-----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, RmFKXMdh4EkencTtSA1pCE+IicPm0HpFu6dUXXpd8dY1oXzsEJs/3AR0bRDTqjdS 04o64Q3aubI7mwDteYjD6g== 0000912057-97-011275.txt : 19970401 0000912057-97-011275.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011275 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-21534 FILM NUMBER: 97570057 BUSINESS ADDRESS: STREET 1: 724 1ST ST N STREET 2: 4TH FLOOR CITY: MINNEAPOLIS STATE: MN ZIP: 55401 BUSINESS PHONE: 6123383300 MAIL ADDRESS: STREET 1: 724 FIRST STREET NORTH STREET 2: FOURTH FLOOR CITY: MINNEAPOLIS STATE: MN ZIP: 55401 10KSB 1 10KSB - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 / / TRANSACTION REPORT PURSUANT TO 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.) 724 FIRST STREET NORTH, MINNEAPOLIS, MINNESOTA 55401 (Address of Principal Executive Offices, including Zip Code) (612) 338-3300 (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) (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 $5,654,938. The aggregate market value of the voting stock held by non-affiliates of the issuer as of March 25, 1997 was approximately $18,140,184. The number of shares of the common stock of the issuer outstanding as of March 25, 1997 was 6,029,393. 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 FORM 10-KSB Proxy Statement for 1997 Item 10 of Part III Annual Meeting of Shareholders to be held July 16, 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- CAUTIONARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 1 PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . 7 ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . 20 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . 21 PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 21 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 21 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . 26 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . 56 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934. . . . . . . . . . . . . . . . . . . 56 ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . 58 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 58 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . 60 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . 61 CAUTIONARY STATEMENT CHILDREN'S BROADCASTING CORPORATION (THE "COMPANY"), OR PERSONS ACTING ON BEHALF OF THE COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING STATEMENTS ON BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S SECURITIES, FROM TIME TO TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING STATEMENTS" AS DEFINED UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "LITIGATION REFORM ACT"). THIS CAUTIONARY STATEMENT, WHEN USED IN CONJUNCTION WITH AN IDENTIFIED FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF QUALIFYING FOR THE "SAFE HARBOR" PROVISIONS OF THE LITIGATION REFORM ACT AND IS INTENDED TO BE A READILY AVAILABLE WRITTEN DOCUMENT THAT CONTAINS FACTORS WHICH COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS ARE IN ADDITION TO ANY OTHER CAUTIONARY STATEMENTS, WRITTEN OR ORAL, WHICH MAY BE MADE, OR REFERRED TO, IN CONNECTION WITH ANY SUCH FORWARD- LOOKING STATEMENT. THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS. ACQUISITIONS. One of the Company's strategies used to expand its national network of radio stations broadcasting Aahs World Radio-TM*- is to acquire AM radio broadcast licenses ("RBLs") in key markets. To date, the Company has acquired 13 RBLs, 12 of which are currently owned and operated. The Company has acquired RBLs through the acquisition of securities or assets of radio stations and intends to continue to acquire RBLs in the future. Unless the acquisition is of an existing affiliate, the Company will generally convert an acquired RBL to the Aahs World Radio format. Although the Company believes it has identified a number of potential acquisitions, there can be no assurance that the Company will be successful in acquiring additional RBLs. The Company expects to face competition in acquiring additional RBLs as it seeks to build its national radio network. In the event the Company is unable to continue to acquire RBLs, the Company may not achieve market penetration levels required by major advertisers and the Company's ability to attract national advertising and maximize the rates charged for advertising and air time could be materially adversely affected. COMPANY DEVELOPMENT; HISTORY OF OPERATING LOSSES. Since inception, the Company has experienced substantial net losses as a result of its efforts to develop its national radio network. The Company is continuing to develop its radio network and is generally subject to the risks attendant to a new or emerging business venture. The Company has incurred net losses since its inception in 1990 and has not generated positive cash flow sufficient to fund its ongoing operations. For the two years ended December 31, 1995 and 1996, the Company incurred net losses of $6,108,000 and $9,868,000, respectively. The Company has not generated positive cash flow from operations and has had frequent working capital shortages. The Company expects to continue to incur operating losses for 1997 and that it will continue to experience negative cash flow from operations. Working capital requirements have been met by short-term borrowings from investors, including affiliates of the Company, and from the proceeds of public offerings of the Company's Common Stock, and through the use of credit facilities (the "Facilities") established through an agreement (the "Credit Agreement") with Foothill Capital Corporation ("Foothill"). The Company continues to seek additional sources of financing for its working capital needs and for acquisitions. If the Company should be unable to obtain working capital when required, its operations and prospects would be materially and adversely affected. In connection with their audit reports on the Company's financial statements as of and for the years ended December 31, 1995 and 1996, Ernst & Young LLP and BDO Seidman, LLP, the Company's independent auditors as of such dates, expressed substantial doubt about the Company's ability to continue as a going concern because of its recurring losses and negative cash flow from operations. As of December 31, 1996, the Company had an accumulated deficit of $26,304,000 and has used approximately $17,834,000 of cash to fund its losses. - --------------------- * Children's Broadcasting Corporation has applied for a trademark for Aahs World Radio-TM-. The Company recently raised a total of $12,500,000 of capital through the Credit Agreement with Foothill. Additionally, as a part of the Credit Agreement the Company may borrow an additional $4,000,000 to acquire future assets. The Company believes the Credit Agreement will meet the working capital needs of the Company and provide adequate resources for acquisitions until the fall of 1997. Beyond the fall of 1997, the Company's ability to obtain funding to meet its future capital requirements will depend upon a number of factors including, but not limited to, (i) the ability of the Company to generate cash flow from operations, (ii) the acceptance of the Company's children's radio format, (iii) the relative profitability of the format on a local and national basis and (iv) the general availability of debt and equity financing to the Company. The Company continues to seek additional sources for its working capital and long- term capital requirements, including debt and equity financing and strategic partnership activities. RECENT FINANCING. The Company entered into the Credit Agreement with Foothill to address the Company's working capital requirements through the creation of three Facilities on November 25, 1996. The Credit Agreement provides the Company with working capital through (a) a $11,500,000 senior secured term loan (the "Term Loan") collateralized by the assets of the Company, payable over four years, (b) a $1,000,000 senior secured reducing/revolving line of credit (the "Revolving Loan") secured by the Company's accounts receivable, and (c) a $4,000,000 acquisition facility (the "Acquisition Loan") secured by future assets acquired by the Company. The Facilities mature on November 26, 2000. The Company's indebtedness under the Facilities is secured by a first priority lien on substantially all the assets of the Company and its subsidiaries, by a pledge of its subsidiaries' stock and by a guaranty of its subsidiaries. Additionally, the Company granted Foothill a warrant to purchase 50,000 shares of the Company's Common Stock. The Company was required to pay various service and commitment fees as are standard within the industry. Approximately $4,000,000 of the loan proceeds were initially held back by Foothill pending performance by the Company of certain post-closing conditions. At March 15, 1997, the remaining proceeds available under the Term Loan totaling $1,500,000 are being held back by Foothill subject to the Company's completion of certain post-closing conditions which management expects to occur in the second quarter of 1997. Funds available from the Term Loan have been and may in the future be used for working capital needs and acquisitions, including the purchase of the RBL and certain other assets of WAUR-AM in the Chicago market. The Revolving Loan may be used for working capital needs and for acquisitions. Advances are not to exceed 80% of eligible accounts receivable less certain reserves. The Term Loan is to be repaid monthly in 42 installments of principal in the amount of 1/54 of the term loan amount beginning in month seven of the Credit Agreement. The Acquisition Loan is to be repaid monthly based upon a five-year amortization schedule, commencing on the first month following funding. Interest rates under the Facilities are payable at the prime rate plus 2.75%. The Credit Agreement contains a number of financial covenants which, among other things, require the Company to maintain specified financial ratios and impose certain limitations on the Company with respect to the amount of funding available for each acquisition under the Acquisition Loan. SUBSTANTIAL LEVERAGE; ADDITIONAL FINANCING REQUIREMENTS. As of December 31, 1996, the Company's consolidated indebtedness approximated 49% of the sum of its shareholders' equity and consolidated indebtedness, assuming performance by the Company of certain post-closing conditions resulting in full funding under the Facilities. Based on current interest rates, the debt service obligations associated with the Credit Agreement necessitate payments of principal and interest of approximately $3,000,000 in 1997. Further, substantially all assets of the Company serve to secure this loan. This degree of leverage increases the Company's vulnerability to adverse general economic and broadcasting industry conditions and to increased competitive pressures, including pressure from better capitalized competitors. Issuance of additional debt, including the debt securities registered pursuant to the Company's Registration Statement on Form S-4 (the "Debt Securities"), would increase this degree of leverage and the Company's vulnerability to such market conditions. In the event that the Company should default on its obligations under 2 the Credit Agreement, all or substantially all of its assets would be at risk. There can be no assurance that the Company will be able to repay or refinance such indebtedness when due, or that the Company would be able to sell all or any portion of its assets or raise additional capital to make required payments on maturing indebtedness. An inability to make payments when due or to comply with covenants and restrictions associated with such indebtedness could give Foothill the right to foreclose on properties securing payment obligations, which would have a material adverse effect upon the Company. Part of the Company's strategy for development and expansion of its network includes acquiring RBLs and/or operating radio properties in key U.S. markets. It is the Company's desire to purchase RBLs in each of the top 15 markets; however, there can be no assurance that the Company will be able to complete suitable acquisitions on terms favorable or acceptable to the Company. In the event the Company purchases additional RBLs, the limitations on the Credit Agreement may require the Company to seek additional financing for acquisitions and to fund future operations. There can be no assurance that such additional financing will be available to the Company when required, or if available, that it would be on terms 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. DEVELOPMENT OF NATIONAL RADIO NETWORK. Since late 1992, the Company has been developing a network of affiliated and owned or operated radio stations to carry its satellite-transmitted programming to domestic radio markets. The Company's affiliation agreements have terms varying from one to three years. There can be no assurance that the Company will be able to retain existing affiliates or attract additional affiliates. Since the inception of the network, the Company has gained and lost affiliates. As of March 24, 1997, the Company had 29 affiliates. In cases where the Company deems it appropriate, it intends to seek affiliates by entering into affiliation agreements or local marketing agreements ("LMAs"), through which third-party owned stations broker broadcast time to the Company, or by acquiring stations in key markets. In addition, the Company could encounter substantial delays, expenses or other unforeseen difficulties in completing the establishment of its network in the major markets. The Company also risks the potential loss of strategic alliances which it has developed in connection with its strategy to develop the Company's brand, to assist in growth of the Company's network, and to pursue related business opportunities. Furthermore, the signal of the Company's affiliates and of its owned and operated stations may not cover households in certain portions of the markets in which such stations broadcast. In addition, the Company's management has limited experience in the development or operation of a national radio network. The success and viability of the Company's network will depend upon its ability to generate substantial revenue from network advertisers. For the year ended December 31, 1996, the Company's network generated revenue totaling $1,594,000. Since the inception of the Company, the primary sources of the Company's revenue have been from the sale of local advertising and air time and network revenue. A substantial portion of the Company's local advertising revenue is derived from Company-owned stations not broadcasting the Aahs World Radio format. For the years ended December 31, 1995 and 1996, approximately 42% and 38% respectively, of the Company's revenue was derived from its radio stations which do not carry the Aahs World Radio format: KTEK-AM, Houston, Texas, KCNW-AM, Kansas City, Kansas, WZER-AM, Milwaukee, Wisconsin and KYCR-AM, Minneapolis, Minnesota. For the years in the two year period ended December 31, 1996, the Company derived approximately 13% and 12% respectively, of its revenue from KTEK-AM; approximately 9% and 9% respectively, of its revenue from KCNW-AM; approximately 11% and 8% respectively, of its revenue from WZER-AM; and approximately 9% and 9% respectively, of its revenue from KYCR-AM. If the Company converts any of these stations to the Aahs World Radio format, its revenue may be negatively affected until a new advertising base is developed for the Aahs World Radio format in those markets. No assurance can be given that the Company will be able to acquire additional stations in major markets or to increase the number of network affiliates to a level which would enable it to increase network advertising, even if desired additional acquisitions are made or affiliate relationships are created, or that the Company will be able to generate sufficient advertising revenue to operate profitably in the future. One of the Company's primary methods of expansion has been to acquire RBLs through the acquisition of assets of broadcasters in such major markets as New York City, Los Angeles, Chicago, Philadelphia, Detroit, and Dallas/Fort Worth. The Company's expansion strategy is to acquire additional 3 RBLs which would enable it to broadcast in each of the top 15 United States markets. Such strategy is designed to achieve market penetration levels required by major advertisers who may be reluctant or unwilling to purchase advertising time until the Company's geographic penetration is extended. The Company believes additional market penetration will improve its ability to maximize the rates charged for advertising and air time. ACCEPTANCE OF RADIO FORMAT. The Company produces and distributes a 24-hour children's radio format. There can be no assurance that the Company's programming will gain acceptance by listeners and advertisers. In addition, the Company's primary target audience is not rated by a recognized radio rating service, such as Arbitron. Such ratings are generally used by potential advertisers in making advertising decisions. The Company is working with research companies to attempt to develop such ratings for the pre-teen market. However, there can be no assurance that such ratings can be developed or that the Company will be able to attract additional national advertisers. RISKS RELATED TO ACQUISITION OF RADIO ELIZABETH. On June 4, 1996, the Company acquired all of the issued and outstanding stock of Radio Elizabeth, Inc. ("REI"), which holds a Federal Communications Commission ("FCC") license for WJDM-AM Radio Station licensed to Elizabeth, New Jersey on the 1530 kHz frequency. REI, in addition to its license for operation on 1530 kHz, presently has issued to it a special temporary authorization ("STA") for operation on 1660 kHz at 10 kw power, which provides coverage of a significant portion of the New York City market. WJDM has been broadcasting the Company's Aahs World Radio programming in the nation's largest city radio market since February 1, 1996, over its 1660 kHz frequency. The STA frequency is located in a portion of the spectrum referred to as the expanded band ("Expanded Band") recently allocated by the FCC and assigned to certain AM broadcasters in order to implement Congressional policy. REI and other Expanded Band licensees are expected to be allowed to operate on both their original frequencies and the Expanded Band frequencies for a period of five years, after which time the licensee must elect which frequency on which it will continue broadcasting. Most radio receivers produced prior to 1990 cannot receive Expanded Band frequencies. There can be no assurance that REI will ever receive a permanent license to an Expanded Band frequency, and failure to obtain such a license would leave the Company broadcasting from only the existing licensed frequency, which at 1 kw power does not cover the New York City market, thereby resulting in a substantial diminution of the value of the Company's investment in REI. ABC/DISNEY LITIGATION. In November 1995, the Company entered into a joint operations agreement (the "Operations Agreement") with ABC Radio Networks, Inc. ("ABC") pursuant to which ABC's affiliate development and national advertising sales staffs would augment the Company's efforts to market the Aahs World Radio format to broadcasters and advertisers. On July 25, 1996, ABC notified the Company that ABC would terminate such agreement effective October 24, 1996. Following the termination by ABC of the Operations Agreement, the Company filed a lawsuit in the United States District Court for the District of Minnesota against The Walt Disney Company ("Disney") and ABC for injunctive relief and to recover damages for their alleged attempts to misappropriate the Company's confidential information and trade secrets acquired through their strategic relationship with the Company in order to unfairly compete with the Company in the children's radio market. As a result of the termination by ABC of its Operations Agreement with the Company, the Company has had to rebuild its own affiliate development and national advertising sales staff and is in the process of rebuilding that capability. The Company has commenced rebuilding of its national sales and affiliate development organizations and has hired eight individuals to staff its national sales and affiliate development departments. The Company expects to have its national sales and affiliate development programs in place during the first half of 1997. The Company is, however, unable to determine the full impact of damages it has sustained as a result of the actions by ABC, which are the basis of the Company's claims in the ABC/Disney litigation. Further, there can be no assurance that the Company will be able to rebuild its national sales and affiliate development organizations or that it will prevail in the ABC/Disney litigation or recover any of the damages sought. Such litigation is costly to the Company and legal fees and costs associated with the litigation have reduced and may continue to reduce the Company's working capital. Further, the Company has issued and may in the future issue securities to finance the litigation which could result in substantial dilution to the Company's existing shareholders. On November 15, 1996, the Securities 4 and Exchange Commission (the "Commission") declared effective the Company's Registration Statement on Form S-3 which registered 200,000 shares of Common Stock on behalf of the Company's litigation counsel. COMPETITION. The Company currently derives the majority of its revenue from the sale of local radio advertising time on its owned and operated stations to advertisers in their respective metropolitan markets and faces substantial competition from other radio and television stations as well as other media in those markets. Factors contributing to the Company's ability to attract local advertisers include the success of a station in attracting listeners and the perceived quality of the Company's programming. There can be no assurance that the Company can successfully compete for listeners and advertising revenues with other radio and television networks and other entertainment organizations. The Company may also experience competition from developing technologies in the radio industry. In addition to the Company's current competition for local advertising, the Company also competes for network advertising. On information and belief, Disney has commenced broadcasting of its own children's radio programming in four U.S. markets, thereby entering into direct competition with the Company. Further, other entertainment organizations, including but not limited to radio syndicators and radio stations, many of which have greater resources than the Company, could develop a children's radio format similar to Aahs World Radio. Although radio stations must be licensed by the FCC, there are no significant impediments to the entry of new competitors into the Company's markets. While the Company continues to seek protection for its original programming, where appropriate, under applicable copyright and trademark laws, the Aahs World Radio format can be and has been imitated by others seeking to enter the children's radio field. 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 or its competitors, changes by financial research analysts in their estimates of the earnings of the Company or its competitors, conditions in the economy in general or in the radio industry in particular, unfavorable publicity or changes in applicable laws and regulations (or judicial or administrative interpretations thereof) affecting the Company or the radio industry. During fiscal year 1996, the market price of the Company's Common Stock has ranged from a high of $14.00 on January 31 and February 22, 1996 to a low of $3.25 on November 20, 1996. During the first 12 weeks of 1997, the Company's Common Stock has ranged from $6.63 on January 13, 1997 to $3.25 on March 18, 1997. There can be no assurance that purchasers of the Company's Common Stock can sell such stock at or above the prices at which it was purchased. IMPACT OF SALE OF SHARES; SHARES ELIGIBLE FOR FUTURE SALE. The Company had approximately 5.8 million shares of Common Stock outstanding as of December 31, 1996, and had warrants and options outstanding to purchase additional Common Stock outstanding totaling approximately 2.6 million common shares exercisable at prices ranging from $2.00 to $13.80 per share. On July 11, 1996, the Commission declared effective the Company's Registration Statement on Form S-3 which registered for a secondary offering 1.6 million common shares. On November 15, 1996, the Commission declared effective the Company's Registration Statement on Form S-3, as amended, which registered for a secondary offering 1.1 million common shares. On February 11, 1997, the Commission declared effective the Company's Registration Statement on Form S-3, as amended, which registered 0.5 million common shares and the Company's Registration Statement on Form S-4, as amended, which registered 5.0 million common shares and $5,000,000 of Debt Securities. 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. RELIANCE ON CURRENT MANAGEMENT. The Company is dependent on the management services of its current management team. If the Company were to lose the services of these individuals, its business could be adversely affected. Most of the members of the Company's current senior management team are not subject to employment contracts with the Company. The Company does not maintain insurance on the lives of its key employees. 5 POTENTIAL CONFLICTS OF INTEREST. The Company leases certain broadcast and office facilities from its President, Christopher T. Dahl, and another director, Richard W. Perkins, and the WWTC and KYCR radio transmission tower site from Mr. Dahl. The Company also shares with Community Airwaves Corporation ("CAC"), a corporation owned by the Company's President, Christopher T. Dahl, a director, Richard W. Perkins, and a shareholder, Russell Cowles II, certain management services which are provided by another entity, Radio Management Corporation, owned by Messrs. Dahl, Perkins and Cowles. The management services consist of administrative, legal and accounting services. Such arrangements present potential conflicts of interest in connection with the pricing of services provided. In addition, CAC may acquire interests in additional stations. Such ownership could, under current FCC regulations, limit the markets in which the Company could acquire additional RBLs. In addition, the Company has entered into an agreement with CAC whereby the Company is required to obtain the consent of CAC for any acquisition of an FM station or of an AM station located outside the largest 125 U.S. markets. FCC REGULATION. Although the RBLs of the stations owned by the Company are already granted, the continuation of any RBL acquired by the Company depends upon its compliance with the laws, rules and regulations of the FCC. The FCC can revoke licenses for serious misconduct, subject to the right to an evidentiary hearing, or it may fail to renew a license or impose monetary fines for breach of its rules. Neither the Company nor CAC has ever been denied any FCC license or renewal, or had a fine imposed by the FCC. In recent years, a number of competing applications and formal and informal objections have been filed with respect to broadcast renewal applications. Even though the vast majority of all license renewal applications are granted, and under the Telecommunication Act of 1996 (the "1996 Act") competing applications in license renewal proceedings are no longer allowed, there can be no assurance that renewal of the Company's licenses will be granted. Furthermore, approvals are required for the transfer of ownership. Three directors and attributable shareholders of the Company have interests in AM and FM radio stations unrelated to the Company. Under current FCC regulations, these interests are attributed to the Company and may limit the markets in which the Company can acquire stations. The 1996 Act eliminated the limit upon the number of stations that can be under common ownership or control nationally. Local ownership was substantially relaxed according to market size. 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. CONTROL BY PRINCIPAL SHAREHOLDERS. Approximately 34% 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. NO ASSURANCE AS TO LIQUIDITY ON THE NASDAQ NATIONAL MARKET SYSTEM. The Common Stock is currently listed on the Nasdaq National Market System. 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. ABSENCE OF DIVIDENDS. The Company has not paid any cash dividends since its inception and does not anticipate paying cash dividends in the foreseeable future. The Company presently expects to retain its earnings to finance the development and expansion of 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 6 relevant factors. The declaration or payment by the Company of dividends is also subject to the Company's Credit Agreement with Foothill. Without Foothill's prior written consent, the Company cannot declare or pay any cash dividends. PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL OVERVIEW Children's Broadcasting Corporation is a full-time national broadcaster of children's radio programming in the United States. The Company develops, produces and distributes programming that is entertaining and informative, and directed to the interests and radio listening patterns of pre-teenage children and their families. The Company's Aahs World Radio format provides 24-hour programming featuring music, stories, call-in segments, quizzes and current events features. The programming varies by time of day in order to attract that component of its prospective audience most likely to be listening. The programming originates at the Company's flagship station, WWTC-AM in Minneapolis, Minnesota, and is distributed via satellite to a network of radio stations around the country. Since the inception of the Company, the primary sources of the Company's revenue have been from the sale of local advertising and air time and network revenue. A substantial portion of the Company's local advertising revenue is derived from Company-owned stations not broadcasting the Aahs World Radio format. These stations, which broadcast primarily family-oriented programming in the Houston, Kansas City, Milwaukee and Minneapolis markets, were acquired by the Company in 1994. The Company's growth strategy includes the acquisition of RBLs in the top 15 markets, thereby securing the network's presence and continuity in those key markets. Pursuant to that strategy, the Company has acquired RBLs which serve the New York City, Los Angeles, Chicago, Philadelphia, Detroit and Dallas/Fort Worth markets. During the year ended December 31, 1996, the Company acquired RBLs covering the New York City, Philadelphia and Detroit markets. With the recently completed acquisition of the RBL and certain other assets of radio station WAUR-AM in the Chicago market, the Company distributes its programming to markets representing approximately 40% of the United States' population and has a presence in the top four markets and seven of the top ten markets in the United States. The Company has engaged investment bankers to explore strategic alternatives to enhance shareholder value. Such investment bankers have had and continue to hold discussions with various potential strategic partners with a view toward entering into a joint venture, sale or merger. There can be no assurance that the Company will be successful in completing any transaction with a prospective strategic partner. The Company was incorporated under the Minnesota Business Corporation Act on February 7, 1990. All references to the Company herein include it subsidiaries, unless otherwise noted. The Company's executive office is located at 724 First Street North, Minneapolis, Minnesota 55401, and its telephone number is (612) 338-3300. Its World Wide Web site address is: www.netradioaahs.net. MARKET OVERVIEW Children represent a significant market for advertisers and broadcasters. The continued rise in birth rates coupled with the increasingly significant purchasing power of children, has resulted in additional advertising expenditures being committed to this market segment. Today, there are over 49 million children in the U.S. under the age of 13, representing approximately 19% of the total population. The number of U.S. births has grown steadily, exceeding 4 million in 1991, a trend that has continued through the mid-1990s. Independent research indicates that children have approximately $20 billion of income each year, spend approximately $17 billion and directly influence expenditures by adults in excess of $150 billion annually. 7 Television commands a dominant share of total measured media directed toward children. In 1996, television attracted approximately $700 million of the $1 billion estimated to have been spent on advertising targeting children. Spending by national advertisers for television commercials targeting children has grown at an average annual rate of over 19% since 1983. This growth coincides with the appearance of new TV networks which provide children's programming. While children's programming was limited to Saturday mornings in the past, at present there are three primary television networks dedicated to children's programming: Fox Children's Network, Nickelodeon and The Cartoon Network. Major advertisers to children on television include Kelloggs, Mattel, Hasbro and M&M/Mars. Other forms of advertising such as magazine, newspaper, billboard and point of purchase accounted for the remaining $300 million of advertising to children in 1996. Some of the major magazine publications to kids include Sports Illustrated for Kids, Disney Adventure Magazine, Nickelodeon and Sesame Street. The top five spending categories in children's magazines are sporting goods, toys and games, publishing and media, food and direct response. These major advertisers include Disney, General Mills, Campbell Soup, Time Warner and Kelloggs. Prior to the Company's development of Aahs World Radio, there was no full-time radio service specifically designed for pre-teenage children. Pre-teens represent approximately 19% of the population, and parents of pre-teens represent another 26% of the total population, bringing the Company's potential listening audience to approximately 45% of the U.S. population. In Minneapolis, where the Company's programming has been available for over five years, research conducted by Arbitron in late 1993 shows that 91% of children listen to radio. In addition, this research has also shown that one-third of all listening to Aahs World Radio programming is by a child or children in the company of at least one parent or other adult. By providing appealing programming for pre-teens and their parents, the Company believes it will attract an increasing share of the advertising expenditures directed toward children. COMPANY STRATEGY The Company seeks to attract listeners and advertisers to the Aahs World Radio programming format by continually refining its content and expanding the distribution network. Elements of this strategy include (i) attracting a loyal listenership by maintaining high quality, distinctive programming directed to its target audience, (ii) reinforcing this loyalty by creating a brand identity through the creation of characters which are integrated into its programming, (iii) delivering this listenership base to national advertisers by expanding its radio network to obtain U.S. population coverage, and (iv) making opportunistic acquisitions of RBLs in key markets. - PROGRAMMING. The Company develops programming which appeals to children and their parents, as well as to teachers and other influential adults. By integrating its programming into a 24-hour format, the Company believes it will be able to build a base of loyal listeners and consequently enhance the network's appeal to advertisers. In developing its programming, the Company is guided by focus research, parent surveys, listener feedback and consultation with educators and other professionals. - BRAND DEVELOPMENT. The Company seeks to reinforce its listenership through the development of its brand identity. The Company integrates its mascot and a cast of other cartoon characters into its programming as well as complimentary products and services to reinforce the Aahs World Radio brand. Additionally, the Company utilizes strategic relationships to expand its brand identity. - NATIONAL NETWORK. The Company's programming and related branding efforts are aimed at attracting and sustaining a loyal audience that is attractive to national advertisers. The Company anticipates that it will generate significant revenue in the future from the sale of network advertising time to national advertisers. By increasing the percentage of the U.S. market covered by Aahs World Radio affiliates, the Company believes that revenue will 8 increase because the increased number of listeners will attract more national advertisers and the increased advertising demand is expected to increase the rates the Company will be able to charge for advertising time. - OWNED AND OPERATED STATIONS. In building a national network, the Company aims to own and operate radio stations in key U.S. markets. By owning its stations, the Company is able to (i) generate additional revenue from the sale of local advertising time, while incurring minimal incremental operating costs, (ii) promote to potential advertisers and affiliates the Company's long term commitment to broadcasting the Aahs World Radio format and (iii) enhance the Company's flexibility to alter the mix of national and local advertising sales in these key markets. The Company makes its acquisition decisions based on three factors: (i) the strategic importance of the particular market and the station, (ii) the cost of the station and (iii) the Company's availability of capital. PROGRAMMING Aahs World Radio is a music-driven format which was developed and is produced for pre-teens. In addition to this primary target market, the format has also been strategically designed to appeal to parents and care givers. This is accomplished through a blend of music, stories, call-in segments, interactive quiz features, interviews and current events. Approximately two-thirds of Aahs World Radio programming consists of pop-oriented music which is selected for children on the basis of lyric content, entertainment and/or educational value. Each selection is classified in one of several music categories and entered into the Company's program management system to ensure that it airs under designated conditions and only at designated times. Research conducted by the Company, including focus groups and analysis of listener feedback, has shown that having music as the core element of its programming is the best way to attract and retain its target audience. The Company develops and continually conducts focus groups and written and telephonic surveys in order to enhance its understanding of its target audience and ensure that its programming is meeting the demands of both kids and their parents. Management believes that non-musical programming can be appealing as well and contributes to the "personality" of the format and to its differentiation from competing formats. The programming format is designed to shift throughout the day to reflect the changing composition of its audience. In order to maximize the appeal and value of its programming and advertising to the "mix" of adults and kids, day-part specific programs have been developed which overly the basic music format. During the weekdays the format includes the following programs: - THE ALL-AMERICAN ALARM CLOCK-REGISTERED TRADEMARK-: Aahs World Radio weekday programming begins with this wake-up show targeted to an audience comprised of both kids and adults. Aahs World Radio Brain Games, Aahs World-TM-News, weather reports, birthday greetings and a cast of comic characters provide the context for a blend of morning music especially selected to be entertaining for the kids and "ear friendly" for adults. - RADIOACTIVE: The four hour mid-day programming on Aahs World Radio begins with a pop music driven program complete with a variety of informational and interactive features to get kids involved with their world. And since it is still mid-morning in the western time zones, the program is specifically designed to round-out the morning drive while taking the Midwest and Eastern listeners through the late morning hours with programming that can only be delivered by Aahs World Radio. - AVENUE `A'-SM-: Broadcast as a featured element within RadioActive, Avenue `A' was created to exclusively target the network's youngest listeners. The ninety minute program consists 9 of a mix of catchy children's songs that are not heard at any other times of the day. In addition, Avenue `A' is populated by a cast of colorful characters guaranteed to entertain everyone who chooses to listen in. Also integrated into Avenue `A' is our prime time edition of StoryTime Theater, when listeners are treated to stories which include fairy tales, classic adventures, old time radio and great sagas from history. StoryTime Theater is also repeated each weekday during the late evening hours. - Absolute K-Aahs-SM-: As the late afternoon passes and the sun begins to set, the audience composition moves from a mix of adults and kids to an audience comprised almost exclusively of older kids. Absolute K-Aahs is targeted to 8-12 years olds with a contemporary presentation featuring some much of the same hit music offered by other formats but in a context that kids find more acceptable as well their parents. - THE BIG SHOW: This high energy afternoon show is targeted to carpooling parents and kids, and includes a mix of news, amusing features and music. To balance the presentation of programming in this transitional day-part, the host of the program is also joined each afternoon by a different member of the Aahs World Radio AirForce-TM-** ("AirForce"), a group of announcers ranging in age from 11 to 16. - THE LATE NIGHT EXPRESS: During the late evening and overnight hours, Aahs World Radio continues to fulfill its obligations to be there whenever the radio is turned on by providing an audio "nightlight" for kids just bedding down or for those who just need a friendly voice in the night. The weekend officially begins on Friday evening when the traditional format music rotation is suspended in favor of music programmed by the network's most active and involved listeners with five continuous hours of call-in requests and dedications. Saturday morning programming begins early with a special Saturday edition of The All-American Alarm Clock-Registered Trademark-followed by Just Kids-Registered Trademark-, which is hosted by three members of the AirForce. Other weekend features include: - LIVE FROM UNIVERSAL STUDIOS - HOLLYWOOD AND LIVE FROM UNIVERSAL STUDIOS - FLORIDA: "Live From Universal Studios - Hollywood" airs every Saturday from Universal City, California and "Live from Universal Studios - Florida" broadcasts from Orlando, Florida every Sunday. - JUST KIDS-REGISTERED TRADEMARK-: This Saturday morning clubhouse for kids features great music, science and craft projects, news features, plus interesting and informative guests from astronauts to zoologists. - AAHS WORLD RADIO COUNTDOWN: This show is presented four times each weekend and features the top twenty most requested songs from the past week. - OOHS AND AAHS-SM-: This is the network's version of an oldies show which airs three times each weekend. - THE KINETIC CITY SUPER CREW: This science mystery show, produced by the American Association for the Advancement of Science, also airs twice each weekend. - THE WEEKEND JAM: Heard every Saturday evening right after the Aahs World Radio Countdown. The Weekend Jam is programmed to appeal to a general audience but especially the more urban and minority dominated markets around the country. - ----------------------- **Children's Broadcasting Corporation has applied for a trademark for Aahs World Radio AirForce-TM-. 10 Through the AirForce, kids play an active role in the formulation and delivery of Aahs World Radio programming. AirForce members work on air, answer studio request lines and interact with listeners from across the country providing sustained kid-to-kid communications between the Company and its audience. Led by the Company's 15-year old Vice President of Fun, the AirForce has been a focus of national media attention and various members have appeared on NBC's "Today Show," "Entertainment Tonight," and "The Oprah Winfrey Show," as well as in feature stories in Newsweek Magazine, the Los Angeles Times and other nationally-recognized publications. Each of the 20 members of the AirForce undergoes thorough and ongoing training following a series of auditions, which also include interviews with the child's parents. Individuals are selected based on what unique contributions the Company anticipates that he or she can make to the on-air product. Rather than requiring AirForce members to conform to specific criteria, programming is created and implemented that complements the talents and qualities of the individual while still meeting the needs of the overall programming philosophy and direction. New programs are constantly being considered for development. Since the format's inception, more than 20 different long-form (duration greater than five minutes) and short-form (duration of five minutes or less) programs have been integrated into the network. Programming ideas come from parents, kids, staff members, air talent, AirForce members, network affiliates and market research. These concepts are reviewed by programming management for entertainment value, sales potential, demographic targeting appeal and acceptable production costs. A new program's pilot phase can take weeks or months, depending upon the complexity of the project. The Company currently has six programs in development. BRAND DEVELOPMENT The Company believes that developing a well-recognized brand identity will enhance its network's visibility and create opportunities for the Company to expand beyond the scope of its broadcast operations. The Company has created characters within its programming, including AAHSIE-TM-, the Company's animated mascot, which it has integrated into its merchandising and Internet enterprise. The Company has developed and intends to continue to develop strategic relationships to assist it in its brand development efforts, and to allow the Company to exploit business opportunities without detracting from management's focus upon the Company's core business. The following are summaries of the non-programming branding efforts of the Company: - AAHS WORLD RADIO AT UNIVERSAL STUDIOS: The Aahs World Radio live productions from Universal Studios in California and Florida provide exposure for Aahs World Radio to the weekend visitors to these studios. - COMMUNITY PROMOTIONS: The Company utilizes its characters in walk-around roles at public events such as community promotions. By making character costumes available to affiliates, the Company is able to present a consistent, physical and interactive image in markets around the country. - INTERNET SITE (www.netradioaahs.net): Pursuant to three-year agreements with NetRadio Network, Inc. and Precision Tapes, Inc., the Company distributes its Aahs World Radio format worldwide 24-hours a day on the Internet. - MERCHANDISING: The Company intends to expand its licensing of trademarks and related intellectual property to manufacturers and distributors of merchandise, so as to maximize the effectiveness of its branding efforts. The Company believes that by entering into license agreements, it will further enhance its brand identity without incurring costs itself or distracting management's focus from its core business. The Company would also receive licensing fees from the sale of any such merchandise. The Company recently entered into a license agreement with Endless Games to develop a Brain Game board game for children. 11 - MAGAZINE PUBLICATION: In March 1995, the Company began publication of a national music and entertainment magazine for children, RADIO AAHS MAGAZINE, marketed with a companion compact disc or cassette, which was distributed by Warner Music Enterprises, a publisher of six other magazines. The Company believes this represents the first combination of national radio network broadcasting with an associated magazine and music CD. Time Warner has since dissolved Warner Music Enterprises, and the Company is currently in discussions with other magazine publishers regarding the reestablishment of a Radio AAHS Magazine. The publication of the magazine was suspended in March 1996, and there can be no assurance that the Company will be successful in creating a venture with another magazine publisher, or that its magazine will continue to be published. - PLANET AAHS RECORDS-REGISTERED TRADEMARK-: The Company created its own record label, Planet AAHS Records-Registered Trademark- and intends to publish compilations of children's music under this label, further reinforcing the Company's brand identity. NATIONAL NETWORK The Company derives its revenue primarily from the sale of local and network time to advertisers. The Company believes that as its coverage of the U.S. continues to expand, it will be able to sell national advertising time in greater quantities and at significantly higher rates with no significant additional operating costs. To a large extent, the Company is already incurring the production, operating and administrative costs necessary to broadcast the network to the entire U.S. Incremental costs as the network continues to expand are expected to be minimal, excluding the costs of any station acquisitions or LMAs which the Company may complete or into which the Company might enter. Prior to the Company's development of the Aahs World Radio format, there were not any full-time radio formats which targeted the pre-teen market. It is estimated that over $1.0 billion in advertising dollars is directed toward children annually, yet only a small percentage of these advertising dollars are currently spent on radio. The Company believes that advertisers trying to reach children have not utilized radio due to the lack of children's programming on the radio. By providing quality programming which is appealing to both pre-teens and their parents and by pursuing vigorous sales and marketing efforts, the Company believes it will be able to attract an increasing portion of the annual advertising dollars aimed at this previously underserved market segment. The Company believes that the development of a national radio network will enable it to expand the listenership of the Aahs World Radio format and to increase national advertising revenue. The Company intends to gain listenership by increasing the coverage of the Aahs World Radio network through affiliation agreements and acquisitions of RBLs primarily in the top 100 U.S. markets. The Company currently distributes its programming to markets representing approximately 40% of the U.S. The Company believes that the majority of its revenue will ultimately be derived from the sale of network advertising time to national advertisers once the network reaches a minimum of 50% coverage of the nation's population. The Company believes that its present national advertising customers will spend a greater proportion of their advertising budgets with the Company, and that national advertisers who are not presently customers of the Company will become customers of the Company as it continues to expand the network's coverage of the U.S. 12 The following stations currently comprise the Aahs World Radio network: Owned or Operated Aahs World Radio Affiliates (1) Metro Rank(2) Frequency License Renewal - ------------------------------------------------- ------------- --------- --------------- New York, NY (WJDM-AM)(3). . . . . . . . . . . . 1 1660 NA Los Angeles, CA (KPLS-AM). . . . . . . . . . . . 2 830 12/01/97 Chicago, IL (WAUR-AM). . . . . . . . . . . . . . 3 930 12/01/04 Philadelphia, PA (WPWA-AM) . . . . . . . . . . . 4 1590 08/01/98 Detroit, MI (WCAR-AM). . . . . . . . . . . . . . 6 1090 10/01/04 Dallas/Fort Worth, TX (KAHZ-AM). . . . . . . . . 7 1360 08/01/97 Minneapolis, MN (WWTC-AM). . . . . . . . . . . . 16 1280 04/01/97 Denver, CO (KKYD-AM) . . . . . . . . . . . . . . 23 1340 04/01/97 Kansas City, KS (KCAZ-AM). . . . . . . . . . . . 27 1480 06/01/97 Third Party Aahs World Radio Affiliates Metro Rank(2) Frequency - --------------------------------------- ------------- --------- Washington, D.C. (WKDL-AM) . . . . . . . . . . . 8 1050 St. Louis, MO (WFUN-FM). . . . . . . . . . . . . 17 95.5 Baltimore, MD (WKDB-AM). . . . . . . . . . . . . 18 1570 Phoenix, AZ (KIDR-AM). . . . . . . . . . . . . . 20 740 Salt Lake City, UT (KKDS-AM) . . . . . . . . . . 35 1060 Indianapolis, IN (WSYW-AM) . . . . . . . . . . . 36 810 Orlando, FL (WZKD-AM). . . . . . . . . . . . . . 39 950 Memphis, TN (WOWW-AM). . . . . . . . . . . . . . 42 1430 Greenville, SC (WRAH-AM) . . . . . . . . . . . . 59 1360 Tulsa, OK (KXTD-AM). . . . . . . . . . . . . . . 60 1530 Mobile, AL (WBLX-AM) . . . . . . . . . . . . . . 61 660 Albuquerque, NM (KDZZ-AM). . . . . . . . . . . . 69 1520 Des Moines, IA (KKSO-AM) . . . . . . . . . . . . 90 1390 Lafayette, LA (KDYS-AM). . . . . . . . . . . . . 121 1520 Wilmington, NC (WAHH-AM) . . . . . . . . . . . . 154 1340 Anchorage, AK (KYAK-AM). . . . . . . . . . . . . 164 650 Wheeling, WV (WOHZ-AM) . . . . . . . . . . . . . 210 1600 Eau Claire, WI (WEIO-AM) . . . . . . . . . . . . 222 1050 Manassas, VA (WKDV-AM)(4). . . . . . . . . . . . NA 1460 Ventura/Thousand Oaks, CA (KAHS-AM)(5) . . . . . NA 1590
____________________ (1) The Company also owns or operates other stations which currently do not broadcast the Aahs World Radio format but which may be converted to that format in the future. (2) Source: BIA -- Investing in Radio -- Market Report -- 1995 -- Spring. Rankings based on total population attributable to given metropolitan area. The signal of any listed station may not cover households in certain portions of the market. (3) The station operates on an Expanded Band frequency pursuant to a Special Temporary Authority of the FCC. (4) The Manassas station is included in the Washington, D.C. radio market. (5) The Ventura/Thousand Oaks station is included in the Los Angeles radio market. The Company's programming and affiliation agreements provide for a maximum of 10 minutes of advertising time each hour. Under the agreements, the Company is allocated two minutes each hour from each affiliate station to sell to national advertisers. The Company recently introduced a new affiliate agreement allowing the Company the option of allocating three minutes each hour to sell to national advertisers. The affiliate station has the remaining eight minutes to sell to advertisers in its local market. Network advertising time can be sold to national advertisers at significantly higher rates than local advertising time. The Company's affiliation agreements grant stations the exclusive right to broadcast Aahs World Radio programming in the market in which the affiliate's station broadcasts. In certain markets, Aahs World Radio may be broadcast from more than one radio station pursuant to a single affiliation agreement. The Company retains the right to make all network programming decisions. The affiliate is responsible for 13 maintaining all station licenses necessary to broadcast the Aahs World Radio format, as well as for constructing, operating and maintaining all of the technical and other facilities necessary to receive and broadcast the Company's programming and allotted advertising time. The affiliation agreements generally provide for terms of one to three years. To gain affiliates, the Company maintains an affiliate relations department to market to prospective affiliates and to service affiliates once they have signed an affiliation agreement. Generally, the Company markets to a targeted group of prospective affiliates in the top 100 markets. These prospective affiliates receive information about Aahs World Radio via a monthly newsletter, phone contact, unique concept mailings and presentations. The Company employees trade advertising in a limited manner to maintain exposure to the broadcast industry. Network support for Aahs World Radio affiliates includes a live 24-hour programming feed distributed by satellite from its network studios located in Minneapolis which can be localized through automated or cued station inserts and pre-designed station promotional material including station identifiers. The Company also provides affiliates with a continuously updated how-to manual of promotions and sponsored events. OWNED AND OPERATED STATIONS In addition to expanding its network delivery system through affiliation, the Company's business strategy includes exploring opportunities to acquire RBLs in the top 100 U.S. markets. While it is less capital intensive to have a presence in a particular market through a network affiliate, the Company may seek to acquire an RBL in a particular market if a favorable acquisition opportunity is presented, or the Company deems it to be in its best interests to secure any particular market from the risk of the loss of an affiliate. Each of the Company's owned or operated radio stations has seven minutes of local advertising and three minutes of national advertising per programming hour. As the Company increases its number of owned and operated stations, it expands its radio network, increases its inventory of local advertising time to sell and enjoys economies of scale because the programming it develops in Minneapolis is distributed to its other stations at an insignificant incremental cost. In analyzing the strategic suitability of a potential acquisition, the Company considers such factors as: (i) the demographics, historical and projected rates of growth of the market and other factors relating to population, retail sales and the local economy; (ii) the competition in the market; (iii) whether the station has a desirable dial position and broadcast signal to reach a sufficient audience to allow it to compete in the market; (iv) the projected level of performance which the Company estimates can be achieved within 12 to 24 months; and (v) agency and advertiser concentration in the market. The Company generally seeks to acquire the assets and RBLs of radio stations, but does not rely on the existing advertiser or listener base of acquired stations because of the conversion to the Aahs World Radio format. The Company believes it is able to identify radio stations which offer the potential to become strong links in its network. The Company believes that the AM radio market offers a significant opportunity for expansion of its network because many AM radio station owners are looking for the opportunity to revitalize their operations, reduce operating costs and improve profitability. The Company owns and operates radio stations in the top three population centers of the United States, New York, Los Angeles and Chicago. The Company currently owns and operates WJDM in the New York market, KPLS in the Los Angeles market and WAUR in the Chicago market. The Company believes it is desirable to own and operate stations in these three markets because: (i) the Company will be able to maintain coverage, assuring advertisers that their commercial messages will always be carried in these key markets; and (ii) presence in these markets will demonstrate the Company's level of commitment to the Aahs World Radio format, and consequently, will help the Company with national sales and affiliate recruitment. The Company's strategy to own or operate stations in the top markets parallels the strategy of many broadcast networks, including NBC, ABC, CBS and Fox. 14 ACQUISITIONS Since 1995, the Company has made the following acquisitions of RBLs in major markets: WAUR-AM, SANDWICH, ILLINOIS. In January 1997, the Company acquired the RBL of WAUR-AM in the Chicago market. The purchase price was paid by the issuance of approximately $291,000 in Common Stock, a promissory note of $1,400,000 to be paid over six years, a non-competition agreement of $500,000 to be paid over ten years, and approximately $1,700,000 in cash. WPWA-AM, CHESTER, PENNSYLVANIA. In September 1996, the Company acquired the RBL of WPWA-AM in the Philadelphia market. The purchase price was paid by issuance of approximately $500,000 in Common Stock and $820,000 cash. WJDM-AM, ELIZABETH, NEW JERSEY. In June 1996, the Company acquired the stock of Radio Elizabeth, Inc. which operates radio station WJDM-AM in the New York market. The purchase price was paid by the issuance of approximately $2,500,000 in Common Stock, the Company's assumption and payment at closing of approximately $518,000 of the seller's debt, $7,062,000 cash, and a non-competition and consulting agreement of $1,500,000 to be paid over a ten year period. WCAR-AM, LIVONIA, MICHIGAN. In June 1996, the Company acquired the RBL of WCAR-AM in the Detroit market. The purchase price of $1,500,000 was paid in cash. KKYD-AM, DENVER, COLORADO. In November 1995, the Company acquired the RBL of KKYD-AM, Denver, Colorado. The purchase price was paid by the issuance of approximately $365,000 in Common Stock, the Company's assumption of approximately $521,000 of the seller's debt, and $47,000 cash. SALES AND MARKETING The Company's primary source of revenue is the sale of radio advertising time. The Company's national advertising customers include, among others, Target, Nickelodeon, Buena Vista, Fox and Southland. The Company's own sales force sells the Aahs World Radio network ad-time inventory directly to advertisers and their agencies. Sales efforts are aimed at advertising agencies, national advertisers, sports franchises, non-profit groups and foundations. Local advertising time is sold to advertisers whose businesses are in each station's market. The leading audience measurement services only tabulate radio listening for persons aged 12 and over. The Company's primary audience is persons 12 and under. In a 1994 study commissioned by WWTC in Minneapolis, Arbitron, the principal radio audience measurement service, found that 91% of children under 12 in the Minneapolis radio market listen to the radio. The same study revealed that 22% of all children in the Minneapolis market listened to WWTC each week. A similar study performed in 1992 by AccuRatings, another independent audience measurement service, found that Aahs World Radio ranked first in retaining new listeners and as the ninth overall favorite station out of the 26 stations included in the survey, all of which, except for Aahs World Radio, seek primarily to attract adult audiences. While these surveys have helped the Company demonstrate to advertisers the appeal of the Aahs World Radio format, there are no audience surveys that measure the listening behavior of the Company's core audience on a regular basis. The Company continues to seek means to provide information to prospective advertisers as to the size and composition of the Aahs World Radio format audience, despite the absence of conventional ratings. One way is by engaging in promotional selling, where an advertiser's spots call for a direct response from the listener, such as a call-in request for information or some premium. The Company also manages an inbound direct-response telephone system which gives callers an opportunity to respond to questions by pushing buttons on the phone, or, as appropriate, to talk to an operator. This phone system allows the Company to collect and tabulate responses to an advertiser's campaign. During 1996 the Company received approximately 3,000,000 phone calls from listeners. Use of this system has enabled the Company to build a database of Aahs 15 World Radio listeners. The Company conducts studies to ascertain listening habits, programming preferences and other information of significance to advertisers and prospective advertises through the use of this database. The Company generally develops local marketing and sales techniques at WWTC in Minneapolis. Once the techniques have been proven effective, the Company can implement them at its other stations, and can share them with affiliates. Among these techniques are major local event sponsorships and local remote "on location" broadcasts, which may include AAHSIE-TM-. In addition, the Company has designed local sales programs for its owned and operated stations, as well as affiliated stations. For example, one local sales program, AAHS-TM- Direct, provides advertisers with an annual advertising schedule that includes a mix of radio spots, billboard postings and display space in certain print media. The Company maintains a program of communications with the advertising community, and present and prospective affiliates. The Company utilizes outdoor advertising and certain print media to promote itself to advertisers generally, and has used various printed communications to keep advertisers abreast of Company developments. The Company has implemented a targeted mail campaign to develop its affiliate roster, and thereby increase the national coverage of the Aahs World Radio format. By increasing national coverage the Company expects to generate additional revenue. The Company's public relations department actively seeks to obtain favorable coverage of Aahs World Radio events and advancements. The Company sponsors local promotions in those markets where it owns or operates stations. The promotions are designed to increase community awareness of Aahs World Radio. STRATEGIC RELATIONSHIPS The Company has sought out and developed strategic relationships in order to enhance and reinforce its brand, and to allow the Company to exploit business opportunities at minimal cost to it and without detracting from management's focus upon the Company's core business. The Company has engaged investment bankers to explore strategic alternatives to enhance shareholder value. Such investment bankers have had and continue to hold discussions with various potential strategic partners with a view toward entering into a joint venture, sale or merger. There can be no assurance that the Company will be successful in completing any transaction with a prospective strategic partner. PROGRAMMING DISTRIBUTION The Company transmits all of its programming from Minneapolis, Minnesota by means of communications satellite, utilizing services provided pursuant to contracts with unaffiliated third parties. The first step in the transmission process is sending a signal from WWTC to an "uplink facility" via microwave. The uplink facility transmits Aahs World Radio programming to a communications satellite, which transmits the signal to receiving antennas at each Aahs World Radio affiliate. The Company has contracted with CBS Television Stations, a division of CBS, Inc., doing business as Teleport Minnesota, for the provision of uplink services. At present there are approximately 40 domestic communications satellites available for the transmission of broadcast signals, as well as one uplink facility in the Minneapolis-St. Paul area. If satellite transmission were interrupted or terminated due to the failure or unavailability of the uplink facility or a satellite, such termination or interruption could have a material adverse effect on the Company. However, the Company believes, given the number of communications satellites and available uplink facilities, that termination of the Company's transmission as a result of failure or unavailability of such services is unlikely. COMPETITION The Company competes for listeners and advertising revenue. Television networks and other organizations offering television programming for pre-teens represent the Company's largest source of competition. In addition to ABC, NBC, CBS and FOX, a number of basic cable television networks (such as USA, the Family Channel, Nickelodeon and the Cartoon Network), pay television networks (such as the 16 Disney Channel), superstations (such as WWOR and WGN) and public television stations provide programming targeting the pre-teen audience. The Company also competes with radio media targeting adults and young adults, syndicated children's radio programs, magazines, newspapers and other leisure-time activities including home video, movie theaters and video games. While competitive non-radio product is generally consumed in the home, Aahs World Radio may be consumed in a variety of locations, including automobiles. Aahs World Radio offers advertisers an alternative, at advertising rates considerably below television advertising rates. Additionally, the cost to produce a radio advertisement is small in comparison to the cost to produce an advertisement for television. Aahs World Radio format is the largest 24-hour national radio network that programs exclusively to the pre-teen audience. ABC/Disney recently began providing programming aimed primarily at the pre-teen market. ABC/Disney, as well as many competing media companies, are well-established and have substantially greater financial resources than the Company. Other entities, including those with greater financial resources, could create or carry children's programming in competition with the Company. No assurance can be given that the Company will compete successfully with such established media competitors. The Company believes, however, its strong lead in developing the children's radio network provides a competitive barrier to others who may attempt to enter this particular field. See "Cautionary Statement -- ABC/Disney Litigation" and "-- Competition." REGULATION FCC REGULATION Radio stations are subject to the jurisdiction of the FCC under the Communications Act, which empowers the FCC to issue, renew, revoke and modify broadcasting licenses, approve transfers of licenses, regulate the apparatus used by stations, establish areas served by particular stations, assign frequencies, consider concentrations of broadcast control, adopt such regulations as may be necessary to carry out the provisions of the Communications Act and impose penalties for violations of such regulations, including forfeiture of licenses. The Telecommunications Act of 1996 (the "1996 Act") eliminated the limit upon the number of stations that can be under common ownership or control nationally. Local ownership was substantially relaxed according to market size (which will continue to be measured by commercial contour overlap) to permit the following: (1) in markets of 14 or fewer stations: up to 5 total (but no more than half of the stations in the market) and no more than 3 in the same service (AM or FM); (2) 15 to 29 stations: up to 6 total, 4 in the same service; (3) 30 to 44 stations: up to 7 total, 4 in the same service; and (4) over 45 stations: up to 8 total, 5 in the same service. The 1996 Act authorized the FCC to override these limits if it determines that the result would be an increase in the number of stations in operation. The 1996 Act also made changes to the licensing scheme for radio stations. Radio standard license terms were extended to 8 years, subject to short-term renewal sanctions where appropriate. A license terminates automatically if a station is silent for one year. The 1996 Act also provided that a station license renewal application must be granted if the FCC finds (a) that the station has served the public interest, (b) the licensee has not committed any serious violations of the Communications Act or FCC rules, and (c) other violations of the Communications Act or rules, taken together, would not constitute a pattern of abuse. Only if the standards are not met, and renewal is denied, may the FCC accept other applications for the forfeited facilities. These procedures apply retroactively to all renewal applications filed after May 1, 1995. Under the FCC's attribution rules, interests of parties who have an attributable interest in the Company are counted among the Company's interests in the application of the multiple ownership rules. The FCC requires the attribution of RBLs held by a broadcasting company to its officers, directors and certain holders of its voting securities. Under FCC rules, with certain exceptions, attribution of RBLs occurs when any five percent voting shareholder or officer or director of a broadcasting company directly or indirectly owns, 17 operates, controls or has a five percent voting interest in or is an officer or director of any other broadcasting company. Christopher T. Dahl and Richard W. Perkins hold ownership interests, directorships and/or offices in the Company and in CAC which holds RBLs. Consequently, the RBLs of all companies in which they have attributable interests are aggregated for the purposes of calculating the limitations imposed by the application of the multiple ownership rules. Such ownership could, under current FCC regulations, limit the markets in which the Company could acquire additional RBLs. On March 3, 1997, by REPORT AND ORDER in FCC IB Docket 95-91, the Federal Communications Commission adopted service rules for the satellite Digital Audio Radio Service (satellite DARS), which is promised to provide CD-quality nationwide radio service. The service rules apply to two groups of satellite DARS operators: two 12.5 MHz licenses in the 2320-2345 MHz band, which commencing April 1, 1997 will be available for bidding in a closed auction of four applications that have been pending for several years; and two licenses of 5-10 MHz in the Wireless Communications Service (WCS) bands of 2305-2320 MHz and 2345-2350 MHz, which will be available for bidding by the public at an auction scheduled to commence April 15, 1997. The Company is unable to predict the effect, if any, that this form of radio service may have on its future operations. The FCC's technical limitations and interference standards determine the number of stations that can be granted licenses. In making initial licensing determinations and in reviewing applications for renewal or transfer of existing licenses under the Communications Act, the FCC considers a number of factors relating to the applicant and each party having an attributable interest in the applicant in order to make a judgment as to whether or not the public interest, convenience and necessity will be served by granting or renewing the application. These factors include financial and character qualifications, employment practices, past record of public service programming and past record of compliance with FCC regulations. The FCC also restricts ownership interests in broadcast stations by a corporation of which any officer or director is an alien or of which more than twenty percent of its capital stock is owned or voted by aliens or their representatives or by any corporation organized under the laws of a foreign company. The FCC has deregulated many aspects of the radio industry. The FCC has eliminated or reduced its regulation of radio with regard to licensee responsibilities for the ascertainment of community needs, non-entertainment programming standards, commercial advertising limitations and the recording of certain informational items on a programming log. Several aspects of the FCC's regulatory system (for example, equal time requirements and equal employment opportunity requirements) remain unaffected by these actions. Even though the FCC has eliminated certain programming guidelines, it continues to monitor radio and television stations to ensure that programming is responsive to the issues confronting a licensee's community. However, licensees are afforded substantial discretion in making programming determinations. Radio broadcasting licenses are granted for a maximum term of eight years and are subject to renewal upon application to the FCC. The renewal schedule of broadcasting licenses for the Company's owned or operated radio stations is as follows: KPLS-AM December 1, 1997 KAHZ-AM August 1, 1997 KCNW-AM June 1, 1997 KTEK-AM August 1, 1997 KYCR-AM April 1, 1997 WZER-AM December 1, 2004 WWTC-AM April 1, 1997 KKYD-AM April 1, 1997 KCAZ-AM June 1, 1997 WAUR-AM December 1, 2004 WPWA-AM August 1, 1998 WCAR-AM October 1, 2004 WJDM-AM (1530) June 1, 1998 18 Petitions to deny license renewals by which various issues may be raised before the FCC, can be filed by interested parties, including members of the public, and the FCC may itself determine to conduct a hearing in the absence of a formal request by other parties. The FCC is required to hold hearings on renewal applications if it is unable to determine that renewal of a license would serve the public interest, convenience and necessity or if a substantial and material question of fact is raised in the renewal application. In recent years, a number of competing applications and formal and informal objections have been filed with respect to broadcast renewal applications. However, the vast majority of all license renewal applications filed with the FCC on behalf of radio stations throughout the country are granted for the maximum statutory term. In June 1996, the Company acquired the stock of REI, licensee of radio station WJDM-AM, Elizabeth, New Jersey, which also holds an STA to construct an Expanded Band facility to broadcast at 1660 at 10,000 watts. The FCC recently concluded its rulemaking proceeding relating to Expanded Band allocations, confirming REI as one of the stations receiving such an allocation. The Company's obtaining of a permanent license to broadcast on the Expanded Band frequency is subject to the filing by the Company of a Form 301 with the FCC and approval by the FCC of such application. The Company has reviewed the FCC file maintained by REI and based upon that review and correspondence between the FCC and REI's counsel contained in that file, the Company believes that it will ultimately receive an allocation of an Expanded Band frequency. The foregoing is only a brief summary of certain provisions of the Communications Act, the 1996 Act and the regulations of the FCC. Reference is made to the Communications Act, the 1996 Act, FCC regulations and the public notices promulgated by the FCC for further information. Legislation has been introduced from time to time which would amend the Communication Act in various respects and the FCC from time to time considers new regulations or amendments to its existing regulation. The Company cannot predict whether any such legislation will be enacted or new or amended FCC regulations adopted or what their effect would be on the Company. FRANCHISE REGULATION The Federal Trade Commission ("FTC") regulates franchises under the "Franchise Rule," a regulation which sets forth standards for mandating disclosure of information before the sale of a franchise or business opportunity. Additionally, several states regulate various aspects of franchising. The Company has structured its local station affiliation agreements in such a way as to prevent, in the Company's opinion, their characterization as franchise or business opportunity arrangements under various state laws and the FTC Franchise Rule, and thus avoid the cost, delays and other burdens associated with registration and disclosure compliance obligations associated with franchising or business opportunity sales. It is possible that a state agency, the FTC or a court could find that the affiliation agreements constitute franchising or business opportunity sales, in which case the Company could face various sanctions and private litigation. In addition, the affiliation agreements may be subject to state laws in various states regulating the basis and terms upon which dealership and similar agreements may be terminated or not renewed or regulating other aspects of producer-dealer relations. These statutes could impede the Company's ability to terminate a particular affiliation agreement, materially alter the nature and terms of the Company's relationships with its affiliates, or affect other aspects of the Company's dealings with its affiliates. Other such laws may be enacted in the future by both the state and federal governments. TRADEMARKS AND COPYRIGHTS The Company claims trademark rights to and ownership in a number of marks including, but not limited to, RADIO AAHS-REGISTERED TRADEMARK-, RADIO AAHS-REGISTERED TRADEMARK- (words plus design of unicorn), CHILDREN'S SATELLITE NETWORK-TM-, ALL THE GOOD STUFF RADIO DOES-REGISTERED TRADEMARK-, THE ALL-AMERICAN ALARM CLOCK-REGISTERED TRADEMARK-, ALPHABET SOUP-REGISTERED TRADEMARK-, GREAT MUSIC FOR GREAT KIDS-REGISTERED TRADEMARK-, JUST KIDS-REGISTERED TRADEMARK-, RADIO AAHS AIRFORCE-REGISTERED TRADEMARK-, THE EDUCATIONAL, SENSATIONAL RADIO AAHS-REGISTERED TRADEMARK-, AAHS-TM-, AAHSIE-TM-, AVENUE `A'-SM-, FASCINATING FACTS-SM-, THE FUN AND ONLY-TM-, NEWS AAHS IT WAS-SM-, PLANET AAHS RECORDS-REGISTERED TRADEMARK-, PLAYING ALL DAY WITH RADIO AAHS-TM-, RADIO AAHS-TM- (with new logo design), KA'ZOO-TM-, RADIO AAHS-REGISTERED TRADEMARK- COUNTDOWN, Storytime THEATER-SM-, AAHS WORLD RADIO-TM-, AAHS WORLD RADIO AIRFORCE-TM-. 19 The Company intends to continue to use these names and marks and to develop other distinctive marks for the radio programming developed by the Company. In addition, the Company intends to protect its radio programming under the copyright laws. No assurance can be given, however, that the Company will be successful in obtaining federal trademark or copyright protection for any of the marks or its programming which are the subject of pending applications. EMPLOYEES As of December 31, 1996, the Company had 204 employees, 107 of whom are full-time. The services of the Chief Operating Officer and Chief Financial Officer and General Counsel are rendered by James G. Gilbertson and Lance W. Riley, respectively, on a shared basis with Community Airwaves Corporation ("CAC"). Executive officers of the Company and certain other corporate employees are employed by RMC and their services are provided to the Company and to CAC under contract for a fee. None of the Company's employees are represented by unions. The Company believes its relations with employees are satisfactory. ITEM 2. DESCRIPTION OF PROPERTY The Company's executive offices are located at 724 First Street North, Fourth Floor, Minneapolis, Minnesota. The facility consists of approximately 3,000 square feet and is shared with Radio Management Corporation and Community Airwaves Corporation, both of which are owned by the Company's President and a director, Christopher T. Dahl, another director, Richard W. Perkins, and a shareholder of the Company, Russell Cowles II. The facilities are leased from a partnership consisting of Mr. Dahl, Mr. Perkins and an unaffiliated third party at an annual rent of $54,000. The studios and tower site of WWTC and KYCR are located in St. Louis Park, Minnesota. The studio facility consists of approximately 12,000 square feet. The tower site includes four 200-foot towers, a transmitter building and a storage garage on approximately 16 acres. The tower site is leased from Mr. Dahl at a total annual rent of approximately $114,000, and the studio site is leased from a partnership consisting of Mr. Dahl and Mr. Perkins at an annual rent of approximately $132,000. The Company currently lease studio facilities in the following markets, for the purpose of housing certain of its radio stations, upon the general terms set forth below. The Los Angeles studio facility consists of approximately 3,422 square feet. The facility is leased at an annual rent of $36,136 and the lease is for a term of three years ending August 1999. The New York studio facility consists of approximately 1,700 square feet. The facility is leased at a monthly rent of $1,675 and the lease is on a month-to-month basis. The Dallas/Fort Worth studio facility consists of approximately 2,000 square feet. The facility is leased at an annual rent of $35,700 and the lease is for a term of five years ending May 1998. The Houston studio facility consists of approximately 2,700 square feet. The facility is leased at an annual rent of $29,700 and the lease is for a term of five years ending July 2001. The Milwaukee studio facility consists of approximately 2,400 square feet. The facility is leased at an annual rent of $21,360 and the lease is for a term of five years ending November 1999. The Chicago studio facility consists of 322 square feet. The facility is leased at a monthly rent of $600 and the lease is for a term of six months ending May 1997. The Company currently leases broadcast tower sites in the following markets, for the purpose of transmitting its broadcast signals, upon the general terms set forth below. The Los Angeles tower site is leased at an annual rent of $40,000 and the lease is for a term of nine years ending October 1999. The New York tower site is leased at an annual rent of $4,500 and the lease is for a term of fifteen years ending March 2000. The Dallas/Fort Worth tower site is leased at a monthly rent of $125 and the lease is on a month-to-month basis. The Milwaukee tower site is leased at an annual rent of $2,100 and the lease is for a term of five years ending February 2000. The Chicago tower site is leased at an annual rent of $18,000 and the lease is for a term of ten years ending December 2006. ITEM 3. LEGAL PROCEEDINGS In November 1995, the Company entered into an Operations Agreement with ABC pursuant to which ABC's affiliate development and national advertising sales staffs would augment the Company's efforts to market the Aahs World Radio format to broadcasters and advertisers. On July 25, 1996, ABC notified the Company that ABC would terminate such agreement effective October 24, 1996. Following the termination by ABC of the Operations Agreement, the Company filed a lawsuit in the United States District Court for the District of Minnesota against The Walt Disney Company and ABC for injunctive relief and to recover damages for their alleged attempts to misappropriate the Company's confidential information and trade secrets acquired through their strategic relationship with the Company in order to unfairly compete with the Company in the children's radio market. As a result of the termination by ABC of its Operations Agreement with the Company, the Company has had to rebuild its own affiliate development and national advertising sales staff and is in the process of rebuilding that capability. The Company has commenced rebuilding of its national sales and affiliate development organizations and has hired eight individuals to staff its national sales and affiliate development departments. The Company expects to have its national sales and affiliate development programs in place during the first half of 1997. The Company is, however, unable to determine the full impact of damages it has sustained as a result of the actions by ABC, which are the basis of the Company's claims in the ABC/Disney litigation. Further, there can be no assurance that the Company will be able to rebuild its national sales and affiliate development organizations or that it will prevail in the ABC/Disney litigation or recover any of the damages sought. Such litigation is costly to the Company and legal fees and costs associated with the litigation have reduced and may continue to reduce the Company's working capital. Further, the Company has issued and may in the future issue securities to finance the litigation which could result in substantial dilution to the Company's existing shareholders. On November 15, 1996, the Commission declared effective the Company's Registration Statement on Form S-3 which registered 200,000 shares of Common Stock on behalf of the Company's litigation counsel. 20 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 before the FCC in connection with the licensing of radio stations. 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. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER 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 since May 1993 and on the over-the-counter Bulletin Board ("OTC") from the completion of the Company's public offering in 1992 until that time. 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 Stock Market. Share prices have been adjusted to reflect the Company's one-for-two reverse stock split (share combination) effected on January 23, 1996. Period High Low ------ ---- ------ 1995 First Quarter. . . . . . . . . . . . $13 $ 7 1/2 Second Quarter . . . . . . . . . . . 14 10 Third Quarter. . . . . . . . . . . . 15 1/4 9 1/4 Fourth Quarter . . . . . . . . . . . 14 1/4 7 3/4 1996 First Quarter. . . . . . . . . . . . $14 $ 8 1/2 Second Quarter . . . . . . . . . . . 10 1/2 6 1/4 Third Quarter. . . . . . . . . . . . 7 7/8 4 5/8 Fourth Quarter . . . . . . . . . . . 5 7/8 3 1/4 As of March 3, 1997, the Company had 512 shareholders of record. The above quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The holders of the Company's Common Stock are entitled to such dividends as may be declared from funds legally available for such purpose by the Company's Board of Directors in its sole discretion. The Company has never paid a dividend on its common stock and does not anticipate that dividends will be paid in the foreseeable future. To the extent any operating profits are realized, the Company intends to retain the same for operating purposes. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 of the Company's securities are cautioned not to place undue reliance on such forward-looking statements which are qualified in their entirety by the cautions and risks described herein. GENERAL The Company has developed a radio programming format, Aahs World Radio, designed and directed toward pre-teen children and their parents. The Company is developing a network of radio stations, both by acquisition of radio stations and the entry into affiliation agreements with independently-owned radio stations, for the purpose of distributing the Company's Aahs World Radio format. Since the inception of the Company, the primary sources of the Company's revenue have been from the sale of local advertising and air time and 21 network revenue. A substantial portion of the Company's local advertising revenue is derived from Company-owned stations not broadcasting the Aahs World Radio format. This source will continue to remain a substantial source of revenue for 1997. Network expenses are expected to continue to exceed network revenues through 1997, as the Company must maintain its affiliate support staff and national programming staff. While these costs are not expected to materially increase during this period, they will remain a substantial part of the Company's overall expenses. Radio stations frequently barter unsold advertising time for products or services, such as hotels, restaurants and other goods used principally for promotional, sales and other business activities. Barter revenues and expenses are included in the financial presentation below. The revenue and expenses related to barter do not have a material effect on the Company's operating profit in a given period. In connection with their audit reports on the Company's financial statements as of and for the years ended December 31, 1995 and 1996, Ernst & Young LLP and BDO Seidman, LLP, the Company's independent auditors as of such dates, expressed substantial doubt about the Company's ability to continue as a going concern because of its recurring losses and negative cash flow from operations. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995. Owned, Operated and LMA Station Revenues: Total revenues from the Company's owned, operated and LMA stations increased $13,000 from $4,048,000 in 1995 to $4,061,000 in 1996. Barter revenues decreased $407,000 while non-barter revenues increased $420,000. This non-barter revenue increase resulted from the stations the Company acquired in 1996 (New York, Detroit and Philadelphia) which totaled $152,000, an increase in sales totaling $145,000 from the Kansas City and Minneapolis Aahs World Radio formatted stations, and an increase in sales totaling $123,000 from three of the four non-Aahs World Radio formatted stations (Houston, Kansas City, and Minneapolis). Network Revenues: Total revenues of $1,594,000 were produced by the network in 1996, an increase of $535,000 or 51% over 1995 revenues. This increase in network revenues is the result of the expanded coverage of the network and the continued acceptance of its format as a viable medium on which to advertise. Owned, Operated and LMA Station Expenses: General and administrative expenses increased 19% to $2,493,000 for 1996 from $2,104,000 in 1995. Of this increase, $245,000 was due to the addition of the Detroit and New York stations in June 1996 and the Philadelphia station in October 1996 and $128,000 was attributable to increase in compensation expense at previously existing stations. Technical and programming expenses decreased $88,000 in 1996 from $1,057,000 in 1995 to $969,000. The technical expenses have decreased as equipment has been upgraded, requiring less maintenance and repair, and programming expenses have been reduced as the Aahs World Radio formatted stations are able to depend more fully on the network to provide their programming needs. Sales expenses decreased from $1,795,000 in 1995 to $1,575,000 in 1996, a decrease of 12%, due primarily to the 40% reduction of barter expenses during that time period. The $32,000 increase in non-barter expenses for the period is due to the addition of the Detroit, New York and Philadelphia stations in 1996. Network Expenses: General and administrative expenses increased $134,000 in 1996 to $885,000 as compared to $751,000 for 1995 due primarily to $225,000 of expense incurred related to the joint operating agreement with ABC/Disney which has now been terminated. Compensation expense decreased $50,000 in 1996 and bad debt expense decreased approximately $100,000. 22 Programming expenses increased $248,000 to $885,000 in 1996 compared to $637,000 in 1995 due primarily to the $192,000 increase in line charges related to the implementation of an integrated telephone system designed to enhance programming and encourage active listener participation. There has also been a $75,000 increase in programming salaries and talent fees and a $17,000 reduction in programs and materials expense as the network is able to produce these internally. Sales expenses increased 17% from $943,000 in 1995 to $1,106,000 in 1996. These sales expenses relate to both advertising sales and affiliate relations sales. Although sales expenses decreased during the mid year due to the reduction of advertising sales salaries as well as the reduction of travel and lodging expenses as a result of the Company utilizing the ABC advertising team under its joint operating agreement, expenses increased during the latter part of the year as the Company began rebuilding its advertising sales efforts, including hiring staff, providing supplemental training, and increasing travel. Additionally, in the last quarter of 1996, the network implemented a sales development team which assists the newly acquired owned and operated stations in their sales efforts. Marketing expenses were $524,000 during 1996 compared to $21,000 in 1995. The Company began developing this department in 1996 and anticipates expenses will remain at current levels of approximately $38,000 per month as it becomes fully operational. During 1996, activities in this category included advertising, research, television spot production and promotion. Corporate charges were $2,774,000 in 1996 compared to $1,465,000 in 1995, representing an increase of 89%. This increase is attributable to an increase in outside service fees including $135,000 of investor/media relations expenses, $137,000 of legal and accounting fees related to stock, trademark, employee matters, SEC filings and audits, $150,000 of management fees, and $86,000 of compensation expense. Additionally, as of December 31, 1996 the Company incurred $400,000 of expenses relating to the ABC/Disney litigation. Such litigation is anticipated to be costly and may continue to reduce the Company's working capital. The Company has filed a Form S-3 registering 200,000 shares of common stock to be used to finance this litigation. Depreciation and amortization increased to $1,501,000 in 1996 from $937,000 in 1995, due in part to the acquisition of the assets of the Denver station acquired in November 1995, the acquisition of the assets of the Detroit and New York stations acquired in June 1996 and the acquisition of the assets of the Philadelphia station in September 1996. In July 1996, the operations agreement with ABC/Disney was effectively canceled and the unamortized value initially ascribed to that warrant, aggregating $2,288,000 was expensed in 1996 (see note 12 to the financial statements). Net interest expense for the year decreased $809,000 as a result of the repayment of debt from the proceeds of the public offering. The net loss increased 62% in 1996 to $9,868,000 from $6,108,000 in 1995. Consistent with its business plan and network strategy, the Company anticipates that its coverage of the United States will continue to expand during the upcoming year either through affiliation or acquisition of additional radio stations. The Company expects to incur operating losses as such network expansion increases, and that the losses will continue throughout 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity, as measured by its working capital, was negative $5,489,000 at December 31, 1996 compared to negative working capital of ($4,421,000) at December 31, 1995. The decrease in net working capital during 1996, was primarily the result of the reclassification of the long-term portion of the Term Loan as the Company did not meet certain restrictive financial covenants contained in the Credit Agreement as of December 31, 1996. The failure to meet these covenants was principally due to the holdback of $4,000,000 by Foothill to be released upon the Company's fulfillment of certain post-closing conditions. On March 27, 1997, Foothill waived its rights pursuant to the December 31, 1996 violations. Pursuant to generally accepted accounting principles (EITF No. 86-30), if similar restrictive covenants must be met at future interim periods, the debt must continue to be classified as current unless it is probable that the Company will satisfy the covenants in the future or Foothill agrees to waive its rights to such potential future covenant violations. Foothill would not provide the Company with such a waiver and accordingly, the principal balances outstanding at December 31, 1996 aggregating $7,885,000 have been entirely classified as current obligations, even though $6,353,000 of this amount is not scheduled to be repaid until after December 31, 1997. The Company is scheduled to meet with Foothill to discuss the possibility of reviewing the covenant requirements in an effort to avoid future violations. Exclusive of this $6,353,000 reclassification, the Company's net working capital increased from December 31, 1995 to December 31, 1996 by $5,285,000. This increase was the result of the Company receiving net proceeds from a public offering of common stock, repaying approximately $4,500,000 of short term debt and related accrued interest and purchasing RBLs in three markets. At present, the Company has experienced a cash working capital loss of approximately $500,000 per month. The Company 23 expects this loss per month to decrease as it heads into stronger revenue months. Typically, the first quarter is the weakest sales quarter for broadcast entities. The Company anticipates that its network advertising and owned and operated station revenues will continue to fall short of expenses from operations throughout 1997. The Company believes it will need to obtain additional financing by the fall of 1997. During 1996, management engaged investment bankers to explore strategic alternatives (see "Description of Business -- Strategic Relationships"). If the Company is not able to obtain proper financing or financing on terms acceptable to the Company, it may (a) be forced to reduce or terminate its operations, (b) curtail acquisitions or other projects, (c) sell or lease current assets, (d) delay certain capital projects or (e) potentially default on obligations to creditors, all of which would be materially adverse to the Company's operations and prospects. The Company purchased the assets of a radio station in the Chicago market in January 1997. This acquisition required approximately $1.6 million of capital at the time of closing. The Company entered into an agreement with Foothill Capital Corporation ("Foothill") in November 1996 to address the Company's working capital requirements. The transaction provided the Company with working capital through (a) a $11,500,000 term loan collateralized by the assets of the Company, payable over four years at a rate of 2.75% above prime, (b) a $1,000,000 line of credit secured by the Company's accounts receivable and (c) a $4,000,000 acquisition facility secured by future assets acquired by the Company. Additionally, the Company granted Foothill a warrant to purchase 50,000 shares of the Company's common stock. The Company was required to pay various service and commitment fees as are standard within the industry. Additionally, at March 15, 1997, the remaining proceeds available under the Term Loan totaling $1,500,000 are being held back by Foothill subject to the Company's completion of certain post-closing conditions which management expects to occur in the second quarter of 1997. Part of the Company's strategy for development and expansion of its network includes acquiring and/or operating radio properties in key U.S. markets. Financing will be required to fund future operations and the expansion of its radio network through acquisitions. There can be no assurance that any such financing will be available to the Company when required, or if available, that it would be on terms acceptable or favorable to the Company. The Company is hopeful, however, the above described financing from Foothill will provide the financing needed to implement its strategy. Because the Foothill financing required the Company to grant liens and security interests to the lender in substantially all of the assets of the Company, this financing may limit the Company's ability to incur additional indebtedness in connection with future financings in the event future funding is required by the Company. The Foothill financing also requires the Company to meet various operating covenants and there can be no assurance that the Company will be able to perform in accordance with such covenants. Any additional capital the Company may require may necessitate the sale of equity securities, which could result in significant dilution to the Company's shareholders. Failure of the Company to obtain additional financing when required could materially and adversely affect its acquisition and operational strategy. Consolidated cash was $3,370,000 at December 31, 1996 and $587,000 at December 31, 1995, an increase of $2,783,000. The change in cash can be attributed to the cash raised at the completion of the public offering of common stock and through the Foothill financing less the cash used to purchase stations in the Detroit, New York and Philadelphia markets and to pay back debt. The Company's children's radio concept is unproven from a commercial viability standpoint. The Company is highly leveraged and substantially all of its assets are subject to the security interest of Foothill. As of December 31, 1996, the Company's consolidated indebtedness approximated 49% of the sum of its shareholders' equity and consolidated indebtedness, assuming performance by the Company of certain post-closing conditions resulting in full funding under the Facilities. Based on current interest rates, the debt service obligations associated with the Credit Agreement necessitate payments of principal and interest of approximately $3,000,000 in 1997. Further, substantially all assets of the Company serve to secure this loan. This degree of leverage increases the Company's vulnerability to adverse general economic and broadcasting industry conditions and to increased competitive pressures, including pressure from better capitalized competitors. Issuance of additional debt, including the debt securities registered pursuant to the Company's Registration Statement on Form S-4 (the "Debt Securities"), would increase this degree of leverage and, therefore, could further increase the Company's vulnerability to such market conditions. In the event that the Company should default on its obligations under the Credit Agreement, all or substantially all of its assets would be at risk. There can be no assurance that 24 the Company will be able to repay or refinance such indebtedness when due, or that the Company would be able to sell all or any portion of its assets or raise additional capital to make required payments on maturing indebtedness. An inability to make payments when due or to comply with covenants and restrictions associated with such indebtedness could give Foothill the right to foreclose on properties securing payment obligations, which would have a material adverse effect upon the Company. Further, approximately $1,500,000 of the loan proceeds continues to be held back by Foothill pending performance by the Company of certain post-closing conditions. Part of the Company's strategy for development and expansion of its network includes acquiring RBLs and/or operating radio properties in key U.S. markets. It is the Company's desire to purchase RBLs in each of the top 15 markets; however, there can be no assurance that the Company will be able to complete suitable acquisitions on terms favorable or acceptable to the Company. In the event the Company purchases additional RBLs, the limitations on the Credit Agreement may require the Company to seek additional financing for acquisitions and to fund future operations. There can be no assurance that such additional financing will be available to the Company when required, or if available, that it would be on terms 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. Accounts receivable at December 31, 1996 increased $713,000 from $877,000 at December 31, 1995. Prepaid expenses at December 31, 1996 decreased $517,000 from December 31, 1995 while other receivables and inventory increased a total of $124,000. Accounts payable at December 31, 1996 increased $517,000 to $1,267,000 compared to the $750,000 balance at December 31, 1995. Other accrued expenses at December 31, 1996 increased $267,000 from December 31, 1995 and accrued interest decreased $217,000 in 1996. The increased amount of cash used for operations was a result of using the monies received through the Company's public offering of common stock to pay down interest and fund an increase in the Company's cash operating requirements. During 1996, $11,178,000 of cash was used for investing activities. This cash was used to purchase stations in the New York, Detroit and Philadelphia markets. Cash obtained through financing activities amounted to $19,453,000 during 1996. This cash represents the monies received from the Company's public offering of common stock less the repayment of debt. SEASONALITY AND INFLATION The Company's revenues generally follow retail sales trends, with the fall season (September through December) reflecting the highest revenues for the year, due primarily to back-to-school and holiday season retail advertising and the first quarter reflecting the lowest revenues for the year. The Company does not believe inflation has affected the results of its operations, and does not anticipate that inflation will have an impact on its future operation. 25 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE ---- CHILDREN'S BROADCASTING CORPORATION Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . . . . .27 Consolidated Financial Statements Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . . .30 Statement of Shareholder's Equity . . . . . . . . . . . . . . . . . . . .31 Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . .32 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .35 26 INDEPENDENT AUDITORS' REPORT Board of Directors Children's Broadcasting Corporation We have audited the accompanying consolidated balance sheet of Children's Broadcasting Corporation as of December 31, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the year 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 audit. We conducted our audit 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 audit provides 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, 1996, and the consolidated results of its operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the Company's recurring losses and negative cash flow from operations raise substantial doubt about its ability to continue as a going concern. Management's plans as to these matters are also described in Note 2. The 1996 financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO SEIDMAN, LLP Milwaukee, Wisconsin February 28, 1997, except for Note 8 which is dated March 27, 1997 27 INDEPENDENT AUDITORS' REPORT Board of Directors Children's Broadcasting Corporation We have audited the accompanying consolidated balance sheet of Children's Broadcasting Corporation as of December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the year 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 audit. We conducted our audit 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 audit provides 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, 1995, and the consolidated results of its operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the Company's recurring losses and negative cash flow from operations raise substantial doubt about its ability to continue as a going concern. Management's plans as to these matters are also described in Note 2. The 1995 financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota January 31, 1996 28 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- ASSETS (NOTES 2 AND 8) 1996 1995 ------------ ----------- Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 3,370,038 $ 587,292 Accounts receivable, net of allowance for doubtful accounts of $93,500 and $71,490, respectively . 1,496,180 804,997 Accounts receivable - other . . . . . . . . . . . . . . . . -- 49,576 Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . 190,398 707,689 Barter activity, net. . . . . . . . . . . . . . . . . . . . 37,612 23,435 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . -- 74,046 ------------ ----------- Total current assets. . . . . . . . . . . . . . . . . . 5,094,228 2,247,035 Deferred expenses. . . . . . . . . . . . . . . . . . . . . . . . -- 2,288,141 Property and equipment, net (Notes 4 and 9). . . . . . . . . . . 4,274,931 3,083,769 Broadcast licenses, net (Note 5) . . . . . . . . . . . . . . . . 16,724,653 4,969,573 Intangible assets, net (Note 5). . . . . . . . . . . . . . . . . 2,513,539 738,220 ------------ ----------- Total assets . . . . . . . . . . . . . . . . . . . . . $28,607,351 $13,326,738 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable. . . . . . . . . . . . . . . . . . . . . . $ 1,266,492 $ 749,742 Accrued interest. . . . . . . . . . . . . . . . . . . . . . 84,146 301,389 Other accrued expenses. . . . . . . . . . . . . . . . . . . 1,000,194 733,371 Line of credit (Note 7) . . . . . . . . . . . . . . . . . . 164,162 -- Short-term debt (Note 6). . . . . . . . . . . . . . . . . . -- 3,650,000 Short-term debt - officers and directors (Note 6) . . . . . -- 900,000 Long-term debt - current portion (Note 8) . . . . . . . . . 8,033,758 297,365 Obligation under capital lease - current portion (Note 9) . 34,705 36,173 ------------ ----------- Total current liabilities. . . . . . . . . . . . . . . 10,583,457 6,668,040 Long-term debt, less current portion (Note 8) . . . . . . . . 1,365,992 872,338 Obligation under capital lease (Note 9). . . . . . . . . . . . . 70,790 52,847 ------------ ----------- Total liabilities. . . . . . . . . . . . . . . . . . . 12,020,239 7,593,225 Commitments and Contingencies (Notes 2 and 10): Redeemable convertible preferred stock series 1993-A (Note 11). . . . . . . . . . . . . . . . . . . . . . -- 2,246,838 Shareholders' equity (Note 12): Common stock. . . . . . . . . . . . . . . . . . . . . . . . 115,966 62,683 Additional paid-in capital. . . . . . . . . . . . . . . . . 42,775,092 19,491,302 Accumulated deficit . . . . . . . . . . . . . . . . . . . . (26,303,946) (16,067,310) ------------ ----------- Total shareholders' equity . . . . . . . . . . . . . . 16,587,112 3,486,675 ------------ ----------- Total liabilities and shareholders' equity . . . . . . $ 28,607,351 $13,326,738 ------------ ----------- ------------ -----------
See accompanying notes to the consolidated financial statements. 29 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------- 1996 1995 ------------ ----------- Revenues: Owned, operated and LMA stations. . . . . . . . . . . . . . $ 4,061,055 $ 4,047,534 Network . . . . . . . . . . . . . . . . . . . . . . . . . . 1,593,883 1,059,011 ----------- ----------- Total revenues . . . . . . . . . . . . . . . . . . 5,654,938 5,106,545 Operating expenses: Owned, operated and LMA stations: General and administrative . . . . . . . . . . . . . . 2,492,992 2,103,673 Technical and programming. . . . . . . . . . . . . . . 968,550 1,056,692 Selling. . . . . . . . . . . . . . . . . . . . . . . . 1,574,869 1,794,676 ----------- ----------- 5,036,411 4,955,041 Network: General and administrative . . . . . . . . . . . . . . 884,652 750,548 Programming. . . . . . . . . . . . . . . . . . . . . . 885,227 636,811 Selling. . . . . . . . . . . . . . . . . . . . . . . . 1,105,817 942,650 Merchandising. . . . . . . . . . . . . . . . . . . . . 523,719 21,223 Magazine . . . . . . . . . . . . . . . . . . . . . . . 125,542 138,926 ----------- ----------- 3,524,957 2,490,158 Stock option and stock award compensation . . . . . . . . . -- 24,991 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . 2,023,936 853,968 Corporate expenses paid to affiliated management company . . . . . . . . . . . . . . . . . . 750,000 600,000 Amortization and write-off of deferred expenses . . . . . . 2,288,141 103,086 Litigation settlements. . . . . . . . . . . . . . . . . . . -- 10,570 Depreciation and amortization . . . . . . . . . . . . . . . 1,500,504 936,822 Loss on exchange of assets. . . . . . . . . . . . . . . . . -- 31,423 ----------- ----------- Total operating expenses . . . . . . . . . . . . . . . 15,123,949 10,006,059 ----------- ----------- Loss from operations . . . . . . . . . . . . . . . . . . . . . . (9,469,011) (4,899,514) Interest expense . . . . . . . . . . . . . . . . . . . . . . . . (604,296) (1,065,060) Interest expense - officers and directors. . . . . . . . . . . . (28,808) (157,877) Interest income. . . . . . . . . . . . . . . . . . . . . . . . . 234,236 14,674 ----------- ----------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(9,867,879) $(6,107,777) ----------- ----------- ----------- ----------- Net loss per share . . . . . . . . . . . . . . . . . . . . . . . $ (1.99) $ (2.22) ----------- ----------- ----------- ----------- Weighted average number of shares outstanding. . . . . . . . . . 5,149,000 2,815,500 ----------- ----------- ----------- -----------
See accompanying notes to the consolidated financial statements. 30 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996 AND 1995
COMMON STOCK ADDITIONAL TOTAL ------------------------ PAID-IN ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY ------------ --------- ----------- ------------ ------------ Balance at December 31, 1994 . . . . . . . . . . . . . . . . 2,709,041 $ 54,180 $12,824,299 $ (9,808,059) $ 3,070,420 Issuance of common stock upon exercise of options. . . . . . 7,250 145 16,985 -- 17,130 Issuance of common stock to employees as compensation. . . . 3,375 67 26,055 -- 26,122 Issuance of stock warrants in connection with bridge loan financing. . . . . . . . . . . . . . . . . . . -- -- 860,858 -- 860,858 Issuance of common stock upon conversion of debt and accrued interest . . . . . . . . . . . . . . . 378,985 7,580 3,134,769 -- 3,142,349 Issuance of stock options to directors as compensation . . . -- -- 43,125 -- 43,125 Issuance of common stock in connection with purchase of KKYD - Denver, Colorado. . . . . . . . . . . . 35,573 711 364,296 -- 365,007 Issuance of stock warrants in connection with marketing agreement . . . . . . . . . . . . . . . . . -- -- 2,220,915 -- 2,220,915 Accretion of redeemable convertible preferred stock. . . . . -- -- -- (151,474) (151,474) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- (6,107,777) (6,107,777) ------------ --------- ----------- ------------ ------------ Balance at December 31, 1995 . . . . . . . . . . . . . . . . 3,134,224 62,683 19,491,302 (16,067,310) 3,486,675 Net proceeds from public offering of common stock . . . . . . . . . . . . . . . . . . . . . . . 2,200,000 44,000 19,740,497 -- 19,784,497 Issuance of common stock upon exercise of options and warrants . . . . . . . . . . . . . . . . . . . . . . . 39,536 793 175,550 -- 176,343 Issuance of common stock in connection with acquisition of WJDM, Elizabeth, New Jersey . . . . . . . . . . . . . . 270,468 5,409 2,494,591 -- 2,500,000 Issuance of common stock in connection with acquisition of WPWA - Chester, Pennsylvania. . . . . . . . . . . . . . 79,052 1,581 498,419 -- 500,000 Issuance of common stock in connection with acquisition of WAUR-AM - Sandwich, Illinois. . . . . . . . . . . . . . 75,000 1,500 289,420 -- 290,920 Issuance of stock warrants in connection with bridge loan financing . . . . . . . . . . . . . . . . . . . . . . -- -- 85,313 -- 85,313 Accretion of redeemable convertible preferred stock. . . . . -- -- -- (368,757) (368,757) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- (9,867,879) (9,867,879) ------------ --------- ----------- ------------ ------------ Balance at December 31, 1996 . . . . . . . . . . . . . . . . 5,798,280 $115,966 $42,775,092 $(26,303,946) $16,587,112 ------------ --------- ----------- ------------ ------------ ------------ --------- ----------- ------------ ------------
See accompanying notes to the consolidated financial statements. 31 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 ------------ ----------- OPERATING ACTIVITIES: Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,867,879) $(6,107,777) Adjustments to reconcile net loss to net cash used in operating activities: Loss on sale of assets. . . . . . . . . . . . . . . . . -- 31,423 Provision for doubtful accounts . . . . . . . . . . . . 22,000 - Depreciation and amortization . . . . . . . . . . . . . 1,500,504 936,822 Net barter activity . . . . . . . . . . . . . . . . . . (14,177) 11,927 Stock option and stock award compensation . . . . . . . -- 24,991 Amortization and write-off of deferred expenses . . . . 2,288,141 103,086 Interest expense on bridge loan warrants. . . . . . . . 85,313 697,350 Decrease (increase) in: Accounts receivable . . . . . . . . . . . . . . . . (713,183) (138,480) Other receivables . . . . . . . . . . . . . . . . . 49,576 (6,586) Prepaid expenses. . . . . . . . . . . . . . . . . . 517,291 (352,382) Inventory . . . . . . . . . . . . . . . . . . . . . 74,046 372 Increase (decrease) in: Accounts payable - trade. . . . . . . . . . . . . . 516,750 183,573 Accrued interest. . . . . . . . . . . . . . . . . . (217,243) 424,906 Other accrued expenses. . . . . . . . . . . . . . . 266,823 15,700 ----------- ----------- Net cash used in operating activities . . . . . (5,492,038) (4,175,075) ----------- ----------- INVESTING ACTIVITIES: Purchase of property and equipment. . . . . . . . . . . . . . (607,471) (194,285) Proceeds from disposal of property and equipment. . . . . . . -- 27,154 Sale of radio station . . . . . . . . . . . . . . . . . . . . -- 700,000 Acquisition of radio broadcasting licenses and certain related assets. . . . . . . . . . . . (10,309,654) (46,730) Investment in other intangible assets . . . . . . . . . . . . (261,056) (39,267) ----------- ----------- Net cash used in investing activities . . . . . . . (11,178,181) 446,872 ----------- ----------- FINANCING ACTIVITIES: Increase in line of credit. . . . . . . . . . . . . . . . . . 164,162 -- Repayment of long-term debt . . . . . . . . . . . . . . . . . (977,237) (528,456) Repayment of capital lease obligation . . . . . . . . . . . . (29,205) (41,912) Proceeds from issuance of common stock. . . . . . . . . . . . 19,960,840 17,130 Proceeds from issuance of debt. . . . . . . . . . . . . . . . 8,400,000 4,625,000 Repayment of short-term debt. . . . . . . . . . . . . . . . . (5,450,000) -- Redemption of Preferred Stock . . . . . . . . . . . . . . . . (2,615,595) -- ----------- ----------- Net cash provided by financing activities . . . . . 19,452,965 4,071,762 ----------- ----------- Increase in cash and cash equivalents. . . . . . . . . . . . . . 2,782,746 343,559 Cash and cash equivalents at beginning of year . . . . . . . . . 587,292 243,733 ----------- ----------- Cash and cash equivalents at end of year . . . . . . . . . . . . $ 3,370,038 $ 587,292 ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest. . . . . . . . . . . . $ 696,347 $ 66,642 ----------- ----------- ----------- -----------
See accompanying notes to the consolidated financial statements. 32 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 1996: The Company recognized revenues of $640,903 and expenses of $626,726 through barter activity. The Company issued 424,520 shares of common stock valued at $3,290,920 and incurred a covenant not-to-compete liability with an estimated net present value of $1,072,284 related to the acquisition of radio broadcast licenses and property and equipment. The Company incurred capital lease liabilities totaling $45,680 and a note payable of $250,000 related to the acquisition of property and equipment. The Company's redeemable convertible preferred stock accreted $368,757 during the year. See accompanying notes to the consolidated financial statements. 33 CHILDREN'S BROADCASTING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 1995: The Company recognized revenues of $1,027,587, incurred expenses of $1,039,514 and sold $10,467 of goods through barter activity. The Company granted 3,375 shares to a key employee of the Company under a 1994 agreement. The Company accrued $23,944 during 1994 for this grant and incurred an additional $17,400 of expense in 1995. The Company granted options to purchase 11,250 shares of common stock to directors of the Company. An expense of $43,125 was recognized due to the exercise price of the option being below market price on the date of grant. The Company issued warrants to purchase 593,541 shares of common stock in conjunction with obtaining Bridge Loan financing. A value of $860,858 was assigned to these warrants. The Company's redeemable convertible preferred stock accreted $151,474 during the year. The Company converted $3,142,349 of debt and accrued interest to equity. Warrants to purchase 1,088,684 shares of common stock, valued at $2,220,915, were issued in exchange for a joint operations agreement. The litigation settlements accrued for during 1994 were reclassed to long- term debt as a result of the amendment signed during 1995. The Company issued 35,573 shares of its common stock valued at $365,007 and assumed notes payable of the seller totaling $520,838 in connection with the acquisition of radio broadcast licenses and certain related assets. The Company incurred capital lease liabilities totaling $62,514 and a note payable of $17,115 in exchange for equipment. See accompanying notes to the consolidated financial statements. 34 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") is a full- time national broadcaster of children's radio programming in the United States. The Company develops, produces and distributes programming that is entertaining and informative and directed to the interests and radio listening patterns of pre-teenage children and their families. The Company's Radio AAHS format provides 24-hour programming featuring music, stories, call-in segments, quizzes and current events features. The programming varies by time of day in order to attract that component of its prospective audience most likely to be listening. The programming originates at the Company's flagship station, WWTC in Minneapolis, and is distributed via satellite to a network of radio stations around the country, which includes stations owned or operated by the Company as well as affiliated stations owned by third parties. 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. 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. 35 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Barter Transactions (continued): 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 following represents the barter activity for the respective years: Barter activity, net - January 1, 1995 $ 45,829 Barter revenues 1,027,587 Barter expenses (1,039,514) Sale of station WDCT (10,467) ----------- Barter activity, net - December 31, 1995 23,435 Barter revenues 640,903 Barter expenses (626,726) ----------- Barter activity, net - December 31, 1996 $ 37,612 ----------- ----------- Net Loss Per Share: Net loss per share is computed based on the weighted average number of shares outstanding during the period. Outstanding options and warrants are not considered as their effect would be anti-dilutive. Reverse Stock Split: On January 11, 1996, the Company's Board of Directors approved a one-for-two reverse stock split of the Company's common stock effective January 23, 1996, and simultaneously approved an increase of the par value of the common stock to $.02 per share. Accordingly, all share, per share, weighted average share, stock option and stock warrant information has been restated to reflect the split. 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. 36 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 principally of accounts receivable. Accounts receivable arise from sale of on-air advertising time to the Company's customer base located throughout the network broadcast area. The Company performs ongoing credit evaluations of its customers' financial condition, and generally requires no collateral from its customers. The Company's credit losses are subject to general economic conditions of the various retail and services provider industries represented in its customer base. 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. New Pronouncements: Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of". The new standard establishes new 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 adoption of this standard did not have an impact on the Company's financial position or results of operations. Effective January 1, 1996, the Company adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 establishes a new, fair value- based method of measuring stock-based compensation, but does not require an entity to adopt the new method for preparing its basic financial statements. For entities not adopting the new method for preparing basic financial statements, SFAS No. 123 requires disclosures in the footnotes of pro forma net earnings and earnings per share information as if the fair value-based method had been adopted. Reclassifications: Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 presentation. These reclassifications have no effect on the accumulated deficit or net loss previously reported. 37 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: CONTINUED EXISTENCE AND MANAGEMENT'S PLAN During 1996, the Company incurred a net loss of $9,867,879 and a negative cash flow from operations of $5,492,038, resulting in a working capital position of negative $5,489,229 and an accumulated deficit totaling $26,303,946 at December 31, 1996. Given these circumstances and the Company's expected working capital losses in 1997, additional capital will be necessary to sustain the Company's operations. In this regard, management has continued its efforts to secure the funding holdbacks of the finance company term note payable which totaled $4,000,000 at December 31, 1996. In February 1997, the Company received an additional $2,500,000 of the term loan while $1,500,000 continues to be held back at February 28, 1997 (Note 8). During 1996, management also engaged investment bankers to explore strategic alternatives. These investment bankers continue to hold discussions with various potential strategic partners with a view toward entering into various joint venture, sale or merger transactions. Management believes the amount of cash required by the Company's operations will decline in 1997 as a result of increased advertiser acceptance of its children's radio format. Further, management believes that this decline in operating cash requirements when combined with proceeds from the finance company term loan and from potential transactions resulting from its investment banker relationships will allow for adequate funding of the Company's cash requirements through December 31, 1997, although no assurance regarding the success of these efforts can be provided at this time. In the event that management's plans as described above are not successful, the Company may be forced to curtail acquisitions or other projects, sell or lease current assets, delay certain capital projects, or be forced to reduce its operations. The consolidated financial statements do not contain any adjustments which might be necessary if the Company is unable to continue as a going concern. NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS KKYD-AM, Denver, Colorado: In October 1994, the Company signed an agreement to operate KKYD-AM radio station under a Local Programming and Marketing Agreement (LMA) for a period of five years beginning November 1, 1994. Under the LMA, monthly payments of $7,900 are made by the Company to cover the operating expenses of the station. The Company operated the station under the LMA agreement until November 1, 1995, when the Company executed a previously signed asset purchase agreement. The consideration for the acquisition aggregated $932,575 consisting of cash payments totaling $46,730, the assumption of two notes payable of the seller in the amounts of $465,000 and $55,838, and the issuance of 35,573 shares of common stock valued at $365,007. The $932,575 purchase price was allocated based upon the estimated fair market value of the assets acquired, consisting of a broadcast license of $819,495 a covenant not-to-compete of $55,838 and property and equipment totaling $57,242. 38 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS (CONTINUED) 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, 1996 and 1995. WJDM-AM, Elizabeth, New Jersey: In June 1996, the Company acquired all of the issued and outstanding shares of common stock of Radio Elizabeth, Inc. which holds the radio broadcast license for WJDM-AM and a special temporary authorization for an expanded band radio frequency. The consideration for the acquisition aggregated $11,580,000 consisting of 270,468 shares of common stock valued at $2,500,000, cash payments totaling $7,580,000 and payments totaling $1,500,000 pursuant to a ten year covenant not-to- compete agreement. The $11,580,000 purchase price and related acquisition expenses incurred of $227,784 were allocated based upon the fair market value of the assets acquired, consisting of broadcast licenses of $10,179,984, property and equipment aggregating $140,000, and a covenant not-to-compete of $1,072,284 based upon the net preset value of the payments due under the agreement. During the period February to June 1996, the Company operated the station on behalf of the seller pursuant to a LMA. Additionally, the Company has agreed to allow the seller to continue operation over the existing licensed frequency pursuant to a LMA for so long as dual broadcast operations over the original and expanded band frequencies are allowed by the FCC, up to a maximum of five years, for nominal consideration. WCAR-AM, Livonia, Michigan: In June 1996, the Company acquired the radio broadcast license and certain other assets of the radio station WCAR-AM for $1,500,000 in cash. The purchase price and acquisition expenses incurred of $70,920 were allocated based upon the fair market value of the assets acquired consisting of a broadcast license of $1,251,360 and property and equipment totaling $319,560. 39 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS (CONTINUED) WPWA-AM, Chester, Pennsylvania: In September 1996, the Company acquired the radio broadcast licenses and certain other assets of the radio station WPWA-AM. The consideration for the acquisition aggregated $1,320,000 consisting of 79,052 shares of common stock valued at $500,000 and cash payments totaling $820,000. The purchase price and related acquisition expenses incurred of $17,750 were allocated based upon the fair market value of the assets acquired consisting of a broadcast license of $923,200 and property and equipment totaling $414,550. WAUR-AM, Sandwich, Illinois: In September 1996, the Company entered into an asset purchase agreement to acquire 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 pursuant to a ten year covenant not- to-compete agreement. During 1996, the Company satisfied a portion of the purchase price by issuing 75,000 shares of its common stock valued at $290,920 and making a cash payment of $81,000. Subsequently, the acquisition was completed in January, 1997. 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 which bears interest at a variable rate (11.0% at January 11, 1997). The Company expects that the seller will satisfy the subscription note receivable through transfer of the station assets pursuant to the aforementioned asset purchase agreement. 40 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: ACQUISITIONS AND LOCAL PROGRAMMING AND MARKETING AGREEMENTS (CONTINUED) The unaudited pro forma results of operations which follow assume that the acquisitions of WJDM-AM, WCAR-AM and WPWA-AM had occurred at January 1, 1995. In addition to combining the historical results of operations of the Company and the acquired businesses, the pro forma calculations include adjustments for the estimated effect on the historical results of operations for depreciation, interest and issuance of common stock related to the business acquisitions. 1996 1995 ------------ ----------- Revenues $ 6,086,647 $ 5,926,900 Loss from operations (9,787,680) (5,484,798) Net Loss (10,149,348) (6,693,061) Net loss per share (1.82) (1.56) Weighted average number of shares outstanding 5,570,000 4,287,500 The unaudited proforma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on January 1, 1995 or of future results of operations of the consolidated entities. NOTE 4: PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
ESTIMATED USEFUL LIFE 1996 1995 IN YEARS ---------- ---------- ----------- Land . . . . . . . . . . . . . . . $ 568,462 $ 241,966 Buildings. . . . . . . . . . . . . 742,962 215,313 30 Studio and broadcast equipment . . 2,162,022 1,745,346 5-10 Towers . . . . . . . . . . . . . . 943,328 741,668 13 Office equipment . . . . . . . . . 1,102,632 909,491 5 Leasehold improvements . . . . . . 211,998 150,269 5 Equipment under capital leases . . 172,391 126,711 5 ---------- ---------- 5,903,795 4,130,764 Less accumulated depreciation. . . 1,628,864 1,046,995 ---------- ---------- Property and equipment, net. . . . $4,274,931 $3,083,769 ---------- ---------- ---------- ----------
Depreciation expense, including that on equipment under capital leases, was $586,901 and $510,035 for the years ended December 31, 1996 and 1995, respectively. Accumulated depreciation on the equipment under capital leases was $65,567 and $37,975 at December 31, 1996 and 1995, respectively. 41 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: INTANGIBLE ASSETS Intangible assets consisted of the following at December 31:
ESTIMATED USEFUL LIFE 1996 1995 IN YEARS ----------- ---------- ----------- Broadcast license. . . . . . . . . $17,671,494 $5,301,609 20 Less accumulated amortization. . . 946,841 332,036 ----------- ---------- Broadcast licenses, net. . . . . . $16,724,653 $4,969,573 ----------- ---------- ----------- ---------- Trademarks and tradenames. . . . . $ 443,380 $ 443,380 6 Non-compete agreement. . . . . . . 1,619,755 547,471 2-10 Other. . . . . . . . . . . . . . . 1,110,615 132,542 5 ----------- ---------- 3,173,750 1,123,393 Less accumulated amortization. . . 660,211 385,173 ----------- ---------- Intangible assets, net . . . . . . $ 2,513,539 $ 738,220 ----------- ---------- ----------- ----------
Amortization expense related to the intangible assets totaled $913,603 and $426,787 for the years ended December 31, 1996 and 1995, respectively. NOTE 6: SHORT-TERM DEBT Short-term debt consisted of the following at December 31:
1996 1995 ---------- ---------- Bridge Loan Series I, interest at 10%. . . . . . . -- $1,250,000 Bridge Loan Series II, interest at 10% . . . . . . -- 400,000 Note payable, interest at 8% . . . . . . . . . . . -- 500,000 Note payable to a director of the Company, interest at 10%. . . . . . . . . . . . . . . . . -- 900,000 Note payable, interest at 10%. . . . . . . . . . . -- 500,000 Note payable, interest at 10%. . . . . . . . . . . -- 1,000,000 ---------- ---------- $ -- $ 4,550,000 ---------- ---------- ---------- ----------
In January 1996, the Company borrowed $750,000 pursuant to a promissory note with interest at 6%. Additionally, in March 1996, the Company borrowed $150,000 from a director of the Company pursuant to a promissory note with interest at 10%. All amounts due under short-term notes payable were repaid in March 1996 after the completion of a public offering of the Company's common stock. 42 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: LINE OF CREDIT In November 1996, the Company obtained a discretionary line of credit pursuant to the finance company credit agreement (Note 8). The line of credit is limited to the lessor of $1,000,000 or a percentage of accounts receivable. At December 31, 1996, the maximum credit available was approximately $780,000 of which $615,838 was unused. Interest is charged at a variable rate (11.0% at December 31, 1996). NOTE 8: LONG-TERM DEBT Long-term debt consisted of the following at December 31:
1996 1995 ---------- ---------- Term note payable pursuant to the finance company credit agreement, interest at a variable rate (11.0% at December 31, 1996), payable in monthly installments of $220,100 plus applicable interest beginning June 1997 through November 2000 when the remaining balance is payable in full. Due to the recurring requirement to meet certain restrictive financial covenants, this entire indebtedness is classified as current at December 31, 1996. . . . . . . . . . . . . . . . . . . $7,885,000 $ -- Covenant not-to-compete, non-interest bearing, payable in quarterly installments of $37,500 through June 2006, less unamortized discount at 9.25% ($390,514 at December 31, 1996).. . . . . . . 1,034,486 -- Note payable due to a bank, interest at 9.25%, payable in monthly installments of principle and interest totaling $2,164 through September 2021, secured by the real property of station KKYD-AM in Denver.. . . . . . 249,414 -- 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 the majority shareholder.. . . . . . . . . . . . . . . . . 120,471 138,047 Various unsecured installment notes payable, bearing interest from 0% to 8.5% and due at various maturities through September 2001. . . . . . . . . . . 103,903 183,467 Various secured installment notes payable, bearing interest from 8.4% to 9.25% and due at various maturities through November 1997.. . . . . . . . . . . 6,476 27,660
43 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: LONG-TERM DEBT (CONTINUED)
1996 1995 ---------- ---------- Covenants not-to-compete bearing interest at 7%. The obligations were repaid after completion of the finance company note payable . . . . . . . . . . . -- 420,529 Note payable bearing interest at 9.75%. The note payable was repaid after completion of the finance company note payable.. . . . . . . . . . . . . . . . . -- 400,000 ---------- ---------- 9,399,750 1,169,703 Less current portion . . . . . . . . . . . . . . . . . 8,033,758 297,365 ---------- ---------- Long-term debt, less current portion . . . . . . . . . $1,365,992 $ 872,338 ---------- ---------- ---------- ----------
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 include a $11,500,000 term note payable, a $1,000,000 line of credit (Note 7), and a $4,000,000 acquisition facility which was unused at December 31, 1996. The Facilities mature on November 26, 2000 and are subject to certain restrictive covenants. The restrictive covenants include, but are not limited to, the following: the Company may incur additional indebtedness or liens on its assets only under specified circumstances, must maintain the principle nature of its business, cannot dispose of significant assets, must maintain stockholders equity of at least $14,100,000, must maintain working capital of at least $2,000,000, and may not make capital expenditures in excess of $1,250,000 during 1997. As of December 31, 1996, the Company had not met certain of the covenant requirements; however, on March 27, 1997, the finance company waived its rights pursuant to these violations. Pursuant to generally accepted accounting principles (EITF No. 86-30), if similar restrictive covenants must be met at future interim periods, the debt must continue to be classified as current unless it is probable that the Company will satisfy the covenants in the future or the finance company agrees to waive its rights to such potential future covenant violations. The finance company would not provide the Company with such a waiver and accordingly, the Company has reflected all related outstanding debt as a current liability on the accompanying consolidated balance sheet. The Company's indebtedness under the Facilities is secured by substantially all the assets of the Company and its subsidiaries, by a pledge of its subsidiaries' stock and by a guarantee of its subsidiaries. Approximately $4,000,000 of the term note payable proceeds were held back by the finance company pending performance by the Company of certain post-closing conditions. In February 1997, the Company satisfied certain of these conditions and received an additional advance of $2,500,000 while $1,500,000 continues to be held back at February 28, 1997. 44 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: LONG-TERM DEBT (CONTINUED) Future maturities of long-term debt, including classification of the entire term note payable to the finance company (aggregating $7,885,000 at December 31, 1996) as a current obligation, are as follows: Year ending December 31: 1997 . . . . . . . . . . $8,033,758 1998 . . . . . . . . . . 141,241 1999 . . . . . . . . . . 134,752 2000 . . . . . . . . . . 173,113 2001 . . . . . . . . . . 109,040 Thereafter . . . . . . . 807,846 ---------- $9,399,750 ---------- ---------- The Company believes that the carrying value of the debt approximates its fair market value at December 31, 1996, as the Company's borrowing rate has not changed substantially since the issuance of the debt. NOTE 9: OBLIGATIONS UNDER CAPITAL LEASES The Company leases certain computer equipment under capital leases expiring through October 2001. Future minimum lease payments for each of the next five years are as follows: Year ending December 31: 1997 . . . . . . . . . . . . . . . . . . . $ 49,012 1998 . . . . . . . . . . . . . . . . . . . 35,593 1999 . . . . . . . . . . . . . . . . . . . 29,754 2000 . . . . . . . . . . . . . . . . . . . 13,627 2001 . . . . . . . . . . . . . . . . . . . 11,955 ----------- Total minimum lease payments. . . . . . . . . . 139,941 Less amount representing interest . . . . . . . (34,446) ----------- Present value of net minimum lease payments . . 105,495 Less current portion. . . . . . . . . . . . . . (34,705) ----------- Long-term portion . . . . . . . . . . . . . . . $ 70,790 ----------- ----------- NOTE 10: COMMITMENTS AND CONTINGENCIES Operating Leases and Other Commitments: The Company leases office, broadcast space and a transmitter site from related parties, including the Company's majority shareholder. Other commitments include office equipment, satellite transmission rights, local programming and marketing agreements, license agreements and similar type contracts. 45 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED) Operating Leases and Other Commitments: (Continued) Future minimum lease and other commitment payments are as follows for the years ending December 31: RELATED THIRD PARTIES PARTIES TOTAL ---------- ---------- ---------- 1997 $ 284,000 $ 534,145 $ 818,145 1998 300,000 384,467 684,467 1999 313,000 269,006 582,006 2000 324,000 79,651 403,651 2001 280,000 65,751 345,751 ---------- ---------- ---------- $1,501,000 $1,333,020 $2,834,020 ---------- ---------- ---------- ---------- ---------- ---------- Total rent expense was $792,069 and $571,765 for the years ended December 31, 1996 and 1995, respectively. Rent expense to related parties during those same years was $244,518 and $148,403, respectively. Litigation Settlements: In February 1995, the Company settled two separate employment disputes. One settlement requires the Company to pay $67,000 in cash and allow the exercise of options to purchase 2,500 shares of the Company's common stock. The second settlement requires the Company to pay $40,000 in cash, to deliver common stock with a total value of $117,000 as of the settlement date and to issue a $77,000 note, payable over two years. During 1995, the Company completed performance of the first settlement agreement. The second agreement was amended to require the Company to issue two $42,000 non-interest bearing notes payable over two years beginning April for 1995, to issue an $85,000 note with interest at 8.5% interest payable over three years beginning August 1, 1995 and a $78,500 note with interest at 8% payable over five years beginning October 1, 1995. Additional expense of $10,570 was recognized during 1995 ad a result of this amendment. AAHS Children's Foundation: In December 1994, the AAHS Children's Foundation was incorporated and the Company's board of directors authorized the contribution of 25,000 shares of the Company's common stock to capitalize the Foundation. No shares have been issued as of December 31, 1996. A contribution expense will be recorded for the fair market value of the shares on the date the shares are actually issued. 46 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED) Pending Litigation: Following the termination of the ABC Radio Network's Joint Operations Agreement (Note 12) by ABC, the Company filed a lawsuit against The Walt Disney Company and ABC for relief and to recover damages for their alleged attempts to misappropriate the Company's confidential information and trade secrets acquired through their strategic relationship with the Company in order to unfairly compete with the Company. There can be no assurance that the Company will prevail in this litigation or recover any of the damages sought. Additionally, the Company authorized the issuance of up to 200,000 shares of the Company's common stock for payment of the legal fees associated with this litigation, none of which were issued at December 31, 1996. Transaction Commissions: During 1996, the Company has entered into agreements with two brokers whereby the brokers will receive a commission in the event of the completion of certain defined financing, radio station sale, and strategic partnership transactions with specified parties. As of December 31, 1996, no amounts were due under the agreements. 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 have been no Company contributions in 1996 or 1995. NOTE 11: REDEEMABLE CONVERTIBLE PREFERRED STOCK 47 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED) On August 23, 1994, the Company issued 290,213 shares of redeemable convertible preferred stock in partial payment for acquiring certain assets and liabilities of Orange County Broadcasting Corporation. This stock was redeemed in November 1996 for consideration totaling $2,615,595 utilizing funds received in connection with the Company's finance company note payable (Note 8). For financial reporting purposes, the preferred stock had been discounted from its stated value of $10 per share at the redemption date, originally five years from the date of issuance to its present value using a discount rate of 7%. Prior to the redemption, this balance had been accreted to its stated value over the original five-year nonredeemable period. NOTE 12: SHAREHOLDERS' EQUITY Common Stock: The Company has authorized 50,000,000 shares of common stock at $.02 par value. The Company has issued 5,609,239 voting shares of which 5,609,239 and 2,945,183 are outstanding at December 31, 1996 and 1995, respectively, and 189,041 nonvoting shares of which all are outstanding at December 31, 1996 and 1995, respectively. Public Securities Offering: In March 1996, the Company issued 2,200,000 shares of its common stock at a price of $10 per share resulting in proceeds net of commission and other direct expenses (aggregating $2,215,503) of $19,784,497. Additionally, the direct public offering expenses include payment of $100,000 to a corporation related through common control as a bonus to that company for the contributions its employee made towards the successful completion of the offering. Incentive and Non-Qualified Stock Options Plans: The Company established a stock option plan in 1991 to provide incentives to employees whereby 100,000 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. During 1991, the Company also established a plan to grant non- qualified stock options to key employees and directors of the Company. These options become exercisable through 1996 and expire through July 2003. 48 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Incentive and Non-Qualified Stock Options Plans (Continued) 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 vest over a three year period and expire through December 2001. 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 shares become exercisable one year from the date of grant and expire five years thereafter. 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 1996. A summary of the status of the Company's stock option plans as of December 31, 1996 and 1995 and changes during the years ending on those dates is presented below:
1996 1995 ------------------------------ --------------------------- Weighted-Average Weighted-Average Plan Option Shares Exercise Price Shares Exercise Price - ----------- ---------- ------------------ ---------- ---------------- Outstanding at beginning of year 570,316 $ 6.71 363,816 $5.70 Granted 831,015 5.24 213,750 8.29 Exercised (21,782) 7.94 (7,250) 2.36 Forfeited (35,743) 7.36 -- -- --------- ------- Outstanding at end of year 1,343,806 5.74 570,316 6.71 --------- ------- --------- ------- Options exercisable at year end 436,425 6.33 325,400 5.79 Weighted-average fair value of options granted during the year $2.56 $4.50
The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ------------------------------------------------- ----------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - --------------- ----------- ----------------- ---------------- ----------- ---------------- $2.00 to 4.99 525,781 3.9 years $3.22 143,766 $2.35 5.00 to 7.99 479,775 3.9 years 6.43 108,525 7.45 8.00 to 12.76 338,250 3.5 years 8.71 184,134 8.77 ----------- ----------- 2.00 to 12.76 1,343,806 3.8 years 5.74 436,425 6.33 ----------- ----------- ----------- -----------
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:
1996 1995 ---------------------------- ----------------------------- Weighted-Average Weighted-Average Performance Options Shares Exercise Price Shares Exercise Price - ------------------- -------- ------------------ ---------- ----------------- Outstanding at beginning of year 183,125 $7.43 8,750 $7.70 Granted 2,500 8.38 183,125 7.43 Exercised -- -- -- -- Forfeited (25,000) 7.26 (8,750) 7.70 -------- ---------- Outstanding at end of year 160,625 7.60 183,125 7.43 -------- ---------- -------- ---------- Options exercisable at year end 50,000 7.70 -- -- Weighted-average fair value of options granted during the year $4.02 $4.93
As of December 31, 1996, the performance options outstanding under the Plans have exercise prices between $7.26 and $8.38 and a weighted- average remaining contractual life of 4.9 years. 49 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Incentive and Non-Qualified Stock Options Plans (Continued) 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 1996 and 1995, respectively: dividend yield for each year; expected volatility of 70.2 and 66.1 percent; risk-free interest rates of 6.0 and 7.2 percent. Under the accounting provisions of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1995 ----------- ----------- Net loss: As reported $(9,867,879) $(6,107,777) Pro forma (11,996,781) (7,070,490) Net loss per share: As reported (1.99) (2.22) Pro forma $ (2.40) $ (2.56) Affiliate Warrant Program: In 1994, the Company implemented a program whereby the Company could grant warrants to affiliates carrying its programming and has reserved 375,000 shares of its common stock for issuance under this program. Warrants are to be granted to affiliates based upon number of persons within the affiliate's area (coverage). Warrants are issued to purchase 500 shares of common stock for a specified coverage area. The warrants vest in one-third increments upon the first three anniversary dates of entry into an affiliation agreement, contingent upon such affiliates having carried the Company programming for at least 18 hours per day for the preceding year as specified in the affiliation agreement. The warrants expire two years following full vesting. This program qualifies as a performance based warrant program under which performance expense will be measured at each anniversary date. During 1995, warrants have been issued to purchase 25,000 shares of common stock under this program at an exercise price of $8.00. 50 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Sponsor Partnership Warrant Program: In 1994, the Company reserved 250,000 shares of its common stock under a program to grant warrants to qualified sponsors committing to a three year advertising program. This commitment must be renewed in years two and three in order for the warrants to vest. This program qualifies as a performance based warrant program under which an expense will be measured as the warrants vest. No warrants have been issued under this program. Short Term Debt Conversion: During 1995, Bridge Loan Series I Notes totaling $1,250,000 were converted into 156,250 shares of common stock, and Bridge Loan Series II Notes totaling $1,100,000 were converted into 137,500 shares of common stock by exercising warrants with a stated exercise price of $8.00. The accrued interest on these Bridge Loan Notes of approximately $240,000 was converted into 30,003 shares of common stock based on a conversion price of $8.00 per share. In addition, unsecured promissory notes totaling $525,000 and accrued interest of $27,320 were converted into 55,232 shares of common stock based on a conversion price of $10.00 per share. Warner Music Agreement: In June 1994, the Company entered into an agreement with Warner Music Enterprises, Inc. under which the Company granted an exclusive license to manufacture, market and distribute a Radio AAHS Magazine and compact disc. Upon signing this agreement, the Company granted Warner Music Enterprises, Inc. warrants to purchase 100,000 shares of the Company's common stock at $7.64 per share. In November 1995, Time Warner announced the closing of Warner Music Enterprises, the division responsible for producing the Radio AAHS magazine resulting in the 1996 cancellation of the warrants. ABC Radio Networks Joint Operations Agreement: In November 1995, the Company entered into an agreement with ABC Radio Networks, Inc. pursuant to which ABC's affiliate development and national advertising sales staffs were to add the AAHS format to their inventory, assisting the Company in marketing the format to broadcasters and advertisers. The ABC Agreement also provided for a cooperative effort in developing sales, marketing and research programs. In consideration for entering into the Joint Operations Agreement and providing services to the Company, ABC received a payment of $25,000 per month and a warrant to purchase 1,088,684 non-voting shares of common stock. The value of these warrants was determined to be approximately $2,221,000 using the Black Sholes Pricing Model. Approximately $606,000 and $96,500 was charged to operations during the period January to July 1996 and in 51 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) ABC Radio Networks Joint Operations Agreement (continued): 1995, respectively. In July 1996, ABC notified the Company of its intent to terminate the agreement and the remaining balance of $1,518,500 was written-off and the warrant was canceled. Brokerage Fee: In July 1996 and in connection with the acquisition of WJDM-AM, Elizabeth, New Jersey (Note 3), the Company granted warrants to purchase 125,000 shares of the Company's common stock at an exercise price of $11.00 per share as a brokerage commission. The warrants become exercisable in June 1997 and expire in June 2002. Finance Company Credit Agreement: Upon completion of the Finance Company Credit Agreement (Note 8), the Company granted the finance company warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $4.40 per share. The warrants became immediately exercisable and expire in November 2001. Additionally, these warrants 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 $220,000 exercise price. 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, 1995 842,670 731,336 2.40 - 13.80 Granted: Bridge Loan Series II 90,000 90,000 8.00 Extension - Bridge Loan Series I 62,500 62,500 8.00 Extension - Bridge Loan Series II 37,500 37,500 8.00 Debt conversion - Bridge Loan Series I 62,500 62,500 10.00 Debt conversion - Bridge Loan Series II 55,000 55,000 10.00 Affiliates 25,000 16,666 8.00 Other 5,000 5,000 8.00 Note payable, interest at 8% 68,333 68,333 11.50 Extension - Note payable, interest at 8% 8,333 8,333 11.50
52 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
EXERCISE WARRANTS PRICE OUTSTANDING EXERCISABLE PER SHARE ----------- ----------- -------------- ABC Radio Networks, Inc. 1,088,684 1,088,684 10.26 Note payable, 10%, to a company director 84,375 84,375 10.00 Note payable, interest at 10% 37,500 37,500 12.00 Note payable, interest at 10% 87,500 87,500 11.00 Exercised: Debt conversion - Bridge Loan Series I (156,250) (156,250) 8.00 Debt conversion - Bridge Loan Series II (137,500) (137,500) 8.00 Became exercisable - 105,667 7.64 ----------- ----------- -------------- Balance at December 31, 1995 2,261,145 2,247,144 $2.40 - $13.80 Granted: Brokerage fee 125,000 - 11.00 6% promissory notes 57,500 57,500 13.00 Finance company note payable 50,000 50,000 4.40 Exercised: Private placements warrants (12,500) (12,500) 4.00 Other (1,870) (1,870) 2.40 Canceled: ABC Radio Networks, Inc. (1,088,684) (1,088,684) 7.63 Warner Music Enterprises (100,000) (100,000) 7.63 ----------- ----------- -------------- Balance at December 31, 1996 1,290,591 1,151,590 $2.40 - $13.80 ----------- ----------- -------------- ----------- ----------- --------------
Included in the table above are warrants issued in connection with bridge loans and other short-term notes payable. The value of these warrants was charged to interest expense over the term of the related debt agreement and during the years ended December 31, 1996 and 1995, the Company incurred interest expense aggregating approximately $238,000 and $726,000, 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. Additionally, the value of the warrants related to debt conversions and extensions was determined based on the difference between the exercise or conversion price and the fair market value of the Company's common stock, or by comparison to the value of similar warrants issued by the Company at approximately the same date. 53 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13: RELATED PARTY TRANSACTIONS Certain corporate expenses are shared with and paid by a related corporation under common control. The portion of these expenses allocated to the Company are then reimbursed by the Company to the related party. During the years ended December 31, 1996 and 1995, $750,000 and $600,000, respectively, of such charges were allocated to and paid by the Company and are reflected as corporate expenses in the consolidated statement of operations. The allocation is based on estimated usage of the product or service by each company. Management reviews the allocation periodically and believes that the allocation method is reasonable. NOTE 14: INCOME TAXES At December 31, 1996, the Company has net operating loss carryforwards of approximately $21,850,000 for income tax purposes that expire in years 2007 through 2011. An ownership change under Section 382 of the Internal Revenue Code occurred as a result of the 1996 public stock offering which will limit the amount of these net operating losses available each year. 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: 1996 1995 ------ ------ Statutory rate (benefit) (34.0)% (34.0)% Operating losses generating no current tax benefit 26.7 34.0 Deferred warrant costs associated with the terminated ABC marketing agreement 7.3 -- ------ ------ Effective tax rate -- % -- % ------ ------ ------ ------ 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: 1996 1995 ----------- ----------- Deferred tax assets: Net operating loss carryforwards $ 8,086,000 $ 5,236,000 Other items not yet deductible for tax purposes 291,000 305,000 ----------- ----------- Total net deferred tax asset 8,377,000 5,541,000 Valuation allowance for deferred tax assets (8,377,000) (5,541,000) ----------- ----------- Net deferred tax assets $ -- $ -- ----------- ----------- ----------- ----------- As the Company has posted consistent losses since inception, realization of the tax benefit related to these carryforwards is uncertain. Accordingly, no deferred tax asset 54 CHILDREN'S BROADCASTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14: INCOME TAXES (CONTINUED) has been recorded to reflect their potential value. The net change in the deferred tax valuation allowance was an increase of $2,836,000 and $2,270,000 in 1996 and 1995, respectively. 55 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 27, 1996, the Board of Directors engaged BDO Seidman, LLP as the Company's new independent accountant for the fiscal year ending December 31, 1996. During the two most recent fiscal years and through June 27, 1996, the Company did not consult with BDO Seidman, LLP on items which (1) involved the application of accounting principles to a specified transaction, either completed or proposed, or involved the type of audit opinion that might be rendered on the Company's financial statements, or (2) concerned the subject matter of a disagreement or reportable event with the former auditor (as described in Regulation S-K, Item 304(a)(2). On June 27, 1996, the Company dismissed Ernst & Young LLP as its independent accountant. Except for an explanatory paragraph with respect to substantial doubt about the Company's ability to continue as a going concern and management's plans described in Note 2 to the Company's consolidated financial statements as of and for the years ended December 31, 1994 and 1995, the reports of Ernst & Young LLP on the financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The Company's Audit Committee and Board of Directors participated in and approved the decision to change independent accountants. In connection with its audits for the years ended December 31, 1994 and 1995, and through June 27, 1996, there have been no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Ernst & Young LLP would have caused them to make reference thereto in their report on the financial statements for such years. During the years ended December 31, 1994 and 1995, and through June 27, 1996, there have been no reportable events (as defined in Regulation S-K, Item 304(a)(1)(v)). PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 MANAGEMENT
Name Age Position ---- --- -------- Christopher T. Dahl 53 Chairman of the Board of Directors and President James G. Gilbertson 35 Chief Operating Officer, Chief Financial Officer and Treasurer Lance W. Riley 46 General Counsel and Secretary Gary W. Landis 43 Executive Vice President of Programming Melvin E. Paradis 58 Executive Vice President of Operations Barbara A. McMahon 41 Executive Vice President of Affiliate Relations Rick E. Smith 35 Executive Vice President of National Sales Denny J. Manrique 47 Executive Vice President of Sales Development Richard W. Perkins 66 Director Rodney P. Burwell 58 Director Mark A. Cohn 39 Director Russell Cowles II 60 Director - elect
CHRISTOPHER T. DAHL has been President and a Director of the Company since its inception in February 1990. Mr. Dahl is Chairman and Chief Executive Officer of CAC. Prior to founding CAC in 1986, Mr. Dahl managed his private investments. From 1969 to 1979, he was the founder and President of a group of companies involved in photofinishing, 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. JAMES G. GILBERTSON has served as the Company's Chief Operating Officer since April 1996, and its Chief Financial Officer since July 1992 and became an Executive Vice President in March 1994. From June 56 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. LANCE W. RILEY became the General Counsel and Secretary of the Company in March 1994. Mr. Riley has been practicing law since 1977. His primary area of practice is radio broadcasting and he held the position of Chairman of the Communications Law Section of the Minnesota Bar Association from 1990 to 1994. Prior to joining the Company, Mr. Riley was partner in the firm of Courey, Albers, Gilbert and Riley. GARY W. LANDIS served as the Company's Vice President of Programming since December 1992 and became an Executive Vice President in July 1994. From 1985 to 1992, Mr. Landis served as Vice President of Programming for Westwood One, the second largest radio network company in the U.S. Between 1982 and 1985, Mr. Landis served as Director of Programming for the RKO Radio Networks. MELVIN E. PARADIS became the Company's Executive Vice President of Operations in January 1996. He has been the President of Community Airwaves Corporation since 1992 and the Chief Operating Officer of that company since 1987. Mr. Paradis has also owned and managed other radio stations for several years. BARBARA A. MCMAHON joined the Company in June 1993 to oversee the growth of the network through affiliates and was promoted to Executive Vice President of Affiliate Relations in June 1996. During the years 1980 through 1989, Ms. McMahon served as Director for NBC Radio Networks, Mutual Broadcasting and RKO Radio Networks. RICK E. SMITH became the Company's Executive Vice President of National Sales in October 1996. From September 1994 to April 1995 he served as Affiliate Relations Manager and then assumed the position of Marketing Manager. Mr. Smith served as Vice President of Sales and Marketing for Uncle B's Bakery, a national food manufacturer, from 1989 to 1994. DENNY J. MANRIQUE served as Vice President of Children's Radio Network from 1989 until it was acquired by the Company in 1990. From 1990 through 1994, Mr. Manrique operated an independent marketing firm which provided sales representation services to the Company. Mr. Manrique was employed as Vice President of Sales in January 1995 and was promoted to Executive Vice President of Sales Development in October 1996. 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 Perkins Capital Management, Inc., 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; Discus Acquisition Corporation, a manufacturer of metal products; Garment Graphics, Inc., a manufacturer of printed software; Lifecore Biomedical, Inc., a medical device manufacturer; Nortech Systems, Inc., an electronic sub-systems manufacturer; Eagle Pacific Industries, Inc., a manufacturer of plastic pipe; and Quantech LTD., a developer of immunological tests. RODNEY P. BURWELL has been a director of the Company since June 1992. Since 1979, Mr. Burwell has served as Chairman of Xerxes Corporation, a manufacturer of fiberglass tanks. Mr. Burwell also owns and operates hotels in Wisconsin and Colorado. Mr. Burwell is also a director of the Vaughn Company. MARK A. COHN joined the Company's Board of Directors in July 1994. Mr. Cohn is a co-founder of and has served as Chief Executive Officer of Damark International, Inc., a direct marketer of brand name and general merchandise products, since Damark's inception in 1986. From 1981 to 1984, Mr. Cohn held various marketing and operations positions, including Director of Marketing Operations, with C.O.M.B., Co., a retailer of discount, discontinued and close-out merchandise through stores and direct mail catalogs. RUSSELL COWLES II was elected in 1994 as a director of the Company subject to either the obtaining of a waiver from the FCC of the application of its cross-ownership rules or the amendment of such rules to 57 remove existing restrictions. Mr. Cowles has thus not yet assumed his role as a director. Mr. Cowles has served as a Trustee of the Cowles Family Voting Trust since 1984. The Voting Trust holds a majority share of the voting stock of Cowles Media Corporation, a newspaper, magazine and book publisher and information service provider. Mr. Cowles was previously employed in the production, distribution, financial and planning departments of the Minneapolis STAR TRIBUNE and worked in the engineering and production departments of radio and television broadcasting stations. Mr. Cowles is also a director of CAC. Section 16(a) of the Securities Exchange Act of 1934 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 Securities and Exchange Commission (the "Commission"). Such officers, directors and shareholders are required by the Commission to furnish the Company with copies of all such reports. To the Company's knowledge, based soley on a review of copies of reports filed with the Commission during 1996, all applicable Section 16(a) filing requirements were complied with, except that one report on Form 3 setting forth the event of Barbara A. McMahon becoming an executive officer was not filed on a timely basis. 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 1997 Proxy Statement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table contains certain information as of March 3, 1997 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, nominee for director and executive officer of the Company and (iii) the executive officers of the Company 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, Riley, Landis, Paradis, Smith, Manrique and Ms. McMahon is 724 First Street North, Minneapolis, Minnesota 55401. 58
NUMBER OF PERCENT SHARES OF OF NAME AND ADDRESS COMMON STOCK CLASS - ---------------- ------------ ------- Heartland Advisors, Inc. . . . . . . . . . . 1,104,600(1) 18.6% 790 North Milwaukee Street Milwaukee, Wisconsin 53202 Perkins Capital Management, Inc. . . . . . . 706,638(2) 11.7% 730 East Lake Street Wayzata, Minnesota 55391 Christopher T. Dahl. . . . . . . . . . . . . 554,502(3) 9.1% Richard W. Perkins . . . . . . . . . . . . . 471,459(4) 7.6% 730 East Lake Street Wayzata, Minnesota 55391 Russell Cowles II. . . . . . . . . . . . . . 283,139(5) 4.8% c/o Sherburne and Coughlin, Ltd. 708 South 3rd Street, Suite 510 Minneapolis, Minnesota 55415 John Cowles Family Trust . . . . . . . . . . 214,042(6) 3.6% Sherburne and Coughlin, Ltd. 708 South 3rd Street, Suite 510 Minneapolis, Minnesota 55415 Rodney P. Burwell. . . . . . . . . . . . . . 68,750(7) 1.2% 7901 Xerxes Avenue South, Suite 201 Minneapolis, Minnesota 55431 James G.Gilbertson . . . . . . . . . . . . . 56,917(8) 1.0% Gary W. Landis . . . . . . . . . . . . . . . 31,249(9) * Lance W. Riley . . . . . . . . . . . . . . . 32,083(9) * Mark A. Cohn . . . . . . . . . . . . . . . . 27,500(10) * 7101 Winnetka Avenue North Minneapolis, Minnesota 55428 Barbara A. McMahon . . . . . . . . . . . . . 25,000(9) * Melvin E. Paradis. . . . . . . . . . . . . . 37,915(11) * Rick E. Smith. . . . . . . . . . . . . . . . 17,600(9) Denny J. Manrique. . . . . . . . . . . . . . 15,388(9) All Officers, Directors and Nominees as a Group (12 persons) . . . . . . . . 2,328,140(12) 34.4%
_______________ * Less than 1% (1) As set forth in Schedule 13G filed with the Commission on February 10, 1997, includes 966,600 shares over which Heartland Advisors, Inc. claims sole voting power, and 1,104,600 shares over which sole dispositive power is claimed. (2) Based upon statements filed with the Commission, PCM is a registered investment adviser of which Mr. Richard W. Perkins, a director of the Company, is President, Chief Executive Officer, a director and the controlling shareholder. PCM has the right to sell the shares but does not have voting power over the shares. Mr. Perkins and PCM disclaim any beneficial interest in such shares. Excludes shares beneficially owned by Mr. Perkins. (3) Includes: (i) 410,486 shares owned directly and (ii) 144,016 shares purchasable upon exercise of options and warrants. (4) Includes: (i) 189,691 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) 269,374 shares purchasable upon exercise of options and warrants by Mr. Perkins and (iv) 5,625 shares purchasable upon exercise of warrants by Perkins Capital Management, Inc. Profit Sharing Plan and Trust and Perkins Foundation. Mr. Perkins beneficial ownership excludes shares held for the accounts of clients of Perkins Capital Management, Inc. ("PCM"). (5) Includes: (i) 56,597 shares owned directly and (ii) 12,500 shares purchasable upon exercise of warrants. Mr. Cowles beneficially owns: (i) 189,042 shares owned by the John Cowles Family Trust and (ii) 25,000 shares purchasable by the John Cowles Trust upon exercise of warrants. The shares owned by the John Cowles Family Trust are non-voting shares. (6) The shares owned by the John Cowles Family Trust are non-voting shares. (7) Includes: (i) 25,000 shares owned directly by Mr. Burwell and (ii) 43,750 shares purchasable upon exercise of options and warrants. (8) Includes: (i) 4,500 shares owned directly by Mr. Gilbertson and (ii) 52,417 shares purchasable upon exercise of options. (9) Includes options for the purchase of 32,083 shares, 31,249 shares, 17,600 shares, 15,388 shares, and 25,000 shares for Messrs. Riley, Landis, Smith, Manrique and Ms. McMahon, respectively. (10) Includes: (i) 12,500 shares owned directly by Mr. Cohn and (ii) 15,000 shares purchasable upon exercise of options and warrants. (11) Includes: (i) 2,500 shares owned directly and (ii) 35,415 shares purchasable upon exercise of warrants. 59 (12) Includes: (i) 1,494,347 shares and owned directly by all officers, directors and director nominees and (ii) 833,793 shares purchasable upon exercise of options and warrants. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LEASES The studios and tower site of WWTC-AM and KYCR-AM are located in St. Louis Park, Minnesota. The studio facility consists of approximately 12,000 square feet. The tower site includes four 200-foot towers, a transmitter building and a storage garage on approximately 16 acres. The tower site is leased from Mr. Dahl at a total annual rent of approximately $114,000, and the studio site is leased from a partnership consisting of Mr. Dahl and Mr. Perkins at an annual rent of approximately $132,000. In January 1996, 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 North First Street, Minneapolis, Minnesota. These facilities are leased at annual rental of $54,000 and house the Company's executive offices. The executive offices are adjacent to the offices of CAC and RMC. CAC is owned and controlled by Messrs. Dahl, Perkins and Cowles, either directly or through trusts. RMC is owned by Messrs. Dahl, Perkins and Cowles. Mr. Cowles is a beneficiary and trustee of the John Cowles Family Trust, and the Trust is a principal 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. MANAGEMENT SERVICES FROM AN AFFILIATE Since July 1993, the Company has received administrative, legal and accounting services from RMC. RMC is a company owned by the Company's President, another director and a shareholder. RMC provides corporate, legal, accounting and financial services to the Company and CAC. CAC is a separate private company also owned by the individuals listed above. The Company pays a set monthly fee of $75,000 for the services listed above. All outside services directly attributable to the Company are billed directly to the Company. The Company paid RMC an aggregate of $600,000 for such services during the fiscal year ended December 31, 1995 and an aggregate of $750,000 for such services during the fiscal year ended December 31, 1996. The salaries of two officers of the Company, Lance W. Riley and James G. Gilbertson, are paid by RMC. These arrangements were approved by the Related Party Transaction Committee of the Company and 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. LOANS AND FINANCING TRANSACTIONS Between April 1994 and November 1995, the Company borrowed from Messrs. Dahl, Perkins, Cowles and Cohn in the form of bridge financings. The Company borrowed $100,000 from Mr. Dahl at an interest rate of 10% per annum. The Company subsequently repaid the loan balance in full. The Company also borrowed a total of $1,950,000 from Mr. Perkins, at annual interest rates ranging from 8% to 10%. In connection with these borrowings, warrants were granted to Mr. Perkins to purchase 171,875 shares of Common Stock at prices ranging from $8.00 to $10.00 per share. Mr. Cowles participated in the bridge financings as well by lending to the Company a total of $200,000 at an annual interest rate of 10%. Mr. Cowles also received warrants from the Company to purchase 27,500 shares of Common Stock at $8.00 per share. Finally, the Company borrowed $100,000 from Mr. Cohn at an annual rate of 10%. Mr. Cohn received warrants from the Company to purchase 15,000 shares of Common Stock at $8.00 per share. The Company completed the conversion of an aggregate of $2,875,000 of outstanding bridge financing Promissory Notes into Common Stock of the Company effective September 30, 1995. $2,400,000 of the $2,875,000 of Promissory Notes converted was from the Company's 1994 bridge financings. Holders of the Promissory Notes from the Company's 1994 bridge financings agreed to surrender the Notes in satisfaction 60 of the exercise price of warrants which were issued as part of such bridge financings. Most of the Note holders who chose to convert also chose to convert interest accrued through September 30, 1995 at the same $8.00 per share conversion price applicable to the exercised warrants. In addition to receiving shares of Common Stock pursuant to the exercised warrants, and as an incentive to convert their indebtedness into equity, the holders of the surrendered 1994 bridge Promissory Notes also received new warrants to purchase 1,250 shares of Common Stock for each $25,000 of debt converted, which new warrants will be exercisable for five years at $10.00 per share. The remaining $525,000 of indebtedness converted was from the Company's previous 1995 bridge financing. Messrs. Perkins, Cohn and Cowles participated in the conversion with respect to $300,000, $100,000 and $200,000, respectively. As a result of such conversions, they received shares of Common Stock and additional warrants for the purchase of 15,000, 5,000 and 10,000 shares, respectively. POTENTIAL CONFLICT OF INTEREST WITH COMMUNITY AIRWAVES CAC may acquire additional radio stations in the future. Under current FCC regulations, radio stations owned by CAC are attributed to the Company and radio stations owned by the Company are attributed to CAC for the purpose of determining whether a station may be acquired in a particular market under the FCC's duopoly rules. The Company does not believe that any such purchases will conflict with its present acquisition strategy, which is to have affiliates or acquire properties in the top 100 U.S. metropolitan markets. CAC has advised the Company that its strategy is to acquire and operate stations in smaller markets. An acquisition by CAC in any market would, however, be attributed to the Company and could further limit the stations which the Company can acquire under existing FCC regulations. The Company is a party to an Attribution Agreement with CAC under which the Company is required to obtain the consent of CAC for the acquisition of any FM radio station or any AM radio station located outside the top 125 U.S. markets. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Articles of Incorporation, as amended and restated * 3.2 Amended and Restated Bylaws * 10.1 1991 Incentive Stock Option Plan 10.2 Lease between the Company and 5501 Building Company dated November 1, 1996 10.3 Lease between the Company and 724 Associates dated November 1, 1996 10.4 Management Services Agreement between the Company and Radio Management Corporation dated February 22, 1997 10.5 1994 Stock Option Plan ** 10.6 1994 Director Stock Option Plan ** 10.7 Attribution Agreement between the Company, Community Airwaves Corporation, DCP Broadcasting Corporation and Christopher T. Dahl dated February 15, 1995 *** 10.8 Letter Agreement between the Company and Brenner Securities Corporation dated November 7, 1995, relating to the provision of certain financial services *** 10.9 Stock Purchase Agreement dated January 19, 1996, between the Company and John Quinn *** 10.10 Asset Purchase Agreement dated January 30, 1996, between the Company and Wolpin Broadcasting Company *** 10.11 Real Estate Purchase Agreement dated January 30, 1996, between Company and Weber/Wolpin Realty Company 61 **** 10.12 1996 Employee Stock Purchase Plan + 10.13 Loan and Security Agreement dated November 25, 1996, between the Company and Foothill Capital Corporation 10.14 Common Stock Purchase Warrant between Foothill Capital Corporation and the Company dated November 7, 1996 ++ 16 Letter on Change in Certifying Accountant 21 Subsidiaries of the Company 23.1 Consent of Ernst & Young LLP 23.2 Consent of BDO Seidman, LLP 27 Financial Data Schedule ___________________ * Incorporated by reference to the Company's Registration Statement on Form S-18 (File No. 33-44412) filed on December 5, 1991. ** Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994 (File No. 0-21534) filed on March 31, 1995, as amended by Form 10-KSB/A filed on October 4, 1995. *** Incorporated by reference to the Company's Registration Statement on Form S-2 (File No. 33-80721) filed on December 21, 1995. **** Incorporated by reference to the Company's Definitive Schedule 14A (Proxy Statement) (File No. 0-21534) filed on August 22, 1996, relating to the Company's Annual Meeting of Shareholders held on September 30, 1996. + Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21534) filed on December 20, 1996, relating to the Company closing on a $16,500,000 loan from Foothill Capital Corporation. ++ Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21534) filed on July 3, 1996, relating to changes in the Company's certifying accountant. (b) Reports on Form 8-K (1) The Company's Current Report on Form 8-K filed on October 3, 1996, relating to the Company filing a lawsuit in United States District Court for the District of Minnesota against The Walt Disney Company and ABC Radio Networks, Inc. (2) The Company's Current Report on Form 8-K filed on October 17, 1996, relating to the Company filing Form 10-QSB/A regarding the write-off of a deferred warrant expense resulting from the termination by ABC Radio Networks, Inc. of its joint operations agreement with the Company. (3) The Company's Current Report on Form 8-K/A filed on November 12, 1996, relating to acquisition of Radio Elizabeth, Inc. (4) The Company's Current Report on Form 8-K filed on November 12, 1996, relating to the Company signing a commitment letter for a $15,000,000 loan from Foothill Capital Corporation. (5) The Company's Current Report on Form 8-K filed on December 20, 1996, relating to the Company closing on a $16,500,000 loan from Foothill Capital Corporation. 62 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 28, 1997. 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 and March 28, 1997 - ---------------------------------- Director (principal executive officer) Christopher T. Dahl /s/ James G. Gilbertson Chief Operating Officer and Treasurer March 28, 1997 - ---------------------------------- (principal accounting and financial officer) James G. Gilbertson Director - ---------------------------------- Rodney P. Burwell /s/ Richard W. Perkins - ---------------------------------- Director March 28, 1997 Richard W. Perkins /s/ Mark A. Cohn - ---------------------------------- Director March 28, 1997 Mark A. Cohn
63 EXHIBIT INDEX Exhibit No. Description - ---------- ----------- 3.1 Articles of Incorporation, as amended and restated * 3.2 Amended and Restated Bylaws * 10.1 1991 Incentive Stock Option Plan 10.2 Lease between the Company and 5501 Building Company dated November 1, 1996 10.3 Lease between the Company and 724 Associates dated November 1, 1996 10.4 Management Services Agreement between the Company and Radio Management Corporation dated February 22, 1997 10.5 1994 Stock Option Plan ** 10.6 1994 Director Stock Option Plan ** 10.7 Attribution Agreement between the Company, Community Airwaves Corporation, DCP Broadcasting Corporation and Christopher T. Dahl dated February 15, 1995 *** 10.8 Letter Agreement between the Company and Brenner Securities Corporation dated November 7, 1995, relating to the provision of certain financial services *** 10.9 Stock Purchase Agreement dated January 19, 1996, between the Company and John Quinn *** 10.10 Asset Purchase Agreement dated January 30, 1996, between the Company and Wolpin Broadcasting Company *** 10.11 Real Estate Purchase Agreement dated January 30, 1996, between Company and Weber/Wolpin Realty Company **** 10.12 1996 Employee Stock Purchase Plan + 10.13 Loan and Security Agreement dated November 25, 1996, between the Company and Foothill Capital Corporation 10.14 Common Stock Purchase Warrant between Foothill Capital Corporation and the Company dated November 7, 1996 ++ 16 Letter on Change in Certifying Accountant 21 Subsidiaries of the Company 23.1 Consent of Ernst & Young LLP 64 23.2 Consent of BDO Seidman, LLP 27 Financial Data Schedule ___________________ * Incorporated by reference to the Company's Registration Statement on Form S-18 (File No. 33-44412) filed on December 5, 1991. ** Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994 (File No. 0-21534) filed on March 31, 1995, as amended by Form 10-KSB/A filed on October 4, 1995. *** Incorporated by reference to the Company's Registration Statement on Form S-2 (File No. 33-80721) filed on December 21, 1995. **** Incorporated by reference to the Company's Definitive Schedule 14A (Proxy Statement) (File No. 0-21534) filed on August 22, 1996, relating to the Company's Annual Meeting of Shareholders held on September 30, 1996. + Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21534) filed on December 20, 1996, relating to the Company closing on a $16,500,000 loan from Foothill Capital Corporation. ++ Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21534) filed on July 3, 1996, relating to changes in the Company's certifying accountant. 65 EX-3.1 2 ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF CHILDREN'S BROADCASTING CORPORATION The undersigned officer, on behalf of Children's Broadcasting Corporation, a Minnesota corporation (the "Corporation"), hereby certifies that an amendment to the Corporation's Articles of Incorporation has been duly approved by the Company's Board of Directors and shareholders in accordance with Sections 302A.135 and 302A.139 of the Minnesota Statutes. Accordingly, Article IV is amended in its entirety to read as follows: ARTICLE IV CAPITAL The aggregate number of shares of stock which this corporation shall have the authority to issue is fifty million (50,000,000) shares with a par value of two cents ($.02) per share. IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to the Articles of Incorporation to be executed this 3rd day of October, 1996. CHILDREN'S BROADCASTING CORPORATION By /s/J. G. Gilbertson --------------------------------- Its Chief Operating Officer --------------------------------- 71 ARTICLES OF AMENDMENT OF CD BROADCASTING CORPORATION OF MINNEAPOLIS RESTATING AND AMENDING THE ARTICLES OF INCORPORATION The undersigned, President of CD Broadcasting Corporation of Minneapolis, a corporation subject to Chapter 302A, hereby certifies that the Articles of Amendment set forth below, containing the restatement of the Articles of Incorporation with amendments thereto, were adopted by unanimous written authorization of the directors and shareholders pursuant to Sections 302A.239 and 302A.441, Minnesota Statutes: ARTICLE I. NAME The name of this corporation shall be Children's Broadcasting Corporation. ARTICLE II. REGISTERED OFFICE The registered office of this corporation is located at 215 South Eleventh Street, Minneapolis, MN 55403. ARTICLE III. The names and addresses of the members of the Board of Directors at the time of the adoption of these Amended and Restated Articles are: NAME ADDRESS ------ --------- Christopher T. Dahl 5404 Interlachen Blvd. Edina, MN 55436 Richard W. Perkins 1485 Fox Street Orono, MN 55391 ARTICLE IV. CAPITAL The aggregate number of shares of stock which this corporation shall have the authority to issue is ten million shares with a par value of One Cent ($0.01) per share. 72 ARTICLE V. CLASSES AND SERIES OF STOCK In addition to, and not by way of limitation of, the powers granted to the Board of Directors by Minnesota Statutes, Chapter 302A, the Board of Directors of this corporation shall have the power and authority to fix by resolution any designation, class, series, voting power, preference, right, qualification, limitation, restriction, dividend, time and price of redemption, and conversion right with respect to any stock of the corporation. Upon adoption of such resolution, a statement shall be filed with the Secretary of State in compliance with Section 302A.401, Minnesota Statutes, before the issuance of any shares for which the resolution creates rights or preferences not set forth in these Articles; provided, however, where the shareholders have received notice of the creation of shares with rights or preferences not set forth in the Articles before the issuance of the shares, the statement may be filed any time within one year after the issuance of the shares. ARTICLE VI. SHAREHOLDER VOTING No shareholder of this corporation shall be entitled to any cumulative voting rights. The shareholders of the corporation shall take action by the affirmative vote of the holders of a majority of the shares present and entitled to vote, except where a larger proportion is required by law, these Articles of Incorporation or a shareholder control agreement. The affirmative vote of a majority of the voting power of all shares entitled to vote shall be required to authorize the sale, lease, exchange or other disposition of all or substantially all of the property and assets of the corporation, including its goodwill, to amend the Articles of Incorporation, to adopt or reject an agreement of merger or to authorize the dissolution of the corporation. ARTICLE VII. PREEMPTIVE RIGHTS No shareholder of this corporation shall have any preferential, preemptive, or other rights of subscription to any shares of any class or series of stock of this corporation allotted or sold or to be allotted or sold, whether now or hereafter authorized, or to any obligations or securities convertible into 73 any class or series of stock of this corporation. ARTICLE VII. DIRECTOR LIABILITY A director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for (i) liability based on a breach of the duty of loyalty to the corporation or the shareholders; (ii) liability for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) liability based on the payment of an improper dividend or an improper repurchase of the corporation's stock under Minnesota Statutes, Section 302A.559, or on violations of federal or state securities laws; (iv) liability for any transaction from which the director derived an improper personal benefit; or (v) liability for any act or omission occurring prior to the date this Article becomes effective. If Minnesota Statutes, Chapter 302A, hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the corporation in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Chapter 302A. Any repeal of this provision as a matter of law or any modification of this Article by the shareholders of the corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the corporation existing at the time of such repeal or modification. ARTICLE IX. BOARD OF DIRECTORS VOTE The affirmative vote of a majority of the Board of Directors of the corporation present at a meeting is required for an action of the Board. ARTICLE X. BOARD ACTION WITHOUT A MEETING Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting by written action signed by a majority of the Board of Directors then in office, except as to those matters which require shareholder approval, in which case the written action shall be signed by all members of the Board of Directors then in office. Whenever written action is taken by less than all of the directors, all directors shall be notified immediately of the text and the effective date. Failure to provide the notice to the other directors shall not invalidate the written action. The undersigned has been authorized and directed to sign and file these Articles of Amendment in the manner required by law. /s/ Christopher T. Dahl ---------------------------------- President 74 State of Minnesota Office of the Secretary of State NOTICE OF CHANGE OF REGISTERED OFFICE -- REGISTERED AGENT OR BOTH BY - ------------------------------------------------------------------------------- NAME OF CORPORATION CHILDREN'S BROADCASTING CORPORATION - ------------------------------------------------------------------------------- Pursuant to Minnesota Statutes, Section 302A.123, 303.10, or 317.19 the undersigned hereby certifies that the Board of Directors of the above named Corporation has resolved to change the corporation's registered office or agent: - ------------------------------------------------------------------------------- F AGENT'S NAME (FILL IN THIS BOX ONLY IF YOU ALREADY HAVE R AN AGENT. DO NOT LIST THE CORPORATE NAME O IN THIS BOX.) M ---------------------------------------------------------------------- ADDRESS (NO. & STREET) 215 South Eleventh Street ---------------------------------------------------------------------- CITY COUNTY ZIP Minneapolis Hennepin MN 55403 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- T AGENT'S NAME (FILL IN THIS BOX ONLY IF YOU ALREADY HAVE AN O AGENT. DO NOT LIST THE CORPORATE NAME IN THIS BOX.) ------------------------------------------------------------------------ ADDRESS (NO. & STREET) 5501 Excelsior Boulevard ------------------------------------------------------------------------ CITY COUNTY ZIP Saint Louis Park Hennepin MN 55416 - ------------------------------------------------------------------------------- The new address may not be a post office box. It must be a street address, pursuant to Minnesota Statutes, Section 302A.011, Subd.3 This change is effective on the day it is filed with the Secretary of State, unless you indicate another date, no later than 30 days after filing with the Secretary of State, in this box: ---------------------------------- ---------------------------------- I certify that I am authorized to execute this certificate and I further certify that I understand that by signing this certificate I am subject to the penalties of perjury as set forth in section 609.48 as if I had signed this certificate under oath. ------------------------------------------------------------------------ NAME OF OFFICER OR OTHER AUTHORIZED SIGNATURE AGENT OF CORPORATION Christopher T. Dahl ------------------------------------------------------------------------ TITLE OR OFFICE DATE President January 23, 1992 ------------------------------------------------------------------------ Do not write below this line. For Secretary of State's use only. - ------------------------------------------------------------------------------- RECEIPT NUMBER FILE DATA - ------------------------------------------------------------------------------- STATE OF MINNESOTA DEPARTMENT OF STATE 683411 FILED JAN 28, 1990 /s/ Joan Anderson Growe ----------------------- Secretary of State 75 CHILDREN'S BROADCASTING CORPORATION CERTIFICATE OF DESIGNATION OF STOCK The undersigned, being the duly appointed Secretary of Children's Broadcasting Corporation, hereby certifies that the Board of Directors of the Corporation, acting pursuant to Chapter 302A, Minnesota Statutes, took action by unanimous resolution on November 18, 1991 to designate 378,083 shares of non-voting Common Stock of the Corporation, pursuant to which resolution said stock was issued on April 16, 1992. The undersigned further certifies that the following resolution has been duly adopted by the Board of Directors of the Corporation with respect to the establishment and designation of non-voting stock: DESIGNATION OF NON-VOTING STOCK RESOLVED, in accordance with the Articles of Incorporation of the Corporation and pursuant to Minnesota Statutes, Chapter 302A, the Board of Directors hereby establishes and designates from the Corporation's unauthorized and unissued shares, 378,083 shares of common stock without voting rights (except as hereinafter provided), which shares shall in all respects, except for voting, be equal and have the same rights as, the common stock of the Corporation, such non-voting common stock hereinafter referred to as "Nonvoting Common Stock". Notwithstanding the foregoing, such non-voting stock shall have full voting rights at such time as the transfer of such shares is legally permitted pursuant to the terms of an agreement dated August 1, 1991 between this Corporation, Russell Cowles II, Marguerite A. Cowles and First Bank Minneapolis, N.A., Trustees of the John Cowles Family Trust for the benefit of Russell Cowles, II. RESOLVED FURTHER, that the President and Secretary of the Corporation are authorized and directed to take such further action as shall be necessary or required to issue said Non-Voting Common Stock and they, or any of them, are authorized and directed to file a certificate of designation pursuant to Section 302A.401, Subd. 3 of the Minnesota Business Corporation Act with the Minnesota Secretary of State. I certify that I am authorized to execute this instrument and I further certify that I understand that by signing this amendment I am subject to the penalties of perjury as set forth in Section 609.48 as if I had signed this Amendment under oath. ---------------------------------------- Leah E. Hauge Secretary of CHILDREN'S BROADCASTING CORPORATION 76 State of Minnesota Office of the Secretary of State CERTIFICATE OF CHANGE OF REGISTERED OFFICE BY - ------------------------------------------------------------------------------- NAME OF CORPORATION CHILDREN'S BROADCASTING CORPORATION [REMAINDER ILLEGIBLE] - ------------------------------------------------------------------------------- Pursuant to Minnesota Statutes, Section 302A.123, or 317.19, the undersigned hereby certifies that the Board of Directors of the above named Minnesota Corporation has resolved to change the corporation's registered office: - ------------------------------------------------------------------------------- F ADDRESS R (NO. & STREET) 5501 Excelsior Blvd. O ----------------------------------------------------------------------- M CITY COUNTY ZIP St. Louis Park Hennepin MN 55416 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- T AGENT'S NAME O ----------------------------------------------------------------------- ADDRESS (FILL IN THIS BOX ONLY IF YOU ALREADY HAVE AN (NO. & STREET) AGENT. DO NOT LIST THE CORPORATE NAME IN THIS BOX.) 5501 Excelsior Boulevard ----------------------------------------------------------------------- CITY COUNTY ZIP Saint Louis Park Hennepin MN 55416 - ------------------------------------------------------------------------------- The effective date of the change will be the 1st day of January, 1992 or the day of filing of this certificate with the Secretary of State, whichever is later. I swear that the foregoing is true and accurate and that I have the authority to sign this document on behalf of the corporation. ------------------------------------------------------------------------- NAME OF OFFICER OR OTHER AUTHORIZED AGENT OF CORPORATION SIGNATURE ------------------------------------------------------------------------- TITLE OR OFFICE DATE ------------------------------------------------------------------------- STATE OF MINNESOTA ) The foregoing instrument was )ss. acknowledged before me County of____________________ ) on this ___ day of __________, 19__. (Notarial ___________________________________ Seal) (Notary Public) - ------------------------------------------------------------------------------- RECEIPT NUMBER FILE DATA - ------------------------------------------------------------------------------- STATE OF MINNESOTA DEPARTMENT OF STATE 915846 FILED OCT [illegible], 1993 /s/ [ILLEGIBLE] --------------------------- [ILLEGIBLE] SC-00014-05 77 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF CONVERTIBLE PREFERRED STOCK SERIES 1993-A OF CHILDREN'S BROADCASTING CORPORATION Children's Broadcasting Corporation, a corporation organized and existing under the laws of Minnesota (the "Corporation"), does hereby certify: That pursuant to authority vested in it by the provisions of the Articles of Incorporation, the Board of Directors of the Corporation, at a meeting of the Board held on December 8, 1993, at which meeting a quorum of directors was present and acting throughout, did adopt the following resolution authorizing the creation and issuance of a series of Preferred Stock designated as Convertible Preferred Stock Series 1993-A: RESOLVED, that the Corporation hereby designates 290,213 shares of its authorized but unissued Preferred Stock, par value $.01, as Convertible Preferred Stock, Series 1993-A, which shall have the following designations, preferences, rights, qualifications, limitations and restrictions in addition to those set forth in the Articles of Incorporation, as amended, of the Corporation: 1. DESIGNATION; NUMBER OF SHARES; STATED VALUE; DIVIDENDS. Two Hundred Ninety Thousand Two Hundred Thirteen (290,213) shares of Preferred Stock shall be designated Convertible Preferred Stock 1993-A (hereinafter sometimes referred to as the "Convertible Preferred Stock" or as this "Series"). Shares of this Series shall have a stated value of $10.00 per share ("Stated Value"). Except as provided herein, shares of this Series shall not be entitled to dividends or other distributions and shall be non-participating for all purposes. 2. REDEMPTION AT OPTION OF HOLDERS. (a) Commencing with the second day following the fifth anniversary of the date of issuance (the "Redemption Commencement Date"), the Corporation shall, subject to the requirements of the Minnesota Business Corporation Act, from time to time, redeem all shares of this Series tendered to the Corporation for redemption at the option of the holders of the Convertible Preferred Stock. The redemption price shall be the Stated Value. Such redemption shall be effected on the terms and conditions hereinafter provided. (b) Each holder of shares of this Series who elects to require the Corporation to purchase all or any of such holder's shares shall surrender to the Corporation's transfer agent (or other fiduciary designated in writing by the Corporation as agent for redemption) certificates of this Series then outstanding as soon as practicable following 78 the Redemption Date (hereinafter defined). The "Redemption Date" shall mean a date which is eight (8) calendar months following the giving of written notice (the "Redemption Notice") by such holder to the Corporation. The Redemption Notice may be given up to eight months prior to the Redemption Commencement Date and at any time after the Redemption Commencement Date. A Redemption Notice shall contain the holder's demand for redemption and be given to the Company at its principal executive offices last set forth in the Corporation's 10-Q/10-QSB report filed with the Securities and Exchange Commission or, if no such report has been filed, to the Corporation's registered office in the state of its incorporation, as certified to or disclosed by the secretary of state of such state. Such notice shall be deemed given if in writing and sent postage prepaid by certified or registered first class mail or by nationwide overnight courier. Once given, a Redemption Notice may not be withdrawn; however, a holder may elect to convert, in accordance with paragraph 3 hereof, any or all of the shares of this Series prior to the Redemption Date. (c) The Corporation shall, on or before the Redemption Date, deposit with its transfer agent (or such other agent for redemption selected by the Corporation) as a trust fund, a sum sufficient to redeem the shares of this Series subject to redemption, with irrevocable instructions and authority to such transfer agent or other redemption agent to give or complete the notice of redemption thereof and to pay to the respective holders of such shares, as evidenced by a list of such holders who have duly exercised such rights of redemption, certified by an officer of the Corporation, the redemption price upon surrender of their respective share certificates. Such deposit shall be deemed to constitute full payment of such shares to their holders; and from and after the date of such deposit, notwithstanding that any certificates for such shares shall not have been surrendered for cancellation by holders who have given a Redemption Notice, the shares represented thereby shall no longer be deemed outstanding, and all rights of such holders of the shares of Convertible Preferred Stock shall cease and terminate, except the right to receive the redemption price, without interest, as of the Redemption Date. 3. CONVERSION. (a) The holder of any shares of this Series may at any time, prior to a Redemption Date applicable to such holder, elect to convert all or any portion of the shares of this Series into fully paid and non-assessable shares of Common Stock at the initial rate of one (1) share of Common Stock for each share of this Series, subject to adjustment pursuant to the provisions of subparagraph (c) of this paragraph 3. Such right of conversion shall be exercised by the surrender of the shares so to be converted to the Corporation at any time during normal business hours at the principal executive offices of the Corporation or at the office of any agent for conversion from time to time designated by it for conversion of ("Conversion Agent") the shares of this Series accompanied by written notice of such holder's election to convert and (if so required by the Corporation or the Conversion Agent) by instruments of transfer, in form satisfactory to the Corporation and to the Conversion Agent, duly executed by the registered holder or by his duly authorized attorney, and transfer tax stamps or funds therefor, if required pursuant to subparagraph (h) of this paragraph 3. 79 (b) As promptly as practicable after the surrender for conversion of any shares of this Series in the manner provided in subparagraph (a) of this paragraph 3 and the payment in cash of any amount required by the provisions of subparagraphs (a) and (h) of this paragraph 3, the Corporation will deliver or cause to be delivered at the principal executive offices of the Corporation or at the office of the Conversion Agent to or upon the written order of the holder of such shares, certificates representing (i) the number of full shares of Common Stock issuable upon such conversion, and (ii) if less than the full number of shares evidenced by the Convertible Preferred Stock certificate are being converted, a new certificate for the remaining number of shares thereof issued in such name or names as such holder may direct. Such conversion shall be deemed to have been immediately prior to the close of business on the date of such surrender of the shares, and all rights of the holder of such shares as a holder of such shares shall cease at such time and the person or persons in whose name or names the certificates for such shares of Common Stock are to be issued shall be treated for all purposes as having become the record holder or holders thereof at such time and such conversion shall be at the conversion rate in effect at such time; provided, however, that any such surrender and payment on any date when the stock transfer books of the Corporation shall be closed shall constitute the person or persons in whose name or names the certificates for such shares of Common Stock are to be issued as the record holder or holders thereof for all purposes immediately prior to the close of business on the next succeeding day on which such stock transfer books are opened and such conversion shall be at the conversion rate in effect at such time on such succeeding day. (c) The initial conversion rate shall be one (1) share of Common Stock per share of this Series (equivalent to a conversion price of $10.00 per share). The conversion rate shall be subject to adjustment as follows: (i) In case the Corporation shall (A) pay a dividend or make a distri- bution in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class), (B) subdivide its outstanding shares of Common Stock, (C) combine its outstanding shares of Common Stock into a smaller number of shares, (D) issue by reclassification of its shares of Common Stock (whether by merger or consolidation or otherwise) any shares of capital stock of the Corporation or (E) take any action with the same effect as any of the foregoing, the conversion privilege and the conversion rate in effect immediately prior to such action shall be adjusted so that the holder of any shares of this Series thereafter surrendered for conversion shall be entitled to receive (subject to further adjustments pursuant to subparagraphs (c)(ii) and (c)(iii) hereof) the number of shares of capital stock of the Corporation (or of the corporation surviving or resulting from any merger or consolidation) which he would have owned immediately following such action had such share been converted immediately prior thereto. An adjustment made pursuant to this subparagraph (c)(i) shall become effective retroactively immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subparagraph (c)(i), the holder of 80 any shares thereafter surrendered for conversion shall become entitled to receive shares of two or more classes of capital stock of the Corporation, the Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted conversion rate between or among shares of such classes of capital stock. (ii) In case the Corporation shall issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (as determined pursuant to subparagraph (c)(iv) below) on the record date mentioned below, other than pursuant to a dividend reinvestment plan, the conversion rate shall be adjusted so that the same shall equal the rate determined by multiplying the conversion rate in effect immediately prior to the date of issuance of such rights or warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares in which the aggregate offering price of the total number of shares so offered would purchase at such current market price. Such adjustment shall become effective retroactively immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. For the purposes of this paragraph 3(c)(ii), the issuance of rights or warrants to subscribe for or purchase stock or securities convertible into shares of Common Stock shall be deemed to be the issuance of rights or warrants to purchase the shares of Common Stock into which such stock or securities are convertible at an aggregate offering price equal to the aggregate offering price of such stock or securities plus the minimum aggregate amount (if any) payable upon conversion of such stock or securities into Common Stock. (iii) In case the Corporation shall distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding any cash dividend paid from retained earnings of the Corporation) or rights or warrants to subscribe to securities of the Corporation (excluding those referred to in subparagraph (c)(ii) above), then in each such case the conversion rate shall be adjusted so that the same shall equal the rate determined by multiplying the conversion rate in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in subparagraph (c)(iv) below) of the Common Stock on the record date mentioned below, and of which the denominator shall be such current market price per share of Common Stock less the then fair market value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants applicable to one share of Common Stock. Such adjustment shall become effective retroactively 81 immediately after the record date for the determination of stockholders entitled to receive such distribution. (iv) For the purpose of any computation under subparagraphs (c)(ii) and (c)(iii) above, the current market price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices for 30 consecutive trading days commencing 45 trading days before the day in question. The "closing price" on any day shall mean the reported last sale price on such day or, in case no such reported sales takes place on such day, the average of the reported closing bid and asked prices, in each case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, then in the over-the-counter market as reported on NASDAQ or a similar reporting service, or, if no such quotations are available, the fair market price as determined by the Corporation (whose determination shall be conclusive). (v) In any case in which this subparagraph (c) shall require that an adjustment be made retroactively immediately following a record date, the Corporation may elect to defer (but only until five business days following the mailing by the Corporation of the certificate of independent public accountants described in subparagraph (c)(vii) below) issuing to the holder of any shares converted after such record date (x) the shares of Common Stock and other capital stock of the Corporation issuable upon such conversion over and above (y) the shares of Common Stock and other capital stock of the Corporation issuable upon such conversion only on the basis of the conversion rate prior to adjustment. (vi) No adjustment in the conversion rate shall be required unless such adjustment would require an increase or decrease of at least 1% in such rate; provided, however, that any adjustments which by reason of this subparagraph (c)(vi) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; and, provided further, that the provisions of this paragraph 3 (other than this subparagraph (c)(vi)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holders of shares of Common Stock. All calculations under this paragraph 3 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this paragraph 3 to the contrary notwithstanding, the Corporation shall be entitled to make such increases in the conversion rate in addition to those required by this subparagraph (c) as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock hereafter made by the Corporation to its stockholders shall not be taxable. 82 (vii) Whenever the conversion rate is adjusted as herein provided, the Corporation shall promptly (x) file with the Conversion Agent a certificate of a firm of independent public accountants selected by the Board of Directors (who may be the regular accountants employed by the Corporation) setting forth the conversion rate after such adjustment and setting forth a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment, and (y) mail or cause to be mailed a notice of such adjustment to the holders of shares of this Series at their last addresses as they shall appear upon the books of the Corporation. (viii) The term "Common Stock" shall mean the Corporation's voting Common Stock, par value $.01 per share, as the same exists at the date of filing of this Certificate of Designation, Preferences and Rights of the Convertible Preferred Stock, or any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time as a result of an adjustment made pursuant to subparagraph (c)(i) above, the holder of any share thereafter surrendered for conversion shall become entitled to receive any shares of the Corporation other than shares of its Common Stock, thereafter the conversion rate of such other shares so receivable upon conversion of any share shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in subparagraphs (c)(i) through (c)(vii) above, and the provisions of subparagraphs (a) through (c) and subparagraphs (e) through (k) of this paragraph 4 with respect to the Common Stock shall apply on like or similar terms to any such other shares. (d) No fractional shares of stock shall be issued upon the conversion of any share or shares of this Series. If more than one such share of this Series shall be surrendered for conversion at the same time by the same holder, the number of full shares which shall be issuable upon the conversion thereof shall be computed on the basis of the aggregate number of shares so surrendered. If any fractional interest in a share of Common Stock would, except for the provisions of this subparagraph (e), be deliverable upon the conversion of any share or shares, the Corporation shall in lieu of delivering the fractional share therefor, adjust such fractional interest by payment to the holder of such surrendered share or shares of an amount in cash equal (computed to the nearest cent) to the current market value of such fractional interest on the last business day prior to the date of conversion, computed on the basis of the last reported sale price on such day or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in each case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, then in the over-the-counter market as reported by NASDAQ or a similar reporting service, or if no such quotations are available, the fair market price as determined by the Corporation (whose determination shall be conclusive). 83 (e) If either of the following shall occur, namely: (i) any consolidation or merger to which the Corporation is a party, other than a consolidation or a merger in which consolidation or merger the Corporation is a continuing corporation and which does not result in any reclassification of, or change (other than a change in par value or from par value to no par value or from no par value to par value, or as a result of a subdivision or combination) in, outstanding shares of the Common Stock, or (ii) any sale or conveyance to another corporation of the property of the Corporation as an entirety or substantially as an entirety in consideration for property or securities of such other corporations; then the holder of each share of Convertible Preferred Stock then outstanding shall have the right to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock issuable upon conversion of such share immediately prior to such consolidation, merger, sale or conveyance, subject to adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this paragraph 3. In any such event, effective provision shall be made in the articles or certificate of incorporation of the resulting or surviving corporation or other corporation issuing or delivering such shares of stock or other securities or property or otherwise, so that the provisions set forth herein for the protection of the conversion rights of the Convertible Preferred Stock shall thereafter be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable upon conversion of the Convertible Preferred Stock remaining outstanding or other convertible stock or securities received by the holders in place thereof; and any such resulting surviving corporation or other corporation issuing or delivering such shares or other securities or property shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such shares of stock or other securities or property as the holders of the Convertible Preferred Stock remaining outstanding, or other convertible stock or securities received by the holders of the Convertible Preferred Stock remaining outstanding, or other convertible stock or securities received by the holders in place thereof, shall be entitled to receive, pursuant to the provisions hereof, and to make provision for the protection of the conversion right as above provided. In case shares, securities or other property other than Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all references to Common Stock in this paragraph 3(e) shall be deemed to apply, so far as provided and as nearly as is reasonable, to any such shares of stock and other securities and property. The provisions of this subparagraph (e) shall similarly apply to successive consolidations, mergers, sales or conveyances. (f) The Corporation covenants that it will at all times reserve and keep available, solely for the purpose of issue upon conversion of the shares of this Series, such number of shares of Common Stock as shall be issuable upon the conversion of all such outstanding shares; provided, that nothing contained herein shall be construed to preclude the Corporation from satisfying its obligations in respect of the Conversion of the shares by delivery of purchased shares of Common Stock which are held in the treasury of the Corporation. For the purpose of this subparagraph (f), the full number of shares of Common Stock issuable upon the conversion of all outstanding shares of this 84 Series shall be computed as if at the time of computation of such number of shares of Common Stock all outstanding shares of this Series were held by a single holder. The Corporation will endeavor to list the shares of Common Stock required to be delivered upon conversion of shares prior to such delivery on NASDAQ or each national securities exchange upon which the outstanding Common Stock is listed at the time of such delivery. The Corporation covenants that all shares of Common Stock which shall be issued upon conversion of the shares will upon issue be fully paid and non-assessable and not subject to any preemptive rights. (g) Before taking any action which would cause an adjustment reducing the conversion price per share of this Series below the then par value of the Common Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and non- assessable shares of Common Stock at the conversion rate as so adjusted. If as a result of conversion of the shares of this Series it becomes necessary to authorize additional shares of Common Stock, the Corporation covenants that it will take such action at such time as is necessary by amendment of the Corporation's Articles of Incorporation. (h) The Corporation shall pay any and all issue or other taxes payable in respect of any issue or delivery of shares of Common Stock upon conversion. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares converted, the person or persons requesting the issuance thereof shall pay to the Corporation the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Corporation that such tax has been paid. (i) Notwithstanding anything elsewhere contained in this Certificate, any funds which at any time shall have been deposited by the Corporation or on its behalf with any paying agent for the purpose of paying dividends on or the redemption price of any shares of this Series and which shall not be required for such purposes because of the conversion of such shares, as provided in this paragraph 3, shall be, upon delivery to the paying agent of evidence satisfactory to it of such conversion, after such conversion be repaid to the Corporation by the paying agent. (j) In case: (i) the Corporation shall take any action which would require an adjustment in the conversion rate pursuant to subparagraph (c) of this paragraph 3; or (ii) the Corporation shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of 85 stock of any class or of any other rights and notice thereof shall be given to holders of Common Stock; or (iii) there shall be any capital reorganization or reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock and other than a change in par value or from par value to no par value or from no par value to par value of the Common Stock), or any consolidation or merger to which the Corporation is a consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or any sale or transfer of all or substantially all of the assets of the Corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed with any conversion agent, and shall cause to be given to the holders of the shares of this Series at least ten business days prior to the applicable date hereinafter specified, a notice setting forth (x) the date on which a record is to be taken for the purpose of any distribution or grant to holders of Common Stock, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such distribution or grant are to be determined or (y) the date on which such reorganization, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, transfer dissolution, liquidation or winding-up. Failure to give such notice or any defect therein shall not affect the legality or validity of the proceedings described in clauses (i) through (iv) of this subparagraph (j). 4. VOTING. The shares of this Series shall not have any voting powers either general or special, except as provided by law. In exercising any voting rights conferred by law, each share of Convertible Preferred Stock shall be entitled to one vote. 5. LIQUIDATION RIGHTS. Upon the dissolution, liquidation or winding-up of the Corporation, whether voluntary or involuntary, the holders of the shares of this Series shall be entitled to receive, before any payment or distribution of the assets of the Corporation or proceeds thereof (whether capital or surplus) shall be made to or set apart for the holders of the Common Stock or any other class or series of stock, the amount of $10.00 per share. If, upon any liquidation, dissolution or winding-up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of the Convertible Preferred Stock and any other class or series of Preferred Stock ranking on a parity with the Convertible Preferred Stock as to payments upon 86 liquidation, dissolution or winding-up shall be insufficient to pay in full the preferential amount aforesaid, then such assets or the proceeds thereof, shall be distributed among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes of this paragraph 5, the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all the property or assets of the Corporation to, or a consolidation or merger of the Corporation with, one or more other corporations (whether or not the Corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding-up, voluntary or involuntary. 6. NO PURCHASE, RETIREMENT OR SINKING FUND. The shares of this Series shall not be subject to the operation of any purchase, retirement or sinking fund. 7. STATUS. Shares of this Series which have been issued and reacquired in any manner by the Corporation shall, upon compliance with any applicable provisions of the Minnesota Business Corporation Act, have the status of authorized and unissued shares of Preferred Stock and may be reissued as a part of this Series or as part of a new series of Preferred Stock to be established by the Board of Directors or as part of any other series of Preferred Stock the terms of which do not prohibit such reissue; provided, however, that such shares may not be reissued as shares of this Series. 8. PRIORITY. The Common Stock and all other series of Preferred Stock of the Corporation, now or hereafter issued, shall rank junior to the Convertible Preferred Stock as to payment of dividends and as to distributions of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. 9. RELATIVE RIGHTS OF CONVERTIBLE PREFERRED STOCK. So long as any of the Convertible Preferred Stock is outstanding, the Corporation will not: (a) Declare, or pay, or set apart for payment, or make any distribution in cash or other property on any other class or series of stock of the Corporation ranking junior to the Convertible Preferred Stock either upon liquidation, dissolution or winding-up, and will not redeem, purchase or otherwise acquire any shares of any such junior class or series if at the time of making such declaration, payment, distribution, redemption, purchase or acquisition the Corporation shall be in default with respect to any obligation to redeem shares of Convertible Preferred Stock which shall have been tendered for redemption; and 87 (b) Without the affirmative vote or consent of the holders of at least a majority of all the Convertible Preferred Stock at the time outstanding, voting separately as a class, given in person or by proxy, either in writing or by resolution adopted either at an annual meeting or special meeting called for the purpose, (i) authorize, create, or issue, or increase the authorized or issued amount, of any class or series of stock ranking on a par with or prior to the Convertible Preferred Stock, upon liquidation, dissolution or winding-up or (ii) amend, alter or repeal (whether by merger, consolidation or otherwise) any of the provisions of the Corporation's Articles of Incorporation, or of the Certificate of Designation, Preferences and Rights of the Convertible Preferred Stock, so as to materially and adversely affect the preferences, special rights, privileges or powers of the Convertible Preferred Stock; provided, however, that the creation and issuance of other series of Preferred Stock ranking junior to the Convertible Preferred Stock shall not be deemed to materially and adversely affect such preferences, rights, privileges or powers. IN WITNESS WHEREOF, CHILDREN'S BROADCASTING CORPORATION has caused its corporate seal to be hereunto affixed and this Certificate of Designation of Preferences and Rights to be signed by its President and attested by its Secretary this 21st day of August, 1994. CHILDREN'S BROADCASTING CORPORATION [Corporate Seal] By /s/ Christopher T. Dahl ----------------------------- Christopher T. Dahl, Chief Executive Officer 60-568 5080 Attest: /s/ Lance W. Riley - ------------------------------ Lance W. Riley, Secretary 88 State of Minnesota SECRETARY OF STATE CERTIFICATE OF MERGER I, JOAN ANDERSON GROWE, SECRETARY OF STATE OF MINNESOTA, CERTIFY THAT: THE DOCUMENTS REQUIRED TO EFFECTUATE A MERGER BETWEEN THE ENTITIES LISTED BELOW AND DESIGNATING THE SURVIVING ENTITY HAVE BEEN FILED IN THIS OFFICE ON THE DATE NOTED ON THIS CERTIFICATE; AND THE QUALIFICATION OF THE INDIVIDUAL MERGING ENTITIES TO DO BUSINESS IN MINNESOTA IS TERMINATED ON THE EFFECTIVE DATE OF THIS MERGER. MERGER FILED PURSUANT TO MINNESOTA STATUTES, CHAPTER: 302A STATE OF FORMATION AND NAME OF MERGING ENTITIES: MN: CBC MERGER CORP. MN: CHILDREN'S BROADCASTING CORPORATION STATE OF FORMATION AND NAME OF SURVIVING ENTITY: MN: CHILDREN'S BROADCASTING CORPORATION EFFECTIVE DATE OF MERGER: AUGUST 23, 1994 NAME OF SURVIVING ENTITY AFTER EFFECTIVE DATE OF MERGER: CHILDREN'S BROADCASTING CORPORATION THIS CERTIFICATE HAS BEEN ISSUED ON: AUGUST 23, 1994 /s/ Joan Anderson Growe -------------------------------------------- [SEAL OF STATE OF MINNESOTA] 89 ARTICLES OF MERGER BETWEEN CHILDREN'S BROADCASTING CORPORATION AND CBC MERGER CORP. Pursuant to Section 302A.621 of the Minnesota Business Corporation Act, the undersigned officer of Children's Broadcasting Corporation, Inc., a Minnesota corporation (hereinafter referred to as the "Surviving Corporation"), which is the owner of all of the outstanding capital stock of CBC Merger Corp., a Minnesota corporation (hereinafter referred to as the "Subsidiary Corporation"), hereby executes and files these Articles of Merger: FIRST: The Plan of Merger is attached hereto as Exhibit A. SECOND: The number of outstanding shares of each class and series of the Subsidiary Corporation and the number of shares of each class and series owned by the Surviving Corporation are as follows: Number of Number of Shares Designation of Outstanding Shares of Owned by Surviving Class & Series Subsidiary Corporation Corporation - ----------------- ----------------------- ------------------ Common Stock one (1) one (1) no par value THIRD: The Surviving Corporation is the sole shareholder of the Subsidiary Corporation and there are no other shareholders to which to mail a copy of the Plan of Merger. FOURTH: The Plan of Merger has been duly approved by the Surviving Corporation under Minnesota Statutes Section 302A.621. FIFTH: The merger shall be effective on filing with the Minnesota Secretary of State. Dated: August 22 , 1994. CHILDREN'S BROADCASTING CORPORATION By /s/ Christopher T. Dahl ---------------------------------------- Christopher T. Dahl Its President and Chief Executive Officer 90 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of this 22 day of August, 1994, by and between Children's Broadcasting Corporation, a Minnesota corporation (the "Survivor") and CBC Merger Corp., a Minnesota Corporation (the "Subsidiary"). WHEREAS, Subsidiary is a wholly-owned subsidiary of the Survivor, and Survivor and Subsidiary desire that the Subsidiary merge with and into the Survivor, and that the Survivor shall continue as the surviving corporation of such merger, upon the terms and subject to the conditions set forth herein and in accordance with Section 302A.621 of the Minnesota Business Corporation Act (the "MBCA"). WHEREAS, the respective Boards of Directors have approved this Agreement. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, the parties hereto agree to merge as follows: ARTICLE 1 MERGER 1.1 MERGER. Subject to the terms and conditions of this Agreement, the Subsidiary shall be merged with and into the Survivor (the "Merger") in accordance with Sections 302A.601 and 302A.621 of the MBCA, and the separate existence of the Subsidiary shall cease and the Survivor shall be the surviving corporation and continue its corporate existence under the laws of the State of Minnesota. 1.2 EFFECT OF THE MERGER. At the Effective Time of the Merger (as hereinafter defined), the Survivor shall possess and succeed all the rights, privileges, immunities and franchises, of a public as well as of a private nature, of the Subsidiary; all property, real, personal and mixed, and all debts due on any account, including subscriptions for shares, and all other chooses in action, and every other interest of or belonging to or due to each of the Subsidiary shall vest in the Survivor without any further act or deed; the title to any real estate or any interest therein vested in the Subsidiary shall revert to the Survivor by reason of the Merger; the Survivor shall be responsible and liable for all the liabilities and obligations of the Subsidiary the Survivor; a claim of or against or a pending proceeding by or against the Subsidiary may be prosecuted as if the Merger had not taken place, or the Survivor may be substituted in the place of the Subsidiary; and neither the rights of creditors nor any liens upon the property of the Subsidiary or the Survivor shall be impaired by the Merger. 1.3 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective as of the date and time (the "Effective Time of the Merger") the Articles of Merger of the Subsidiary and the Survivor are filed with the Minnesota Secretary of State. 91 ARTICLE 2 NAME, ARTICLES OF INCORPORATION, BYLAWS, DIRECTORS AND OFFICERS OF THE SURVIVOR 2.1 NAME OF SURVIVING CORPORATION. The name of the surviving corporation shall be "Children's Broadcasting Corporation." 2.2 ARTICLES OF INCORPORATION. The Articles of Incorporation of the Survivor shall be the articles of incorporation of the surviving corporation from and after the Effective Time of the Merger until amended thereafter as provided therein or by law. 2.3 BYLAWS. The Bylaws of the Survivor shall be the Bylaws of the surviving corporation from and after the Effective Time of the Merger until amended thereafter as provided therein or by law. 2.4 DIRECTORS AND OFFICERS. The directors and officers of the Survivor at the Effective Time of the Merger shall be the directors and officers, respectively, of the surviving corporation from and after the Effective Time of the Merger and shall hold office in accordance with the Articles of Incorporation and Bylaws of the Survivor. ARTICLE 3 CANCELLATION OF SUBSIDIARY SHARES 3.1 CANCELLATION OF ALL SUBSIDIARY SHARES. At the Effective Time of the Merger, each share of the Subsidiary's Common Stock issued and outstanding immediately prior to the Effective Time of the Merger shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled. The Common Stock of the Subsidiary so canceled shall cease to exist as such. No shares of the Survivor stock shall be issued in respect thereto. ARTICLE 4 GENERAL 4.1 TERMINATION AND ABANDONMENT. This Agreement may be terminated and the Merger and other transactions herein provided for abandoned at any time prior to the Effective Time of the Merger if the board of directors of the Survivor determines that the consummation of the transactions provided for herein would not, for any reason, be in the best interests of the Survivor and its shareholders. 4.2 AMENDMENT. This Agreement may be amended at any time prior to the Effective Time of the Merger with the mutual consent of the boards of Directors of the Subsidiary and the Survivor. 4.3 DEFERRAL. Consummation of the transactions herein provided for may be deferred by the board of directors of the Subsidiary and the Survivor, or any authorized officer thereof for a reasonable period of time if the board of directors of either corporation determines that such deferral would be in the best interests of the Subsidiary, the Survivor or their respective shareholders. 92 4.4 HEADINGS. The headings set forth herein are inserted for convenience or reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 4.5 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, and all of which, when taken together, shall constitute one and the same instrument. 4.6 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota without giving effect to the principles of conflicts of law thereof. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed on its behalf and attested by its officers hereunto duly authorized, all as of the day and year first above written. SUBSIDIARY: CBC Merger Corp. By /s/ Christopher T. Dahl ----------------------- Its President ------------------- Attest: /s/ Lance W. Riley - ------------------- Secretary SURVIVOR: Children's Broadcasting Corporation By /s/ Christopher T. Dahl ---------------------------- Christopher T. Dahl Its President and Chief Executive Officer Attest: /s/ Lance W. Riley - ------------------- Lance W. Riley, Secretary 93 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF CHILDREN'S BROADCASTING CORPORATION The undersigned officer, on behalf of Children's Broadcasting Corporation, a Minnesota corporation (the "Corporation"), hereby certifies that an amendment to the Corporation's Articles of Incorporation has been duly approved by the Company's Board of Directors and shareholders in accordance with Sections 302A.135 and 302A.139 of the Minnesota Statutes. Accordingly, Article IV is amended in its entirety to read as follows: ARTICLE IV CAPITAL The aggregate number of shares of stock which this corporation shall have the authority to issue is twenty-five million (25,000,000) shares with a par value of one cent ($0.01) per share. IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to the Articles of Incorporation to be executed this 31st day of October, 1994. CHILDREN'S BROADCASTING CORPORATION By: /s/ Christopher T. Dahl ---------------------------------- Its: President ----------------------------- 94 ARTICLES OF AMENDMENT TO RESTATED ARTICLES OF INCORPORATION OF CHILDREN'S BROADCASTING CORPORATION CHILDREN'S BROADCASTING CORPORATION, a corporation organized and existing under the laws of the State of Minnesota (herein referred to as the "Corporation"), in accordance with the provisions of Minnesota Statutes, Section 302A.139, does hereby certify that: 1. Effective as of January 11, 1996, pursuant to the authority conferred upon the Board of Directors by Minnesota Statutes, Section 302A.402, Subdivision 3, the Board of Directors authorized and adopted in writing resolutions providing for a one (1) for two (2) "Combination," and the following is a true copy of such resolutions: RESOLVED, that there is hereby declared a Reverse Stock Split or Combination, pursuant to which every two (2) shares of issued and outstanding voting or nonvoting Common Stock, $.01 par value per share, and every two (2) shares of authorized but unissued voting or nonvoting Common Stock, $.01 par value per share, existing on the Combination Effective Date, shall be converted into one (1) share of Common Stock, $.02 par value per share; and every two (2) shares of Common Stock, $.01 par value per share issuable or reserved for issuance upon conversion of convertible preferred stock or upon exercise of outstanding stock options and stock purchase warrants, shall, as of the Combination Effective Date, be converted automatically into one (1) share of Common Stock, $.02 par value per share. FURTHER RESOLVED, that in order to effect the Combination, Article IV of the Corporation's Restated Articles of Incorporation is amended in its entirety as follows: Article IV Capital The aggregate number of shares of stock which this corporation shall have the authority to issue is twelve million five hundred thousand (12,500,000) shares with a par value of two cents ($.02) per share. 95 FURTHER RESOLVED, that such Combination shall be effected automatically on January 23, 1996, or such later date when the Amendment shall be filed with the Minnesota Secretary of state without further action by the Board of Directors or shareholders. FURTHER RESOLVED, that the appropriate officers are hereby authorized and directed to prepare, execute, acknowledge and file on the Combination Effective Date the Articles of Amendment to the Restated Articles of Incorporation of this Corporation together with any other document or instrument necessary in connection with such Combination; and to request shareholders to exchange their stock certificates representing shares of Common Stock held prior to the Combination for new certificates representing shares of Common Stock issued as a result of the Combination. FURTHER RESOLVED, that, promptly following the Combination Effective Date, the Corporation shall furnish the shareholders with the necessary materials and instructions to effect the exchange of their stock certificates in accordance with the Combination. FURTHER RESOLVED, that shareholders who after the Combination would otherwise be entitled to receive fractional shares of Common Stock, will, upon surrender of their stock certificates representing shares of Common Stock owned as of the Combination Effective Date, receive a cash payment in lieu thereof equal to the value of such fractional shares determined by reference to the average closing bid price of the Common Stock for a period of ten trading days immediately preceding the Combination Effective Date, as reported by the NASDAQ SmallCap Market. FURTHER RESOLVED, that certificates representing shares of Common Stock outstanding immediately prior to the Combination Effective Date which are subsequently presented for transfer will not be transferred on the books and records of the Corporation until the certificates representing such shares of Common Stock have been exchanged of record for certificates representing shares of Common Stock reflecting the Combination. FURTHER RESOLVED, that in the event any certificate representing shares of Common Stock outstanding prior to the Combination is not presented for exchange upon request by the Corporation, any dividends that may be declared after the Combination Effective Date with respect 96 to the Common Stock represented by such certificate will be withheld by the Corporation until such certificate has been properly presented for exchange. FURTHER RESOLVED, that the appropriate officers of the Corporation, be and they hereby are authorized and directed, upon filing of the Amendment pursuant to Minnesota Statutes, Section 302A.402, to proceed promptly to carry out the foregoing Actions and to execute and file all documents and instruments and to take such other actions as such officers deem necessary and appropriate to complete the Combination in accordance with Minnesota Statutes, Chapter 302A. FURTHER RESOLVED, that the effective date of the above Resolutions shall be as of January 11, 1996. 2. The foregoing amendment to Article IV of the Restated Articles of Incorporation will not adversely affect the rights or preferences of the holders of outstanding shares of any class or series of the Corporation's stock and will not result in the percentage of authorized shares that remains unissued after the Combination exceeding the percentage of authorized shares that were unissued before the Combination. 3. The amendment to Article IV of the Restated Articles of Incorporation was adopted pursuant to Chapter 302A. IN WITNESS WHEREOF, Children's Broadcasting Corporation has caused these Articles of Amendment to be signed by its President this 18th day of January, 1996. CHILDREN'S BROADCASTING CORPORATION By: /s/ Christopher T. Dahl -------------------------------- Christopher T. Dahl President 97 CHILDREN'S BROADCASTING CORPORATION CERTIFICATE OF DESIGNATION OF STOCK The undersigned, being duly appointed Secretary of Children's Broadcasting Corporation (the "Corporation), hereby certifies that the Board of Directors of the Corporation, acting pursuant to the authority contained in Article V of the Articles of Incorporation of the Corporation and the provisions of Chapter 302A, Minnesota Statutes, took action by unanimous resolution on November 28, 1995, and duly adopted the following resolutions to establish and designate 2,177,368 shares of Common Stock of the Corporation as Class A Common Stock. DESIGNATION OF CLASS A COMMON STOCK RESOLVED, in accordance with Article V of the Articles of Incorporation of the Corporation and pursuant to Minnesota Statutes, Chapter 302A, the Board of Directors hereby establishes, designates and reserves from the Corporation's unauthorized and unissued shares of Common Stock, Class A Common Stock in the amount and the voting powers and other special rights as follows: SECTION 1. DESIGNATION AND AMOUNT. The shares of such class of Common Stock shall be designated as "Class A Common Stock" and the number of shares constituting such class shall be 2,177,368. SECTION 2. ALL OTHER RIGHTS. Other than with respect to voting and conversion as set forth in Sections 3 and 4 below, the Class A Common Stock shall in all respects be equal and have the same rights as the Common Stock of the Corporation. SECTION 3. VOTING RIGHTS. Except as otherwise required by law, each outstanding share of Class A Common Stock shall not be entitled to vote on any matter on which the shareholders of the Corporation shall be entitled to vote and shares of Class A Common Stock shall not be included in determining the number of shares voting or entitled to vote on any such matter, provided that, notwithstanding the foregoing, holders of shares of Class A Common Stock shall be entitled to vote as a separate class on any amendment to the Certificate of Designation of Stock establishing such class and on any amendment, repeal or modification of any provision of the Articles of Incorporation of the Corporation that adversely affects the powers, preferences or special rights of holders of Class A Common Stock. Upon a conversion to Common Stock in accordance 98 with Section 4 below, the holders of Class A Common Stock shall have full voting rights with respect to the shares of Common Stock issued by virtue of the conversion. Section 4. Conversion. (a) CONVERSION RIGHTS. Subject to the provisions of this Section 4, each holder of Class A Common Stock shall be entitled to convert, at any time and from time to time, at its option, any or all of the shares of Class A Common Stock held by such holder into an equivalent number of shares of voting Common Stock, provided that if pursuant to any federal law, rule, regulation or regulatory policy such conversion would cause the broadcast or other media interests of the holder to be attributed to the Corporation, or the broadcast or other media interest of the Corporation to be attributed to the holder and, as a result of the attribution of such broadcast or other media interests, (i) the holder would be foreclosed from the ownership of voting securities of the Corporation, or (ii) the Corporation would be foreclosed from the ownership of its broadcast or media interests or from the acquisition of any additional broadcast or media interests, the Class A Common Stock shall not be convertible, except in such amount as would not cause such broadcast or media interests to be so attributable. (b) CONVERSION PROCEDURES. Each conversion of shares of Class A Common Stock into shares of Common Stock shall be effected by the surrender of the certificate or certificates representing the shares to be converted (the "Converting Shares") at the principal office of the Corporation (or such other office or agency of the Corporation as the Corporation may designate by written notice to the holders of Class A Common Stock) at any time during its usual business hours, together with written notice by the holder of such Converting Shares, stating that such holder desires to convert the Converting Shares, stating that such holder desires to convert the Converting Shares, or a stated number of the shares represented by such certificate or certificates, into an equal number of shares of Common Stock (the "Converted Shares"). Such notice shall also state the name or names (with addresses) and denominations in which the certificate or certificates for Converted Shares are to be issued and shall include instructions for the delivery thereof. Promptly after such surrender and the receipt of such written notice, the Corporation will issue and deliver in accordance with the surrendering holder's instructions the certificate or certificates evidencing the Converted Shares issuable upon such conversion, and the Corporation will deliver to the converting holder a certificate (which shall contain such legends as 99 were set forth on the surrendered certificate or certificates) representing any shares which were represented by the certificate or certificates that were delivered to the Corporation in connection with such conversion, but which were not converted; provided, however, that the Corporation shall issue shares to persons other than those indicated on the certificate or certificates representing the Converting Shares only in compliance with the Securities Act of 1933, as amended, and any other applicable state or federal securities law. Such conversion, to the extent permitted by law, shall be deemed to have been effected as of the close of business on the date on which such certificate or certificates shall have been surrendered and such notice shall have been received by the Corporation, and at such time the rights of the holder of the Converting Shares as such holder shall cease and the person or persons in whose name or names the certificate or certificates for the Converted Shares are to be issued upon such conversion shall be deemed to have become the holder or holders or record of the Converted Shares. (c) RESERVATION OF SHARES. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock or its treasury shares, solely for the purpose of issuance upon the conversion of shares of Class A Common Stock, such number of shares of Common Stock as are then issuable upon the conversion of all outstanding shares of Class A Common Stock. FURTHER RESOLVED, that the President and the Secretary of the Corporation are authorized and directed to take such further action as shall be necessary or required to carry into effect the intent of the foregoing resolution and they, or any of them, are authorized and directed to file a certificate of designation pursuant to Section 302A.401, Subd. 3 of the Minnesota Business Corporation Act with the Minnesota Secretary of State. IN WITNESS WHEREOF, Children's Broadcasting Corporation has caused this Certificate of Designation to be signed by Lance W. Riley, its Secretary, this 27th day of February, 1996. CHILDREN'S BROADCASTING CORPORATION /s/ Lance W. Riley ---------------------------- Lance W. Riley, Secretary 100 EX-10.2 3 EXHIBIT 10.2 - OFFICE/WAREHOUSE LEASE EXHIBIT 10.2 OFFICE/WAREHOUSE LEASE THIS INDENTURE of lease, made effective this 1st day of November, 1996, by and between 5501 BUILDING COMPANY, a partnership (hereinafter referred to as "Lessor"), and CHILDREN'S BROADCASTING CORPORATION (hereinafter referred to as "Lessee"). DEFINITIONS "PREMISES" - That certain real property located in the City of Minneapolis, County of Hennepin and State of Minnesota and legally described on Exhibit "A" attached hereto and made a part hereof, including all buildings and site improvements located thereon. "BUILDING" - That certain office/warehouse building containing approximately 12,000 square feet located upon the Premises and commonly described as the 5501 Building. "DEMISED PREMISES" - That certain portion of the Building located at 5501 Excelsior Boulevard and designated as Exhibit B, consisting of approximately 12,000 square feet (12,000 square feet of office space and zero square feet of warehouse space), as measured from the outside walls of the Demised Premises to the center of the partition wall, as shown on the floor plan attached hereto as Exhibit "B" and made a part hereof. The Demised Premises includes a non- exclusive easement for access to common area, as hereinafter defined, and all licenses and easements appurtenant to the Demised Premises. "COMMON AREAS" - The term "common area" means the entire areas as designated on Exhibit "B" and to be used for the non-exclusive use by Lessee and other lessees in the Building, including, but not limited to, corridors, lavatories, driveways, truck docks, parking lots and landscaped areas, if any. Subject to reasonable rules and regulations to the promulgated by Lessor, the common areas are hereby made available to Lessee and its employees, agents, customers and invitees for reasonable use in common with other lessees, their employee, agents, customer and invitees. 110 W I T N E S S E T H : 1. TERM. For and in consideration of the rents, additional rents, terms, provisions and covenants herein contained, Lessor hereby lets, leases and demises to Lessee the Demised Premises for the term of sixty (60) months commencing on the 1st day of July, 1996 (sometimes called "the Commencement Date") and expiring the 31st day of July, 2001 (sometimes called "Expiration Date"), unless sooner terminated as hereinafter provided. 2. BASE RENT. Lessor reserves and Lessee shall pay Lessor, a total rental of Six Hundred Seventy-two Thousand and no/100 Dollars ($672,000), payable in advance, in monthly installments of Ten Thousand and No/100's Dollars ($10,000.00), commencing on the Commencement Date and continuing on the first day of each and every month thereafter for the next succeeding twelve months through June, 1997, and Eleven Thousand and no/100 Dollars ($11,000.00) on the first day of each and every month thereafter for the next succeeding 24 months through June 30, 1999, and Twelve Thousand and No/100s Dollars ($12,000.00) on the first day of each and every month for the next succeeding months during the balance of the term (sometimes called "Base Rent"). In the event the Commencement Date falls on a date other than the first of a month the rental for that month shall be prorated and adjusted accordingly. 3. ADDITIONAL RENT. Lessee shall pay to Lessor throughout the term of this Lease the following: (a) Lessee shall pay a sum equal to one hundred percent (100%) of the Real Estate Taxes. The term "Real Estate Taxes" shall mean all real estate taxes, all assessments and any taxes in lieu thereof which may be levied upon or assessed against the Premises of which the Demised Premises are a part. Lessee, in addition to all other payments to Lessor by Lessee required hereunder shall pay to Lessor, in each year during the term of this Lease and any extension or renewal thereof, Lessee's proportionate share of such real estate taxes and assessments paid in the first instance by Lessor. Any tax year commencing during any lease year shall be deemed to correspond to such lease year. In the event the taxing authorities include in such real estate taxes and assessments the value of any improvements made by Lessee, or of machinery, equipment, fixtures, Inventory or other personal property or assets of Lessee, then Lessee shall pay all the taxes attributable to such items in addition to its proportionate share of said 111 aforementioned real estate taxes and assessments. A photostatic copy of the tax statement submitted by Lessor to Lessee shall be sufficient evidence of the amount of taxes and assessments assessed or levied against the Premises of which the Demised Premises are a part as well as the items taxed. (b) A sum equal to one hundred percent (100%) of the annual aggregate operating expenses incurred by Lessor in the operation, maintenance and repair of the Premises. The term "Operating Expenses" shall include, but not be limited to, maintenance, repair, replacement and care of all heating, lighting, plumbing and air conditioning fixtures, equipment and systems, roofs, parking and landscaped area, signs, snow removal, non-structural repair and maintenance of the exterior of the Building, insurance premiums, management fees, wages and fringe benefits of personnel employed for such work, cost of equipment purchased and used for such purposes, and the cost or portion thereof properly allocable to the Premises (amortized over such reasonable period as Lessor shall determine together with the interest at the rate of eighteen percent (18%) per annum on the unamortized balance) of any capital improvements made to the Building by Lessor after the Base Year which result in a reduction of Operation Expenses or made to the Building by Lessor after the date of this lease that are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed. (c) The payment of the sums set forth in this Article 3 shall be in addition to the Base Rent payable pursuant to Article 2 of this Lease. All sums due hereunder shall be due and payable within thirty (30) days of delivery of written certification by Lessor setting forth the computation of the amount due from Lessee. In the event the lease term shall begin or expire at any time during the calendar year, the Lessee shall be responsible for his pro-rata share of Additional Rent under subdivisions a. and b. during this Lease and/or occupancy time. Prior to commencement of this Lease, and prior to the commencement of each calendar year thereafter commencing during the term of this Lease or any renewal or extension thereof, Lessor may estimate for each calendar year (i) the total amount of Real Estate Taxes; (ii) the total amount of Operating Expenses; (iii) Lessee's share of Real Estate Taxes for such calendar year; (iv) Lessee's share of Operating Expenses for such calendar year; and (v) the computation of the annual and monthly rental payable during such calendar year as a result of increases or decreases in Lessee's 112 share of Real Estate Taxes and Operating Expenses. Said estimates will be in writing and will be delivered or mailed to Lessee at the Premises. The amount of Lessee's share of Real Estate Taxes and Operating Expenses for each calendar year, so estimated, shall be payable as Additional Rent, in equal monthly installments, in advance, on the first day of each month during such calendar year at the option of Lessor. In the event that such estimate is delivered to Lessee before the first day of January of such calendar year said amount, so estimated, shall be payable as additional rent in equal monthly installments, in advance, on the first day of each month over the balance of such calendar year, with the number of installments being equal to the number of full calendar months remaining in such calendar year. Upon completion of each calendar year during the term of this Lease or any renewal or extension thereof, Lessor shall cause its accountants to determine the actual amount of the Real Estate Taxes and Operating Expenses payable in such calendar year and Lessee' share thereof and deliver a written certification of the amounts thereof to Lessee. If Lessee has underpaid its share of Real Estate Taxes or Operating Expenses for such calendar year, Lessee shall pay the balance of its share of same within ten (10) days after the receipt of such statement. If Lessee has overpaid its share of Real Estate Taxes or Operating Expenses for such calendar year, Lessor shall either (i) refund such excess, or (ii) credit such excess against the most current monthly installment or installments due Lessor for its estimate of Lessee's share of Real Estate Taxes and Operating Expenses for the next following calendar year. A pro-rata adjustment shall be made for a fractional calendar year occurring during the term of this Lease or any renewal or extension thereof based upon the number of days of the term of the Lease during said calendar year as compared to three hundred sixty-five (365) days and all additional sums payable by Lessee or credits due Lessee as a result of the provisions of this Article 3 shall be adjusted accordingly. 4. COVENANT TO PAY RENT. The covenants of Lessee to pay the Base Rent and the Additional Rent are each independent of any other covenant, condition, provision or agreement contained in this Lease. All rents are payable to Lessor at: 5501 Building Company 5501 Excelsior Boulevard Minneapolis, Minnesota 55416 113 5. UTILITIES. Lessor shall provide mains and conduits to supply water, gas, electricity and sanitary sewage to the Premises. Lessee shall pay, when due, all charges for sewer usage or rental, garbage disposal, refuse removal, water, electricity, gas, fuel, oil, L.P. gas, telephone and/or other utility services or energy source furnished to the Demised Premises during the term of this Lease, or any renewal or extension thereof. If Lessor elects to furnish any of the foregoing utility services or other services furnished or caused to be furnished by lessor shall not exceed the rate Lessee would be required to pay to a utility company or service company furnishing any of the foregoing utilities or services. The charges thereof shall be deemed Additional Rent in accordance with Article 3. 6. CARE AND REPAIR OF DEMISED PREMISES. Lessee shall, at all times throughout the term of this Lease, including renewals and extensions, and at its sole expense, keep and maintain the Demised Premises in a clean, safe, sanitary and first class condition and in compliance with all applicable laws, codes, ordinances, rules and regulations. Lessee's obligations hereunder shall include, but not be limited to, the maintenance, repair and replacement, if necessary, of all lighting and plumbing fixtures and equipment, fixtures, motors and machinery, all interior walls, partitions, doors and windows, including the regular painting thereof, all exterior entrances, windows, doors and docks and the replacement of all broken glass. When used in this provision, the term "repairs" shall include replacements or renewals when necessary, and all such repairs made by the Lessee shall be equal in quality and class to the original work. The Lessee shall keep and maintain all portions of the Demised Premises and the sidewalk and areas adjoining the same in a clean and orderly condition, free of accumulation of dirt, rubbish, snow and ice. If Lessee fails, refuses or neglects to maintain or repair the Demised Premises as required in this Lease after notice shall have been given Lessee, in accordance with Article 36 of this Lease, Lessor may make such repairs without liability to Lessee for nay loss or damage that may accrue to Lessee's merchandise, fixtures or other property or to Lessee;s business by reason thereof, and upon completion thereof, Lessee shall pay to Lessor all costs plus fifteen (15%) for overhead incurred by Lessor in making such repairs upon presentation to Lessee of bill therefor. Lessor shall repair, at its expense, the structural portions of the Building, provided however where structural repairs are required to be made by reason of the acts of Lessee, the costs thereof shall be borne by Lessee and payable by Lessee to Lessor upon demand. 114 The Lessor shall be responsible for all outside maintenance of the Demised Premises, including grounds and parking areas. All such maintenance which is the responsibility of the Lessor shall be provided as reasonably necessary to the comfortable use and occupancy of Demised Premises during business hours, except Saturdays, Sundays and holidays, upon the condition that the Lessor shall not be liable for damages for failure to do so due to causes beyond its control. 7. SIGNS. Any sign, lettering, picture, notice or advertisement installed on or in any part of the Premises and visible from the exterior of the Building, or visible form the exterior of the Demised Premises, shall be approved and installed by Lessor at Lessee's sole cost and expense. Signs to be maintained by Lessor at Lessee's expense. In the event of a violation of the foregoing by Lessee, Lessor may remove the same without any liability and may charge the expense incurred by such removal to Lessee. 8. ALTERATIONS, INSTALLATION, FIXTURES. Except as hereinafter provided, Lessee shall not make any alteration, additions or improvements in or to the Demised Premises or add, disturb in any way, change any plumbing or wiring therein without the prior written consent of the Lessor. In the event alterations are required by any governmental agency by reason of the use and occupancy of the Demised Premises by Lessee, Lessee shall make such alterations at its own expense after first obtaining Lessor's approval of plans and specifications therefor and furnishing such indemnifications as Lessor may reasonable require against liens, costs, damages and expenses arising of such alterations. Alterations or additions by Lessee must be built in compliance with all laws, ordinances and governmental regulations and affecting the Premises and Lessee shall warrant to Lessor that all such alterations, additions or improvements shall be in strict compliance with all relevant laws, ordinances, governmental regulations and insurance requirements. Construction of such alterations or additions shall commence only once Lessee has obtained and exhibited to Lessor the requisite approvals, licenses and permits and indemnification against liens. All alterations, installations, physical additions or improvements to the demised Premises made by Lessee shall at once become the property of Lessor and shall be surrendered to Lessor upon the termination of this Lease; provided, however, that this clauses shall not apply to movable equipment or furniture owned by Lessee which may be removed by Lessee at the end of the term of this Lease in the event that Lessee is not then in default. 9. POSSESSION. Except as hereinafter provided Lessor shall deliver possession of Demised Premises to Lessee in the condition required by this Lease on or before the Commencement Date, but delivery of possession prior to or later 115 than such Commencement Date shall not affect the expiration date of this Lease. The rentals herein reserved shall commence on the date actual possession of the Demised Premises is delivered by Lessor to Lessee. Any occupancy by Lessee prior to the beginning of the term of this Lease shall in all respects be the same as that of a Lessee under this Lease. Lessor shall have no responsibility or liability for loss or damage to fixtures, facilities or equipment installed or left on the Demised Premises. If Demised Premises is not ready for occupancy by Commencement Date and possession is later than Commencement Date, rent shall begin on the date of actual possession. 10. SECURITY AND DAMAGE DEPOSIT. Lessee contemporaneously with the execution of this Lease, deposited with Lessor the sum of Zero Dollars ($---0---), receipt of which is hereby acknowledged by Lessor, which deposit is to be held by Lessor, without liability for interest as a security and damage deposit for the faithful performance by Lessee during the term hereof or any extension hereof. Prior to the time of when Lessee shall be entitled to the return of this security deposit, Lessor may commingle such deposit with Lessor's own funds and to use such security deposit for such purposes as Lessor may determine. In the event of the failure of Lessee to keep and perform any of the terms, covenants and conditions of this Lease to be kept and performed by Lessee during the term hereof or extension hereof, then Lessor, either with or without terminating this Lease may (but shall not be required to) apply such portion of said deposit as may be necessary to compensate or repay Lessor for all losses or damages sustained or to be sustained by Lessor due to such breach on the part of Lessee, including, but not limited to, overdue and unpaid rent, any other amounts payable by Lessee to Lessor pursuant to the provisions of this Lease, damages or deficiencies in the reletting of Demised Premises, and reasonable attorney's fees incurred by Lessor. Should the entire deposit or any portion thereof, be appropriated and applied by Lessor, in accordance with provisions of this paragraph, Lessee upon written demand by Lessor shall remit forthwith to Lessor a sufficient amount of cash to restore said security deposit to the original sum deposited, and Lessee's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this Lease. Said security deposit shall be returned to Lessee, less any deposit thereof as the result of the provisions of this paragraph, at the end of the term of this Lease, or any renewal thereof or upon the earlier termination of this Lease. Lessee shall have no right to anticipate return of said deposit withholding any amount required to be paid pursuant to the provision of this Lease or otherwise. In the event Lessor shall sell the Premises, or shall otherwise convey or dispose of its interest in this Lease, Lessor may assign said security deposit or any 116 balance thereof to Lessor's assignee, whereupon Lessor shall be released from all liability for the return or repayment of such security deposit and Lessee shall look solely to the said assignee for the return and reimbursement of said security deposit. Said security deposit shall not be assigned or encumbered by Lessee without the written consent of Lessor, and any assignment or encumbrance without such consent shall not bind Lessor. In the event of any rightful and permitted assignment of this Lease by Lessor said security deposit shall be deemed to be held by Lessor as a deposit made by the assignee, and Lessor shall have no further liability with respect to the return of said security deposit to the Lessee. 11. USE. The Demised Premises shall be used and occupied by Lessee strictly for the purposes of an office so long as such use is in compliance with all applicable laws, ordinances and governmental regulations affecting the Building and Premises. The Demised Premises shall not be used in such manner that, in accordance with any requirement of law or of any public authority, Lessor shall be obliged on account of the purpose or manner of said use to make any addition or alteration to or in the Building. The Demised Premises shall not be used in any manner which will increase the rates required to be paid for public liability or for fire and extended coverage insurance covering the Premises. Lessee shall occupy the Demised Premises conduct its business and control its agents, employees, invitees and visitors in such a way as is lawful, and reputable and will not permit or create any nuisance, noise, odor, or otherwise interfere with, annoy or disturb any other tenant in the Building in its normal business operations or Lessor in its management of the Building. Lessee's use of the Demised Premises shall conform to all the Landlord's rules and regulations relating to the use of the Premises. Outside storage on the Premises of any type of equipment, property or materials owned or used on the Premises by Lessee or its customers and suppliers shall not be permitted. 12. ACCESS TO DEMISED PREMISES. The Lessee agrees to permit the Lessor and the authorized representatives of the Lessor to enter the Demised Premises at all times during usual business hours for the purpose of inspecting the same and making any necessary repairs to the Demised Premises and performing any work therein that may be necessary to comply with any laws, ordinances, rules, regulations or requirements of any public authority or of the Board of Fire Underwriters or any similar body or that the Lessor may deem necessary to prevent waste or deterioration in connection with the Demised Premises. Nothing herein shall imply any duty upon the part of the Lessor to do any such work which, under any provision of this Lease, the Lessee may be required to perform and the performance thereof by the Lessor shall not constitute a waiver 117 of the Lessee's default in failing to perform the same. The Lessor may, during the progress of any work in the Demised Premises, keep and store upon the Demised Premises all necessary materials, tools and equipment. The Lessor shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business, or other damage of the Lessee by reason of making repairs or the performance of any work in the Demised Premises, or on account of bringing materials, supplies and equipment into or through the Demised Premises during the course thereof and the obligations of the Lessee under this Lease shall not thereby be affected in any matter whatsoever. Lessor reserves the right to enter upon the Demised Premises at any time in the event of an emergency and at reasonable hours to exhibit the Demised Premises to prospective purchasers or others; and to exhibit the Demised Premises to prospective tenants and to display "For Rent" or similar signs on windows and doors in the Demised Premises during the last one hundred eighty (180) days of the term of this Lease, all without hindrance or molestation by Lessee. 13. EMINENT DOMAIN. In the event of any eminent domain or condemnation proceeding or private sale in lieu thereof in respect to the Premises during the term thereof, the following provisions shall apply: (a) If the whole of the of the Premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then the term of this Lease shall cease and terminate as of the date possession shall be taken in such proceeding and all rentals shall be paid up to that date. (b) If any part constituting less than the whole of the Premises shall be acquired or condemned or aforesaid, and in the event that such partial taking or condemnation shall materially affect the Demised Premises so as to render the Demised Premises unsuitable for the business of the Lessee, in the reasonable opinion of the Lessor, then the term of this Lease shall cease and terminate as of the date possession shall be taken by the condemning authority and rent shall be paid to the date of such termination. In the event of a partial taking or condemnation of the Premises which shall not materially affect the Demised Premises so as to render the Demised Premises unsuitable for the business of the Lessee, in the reasonable opinion of the Lessor, this Lease shall continue in full force and affect but with a proportionate abatement of the Base Rent and Additional Rent based on the portion, if any, of the Demised Premises taken. Lessor 118 reserves the right, at its option, to restore the Building and the Demised Premises to substantially the same condition as they were prior to such condemnation. In such event, Lessor shall give written notice to Lessee, within thirty (30) days following the date possession shall be taken by the condemning authority, of Lessor's intention to restore. Upon Lessor's notice of election to restore, Lessor shall commence restoration and shall restore the Building and the Demised Premises with reasonable promptness, subject to delays beyond Lessor's control and delays in the making of condemnation or sale proceeds adjustments by Lessor; and Lessee shall have no right to terminate this Lease except as herein provided. Upon completion of such restoration, the rent shall be adjusted based upon the portion, if any, of the Demised Premises restored. (c) In the event of any condemnation or taking as aforesaid, whether whole or partial, the Lessee shall not be entitled to any part of the award paid for such condemnation and Lessor is to receive the full amount of such award, the Lessee hereby expressly waiving any right or claim to any part thereof. (d) Although all damages in the event of any condemnation shall belong to the Lessor whether such damages are awarded as compensation for diminution of value of the leasehold or to the fee of the Demised Premises, Lessee shall have the right to claim and recover from the condemning authority, but not from Lessor, such compensation as may be separately awarded and recoverable by Lessee in Lessee's own right on account of any and all damage to Lessee's business by reason of the condemnation and for or on account of any cost or loss to which Lessee might be put in removing Lessee's merchandise, furniture, fixtures, leasehold improvements and equipment. 14. DAMAGE OR DESTRUCTION. In the event of any damage or destruction to the Premises by fire or other cause during the term hereof, the following provisions shall apply: (a) If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Lessor, will equal or exceed thirty percent (30%) of the replacement value of the Building (exclusive of foundations) just prior to the occurrence of the damage, then Lessor may, no later than the sixtieth (60th) day following the damage, give Lessee written notice of Lessor's election to terminate this Lease. 119 (b) If the cost of restoration as estimated by Lessor will equal or exceed fifty percent (50%) of said replacement value of the Building and if the Demised Premises are not suitable as a result of said damage for the purposes for which they are demised hereunder, in the reasonable opinion of Lessee, then Lessee may, no later than the sixtieth (60th) day following the damage, give Lessor a written notice of election to terminate this Lease. (c) If the cost or restoration as estimated by Lessor shall amount to less than thirty percent (30%) of said replacement value of the Building, or if despite the cost, Lessor does not elect to terminate this Lease, Lessor shall restore the Building and the Demised Premises with reasonable promptness, subject to delays beyond Lessor's control and delays in the making of insurance adjustments by Lessor; and Lessee shall not have the right to terminate this Lease., Lessor shall not be responsible for restoring or repairing leasehold improvements of the Lessee. (d) In the event of either of the elections to terminate, this Lease shall be deemed to terminate on the date of the receipt of the notice of election and all rentals shall be paid up to that date. Lessee shall have no claim against Lessor for the value of any unexpired term of this Lease. (e) In any case where damage to the Building shall materially affect the Demised Premises so as to render them unsuitable in whole or in part for the purposes of which they are demised hereunder, then, unless such destruction was wholly or partially caused by the negligence or breach of the terms of this Lease by Lessee, its employees, contractors or licensees, a portion of the rent based upon the amount of the extent to which the Demised Premises are rendered unsuitable shall be abated until repaired or restored. If the destruction or damage was wholly or partially caused by negligence or breach of the terms of this Lease by Lessee as aforesaid and if Lessor shall elect to rebuild, the rent shall not abate and the Lessee shall remain liable for the same. 15. CASUALTY INSURANCE. (a) Lessor shall at all times during the term of this Lease, at its expense, maintain a policy or policies of insurance with premiums paid in advance issued by an insurance company licensed to do business in the State of Minnesota insuring the Building against loss or damage by fire, explosion or other insurable hazards and contingencies for the full replacement value, provided that Lessor shall not be obligated to insure any furniture, 120 equipment, machinery, goods or supplies not covered by this Lease which Lessee may bring upon the Demised Premises or any additional improvements which Lessee may construct or install on the Demised Premises. (b) Lessee shall not carry any stock of goods or do anything in or about the Demised Premises which will in any way impair or invalidate the obligation of the insurer under any policy of insurance required by this Lease. (c) Lessor hereby waives and releases all claims, liabilities and causes of action against Lessee and its agents, servant and employees for loss or damage to, or destruction of, the Premises or any portion thereof, including the buildings and other improvements situated thereon, resulting from fire, explosion or other perils included in standard extended coverage insurance, whether caused by the negligence of any of said persons or otherwise. Likewise, Lessee hereby waives and releases all claims, liabilities and causes of action against Lessor and its agents, servants and employees for loss or damage to, or destruction of, any of the improvements, fixtures, equipment, supplies, merchandise and other property, whether that of Lessee or of others in, upon or about the Premises resulting from fire, explosion or the other perils included in standard extended coverage insurance, whether caused by the negligence of any of said persons otherwise. The waiver shall remain in force whether or not the Lessee's insurance shall consent thereto. (d) In the event that the use of the Demised Premises by Lessee increases the premium rate for insurance carried by Lessor on the improvement of which the Demised Premises are a part, Lessee shall pay Lessor, upon demand, the amount of such premium increase. If Lessee installs any electrical equipment that overload the power lines to the Building or its wiring, Lessee shall, at its own expense, make whatever changes are necessary to comply with the requirements of the insurance underwriter, insurance rating bureau and governmental authorities have jurisdiction. 16. PUBLIC LIABILITY INSURANCE. Lessee shall during the term hereof keep in full force and effect at its own expense a policy or policies of public liability insurance with respect to the Demised Premises and the business of Lessee, on terms and with companies approved in writing by Lessor, in which both Lessee and Lessor shall be covered by being named as insured parties under reasonable limits of liability not less than: One Million Dollars ($1,000,000) for injury or death to any one person: One Million Dollars ($1,000,000) for injury or death to more than one person; and Five Hundred and Fifty Thousand Dollars 121 ($550,000) with respect to damage to property. Such policy or policies shall provide that ten (10) days written notice must be given to Lessor prior to cancellation thereof. Lessee shall furnish evidence satisfactory to Lessor at the time this Lease is executed, and from time to time, that such coverage is in full force and effect. 17. DEFAULT OF TENANT. (a) In the event of any failure of Lessee to pay any rental due hereunder within ten (10) days after the same shall be due, or any failure to perform any other of the term, condition or covenant of this Lease to be observed or performed by Lessee for more than thirty (30) days after written notice of such failure shall have been given to Lessee, or if Lessee or an agent of Lessee shall falsify any report required to be furnished to Lessor pursuant to the terms of this Lease, or if Lessee or any guarantor of this Lease shall become bankrupt or insolvent, or file any debtor proceedings or any person shall take or have against Lessee or any guarantor of this Lease in any court pursuant to any statute either of the United States or of any state a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Lessee's or any such guarantor's property, or if Lessee or any such guarantor makes an assignment for the benefit of creditors, or petitions for or enters into an arrangement, or if Lessee shall abandon the Demised Premises or suffer this Lease to be taken under any writ of execution, then in any such event Lessee shall be in default hereunder, and Lessor, in addition to other rights of remedies it may have, shall have the immediate right of re-entry and may remove all persons and property from the Demised Premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of the Lessee, all without service of notice or resort to legal process and without being guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby. (b) Should Lessor elect to re-enter the Demised Premises as herein provided, or should it take possession of the Demised Premises pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time, without terminating this Lease, make such alterations, and repairs as may be necessary in order to relet the Demised Premises and relet the Demised Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and conditions as Lessor in its sole discretion may deem advisable. 122 Upon each such subletting all rentals received by the Lessor from such reletting shall be applied first to the payment of any indebtedness other than rent due hereunder from Lessee to Lessor; second, to the payment of any costs and expenses of such reletting, including brokerage fees, attorney's fees and costs; third, to the payment of accrued and unpaid rent hereunder, and the remainder, if any, shall be held by Lessor and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month are less than that to be paid during that month by Lessee hereunder, Lessee, upon demand, shall pay any such deficiency to Lessor. No such re-entry or taking possession of the Demised Premises by Lessor shall be construed as an election on Lessor's part to terminate this Lease unless a written notice of such intention be given to Lessee or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Lessor may at any time after such re-entry and reletting elect to terminate this Lease for such previous breach. Should Lessor at any time terminate this Lease for any such breach, in addition to any other remedies it may have, it may recover from Lessee all damages it may incur by reason of such breach, including the cost of recovering the Demised Premises, the cost of reletting the Demises premises, reasonable attorney's fees, and including the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent reserved in this Lease for the remainder of the stated term over the then reasonable rental value of the Demised Premises for the remainder of the stated term, all of which amounts shall be immediately due and payable from Lessee to Lessor. (c) Lessor may, at its option, instead of exercising any other rights or remedies available to it in this Lease or otherwise by law, statute or equity, spend such money as is reasonable necessary to cure any default of Lessee herein and the amount so spent, and costs incurred, including attorney's fees in curing such default, shall be paid by Lessee, as Additional Rent, upon demand. (d) In the event suit shall be brought for recovery of possession of the Demised Premises, for the recovery of rent or any other amount due under the provisions of this Lease or because of the breach of any other covenant herein contained on the part of the Lessee to be kept or performed, and a breach shall be established, Lessee shall pay to Lessor all expenses incurred therefore, including a reasonable attorney's fee, together with interest on all 123 such expenses at the rate of eighteen percent (18%) per annum from the date of such breach of the covenants of this Lease. (e) Lessee hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Lessee being evicted or dispossessed for any cause, or in the event of Lessor obtaining possession of the Demised Premises, by reason of the violation by Lessee of any of the covenants or conditions of this Lease, or otherwise. Lessee also waives any demand for possession of the Demised Premises, and any demand for payment of rent and any notice of intent to re-enter the Demised Premises, or of intent to terminate this Lease, other than the notices provided in this Article, and waives any and every other notice or command prescribed by any applicable statutes or laws. (f) No remedy herein or elsewhere in this Lease or otherwise by law, statute or equity, conferred upon or reserved to Lessor or Lessee shall be exclusive of any other remedy, but shall be cumulative, and may be exercised from time to time and as often as the occasion may arise. 18. COVENANTS TO HOLD HARMLESS. Unless the liability for damage or loss is caused by the negligence of Lessor, its agents or employees, Lessee shall hold harmless Lessor from any liability for damages to any person or property in or upon the Demised Premises and the Premises, including the person and property of Lessee and its employees and all persons in the Building at its or their invitation or sufferance, and from all damages resulting from Lessee's failure to perform the covenants of this Lease. All property kept, maintained or stored on the Demised Premises shall be so kept, maintained or stored at the sole risk of Lessee. Lessee agrees to pay all sums of money in respect of any labor, service, materials, supplies or equipment furnished or alleged to have been furnished to Lessee in or about the Premises, and not furnished on order of Lessor, which may be secured by any Mechanic's Materialmen's or other lien to be discharged at the time performance of any obligation secured thereby matures, provided that Lessee may contest such lien, but if such lien is reduced to final judgement and if such judgement or process thereon is not stayed, or if stayed and said stay expires, then and in each such event, Lessee shall forthwith pay and discharge said judgement. Lessor shall have the right to post and maintain on the Demised Premises, notices of non-responsibility under the laws of the State in which the Demised premises are located. 19. NON-LIABILITY. Subject to the terms and conditions of Article 14 hereof, Lessor shall not be liable for any damage to property of Lessee or of others 124 located on the Premises, nor for the loss of or damage to any property of Lessee or of other by theft or otherwise. Lessor shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Premises or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature. Lessor shall not be liable for any such damage caused by other Lessees or persons in the Premises, occupants of adjacent property, other occupants of the buildings, or the public or caused by operations in construction of any private, public or quasi-public work. Lessor shall not be liable for any latent defect in the Demised Premises. All property of Lessee kept or stored on the Demised Premises shall be so kept or stored at the risk of Lessee only and Lessee shall hold Lessor harmless from any claims arising out of damage to the same, including subrogation claims by Lessee's insurance carrier. 20. SUBORDINATION. This Lease shall be subordinated to any mortgages that may now exist or that may hereafter be placed upon the Demised Premises and to any and all advances made thereunder, and to the interest upon the indebtedness evidenced by such mortgages, and to all renewals, replacements and extensions thereof. In the event of execution by Lessor after the date of this Lease of any such mortgage, renewal, replacement or extension, Lessee agrees to execute a subordination agreement with the holder thereof which agreement shall provide that: (a) Such holder shall not disturb the possession and other rights of Lessee under this Lease so long as Lessee is not in default hereunder. (b) In the event of acquisition of title to the Demised Premises by such holder, such holder shall accept the Lessee as Lessee of the Demised Premises under the terms and conditions of this Lease and shall perform all the obligations of Lessor hereunder, and (c) The Lessee shall recognize such holder as Lessor hereunder. Lessee shall, upon receipt of a request from Lessor therefor, execute and deliver to Lessor or to any proposed holder of a mortgage or trust deed or any proposed purchaser of the Premises, a certificate in recordable form certifying that this Lease is in full force and effect, and that there are no offsets against rent nor defenses to Lessee's performance under this Lease, or setting forth any such offsets or defenses claimed by Lessee, as the case may be. 125 21. ASSIGNMENT OR SUBLETTING. Lessee agrees to use and occupy the Demised Premises throughout the entire term hereof for the purpose herein specified and for no other purposes, in the manner and to substantially the extent intended, and not to transfer or assign this Lease or sublet said Demised Premises, or any part thereof, whether by voluntary act, operation of law, otherwise, without obtaining the prior consent of Lessor in each instance. Lessee shall seek such consent of Lessor by a written request thereof setting forth such information as Lessor may deem necessary. Lessor agrees not to withhold consent unreasonably. Consent to any assignment or subletting shall not relieve Lessee of its obligations hereunder. Consent by Lessor to an assignment of this Lease or to any subletting of the Demised Premises should not be a waiver of Lessor's rights under this Article as to any subsequent assignment or subletting. Lessor's rights to assign this Lease are and should remain unqualified. No such assignment or sublease or other transfer of this Lease shall be effective unless the assignee, sublessee or transferee shall at the time of such assignment, sublease or transfer, assume in writing for the benefit of Lessor, its successors or assigns, all of the terms, covenants and conditions of this Lease thereafter to be performed by Lessee and shall agree in writing to be bound thereby. Should Lessee sublease in accordance with the terms of this Lease, fifty percent (50%) of any increase in rental received by Lessee over the per square foot rental rate which is being paid by Lessee shall be forwarded to and retained by Lessor, which increase shall be in addition to the Base Rent and Additional Rent due Lessor under this Lease. 22. ATTORNMENT. In the event of a sale or assignment of Lessor's interest in the Premises, or the Building in which the Demised Premises are located, or this Lease, or if the Premises come into custody or possession of a mortgagee or any other party whether because of a mortgage foreclosure, or otherwise, Lessee shall attorn to such assignee or other party and recognize such party as Lessor hereunder; provided, however, Lessee's peaceable possession will not be disturbed so long as Lessee faithfully performs its obligations under this Lease. Lessee shall execute, on demand, any attornment agreement required by any such party to be executed, containing such provisions and such other provisions as such party may require. 23. NOVATION IN THE EVENT OF SALE. In the event of the sale of the Demised Premises, Lessor shall be and hereby is relieved of all of the covenants and obligations created hereby accruing from and after the date of sale, and such sale shall result automatically in the purchaser assuming and agreeing to carry out all the covenants and obligations of Lessor herein. Notwithstanding the foregoing provisions of this Article, Lessor, in the event of a sale of the Demised 126 Premises, shall cause to be included in this agreement of sale and purchase a covenant whereby the purchaser of the Demised Premises assumes and agrees to carry out all the covenants and obligations of Lessor herein. The Lessee agrees at any time and from time to time upon not less than ten (10) days prior written request by the Lessor to execute, acknowledge and deliver to the Lessor a statement in writing certifying that this Lease is in full force and effect and stating any modifications hereto, and the dates to which the basic rent and other charges have been paid in advance, if any, it being intended that any such statement delivered pursuant to this paragraph may be relied upon by any prospective purchaser of the fee or mortgagee or assignee of any mortgage upon the fee of the Demised Premises. 24. SUCCESSORS AND ASSIGNS. The terms, covenants and conditions hereof shall be binding upon and inure to the successors and assigns of the parties hereto. 25. UNIFORM COMMERCIAL CODE. The Lessee grants to the Lessor a lien upon all personal property of the Lessee in the Demised Premises during said term to secure payment of the rent payable hereunder, and agrees that no such property shall be removed from the Demised Premises without the consent of the Lessor while any installments of rent are past due, and during any other default in the conditions hereof. To the extent this Lease grants Lessor, or recognizes in Lessor any lien or rights greater than provided by the laws of the State in which the Premises are located pertaining to "Landlord's Liens", this Lease is intended and does constitute a security agreement within the meaning of the Uniform Commercial Code as adopted in said State, and Lessor, in addition to the rights prescribed herein shall have the rights, titles, liens and interests in and to Lessee's property now or hereafter located in or upon the Demised Premises which are granted a "secured party" as the term is defined under such Uniform Commercial Code to secure the payment to Lessor of amounts and monies due under this Lease. Lessee will execute, on request of Lessor, and will deliver to Lessor a financing statement for the purpose of perfecting Lessor's security interest under this Lease or the Lessor may file this Lease as a security agreement. 26. QUIET ENJOYMENT. Lessor warrants that it has full right to execute and to perform this Lease and to grant the estate demised, and that Lessee, upon payment of the rents and other amounts due and the performance of all the terms, conditions, covenants and agreements on Lessee's part to be observed and performed under this Lease, may peaceable and quietly enjoy the Demised 127 Premises for the business uses permitted hereunder, subject, nevertheless, to the terms and conditions of this Lease. 27. RECORDING. Lessee shall not record this Lease without the written consent of Lessor. However, upon the request of either party hereto, the other party shall join in the execution of a Memorandum Lease for the purposes of recordation. Said Memorandum Lease shall describe the parties, the Demised Premises and the term of the Lease and shall incorporate this Lease by reference. The Article 28 shall not be construed to limit Lessor's right to file this Lease. 28. OVERDUE PAYMENTS. All monies due under this Lease from Lessee to Lessor shall be due on demand, unless otherwise specified, and if not paid when due, shall incur a late fee payment calculated at five percent (5%) of the current monthly Base Rent amount due. 29. SURRENDER. On the Expiration Date or upon the termination hereof upon a day other than the Expiration Date, Lessee shall peaceably surrender the Demised Premises broom-clean in good order, condition and repair, reasonable wear and tear only excepted. On or before the Expiration Date or upon termination of this Lease on a day other than the Expiration Date, Lessee shall, at its expense, remove all trade fixtures, personal property and equipment and signs from the Demised Premises and any property not removed shall be deemed to have been abandoned. Any damage caused in the removal of such items shall be immediately repaired by Lessee and at its expense. All alterations, additions, improvements and fixtures (other than trade fixtures) which shall have been made or installed by Lessor or Lessee upon the Demised Premises and all floor covering so installed shall remain upon and be surrendered with the Demised Premises as a part thereof, without disturbance, molestation or injury, and without charge, at the expiration or termination of this Lease. If the Demised Premises are not surrendered on the Expiration Date or the date of termination, Lessee shall indemnify and hold Lessor harmless against any loss or liability, claims, without limitation, made by any succeeding lessee founded on or related to such delay. Lessee shall promptly surrender all keys for the Demised Premises to Lessor at the place then fixed for payment of rent and shall inform Lessor of combinations of any locks and safes on the Demised Premises. 30. HOLDING OVER. In the event Lessee remains in possession of the Demised Premises after the Expiration Date of this Lease and without the execution of a new Lease, it shall be deemed to be occupying said Demised Premises as a Lessee from month to month, subject to all the conditions, provisions and 128 obligations of this Lease insofar as the same can be applicable to a month- to-month tenancy, provided however that the Base Rent required to be paid by Lessee during any holdover period shall be in an amount equal to 150% of the most recent Base Rent amount due pursuant to the terms of the Lease per month, plus all Additional Rent as set forth in Article 3 of this Lease. 31. ABANDONMENT. In the event Lessee shall remove its fixtures, equipment or machinery or shall vacate the Demised Premises or any part thereof prior to the Expiration Date of this Lease, or shall discontinue or suspend the operation of its business conducted on the Demised Premises for a period of more than thirty (30) consecutive days (except during any time when the Demised Premises may be rendered untenantable by reason of fire or other casualty), then in any such event Lessee shall be deemed to have abandoned the Demised Premises and Lessee shall be in default under the terms of this Lease. 32. CONSENTS BY LESSOR. Whenever provision is made under this Lease for Lessee securing the consent or approval by Lessor, such consent or approval shall only be in writing. 33. NOTICES. Any notice required or permitted under this Lease shall be deemed sufficiently given or secured if sent by registered or certified return receipt mail to Lessee at the street address of the Demised Premises and to Lessor at the address then fixed for the payment of rent as provided in Article 4 of this Lease, and either party may by like written notice at any time designate a different address to which notices shall subsequently be sent or rent to be paid. 34. RULES AND REGULATIONS. Lessee shall observe and comply with the rules and regulations hereinafter set forth in "Exhibit C", and with such further reasonable rules and regulations as Lessor may prescribe, on written notice to Lessee for the safety, care and cleanliness of the Building. 35. INTENT OF PARTIES. Except as otherwise provided herein, the Lessee covenants and agrees that if it shall at any time fail to pay any such cost or expense, or fail to take out, pay for, maintain or deliver any of the insurance policies above required, or fail to make any other payment or perform any other act on its part to be made or performed as in this Lease provided, then the Lessor may, but shall not be obligated so to do, and without notice to or demand upon the Lessee and without waiving or releasing the Lessee from any obligations of the Lessee in this Lease contained, pay any such cost or expense, effect any such insurance coverage and pay premiums therefor and may make any other payment or perform any other act on the part of the Lessee to be 129 made and performed as in this Lease provided, in such manner and to such extent as the Lessor may deem desirable, and in exercising any such right, to also pay all necessary and incidental costs and expenses, employ counsel and incur and pay reasonable attorney's fees. All sums so paid by Lessor and all necessary and incidental costs and expenses in connection with the performance of any such act by the Lessor together with interest thereon at the rate of eighteen percent (18%) per annum from the date of making of such expenditure by Lessor, shall be deemed Additional Rent hereunder, and shall be payable to Lessor upon demand. Lessee covenants to pay any such sum or sums with interest as aforesaid and the Lessor shall have the same rights and remedies in the event of the non-payment thereof by Lessee as in the case of default by Lessee in the payment of the Base Rent payable under this Lease. 36. GENERAL. The Lease does not create the relationship of principal and agent or of partnership or of joint venture or of any association between Lessor and Lessee, the sole relationship between the parties hereto being that of Lessor and Lessee. No waiver of any default of Lessee hereunder shall be implied from any omission by Lessor to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect any default other than the default specified in the express waiver and only for the time and to the extent therein stated. One or more waivers by Lessor shall not then be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent to or approval by Lessor of any act by Lessee requiring Lessor's consent or approval shall not waive or render unnecessary Lessor's consent to or approval of any subsequent similar act by Lessee. Each form and each provision of this Lease performable by Lessee shall be construed to be both a covenant and a condition. No action required or permitted to be taken by or on behalf of Lessor under the terms or provisions of this Lease shall be deemed to constitute an eviction or disturbance of Lessee's possession of the Demised Premises. All preliminary negotiations are merged into and incorporated in this Lease. The laws of the State of Minnesota shall govern the validity, performance and enforcement of this Lease. (a) This Lease and the Exhibits, if any, attached hereto and forming a part hereof, constitute the entire agreement between Lessor and Lessee affecting the Demised Premises and there are no other agreements, either oral or written, between them other than are herein set forth. No subsequent alteration, amendment, change or addition to this Lease shall be binding 130 upon Lessor or Lessee unless reduced to writing and executed in the same form and manner in which this Lease is executed. (b) If any agreement, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such agreement, covenant or condition to person or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each agreement, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. 37. CAPTIONS. The captions are inserted only as a matter of convenience and reference, and in no way define, limit or describe the scope of this Lease, the intent of the parties, or any provision of the Lease. 38. NOTIFICATION TO LESSEE. Owner of the Premises, hereby notifies Lessee that the entity/person authorized to manage the Premises is CTD Properties, Contract Manager. Said organization has been appointed to act as the agent in the leasing, management and operation of the Building for the owner and is authorized to accept service of process and receive and give receipts for notices and demands. Lessor serves the right to change the identity or status of its duly authorized agents upon written notice to Lessee. 39. EXHIBITS. Reference is made to Exhibits A through E, inclusive, which Exhibits are attached hereto and made a part hereof. Exhibit Description ------- ----------- Exhibit A Legal Description Exhibit B Demised Premises Exhibit C Building Rules and Regulations Exhibit D Improvements Exhibit E Signs IN WITNESS WHEREOF, the Lessor and the Lessee have caused these presents to be executed in form and manner sufficient to bind them at law, as of the day and year first written above written. LESSEE: LESSOR: 131 CHILDREN'S BROADCASTING CORPORATION 5501 BUILDING COMPANY BY /S/JAMES G. GILBERTSON /S/CHRISTOPHER T. DAHL -------------------------------- --------------------------------- ITS CFO CHRISTOPHER T. DAHL ----------------------------- CHILDREN'S RADIO GROUP, INC. BY /S/JAMES G. GILBERTSON -------------------------------- ITS CFO ----------------------------- 132 STATE OF MINNESOTA) ) ss. COUNTY OF HENNEPIN) On this 1st day of November, 1996, personally came before me, a Notary Public within and for said County, James G. Gilbertson, COO, of Children's Broadcasting Corporation, to me well known, and who executed the foregoing instrument, and acknowledged that he executed the same on behalf of the corporation. /s/Christine A. Hein ----------------------------------- Notary Public STATE OF MINNESOTA) ) ss. COUNTY OF HENNEPIN) On this 1st day of November, 1996, personally came before me, a Notary Public within and for said County, James G. Gilbertson, COO, of Children's Radio Group, Inc. to me well known, and who executed the foregoing instrument, and acknowledged that he executed the same on behalf of the corporation. /s/Christine A. Hein ----------------------------------- Notary Public STATE OF MINNESOTA) ) ss. COUNTY OF HENNEPIN) On this 1st day of November, 1996, personally came before me, a Notary Public within and for said County, Christopher T. Dahl, to me well known, and who executed the foregoing instrument, and acknowledged that he executed the same on behalf of the 5501 Building Company. /s/Christine A. Hein ----------------------------------- Notary Public 133 EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 OFFICE/WAREHOUSE LEASE THIS INDENTURE of lease, made effective this 1st day of November, 1996, by and between 724 ASSOCIATES, a partnership (hereinafter referred to as "Lessor"), and CHILDREN'S BROADCASTING CORPORATION (hereinafter together referred to as "Lessee"). DEFINITIONS "PREMISES" - That certain real property located in the City of Minneapolis, County of Hennepin and State of Minnesota and legally described on Exhibit "A" attached hereto and made a part hereof, including all buildings and site improvements located thereon. "BUILDING" - That certain office/warehouse building containing approximately 42,000 square feet located upon the Premises and commonly described as the 724 First Street North Building. "DEMISED PREMISES" - That certain portion of the Building located at 724 First Street North and designated as Exhibit B, consisting of approximately 4,000 square feet (4,000 square feet of office space and zero square feet of warehouse space), as measured from the outside walls of the Demised Premises to the center of the partition wall, as shown on the floor plan attached hereto as Exhibit "B" and made a part hereof. The Demised Premises include a non- exclusive easement for access to common area, as hereinafter defined, and all licenses and easements appurtenant to the Demised Premises. "COMMON AREAS" - The term "common area" means the entire areas as designated on Exhibit "B" and to be used for the non-exclusive use by Lessee and other lessees in the Building, including, but not limited to, corridors, lavatories, driveways, truck docks, parking lots and landscaped areas, if any. Subject to reasonable rules and regulations to the promulgated by Lessor, the common areas are hereby made available to Lessee and its employees, agents, customers and invitees for reasonable use in common with other lessees, their employee, agents, customer and invitees. 134 W I T N E S S E T H : 1. TERM. For and in consideration of the rents, additional rents, terms, provisions and covenants herein contained, Lessor hereby lets, leases and demises to Lessee the Demised Premises for the term of sixty (60) months commencing on the 1st day of January, 1996 (sometimes called "the Commencement Date") and expiring the 31st day of December, 2001 (sometimes called "Expiration Date"), unless sooner terminated as hereinafter provided. 2. BASE RENT. Lessor reserves and Lessee shall pay Lessor, a total rental of One Hundred Eighty-four Thousand and no/100 Dollars ($184,000), payable in advance, in monthly installments of Two Thousand Six Hundred Sixty-six and 66/100 Dollars ($2,666.66), commencing on the Commencement Date and continuing on the first day of each and every month thereafter for the next succeeding twelve months through December, 1996, and Three Thousand and no/100 Dollars ($3,000.00) on the first day of each and every month thereafter for the next succeeding 24 months, and Three Thousand Three Hundred and Thirty-three and 33/100s Dollars ($3,333.33) on the first day of each and every month for the next succeeding 24 months during the balance of the term (sometimes called "Base Rent"). In the event the Commencement Date falls on a date other than the first of a month the rental for that month shall be prorated and adjusted accordingly. 3. ADDITIONAL RENT. Lessee shall pay to Lessor throughout the term of this Lease the following: (a) Lessee shall pay a sum equal to one hundred percent (100%) of the Real Estate Taxes. The term "Real Estate Taxes" shall mean all real estate taxes, all assessments and any taxes in lieu thereof which may be levied upon or assessed against the Premises of which the Demised Premises are a part. Lessee, in addition to all other payments to Lessor by Lessee required hereunder shall pay to Lessor, in each year during the term of this Lease and any extension or renewal thereof, Lessee's proportionate share of such real estate taxes and assessments paid in the first instance by Lessor. Any tax year commencing during any lease year shall be deemed to correspond to such lease year. In the event the taxing authorities include in such real estate taxes and assessments the value of any improvements made by Lessee, or of machinery, equipment, fixtures, Inventory or other 135 personal property or assets of Lessee, then Lessee shall pay all the taxes attributable to such items in addition to its proportionate share of said aforementioned real estate taxes and assessments. A photostatic copy of the tax statement submitted by Lessor to Lessee shall be sufficient evidence of the amount of taxes and assessments assessed or levied against the Premises of which the Demised Premises are a part as well as the items taxed. (b) A sum equal to one hundred percent (100%) of the annual aggregate operating expenses incurred by Lessor in the operation, maintenance and repair of the Premises. The term "Operating Expenses" shall include, but not be limited to, maintenance, repair, replacement and care of all heating, lighting, plumbing and air conditioning fixtures, equipment and systems, roofs, parking and landscaped area, signs, snow removal, non-structural repair and maintenance of the exterior of the Building, insurance premiums, management fees, wages and fringe benefits of personnel employed for such work, cost of equipment purchased and used for such purposes, and the cost or portion thereof properly allocable to the Premises (amortized over such reasonable period as Lessor shall determine together with the interest at the rate of eighteen percent (18%) per annum on the unamortized balance) of any capital improvements made to the Building by Lessor after the Base Year which result in a reduction of Operation Expenses or made to the Building by Lessor after the date of this lease that are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed. (c) The payment of the sums set forth in this Article 3 shall be in addition to the Base Rent payable pursuant to Article 2 of this Lease. All sums due hereunder shall be due and payable within thirty (30) days of delivery of written certification by Lessor setting forth the computation of the amount due from Lessee. In the event the lease term shall begin or expire at any time during the calendar year, the Lessee shall be responsible for his pro-rata share of Additional Rent under subdivisions a. and b. during this Lease and/or occupancy time. Prior to commencement of this Lease, and prior to the commencement of each calendar year thereafter commencing during the term of this Lease or any renewal or extension thereof, Lessor may estimate for each calendar year (i) the total amount of Real Estate Taxes; (ii) the total amount of Operating Expenses; (iii) Lessee's share of Real Estate Taxes 136 for such calendar year; (iv) Lessee's share of Operating Expenses for such calendar year; and (v) the computation of the annual and monthly rental payable during such calendar year as a result of increases or decreases in Lessee's share of Real Estate Taxes and Operating Expenses. Said estimates will be in writing and will be delivered or mailed to Lessee at the Premises. The amount of Lessee's share of Real Estate Taxes and Operating Expenses for each calendar year, so estimated, shall be payable as Additional Rent, in equal monthly installments, in advance, on the first day of each month during such calendar year at the option of Lessor. In the event that such estimate is delivered to Lessee before the first day of January of such calendar year said amount, so estimated, shall be payable as additional rent in equal monthly installments, in advance, on the first day of each month over the balance of such calendar year, with the number of installments being equal to the number of full calendar months remaining in such calendar year. Upon completion of each calendar year during the term of this Lease or any renewal or extension thereof, Lessor shall cause its accountants to determine the actual amount of the Real Estate Taxes and Operating Expenses payable in such calendar year and Lessee' share thereof and deliver a written certification of the amounts thereof to Lessee. If Lessee has underpaid its share of Real Estate Taxes or Operating Expenses for such calendar year, Lessee shall pay the balance of its share of same within ten (10) days after the receipt of such statement. If Lessee has overpaid its share of Real Estate Taxes or Operating Expenses for such calendar year, Lessor shall either (i) refund such excess, or (ii) credit such excess against the most current monthly installment or installments due Lessor for its estimate of Lessee's share of Real Estate Taxes and Operating Expenses for the next following calendar year. A pro-rata adjustment shall be made for a fractional calendar year occurring during the term of this Lease or any renewal or extension thereof based upon the number of days of the term of the Lease during said calendar year as compared to three hundred sixty-five (365) days and all additional sums payable by Lessee or credits due Lessee as a result of the provisions of this Article 3 shall be adjusted accordingly. 4. COVENANT TO PAY RENT. The covenants of Lessee to pay the Base Rent and the Additional Rent are each independent of any other covenant, 137 condition, provision or agreement contained in this Lease. All rents are payable to Lessor at: 724 Associates 724 First Avenue North Fourth Floor Minneapolis, Minnesota 55401 5. UTILITIES. Lessor shall provide mains and conduits to supply water, gas, electricity and sanitary sewage to the Premises. Lessee shall pay, when due, all charges for sewer usage or rental, garbage disposal, refuse removal, water, electricity, gas, fuel, oil, L.P. gas, telephone and/or other utility services or energy source furnished to the Demised Premises during the term of this Lease, or any renewal or extension thereof. If Lessor elects to furnish any of the foregoing utility services or other services furnished or caused to be furnished by lessor shall not exceed the rate Lessee would be required to pay to a utility company or service company furnishing any of the foregoing utilities or services. The charges thereof shall be deemed Additional Rent in accordance with Article 3. 6. CARE AND REPAIR OF DEMISED PREMISES. Lessee shall, at all times throughout the term of this Lease, including renewals and extensions, and at its sole expense, keep and maintain the Demised Premises in a clean, safe, sanitary and first class condition and in compliance with all applicable laws, codes, ordinances, rules and regulations. Lessee's obligations hereunder shall include, but not be limited to, the maintenance, repair and replacement, if necessary, of all lighting and plumbing fixtures and equipment, fixtures, motors and machinery, all interior walls, partitions, doors and windows, including the regular painting thereof, all exterior entrances, windows, doors and docks and the replacement of all broken glass. When used in this provision, the term "repairs" shall include replacements or renewals when necessary, and all such repairs made by the Lessee shall be equal in quality and class to the original work. The Lessee shall keep and maintain all portions of the Demised Premises and the sidewalk and areas adjoining the same in a clean and orderly condition, free of accumulation of dirt, rubbish, snow and ice. If Lessee fails, refuses or neglects to maintain or repair the Demised Premises as required in this Lease after notice shall have been given Lessee, in accordance with Article 36 of this Lease, Lessor may make such repairs without liability to Lessee for nay loss or damage that may accrue to Lessee's 138 merchandise, fixtures or other property or to Lessee;s business by reason thereof, and upon completion thereof, Lessee shall pay to Lessor all costs plus fifteen (15%) for overhead incurred by Lessor in making such repairs upon presentation to Lessee of bill therefor. Lessor shall repair, at its expense, the structural portions of the Building, provided however where structural repairs are required to be made by reason of the acts of Lessee, the costs thereof shall be borne by Lessee and payable by Lessee to Lessor upon demand. The Lessor shall be responsible for all outside maintenance of the Demised Premises, including grounds and parking areas. All such maintenance which is the responsibility of the Lessor shall be provided as reasonably necessary to the comfortable use and occupancy of Demised Premises during business hours, except Saturdays, Sundays and holidays, upon the condition that the Lessor shall not be liable for damages for failure to do so due to causes beyond its control. 7. SIGNS. Any sign, lettering, picture, notice or advertisement installed on or in any part of the Premises and visible from the exterior of the Building, or visible form the exterior of the Demised Premises, shall be approved and installed by Lessor at Lessee's sole cost and expense. Signs to be maintained by Lessor at Lessee's expense. In the event of a violation of the foregoing by Lessee, Lessor may remove the same without any liability and may charge the expense incurred by such removal to Lessee. 8. ALTERATIONS, INSTALLATION, FIXTURES. Except as hereinafter provided, Lessee shall not make any alteration, additions or improvements in or to the Demised Premises or add, disturb in any way, change any plumbing or wiring therein without the prior written consent of the Lessor. In the event alterations are required by any governmental agency by reason of the use and occupancy of the Demised Premises by Lessee, Lessee shall make such alterations at its own expense after first obtaining Lessor's approval of plans and specifications therefor and furnishing such indemnifications as Lessor may reasonable require against liens, costs, damages and expenses arising of such alterations. Alterations or additions by Lessee must be built in compliance with all laws, ordinances and governmental regulations and affecting the Premises and Lessee shall warrant to Lessor that all such alterations, additions or improvements shall be in strict compliance with all relevant laws, ordinances, governmental regulations and insurance requirements. Construction of such alterations or additions shall commence 139 only once Lessee has obtained and exhibited to Lessor the requisite approvals, licenses and permits and indemnification against liens. All alterations, installations, physical additions or improvements to the demised Premises made by Lessee shall at once become the property of Lessor and shall be surrendered to Lessor upon the termination of this Lease; provided, however, that this clauses shall not apply to movable equipment or furniture owned by Lessee which may be removed by Lessee at the end of the term of this Lease in the event that Lessee is not then in default. 9. POSSESSION. Except as hereinafter provided Lessor shall deliver possession of Demised Premises to Lessee in the condition required by this Lease on or before the Commencement Date, but delivery of possession prior to or later than such Commencement Date shall not affect the expiration date of this Lease. The rentals herein reserved shall commence on the date actual possession of the Demised Premises is delivered by Lessor to Lessee. Any occupancy by Lessee prior to the beginning of the term of this Lease shall in all respects be the same as that of a Lessee under this Lease. Lessor shall have no responsibility or liability for loss or damage to fixtures, facilities or equipment installed or left on the Demised Premises. If Demised Premises is not ready for occupancy by Commencement Date and possession is later than Commencement Date, rent shall begin on the date of actual possession. 10. SECURITY AND DAMAGE DEPOSIT. Lessee contemporaneously with the execution of this Lease, deposited with Lessor the sum of Zero Dollars ($---0---), receipt of which is hereby acknowledged by Lessor, which deposit is to be held by Lessor, without liability for interest as a security and damage deposit for the faithful performance by Lessee during the term hereof or any extension hereof. Prior to the time of when Lessee shall be entitled to the return of this security deposit, Lessor may commingle such deposit with Lessor's own funds and to use such security deposit for such purposes as Lessor may determine. In the event of the failure of Lessee to keep and perform any of the terms, covenants and conditions of this Lease to be kept and performed by Lessee during the term hereof or extension hereof, then Lessor, either with or without terminating this Lease may (but shall not be required to) apply such portion of said deposit as may be necessary to compensate or repay Lessor for all losses or damages sustained or to be sustained by Lessor due to such breach on the part of Lessee, including, but not limited to, overdue and unpaid rent, any other amounts payable by Lessee to Lessor pursuant to the provisions of this Lease, damages or deficiencies in the reletting of Demised Premises, and reasonable attorney's fees incurred by Lessor. Should the entire deposit or any portion thereof, be 140 appropriated and applied by Lessor, in accordance with provisions of this paragraph, Lessee upon written demand by Lessor shall remit forthwith to Lessor a sufficient amount of cash to restore said security deposit to the original sum deposited, and Lessee's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this Lease. Said security deposit shall be returned to Lessee, less any deposit thereof as the result of the provisions of this paragraph, at the end of the term of this Lease, or any renewal thereof or upon the earlier termination of this Lease. Lessee shall have no right to anticipate return of said deposit withholding any amount required to be paid pursuant to the provision of this Lease or otherwise. In the event Lessor shall sell the Premises, or shall otherwise convey or dispose of its interest in this Lease, Lessor may assign said security deposit or any balance thereof to Lessor's assignee, whereupon Lessor shall be released from all liability for the return or repayment of such security deposit and Lessee shall look solely to the said assignee for the return and reimbursement of said security deposit. Said security deposit shall not be assigned or encumbered by Lessee without the written consent of Lessor, and any assignment or encumbrance without such consent shall not bind Lessor. In the event of any rightful and permitted assignment of this Lease by Lessor said security deposit shall be deemed to be held by Lessor as a deposit made by the assignee, and Lessor shall have no further liability with respect to the return of said security deposit to the Lessee. 11. USE. The Demised Premises shall be used and occupied by Lessee strictly for the purposes of an office so long as such use is in compliance with all applicable laws, ordinances and governmental regulations affecting the Building and Premises. The Demised Premises shall not be used in such manner that, in accordance with any requirement of law or of any public authority, Lessor shall be obliged on account of the purpose or manner of said use to make any addition or alteration to or in the Building. The Demised Premises shall not be used in any manner which will increase the rates required to be paid for public liability or for fire and extended coverage insurance covering the Premises. Lessee shall occupy the Demised Premises conduct its business and control its agents, employees, invitees and visitors in such a way as is lawful, and reputable and will not permit or create any nuisance, noise, odor, or otherwise interfere with, annoy or disturb any other tenant in the Building in its normal business operations or Lessor in its management of the Building. Lessee's use of the Demised Premises shall conform to all the Landlord's rules and regulations relating to the use of the Premises. Outside storage on the Premises of any type of equipment, 141 property or materials owned or used on the Premises by Lessee or its customers and suppliers shall not be permitted. 12. ACCESS TO DEMISED PREMISES. The Lessee agrees to permit the Lessor and the authorized representatives of the Lessor to enter the Demised Premises at all times during usual business hours for the purpose of inspecting the same and making any necessary repairs to the Demised Premises and performing any work therein that may be necessary to comply with any laws, ordinances, rules, regulations or requirements of any public authority or of the Board of Fire Underwriters or any similar body or that the Lessor may deem necessary to prevent waste or deterioration in connection with the Demised Premises. Nothing herein shall imply any duty upon the part of the Lessor to do any such work which, under any provision of this Lease, the Lessee may be required to perform and the performance thereof by the Lessor shall not constitute a waiver of the Lessee's default in failing to perform the same. The Lessor may, during the progress of any work in the Demised Premises, keep and store upon the Demised Premises all necessary materials, tools and equipment. The Lessor shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business, or other damage of the Lessee by reason of making repairs or the performance of any work in the Demised Premises, or on account of bringing materials, supplies and equipment into or through the Demised Premises during the course thereof and the obligations of the Lessee under this Lease shall not thereby be affected in any matter whatsoever. Lessor reserves the right to enter upon the Demised Premises at any time in the event of an emergency and at reasonable hours to exhibit the Demised Premises to prospective purchasers or others; and to exhibit the Demised Premises to prospective tenants and to display "For Rent" or similar signs on windows and doors in the Demised Premises during the last one hundred eighty (180) days of the term of this Lease, all without hindrance or molestation by Lessee. 13. EMINENT DOMAIN. In the event of any eminent domain or condemnation proceeding or private sale in lieu thereof in respect to the Premises during the term thereof, the following provisions shall apply: (a) If the whole of the of the Premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then the term of this Lease shall cease and terminate as of the date possession 142 shall be taken in such proceeding and all rentals shall be paid up to that date. (b) If any part constituting less than the whole of the Premises shall be acquired or condemned or aforesaid, and in the event that such partial taking or condemnation shall materially affect the Demised Premises so as to render the Demised Premises unsuitable for the business of the Lessee, in the reasonable opinion of the Lessor, then the term of this Lease shall cease and terminate as of the date possession shall be taken by the condemning authority and rent shall be paid to the date of such termination. In the event of a partial taking or condemnation of the Premises which shall not materially affect the Demised Premises so as to render the Demised Premises unsuitable for the business of the Lessee, in the reasonable opinion of the Lessor, this Lease shall continue in full force and affect but with a proportionate abatement of the Base Rent and Additional Rent based on the portion, if any, of the Demised Premises taken. Lessor reserves the right, at its option, to restore the Building and the Demised Premises to substantially the same condition as they were prior to such condemnation. In such event, Lessor shall give written notice to Lessee, within thirty (30) days following the date possession shall be taken by the condemning authority, of Lessor's intention to restore. Upon Lessor's notice of election to restore, Lessor shall commence restoration and shall restore the Building and the Demised Premises with reasonable promptness, subject to delays beyond Lessor's control and delays in the making of condemnation or sale proceeds adjustments by Lessor; and Lessee shall have no right to terminate this Lease except as herein provided. Upon completion of such restoration, the rent shall be adjusted based upon the portion, if any, of the Demised Premises restored. (c) In the event of any condemnation or taking as aforesaid, whether whole or partial, the Lessee shall not be entitled to any part of the award paid for such condemnation and Lessor is to receive the full amount of such award, the Lessee hereby expressly waiving any right or claim to any part thereof. (d) Although all damages in the event of any condemnation shall belong to the Lessor whether such damages are awarded as compensation for diminution of value of the leasehold or to the fee of the Demised 143 Premises, Lessee shall have the right to claim and recover from the condemning authority, but not from Lessor, such compensation as may be separately awarded and recoverable by Lessee in Lessee's own right on account of any and all damage to Lessee's business by reason of the condemnation and for or on account of any cost or loss to which Lessee might be put in removing Lessee's merchandise, furniture, fixtures, leasehold improvements and equipment. 14. DAMAGE OR DESTRUCTION. In the event of any damage or destruction to the Premises by fire or other cause during the term hereof, the following provisions shall apply: (a) If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Lessor, will equal or exceed thirty percent (30%) of the replacement value of the Building (exclusive of foundations) just prior to the occurrence of the damage, then Lessor may, no later than the sixtieth (60th) day following the damage, give Lessee written notice of Lessor's election to terminate this Lease. (b) If the cost of restoration as estimated by Lessor will equal or exceed fifty percent (50%) of said replacement value of the Building and if the Demised Premises are not suitable as a result of said damage for the purposes for which they are demised hereunder, in the reasonable opinion of Lessee, then Lessee may, no later than the sixtieth (60th) day following the damage, give Lessor a written notice of election to terminate this Lease. (c) If the cost or restoration as estimated by Lessor shall amount to less than thirty percent (30%) of said replacement value of the Building, or if despite the cost, Lessor does not elect to terminate this Lease, Lessor shall restore the Building and the Demised Premises with reasonable promptness, subject to delays beyond Lessor's control and delays in the making of insurance adjustments by Lessor; and Lessee shall not have the right to terminate this Lease., Lessor shall not be responsible for restoring or repairing leasehold improvements of the Lessee. (d) In the event of either of the elections to terminate, this Lease shall be deemed to terminate on the date of the receipt of the notice of election and all rentals shall be paid up to that date. Lessee shall have no claim against Lessor for the value of any unexpired term of this Lease. 144 (e) In any case where damage to the Building shall materially affect the Demised Premises so as to render them unsuitable in whole or in part for the purposes of which they are demised hereunder, then, unless such destruction was wholly or partially caused by the negligence or breach of the terms of this Lease by Lessee, its employees, contractors or licensees, a portion of the rent based upon the amount of the extent to which the Demised Premises are rendered unsuitable shall be abated until repaired or restored. If the destruction or damage was wholly or partially caused by negligence or breach of the terms of this Lease by Lessee as aforesaid and if Lessor shall elect to rebuild, the rent shall not abate and the Lessee shall remain liable for the same. 15. CASUALTY INSURANCE. (a) Lessor shall at all times during the term of this Lease, at its expense, maintain a policy or policies of insurance with premiums paid in advance issued by an insurance company licensed to do business in the State of Minnesota insuring the Building against loss or damage by fire, explosion or other insurable hazards and contingencies for the full replacement value, provided that Lessor shall not be obligated to insure any furniture, equipment, machinery, goods or supplies not covered by this Lease which Lessee may bring upon the Demised Premises or any additional improvements which Lessee may construct or install on the Demised Premises. (b) Lessee shall not carry any stock of goods or do anything in or about the Demised Premises which will in any way impair or invalidate the obligation of the insurer under any policy of insurance required by this Lease. (c) Lessor hereby waives and releases all claims, liabilities and causes of action against Lessee and its agents, servant and employees for loss or damage to, or destruction of, the Premises or any portion thereof, including the buildings and other improvements situated thereon, resulting from fire, explosion or other perils included in standard extended coverage insurance, whether caused by the negligence of any of said persons or otherwise. Likewise, Lessee hereby waives and releases all claims, liabilities and causes of action against Lessor and its agents, servants and employees for loss or damage to, or destruction of, any of the improvements, fixtures, equipment , supplies, merchandise and other property, whether that of Lessee or of others in, upon or about the 145 Premises resulting from fire, explosion or the other perils included in standard extended coverage insurance, whether caused by the negligence of any of said persons otherwise. The waiver shall remain in force whether or not the Lessee's insurance shall consent thereto. (d) In the event that the use of the Demised Premises by Lessee increases the premium rate for insurance carried by Lessor on the improvement of which the Demised Premises are a part, Lessee shall pay Lessor, upon demand, the amount of such premium increase. If Lessee installs any electrical equipment that overload the power lines to the Building or its wiring, Lessee shall, at its own expense, make whatever changes are necessary to comply with the requirements of the insurance underwriter, insurance rating bureau and governmental authorities have jurisdiction. 16. PUBLIC LIABILITY INSURANCE. Lessee shall during the term hereof keep in full force and effect at its own expense a policy or policies of public liability insurance with respect to the Demised Premises and the business of Lessee, on terms and with companies approved in writing by Lessor, in which both Lessee and Lessor shall be covered by being named as insured parties under reasonable limits of liability not less than: _______________ _______________________ Dollars ($_____________) for injury or death to any one person: _________________________________ Dollars ($____________) for injury or death to more than one person; and _____________________________ Dollars ($_____________) with respect to damage to property. Such policy or policies shall provide that ten (10) days written notice must be given to Lessor prior to cancellation thereof. Lessee shall furnish evidence satisfactory to Lessor at the time this Lease is executed, and from time to time, that such coverage is in full force and effect. 17. DEFAULT OF TENANT. (a) In the event of any failure of Lessee to pay any rental due hereunder within ten (10) days after the same shall be due, or any failure to perform any other of the term, condition or covenant of this Lease to be observed or performed by Lessee for more than thirty (30) days after written notice of such failure shall have been given to Lessee, or if Lessee or an agent of Lessee shall falsify any report required to be furnished to Lessor pursuant to the terms of this Lease, or if Lessee or any guarantor of this Lease shall become bankrupt or insolvent, or file any debtor proceedings or any person shall take or have against Lessee or any guarantor of this Lease in any court pursuant to any statute either of the United States or of any state a petition in bankruptcy or 146 insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Lessee's or any such guarantor's property, or if Lessee or any such guarantor makes an assignment for the benefit of creditors, or petitions for or enters into an arrangement, or if Lessee shall abandon the Demised Premises or suffer this Lease to be taken under any writ of execution, then in any such event Lessee shall be in default hereunder, and Lessor, in addition to other rights of remedies it may have, shall have the immediate right of re-entry and may remove all persons and property from the Demised Premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of the Lessee, all without service of notice or resort to legal process and without being guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby. (b) Should Lessor elect to re-enter the Demised Premises as herein provided, or should it take possession of the Demised Premises pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time, without terminating this Lease, make such alterations, and repairs as may be necessary in order to relet the Demised Premises and relet the Demised Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and conditions as Lessor in its sole discretion may deem advisable. Upon each such subletting all rentals received by the Lessor from such reletting shall be applied first to the payment of any indebtedness other than rent due hereunder from Lessee to Lessor; second, to the payment of any costs and expenses of such reletting, including brokerage fees, attorney's fees and costs; third, to the payment of accrued and unpaid rent hereunder, and the remainder, if any, shall be held by Lessor and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month are less than that to be paid during that month by Lessee hereunder, Lessee, upon demand, shall pay any such deficiency to Lessor. No such re-entry or taking possession of the Demised Premises by Lessor shall be construed as an election on Lessor's part to terminate this Lease unless a written notice of such intention be given to Lessee or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Lessor may at any time after such re-entry and reletting elect to terminate this Lease for such previous breach. Should Lessor at any time terminate this Lease for any such breach, in addition to any 147 other remedies it may have, it may recover from Lessee all damages it may incur by reason of such breach, including the cost of recovering the Demised Premises, the cost of reletting the Demises premises, reasonable attorney's fees, and including the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent reserved in this Lease for the remainder of the stated term over the then reasonable rental value of the Demised Premises for the remainder of the stated term, all of which amounts shall be immediately due and payable from Lessee to Lessor. (c) Lessor may, at its option, instead of exercising any other rights or remedies available to it in this Lease or otherwise by law, statute or equity, spend such money as is reasonable necessary to cure any default of Lessee herein and the amount so spent, and costs incurred, including attorney's fees in curing such default, shall be paid by Lessee, as Additional Rent, upon demand. (d) In the event suit shall be brought for recovery of possession of the Demised Premises, for the recovery of rent or any other amount due under the provisions of this Lease or because of the breach of any other covenant herein contained on the part of the Lessee to be kept or performed, and a breach shall be established, Lessee shall pay to Lessor all expenses incurred therefore, including a reasonable attorney's fee, together with interest on all such expenses at the rate of eighteen percent (18%) per annum from the date of such breach of the covenants of this Lease. (e) Lessee hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Lessee being evicted or dispossessed for any cause, or in the event of Lessor obtaining possession of the Demised Premises, by reason of the violation by Lessee of any of the covenants or conditions of this Lease, or otherwise. Lessee also waives any demand for possession of the Demised Premises, and any demand for payment of rent and any notice of intent to re-enter the Demised Premises, or of intent to terminate this Lease, other than the notices provided in this Article, and waives any and every other notice or command prescribed by any applicable statutes or laws. (f) No remedy herein or elsewhere in this Lease or otherwise by law, statute or equity, conferred upon or reserved to Lessor or Lessee shall be 148 exclusive of any other remedy, but shall be cumulative, and may be exercised from time to time and as often as the occasion may arise. 18. COVENANTS TO HOLD HARMLESS. Unless the liability for damage or loss is caused by the negligence of Lessor, its agents or employees, Lessee shall hold harmless Lessor from any liability for damages to any person or property in or upon the Demised Premises and the Premises, including the person and property of Lessee and its employees and all persons in the Building at its or their invitation or sufferance, and from all damages resulting from Lessee's failure to perform the covenants of this Lease. All property kept, maintained or stored on the Demised Premises shall be so kept, maintained or stored at the sole risk of Lessee. Lessee agrees to pay all sums of money in respect of any labor, service, materials, supplies or equipment furnished or alleged to have been furnished to Lessee in or about the Premises, and not furnished on order of Lessor, which may be secured by any Mechanic's Materialmen's or other lien to be discharged at the time performance of any obligation secured thereby matures, provided that Lessee may contest such lien, but if such lien is reduced to final judgement and if such judgement or process thereon is not stayed, or if stayed and said stay expires, then and in each such event, Lessee shall forthwith pay and discharge said judgement. Lessor shall have the right to post and maintain on the Demised Premises, notices of non-responsibility under the laws of the State in which the Demised premises are located. 19. NON-LIABILITY. Subject to the terms and conditions of Article 14 hereof, Lessor shall not be liable for any damage to property of Lessee or of others located on the Premises, nor for the loss of or damage to any property of Lessee or of other by theft or otherwise. Lessor shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Premises or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature. Lessor shall not be liable for any such damage caused by other Lessees or persons in the Premises, occupants of adjacent property, other occupants of the buildings, or the public or caused by operations in construction of any private, public or quasi-public work. Lessor shall not be liable for any latent defect in the Demised Premises. All property of Lessee kept or stored on the Demised Premises shall be so kept or stored at the risk of Lessee only and Lessee shall hold Lessor harmless from any claims arising out of damage to the same, including subrogation claims by Lessee's insurance carrier. 149 20. SUBORDINATION. This Lease shall be subordinated to any mortgages that may now exist or that may hereafter be placed upon the Demised Premises and to any and all advances made thereunder, and to the interest upon the indebtedness evidenced by such mortgages, and to all renewals, replacements and extensions thereof. In the event of execution by Lessor after the date of this Lease of any such mortgage, renewal, replacement or extension, Lessee agrees to execute a subordination agreement with the holder thereof which agreement shall provide that: (a) Such holder shall not disturb the possession and other rights of Lessee under this Lease so long as Lessee is not in default hereunder. (b) In the event of acquisition of title to the Demised Premises by such holder, such holder shall accept the Lessee as Lessee of the Demised Premises under the terms and conditions of this Lease and shall perform all the obligations of Lessor hereunder, and (c) The Lessee shall recognize such holder as Lessor hereunder. Lessee shall, upon receipt of a request from Lessor therefor, execute and deliver to Lessor or to any proposed holder of a mortgage or trust deed or any proposed purchaser of the Premises, a certificate in recordable form certifying that this Lease is in full force and effect, and that there are no offsets against rent nor defenses to Lessee's performance under this Lease, or setting forth any such offsets or defenses claimed by Lessee, as the case may be. 21. ASSIGNMENT OR SUBLETTING. Lessee agrees to use and occupy the Demised Premises throughout the entire term hereof for the purpose herein specified and for no other purposes, in the manner and to substantially the extent intended, and not to transfer or assign this Lease or sublet said Demised Premises, or any part thereof, whether by voluntary act, operation of law, otherwise, without obtaining the prior consent of Lessor in each instance. Lessee shall seek such consent of Lessor by a written request thereof setting forth such information as Lessor may deem necessary. Lessor agrees not to withhold consent unreasonably. Consent to any assignment or subletting shall not relieve Lessee of its obligations hereunder. Consent by Lessor to an assignment of this Lease or to any subletting of the Demised Premises should not be a waiver of Lessor's rights under this Article as to any subsequent assignment or subletting. Lessor's rights to assign this Lease are and should remain unqualified. No such assignment or sublease or other transfer of this Lease shall be effective unless the assignee, sublessee or 150 transferee shall at the time of such assignment, sublease or transfer, assume in writing for the benefit of Lessor, its successors or assigns, all of the terms, covenants and conditions of this Lease thereafter to be performed by Lessee and shall agree in writing to be bound thereby. Should Lessee sublease in accordance with the terms of this Lease, fifty percent (50%) of any increase in rental received by Lessee over the per square foot rental rate which is being paid by Lessee shall be forwarded to and retained by Lessor, which increase shall be in addition to the Base Rent and Additional Rent due Lessor under this Lease. 22. ATTORNMENT. In the event of a sale or assignment of Lessor's interest in the Premises, or the Building in which the Demised Premises are located, or this Lease, or if the Premises come into custody or possession of a mortgagee or any other party whether because of a mortgage foreclosure, or otherwise, Lessee shall attorn to such assignee or other party and recognize such party as Lessor hereunder; provided, however, Lessee's peaceable possession will not be disturbed so long as Lessee faithfully performs its obligations under this Lease. Lessee shall execute, on demand, any attornment agreement required by any such party to be executed, containing such provisions and such other provisions as such party may require. 23. NOVATION IN THE EVENT OF SALE. In the event of the sale of the Demised Premises, Lessor shall be and hereby is relieved of all of the covenants and obligations created hereby accruing from and after the date of sale, and such sale shall result automatically in the purchaser assuming and agreeing to carry out all the covenants and obligations of Lessor herein. Notwithstanding the foregoing provisions of this Article, Lessor, in the event of a sale of the Demised Premises, shall cause to be included in this agreement of sale and purchase a covenant whereby the purchaser of the Demised Premises assumes and agrees to carry out all the covenants and obligations of Lessor herein. The Lessee agrees at any time and from time to time upon not less than ten (10) days prior written request by the Lessor to execute, acknowledge and deliver to the Lessor a statement in writing certifying that this Lease is in full force and effect and stating any modifications hereto, and the dates to which the basic rent and other charges have been paid in advance, if any, it being intended that any such statement delivered pursuant to this paragraph may be relied upon by any prospective purchaser of the fee or mortgagee or assignee of any mortgage upon the fee of the Demised Premises. 151 24. SUCCESSORS AND ASSIGNS. The terms, covenants and conditions hereof shall be binding upon and inure to the successors and assigns of the parties hereto. 25. UNIFORM COMMERCIAL CODE. The Lessee grants to the Lessor a lien upon all personal property of the Lessee in the Demised Premises during said term to secure payment of the rent payable hereunder, and agrees that no such property shall be removed from the Demised Premises without the consent of the Lessor while any installments of rent are past due, and during any other default in the conditions hereof. To the extent this Lease grants Lessor, or recognizes in Lessor any lien or rights greater than provided by the laws of the State in which the Premises are located pertaining to "Landlord's Liens", this Lease is intended and does constitute a security agreement within the meaning of the Uniform Commercial Code as adopted in said State, and Lessor, in addition to the rights prescribed herein shall have the rights, titles, liens and interests in and to Lessee's property now or hereafter located in or upon the Demised Premises which are granted a "secured party" as the term is defined under such Uniform Commercial Code to secure the payment to Lessor of amounts and monies due under this Lease. Lessee will execute, on request of Lessor, and will deliver to Lessor a financing statement for the purpose of perfecting Lessor's security interest under this Lease or the Lessor may file this Lease as a security agreement. 26. QUIET ENJOYMENT. Lessor warrants that it has full right to execute and to perform this Lease and to grant the estate demised, and that Lessee, upon payment of the rents and other amounts due and the performance of all the terms, conditions, covenants and agreements on Lessee's part to be observed and performed under this Lease, may peaceable and quietly enjoy the Demised Premises for the business uses permitted hereunder, subject, nevertheless, to the terms and conditions of this Lease. 27. RECORDING. Lessee shall not record this Lease without the written consent of Lessor. However, upon the request of either party hereto, the other party shall join in the execution of a Memorandum Lease for the purposes of recordation. Said Memorandum Lease shall describe the parties, the Demised Premises and the term of the Lease and shall incorporate this Lease by reference. The Article 28 shall not be construed to limit Lessor's right to file this Lease. 152 28. OVERDUE PAYMENTS. All monies due under this Lease from Lessee to Lessor shall be due on demand, unless otherwise specified, and if not paid when due, shall bear interest at the rate of eighteen percent (18%) per annum until paid. 29. SURRENDER. On the Expiration Date or upon the termination hereof upon a day other than the Expiration Date, Lessee shall peaceably surrender the Demised Premises broom-clean in good order, condition and repair, reasonable wear and tear only excepted. On or before the Expiration Date or upon termination of this Lease on a day other than the Expiration Date, Lessee shall, at its expense, remove all trade fixtures, personal property and equipment and signs from the Demised Premises and any property not removed shall be deemed to have been abandoned. Any damage caused in the removal of such items shall be immediately repaired by Lessee and at its expense. All alterations, additions, improvements and fixtures (other than trade fixtures) which shall have been made or installed by Lessor or Lessee upon the Demised Premises and all floor covering so installed shall remain upon and be surrendered with the Demised Premises as a part thereof, without disturbance, molestation or injury, and without charge, at the expiration or termination of this Lease. If the Demised Premises are not surrendered on the Expiration Date or the date of termination, Lessee shall indemnify and hold Lessor harmless against any loss or liability, claims, without limitation, made by any succeeding lessee founded on or related to such delay. Lessee shall promptly surrender all keys for the Demised Premises to Lessor at the place then fixed for payment of rent and shall inform Lessor of combinations of any locks and safes on the Demised Premises. 30. HOLDING OVER. In the event Lessee remains in possession of the Demised Premises after the Expiration Date of this Lease and without the execution of a new Lease, it shall be deemed to be occupying said Demised Premises as a Lessee from month to month, subject to all the conditions, provisions and obligations of this Lease insofar as the same can be applicable to a month- to-month tenancy, provided however that the Base Rent required to be paid by Lessee during any holdover period shall be in an amount equal to 150% of the most recent Base Rent amount due pursuant to the terms of the Lease per month, plus all Additional Rent as set forth in Article 3 of this Lease. 31. ABANDONMENT. In the event Lessee shall remove its fixtures, equipment or machinery or shall vacate the Demised Premises or any part thereof prior to the Expiration Date of this Lease, or shall discontinue or suspend the 153 operation of its business conducted on the Demised Premises for a period of more than thirty (30) consecutive days (except during any time when the Demised Premises may be rendered untenantable by reason of fire or other casualty), then in any such event Lessee shall be deemed to have abandoned the Demised Premises and Lessee shall be in default under the terms of this Lease. 32. CONSENTS BY LESSOR. Whenever provision is made under this Lease for Lessee securing the consent or approval by Lessor, such consent or approval shall only be in writing. 33. NOTICES. Any notice required or permitted under this Lease shall be deemed sufficiently given or secured if sent by registered or certified return receipt mail to Lessee at the street address of the Demised Premises and to Lessor at the address then fixed for the payment of rent as provided in Article 4 of this Lease, and either party may by like written notice at any time designate a different address to which notices shall subsequently be sent or rent to be paid. 34. RULES AND REGULATIONS. Lessee shall observe and comply with the rules and regulations hereinafter set forth in "Exhibit C", and with such further reasonable rules and regulations as Lessor may prescribe, on written notice to Lessee for the safety, care and cleanliness of the Building. 35. INTENT OF PARTIES. Except as otherwise provided herein, the Lessee covenants and agrees that if it shall at any time fail to pay any such cost or expense, or fail to take out, pay for, maintain or deliver any of the insurance policies above required, or fail to make any other payment or perform any other act on its part to be made or performed as in this Lease provided, then the Lessor may, but shall not be obligated so to do, and without notice to or demand upon the Lessee and without waiving or releasing the Lessee from any obligations of the Lessee in this Lease contained, pay any such cost or expense, effect any such insurance coverage and pay premiums therefor and may make any other payment or perform any other act on the part of the Lessee to be made and performed as in this Lease provided, in such manner and to such extent as the Lessor may deem desirable, and in exercising any such right, to also pay all necessary and incidental costs and expenses, employ counsel and incur and pay reasonable attorney's fees. All sums so paid by Lessor and all necessary and incidental costs and expenses in connection with the performance of any such act by the Lessor together with interest thereon at the rate of eighteen percent (18%) per annum from the date of making of 154 such expenditure by Lessor, shall be deemed Additional Rent hereunder, and shall be payable to Lessor upon demand. Lessee covenants to pay any such sum or sums with interest as aforesaid and the Lessor shall have the same rights and remedies in the event of the non-payment thereof by Lessee as in the case of default by Lessee in the payment of the Base Rent payable under this Lease. 36. GENERAL. The Lease does not create the relationship of principal and agent or of partnership or of joint venture or of any association between Lessor and Lessee, the sole relationship between the parties hereto being that of Lessor and Lessee. No waiver of any default of Lessee hereunder shall be implied from any omission by Lessor to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect any default other than the default specified in the express waiver and only for the time and to the extent therein stated. One or more waivers by Lessor shall not then be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent to or approval by Lessor of any tact by Lessee requiring Lessor's consent or approval shall not waive or render unnecessary Lessor's consent to or approval of any subsequent similar act by Lessee. Each form and each provision of this Lease performable by Lessee shall be construed to be both a covenant and a condition. No action required or permitted to be taken by or on behalf of Lessor under the terms or provisions of this Lease shall be deemed to constitute an eviction or disturbance of Lessee's possession of the Demised Premises. All preliminary negotiations are merged into and incorporated in this Lease. The laws of the State of Minnesota shall govern the validity, performance and enforcement of this Lease. (a) This Lease and the Exhibits, if any, attached hereto and forming a part hereof, constitute the entire agreement between Lessor and Lessee affecting the Demised Premises and there are no other agreements, either oral or written, between them other than are herein set forth. No subsequent alteration, amendment, change or addition to this Lease shall be binding upon Lessor or Lessee unless reduced to writing and executed in the same form and manner in which this Lease is executed. (b) If any agreement, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such 155 agreement, covenant or condition to person or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each agreement, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. 37. CAPTIONS. The captions are inserted only as a matter of convenience and reference, and in no way define, limit or describe the scope of this Lease, the intent of the parties, or any provision of the Lease. 38. NOTIFICATION TO LESSEE. Owner of the Premises, hereby notifies Lessee that the entity/person authorized to manage the Premises is CTD Properties, Contract Manager. Said organization has been appointed to act as the agent in the leasing, management and operation of the Building for the owner and is authorized to accept service of process and receive and give receipts for notices and demands. Lessor serves the right to change the identity or status of its duly authorized agents upon written notice to Lessee. 39. EXHIBITS. Reference is made to Exhibits A through E, inclusive, which Exhibits are attached hereto and made a part hereof. Exhibit Description ------- ----------- Exhibit A Legal Description Exhibit B Demised Premises Exhibit C Building Rules and Regulations Exhibit D Improvements Exhibit E Signs IN WITNESS WHEREOF, the Lessor and the Lessee have caused these presents to be executed in form and manner sufficient to bind them at law, as of the day and year first written above written. LESSEE: LESSOR: CHILDREN'S BROADCASTING CORPORATION CHRISTOPHER T. DAHL By /s/James G. Gilbertson /s/Christopher T. Dahl --------------------------------- ----------------------------------- Its COO ------------------------------ 156 STATE OF MINNESOTA) ) ss. COUNTY OF HENNEPIN) On this 1st day of November, 1996, personally came before me, a Notary Public within and for said County, James G. Gilbertson, CFO of Children's Broadcasting Corporation, to me well known to be the same persons described in and who executed the foregoing instrument, and acknowledged that they executed the same as their free act and deed. /s/Christine A. Hein ------------------------------------ Notary Public My Commission expires: 1/31/00 STATE OF MINNESOTA) ) ss. COUNTY OF HENNEPIN) On this 1st day of November, 1996, personally came before me, a Notary Public within and for said County, Christopher T. Dahl, to me well known to be the same persons described in and who executed the foregoing instrument, and acknowledged that they executed the same as their free act and deed. /s/Christine A. Hein ------------------------------------ Notary Public My Commission expires: 1/31/00 157 EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 SERVICE AGREEMENT THIS AGREEMENT made this 22nd day of February, 1997, and effective January 1, 1997, by and between RADIO MANAGEMENT CORPORATION, a Minnesota corporation (hereinafter "RMC"), and CHILDREN'S BROADCASTING CORPORATION, a Minnesota corporation (hereinafter "CBC"). WHEREAS, RMC engages in the business of providing general and administrative services for radio broadcast stations and CBC is the owner of a number of radio broadcast facilities; and WHEREAS, CBC intends to retain RMC to provide general and administrative services for its radio broadcast facilities 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, RMC 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 RMC hereunder, CBC shall pay RMC $75,000.00 per month payable within thirty (30) days from the end of each calendar month. The compensation paid to RMC hereunder shall not include any fees or expenses for accounting, legal or other services performed for CBC by third parties. 158 3. QUARTERLY REVIEW. The parties agree that they will review the services provided by RMC 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 RMC 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 RMC hereunder. RMC 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) RMC, while preforming services hereunder, at all times acting as an independent contractor and not as an employee of CBC; (ii) the employees of RMC shall at no time be considered employees of CBC in connection with the services performed hereunder; and (iii) RMC 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 RMC is required to make as a result of the services RMC performs hereunder. CBC shall approve the engagement of any officer of RMC 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 RMC 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 RMC's liability to CBC hereunder, if any, shall in no event exceed the total compensation paid to RMC 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 159 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 RMC 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 RMC 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 CORPORATION BY: /S/CHRISTOPHER T. DAHL -------------------------------- ITS: PRESIDENT ------------------------------- 160 CHILDREN'S BROADCASTING CORPORATION BY: /S/JAMES G. GILBERTSON -------------------------------- ITS: COO ------------------------------- 161 EX-10.14 6 EXHIBIT 10.14 EXHIBIT 10.14 THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH LAWS COVERING THE SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND SUCH LAWS. WARRANT TO PURCHASE 50,000 SHARES OF COMMON STOCK OF CHILDREN'S BROADCASTING CORPORATION THIS CERTIFIES THAT, for good and valuable consideration, Foothill Capital Corporation ("Foothill"), or its registered assigns, is entitled to subscribe for and purchase from Children's Broadcasting Corporation, a Minnesota corporation (the "Company"), at any time commencing November 25, 1996, up to and including November 25, 2001, Fifty Thousand (50,000) fully paid and nonassessable shares of the Common Stock of the Company at the price of $4.40 per share (the "Warrant Exercise Price"), subject to the antidilution provisions of Section 5 of this Warrant. Reference is made to this Warrant in the Loan and Security Agreement dated November 25, 1996 (the "Loan Agreement"), by and between the Company and Foothill. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means Foothill, any party who acquires all or a part of this Warrant as a registered transferee of Foothill, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized Common Stock, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the Holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up of the Company. This Warrant is subject to the following provisions, terms and conditions: 1. EXERCISE; TRANSFERABILITY. (a) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company prior to the expiration of this Warrant and accompanied or preceded by the surrender of this Warrant along with payment of the Warrant Exercise Price for such shares (a) in cash, by check or by wire transfer of federal funds, (b) to the extent permitted by law, by offset of the Obligations (as defined in the Loan Agreement), or (c) by a combination of the methods specified in clauses (a) and (b). 162 (b) This Warrant may not be sold, transferred, assigned, hypothecated or divided except as provided in Section 7 hereof. 2. EXCHANGE AND REPLACEMENT. Subject to Sections 1 and 7 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its office for new Warrants of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if Foothill shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 2. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses, taxes (other than stock transfer taxes), and other charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Section 2. 3. ISSUANCE OF THE WARRANT SHARES. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered and the payment made for such Warrant Shares as provided herein. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding fifteen (15) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws, except as provided in Section 9. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 45 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes, liens, and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the purchase rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 5. ANTIDILUTION ADJUSTMENTS. The provisions of this Warrant are subject to adjustment from time to time as provided in this Section 5. 163 (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: (i) pay any dividends on any class of stock of the Company payable in Common Stock or securities convertible into Common Stock; (ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or (iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (a) the number of shares of Common Stock outstanding immediately prior to such event (including the maximum number of shares of Common Stock issuable in respect of any then outstanding securities convertible into Common Stock), multiplied by the then existing Warrant Exercise Price, by (b) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any then outstanding securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive) shall determine, in good faith, which determination shall be described in a duly adopted board resolution certified by the Company's Secretary, the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) In case the Company shall issue shares of Common Stock, or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding (i) shares, rights, options, warrants, or convertible or exchangeable securities described in subparagraphs (f) or (g) of Section 11 hereof or issued in any of the transactions described in subparagraphs (a) or (d) of this Section 5, (ii) shares issued upon the exercise of such rights, options or warrants or upon conversion or exchange of such convertible or exchangeable securities, and (iii) the Warrants and any shares issued upon exercise thereof), at a price per share of Common Stock (determined in the case of such rights, options, warrants, or convertible or exchangeable securities by dividing (x) the total amount receivable by the Company in consideration of the sale and issuance of such rights, options, warrants, or convertible or exchangeable securities, plus the total minimum consideration payable to the Company upon exercise, conversion, or exchange thereof by (y) the total maximum number of shares of Common Stock covered by such rights, options, warrants, or convertible or exchangeable securities) lower than the Market Price (as such term is defined in Section 8 hereof) per share of Common Stock on the date the Company fixes the offering price of such shares, rights, options, warrants, or convertible or exchangeable securities, then the Warrant Exercise Price shall be adjusted so that it shall equal the price determined by multiplying the Warrant Exercise Price in effect immediately prior thereto by a fraction (i) the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such sale and issuance plus (B) the 164 number of shares of Common Stock which the aggregate consideration received (determined as provided below) for such sale or issuance would purchase at such Market Price per share, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such sale and issuance. Such adjustment shall be made successively whenever such an issuance is made. For the purposes of such adjustment, the maximum number of shares of Common Stock which the holder of any such rights, options, warrants or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale and issuance and the consideration received by the Company therefor shall be deemed to be the consideration received by the Company for such rights, options, warrants, or convertible or exchangeable securities, plus the minimum consideration or premium stated in such rights, options, warrants, or convertible or exchangeable securities to be paid for the shares of Common Stock covered thereby. In case the Company shall sell and issue shares of Common Stock, or rights, options, warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the price per share of Common Stock and the consideration received by the Company for purposes of the first sentence of this subparagraph (b), the Board of Directors of the Company shall determine, in good faith, the fair value of said property, and such determination shall be described in a duly adopted board resolution certified by the Company's Secretary. In case the Company shall sell and issue rights, options, warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock together with one or more other securities as a part of a unit at a price per unit, then in determining the price per share of Common Stock and the consideration received by the Company for purposes of the first sentence of this subparagraph (b), the Board of Directors of the Company shall determine, in good faith, which determination shall be described in a duly adopted board resolution certified by the Company's Secretary, the fair value of the rights, options, warrants, or convertible or exchangeable securities then being sold as part of such unit. Such adjustment shall be made successively whenever such an issuance occurs, and in the event that such rights, options, warrants, or convertible or exchangeable securities expire or cease to be convertible or exchangeable before they are exercised, converted, or exchanged (as the case may be), then the Warrant Exercise Price shall again be adjusted to the Warrant Exercise Price that would then be in effect if such sale and issuance had not occurred, but such subsequent adjustment shall not affect the number of Warrant Shares issued upon any exercise of Warrants prior to the date such subsequent adjustment is made. (c) Upon each adjustment of the Warrant Exercise Price pursuant to Section 5(a) or Section 5(b) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (d) In case of any consolidation or merger to which the Company is a party, other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which the Holder would have owned or have been entitled to receive immediately after such consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on 165 the exercise of the Warrant. The provisions of this subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. (e) Upon any adjustment of the Warrant Exercise Price, then and in each such case, the Company shall give written notice thereof, by first-class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 6. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. 7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE WARRANT SHARES. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel and to counsel to the original purchaser of this Warrant. If in the opinion of each such counsel the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on the Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act of 1933, as amended (the "Act"), and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties, and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company or the Holder for the transfer or disposition of the Warrant or Warrant Shares. (b) If in the opinion of counsel referred to in this Section 7, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 7 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder. 8. FRACTIONAL SHARES. Fractional shares shall not be issued upon the exercise of this Warrant, but in any case where the Holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional share, the Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Market Price of such fractional share over the proportional part of the Warrant Exercise Price represented by such fractional share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional share. For purposes of this Section, the term "Market Price" with respect to shares of Common Stock of any class or series means the last reported sale price or, if none, the average of the last reported closing bid and asked prices on any national securities exchange, the Nasdaq National Market or Nasdaq SmallCap Market, or if not listed on a national securities exchange or quoted on Nasdaq, the average of the last reported closing bid and asked prices as reported in the "pink sheets" or other standard compilation of quotations by market makers in the over-the-counter market. 166 9. REGISTRATION RIGHTS. (a) If at any time after November 25, 1996 and on or before November 25, 2001, the Company proposes to register under the Act (except by a Form S-4 or Form S-8 Registration Statement or any successor forms thereto) or qualify for a public distribution under Section 3(b) of the Act, any of its equity securities or debt with equity features, it will give written notice to all Holders of this Warrant, any Warrants issued pursuant to Section 2 or Section 3(a) hereof, and any Warrant Shares of its intention to do so and, on the written request of any such Holder given within twenty (20) days after receipt of any such notice (which request shall specify the interest in such Warrants or the Warrant Shares intended to be sold or disposed of by such Holder and describe the nature of any proposed sale or other disposition thereof), the Company will use its best efforts to cause all Warrant Shares, the Holders of which shall have requested the registration or qualification thereof, to be included in such Registration Statement proposed to be filed by the Company; provided, however, that if a greater number of Warrant Shares is offered for participation in the proposed offering than in the reasonable opinion of the managing underwriter of the proposed offering can be accommodated without adversely affecting the proposed offering, then the amount of Warrants and Warrant Shares proposed to be offered by such Holders for registration, as well as the number of securities of any other selling stockholders participating in the registration, shall be proportionately reduced to a number deemed satisfactory by the managing underwriter. For purposes of this Section 9(a), the Holders who have requested registration of Warrant Shares to be acquired upon the exercise of Warrants not theretofore exercised shall furnish the Company with an undertaking that they or the underwriters or other persons to whom such Warrants will be transferred have undertaken to exercise such Warrants and to sell, transfer or otherwise dispose of the Warrant Shares received upon exercise of such Warrants in such registration. (b) Upon request made any time not earlier than November 25, 1997 and on or before November 25, 2001, by Holders of Warrants and Warrant Shares (together, the "Securities") representing at least fifty percent (50%) of the Securities then outstanding, the Company will, at its expense, promptly take all necessary steps to register or qualify all of the Warrant Shares under Section 3(b) or Section 5 of the Act and such state laws as such Holders may reasonably request and, if so requested by such Holders, the Company shall use its best efforts to cause such registration to be underwritten on a firm commitment basis; provided that the Company shall not be obligated to effect more than one (1) such registration pursuant to this Section 9(b) unless, in such initial registration, the Company shall have been unable to effect the registration of all of the Warrant Shares, the Holders of which have requested inclusion in such registration, (whether then outstanding or issuable upon the exercise of Warrants then outstanding); in which case, the Company shall be obligated to effect one (1) additional registration pursuant to this Section 9(b) when requested by Holders who have not sold all of their Warrant Shares. For purposes of this Section 9(b), the Holders who have requested registration of Warrant Shares to be acquired upon the exercise of Warrants not theretofore exercised shall furnish the Company with an undertaking that they or the underwriters or other persons to whom such Warrants will be transferred have undertaken to exercise such Warrants and to sell, transfer or otherwise dispose of the Warrant Shares received upon exercise of such Warrants in such registration. In the event of an underwritten offering pursuant to this Section 9(b), the Holders requesting registration of the Warrant Shares being registered (i) shall be entitled to select the underwriter; PROVIDED, that the underwriter so selected shall be subject to approval by the Company, which approval shall not be withheld unreasonably, and (ii) must agree to all usual and customary underwriting terms and conditions including, but not limited to, any lock-up period imposed on selling Holders (not to exceed 180 days); PROVIDED, HOWEVER, that the Company shall use its reasonable best efforts to cause each Holder of a material number of shares of Common Stock to enter into similar lock-up agreements in respect to such offering. The Company shall keep effective and maintain any registration, qualification, notification or approval specified in this paragraph for such period as may be necessary for the Holders of the Warrants and the Warrant Shares to dispose thereof and from time to time shall amend or supplement, at the Company's expense, the prospectus used in connection therewith to the extent necessary in order to comply with applicable law, provided that the Company shall not be obligated to maintain any registration for a period of more than six (6) months after effectiveness, except that a Form S-3 Registration Statement or successor thereof shall be maintained for up to twelve (12) months after 167 effectiveness. Notwithstanding the foregoing, if a greater number of securities is offered for participation in the proposed offering pursuant to this Section 9(b) than in the reasonable opinion of the managing underwriter of the proposed offering can be accommodated without adversely affecting the proposed offering, then the securities to be included in the proposed offering shall be included as follows: first, the amount of the Warrants and Warrant Shares proposed to be offered by the Holders for registration; and second, the number of other securities of the Company and of any other selling stockholders participating in the registration shall be proportionately reduced to a number deemed satisfactory by the managing underwriter. (c) With respect to each inclusion of securities in a Registration Statement pursuant to Section 9(a) or 9(b) above, the Company shall bear the following fees, costs, and expenses: all registration, filing and NASD fees, Nasdaq fees, printing expenses, fees and disbursements of counsel and accountants for the Company, reasonable fees and disbursements for one (1) counsel for all the Holders, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the offering is underwritten and the Company is required to bear such fees and disbursements), all internal expenses, the premiums and other costs of policies of insurance against liability arising out of the public offering, and legal fees and disbursements and other expenses of complying with state securities laws of any jurisdictions in which the securities to be offered are to be registered or qualified. Except as set forth in the foregoing sentence, fees and disbursements of special counsel and accountants for the selling Holders, underwriting discounts and commissions, and transfer taxes for selling Holders and any other expenses relating to the sale of securities by the selling Holders shall be borne by the selling Holders. (d) The Company hereby indemnifies each of the Holders of this Warrant and of any Warrant Shares, and the officers and directors and each other person, if any, who control such Holders, within the meaning of Section 15 of the Act, against all losses, claims, damages, and liabilities caused by (1) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (and as amended or supplemented if the Company shall have furnished any amendments thereof or supplements thereto), any Preliminary Prospectus or any state securities law filings; (2) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Company by such Holder expressly for use therein; and each such Holder by its acceptance hereof severally agrees that it will indemnify and hold harmless the Company, each of its officers who signs such Registration Statement, and each person, if any, who controls the Company, within the meaning of Section 15 of the Act, with respect to losses, claims, damages, or liabilities which are caused by any untrue statement or omission contained in information furnished in writing to the Company by such Holder expressly for use therein. Unless otherwise required by applicable law or judicial interpretation thereof, the liability of any selling Holder hereunder shall not be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of the Securities giving rise to such indemnification obligation. (e) The Company shall not file or permit the filing of any registration or comparable statement which refers to any Holder by name or otherwise as the Holder of any securities of the Company unless such reference to such Holder is specifically required by the Act or any similar federal statute then in force. (f) In connection with the preparation and filing of each registration statement under the Act pursuant to this Section 9, the Company shall give the selling Holders under such registration statement, their underwriters, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Securities and Exchange Commission (the "Commission"), and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such Holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Act. 168 (g) If the indemnification provided for in Section 9(d) hereof from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities, or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities, and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of the Securities giving rise to such contribution obligation. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 9(g) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in this Section 9(g). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (h) The Company shall not after November 25, 1996 (the "Date of Grant"), grant additional registration rights which conflict with the rights under this Section 9. 10. RIGHT TO CONVERT WARRANT INTO COMMON STOCK; NET ISSUANCE. (a) RIGHT TO CONVERT. In addition to and without limiting the rights of the Holder under the terms of this Warrant, the Holder shall have the right to convert this Warrant or any portion thereof (the "Conversion Right") into shares of Common Stock as provided in this Section 10 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right and with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the Holder (without payment by the Holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Common Stock equal to the quotient obtained by dividing (i) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subsection (b) hereof), which value shall be equal to (A) the aggregate Market Price of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date less (B) the aggregate Warrant Exercise Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right by (ii) the Market Price of one share of Common Stock on the Conversion Date. Expressed as a formula, such conversion shall be computed as follows: X= A - B ----- Y Where: X = the number of shares of Common Stock that may be issued to holder Y = the Market Price (FMV) of one share of Common Stock A = the aggregate FMV (i.e., FMV x Converted Warrant Shares) 169 B = the aggregate Warrant Exercise Price (i.e., Converted Warrant Shares x Warrant Price) No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date. For purposes of Section 9 of this Warrant, Warrant Shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant. (b) METHOD OF EXERCISE. The Conversion Right may be exercised by the Holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in subsection (a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date. (c) DETERMINATION OF MARKET PRICE. For purposes of this Section 10, "Market Price" of a share of Common Stock shall have the meaning set forth in Section 8 above. 11. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Holder of this Warrant as follows: (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies; (b) The Warrant Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; (c) The rights, preferences, privileges and restrictions granted to or imposed upon the Common Stock and the holders thereof are as set forth in the articles of incorporation of the Company, as amended to the date of grant (as so amended, the "Articles"), a true and complete copy of which has been delivered to Foothill; (d) The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Articles or by-laws of the Company, do not and will not contravene, in any material respect, any governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby; (e) There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board 170 or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under this Warrant; (f) The authorized capital stock of the Company consists of Fifty Million (50,000,000) shares of Common Stock, of which Five Million Nine Hundred Ninety- Six Thousand Four Hundred Ten (5,996,410) shares were issued and outstanding as of the close of business on October 31, 1996, and Two Hundred Ninety Thousand Two Hundred Thirteen (290,213) shares of Preferred Stock, of which all such shares were issued and outstanding as of the Date of Grant. All such outstanding shares have been validly issued and are fully paid, nonassessable shares free of preemptive rights; (g) Except for the capital stock issuable pursuant to the 1991 Incentive Stock Option Plan, the 1994 Director Stock Option Plan, the 1994 Stock Option Plan, the 1996 Employee Stock Purchase Plan, Non-Qualified Stock Options, and any other rights, options or warrants issuable or outstanding as of the Date of Grant as disclosed in the Company's filings with the Commission, there are no subscriptions, rights, options, warrants or calls relating to any shares of the Company's capital stock, including any right of conversion or exchange under any outstanding security or other instrument; and (h) Except as disclosed in the Company's filings with the Commission, the Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any security convertible into or exchangeable for any of its capital stock. IN WITNESS WHEREOF, Children's Broadcasting Corporation has caused this Warrant to be signed by its duly authorized officer this 25th day of November, 1996. Children's Broadcasting Corporation By /s/Christopher T. Dahl ---------------------------------- Christopher T. Dahl Its President 171 CHILDREN'S BROADCASTING CORPORATION WARRANT EXERCISE NOTICE (TO BE SIGNED ONLY UPON EXERCISE OF WARRANT) The undersigned, the Holder of the foregoing Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ___________________________ shares of the Common Stock of Children's Broadcasting Corporation to which such Warrant relates and herewith makes payment of $____________ therefor in cash or by certified or cashier's check and requests that the certificate for such shares be issued in the name of, and be delivered to _________________________________________, whose address is set forth below the signature of the undersigned. If the number of shares purchased is less than all of the shares purchasable under the Warrant, a new Warrant will be issued in the name of the undersigned for the remaining balance remaining of the shares purchasable thereunder. Name of Warrant Holder: ------------------------------------ (Please print) Address of Warrant Holder: ------------------------------------ ------------------------------------ Tax Identification No. or Social Security No. of Warrant Holder: ------------------------------------ Signature: -------------------------- NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME OF THE WARRANT HOLDER AS IT APPEARS ON THE FIRST PAGE OF THE WARRANT OR ON A DULY EXECUTED WARRANT ASSIGNMENT. Dated: ------------------------------ 172 CHILDREN'S BROADCASTING CORPORATION WARRANT ASSIGNMENT (TO BE SIGNED ONLY UPON TRANSFER OF WARRANT) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ___________________________________________________________, the assignee, whose address is______________________________________________________________, and whose tax identification or social security number is ____________________, the right represented by the foregoing Warrant to purchase ___________________ shares of the Common Stock of Children's Broadcasting Corporation to which the foregoing Warrant relates and appoints _______________________________________ attorney to transfer said right on the books of Children's Broadcasting Corporation, with full power of substitution in the premises. If the number of shares assigned is less than all of the shares purchasable under the Warrant, a new Warrant will be issued in the name of the undersigned for the remaining balance of the shares purchasable thereunder. Name of Warrant Holder/Assignor: ------------------------------------ (Please print) Address of Warrant Holder/Assignor: ------------------------------------ ------------------------------------ Tax Identification No. or Social Security No. of Warrant Holder/Assignor: ------------------------------------ Signature: -------------------------- NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME OF THE WARRANT HOLDER AS IT APPEARS ON THE FIRST PAGE OF THE WARRANT OR ON A DULY EXECUTED ASSIGNMENT FORM. Dated: ------------------------------ 173 EX-10.15 7 1994 STOCK OPTION PLAN EXHIBIT 10.15 CHILDREN'S BROADCASTING CORPORATION 1994 STOCK OPTION PLAN 1. PURPOSE The purpose of this Children's Broadcasting Corporation 1994 Stock Option Plan (the "Plan") is to promote the interests of Children's Broadcasting Corporation, a Minnesota corporation (the "Company"), by providing employees of the Company and certain independent contractors with an opportunity to acquire a proprietary interest in the Company and thereby develop a stronger incentive to contribute to the Company's continued success and growth. In addition, the granting of stock options will assist the Company in attracting and retaining key personnel of outstanding ability. 2. DEFINITIONS Wherever used in the Plan, the following terms have the meanings set forth below: 2.1 "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder. 2.2 "Committee" means a committee of the Board of Directors of the Company designated by such Board to administer the Plan and composed of not less than two directors. Beginning on the date the Company first registers the Stock under Section 12 of the Securities Exchange Act of 1934, each member of the Committee must be a "disinterested person" within the meaning of Rule 16b-3. 2.3 "Incentive Stock Option" or "ISO" means a stock option which is intended to qualify as an incentive stock option as defined in Section 422 of the Code. 2.4 "Non-Statutory Stock Option" or "NSO" means a stock option that is not intended to, or does not, qualify as an incentive stock option as defined in Section 422 of the Code. 2.5 "Option" means, where required by the context of the Plan, an ISO or NSO granted pursuant to the Plan. 2.6 "Optionee" means a Participant in the Plan who has been granted one or more Options under the Plan. 2.7 "Participant" means an individual described in Section 5 of this Plan who may be granted Options under the Plan. 2.8 "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934. 2.9 "Stock" means the Common Stock, $.01 par value, of the Company. 2.10 "Subsidiary" means any corporation, other than the Company, in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation 174 in the unbroken chain owns 50% or more of the voting stock in one of the other corporations in such chain. 3. ADMINISTRATION 3.1 The Plan shall be administered by the Committee, which shall have full power, subject to the provisions and restrictions of the Plan, to grant Options, construe and interpret the Plan, establish rules and regulations with respect to the Plan and Options granted hereunder, and perform all other acts, including the delegation of administrative responsibilities, that it believes reasonable and necessary. 3.2 The Committee shall have the sole discretion, subject to the provisions of the Plan, to determine the Participants eligible to receive Options pursuant to the Plan and the amount, type and terms of any Options and the terms and conditions of option agreements relating to any Option. 3.3 The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Option granted hereunder in the manner and to the extent it shall deem necessary to carry out the terms of the Plan. 3.4 Any decision made, or action taken, by the Committee arising out of or in connection with the interpretation and administration of the Plan shall be final, conclusive and binding upon all Optionees. 4. SHARES SUBJECT TO THE PLAN 4.1 NUMBER. The total number of shares of Stock reserved for issuance upon exercise of Options under the Plan is one million (1,000,000). Such shares shall consist of authorized but unissued Stock. If any Option granted under the Plan lapses or terminates for any reason before being completely exercised, the shares covered by the unexercised portion of such Option may again be made subject to Options under the Plan. 4.2 CHANGES IN CAPITALIZATION. In the event of any change in the outstanding shares of Stock of the Company by reason of any stock dividend, split, recapitalization, reorganization, merger, consolidation, combination, exchange of shares or rights offering to purchase stock at a price substantially below fair market value, or other similar corporate change, the aggregate number of shares which may be subject to Options under the Plan and the terms of any outstanding Option, including the number and kind of shares subject to such Options and the purchase price per share thereof, shall be appropriately adjusted by the Committee, consistent with such change and in such manner as the Committee, in its sole discretion, may deem equitable to prevent substantial dilution or enlargement of the rights granted to or available for Optionees. Notwithstanding the preceding sentence, in no event shall any fraction of a share of Stock be issued upon the exercise of an Option. 5. ELIGIBLE PARTICIPANTS The following persons are Participants eligible to participate in the Plan: 5.1 INCENTIVE STOCK OPTIONS. Incentive Stock Options may be granted only to employees of the Company or any Subsidiary, including officers and directors who are also employees of the Company or any Subsidiary. 175 5.2 NON-STATUTORY STOCK OPTIONS. Non-statutory stock options may be granted to (i) any employee of the Company or any Subsidiary, including any officer or director who is also an employee of the Company or any Subsidiary; and (ii) any consultant to, or other independent contractor of, the Company who is not a director of the Company. 6. GRANT OF OPTIONS Subject to the terms, conditions and limitations set forth in this Plan, the Company, by action of the Committee, may from time to time grant Options to purchase shares of the Company's Stock to those eligible Participants as may be selected by the Committee, in such amounts and on such other terms as the Committee in its sole discretion shall determine. Such Options may be (i) "Incentive Stock Options" so designated by the Committee and which, when granted, are intended to qualify as incentive stock options as defined in Section 422 of the Code; (ii) "Non-Statutory Stock Options" so designated by the Committee and which, when granted, are not intended to, or do not, qualify as incentive stock options under Section 422 of the Code; or (iii) a combination of both. The date on which the Committee approves the granting of an Option shall be the date of grant of such Option, unless a different date is specified by the Committee on such date of approval. Notwithstanding the foregoing, with respect to the grant of any Incentive Stock Option under the Plan, the aggregate fair market value of Stock (determined as of the date the Option is granted) with respect to which Incentive Stock Options are exercisable for the first time by an Optionee in any calendar year (under all such stock option plans of the Company or Subsidiaries) shall not exceed $100,000. Each grant of an Option under the Plan shall be evidenced by a written stock option agreement between the Company and the Optionee setting forth the terms and conditions, not inconsistent with the Plan, under which the Option so granted may be exercised pursuant to the Plan and containing such other terms with respect to the Option as the Committee in its sole discretion may determine. 7. OPTION PRICE AND FORM OF PAYMENT 7.1 The purchase price for a share of Stock subject to an Option granted hereunder shall not be less than 100% of the fair market value of the Stock. For purposes of this Section 7, the "fair market value" of the Stock shall be determined as follows: (a) if the Stock of the Company is listed or admitted to unlisted trading privileges on a national securities exchange, the fair market value on any given day shall be the closing sale price for the Stock, or if no sale is made on such day, the closing bid price for such day on such exchange; (b) if the Stock is not listed or admitted to unlisted trading privileges on a national securities exchange, the fair market value on any given day shall be the closing sale price for the Stock as reported on any NASDAQ market on such day, or if no sale is made on such day, the closing bid price for such day as entered by a market maker for the Stock; (c) if the Stock is not listed on a national securities exchange, is not admitted to unlisted trading privileges on any such exchange and is not eligible for inclusion in any NASDAQ market, the fair market value on any given day shall be the average of the closing representative bid and asked prices as reported by such other publicly available compilation of the bid and asked prices of the Stock in any over-the-counter market on which the Stock is traded; or (d) if there exists no public trading market for the Stock, the fair market value on any given day shall be an amount determined in good faith by the Committee in such manner 176 as it may reasonably determine in its discretion, provided that such amount shall not be less than the book value per share as reasonably determined by the Committee as of the date of determination or less than the par value of the Stock. Notwithstanding the foregoing, in the case of an Incentive Stock Option granted to any Optionee then owning more than 10% of the voting power of all classes of the Company's stock, the purchase price per share of the Stock subject to such Option shall not be less than 110% of the fair market value of the Stock on the date of grant of the Incentive Stock Option, determined as provided above. 7.2 Except as provided herein, the purchase price of each share of Stock purchased upon the exercise of any Option shall be paid: (a) in United States dollars in cash or by check, bank draft or money order payable to the order of the Company; or (b) at the discretion of the Committee, through the delivery of shares of Stock valued at fair market value at the time the Option is exercised (as determined in the manner provided under this Plan); or (c) at the discretion of the Committee, by a combination of both (a) and (b) above; or (d) by such other method as may be permitted in the written stock option agreement between the Company and the Optionee. If such form of payment is permitted, the Committee shall determine procedures for tendering Stock as payment upon exercise of an Option and may impose such additional limitations and prohibitions on the use of Stock as payment upon the exercise of an option as it deems appropriate. If the Committee in its sole discretion so agrees, the Company may finance the amount payable by an Optionee upon exercise of any Option upon such terms and conditions as the Committee may determine at the time such Option is granted under this Plan. 8. EXERCISE OF OPTIONS 8.1 MANNER OF EXERCISE. An Option, or any portion thereof, shall be exercised by delivering a written notice of exercise to the Company and paying to the Company the full purchase price of the Stock to be acquired upon the exercise of the Option. Until certificates for the Stock acquired upon the exercise of an Option are issued to an Optionee, such Optionee shall not have any rights as a shareholder of the Company with respect to such Stock. 8.2 LIMITATIONS AND CONDITIONS ON EXERCISE OF OPTIONS. In addition to any other limitations or conditions contained in this Plan or that may be imposed by the Committee from time to time or in the stock option agreement to be entered into with respect to Options granted hereunder, the following limitations and conditions shall apply to the exercise of Options granted under this Plan: 8.2.1 No Incentive Stock Option may be exercisable by its terms after the expiration of 10 years from the date of the grant thereof. 8.2.2 No Incentive Stock Option granted pursuant to the Plan to an eligible Participant then owning more than 10% of the voting power of all classes of the Company's 177 stock may be exercisable by its terms after the expiration of five years from the date of the grant thereof. 8.2.3 To the extent required to comply with Rule 16b-3, Stock acquired upon exercise of an Option granted under to the Plan may not be sold or otherwise disposed of for a period of six months from the date of grant of the Option. 9. INVESTMENT PURPOSES 9.1 Unless a registration statement under the Securities Act of 1933 is in effect with respect to Stock to be purchased upon exercise of Options to be granted under the Plan, the Company shall require that an Optionee agree with and represent to the Company in writing that he or she is acquiring such shares of Stock for the purpose of investment and with no present intention to transfer, sell or otherwise dispose of such shares of Stock other than by transfers which may occur by will or by the laws of descent and distribution, and no shares of Stock may be transferred unless, in the opinion of counsel to the Company, such transfer would be in compliance with applicable securities laws. In addition, unless a registration statement under the Securities Act of 1933 is in effect with respect to the Stock to be purchased under the Plan, each certificate representing any shares of Stock issued to an Optionee hereunder shall have endorsed thereon a legend in substantially the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND WITHOUT REGISTRATION UNDER ANY APPLICABLE STATE SECURITIES LAWS, IN RELIANCE UPON EXEMPTION(S) CONTAINED THEREIN. NO TRANSFER OF THESE SHARES OR ANY INTEREST THEREIN MAY BE MADE EXCEPT PURSUANT TO EFFECTIVE REGISTRATION STATEMENTS UNDER SUCH LAWS UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER OR DISPOSITION DOES NOT REQUIRE REGISTRATION UNDER SUCH LAWS AND, FOR ANY SALES UNDER RULE 144 OF THE ACT, SUCH EVIDENCE AS IT SHALL REQUEST FOR COMPLIANCE WITH THAT RULE, OR APPLICABLE STATE SECURITIES LAWS. 10. TRANSFERABILITY OF OPTIONS No Option granted under the Plan shall be transferable by an Optionee (whether by sale, assignment, hypothecation or otherwise) other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined under the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. An Option shall be exercisable during the Optionee's lifetime only by the Optionee or, if permissible under applicable law, by the Optionee's guardian or legal representative. 11. TERMINATION OF OPTIONS 11.1 GENERALLY. Except as otherwise provided in this Section 11, if an Optionee's employment with the Company or Subsidiary is terminated (hereinafter "Termination") other than by death or Disability (as hereinafter defined), the Optionee may exercise any Option granted under the Plan, to the extent the Optionee was entitled to exercise the Option at the date of Termination, for a period of three months after the date of Termination or until the term of the Option has expired, whichever date is earlier. 178 11.2 DEATH OR DISABILITY OF OPTIONEE. In the event of the death or Disability of an Optionee prior to expiration of an Option held by him or her, the follow ing provisions shall apply: 11.2.1 If the Optionee is at the time of his or her Disability employed by the Company or a Subsidiary and has been in continuous employment (as determined by the Committee in its sole discretion) since the date of grant of the Option, then the Option may be exercised by the Optionee until the earlier of one year following the date of such Disability or the expiration date of the Option, but only to the extent the Optionee was entitled to exercise such Option at the time of his or her Disability. For the purpose of this Section 11, the term "Disability" shall mean a permanent and total disability as defined in Section 22(e)(3) of the Code. The determination of whether an Optionee has a Disability within the meaning of Section 22(e)(3) shall be made by the Committee in its sole discretion. 11.2.2 If the Optionee is at the time of his or her death employed by the Company or a Subsidiary and has been in continuous employment (as determined by the Committee in its sole discretion) since the date of grant of the Option, then the Option may be exercised by the Optionee's estate or by a person who acquired the right to exercise the Option by will or the laws of descent and distribution, until the earlier of one year from the date of the Optionee's death or the expiration date of the Option, but only to the extent the Optionee was entitled to exercise the Option at the time of death. 11.2.3 If the Optionee dies within three months after Termination, the Option may be exercised until the earlier of nine months following the date of death or the expiration date of the Option, by the Optionee's estate or by a person who acquires the right to exercise the Option by will or the laws of descent or distribution, but only to the extent the Optionee was entitled to exercise the Option at the time of Termination. 11.3 TERMINATION FOR CAUSE. If the employment of an Optionee is terminated by the Company or a Subsidiary for cause, then the Committee shall have the right to cancel any Options granted to the Optionee under the Plan. 11.4 SUSPENSION OR TERMINATION FOR MISCONDUCT. If the Committee reasonably believes that an Optionee has committed an act of misconduct, it may suspend the Optionee's right to exercise any Option pending a determination by the Committee. If the Committee determines that an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company's rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition with respect to the Company or induces any party to breach a contract with the Company, neither the Optionee nor the Optionee's estate shall be entitled to exercise any Option whatsoever. In making such determination, the Committee shall act fairly and shall give the Optionee an opportunity to appear and present evidence on the Optionee's behalf at a hearing before the Committee. 12. CHANGE IN CONTROL PROVISIONS 12.1 IMPACT OF EVENT. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control (as defined in 12.2), any Options outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested in the full extent of the original grant. 179 12.2 DEFINITION OF CHANGE IN CONTROL. For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of either (1) the then outstanding shares of Common Stock of the Company or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; provided, however, that the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company; (2) any acquisition by the Company; (3) any acquisition by a Person including the participant or with whom or with which the participant is affiliated; (4) any acquisition by a Person or Persons one or more of which is a member of the Board or an officer of the Company or an affiliate of any of the foregoing on the Effective Date, (5) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (6) any acquisition by any corporation pursuant to a transaction described in clauses (A), (B) and (C) of paragraph (c) of this Section 12.2; or (b) During any period of twenty-four (24) consecutive months, individuals who, as of the beginning of such period, constituted the entire Board cease for any reason to constitute at least a majority of the Board, unless the election, or nomination for election, by the Company's stockholders, of each new director was approved by a vote of at least two-thirds (2/3) of the Continuing Directors, as hereinafter defined, in office on the date of such election or nomination for election for the new director. For purposes hereof, "Continuing Director" shall mean: (i) any member of the Board at the close of business on the Effective Date; or (ii) any member of the Board who succeeded any Continuing Director described in clause (1) above if such successor's election, or nomination for election, by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the Continuing Directors then still in office. The term "Continuing Director" shall not, however, include any individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such term is used in Rule 14a-11 of Regulation 14A of the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board. (c) Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (A) more than 60% of the then outstanding securities having the right to vote in the election of directors of the corporation resulting from such reorganization, merger or consolidation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such reorganization, merger or consolidation, (B) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the 180 election of the corporation resulting from such reorganization, merger or consolidation, and (C) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger are Continuing Directors at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the stockholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (1) more than 60% of the then outstanding securities having the right to vote in the election of directors of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such sale or other disposition of such outstanding securities, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 30% or more of the outstanding securities having the right to vote in the election of directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of directors of such corporation and (3) at least a majority of the members of the board of directors of such corporation are Continuing Directors at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 12.3 CHANGE IN CONTROL PRICE. For purposes of the Plan, "Change in Control Price" means the highest price per share (i) paid in any transaction reported on the New York Stock Exchange Composite or other national exchange on which such shares are listed or on NASDAQ, or (ii) paid or offered in any bona fide transaction related to a potential or actual Change in Control of the Company at any time during the preceding sixty (60) day period as determined by the Committee. 13. AMENDMENT AND TERMINATION OF PLAN 13.1 The Committee may at any time, and from time to time, suspend or terminate the Plan in whole or in part or amend it from time to time in such respects as may be in the best interests of the Company; provided, however, that no such amendment shall be made without the approval of the shareholders if it would: (a) materially modify the eligibility requirements for Participants as set forth in Section 5 hereof; (b) increase the maximum aggregate number of shares of Stock which may be issued pursuant to Options, except in accordance with Section 4.2 hereof; (c) reduce the minimum Option price per share as set forth in Section 7 hereof, except in accordance with Section 4.2 hereof; (d) extend the period of granting Options; or (e) materially increase in any other way the benefits accruing to Optionees. 13.2 No amendment, suspension or termination of this Plan shall, without the Optionee's consent, alter or impair any of the rights or obligations under any Option theretofore granted to him or her under the Plan. 13.3 The Committee may amend the Plan, subject to the limitations cited above, in such manner as it deems necessary to permit the granting of Incentive Stock Options meeting the requirements of future amendments to the Code. 181 13.4 In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instance, declare that any Option shall terminate as of a date fixed by the Committee and give each Optionee the right to exercise his or her Option as to all or any part of the Option, including Stock as to which the Option would not otherwise be exercisable. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Committee determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option in full including Stock as to which the Option would not otherwise be exercisable. If the Committee makes an Option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Committee shall notify the Optionee that the Option shall be fully exercisable for a period of 15 days from the date of such notice, and the Option shall terminate upon the expiration of such period. 14. MISCELLANEOUS PROVISIONS 14.1 NO RIGHT TO CONTINUED EMPLOYMENT. No person shall have any claim or right to be granted an Option under the Plan, and the grant of an Option under the Plan shall not be construed as giving an Optionee the right to continued employment with the Company. The Company further expressly reserves the right at any time to dismiss an Optionee or reduce an Optionee's compensation with or without cause, free from any liability, or any claim under the Plan, except as provided herein or in a stock option agreement. 14.2 TRANSFER OF STOCK AND PAYMENT OF WITHHOLDING TAXES. The Company shall have the right to require that payment or provision for payment of any and all withholding taxes due upon the grant or exercise of an Option hereunder or the disposition of any Stock or other property acquired upon exercise of an Option be made by an Optionee. Stock acquired upon exercise of an Incentive Stock Option may not be disposed of by the Optionee before the later of two years from the date of grant or one year from the date of exercise, unless adequate provision is made for payment to the Company of funds sufficient for payment of any withholding and other taxes required by any governmental authority in respect of the disposition of such Stock. The Company may place a legend on certificates restricting the transfer of Stock issued pursuant to Incentive Stock Options in order to obtain compliance with tax withholding requirements. The Committee shall have the right to establish such other rules and regulations or impose such other terms and conditions in any agreement relating to an Option granted hereunder with respect to tax withholding as the Committee may deem necessary and appropriate. 14.3 GOVERNING LAW. The Plan shall be administered in the State of Minnesota, and the validity, construction, interpretation and administration of the Plan and all rights relating to the Plan shall be determined solely in accordance with the laws of such state, unless controlled by applicable federal law, if any. 15. EFFECTIVE DATE The effective date of the Plan is March 18, 1994. No Option may be granted on or after March 18, 2004; provided, however, that all outstanding Options shall remain in effect until such outstanding Options have expired or been canceled. This Plan shall become effective upon its approval and adoption by the shareholders of the Company on or before March 18, 1995. 182 EX-21 8 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES NAME STATE OF INCORPORATION - ------------------------------------------ ----------------------------------- Children's Radio Group, Inc. Minnesota 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 KAHZ-AM, Inc. Minnesota KCNW-AM, Inc. Minnesota KKYD-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 183 EX-23.1 9 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 Consent of Independent Auditors We consent 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 Agreements, 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. 333-14483) pertaining to the registration of 1,125,580 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-4 (No. 333-18575) pertaining to the registration of 5,000,000 shares of common stock and $5,000,000 of debt securities of Children's Broadcasting Corporation of our report dated January 31, 1996, with respect to the consolidated financial statements included in the Annual Report (Form 10-KSB) for the year ended December 31, 1996. /s/ Ernst & Young LLP Minneapolis, Minnesota March 27, 1997 184 EX-23.2 10 EXHIBIT 23.2 EXHIBIT 23.2 Consent of Independent Auditors We consent 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 Agreements, 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. 333-14483) pertaining to the registration of 1,125,580 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-4 (No. 333-18575) pertaining to the registration of 5,000,000 shares of common stock and $5,000,000 of debt securities of Children's Broadcasting Corporation of our report dated February 28, 1997, except for Note 8 which is dated March 27, 1997, with respect to the consolidated financial statements included in the Annual Report (Form 10-KSB) for the year ended December 31, 1996. /s/ BDO Seidman, LLP Milwaukee, Wisconsin March 27, 1997 185 EX-27 11 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 DEC-31-1996 3,370,038 0 1,589,680 93,500 0 5,094,228 5,903,795 1,628,864 28,607,351 10,583,457 1,436,782 0 0 115,966 16,471,146 28,607,351 5,654,938 5,654,938 0 15,123,949 398,868 101,728 398,868 (9,867,879) 0 (9,867,879) 0 0 0 (9,867,879) (1.99) (1.99)
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