued under the plan at its discretion subject to certain restrictions. Additionally, options issued under the 1991 and 1994 Stock Option Plans were revised to provide that the options would not automatically terminate as a result of a sale of substantially all the Company's assets. In October 1998 upon the closing of the CRN radio station transaction (Note 2), all options outstanding under the plans became fully vested to the holders. In 1991, the Company established the 1991 Stock Option Plan to provide incentives to employees whereby 200,000 shares of the Company's common stock have been granted. The options are exercisable on the date of grant and are generally valued at the fair market value of the stock on the date of grant. The options expire on various dates through January 2005. In March 1994, the board adopted the 1994 Stock Option Plan whereby 1,000,000 shares of the Company's common stock have been reserved. The options can be either incentive stock options or nonstatutory options and are generally valued at the fair market value of the stock on the date of grant. The options generally vest over a five-year period and expire through January 2005. 37 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Incentive and Non-Qualified Stock Options Plans (Continued): In May 1994, the board adopted the 1994 Director Stock Option Plan whereby 125,000 shares of the Company's common stock have been reserved. The plan provides for automatic grants of non-qualified options to purchase 3,750 shares to outside directors upon first becoming a director and an additional 3,750 shares upon each anniversary of the original grant. The options are generally valued at the fair market value of the stock on the date of grant. The shares become exercisable one year from the date of grant and expire five years thereafter. A summary of the status of the Company's stock option plans as of December 31, 1998 and 1997 and changes during the years ending on those dates is presented below:
1998 1997 ---------------------------- ----------------------------- Weighted- Weighted- Average Average Fixed Options Shares Exercise Price Shares Exercise Price - ---------------------------------- ----------- -------------- --------- -------------- Outstanding at beginning of year 1,372,401 5.76 1,343,806 $5.74 Granted 1,063,552 3.20 199,250 3.52 Exercised (2,600) 2.05 (123,000) 2.00 Forfeited (1,449,077) 5.62 (47,655) 5.86 ----------- --------- Outstanding at end of year 984,276 3.19 1,372,401 5.76 =========== ========= Options exercisable at year end 984,276 3.19 518,393 6.71 Weighted-average fair value of options granted during the year $1.16 $2.21
On April 3, 1998, option holders were offered the opportunity to receive a reduced number of options at an exercise price of $3.19, the fair market value of the Company's stock on that date. The number of new options received by the option holders was determined ratably based on the ratio of the existing option exercise price and the new exercise price of $3.19. The forfeited and granted option amounts in the table above include options aggregating 1,289,972 and 817,302, respectively, that were canceled and issued under this offer. The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ----------------------------------------------- ----------------------------- Number Weighted-Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price - --------------- ----------- ---------------- ---------------- ----------- -------------- $ 3.00 to 3.50 984,276 3.1 years $ 3.19 984,276 $ 3.19 ======= =======
38 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Incentive and Non-Qualified Stock Options Plans (Continued): Included in the table above are certain options outstanding which are performance based which become exercisable on the achievement of certain goals reached, but no later than 2005. A summary of these performance-based options is presented below:
1998 1997 ----------------------------- ---------------------------- Weighted Weighted Average Average Performance Options Shares Exercise Price Shares Exercise Price - --------------------------------- ----------- -------------- ---------- -------------- Outstanding at beginning of year 158,750 $ 7.59 160,625 $ 7.70 Granted 66,835 3.19 -- -- Forfeited 158,750 7.59 (1,875) 8.38 --------- --------- ---------- -------- Outstanding at end of year 66,835 3.19 158,750 7.59 ========= ========= ========== ======== Options exercisable at year end 66,835 3.19 50,000 7.70 Weighted-average fair value of options granted during the year $ 1.16 $ --
As of December 31, 1998 the performance options outstanding under the Plans have exercise prices $3.19 and a weighted-average remaining contractual life of 3.0 years. FASB Statement 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998 and 1997, respectively: no dividend yield for each year; weighted average estimated option life 5.0 expected volatility of 41.3 and 69.3 percent; and risk-free interest rates of 5.4 and 6.3 percent. Under the accounting provisions of FASB Statement 123, the Company's net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below: 1998 1997 ------------ ------------ Net income (loss): As reported $ 7,569,795 $(14,558,353) Pro forma 5,513,782 (15,155,046) Net income (loss) per share: As reported 1.03 (2.33) Pro forma $ .72 $ (2.43) 39 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Employee Stock Purchase Plan: In May 1996, the Board adopted the 1996 employee stock purchase plan whereby 400,000 shares of the Company's common stock have been reserved. The reserved shares may be purchased at their fair market value during specified offering periods. No shares were issued under the plan during 1998 and 1997. Shareholder Rights Plan: 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 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 Company 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. Brokerage Fees: In March 1997 and in connection with obtaining the Credit Agreement (Note 9), the Company issued 37,500 shares of common stock with an aggregate value of $154,687 as a brokerage commission. 40 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Finance Company Credit Agreement: In connection with the original completion and subsequent amendments of the Credit Agreement (Note 9), the Company granted the finance company warrants to purchase an aggregate of 600,000 shares of the Company's common stock at exercise prices ranging from $3.68 to $3.76. The warrants became immediately exercisable and expire through November 2001. The warrants also are convertible into a variable number of shares of common stock which, upon conversion, allows the finance company to receive a benefit of an amount equal to the amount obtainable if the options were exercised without payment of the related exercise price. Redeemable Convertible Preferred Stock: In connection with the issuance and subsequent amendment of the Redeemable Convertible Preferred Stock (Note 11), the Company granted the investors warrants to purchase 225,000 shares of the Company's common stock at exercise prices ranging from $2.68 to $3.77. The warrants became immediately exercisable and expire through January 2004. The following table summarizes the warrants to purchase shares of the Company's common stock:
Exercise Warrants Price Outstanding Exercisable Per Share ------------ ------------- ------------- Balance at January 1, 1997 1,290,591 1,151,590 $2.40 - 13.80 Granted: Credit agreement 100,000 100,000 5.29 Credit agreement 200,000 200,000 3.76 Short-term debt 125,000 125,000 4.00 Exercised: Other (15,050) (15,050) 2.40 Became exercisable -- 125,000 11.00 ------------ ------------- ------------- Balance at December 31, 1997 1,700,541 1,686,540 $2.40 - 13.80 Granted: Credit agreement 200,000 200,000 3.68 Credit agreement 200,000 200,000 3.76 Short-term debt 37,500 37,500 3.06 Preferred stock 100,000 100,000 3.77 Preferred stock 125,000 125,000 2.68 Canceled: Credit agreement (50,000) (50,000) 4.40 Credit agreement (100,000) (100,000) 5.29 ------------ ------------- ------------- 2,213,041 2,199,040 $2.40 - 13.80 ============ ============= =============
41 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Included in the table above are warrants issued in connection with the finance company Credit Agreement, bridge loans and other short-term notes payable. The value of these warrants is charged to interest expense over the term of the related debt agreement and during the years ended December 31, 1998 and 1997, the Company incurred interest expense aggregating approximately $725,378 and $103,859, respectively. The value of the warrants related to the issuance of new debt was determined based on the difference between the stated interest rate and the Company's estimated effective borrowing rate. NOTE 13: RELATED PARTY TRANSACTIONS Management Agreement: The Company has a management services contract with a privately held affiliate (the "Management Company") related to the Company through common control. The contract, which expires in December 1999 and is renewable annually thereafter, requires that the Company pay the Management Company a fee of $75,000 per month for services received. The management fees totaled $900,000 and $900,090 in 1998 and 1997, respectively. The Management Company also provides services to another privately held affiliate related to the Company through common control. The management fee is based on estimated usage of the Management Company's services by each company. Management reviews the allocation periodically and believes that the allocation method is reasonable. Accounts Receivable/Payable - Affiliates: At December 31, 1998 and 1997, accounts receivable aggregating $280,438 and $142,868, respectively, were outstanding from several affiliates related to Company through common control or equity investment. These accounts result primarily from the allocation of shared expenses. At December 31, 1998, an account payable totaling $363,727 remained due to an officer and director of the Company associated with their assistance in financing the Company's repurchase of 271,000 shares of its common stock. Notes Receivable - Affiliate: In November 1998, the Company made cash advances totaling $675,000 to Harmony (Note 4) pursuant to unsecured note receivable agreements. The notes bear interest at 10% and are due on demand. Additionally, in February 1999, the notes were amended to provide for interest at 14%. NOTE 14: INCOME TAXES At December 31, 1998, the Company has net operating loss carryforwards as follows for income tax purposes: Net Operating Loss Carryforward Expires Carryforward -------------------- ------------ 2008 (approximate) $ 1,632,000 2009 4,256,245 2010 5,923,651 2011 7,257,593 2012 13,029,698 ----------- $32,099,187 =========== 42 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14: INCOME TAXES (CONTINUED) A reconciliation of the statutory federal income tax rate (benefit) and the effective tax rate as a percentage of income (loss) before taxes on income is as follows: 1998 1997 ---- ---- Statutory rate (benefit) 34.0% (34.0)% Operating losses generating no current tax benefit -- 34.0 Benefit of operating losses not previously recognized (34.0) -- State taxes 4.2 -- ----- ----- Effective tax rate 4.2% --% ===== ===== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows: 1998 1997 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 11,877,000 $ 12,943,000 Excess of subsidiary and equity-basis investee stock tax basis over the amount for financial reporting 5,515,000 3,814,000 Other items not yet deductible for tax purposes 20,000 466,000 ------------ ------------ Total long-term deferred tax asset 17,412,000 17,223,000 Deferred tax liability: Deferred installment gain 3,650,000 -- Amortization and the excess of broadcasting license financial reporting basis over the amounts for taxes 3,237,000 3,356,000 ------------ ------------ Total net long-term deferred tax asset 10,525,000 13,867,000 Valuation allowance for net deferred tax assets (10,525,000) (13,867,000) ------------ ------------ Net deferred tax assets $ -- $ -- ============ ============ The 1998 tax provision consists of current state taxes due. As the Company has posted consistent operating losses since inception exclusive of the radio station sale transactions, realization of the tax benefit related to these net deferred tax asset is uncertain. Accordingly, no deferred tax asset has been recorded to reflect their potential value. The net change in the deferred tax valuation allowance was an increase (decrease) of $(3,342,000) and $5,490,000 in 1998 and 1997, respectively. 43 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15: SUBSEQUENT EVENTS Note Receivable - Affiliate: Subsequently, in January and February 1999, the Company advanced Harmony $2,375,000 in cash pursuant to unsecured note receivable agreements which bear interest at 10% and are due on demand. Additionally, in February 1999, the notes were amended to provide for interest at 14%. Acquisition of Chelsea Pictures, Inc.: On March 4, 1999, the Company acquired all of the issued and outstanding common stock of Chelsea Pictures, Inc. ("Chelsea") for consideration totaling approximately $1,150,000, 125,000 shares of common stock with a value of $250,000 and the assumption of approximately $900,000 in liabilities. Chelsea is a television commercial production company with principle operations in New York, New York. The acquisition will be accounted for as a purchase, whereby, all assets purchased and liabilities assumed are recorded at their fair market value. Additionally, consideration for the transaction may consist of up to an aggregate of 200,000 shares of the Company's common stock, 125,000 of these shares were issued on the acquisition date. Issuance of the remaining shares is contingent upon the level of Chelsea's earnings before interest, taxes, depreciation and amortization (EBITDA) in the first year following the acquisition. If Chelsea achieves EDITDA within a range of $0 - $410,000, the previous owner will receive a proportionate number of shares up to a maximum of 50,000 shares. If Chelsea achieves EBITDA in excess of $500,000, an additional 25,000 shares will be issued. The value of the remaining shares will be treated as an adjustment to the purchase price upon issuance. Chelsea is party to several employment contracts with its officers and other employees which require minimum payments of approximately $2,800,000. These payments are due as follows: $490,000, 660,000, 690,000, 455,000, 400,000 and $105,000 for the years ended December 31, 1999 - 2003 and thereafter, respectively. Certain of these agreements provide for additional compensation based on Chelsea's operating profits. This additional compensation is payable whether or not the Company achieves an operating profit as a whole. Additionally, in connection with the employment contracts, CBC issued several of these parties stock options to purchase an aggregate of 100,000 shares of the Company's common stock. These options vest over a five year term. 44 ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Set forth below is certain information concerning the management of the Company as of March 29, 1999. There are no family relationships between any directors and any executive officers. MANAGEMENT Name Age Position - ------------------------ --- -------- Christopher T. Dahl 55 Chairman of the Board of Directors, President and Chief Executive Officer James G. Gilbertson 37 Chief Operating Officer and Chief Financial Officer Jill J. Theis 28 General Counsel and Secretary Michael N. Delgado 39 Vice President of Marketing Richard W. Perkins 68 Director Michael R. Wigley 44 Director William E. Cameron 54 Director Barbara A. McMahon 42 Vice President of Populuxe CHRISTOPHER T. DAHL has been President, Chief Executive Officer and Chairman of the Company since its inception in February 1990. Mr. Dahl is also Chairman and Chief Executive Officer of CAC, a company that owns and operates radio stations in Hawaii. Prior to founding CAC in 1986, Mr. Dahl managed his private investments. Mr. Dahl also serves as a director of CAC and Harmony. Messrs. Dahl and Perkins own MMLLC which provides certain administrative, legal and accounting services to CAC, the Company and Harmony. From 1969 to 1979, Mr. Dahl was the founder and President of a group of companies involved in photo finishing, retail photo sales, home sewing notions, toy distribution and retail craft stores. He was employed by Campbell-Mithun and Knox Reeves Advertising from 1965 through 1969. Mr. Dahl serves as President, Chief Executive Officer and Chairman of Harmony, of which the Company is the largest shareholder. Harmony produces television commercials, music videos and related media. JAMES G. GILBERTSON has served as the Company's Chief Operating Officer since April 1996 and its Chief Financial Officer since July 1992. From June 1988 to July 1992, he was the Chief Financial Officer of Parker Communications, which operated a group of radio stations. From 1985 to June 1988, he was Controller of the radio division of Palmer Communications located in Des Moines, Iowa. Prior to joining Palmer Communications, Mr. Gilbertson was a practicing certified public accountant with the firm of Ernst & Young LLP. Mr. Gilbertson is also an executive officer of Harmony. JILL J. THEIS joined the Company in March 1997, became a staff attorney in October 1997, and has served as the General Counsel and Secretary since February 1999. From January 1996 to March 1997, Ms. Theis clerked for the law firm of Holper, Welsh, Mitchell & Joanis, P.A. in Minneapolis, Minnesota. From 1993 to 1997, Ms. Theis attended law school at William Mitchell School of Law in St. Paul, Minnesota. From 1994 to 1995, Ms. Theis worked in the sales department for West Publishing Corporation (n/k/a The West Group). From 1995 to 1996, Ms. Theis was a manager for Bruegger's Bagel Bakery in the Twin Cities area. Ms. Theis is also an executive officer of Harmony. MICHAEL N. DELGADO oversees the marketing and sales efforts of the Company and has been with the Company since 1997. A graduate of the University of Southern California School of Fine Arts, Mr. Delgado has orchestrated national marketing campaigns and has been involved in worldwide branding efforts for a variety of corporations including Patagonia and Lucky Brand Clothing Companies. Mr. Delgado gained significant operations experience in his capacity as president of SenDel Automotive Corporation, a manufacturer of aluminum automotive wheels whose customers included Toyota Motor Company. BARBARA A. MCMAHON joined the Company in June 1993 to oversee the growth of the network though affiliates and was promoted to Executive Vice President of Affiliate Relations in June 1996. In 1998, Ms. McMahon became the Vice President of Populuxe. During the years 1980 through 1989, Ms. McMahon served as a Director for NBC Radio Networks, Mutual Broadcasting and RKO Radio Networks. RICHARD W. PERKINS has been a director of the Company since its inception. For more than five years, Mr. Perkins has been President and Chief Executive Officer of PCM, a registered investment advisor. Mr. Perkins is also a director of CAC as well as the following publicly held companies: Bio-Vascular, Inc., a medical products manufacturer; CNS, Inc., a consumer products manufacturer; Eagle Pacific Industries, Inc., a manufacturer of plastic pipe; Harmony; LifeCore Biomedical, Inc., a medical device manufacturer; Nortech Systems, Inc., an electronic sub-systems manufacturer; Quantech LTD., a developer of immunological tests; and Vital Images, Inc., a medical visualization software company. 45 MICHAEL R. WIGLEY was elected to the Company's Board of Directors in February 1998. Mr. Wigley is President and Chief Executive Officer of Great Plains Companies, Inc. ("Great Plains"), a building material and supply company based on Roseville, Minnesota. He has served as its President since 1989. Mr. Wigley is Chairman and Chief Executive Officer of four subsidiaries of Great Plains, as well as Chairman and Chief Executive Officer of Great Plains Properties, Inc. and TerraDek Lighting, Inc., two independent privately-held companies. Mr. Wigley is also a director of Choicetel Communications, Inc., the largest independent pay phone service provider in Minnesota. He co-founded the Minnesota branch of McKinsey & Company, where he managed various teams of consultants from 1986 to 1989. Mr. Wigley holds a M.B.A. from Harvard University and a M.S. in Civil Engineering from Stanford University. WILLIAM E. CAMERON was elected to the Company's Board of Directors in April 1998. Since 1993, Mr. Cameron has been the head of International Business Development for Universal Health Communications, the largest medical-health-wellness video library in the world. After spending ten years in London, England, Mr. Cameron relocated to Los Angeles, California in 1998, to take over International Telemedicine Marketing for KZT Corporation, the creators of the video phone. Mr. Cameron also serves as a director of Harmony and RME Entertainment. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers, directors and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the SEC. Such officers, directors and shareholders are required by the SEC to furnish the Company with copies of all such reports. To the Company's knowledge, based solely on a review of copies of reports filed with the SEC during 1998, all applicable Section 16(a) filing requirements were satisfied except that Mr. Gilbertson filed a late Form 5 in March 1999 regarding the disposition of 10,750 shares of the Company's Common Stock in October 1998. ITEM 10 EXECUTIVE COMPENSATION Information in response to this Item is incorporated herein by reference from the information set forth under the caption "Executive Compensation" in the Company's 1999 Proxy Statement. ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table contains certain information as of March 1, 1999, regarding the beneficial ownership of the Company's Common Stock by (i) each person known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director, (iii) each Named Executive Officer, and (iv) the executive officers and directors as a group, and as to the percentage of the outstanding shares held by them on such date. Any shares which are subject to an option or a warrant exercisable within 60 days are reflected in the following table and are deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by the option or warrant holder but are not deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by any other person. Unless otherwise noted, each person identified below possesses sole voting and investment power with respect to such shares. The business address of Messrs. Dahl, Gilbertson and Ms. McMahon is 5501 Excelsior Boulevard, Minneapolis, Minnesota 55416. 46 SHARES PERCENT BENEFICIALLY OF OWNED(1) CLASS ------------ ------- Heartland Advisors, Inc. .................. 1,185,900(3) 18.0% 790 North Milwaukee Street Milwaukee, Wisconsin 53202 Christopher T. Dahl ....................... 815,882(4) 11.8% Foothill Capital Corporation .............. 600,000(6) 8.4% 11111 Santa Monica Boulevard Los Angeles, California 90025 Richard W. Perkins ........................ 483,549(5) 7.1% 730 East Lake Street Wayzata, Minnesota 55391 Perkins Capital Management, Inc. .......... 371,567(2) 5.7% 730 East Lake Street Wayzata, Minnesota 55391 James G. Gilbertson ....................... 150,928(7) 2.3% Gary W. Landis (10) ....................... 85,082(8) 1.3% Lance W. Riley (11) ....................... 112,298(8) 1.7% Barbara A. McMahon ........................ 53,548(8) * Rick E. Smith (12) ........................ 50,719(8) * Michael R. Wigley ......................... 3,750(8) * William E. Cameron ........................ 3,750(8) * All Directors and Executive Officers as a Group (9 persons) ............... 1,759,506(9) 23.1% - --------------- * Less than 1% (1) Securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the SEC and, accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives of such person as well as other securities as to which the person has or shares voting or investment power or has the option or right to acquire Common Stock within 60 days. (2) Based upon statements filed with the SEC as of March 1, 1999, PCM is a registered investment adviser of which Richard W. Perkins, a director of the Company, is President. As set forth in Schedule 13G filed with the SEC on December 3, 1998, PCM has the sole right to sell such shares and has sole voting power over 68,151 of such shares. Mr. Perkins and PCM disclaim any beneficial interest in such shares. This excludes shares beneficially owned by Mr. Perkins. (3) Based upon statements filed with the SEC, such shares are held in investment advisory accounts. As a result, various persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, such shares. The interests of one such account, Heartland Value Fund, a series of Heartland Group, Inc., a registered investment company, relates to more than 5% of the class. This includes 431,900 shares over which Heartland Advisors, Inc. claims sole voting power, and 1,185,900 shares over which sole dispositive power is claimed. (4) Mr. Dahl has the sole right to sell and has sole voting power over 823,382 of such shares. Mr. Dahl has shared power to sell and shared voting power over 22,500 of such shares. Includes 355,396 shares purchasable upon the exercise of options and warrants. (5) Represents shares held by Mr. Perkins as trustee for various trusts of which he is sole trustee. Includes (i) 239,690 shares owned directly by Mr. Perkins, (ii) 6,769 shares beneficially owned by Mr. Perkins through Perkins Capital Management, Inc. Profit Sharing Plan and Trust and Perkins Foundation, (iii) 231,465 shares purchasable upon the exercise of options and warrants by Mr. Perkins and (iv) 5,625 shares purchasable upon the exercise of warrants by Perkins Capital Management, Inc. Profit Sharing Plan and Trust and Perkins Foundation. Mr. Perkins has the sole right to sell such shares and has sole voting power over 239,690 of such shares. Mr. Perkins' beneficial ownership excludes shares held for the accounts of clients of PCM. (6) Represents shares purchasable upon the exercise of warrants. (7) Includes 146,428 shares purchasable upon the exercise of options. (8) Represents shares purchasable upon the exercise of options or warrants. (9) Includes 1,048,061 shares purchasable upon exercise of options and warrants. (10) Mr. Landis's employment with the Company was terminated as of January 15,1999. (11) Mr. Riley's employment with the Company was terminated effective January 31, 1999. 47 (12) Mr. Smith's employment with the Company was terminated in December 1998. ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LEASES Until October 30, 1998, the studios and tower site of WWTC(AM) and KYCR(AM) were located in St. Louis Park, Minnesota. The studio facility consisted of approximately 12,000 square feet. The tower site included four 200-foot towers, a transmitter building and a storage garage on approximately 16 acres. The tower site was leased from Mr. Dahl at a total annual rent of approximately $114,000, and the studio site was leased from a partnership consisting of Messrs. Dahl and Perkins at an annual rent of approximately $132,000. In January 1996 through February 28, 1999, the Company entered into a five-year lease with 724 Associates, a partnership consisting of Messrs. Dahl, Perkins and Stephen L. Wallack, a shareholder of the Company, for 3,000 square feet of office space at 724 First Street North, Minneapolis, Minnesota, the former location of the executive offices of the Company. These facilities were leased at annual rental of $54,000. The executive offices were adjacent to the offices of CAC and Radio Management Corporation ("RMC"). CAC is owned and controlled by Messrs. Dahl, Perkins and Russell Cowles II, either directly or through trusts. RMC is owned by Messrs. Dahl, Perkins and Cowles. Mr. Cowles, a former director-elect of the Company, is a beneficiary and trustee of the John Cowles Family Trust, a shareholder of the Company. Under the terms of each of the leases, the Company is obligated to pay its proportionate share of repairs and maintenance. These arrangements were approved by the Related Party Transaction Committee of the Company's Board of Directors, which is comprised of disinterested directors, and the Company believes such arrangements were on terms at least as favorable as could have been obtained from unaffiliated third parties. On March 1, 1999, the Company assigned all of its rights and obligations under the lease to 5501 Building Partnership, an entity owned by Dahl and Perkins. MANAGEMENT SERVICES FROM AN AFFILIATE From July 1993 through July 1998 the Company received administrative, legal and accounting services from RMC, an entity owned by Messrs. Dahl, Perkins, and Cowles. Since August 1998, the Company has received such services from MMLLC, an entity owned by Messrs. Dahl and Perkins. MMLLC provides corporate, legal, accounting and financial services to the Company, CAC and Harmony. The Company pays a set monthly fee of $75,000 for the services listed above. Effective May 1, 1999, the Company's management fee will be lowered to $55,000 per month. All outside services directly attributable to the Company are billed directly to the Company. The Company paid RMC an aggregate of $525,000 for such services during the fiscal year ended December 31, 1998 and an aggregate of $900,000 for such services during the fiscal year ended December 31, 1997. The salary of Mr. Gilbertson was paid by RMC and the salary of Mr. Riley, former Secretary and General Counsel, was paid by RMC. The Company paid MMLLC an aggregate of $375,000 for such services during fiscal year ended December 31, 1998. The salaries of two of our officers, Mr. Gilbertson and Ms. Theis are paid by MMLLC. The services of the Chief Operating Officer/Chief Financial Officer and the General Counsel are also rendered by Mr. Gilbertson and Ms. Theis, respectively, on a shared basis with CAC and Harmony. Additionally, MMLLC received an additional payment of $370,000 in connection with the closing of the sale of RBL's to 1090, Salem and CRN. HARMONY-RELATED TRANSACTIONS In connection with the July 1997 acquisition by the Company of shares of common stock of Harmony, the Company borrowed an aggregate of $1.25 million from three parties: Rodney P. Burwell, a former director of the Company, Pyramid Partners, L.P., an entity of which 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 were evidenced by notes bearing interest at 10% per year, payable on July 25, 1998. Additionally, warrants to purchase an aggregate of 125,000 shares of Common Stock at $4.00 per share were issued to those lenders. In June 1998, the Company received extensions from Messrs. Perkins, Toles and Burwell in exchange for an option for either additional warrants or for an increase in the interest rate on the outstanding balance of the loan. Messrs. Toles and Perkins elected to receive additional warrants to purchase an aggregarate of 37,500 shares of the Company's common stock at a price of $3.06 per share for a term of 5 years, and Mr. Burwell elected to receive 48 an increase in the interest rate to 20%. On November 3, 1998, the Company repaid Messrs. Perkins, Toles and Burwell in full. Messrs. Dahl and Perkins are directors of Harmony, an entity of which the Company is the largest shareholder. In January 1998, the Company received proceeds of $611,000 and paid debt issuance costs of $39,000 through the issuance of a note payable to Harmony with a face amount of $650,000. The Company has repaid the entire note along with any related interest in full by June 1998. In April 1998, the Company assigned to Pyramid Partners, L.P.; Perkins & Partners, Inc., Profit Sharing Plan & Trust; and Christopher T. Dahl & State of New Prague Joint Account of all of its right to purchase 225,000 shares of common stock of Harmony at $2.50 per share from Glenn B. Laken, a shareholder of Harmony. In October 1998, the Company repurchased the 225,000 shares of common stock of Harmony at $2.75 from Pyramid Partners, L.P.; Perkins & Partners, Inc.; Profit Sharing Plan & Trust; and Christopher T. Dahl and State of New Prague Joint Account. From November 1998 to March 1999, the Company has advanced Harmony an aggregrate sum of approximately $3.1 million under notes receivable bearing interest at 14%. OTHER In connection with the sale of the assets to CRN, Christopher T. Dahl, Chairman of the Board of Directors, President and Chief Executive Officer of the Company entered into a three (3) year Consulting and Non-Circumvention Agreement with CRN, pursuant to which Mr. Dahl received payment of $750,000. Also, in connection with sale of the assets to Radio Unica, Mr. Dahl entered into a two (2) year Non-Competition Agreement with Radio Unica, pursuant to which Mr. Dahl received payment of $750,000.00. The fees provided for under these agreements are payable whether or not CRN or Radio Unica requests Mr. Dahl to perform any services hereunder. In August 1998, the Board of Directors of the Company authorized the repurchase of up to 400,000 shares pursuant to Exchange Act Rule 10b-18 whereby such repurchase was to be made through a broker which was to have made purchases of common stock in the open market in the Company's name and on its behalf. The Company subsequently determined that the broker did not follow the Company's instructions with repsect to the purchase of such shares and canceled its authorization for the repurchase of shares. The broker then advised the Company that it has accumulated 385,000 shares of common stock for its own account and presented Company with the opportunity to purchase such shares, but the Company was unable to effect such purchase because of delays in connection with the closing of the sale of assets to CRN and restrictions placed upon the Company by its lender. Two of the Company's directors, Christopher T. Dahl and Richard W. Perkins, with the consent of the Board, initiated negotiations with the broker to acquire the broker's ahares and financed the acquisition of 171,000 shares of the Company's common stock from the broker for their own account and assumed all market and other risks associated therewith. Upon the closing of the sale of the assets to CRN, the Company purchased 171,000 shares of the Company's common stock from Messrs. Dahl and Perkins at their actual cost, including financing expenses associated therewith and assumed the financing obligations of Messrs. Dahl and Perkins at Key Community Bank. In January 1999, the Company repaid in full along with interest its indebtedness with Key Community Bank. Lance W. Riley, former Secretary and General Counsel of the Company, had an of counsel relationship with Hessian & McKasy, P.A. ("HMPA"). HMPA is one of the law firms which represented the Company in connection with the ABC/Disney litigation. During 1997, the Company paid HMPA legal fees of $883,749 and disbursements of $106,480. During 1998, the Company paid HMPA legal fees of $419,299 and disbursements of 50,735 in connection with the ABC/Disney litigation. 49 ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Articles of Incorporation, as amended and restated (incorporated by reference to the Company's Form 10QSB for fiscal quarter ended September 30, 1998 and filed on November 16, 1998). 3.2 Amended and Restated Bylaws (incorporated by reference to the Company's Registration Statement on Form S-18 filed on December 5, 1991). 4.1 Rights Agreement between the Company and Norwest Bank Minnesota, National Association, as Rights Agent, dated as of February 19, 1998 (incorporated by reference to the Company's Registration Statement on Form 8-A filed on February 20, 1998). 10.1 1991 Incentive Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-18 filed on December 5, 1991). 10.2 1994 Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 filed on March 31, 1997, as amended by Definitive Schedule 14A (Proxy Statement) filed on July 9, 1998). 10.3 1994 Director Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994 filed on March 31, 1995, as amended by Form 10-KSB/A filed on October 4, 1995). 10.4 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated November 7, 1996 (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 filed on March 31, 1997). 10.5 Management Services Agreement between the Company and Media Management, L.L.C. (f/k/a Radio Management, L.L.C.) dated July 31, 1998 and effective August 1, 1998. 10.6 Registration Rights Agreement by and among the Company and Harmony Holdings, Inc., dated July 22, 1997 (incorporated by reference to the Company's Current Report on Form 8-K filed on August 1, 1997, relating to the Company acquiring a 27.4% beneficial interest in Harmony Holdings, Inc.). 10.7 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated September 25, 1997 (incorporated by reference to the Company's Current Report on Form 8-K/A filed on October 1, 1997, relating to the Company acquiring a 40.7% beneficial interest in Harmony Holdings, Inc.). 10.8 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated as of March 13, 1998.* 10.9 Amended and Restated Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated March 13, 1998.* 10.10 Purchase Agreement with Catholic Radio Network, LLC dated April 17, 1998 (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.11 First Amendment to the Purchase Agreement with Catholic Radio Network, LLC, dated September 29, 1998 (incorporated by reference to the Registrant's Current Report on Form 8-K filed on October 2, 1998). 10.12 Second Amendment to Purchase Agreement with Catholic Radio Network, LLC, dated October 26, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.13 Asset Purchase Agreement by and between the Company and Radio Unica Corp., dated October 27, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.14 First Amendment to the Asset Purchase Agreement by and between the Company and Radio Unica Corp., dated October 27, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.15 Amendment No. 1 to Securities Purchase Agreement by and between the Company, Talisman Capital Opportunity Fund Ltd., Dominion Capital Limited and Sovereign Partners, L.P dated October 22, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.16 Form of Common Stock Purchase Warrant issued by the Company to Talisman Capital Opportunity Fund Ltd. (incorporated by reference to the Registrant's Current Report on Form 8-K filed on July 6, 1998). 10.17 Form of Common Stock Purchase Warrant issed by the Company to Dominion Capital Limited (incorporated by reference to the Registrant's Current Report on Form 8-K filed on July 6, 1998). 10.18 Form of Common Stock Purchase Warrant issued by the Company to Sovereign Partners LP (incorporated by reference to the Registrant's Current Report on Form 8-K filed on July 6, 1998). 10.19 Promissory Note issued by Catholic Radio Network, LLC to the Company, dated October 30, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 50 10.20 Loan Agreement by and between the Company and CRN Broadcasting, LLC, dated October 30, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.21 Amendment No. 4 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of October 1, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.22 Asset Purchase Agreement by and between the Company and 1090 Investments, L.L.C. dated May 1, 1998 (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.23 Amendment No. 3 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of May 21, 1998, and effective as of April 17, 1998 (incorporated by reference to the Registrant's Form 8-K filed on June 5, 1998). 10.24 Securities Purchase Agreement by and between the Company, Talisman Capital Opportunity Fund, Ltd., Dominion Capital Limited and Sovereign Partners, LP dated June 25, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.25 Registration Rights Agreement by and between the Company, Talisman Capital Opportunity Fund, Ltd., Dominion Capital Limited and Sovereign Partners, LP dated June 25, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.26 Common Stock Purchase Warrant issued by the Company to Talisman Capital dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.27 Common Stock Purchase Warrant issued by the Company to Dominion Capital Limited dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.28 Common Stock Purchase Warrant issued by the Company to Sovereign Partners LP, dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.29 Guarantee by and between the Company and Heller Finanicial, Inc., dated July 30, 1998 (incorporated by reference to Registrant's Form 10QSB for quarter ended June 30, 1998 and filed August 13, 1998). 10.30 Asset Purchase Agreement by and between the Company and Salem Communications Corporation for the sale of two of the Company's radio stations (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.31 Guaranty by and between the Company and The Rector, Church-Wardens and Vestrymen of Trinity Church dated July 8, 1998. 10.32 Promissory Note issued by Harmony Holdings, Inc. to the Company dated November 13, 1998. 10.33 Promissory Note issued by Harmony Holdings, Inc. to the Company dated November 18, 1998. 10.34 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January 7, 1999. 10.35 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January 15, 1999. 10.36 Promissory Note issued by The End, Inc. to the Company dated January, 1999. 10.37 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January, 1999. 10.38 Promissory Note issued by Harmony Holdings, Inc. to the Company dated February 8, 1999. 10.39 Promissory Note issued by Harmony Holdings, Inc. to the Company dated February 18, 1999. 10.40 Amendment No. 5 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation. 10.41 Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of July 1, 1997 (incorporated by reference to the Company's Current Report on Form 8-K filed on August 1, 1997). 10.42 Amendment No. 1 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of September 24, 1997 (incorporated by reference to the Company's Current Report on Form 8-K/A filed on October 1, 1997). 10.43 Amendment No. 2 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of March 13, 1998.* 21.1 Subsidiaries of the Company. 23.1 Consent of BDO Seidman, LLP. 27.1 Financial Data Schedule. - ------------- * Previously filed. (b) Reports on Form 8-K (1) The Company's Current Report on Form 8-K filed on October 2, 1998, relating to (i) the ABC/Disney litigation, (ii) sale of the Company's assets to CRN; (iii) the issuance of the Los Angeles conditional use permit; (iv) redemption of the Series B Convertible Preferred Shares; and (v) the share repurchase program. (2) The Company's Current Report on Form 8-K filed on December 10, 1998, relating to the Company's ongoing corporate operations. 51 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota on March 31, 1999. CHILDREN'S BROADCASTING CORPORATION By /s/ Christopher T. Dahl ------------------------------------- Christopher T. Dahl President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date - --------- ----- ---- /s/ Christopher T. Dahl President, Chief Executive Officer March 31, 1999 - ------------------------- and Director Christopher T. Dahl (principal executive officer) /s/ James G. Gilbertson Chief Operating Officer March 31, 1999 - ------------------------- and Chief Financial Officer James G. Gilbertson (principal accounting and financial officer) /s/ Richard W. Perkins Director March 31, 1999 - ------------------------- Richard W. Perkins /s/ Michael R. Wigley Director March 31, 1999 - ------------------------- Michael R. Wigley /s/ William E. Cameron Director March 31, 1999 - ------------------------- William E. Cameron 52 EXHIBIT INDEX Exhibits 3.1 Articles of Incorporation, as amended and restated (incorporated by reference to the Company's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 3.2 Amended and Restated Bylaws (incorporated by reference to the Company's Registration Statement on Form S-18 filed on December 5, 1991). 4.1 Rights Agreement between the Company and Norwest Bank Minnesota, National Association, as Rights Agent, dated as of February 19, 1998 (incorporated by reference to the Company's Registration Statement on Form 8-A filed on February 20, 1998). 10.1 1991 Incentive Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-18 filed on December 5, 1991). 10.2 1994 Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 filed on March 31, 1997, as amended by Definitive Schedule 14A (Proxy Statement) filed on July 9, 1998). 10.3 1994 Director Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994 filed on March 31, 1995, as amended by Form 10-KSB/A filed on October 4, 1995). 10.4 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated November 7, 1996 (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 filed on March 31, 1997). 10.5 Management Services Agreement between the Company and Media Management, L.L.C. (f/k/a Radio Management, L.L.C.) dated July 31, 1998 and effective August 1, 1998. 10.6 Registration Rights Agreement by and among the Company and Harmony Holdings, Inc., dated July 22, 1997 (incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21534) filed on August 1, 1997, relating to the Company acquiring a 27.4% beneficial interest in Harmony Holdings, Inc.). 10.7 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated September 25, 1997 (incorporated by reference to the Company's Current Report on Form 8-K/A (File No. 0-21534) filed on October 1, 1997, relating to the Company acquiring a 40.7% beneficial interest in Harmony Holdings, Inc.). 10.8 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated as of March 13, 1998.* 10.9 Amended and Restated Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated March 13, 1998.* 10.10 Purchase Agreement with Catholic Radio Network, LLC dated April 17, 1998 (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.11 First Amendment to the Purchase Agreement with Catholic Radio Network, LLC, dated September 29, 1998 (incorporated by reference to the Registrant's Current Report on Form 8-K filed on October 2, 1998). 10.12 Second Amendment to Purchase Agreement with Catholic Radio Network, LLC, dated October 26, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.13 Asset Purchase Agreement by and between the Company and Radio Unica Corp., dated October 27, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.14 First Amendment to the Asset Purchase Agreement by and between the Company and Radio Unica Corp., dated October 27, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.15 Amendment No. 1 to Securities Purchase Agreement by and between the Company, Talisman Capital Opportunity Fund Ltd., Dominion Capital Limited and Sovereign Partners, L.P dated October 22, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.16 Form of Common Stock Purchase Warrant issued by the Company to Talisman Capital Opportunity Fund Ltd. (incorporated by reference to the Registrant's Current Report on Form 8-K filed on July 6, 1998). 53 10.17 Form of Common Stock Purchase Warrant issed by the Company to Dominion Capital Limited (incorporated by reference to the Registrant's Current Report on Form 8-K filed on July 6, 1998). 10.18 Form of Common Stock Purchase Warrant issued by the Company to Sovereign Partners LP (incorporated by reference to the Registrant's Current Report on Form 8-k filed on July 6, 1998). 10.19 Promissory Note issued by Catholic Radio Network, LLC to the Company, dated October 30, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.20 Loan Agreement by and between the Company and CRN Broadcasting, LLC, dated October 30, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.21 Amendment No. 4 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of October 1, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.22 Asset Purchase Agreement by and between the Company and 1090 Investments, L.L.C. dated May 1, 1998 (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.23 Amendment No. 3 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of May 21, 1998, and effective as of April 17, 1998 (incorporated by reference to the Registrant's Form 8-K filed on June 5, 1998). 10.24 Securities Purchase Agreement by and between the Company, Talisman Capital Opportunity Fund, Ltd., Dominion Capital Limited and Sovereign Partners, LP dated June 25, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.25 Registration Rights Agreement by and between the Company, Talisman Capital Opportunity Fund, Ltd., Dominion Capital Limited and Sovereign Partners, LP dated June 25, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.26 Common Stock Purchase Warrant issued by the Company to Talisman Capital dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.27 Common Stock Purchase Warrant issued by the Company to Dominion Capital Limited dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.28 Common Stock Purchase Warrant issued by the Company to Sovereign Partners LP, dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.29 Guarantee by and between the Company and Heller Finanicial, Inc., dated July 30, 1998 (incorporated by reference to Registrant's Form 10QSB for quarter ended June 30, 1998 and filed August 13, 1998). 10.30 Asset Purchase Agreement by and between the Company and Salem Communications Corporation for the sale of two of the Company's radio stations (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.31 Guaranty by and between the Company and The Rector, Church-Wardens and Vestrymen of Trinity Church dated July 8, 1998. 10.32 Promissory Note issued by Harmony Holdings, Inc. to the Company dated November 13, 1998. 10.33 Promissory Note issued by Harmony Holdings, Inc. to the Company dated November 18, 1998. 10.34 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January 7, 1999. 10.35 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January 15, 1999. 10.36 Promissory Note issued by The End, Inc. to the Company dated January, 1999. 10.37 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January, 1999. 10.38 Promissory Note issued by Harmony Holdings, Inc. to the Company dated February 8, 1999. 10.39 Promissory Note issued by Harmony Holdings, Inc. to the Company dated February 18, 1999. 10.40 Amendment No. 5 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation. 10.41 Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of July 1, 1997 (incorporated by reference to the Company's Current Report on Form 8-K filed on August 1, 1997). 10.42 Amendment No. 1 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of September 24, 1997 (incorporated by reference to the Company's Current Report on Form 8-K/A filed on October 1, 1997). 10.43 Amendment No. 2 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of March 13, 1998.* 21.1 Subsidiaries of the Company. 23.1 Consent of BDO Seidman, LLP. 27.1 Financial Data Schedule. - ------------- * Previously filed. 54 EX-10.5 2 SERVICE AGREEMENT EXHIBIT 10.5 SERVICE AGREEMENT THIS AGREEMENT made this 31st day of July, 1998, and effective August 1, 1998, by and between RADIO MANAGEMENT, L.L.C., a Minnesota limited liability company (hereinafter "RMLLC"), and CHILDREN'S BROADCASTING CORPORATION, a Minnesota corporation (hereinafter "CBC"). WHEREAS, RMLLC engages in the business of providing administrative, general and legal services for companies and CBC engages primarily in television commercial production; and WHEREAS, CBC intends to retain RMLLC to provide administrative, general and legal services for its television commercial production operations and in connection with the wrapping up of its radio station interests according to the terms and provisions set forth herein. NOW, THEREFORE, based upon the mutual premises contained herein, and other good and valuable consideration, the parties hereby agree as follows: 1. SERVICES. During the term hereof, RMLLC shall perform general and administrative services for CBC, including, but not limited to, payroll services, general accounting services, general legal services and such other services as the parties may mutually agree to from time to time. 2. COMPENSATION. In consideration for the services performed by RMLLC hereunder, CBC shall pay RMLLC Seventy-five Thousand and no/100 Dollars ($75,000.00) per month payable within thirty (30) days from the end of each calendar month. The compensation paid to RMLLC hereunder shall not include any fees or expenses for accounting, legal or other services performed for CBC by third parties. 3. QUARTERLY REVIEW. The parties agree that they will review the services provided by RMLLC hereunder and the compensation set forth herein at the end of each calendar quarter during the term hereof, and at such time the services and compensation may be adjusted upon the mutual agreement of the parties. 4. EXPENSES. In addition to the compensation set forth in Section 2 above, CBC shall pay all reasonable and necessary expenses incurred by RMLLC in connection with the services performed hereunder, including, but not limited to, travel and lodging expenses and any other expenses directly attributable to the services performed by RMLLC hereunder. RMLLC shall bill CBC on a monthly basis for such expenses and CBC shall pay the same within thirty (30) days from the date CBC receives any such invoice. 5. INDEPENDENT CONTRACTOR. The parties hereby acknowledge that (i) RMLLC, while preforming services hereunder, at all times acting as an independent contractor and not as an employee of CBC; (ii) the employees of RMLLC shall at no time be considered employees of CBC in connection with the services performed hereunder; and (iii) RMLLC shall be solely responsible for all federal, state and local income taxes, employment taxes, self-employment taxes, workers' compensation insurance premiums and any and all other similar taxes or payments RMLLC is required to make as a result of the services RMLLC performs hereunder. CBC shall approve the engagement of any officer of RMLLC who shall pursuant to such engagement also serve as an officer of CBC, and CBC shall affirm and agree to the terms of such engagement. 6. LIMITATIONS ON LIABILITY. CBC hereby agrees that in no event shall RMLLC be liable to CBC for any indirect, special or consequential damages or lost profits arising out of or in any way related to this Agreement or the performance of services hereunder or any breach thereof and that RMLLC's liability to CBC hereunder, if any, shall in no event exceed the total compensation paid to RMLLC hereunder. 7. TERM. This Agreement shall remain in effect for a period of one (1) year from the date hereof; provided, however, the term of this Agreement shall automatically renew for successive one (1) year periods unless terminated by either party, by written notice delivered to the other party, within sixty (60) days from the end of the then current term. 8. TERMINATION. Notwithstanding Section 7 above, this Agreement shall terminate upon the occurrence of any of the following events: a. by RMLLC if CBC is more than sixty (60) days delinquent in its payment of compensation or expenses pursuant to the Sections 2 or 3 above; b. by either party if the other party is in default under any provision hereunder and such default is not cured within sixty (60) days after notice thereof is given to the defaulting party; c. by either party if the other party becomes insolvent or seeks protection, voluntarily or involuntarily, under any bankruptcy law; or d. upon the mutual agreement of both parties. A termination of this Agreement pursuant to this Section 8 or Section 7 above shall not relieve CBC of its obligation to pay RMLLC compensation or expenses for any services rendered or expenses incurred prior to the date of termination. 9. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. RADIO MANAGEMENT, L.L.C. BY: /S/ JAMES G. GILBERTSON ----------------------------------- ITS: CHIEF OPERATING OFFICER ----------------------------------- CHILDREN'S BROADCASTING CORPORATION BY: /S/ PATRICK D. GRINDE ----------------------------------- ITS: CHIEF FINANCIAL OFFICER ----------------------------------- EX-10.31 3 LEASE GUARANTY AGREEMENT EXHIBIT 10.31 LEASE GUARANTY AGREEMENT FOR VALUE RECEIVED and in consideration for, and as an inducement to THE RECTOR, CHURCHWARDENS AND VESTRYMEN OF TRINITY CHURCH IN THE CITY OF NEW YORK (hereinafter referred to as "Lessor"), to make and enter into that certain lease (the "Lease") dated as of the 8th day of July, 1998 with The End, Inc., a California corporation (hereinafter referred to as "Lessee"), with respect to certain space located in the building known as 75 Varick Street, New York, New York, the undersigned guarantor, THE CHILDREN'S BROADCASTING CORPORATION, having its address at 724 First Street North, Minneapolis, Minnesota 55401 (hereinafter referred to as "Guarantor") does hereby unconditionally guarantee the full and prompt performance and observance of all of the payments, condiditons, covenants and agreements therein provided to be paid, performed and observed by Lessee, its successors and assigns, and agrees to pay all of Lessor's expenses, including reasonable attorney fees, incurrred in enforcing said obligations, or incurred in enforcing this guaranty. Guarantor further agrees that its liability under this guaranty shall be continuing, absolute, uncondtional and primary and that this guaranty shall remain in full force and effect until Lessee shall have fully and satisfactorily discharged all of its obligations to Lessor under the Lease and further that Lessor may, at Lessor's option, proceed against Guarantor with or without having commenced any action against or having obtained any judgment against Lessee, any assignee of Lessee or any other guarantor. Each and every default by the Lessee under the terms of the Lease shall give rise to a separate cause of action hereunder, and separate suits may be brought hereunder as each cause of action arises. This guaranty and the liability hereunder shall in no wise be affected by the creating of or any compromise, settlement, release, renewal, extension, indulgence, change in or modificaiton of any of the obligations and liabilitites of the Lessee under the Lease (and the Lessor is hereby expressly authorized by Guarantor to make the same from time to time without notice to anyone) or by any redelivery, repossession, surrender or destruction of the leased premises in whole or in part, or by any failure, neglect or omission on the part of the Lessor to realize upon any obligations or liabilities of the Lessee. In order to hold Guarantor liable hereunder, there shall be no obligation on the part of the Lessor at any time to resort for payment to the Lessee or to any other persons or corporations, their properties or assets or to any security, property or other rights or remedies whatsoever and the Lessor shall have the right to enforce this guaranty irrespective of whether or not proceedings or steps are pending, seeking resort to or realization upon or from any of the following: All diligence in the collection of rentals by the Lessor from the Lessee, and all notices of any default by the Lessee under the Lease and any and all notices of acceptance of this guaranty or of reliance by Lessor upon this guaranty are hereby expressly waived by Guarantor. The Lease shall be conclusively presumed to have been created and contracted in reliance upon this guaranty. The payment by Guarantor of any amount pursuant to this guaranty shall not in any wise entitle Guarantor (whether by way of subrogation or otherwise) to any right of possession of the leased property or any other right, title or interest under the Lease. No act of commission or omission of any kind or at any time upon the part of the Lessor in respect of any matter whatsoever shall in any way affect or impair this guaranty. Guarantor expressly agrees that its obligations under this guaranty shall (1) be absolute and unconditional irrespective of (a) any insolvency, bankruptcy or reorganization, or dissolution of Lessee, (b) the validity, genuiness, regularity or enforceability of the obligations of Lessee contained in the Lease, (c) the absence of any action to enforce such obligations, (d) any waiver or consent with respect to any of the provisions of the Agreement of Lease, (e) any amendment, modification, consolidation, extension or renewal of the Lease, whether or not consented to be Guarantor, (f) or any other circumstance which might otherwise constitute a legal or equitable discharege or defense of a surety or guarantor; and (2) constitute an absolute, unconditional, present and continuing guaranty of performance and payment and not of collection and not be in any way conditioned or contingent upon any attempt to enforce performance by, or to collect from Lessee or any other condition or contingency. Guarantor expressly waives any and all presentment, demand, protest and notice whatsoever, and (to the extent it may lawfully do so) the benefit of any provision of law which is or might be in conflict with the terms of this guaranty. The obligations of Guarantor shall not be affected by any action taken by Lessor in the exercise of any right or power conferred by law or otherwise, or by any failure or omission on the part of Lessor to enforce any rights given by law or conferred thereby, or to take any other action thereunder, or by any waiver of any such right or other action by Lessor or by any action of Lessor in granting indulgence or extension to Lessee, or by any waiver by Lessor of any notice under the provisions of the Lease, or by any fialure to give notice required or permitted thereunder. No proceedings taken for the enforcement of the Lease shall affect the obligations of Guarantor hereunder; nor shall the giving, taking or enforcement of any other additional security, collateral, or guaranty for the performance of Lessee under the Lease operate to prejudice, waiver, or affect the security of this guaranty of any rights, powers, or remedies hereunder; nor shall Lessor be required first to look to, enforce or exhaust such other or additional security, collateral, or guaranty. To the extent that it may be lawful to do so, Guarantor expressly agrees that it will not at any time insist upon, or plead, or in any manner whatsover claim or take the benefit or advantage of, any appraisement, valuation, stay, extension or redemption laws, now or at any time hereafter in force, which may delay, prevent or otherwise affect Guarantor's payment and performance under this guaranty, and Guarantor hereby expressly waives all benefits or advantage of such laws and covenants that it will not hinder, delay or impede the execution of any power granted Lessor hereunder, but will suffer and permite the execution of every such power as though no such laws were in force. Guarantor expressly agrees that no right, power or remedy in this guaranty or in the Lease conferred upon Lessor is intended to be exclusive of any other right, power or remedy, and each and every right, power and remedy shall, to the extent permitted by law, be cumulative and shall be in addition to every other remedy given under this guaranty or the Agreement of Lease, or hereafter existing at law or in equity, and may be exercised from time to time as often as deemed expendient, separately or concurrently. Guarantor expressly agrees that if Lessee shall be (a) merged with or into or consolidated or amalgamated with anothor person, firm, corporation or other entity, or (b) dissolved voluntarily or involuntarily, Guarantor's obligation of guaranty hereunder shall continue in full force and effect and apply to the performance by all successors and assigns of the obligations of Lessee under the Lease with the same force and effect as such guaranty as set forth above with respect to Lessee, unless in connection with such sale, assignment, transfer, merger, consolidation, amalgamation or dissolution, Guarantor has been expresly released in writing from its guaranty hereunder by Lessor. Guarantor expressly agrees that the obligations covered by this guaranty include all obligations and liabilities of Lessee to Lessor under the Lease now exising or hereafter coming into existence, and any renewals or extensions, in whole or in part, of any of said obligations and liabilities heretofore described, together with all damages, losses, costs, interest, charges, expenses (including attorneys' fees), and liabilites of every kind, nature and description, suffered or incurred by Lessor arising in ay manner out of, or in any way connected with, or growing out of said obligations and liabilities under the Lease to Lessor. The Lessor may without any notice whatsoever to anyone, sell, assign or transfer all of its right, title, and interest as Lessor under said Agreement of Lease or all of its right, title and interest in and to the rents and other sums at any time due and and to become due thereunder, and in such event each and every immediate and successive assignee or transfer of the right, title and interest of the Lessor shall have the right to enforce this guaranty by suit or otherwise for the benefit of such assignee or transferee as fully as if such assignee or transferee were herein by name specifically given such right, power and benefit. This guaranty and every part thereof shall be binding upon Guarantor and its successors and assigns and shall inure to the benefit of the Lessor and its successors and assigns. Any notice to, or demand on, Guarantor elected to be given or made by Lessor shall be deemed effective, if not first otherwise made or given when forwarded by mail, telegraph, cable, telephone or otherwise to the last address or phone number of Guarantor appearing on the books of Lessor with the same effect as if the same was actually delivered to, and received by, Guarator in person. Guarantor waives a trial by jury and the right to interpose counterclaims or set-offs of any kind and description in any litigation arising out of or relating to said obligations or said liabilities or the matters contained in this guaranty. Lessor shall not be any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder and no waiver shall be valid unless in writing, signed by Lessor and then only to the extent therein set forth. The waiver by Lessor of any right or remedy hereunder on any occasion shall not be construed as a bar to any right or remedy which Lessor would otherwise have had on any future occasion. No executory agreement shall be effective to change or modigy or to discharge in whole or in part this guaranty unless such executory agreement is in writing and signed by Lessor. Guarantor shall be bound and liable hereunder. In the event any clause or provisions of this guaranty shall be invalid or void for any reason, such invalid or void clause or provisions shall not affect the whole of this intrument and the balance of the provisions thereof shall remain in full force and effect, subject to the terms of the Lease. Whenever the context hereof shall require, the masculine pronoun includes the feminine and neuter and the singular number includes the plural and vice verse. This agreement shall be construed in accordance with the laws of the State of New York. This guaranty may not be amended orally and may be amended in writing only if Lessor shall sign such instrument as a party thereto. IN WITNESS WHEREOF, the undersigned has hereunto executed this agreement this 8th day of July, 1998. THE CHILDREN'S BROADCASTING CORPORATION By /s/ Patrick D. Grinde Name: Patrick D. Grinde Title: Chief Financial Officer EX-10.32 4 PROMISSORY NOTE EXHIBIT 10.32 PROMISSORY NOTE $ 75,000.00 MINNEAPOLIS, MINNESOTA NOVEMBER 13, 1998 FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to pay to the order of CHILDREN'S BROADCASTING CORPORATION the sum of Seventy Five Thousand and no/100 Dollars ($75,000.00) with interest on the unpaid balance of this Note which shall accrue at the rate of 14% per annum from the date hereof through the due date, and shall accrue on the basis of actual days based on a 365-day year. The undersigned reserves the right to prepay all or any part of the principal of this Note at any time without penalty. Notwithstanding any provision to the contrary contained in this Note, the undersigned shall not be required to pay, and the holder of this Note (the "Holder") shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Note, then in such event: 1) the provisions of this paragraph shall govern and control; 2) the undersigned shall not be obligated to pay any Excess Interest; 3) and Excess Interest that the Holder may have received hereunder shall be, at the Holder's option, (a) applied as a credit against the outstanding principal balance of this Note or the accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; 4) the interest rate provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Note shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and 5) the undersigned shall not have any action against the Holder for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on this Note is calculated at the Maximum Rate rather than the applicable rate under this Note, and thereafter the Maximum Rate exceeds the applicable rate, the rate of interest payable on this Note shall become the Maximum Rate until the Holder shall have received the amount of interest which the Holder would have received during such period on this Note had the rate of interest not been limited to the Maximum Rate during such period. The undersigned hereby acknowledges that this Note is entered into in the State of Minnesota and is governed by Minnesota law. The undersigned further consents to the jurisdiction and venue of the courts of the County of Hennepin, State of Minnesota, for any and all disputes which may arise under this Note. The makers, endorsers and guarantors hereof waive presentment for payment, notice of non-payment, protest and notice of protest, and consent that the time of payment may be extended without notice. If any part of the principal or interest of this note is not paid when due, then the whole principal sum shall immediately become due and payable at the option of the holder without notice. And the maker and all other parties liable hereon agree to pay the cost of collection of this note, including a reasonable attorney fee. HARMONY HOLDINGS, INC. BY: /s/ James G. Gilbertson ----------------------- ITS: Chief Operating Officer ----------------------- EX-10.33 5 PROMISSORY NOTE EXHIBIT 10.33 PROMISSORY NOTE $ 600,000.00 MINNEAPOLIS, MINNESOTA NOVEMBER 18, 1998 FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to pay to the order of CHILDREN'S BROADCASTING CORPORATION the sum of Six Hundred Thousand and no/100 Dollars ($600,000.00) with interest on the unpaid balance of this Note which shall accrue at the rate of 14% per annum from the date hereof through the due date, and shall accrue on the basis of actual days based on a 365-day year. The undersigned reserves the right to prepay all or any part of the principal of this Note at any time without penalty. Notwithstanding any provision to the contrary contained in this Note, the undersigned shall not be required to pay, and the holder of this Note (the "Holder") shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Note, then in such event: 1) the provisions of this paragraph shall govern and control; 2) the undersigned shall not be obligated to pay any Excess Interest; 3) and Excess Interest that the Holder may have received hereunder shall be, at the Holder's option, (a) applied as a credit against the outstanding principal balance of this Note or the accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; 4) the interest rate provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Note shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and 5) the undersigned shall not have any action against the Holder for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on this Note is calculated at the Maximum Rate rather than the applicable rate under this Note, and thereafter the Maximum Rate exceeds the applicable rate, the rate of interest payable on this Note shall become the Maximum Rate until the Holder shall have received the amount of interest which the Holder would have received during such period on this Note had the rate of interest not been limited to the Maximum Rate during such period. The undersigned hereby acknowledges that this Note is entered into in the State of Minnesota and is governed by Minnesota law. The undersigned further consents to the jurisdiction and venue of the courts of the County of Hennepin, State of Minnesota, for any and all disputes which may arise under this Note. The makers, endorsers and guarantors hereof waive presentment for payment, notice of non-payment, protest and notice of protest, and consent that the time of payment may be extended without notice. If any part of the principal or interest of this note is not paid when due, then the whole principal sum shall immediately become due and payable at the option of the holder without notice. And the maker and all other parties liable hereon agree to pay the cost of collection of this note, including a reasonable attorney fee. HARMONY HOLDINGS, INC. BY: /s/ James G. Gilbertson ----------------------- ITS: Chief Operating Officer ----------------------- EX-10.34 6 PROMISSORY NOTE EXHIBIT 10.34 PROMISSORY NOTE $ 75,000.00 MINNEAPOLIS, MINNESOTA JANUARY 7, 1999 FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to pay to the order of CHILDREN'S BROADCASTING CORPORATION the sum of Seventy Five Thousand and no/100 Dollars ($75,000.00) with interest on the unpaid balance of this Note which shall accrue at the rate of 14% per annum from the date hereof through the due date, and shall accrue on the basis of actual days based on a 365-day year. The undersigned reserves the right to prepay all or any part of the principal of this Note at any time without penalty. Notwithstanding any provision to the contrary contained in this Note, the undersigned shall not be required to pay, and the holder of this Note (the "Holder") shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Note, then in such event: 1) the provisions of this paragraph shall govern and control; 2) the undersigned shall not be obligated to pay any Excess Interest; 3) and Excess Interest that the Holder may have received hereunder shall be, at the Holder's option, (a) applied as a credit against the outstanding principal balance of this Note or the accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; 4) the interest rate provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Note shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and 5) the undersigned shall not have any action against the Holder for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on this Note is calculated at the Maximum Rate rather than the applicable rate under this Note, and thereafter the Maximum Rate exceeds the applicable rate, the rate of interest payable on this Note shall become the Maximum Rate until the Holder shall have received the amount of interest which the Holder would have received during such period on this Note had the rate of interest not been limited to the Maximum Rate during such period. The undersigned hereby acknowledges that this Note is entered into in the State of Minnesota and is governed by Minnesota law. The undersigned further consents to the jurisdiction and venue of the courts of the County of Hennepin, State of Minnesota, for any and all disputes which may arise under this Note. The makers, endorsers and guarantors hereof waive presentment for payment, notice of non-payment, protest and notice of protest, and consent that the time of payment may be extended without notice. If any part of the principal or interest of this note is not paid when due, then the whole principal sum shall immediately become due and payable at the option of the holder without notice. And the maker and all other parties liable hereon agree to pay the cost of collection of this note, including a reasonable attorney fee. HARMONY HOLDINGS, INC. BY: /s/ James G. Gilbertson ----------------------- ITS: Chief Operating Officer ----------------------- EX-10.35 7 PROMISSORY NOTE EXHIBIT 10.35 PROMISSORY NOTE $ 1,100,000.00 MINNEAPOLIS, MINNESOTA JANUARY 15, 1999 FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to pay to the order of CHILDREN'S BROADCASTING CORPORATION the sum of One Million One Hundred Thousand and no/100 Dollars ($1,100,000) with interest on the unpaid balance of this Note which shall accrue at the rate of 14% per annum from the date hereof through the due date, and shall accrue on the basis of actual days based on a 365-day year. The undersigned reserves the right to prepay all or any part of the principal of this Note at any time without penalty. Notwithstanding any provision to the contrary contained in this Note, the undersigned shall not be required to pay, and the holder of this Note (the "Holder") shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Note, then in such event: 1) the provisions of this paragraph shall govern and control; 2) the undersigned shall not be obligated to pay any Excess Interest; 3) and Excess Interest that the Holder may have received hereunder shall be, at the Holder's option, (a) applied as a credit against the outstanding principal balance of this Note or the accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; 4) the interest rate provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Note shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and 5) the undersigned shall not have any action against the Holder for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on this Note is calculated at the Maximum Rate rather than the applicable rate under this Note, and thereafter the Maximum Rate exceeds the applicable rate, the rate of interest payable on this Note shall become the Maximum Rate until the Holder shall have received the amount of interest which the Holder would have received during such period on this Note had the rate of interest not been limited to the Maximum Rate during such period. The undersigned hereby acknowledges that this Note is entered into in the State of Minnesota and is governed by Minnesota law. The undersigned further consents to the jurisdiction and venue of the courts of the County of Hennepin, State of Minnesota, for any and all disputes which may arise under this Note. The makers, endorsers and guarantors hereof waive presentment for payment, notice of non-payment, protest and notice of protest, and consent that the time of payment may be extended without notice. If any part of the principal or interest of this note is not paid when due, then the whole principal sum shall immediately become due and payable at the option of the holder without notice. And the maker and all other parties liable hereon agree to pay the cost of collection of this note, including a reasonable attorney fee. HARMONY HOLDINGS, INC. BY: /s/ James G. Gilbertson ----------------------- ITS: Chief Operating Officer ----------------------- EX-10.36 8 PROMISSORY NOTE EXHIBIT 10.36 PROMISSORY NOTE $ 600,000.00 MINNEAPOLIS, MINNESOTA JANUARY 27, 1999 FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to pay to the order of CHILDREN'S BROADCASTING CORPORATION the sum of Six Hundred Thousand and no/100 Dollars ($600,000.00) with interest on the unpaid balance of this Note which shall accrue at the rate of 14% per annum from the date hereof through the due date, and shall accrue on the basis of actual days based on a 365-day year. The undersigned reserves the right to prepay all or any part of the principal of this Note at any time without penalty. Notwithstanding any provision to the contrary contained in this Note, the undersigned shall not be required to pay, and the holder of this Note (the "Holder") shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Note, then in such event: 1) the provisions of this paragraph shall govern and control; 2) the undersigned shall not be obligated to pay any Excess Interest; 3) and Excess Interest that the Holder may have received hereunder shall be, at the Holder's option, (a) applied as a credit against the outstanding principal balance of this Note or the accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; 4) the interest rate provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Note shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and 5) the undersigned shall not have any action against the Holder for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on this Note is calculated at the Maximum Rate rather than the applicable rate under this Note, and thereafter the Maximum Rate exceeds the applicable rate, the rate of interest payable on this Note shall become the Maximum Rate until the Holder shall have received the amount of interest which the Holder would have received during such period on this Note had the rate of interest not been limited to the Maximum Rate during such period. The undersigned hereby acknowledges that this Note is entered into in the State of Minnesota and is governed by Minnesota law. The undersigned further consents to the jurisdiction and venue of the courts of the County of Hennepin, State of Minnesota, for any and all disputes which may arise under this Note. The makers, endorsers and guarantors hereof waive presentment for payment, notice of non-payment, protest and notice of protest, and consent that the time of payment may be extended without notice. If any part of the principal or interest of this note is not paid when due, then the whole principal sum shall immediately become due and payable at the option of the holder without notice. And the maker and all other parties liable hereon agree to pay the cost of collection of this note, including a reasonable attorney fee. THE END, INC. BY: /s/ James G. Gilbertson ----------------------- ITS: Chief Operating Officer ----------------------- EX-10.37 9 PROMISSORY NOTE EXHIBIT 10.37 PROMISSORY NOTE $ 300,000.00 MINNEAPOLIS, MINNESOTA JANUARY 27, 1999 FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to pay to the order of CHILDREN'S BROADCASTING CORPORATION the sum of Three Hundred Thousand and no/100 Dollars ($300,000.00) with interest on the unpaid balance of this Note which shall accrue at the rate of 14% per annum from the date hereof through the due date, and shall accrue on the basis of actual days based on a 365-day year. The undersigned reserves the right to prepay all or any part of the principal of this Note at any time without penalty. Notwithstanding any provision to the contrary contained in this Note, the undersigned shall not be required to pay, and the holder of this Note (the "Holder") shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Note, then in such event: 1) the provisions of this paragraph shall govern and control; 2) the undersigned shall not be obligated to pay any Excess Interest; 3) and Excess Interest that the Holder may have received hereunder shall be, at the Holder's option, (a) applied as a credit against the outstanding principal balance of this Note or the accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; 4) the interest rate provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Note shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and 5) the undersigned shall not have any action against the Holder for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on this Note is calculated at the Maximum Rate rather than the applicable rate under this Note, and thereafter the Maximum Rate exceeds the applicable rate, the rate of interest payable on this Note shall become the Maximum Rate until the Holder shall have received the amount of interest which the Holder would have received during such period on this Note had the rate of interest not been limited to the Maximum Rate during such period. The undersigned hereby acknowledges that this Note is entered into in the State of Minnesota and is governed by Minnesota law. The undersigned further consents to the jurisdiction and venue of the courts of the County of Hennepin, State of Minnesota, for any and all disputes which may arise under this Note. The makers, endorsers and guarantors hereof waive presentment for payment, notice of non-payment, protest and notice of protest, and consent that the time of payment may be extended without notice. If any part of the principal or interest of this note is not paid when due, then the whole principal sum shall immediately become due and payable at the option of the holder without notice. And the maker and all other parties liable hereon agree to pay the cost of collection of this note, including a reasonable attorney fee. HARMONY HOLDINGS, INC. BY: /s/ James G. Gilbertson ----------------------- ITS: Chief Operating Officer ----------------------- EX-10.38 10 PROMISSORY NOTE EXHIBIT 10.38 PROMISSORY NOTE $ 150,000.00 MINNEAPOLIS, MINNESOTA FEBRUARY 8, 1999 FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to pay to the order of CHILDREN'S BROADCASTING CORPORATION the sum of One Hundred Fifty Thousand and no/100 Dollars ($150,000.00) with interest on the unpaid balance of this Note which shall accrue at the rate of 14% per annum from the date hereof through the due date, and shall accrue on the basis of actual days based on a 365-day year. The undersigned reserves the right to prepay all or any part of the principal of this Note at any time without penalty. Notwithstanding any provision to the contrary contained in this Note, the undersigned shall not be required to pay, and the holder of this Note (the "Holder") shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Note, then in such event: 1) the provisions of this paragraph shall govern and control; 2) the undersigned shall not be obligated to pay any Excess Interest; 3) and Excess Interest that the Holder may have received hereunder shall be, at the Holder's option, (a) applied as a credit against the outstanding principal balance of this Note or the accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; 4) the interest rate provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Note shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and 5) the undersigned shall not have any action against the Holder for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on this Note is calculated at the Maximum Rate rather than the applicable rate under this Note, and thereafter the Maximum Rate exceeds the applicable rate, the rate of interest payable on this Note shall become the Maximum Rate until the Holder shall have received the amount of interest which the Holder would have received during such period on this Note had the rate of interest not been limited to the Maximum Rate during such period. The undersigned hereby acknowledges that this Note is entered into in the State of Minnesota and is governed by Minnesota law. The undersigned further consents to the jurisdiction and venue of the courts of the County of Hennepin, State of Minnesota, for any and all disputes which may arise under this Note. The makers, endorsers and guarantors hereof waive presentment for payment, notice of non-payment, protest and notice of protest, and consent that the time of payment may be extended without notice. If any part of the principal or interest of this note is not paid when due, then the whole principal sum shall immediately become due and payable at the option of the holder without notice. And the maker and all other parties liable hereon agree to pay the cost of collection of this note, including a reasonable attorney fee. HARMONY HOLDINGS, INC. BY: /s/ James G. Gilbertson ----------------------- ITS: Chief Operating Officer ----------------------- EX-10.39 11 PROMISSORY NOTE EXHIBIT 10.39 PROMISSORY NOTE $ 150,000.00 MINNEAPOLIS, MINNESOTA FEBRUARY 18, 1999 FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to pay to the order of CHILDREN'S BROADCASTING CORPORATION the sum of One Hundred Fifty Thousand and no/100 Dollars ($150,000.00) with interest on the unpaid balance of this Note which shall accrue at the rate of 14% per annum from the date hereof through the due date, and shall accrue on the basis of actual days based on a 365-day year. The undersigned reserves the right to prepay all or any part of the principal of this Note at any time without penalty. Notwithstanding any provision to the contrary contained in this Note, the undersigned shall not be required to pay, and the holder of this Note (the "Holder") shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Note, then in such event: 1) the provisions of this paragraph shall govern and control; 2) the undersigned shall not be obligated to pay any Excess Interest; 3) and Excess Interest that the Holder may have received hereunder shall be, at the Holder's option, (a) applied as a credit against the outstanding principal balance of this Note or the accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; 4) the interest rate provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Note shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and 5) the undersigned shall not have any action against the Holder for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on this Note is calculated at the Maximum Rate rather than the applicable rate under this Note, and thereafter the Maximum Rate exceeds the applicable rate, the rate of interest payable on this Note shall become the Maximum Rate until the Holder shall have received the amount of interest which the Holder would have received during such period on this Note had the rate of interest not been limited to the Maximum Rate during such period. The undersigned hereby acknowledges that this Note is entered into in the State of Minnesota and is governed by Minnesota law. The undersigned further consents to the jurisdiction and venue of the courts of the County of Hennepin, State of Minnesota, for any and all disputes which may arise under this Note. The makers, endorsers and guarantors hereof waive presentment for payment, notice of non-payment, protest and notice of protest, and consent that the time of payment may be extended without notice. If any part of the principal or interest of this note is not paid when due, then the whole principal sum shall immediately become due and payable at the option of the holder without notice. And the maker and all other parties liable hereon agree to pay the cost of collection of this note, including a reasonable attorney fee. HARMONY HOLDINGS, INC. BY: /s/ James G. Gilbertson ----------------------- ITS: Chief Operating Officer ----------------------- EX-10.40 12 AMENDMENT NO 5 TO RESTATED LOAN/SECURITY AGREEMENT EXHIBIT 10.40 AMENDMENT NUMBER FIVE TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This AMENDMENT NUMBER FIVE TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Amendment"), is entered into as of October 30, 1998, between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), with a place of business at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333, and CHILDREN'S BROADCASTING CORPORATION, a Minnesota corporation ("Borrower"), with its chief executive office located at 724 First Street, Fourth Floor, Minneapolis, Minnesota 55401. WHEREAS, Borrower and Foothill are parties to that certain Amended and Restated Loan and Security Agreement, dated as of July 1, 1997, as amended by that certain Amendment Number One to Amended and Restated Loan and Security Agreement dated as of September 24, 1997, by that certain Amendment Number Two to Amended and Restated Loan and Security Agreement dated as of March 13, 1998, by that certain Amendment Number Three to Amended and Restated Loan and Security Agreement dated as of May 21, 1998, and by that certain Amendment Number Four to Amended and Restated Loan and Security Agreement dated as of October 1, 1998 (as so amended, the "Loan Agreement"); WHEREAS, Borrower has requested that Foothill (a) revise the scheduled repayment of the Term Loans, (b) release to Borrower Warrants currently held by Foothill for the purchase of up to 50,000 shares of the common stock of Borrower at a strike price of $4.40 per share, and (c) provide for the acknowledgment of the payment to Foothill of the amendment fee due to Foothill in connection with this Amendment; WHEREAS, Borrower and Foothill desire to amend the Loan Agreement as provided in this Amendment, it being understood that no repayment of the obligations under the Loan Agreement is being effected hereby, but merely an amendment and restatement in accordance with the terms hereof. All capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Loan Agreement. NOW THEREFORE, in consideration of the mutual promises contained herein, Foothill and Borrower hereby agree as follows: 1. Section 1.1 of the Loan Agreement hereby is amended by (a) deleting the following defined terms in their entireties: "Amendment Date," "Loan Documents," and "Term Loan Commitment", and (b) inserting following defined terms in alphabetical order: "Amendment Date" means the date on which all conditions precedent to the Fifth Amendment are satisfied. "Loan Documents" means this Agreement as amended by the Fifth Amendment, and as otherwise amended, supplemented, modified, or revised from time to time prior to the Amendment Date, the Disbursement Letter, the Concentration Account Agreement, the Mortgages, the Collateral Assignments of Key Leases, the Collateral Assignments of Tower Leases, the Guaranty, the Guarantor Security Agreement, the Guarantor Stock Pledge Agreement, the Control Agreements, the Stock Pledge Agreement, the Trademark Security Agreement, (if and when executed and delivered pursuant hereto) the Copyright Security Agreement, any note or notes executed by Borrower and payable to Foothill, and any other agreement entered into, now or in the future, in connection with this Agreement. 2. Section 1.1 of the Loan Agreement hereby is amended by inserting following additional defined terms in alphabetical order. "Fifth Amendment" means Amendment Number Five to Loan and Security Agreement, dated as of October 30, 1998, entered into between Borrower and Foothill. 3. Section 2.2(b) of the Loan Agreement is hereby amended and restated in its entirety as follows: (b) The outstanding principal balance and all accrued and unpaid interest under the Term Loan shall be due and payable upon the termination of this Agreement, whether by its terms, by prepayment, by acceleration, or otherwise. All amounts outstanding under the Term Loan shall constitute Obligations. Unless sooner terminated as provided herein, Borrower shall repay the Term Loan in quarterly installments and such installments shall be due and payable on the following dates in the following amounts: Date Installment ------------------------------------- 9/30/98 -0- 10/31/98 -0- 12/31/98 -0- 3/31/99 $2,000,000 6/30/99 $2,000,000 9/30/99 $2,000,000 12/31/99 $2,000,000 3/31/00 $1,000,000 6/30/00 $1,000,000 9/30/00 $1,000,000 4. Release of Warrants. Upon the effectiveness of this Amendment in accordance with the provisions of Section 5 of this Amendment, Foothill shall release and deliver to Borrower Warrants currently held by Foothill for the purchase of up to 50,000 shares of the common stock of Borrower at a strike price of $4.40 per share. 5. Conditions Precedent to Effectiveness of Amendment. The effectiveness of this Amendment is subject to the completion, to the satisfaction of Foothill and its counsel, of each of the following conditions on or before the Amendment Date: (a) Foothill shall have received executed consents and reaffirmations from each Guarantor, in form and substance satisfactory to Foothill; (b) Foothill shall have received an amendment fee of $200,000 which shall be earned in full and non-refundable as of the date hereof. Foothill hereby acknowledges the receipt of such amendment fee in connection with Foothill's receipt of $14,700,000, representing a portion of the proceeds of the sale of the assets of certain of the subsidiaries of Borrower to CRN Operations, LLC, a Delaware limited liability company ("CRN") on October 30, 1998 (the "CRN Asset Sale"). (c) Foothill shall have received the original, executed promissory note delivered to Borrower by CRN as a portion of the consideration delivered to Borrower on October 30, 1998 in connection with the CRN Asset Sale (the "CRN Note"), together with a fully executed Collateral Assignment of Rights with respect to the CRN Note in favor of Foothill, in form and substance satisfactory to Foothill. 6. Representations and Warranties. Borrower hereby represents and warrants to Foothill that (a) the execution, delivery, and performance of this Amendment, are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected, and (b) the Loan Agreement, as amended by this Amendment, constitute Borrower's legal, valid, and binding obligation, enforceable against Borrower in accordance with its terms. 7. Further Assurances. Borrower shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Foothill, and take all actions as Foothill may reasonably request from time to time, to perfect and maintain the perfection and priority of Foothill's security interests in the Collateral, and to fully consummate the transactions contemplated under the Loan Agreement and this Amendment. 8. Effect on Loan Documents. The Loan Agreement, as amended hereby, and the other Loan Documents shall be and remain in full force and effect in accordance with their respective terms and each hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of or as an amendment of any right, power, or remedy of Foothill under the Loan Agreement or any other Loan Document, as in effect prior to the date hereof. This amendment shall deemed a part of and hereby is incorporated into the Loan Agreement. 9. Miscellaneous. (a) Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. (b) Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. (c) This Amendment shall be governed by and construed in accordance with the laws or the State of California. (d) This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. FOOTHILL CAPITAL CORPORATION, a California corporation By /s/ Thomas Sigurdson ----------------------- Title Vice President ----------------------- CHILDREN'S BROADCASTING CORPORATION, a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CONSENT, RATIFICATION, AND REAFFIRMATION BY GUARANTORS Each of the undersigned Guarantors hereby consent to the execution, delivery, and performance of the foregoing Amendment Number Five to Amended and Restated Loan and Security Agreement and agrees, ratifies, and reaffirms that its obligations as a guarantor with respect to the Loan Documents, as heretofore amended, and as amended by the foregoing amendment, remain in full force and effect and are not impaired, diminished, or discharged in any respect. Dated as of the date first set forth above: CHILDREN'S RADIO OF LOS ANGELES, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF NEW YORK, INC., a New Jersey corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF MINNEAPOLIS, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF GOLDEN VALLEY, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF MILWAUKEE, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF DENVER, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF KANSAS CITY, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF DALLAS, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF HOUSTON, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF PHILADELPHIA, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF DETROIT, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF CHICAGO, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- CHILDREN'S RADIO OF PHOENIX, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- WWTC-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- KYCR-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- WZER-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- KKYD-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- KCNW-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- KAHZ-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- KTEK-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- WPWA-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- WJDM-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- KPLS-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- WAUR-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- KIDR-AM, INC., a Minnesota corporation By /s/ James G. Gilbertson ----------------------- Title Chief Operating Officer ----------------------- EX-21.1 13 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES Name State of Incorporation - ---- ---------------------- Children's Radio of Los Angeles, Inc. Minnesota Children's Satellite Network, Inc. Minnesota Children's Radio of New York, Inc. New Jersey Children's Radio of Minneapolis, Inc. Minnesota Children's Radio of Golden Valley, Inc. Minnesota Children's Radio of Dallas, Inc. Minnesota Children's Radio of Houston, Inc. Minnesota Children's Radio of Kansas City, Inc. Minnesota Children's Radio of Milwaukee, Inc. Minnesota Children's Radio of Denver, Inc. Minnesota Children's Radio of Detroit, Inc. Minnesota Children's Radio of Philadelphia, Inc. Minnesota Children's Radio of Chicago, Inc. Minnesota Children's Radio of Phoenix, Inc. Minnesota Children's Radio of Tulsa, Inc. Minnesota KAHZ-AM, Inc. Minnesota KCNW-AM, Inc. Minnesota KIDR-AM, Inc. Minnesota KKYD-AM, Inc. Minnesota KMUS-AM, Inc. Minnesota KPLS-AM, Inc. Minnesota KTEK-AM, Inc. Minnesota KYCR-AM, Inc. Minnesota WAUR-AM, Inc. Minnesota WCAR-AM, Inc. Minnesota WJDM-AM, Inc. Minnesota WPWA-AM, Inc. Minnesota WWTC-AM, Inc. Minnesota WZER-AM, Inc. Minnesota Populuxe Pictures, Inc. Minnesota Buffalo Rome, Inc. Minnesota Chelsea Acquisition, Inc. Minnesota Chelsea Pictures, Inc. Massachusetts EX-23.1 14 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We conent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-62402) pertaining to the 1991 Incentive Stock Option Plan, Stock Grants and Non-Qualified Stock Option Agteements, the Registration Statement on Form S-8 (No. 33-93546) pertaining to the 1994 Stock Option Plan, 1994 Director Stock Option Plan and the Written Compensation Agreement with R. David Ridgeway, the Registration Statement on Form S-8 (no. 333-21699) pertaining to the 1994 Stock Option Plan, the Registration Statement on Form S-8 (No. 333-21701) pertaining to the 1996 Employee Stock Purchase Plan and Non-Qualified Stock Option Agreements, the Registration Statement on Form S-3 (No. 333-06865) pertaining to the registration of 1,614,802 shares of common stock, the Registration Statement on Form S-3 (No. 333-21117) pertaining to the registration of 493,895 shares of common stock, the Registration Statement on Form S-3 (No. 333-28315) pertaining to the registration of 318,607 shares of common stock, the Registration Statement on Form S-4 (No. 333-18575) pertaining to the registration of 5,000,000 shares of common stock and $5,000,000 of debt securities, the Registration Statement on Form S-3 (No. 333-53327) pertaining to the registration of 421,528 shares of common stock, the Registration Statement on Form S-3 (No. 333-60637) pertaining to the registration of 1,590,500 shares of common stock, the Registration Statement on Form S-3 (No. 333-67381) pertaining to the registration of 150,000 shares of common stock of Children's Broadcasting Corporation of our report dated March 4, 1999, with respect to the audited financial statements included in the Annual Reports (Forms 10-KSB) for the years ended December 31, 1997 and December 31, 1998. /s/ BDO Seidman, LLP BDO Seidman, LLP Milwaukee, Wisconsin March 31, 1999 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 253,905 0 39,000 39,000 0 13,212,088 248,866 128,481 33,821,532 18,044,403 11,513,903 2,448,486 0 129,015 12,351,517 33,821,532 2,566,647 2,566,647 0 11,715,016 5,567,713 39,000 5,484,830 7,900,032 330,237 7,569,795 0 0 0 7,569,795 1.03 1.03
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