<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
-----------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ------------------------
Commission file number 33-98756
PETRACOM HOLDINGS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-3324165
- -------------------------------- ---------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
1527 N DALE MABRY HWY, SUITE 105, LUTZ, FL 33549
- ------------------------------------------ ----------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (813) 948-2554
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
NONE
- ------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
NONE
- -------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
<PAGE> 2
AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NON-AFFILIATES OF THE REGISTRANT
None
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH
OF THE REGISTRANT'S CLASSES OF COMMON STOCK,
AS OF THE LATEST PRACTICABLE DATE
240,000 shares of Class A Voting Common Stock, par value $.01 per share, and
60,000 shares of Class B Non-Voting Common Stock, par value $.01 per share, were
outstanding at March 31, 1998
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 3
PART I
ITEM 1. BUSINESS
Petracom Holdings, Inc., a Delaware corporation ("Petracom" or the "Company")
is a holding company that through its subsidiaries owns and operates five
television stations and four radio stations. The Company's predecessor,
Petracom, Inc., was formed in January 1990 for the purpose of acquiring and
operating television and radio broadcast properties. The Company has owned and
operated WQRF-TV in Rockford, Illinois and KAYD-AM/KAYD-FM since 1990 and
KQHN-AM/KQXY-FM in Beaumont, Texas since 1994. On August 1, 1995, the Company
completed the acquisition of the following four television stations: KDEB-TV in
Springfield, Missouri; WTVW-TV in Evansville, Indiana; KARD-TV in Monroe,
Louisiana; and KLBK-TV in Lubbock, Texas.
The following table sets forth certain information with respect to the Company's
Television Stations and Radio Stations:
<TABLE>
<CAPTION>
STATION MARKET DMA/MSA(1) AFFILIATION
--------------- ---------------------------------- --------------- ----------------
<S> <C> <C> <C>
KDEB-TV Springfield, Missouri 77 FOX
WTVW-TV Evansville, Indiana 95 FOX(2)
KARD-TV Monroe, Louisiana 132 FOX
WQRF-TV Rockford, Illinois 135 FOX
KLBK-TV Lubbock, Texas 147 CBS
KAYD-AM Beaumont, Texas 128 --
KAYD-FM Beaumont, Texas 128
KQHN-AM Beaumont, Texas 128 --
KQXY-FM Beaumont, Texas 128
</TABLE>
1. Television Stations indicate Designated Market Area ( DMA) ranking;
Radio Stations indicate Metropolitan Statistical Area (MSA) ranking.
Sources: A.C. Nielsen Company and The Arbitron Company, respectively.
2. WTVW-TV switched affiliations from ABC to FOX in December 1995.
OPERATIONS UNDER TIME BROKERAGE AGREEMENTS
In connection with the pending sale of all of the voting common stock of
Petracom, the Company entered into Time Brokerage Agreements (the "TBA's") with
the buyer of the voting stock on September 30, 1997 for the operation of the
Company's television stations. Under the TBA's the buyer is responsible for (i)
the acquisition, compilation, production, broadcast and sale of the television
stations' programming (ii) the sale of advertising on the television stations
(iii) the promotion of the television stations (iv) the direction of the
television stations' employees and (v) the retaining, hiring and terminating of
the television stations' employees and agents. The buyer's actions are subject
to the approval of the Company, whose approval cannot be unreasonably withheld.
Petracom expects the TBA's to continue until the anticipated consummation of the
sale of the voting stock in April 1998. The Company continues to operate its
radio stations in a manner consistent with past practice and plans to do so
until the expected sale of the radio stations' assets in April 1998.
DESCRIPTION OF TELEVISION STATIONS
Each Television Station is currently affiliated with either the FOX or CBS
television networks pursuant to network affiliation agreements. The Company
switched the network affiliation of WTVW-TV from ABC to FOX effective December
4, 1995.
FOX Stations. WQRF-TV, Rockford; KDEB-TV, Springfield; KARD-TV, Monroe; and
WTVW-TV, Evansville (the "FOX Stations") each are affiliated with FOX pursuant
to substantially similar affiliation agreements (the "FOX Affiliation
Agreements"). Each FOX Affiliation Agreement provides the station with the right
to broadcast all programs transmitted by FOX, which include regular programming
from FOX as well as from the FOX Children's Network ("FCN"). In exchange, FOX
has the right to sell a substantial majority of the advertising time
<PAGE> 4
associated with such programs and to retain the revenue therefrom. During NFL
games and the pre-game shows, FOX has the right to retain a substantial portion
of the advertising time, and the station is entitled to sell the remainder and
retain the associated advertising revenue. The station is also compensated by
FOX according to a ratings-based formula for FOX programming and is entitled to
a share of the programming net profits of the FCN programming, as specified in
its FOX Affiliation Agreement. The compensation rate is subject to increases or
decreases by FOX during the term of each FOX Affiliation Agreement, with
provisions for advance notice and right of termination by the station in the
event of a substantial rate reduction.
Each of the FOX Affiliation Agreements expires December 5, 2005 and is renewable
for successive two-year terms, at the discretion of FOX and upon acceptance by
Petracom. Each FOX Affiliation Agreement may be terminated generally: (a) by FOX
upon (i) a material change in the station's transmitter location, power,
frequency, programming format or hours of operation, with 30 days written
notice, (ii) acquisition by FOX or any of its affiliates of a significant
ownership and/or controlling interest in a television station in the same
market, with 60 days written notice; (iii) assignment or transfer by the station
of their respective FCC broadcast license, with 30 days written notice; (iv)
three or more unauthorized preemptions of FOX programming within a 12 month
period, with 30 days written notice; or (v) failure by FOX and the station to
agree upon the retransmission or "must carry" status with the respective cable
companies, upon 30 days written notice, or (b) by either FOX or the station upon
occurrence of a force majeure event which substantially interrupts FOX's ability
to provide programming or the station's ability to broadcast the programming.
FOX has given the Company certain guarantees pertaining to the net revenues of
WTVW-TV for the first two years subsequent to December 4, 1995, the date the
station became a FOX affiliate. FOX will pay the Company $750,000 for each of
the first two years after WTVW-TV switches its affiliation to FOX, subject to a
reduction of such payments by two-thirds of the amount by which the station's
net revenues exceed certain amounts as defined in the agreement. However, the
Company must repay these amounts to FOX if net revenues exceed certain
established thresholds in the subsequent three year period.
CBS Station. KLBK-TV, Lubbock is affiliated with CBS pursuant to an affiliation
agreement (the "CBS Affiliation Agreement"). The CBS Affiliation Agreement
provides KLBK-TV, Lubbock with the right to broadcast all programs transmitted
by CBS. In return, CBS has the right to sell a substantial majority of the
advertising time during such broadcasts. In exchange for broadcasting the CBS
Network programming, CBS pays KLBK-TV, Lubbock a variable fee for each hour
broadcast, depending on the time of day. Upon advance notice to KLBK-TV,
Lubbock, network compensation rates are subject to increase or decrease by CBS
during the term of the CBS Affiliation Agreement, with provisions for a right of
termination by KLBK-TV, Lubbock in the event of a reduction in rates. The CBS
Affiliation Agreement's current term is from August 1, 1995 through August 1,
2005, and is automatically renewed for successive five-year terms, unless six
months written notice of termination or non-renewal is given by either party. In
addition, the CBS Affiliation Agreement may be terminated generally by CBS upon
(i) assignment or transfer by KLBK-TV, Lubbock of its FCC broadcast license,
(ii) a change by KLBK-TV, Lubbock affecting its transmitter location, power,
frequency or hours of operation, or (iii) the station's owner filing a
bankruptcy petition, taking advantage of any insolvency law or if a receiver or
trustee is appointed and not removed within 30 days.
WQRF-TV, ROCKFORD, ILLINOIS
Acquired in 1990, WQRF, Channel 39, serves as the FOX Affiliate in Rockford,
Illinois. Rockford is the 135th ranked DMA and the second largest city in
Illinois. The population of the five county Rockford DMA is approximately
422,000 with approximately 167,000 television households. Total television
advertising revenues for 1997 in Rockford are estimated to be $ 24,000,000.
While Rockford is the number 135th ranked DMA, it ranks 114th in terms of total
market television revenue. Three UHF stations and one VHF station actively
compete for the television advertising revenue in the DMA.
KDEB-TV, SPRINGFIELD, MISSOURI
Acquired in 1995, KDEB, Channel 27, serves as the FOX Affiliate in Springfield,
Missouri. Springfield is the 77th ranked DMA and the third largest city in
Missouri. The population of the 34-county DMA area is approximately 890,000 with
approximately 360,000 television households. Total television advertising
revenues for 1997 in Springfield are estimated to be $ 32,000,000. Two UHF
stations and two VHF stations actively compete for the television advertising
revenue in the DMA.
<PAGE> 5
WTVW-TV, EVANSVILLE, INDIANA
Acquired in 1995, WTVW, Channel 7, serves as the FOX Affiliate in Evansville,
Indiana. Evansville is the 95th ranked DMA. The population of the 22 county DMA
area is approximately 711,000 with approximately 277,000 television households.
Total television advertising revenues for 1997 in Evansville are estimated to be
$34,000,000. WTVW-TV is the only VHF station along with three UHF stations that
actively compete for the television advertising revenue in the DMA, which serves
counties in Illinois, Indiana and Kentucky. The Company switched the affiliation
of WTVW from ABC to FOX effective December 4, 1995.
KARD-TV, MONROE, LA
Acquired in 1995, KARD, Channel 14, serves as the FOX Affiliate in Monroe,
Louisiana. Monroe is the 132rd ranked DMA. The population of the 18 parish DMA
is approximately 455,000 with approximately 172,000 television households. Total
television advertising revenues for 1997 in Monroe are estimated to be
$16,000,000. Two VHF stations and one UHF station actively compete for the
television advertising revenue in the DMA, which serves parishes in Louisiana
and counties in Arkansas. KARD-TV switched affiliations from ABC to FOX in April
1994.
KLBK-TV, LUBBOCK, TEXAS
Acquired in 1995, KLBK, Channel 13, serves as the CBS Affiliate in Lubbock,
Texas. Lubbock is the 147th ranked DMA. The population of the 18 county DMA is
approximately 376,000 with approximately 141,000 television households. Total
television advertising revenues for 1997 in Lubbock are estimated to be
$22,000,000. Two VHF stations and three UHF stations actively compete for the
television advertising revenues in the DMA.
DESCRIPTION OF RADIO STATIONS
KAYD-AM/KAYD-FM AND KQHN-AM/KQXY-FM, BEAUMONT, TEXAS
Beaumont - Port Arthur, Texas is the 128th ranked Arbitron MSA market with
population in the MSA of approximately 371,000 and approximately 139,000 radio
households. Total radio advertising revenues for 1997 in Beaumont are estimated
to be $11,000,000. Nine radio stations actively compete for the radio
advertising revenues in the market.
In January 1990, Petracom acquired KAYD-AM/KAYD-FM. Both stations simulcast a
country music format. Country music is the dominant format in the market and the
Company directly competes for country music listeners and advertisers with
another FM station.
In March 1994, Petracom purchased KQHN-AM and KQXY-FM in Beaumont. The purchase
created the first duopoly in the market. The Company had operated these stations
for the prior 17 months pursuant to a time brokerage agreement. KQXY-FM is
programmed with a Hot Adult Contemporary format, while KQHN-AM is programmed
with a Sports/Talk format.
EMPLOYEES
As of December 31, 1997, Petracom had 260 full time and 39 part time employees.
None of the Company's employees are represented by unions. The Company believes
its relations with its employees are satisfactory.
SEASONALITY
The Company's operating revenues are generally highest in the second and fourth
quarters of the year. This seasonality is primarily due to increased
expenditures by advertisers in the Spring, increased viewership in the Fall and
increased advertising in anticipation of holiday retail spending.
<PAGE> 6
ADVERTISING SALES IN TELEVISION AND RADIO BROADCASTING
Television station revenues are primarily derived from local, regional and
national advertising and, to a lesser extent, from network compensation and
commercial production. Advertising rates are based upon a program's popularity
among the viewers an advertiser wishes to attract, the number of advertisers
competing for the available time, the size and demographic composition of the
market served by the station and the availability of alternative advertising
media in the market area. An advertiser wishing to reach a nationwide audience
usually purchases advertising time directly from the national networks. A
national advertiser wishing to reach a particular regional or local audience
usually buys advertising time from the local stations through independent
national advertising sales representative firms which are retained by local
stations to solicit such advertising. Local businesses generally purchase
advertising directly from the sales staff of local television stations. Because
broadcast television stations rely on advertising revenue, declines in
advertising budgets, particularly in recessionary periods, adversely affect the
broadcast industry, and, as a result, may contribute to a decrease in the
revenues of broadcast television stations. Typical local advertisers include
automobile dealerships, local grocery chains and fast food restaurants.
Radio station revenues are derived primarily from local, regional and national
advertising. Advertising rates are based upon a station's format and popularity
among the listeners an advertiser wishes to attract, the number of advertisers
competing for the available time, the size and demographic composition of the
market served by the radio station and the availability of alternative
advertising media in the market area.
COMPETITION IN TELEVISION BROADCASTING
Competition in the television industry occurs on several levels: competition for
audience, competition for programming and competition for advertisers. The
broadcasting industry is continually faced with technological change and
innovation, the possible rise in popularity of competing entertainment and
communications media, and governmental restrictions or actions of federal
regulatory bodies, including the FCC and the Federal Trade Commission ("FTC"),
any of which could have a material effect on the Company's operations.
Audience. Television stations compete for audience on the basis of program
content and popularity, which is significantly affected by network affiliation
and local programming activities. A portion of the daily programming for
network-affiliated television stations is supplied by FOX, ABC, CBS, NBC and by
recently created networks UPN and The WB Network. In those time periods, the
television stations are totally dependent upon the performance of the network
programs in attracting viewers. Non-network time periods are programmed by the
television stations with syndicated programs purchased for cash, cash and
barter, or barter-only. Television stations also broadcast sports, news, public
affairs and other entertainment programming.
The development of methods of television transmission of video programming other
than over-the-air broadcasting, and, in particular, the growth of cable
television, has significantly altered competition for audience in the television
industry. These other transmission methods can increase competition for a
broadcasting television station by bringing into its market distant broadcasting
signals not otherwise available to the television station's audience and also by
serving as a distribution system for non-broadcast programming distributed by
the cable system.
Other potential and current sources of competition include home entertainment
systems (including video cassette recorder and playback systems, videodiscs and
television game devices), Internet access, multi point distribution systems,
multichannel multi point distribution systems, wireless cable, satellite
systems, low-power television stations, television translator stations and some
low-power in-home satellite to home video distribution services. Television
stations also face competition from high-powered direct broadcast satellite
services which can transmit programming directly to homes equipped with special
receiving antennas or to cable television systems for transmission to their
subscribers.
Further advances in technology may increase competition for household audiences
and advertisers. Video compression techniques, now under development for use
with current cable television delivery systems or direct broadcast satellites
are expected to reduce the bandwidth required for television signal
transmission. These compression techniques, as well as other technological
developments are applicable to all video delivery systems, including
over-the-air broadcasting, and have the potential to provide vastly expanded
programming to highly targeted audiences. A reduction in the cost of creating
additional channel capacity could lower entry barriers for new channels and
encourage the development of increasingly specialized "niche" programming. This
ability to
<PAGE> 7
reach very defined audiences is expected to alter the competition for
advertising expenditures. The Company is unable to predict the effect that
technological change will have on the broadcast television industry or the
future results of the Company's operations.
Programming. Competition for programming involves negotiating with national
program distributors or syndicators which sell first-run and rerun packages of
programming. Television stations compete against in-market broadcast station
competitors for off-network reruns (such as Seinfeld) and first run products
(such as Wheel of Fortune) for exclusive access to those programs in their
respective markets. Cable systems generally do not compete with local television
stations for programming, although it is becoming more common for national cable
networks to acquire programs that would have otherwise been offered to local
television stations. The growing cross-ownership of broadcast stations,
networks, cable systems, cable networks and studios has also begun to shrink the
pool of programming available to local television stations.
Advertising. Television stations compete for advertising revenues with other
television stations in their respective markets, as well as with other
advertising media, such as newspapers, radio, magazines, outdoor advertising,
transit advertising, yellow page directories, direct mail and local cable
systems. Competition for advertising dollars in the broadcasting industry occurs
primarily in individual markets. Generally, a television station in a particular
market does not compete with stations in other market areas.
COMPETITION IN RADIO BROADCASTING
As with television broadcasting, competition in the radio industry also occurs
on three levels: competition for audience, competition for programming and
competition for advertisers. Additional factors that are material to a radio
station's competitive position include signal coverage, assigned frequency,
audience characteristics, local program acceptance and the number and
characteristics of other stations in the market area. The broadcasting industry
is continually faced with technological change and innovation, the possible rise
in popularity of competing entertainment and communications media, and
governmental restrictions or actions of federal regulatory bodies, including the
FCC, any of which could have a material effect on the company's operations.
Audience. Radio stations compete for audience on the basis of the popularity of
the music, format and on-air talent/personality on the station, which have a
direct effect on advertising rates. As advertisers generally target certain
demographic groups to promote their products, radio stations compete to maximize
audience shares in demographic sex and age groups that appeal to the
advertisers.
Programming. Radio programming is generated primarily by the individual radio
station. Syndicated programming typically accounts for only a small portion of
the total broadcast time, if any, of the radio stations. Competition for radio
programming is generally limited to competition with other radio stations for
exclusive access to syndicated shows and programs such as countdowns and network
news briefs.
Advertising. Radio stations compete for advertising revenues with other radio
stations in their respective markets, as well as with other advertising media,
such as newspapers, television, magazines, outdoor advertising, transit
advertising, yellow page directories, direct mail and local cable systems.
Competition for advertising dollars in the radio broadcasting industry occurs
primarily in individual markets. Generally, a radio station does not compete
with radio stations in other market areas.
RATINGS
The price that television stations and radio stations can charge for advertising
time is determined in part by a station's overall audience ratings and share in
a given market, as well as the station's audience rating and share among a
particular demographic group that an advertiser may be targeting. In the U.S.,
there are more than 200 generally-recognized television "markets" that are
ranked in size according to various formulae based upon actual or a potential
audience. Each market is determined as an exclusive geographic area consisting
of all counties in which the home-market commercial stations receive the
greatest percentage of total viewing hours. Currently, only one national
audience measuring service, Nielsen, periodically publishes data on estimated
audiences for the television stations in the various markets throughout the
country. Similar market and audience data are published periodically with
respect to radio stations and their markets by Arbitron. Each specific
geographic market is called a "designated
<PAGE> 8
market area" by Nielsen for its television ratings service; Arbitron labels
radio markets "metropolitan survey areas." MSAs are generally smaller than a
market's DMA, and generally correspond to the Metropolitan Statistical Areas as
defined by the Federal government. For television stations, estimated audiences
are expressed in terms of the percentage of the total potential audience in the
market viewing a station (the station's "rating") and of the percentage of the
audience actually watching television (the station's "share").
REGULATION OF TELEVISION AND RADIO BROADCASTING
The ownership, operation and sale of television and radio stations, including
the Company's Television Stations and Radio Stations, are subject to the
jurisdiction of the FCC, which acts under the authority granted by the
Communications Act of 1934, as amended (the "Communications Act"). The recently
enacted Telecommunications Act of 1996 (the "Telecommunications Act") effected
sweeping changes in the Communications Act, many of which will influence the
Company's broadcasting operations. Among other things, the FCC issues, renews,
revokes and modifies station licenses; determines whether to approve changes in
ownership or control of station licenses; regulates equipment used by stations;
adopts and implements regulations and policies that directly or indirectly
affect the ownership, operation and employment practices of stations; and has
the power to impose penalties for violations of its rules or the Communications
Act. Television stations and radio stations are from time to time subject to
such investigative and enforcement proceedings as the FCC may initiate
concerning their broadcast operations.
License Renewal. Broadcasting licenses are granted by the FCC for maximum terms
of eight years for television and radio stations, and are subject to renewal
upon application to the FCC for a maximum term of eight years. During certain
periods, petitions to deny license renewal can be filed by interested parties,
including members of the public. However, competing applicants may not file for
the frequency being used by the renewal applicant during the period when a
renewal application is pending. The FCC is required to hold evidentiary,
trial-type hearings on renewal applications, if the FCC is unable to determine
that the "public interest, convenience and necessity" would be served by a grant
thereof, or if a petition to deny raises a "substantial and material question of
fact" as to whether the grant of the renewal application would be prima facie
inconsistent with the public interest, convenience and necessity.
The FCC broadcast licenses of each of the television stations and radio stations
have the following expiration dates:
<TABLE>
<S> <C> <C> <C>
WQRF-TV Rockford, IL December 1, 2005
WTVW-TV Evansville, IN August 1, 2005
KDEB-TV Springfield, MO February 1, 2006
KLBK-TV Lubbock, TX August 1, 1998
KARD-TV West Monroe, LA June 1, 2005
KAYD-AM Beaumont, TX August 1, 2005
KAYD-FM Beaumont, TX August 1, 2005
KQHN-AM Nederland, TX August 1, 2005
KQXY-FM Beaumont, TX August 1, 2005
</TABLE>
Petracom has begun the renewal process for the license that expires in 1998. The
Company fully expects a grant of the renewal application for the maximum term of
eight years.
Ownership Matters. The Communications Act prohibits the assignment of a
broadcast license or the transfer of control of a broadcast licensee without the
prior approval of the FCC. In determining whether to grant or renew a broadcast
license, the FCC considers a number of factors pertaining to the licensee,
including compliance with the Communication Act's limitations on alien
ownership, compliance with various rules limiting common ownership of broadcast,
cable and newspaper properties, and the "character" of the licensee and of those
persons holding "attributable" interests in the licensee.
Under the Communications Act, broadcast licenses may not be granted to any
corporation having more than 20% of its capital stock owned of record or voted
by non-U.S. citizens (including non-U.S. corporations), foreign governments or
their representatives (collectively, "Aliens"). The Communications Act also
prohibits a corporation, without an FCC public interest finding, from holding a
broadcast license if that corporation is controlled, directly or
<PAGE> 9
indirectly by another corporation, more than 25% of the capital stock of which
is owned of record or voted by Aliens. As a result of these provisions, the
Company, which is a holding company for its various television station and radio
station licensee subsidiaries, cannot have more than 25% of its capital stock
owned of record or voted by Aliens, without receiving prior FCC approval.
Multiple Ownership Rules. The FCC's television national multiple ownership rule
limits the audience reach of television stations in which an entity may hold an
attributable interest to 35% of total U.S. television households. Furthermore,
the FCC's television multiple ownership local contour overlap rule generally
prohibits ownership in two or more television stations which serve the same
geographic market by a party under, direct or indirect, common ownership,
operation or control ("single entity"). In radio markets with 45 or more radio
stations, a single entity may own eight radio stations, not more than five of
which are AM or FM. In radio markets with 30 to 44 (inclusive) radio stations, a
single entity may own seven radio stations, not more than four of which are AM
or FM. In radio markets with 15 to 29 (inclusive) radio stations, a single
entity may own six radio stations, not more than four of which are AM or FM. In
radio markets with fourteen or fewer radio stations, a single entity may own
five radio stations not more than three of which are AM or FM, except that a
single entity may not own more than 50% of the stations in such markets.
FCC Rules also generally prohibit or restrict the cross-ownership, operation or
control of a radio station and a television station serving the same geographic
market, and of a television station or a radio station and a daily newspaper
serving the same geographic market. Under these rules, absent waivers, the
Company would not be permitted to acquire any newspaper, radio or television
broadcast station in a geographic market in which it now owns or controls any
television or radio broadcast properties. The FCC's Rules and policies generally
provide for the liberal grant of waivers of the rule prohibiting common
ownership of radio and television stations in the same geographic market for
stations located in the top 50 television markets, if certain conditions are
satisfied.
If an attributable stockholder of the Company violates any of these ownership
rules, the Company may be unable to obtain from the FCC one or more
authorizations needed to conduct its television station and radio station
businesses and may be unable to obtain FCC consents for certain future
acquisitions.
The FCC generally applies its ownership limits to "attributable" interests held
by an individual, corporation, partnership or other association. In the case of
a corporation holding a broadcast license, the interest of officers, directors
and those who, directly or indirectly, have the right to vote 5% or more of the
corporation's voting stock (or 10% or more of such stock in the case of
insurance companies, mutual funds, bank trust departments and certain other
passive investors that are holding stock for investment purposes only) are
generally deemed to be attributable, as are positions of an officer or director
of a corporate parent of a broadcast licensee.
Furthermore, the FCC has a "cross-interest" policy that under certain
circumstances could prohibit a person or entity with an attributable interest in
a broadcast station or daily newspaper from having a "meaningful"
non-attributable interest in another broadcast station or daily newspaper in the
same local market. Among other things, "meaningful" interests could include
significant equity interests (including non-voting stock, and limited
partnership interests) and significant employment positions. This policy may
limit the permissible investments a purchaser of the Company's common stock may
make or hold. If the FCC determines that a stockholder of the Company has
violated this cross-interest policy, the Company may be unable to obtain one or
more FCC authorizations needed to conduct its television station business and
may be unable to obtain FCC consents for certain future acquisitions.
The FCC has initiated rulemaking proceedings in which it has solicited comments
on whether it should alter its multiple ownership rules and ownership
attribution rules. In addition, bills have been introduced in the U.S. Congress
which would alter Alien and other regulatory limits affecting broadcasting and
the communications industry overall. The Company cannot predict whether any of
these proposals will ultimately be adopted by the FCC or Congress or the effect
on the operations of the Company.
Programming and Operation. The Communications Act requires broadcasters to serve
the "public interest". Since the late 1970s, the FCC gradually has relaxed or
eliminated many of the more formalized procedures it had developed to promote
the broadcast of certain types of programming responsive to the needs of a
station's community of license. However, broadcast station licensees continue to
be required to present programming that is responsive to community problems,
needs and interests and to maintain certain records demonstrating such
responsiveness. Complaints from viewers concerning a station's programming will
be considered by the FCC when
<PAGE> 10
it evaluates license renewal applications of a licensee, although such
complaints may be filed at any time and generally may be considered by the FCC
at any time. Stations also must follow various rules promulgated under the
Communications Act that regulate, among other things, political advertising,
sponsorship identifications, the advertisements of contests and lotteries,
obscene and indecent broadcasts, programming for children and commercial limits
within such programming and technical operations, including limits on radio
frequency radiation. In addition, broadcast licensees must develop and implement
affirmative action programs designed to promote equal employment opportunities
("EEO") and must submit reports to the FCC with respect to EEO and children's
programming annually and in connection with license renewal applications.
Failure to observe these or other FCC rules and policies can result in the
imposition of various sanctions, including monetary forfeitures, the grant of
short renewal terms (i.e., less than the full eight year term) and, for
egregious violations, the denial of a license renewal application or the
revocation of a broadcast license.
OTHER RECENT DEVELOPMENTS, PROPOSED LEGISLATION AND REGULATION
The FCC has undertaken several initiatives to deregulate aspects of the
television and radio industries particularly with respect to broadcast
programming and station ownership restrictions. Significant areas of regulation
remain, however, and the FCC continues to enforce strictly its regulations in
several such areas. These include equal employment opportunities, "indecent"
programming restrictions, children's programming, the "character qualifications"
of licensees, political advertising, environmental concerns, technical operating
matters and antenna tower maintenance.
Cable. The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act"), enacted in October 1992, requires television broadcasters to
make an election to exercise either certain "must carry" or, alternatively,
"retransmission consent" rights in connection with their carriage by cable
television systems in the station's local market. If a broadcaster chooses to
exercise its must carry rights, it may demand carriage on a specified channel on
cable systems within its Area of Dominant Influence ("ADI"). Must carry rights
are not absolute, and their exercise is dependent on variables such as the
number of activated channels on, and the location and size of, the cable system
and the amount of duplicative programming on a broadcast station. Under certain
circumstances, a cable system may decline carriage of a given station, which
action may adversely affect such station. If a broadcaster chooses to exercise
its retransmission consent rights, it may prohibit cable systems from carrying
its signal, or permit carriage under a negotiated compensation arrangement.
Compensation to the television stations for signal retransmission can
potentially be monetary, use of a second cable channel per station or in other
forms. However, the existence and level of compensation to the Company, if any,
may ultimately confer little or no benefit to the Company.
In the 1992 Cable Act, Congress established a mechanism to modify local
television markets, under which television stations licensed to communities in
one ADI may become qualified for "must carry" status on cable systems serving
communities outside their ADI and within an ADI of other television station
markets. If a television station licensed to a community not part of the ADI
should be expanded to include communities within the ADI of one of the
television stations, such station could demand "must carry" status on cable
television systems serving such community or communities. Carriage of the signal
of such a station on cable systems carrying the signal of one of the Company's
television stations could further fractionalize the audience of such television
station, particularly if the station seeking such market expansion has the same
network affiliation as the affected television station. Conversely, under the
market modification procedures established in the 1992 Cable Act, the television
stations have the opportunity of requesting the FCC to expand their own
respective ADIs under certain circumstances, in order to qualify for "must
carry" status on cable systems serving communities presently outside such ADIs.
On March 31, 1997, the Supreme Count upheld the constitutionality of the
must-carry provisions of the 1992 Cable Act. The Supreme Court decision did not
expressly address the issue of must-carry of digital television ("DTV") signals.
While the FCC has not decided whether to adopt must carry rules for DTV
broadcasting, it has announced that this issue will be addressed in a future
rulemaking proceeding. On June 13, 1997, Malrite Communications Group filed a
petition with the FCC seeking to modify the "must carry" rules to require cable
systems to adopt "appropriate" digital technologies, i.e., technologies
compatible with broadcast DTV standards. On February 17, 1998, the FCC decided
not to address the Malrite's request separate from a separate rulemaking
proceeding on DTV must carry, and the FCC affirmed its intention to issue a
Notice of Proposed Rulemaking on DTV must carry. The
<PAGE> 11
Company cannot predict the outcome of the issues related to the application of
the must carry rules to DTV or the effect on the Company's business, financial
performance or future prospects.
Prime Time Access. The FCC eliminated the prime time access rule ("PTAR"),
effective August 30, 1996. PTAR had limited a station's ability to broadcast
network programming (including syndicated programming previously broadcast over
a network) during prime time hours. The elimination of PTAR could increase the
amount of network programming broadcast over a station affiliated with ABC, NBC
or CBS. Such elimination also could result in (i) an increase in the
compensation paid by a network to a station (due to the additional prime time
during which network programming could be aired by a network-affiliated station)
and (ii) increased competition for syndicated network programming that
previously was unavailable for broadcast by network affiliates during prime
time.
Fin-syn. The FCC also rescinded its remaining financial interest and syndication
("fin-syn") rules. The fin-syn rules restricted the ability of ABC, CBS and NBC
to obtain financial interests in, or participate in syndication of, prime-time
entertainment programming created by independent producers for airing during the
networks' evening schedules. (The FCC previously had lifted the financial
interest rules and restraints on foreign syndication.)
Distribution of Video Services by Telephone Companies. Local telephone companies
were previously prohibited from providing video programming directly to
subscribers in their telephone service areas. This prohibition was successfully
challenged in several Federal courts before the prohibition was eliminated by
the Telecommunications Act. The Telecommunications Act permits telephone
companies to provide video services as a cable system, a multichannel video
programming distributor or through a newly created "open video" system. An open
video system will allow users access to video programming and interactive
services utilizing their existing telephone service connections. In July 1996,
the FCC adopted rules to implement the "open video" system. In addition,
competition in the video services market is growing. The Company cannot predict
how the provision of video services and other interactive services by local and
regional telephone companies could affect its properties, and cannot predict the
outcome of the regulatory proceedings ongoing at the FCC.
Even prior to the court rulings described in the preceding paragraph, the FCC
had authorized a broadened role for telephone companies in the video marketplace
in its "video dialtone" ("VDT") decision. VDT is defined by the FCC as the
provision of a basic video platform to multiple video programmers on a
nondiscriminatory, common carrier basis. If a local telephone company provides
such a basic platform, it also may provide enhanced and unregulated services
related to the provision of video programming. The FCC has already approved
several applications to construct and operate VDT systems and has begun
processing tariffs filed to govern the rates and terms of VDT offerings
although, most recently, some telephone companies have indicated that they are
reassessing their timetable and possible approach in developing VDT. The
Telecommunications Act repealed the video dialtone rules; however, video
dialtone systems approved as of the effective date of the Telecommunications Act
will not need to be terminated.
Advanced Television Service. The Telecommunications Act required that if the FCC
issued licenses for Digital Television (DTV) services, only incumbent broadcast
licensees and construction permit holders will be eligible initially for these
licenses. Also, the Telecommunications Act authorized the Commission to adopt
regulations that permit broadcasters to use such digital DTV spectrum for
ancillary or supplementary services, provided that such secondary services may
not impair the quality of the DTV signal and such services would be subject to a
fee payable to the U.S. Treasury. The Balanced Budget Act of 1997 (the "1997
Budget Act") directed the FCC to reclaim the analog spectrum from existing
television stations by December 31, 2006, subject to the grant of an extension
of that date to a station under a number of specific circumstances set forth in
the statute.
On April 21, 1997, the FCC issued initial DTV channel assignments to all
eligible full-power television licensees and issued related policies and rules.
On February 17, 1998, the FCC upon reconsideration of its actions, made
adjustments in the DTV channel assignments and related rules to address various
Petitions for Reconsideration and new test data on DTV interference
characteristics. For example, these adjustments include revisions to the plan
for recovery of spectrum after the analog-to-digital transition is completed so
that the spectrum available for DTV broadcasting after the transition will
include channels 2-6; increases in authorized transmission power for UHF DTV
stations; adoption of a de minimis interference standard; clarification of the
rules and procedures for modifying initial DTV channel assignments and the DTV
table of channel allotments; and adoption of additional guidelines and
procedures regarding the displacement of low power television stations. Licenses
for DTV services issued to incumbent broadcast licensees or permittees are
conditioned with a requirement that the original broadcast channel be
surrendered to the FCC for reallocation or reassignment at the end of a
transition period. It is unclear
<PAGE> 12
how operation on new DTV channels will impact the service area of or the
reception of the incumbent stations, including those of the Company. The new FCC
rules require television stations affiliated with ABC, CBS, FOX and NBC to
construct digital facilities in the ten largest television markets by May 1,
1999. Other stations affiliated with ABC, CBS, FOX and NBC in the top 30
television markets must construct DTV facilities by November 1, 1999. All other
commercial stations must construct DTV facilities by May 1, 2002. Noncommercial
stations must construct their DTV facilities by May 1, 2003. Implementation of
advanced television service will impose substantial additional costs on
television stations providing the new service, due to increased equipment costs.
Environmental, zoning, tower site availability, signal strength, equipment
availability, implementation schedule, public acceptance, and other major issues
may present formidable hurdles. At the same time, there may be a potential for
increased revenues derived through the use of the digital transmission format.
Direct Broadcast Satellite and Multipoint Distribution Systems. The FCC has
authorized the provision of video and aural programming directly to home
subscribers through direct broadcast satellites ("DBS") and multipoint
distribution (Wireless Cable) systems. Local broadcast stations are not carried
on DBS systems. Proposals recently advanced in Congress include a prohibition on
restrictions that inhibit a viewer's ability to receive video programming
through DBS services. There is also ongoing litigation between some of the DBS
operators and some of the major networks, including some local broadcast
stations. The networks and local broadcast stations are attempting to restrict
the DBS operators from carrying out-of-market affiliated stations on the DBS
systems. The Company is unable to predict the impact of these new services upon
its business, operations, financial performance or future prospects.
Proposed Changes. In September 1992, the FCC imposed certain restrictions on
local joint ventures that involve "time brokerage," or joint programming of
radio stations. The FCC is now conducting a rulemaking proceeding to consider
changes to the multiple ownership rules that could (i) permit the common
ownership of AM, FM and/or television stations in same geographic market; (ii)
under certain limited circumstances permit common ownership of television
stations with overlapping service areas; (iii) restrict television time
brokerage agreements; and (iv) alter the ownership attribution rules. In
addition, in 1996, the FCC adopted rules, implementing the Children's Television
Act of 1990, increasing the obligation of television stations to present
programming specifically directed to the "educational and informational" needs
of children. In 1996, the FCC also adopted more restrictive standards for the
exposure of the public and workers to potentially harmful radio frequency
radiation emitted by broadcast station transmitting facilities. Other matters
which could affect the Company's broadcast properties include technological
innovations affecting the mass communications industry, such as the Internet.
There are additional FCC regulations and policies, and regulations and policies
of other federal agencies affecting the business and operations of broadcast
stations. The Company cannot predict the resolution of the rulemaking and
proposed legislation discussed above, although their outcome could over a period
of time affect, either adversely or favorably, the revenues of the broadcasting
industry, including those of the Company.
The Congress and the FCC have under consideration, or may in the future consider
and adopt, new laws, regulations and policies regarding a wide variety of
matters that could, directly or indirectly: (i) affect the operation, ownership
and profitability of the Company and its broadcast stations; (ii) result in the
loss of audience share and advertising revenues of the Company's television
broadcast stations; and (iii) affect the ability of the Company to acquire
additional broadcast stations or finance such acquisitions. Such matters
include, for example, proposals to impose spectrum use or other
governmentally-imposed fees upon licensees; proposals to alter the FCC's equal
employment opportunity rules and other matters relating to minority and female
involvement in broadcasting; proposals to increase the benchmarks or thresholds
for attributing ownership interest in broadcast media; proposals to change rules
or policies relating to political broadcasting, including free time to
candidates; technical and frequency allocation matters, including those relative
to the implementation of ATV; proposals to restrict or prohibit the advertising
of beer, wine and other alcoholic beverages on broadcast stations; and proposals
to limit the tax deductibility of advertising expenses by advertisers.
The Company cannot predict the ultimate effects any of the above proposed
changes and any other matters which might be considered in the future, nor can
it predict what impact, if any, the implementation of any of these proposals or
changes might have on its business, operations, financial performance or future
prospects.
<PAGE> 13
ITEM 2. PROPERTIES.
<TABLE>
<CAPTION>
OWNED/ APPROX. EXPIRATION
OPERATION, LOCATION LEASED SIZE DATE
- ------------------- ------ ------- -----------
<S> <C> <C> <C>
Corporate Headquarters, Lutz, FL
- --------------------------------
Office Building Leased 2,000 sq. Ft. 2/1/99
WQRF-TV, Rockford IL
- --------------------
Office/Studio Building Leased 12,500 sq. ft. 7/1/98
Transmitter Building Owned 1,000 sq. ft. n/a
Tower/Transmitter Land Leased 2 Acres none
KAYD-AM/FM, Beaumont, TX
- ------------------------
Office/Studio Building Owned 4,000 sq. ft. n/a
Office/Studio Land Owned 6 acres n/a
KQXY-FM/KQHN-AM, Nederland, TX
- ------------------------------
Tower/ FM Transmitter Land Leased 20 acres 1/1/03
Tower/AM Transmitter Land Leased 10 acres 2/1/99
KDEB-TV, Springfield, MO
- ------------------------
Office/Studio Building Leased 8,000 sq. ft. 8/31/00
Office/Studio Land Leased 2 acres 8/31/00
Transmitter Building Owned 2,000 sq. ft. n/a
Tower/Transmitter Land Owned 114 acres n/a
Translator Building Owned 15 sq. ft. n/a
Translator Land Owned 250 sq. ft. n/a
WTVW-TV, Evansville, IN
- -----------------------
Office/Studio Building Owned 14,000 sq. ft. n/a
Office/Studio Land Owned 71,000 sq. ft. n/a
Transmitter Buildings Owned 2,900 sq. ft. n/a
Tower/Transmitter Land Owned 19 acres n/a
KARD-TV, Monroe, LA
- -------------------
Office/Studio Building Leased 9,000 sq. ft. 7/31/98
Transmitter Building Owned 2,000 sq. ft. n/a
Tower/Transmitter Land Leased 2 acres 9/30/35
KLBK-TV, Lubbock, TX
- --------------------
Office/Studio/Tower/Transmitter Building Owned 27,000 sq. ft. n/a
Office/Studio/Tower/Transmitter Land Owned 9 acres n/a
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
On September 30, 1997 Petracom Broadcasting of Rockford, Inc. ("Petracom-
Rockford) and the holder (the "Holder") of 1,000 shares (100%) of the Class A
Preferred Stock of Petracom-Rockford signed and consummated a settlement
agreement. In 1996 the Holder filed a lawsuit and received partial summary
judgment as to the issue of liability in regards to his claim to redemption of
his preferred stock. Petracom-Rockford (formerly known as Petracom, Inc.) is a
wholly-owned subsidiary of Petracom.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
None
ITEM 6. SELECTED FINANCIAL DATA.
The following table and information set forth selected financial information for
Petracom for the years 1993 through 1997. The Company completed an acquisition
in 1994 and an acquisition and restructuring in 1995 that are reflected in the
consolidated selected financial data. In March 1994, Petracom purchased KQHN-AM
and KQXY-FM in Beaumont. The Company had operated these stations for the prior
17 months pursuant to a Time Brokerage Agreement. On August 1, 1995, the Company
completed the acquisition of the following four television stations: KDEB-TV in
Springfield, Missouri; WTVW-TV in Evansville, Indiana; KARD-TV in Monroe,
Louisiana; and KLBK-TV in Lubbock, Texas. In connection with the acquisition, on
August 1, 1995 Petracom issued the following securities: (i) 240,000 shares of
its Class A Voting Common Stock in exchange for all of the outstanding common
stock of Petracom, Inc., (ii) $41,354,000 aggregate principal amount of Senior
Discount Notes and warrants to purchase up to 100,000 shares of the Company's
Class C Non-Voting Common Stock, (iii) a Junior Subordinated Note in the
principal amount of $13,500,000, and (iv) 60,000 shares of the Company's Class B
NonVoting Common Stock for $1,500,000 and entered into a $55,000,000 Term and
Revolving Credit Facility. The proceeds were used to acquire the four television
stations, repay existing debt, repurchase outstanding preferred stock interests,
provide additional working capital and to pay all fees and expenses related to
the transactions.
The selected financial data should be read in conjunction with Petracom's
Consolidated Financial Statements and notes thereto included elsewhere in this
report. The selected financial data is derived from the Company's audited
financial statements. Operating cash flow reported below is defined as income
from operations, excluding trade and barter, plus depreciation and amortization
of intangibles and programming rights less payments for programming rights.
Although operating cash flow is not a measure of performance calculated in
accordance with generally accepted accounting principles (GAAP), the Company
believes that operating cash flow is useful to investors to measure the
Company's ability to service debt and as a industry measure of the Company's
performance.
Year Ended December 31,
-----------------------
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 6,131 $ 7,031 $ 17,103 $ 29,982 $ 30,889
Net income (loss) (270) 664 (4,413) (10,593) (12,953)
Net income (loss)
per common share (5) 13 (18) (44) (54)
Total Assets 3,688 4,848 92,096 85,491 79,480
Long term obligations
and mandatorily
redeemable securities 3,645 3,606 92,226 101,238 109,261
Operating Cash Flow 752 1,671 5,056 9,949 8,932
</TABLE>
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
Net revenues, including trade and barter revenues, increased to $30,889,000 for
the year ended December 31, 1997 from $29,982,000 for the year ended December
31, 1996, an increase of $907,000 and 3%. The increase resulted primarily from
overall higher trade and barter revenue and increases in local advertising
revenues at the Company's television stations, except for WTVW-TV. These revenue
increases were partially offset by reduced political advertising revenue, a soft
market for national advertising revenues in the Company's television and radio
markets and a decrease in advertising revenues at WTVW-TV. The WTVW-TV decreases
resulted from the affiliation switch from ABC to FOX on December 4, 1995.
Ratings books from Nielsen subsequent to the affiliation change reported
decreases in audience ratings for the time periods programmed by the network.
Since audience ratings are used to set advertising rates and to attract
advertising expenditures, the station's advertising revenues decreased
accordingly. The Company did not anticipate a continued revenue decrease
resulting from the affiliation switch to FOX at WTVW-TV. Petracom is unable to
predict when, and if at all, WTVW-TV's ratings and revenues will return to the
levels achieved while the station was an ABC affiliate.
Total operating expenses, including expenses related to engineering, news,
production, programming, selling, general and administrative expenses,
amortization of programming rights, trade and barter expenses and depreciation
and amortization of intangibles, increased to $28,960,000 for the year ended
December 31, 1997 from $27,111,000 for the year ended December 31, 1996, an
increase of $1,849,000 and 7%. The increase resulted primarily from an increase
in cash operating expenses and trade and barter expenses. The increase in cash
operating expenses resulted primarily from the additional selling, promotion,
news and repair expenses related to improvements to the television and radio
stations' operations.
Since the station did not achieve the net revenue guaranty amount for 1997 as
described in its agreement with FOX, the station received its second $750,000
payment from FOX in January 1998. The Company believes it is unlikely that it
will need to repay any of these amounts to FOX in future years based on the
terms of the agreement.
Interest expense increased to $14,566,000 for the year ended December 31, 1997
from $13,187,000 for the year ended December 31, 1996, an increase of $1,379,000
and 10%. The increase resulted primarily from the effects of compounding on the
Senior Discount Notes and the Junior Subordinated Note.
The Company incurred a net loss of $12,953,000 for the year ended December 31,
1997 compared to a net loss of $10,593,000 for the year ended December 31, 1996.
The increase in the loss resulted primarily from the items discussed above.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995
Net revenues, including trade and barter revenues, increased to $29,982,000 for
the year ended December 31, 1996 from $17,103,000 for the year ended December
31, 1995. Total operating expenses, including expenses related to engineering,
news, production, programming, selling, general and administrative expenses,
amortization of programming rights, trade and barter expenses and depreciation
and amortization of intangibles, increased to $27,111,000 for the year ended
December 31, 1996 from $15,461,000 for the year ended December 31, 1995. The
increases in net revenues and operating expenses resulted primarily from the
operations of WTVW-TV, KDEB-TV, KLBK-TV and KARD-TV which were acquired by the
Company on August 1, 1995. The acquired television stations generated
$20,712,000 in net revenues and $19,686,000 in operating expenses for the year
ended December 31, 1996. Inclusion of the acquired stations' operations for the
full year of 1996 resulted in significant revenue increases when compared to
1995, which includes the acquired station's results for only five months. All
stations, except WTVW-TV showed year-to-year revenue growth. The decrease in
advertising revenues of 18% on a year-to-year basis at WTVW-TV resulted from the
affiliation switch from ABC to FOX on December 4, 1995. Subsequent ratings books
from Nielsen reported decreases in audience ratings for time periods programmed
by the network. Since audience ratings are used to set advertising rates and to
attract advertising expenditures, the station's
<PAGE> 16
advertising revenues decreased accordingly. The Company did not anticipate such
a large revenue decrease resulting from the affiliation switch to FOX at
WTVW-TV.
Since the station did not achieve the net revenue guaranty amount as described
in its agreement with FOX, the station received its first $750,000 payment from
FOX in 1996. The Company believes it is unlikely that it will need to repay any
of these amounts to FOX in future years. Petracom is unable to predict when, and
if at all, WTVW-TV's ratings and revenues will return to the levels achieved
while the station was an ABC affiliate.
Interest expense increased to $13,187,000 for the year ended December 31, 1996
from $5,532,000 for the year ended December 31, 1995. This increase resulted
primarily from interest expense on the debt incurred on August 1, 1995 to
acquire the four television stations, repay existing debt, repurchase
outstanding preferred stock interests, provide additional working capital and to
pay all fees and expenses related to the transaction.
The Company incurred a net loss of $10,593,000 for the year ended December 31,
1996 compared to a net loss of $4,413,000 for the year ended December 31, 1995.
The increase in the loss resulted primarily from the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of capital has been cash flow from operations.
Operating cash flow decreased to $8,932,000 for the year ended December 31, 1997
from $9,949,000 for the year ended December 31, 1996. The decrease resulted
primarily from the increase in expenses as discussed above. Operating cash flow
for this purpose is defined as income from operations, excluding trade and
barter, plus depreciation and amortization of intangibles and programming rights
less payments for programming rights. Although operating cash flow is not a
measure of performance calculated in accordance with generally accepted
accounting principles (GAAP), the Company believes that operating cash flow is
useful to investors to measure the Company's ability to service debt and as a
measure of the Company's performance under the various covenants of its
borrowings.
The switch from ABC to FOX at WTVW-TV, Evansville, Indiana has created
uncertainty regarding future operating cash flow. Petracom has decreased its
original estimates of future cash flows, due to the decrease in revenues at
WTVW-TV, as previously discussed. As a result of the affiliation change,
improvements in operating cash flow at WTVW-TV will take longer than initially
expected. The Company expects the continued growth of operating cash flow at the
other television stations and the radio stations.
As of December 31, 1997, Petracom had $43,171,000 in outstanding indebtedness
under its $50,000,000 term bank credit facility and $3,800,000 in outstanding
indebtedness under its $5,000,000 revolving bank credit facility, collectively,
(the "Bank Credit Facility").
During the year ended December 31, 1997, the Company made interest payments of
$4,476,000 under its Bank Credit Facility. Scheduled principal payments of
$1,500,000 were made under the term bank credit facility for the year ended
December 31, 1997. Principal payments under the Bank Credit Facility are
scheduled to continue quarterly with final payment due September 30, 2002.
As of December 31, 1997, Petracom had $37,517,000 in outstanding indebtedness
under its 17.5% Senior Discount Notes with warrants. The amount due under the
Senior Discount Notes includes $12,517,000 of accrued interest at December 31,
1997. No interest or principal payments were required under the Senior Discount
Notes for the year ended December 31, 1997. Cash interest payments on the Senior
Discount Notes may begin after August 1,1998 and must begin after August 1,
2000, but the Company expects to issue promissory notes in lieu of cash interest
payments during the period from August 1998 through August 2000. The Senior
Discount Notes mature on February 1, 2003.
As of December 31, 1997, Petracom had $21,413,000 in outstanding indebtedness
under its Junior Subordinated Note. The amount due under the Junior Subordinated
Note includes $7,912,000 of accrued interest at December 31, 1997. No interest
or principal payments were required under the Junior Subordinated Note for the
year ended December 31, 1997. Interest on the Junior Subordinated Note will
accrue and be added to the unpaid balance until maturity on August 1, 2003.
<PAGE> 17
'
During the year ended December 31, 1997 the Company purchased $954,000 of
capital equipment and made payments for broadcast program rights of $1,593,000.
ITEM 8. FINANCIAL STATEMENTS.
See index on page F-1 hereof
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
<CAPTION>
YEARS WITH
NAME AGE POSITION COMPANY
- ---- --- -------- ----------
<S> <C> <C> <C>
Henry A. Ash 57 President, Director 8
Gregory H. Graber 49 Vice President, Chief Operating 8
Officer
Howard R. Trickey 73 Executive Vice President of Operations 8
Joseph M. Fry 40 Vice President, Chief Financial Officer, 2
Treasurer and Assistant Secretary
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
----------------------------
NAME, PRINCIPAL POSITION YEAR SALARY BONUS OTHER (1)
- ------------------------ ---- ------ ------- ---------
<S> <C> <C> <C> <C>
Henry A. Ash, President 1997 $250,221 $ - $ 1,910
1996 $193,638 $ - 1,918
Gregory H. Graber, Chief Operating Officer 1997 182,157 15,000 2,375
1996 163,273 20,000 2,375
Howard R. Trickey, Executive Vice President 1997 61,872 8,000 990
1996 44,367 8,000 2,000
Joseph M. Fry, Chief Financial Officer 1997 124,167 15,000 1,951
1996 96,954 15,000 1,312
</TABLE>
(1) Represents matching Company contributions under the Company's Employees'
Savings (401(k)) Plan.
<PAGE> 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 31, 1998 with
respect to beneficial owners of 5% or more of the Company's Class A Voting
Common Stock, on a fully-diluted basis, before and after conversion of all
outstanding Class B Non-Voting Common Stock and Class C Non-Voting Common Stock
into Class A Voting Common Stock:
<TABLE>
<CAPTION>
Before Conversion After Conversion(1)
Name and Address of Beneficial Owner Number / Percentage Number / Percentage
- ------------------------------------ ------------------- -------------------
<S> <C> <C>
Henry A. Ash(2)
1527 N. Dale Mabry Hwy.
Suite 105
Lutz, Florida 33549 240,000(3) / 100% 240,000 / 60%
Fox Television Stations, Inc.
5746 Sunset Boulevard
Los Angeles, California 90028 0 / 0% 60,000(4) / 15.0%(5)
Putnam Investment Management, Inc.(6)
One Post Office Square
Boston, Massachusetts 02110 0 / 0% 100,000(7) / 25.0%(8)
------------------- ---------------------
Total 240,000 / 100% 400,000 / 100%
</TABLE>
1. The Class B Non-Voting Common Stock and the Class C Non-Voting Common
Stock each are convertible into Class A Voting Common Stock upon a
registration by the Company of its common stock for a public offering
and in connection with certain "tag" and "drag" rights granted pursuant
to agreements with FOX and Putnam, respectively. In addition, the Class
C Non-Voting Common Stock is convertible upon sale pursuant to Rule 144
under the Securities Act, and at any time so long as after conversion
such Holder does not own more than 4.9% of the Common Stock of the
Company. However, such conversions are subject to approval by the FCC.
See Footnotes 5 and 8.
2. Petracom Equity Partners, L.P., a Delaware partnership, is the record
owner of these shares. Henry A. Ash, as the General Partner authorized
to vote the Partnership's shares, is the beneficial owner.
3. Class A Voting Common Stock.
4. Class B Non-Voting Common Stock.
5. Percentage may increase depending upon total number of shares issued
upon exercise of the Warrants. Represents the maximum possible number
of shares into which the Warrants are exercisable, on a fully-diluted
basis. Pursuant to the Warrant Agreement, depending upon certain
Company performance results, the minimum possible number of shares into
which the Warrants are convertible is 33,333, representing 10% of the
total equity of the Company. To the extent such number of Warrant
shares is less than 100,000, the percentage ownership of the other
stockholders will increase proportionately.
6. Includes total investment by 17 affiliated Putnam investment funds.
7. Class C Non-Voting Common Stock. Represents the maximum number of
shares into which the Warrants are exercisable. See footnote 8.
8. Percentage may increase depending upon total number of shares issued
upon exercise of the Warrants. 100,000 shares (25%) is the maximum
possible number of shares into which the Warrants are exercisable, on a
fully-diluted basis. Pursuant to the Warrant Agreement, depending upon
certain Company performance results, the minimum possible number of
shares into which the Warrants are convertible is 33,333, representing
10% of the total equity of the Company. To the extent such number of
Warrant shares is less than 100,000, the percentage ownership of the
other stockholders will increase proportionately.
<PAGE> 19
MANAGEMENT
The following table sets forth the number and percentage of shares of the equity
securities of the Company beneficially owned by each director and each executive
officer and by all directors and executive officers as a group, as of March 31,
1998.
<TABLE>
<CAPTION>
Number of Percent of
NAMES OF BENEFICIAL OWNER Class A Shares Class
- ------------------------- -------------- ----------
<S> <C> <C>
Henry A. Ash(1) 240,000 100%
1527 N. Dale Mabry Hwy.
Suite 105
Lutz, Florida 33549
All Directors and Executive 240,000 100%
Officers as a Group
</TABLE>
1. Petracom Equity Partners, L.P., a Delaware partnership, is the record
owner of these shares. Henry A. Ash, as the General Partner of the
Partnership, is authorized to vote the Partnership's shares and thus is
the beneficial owner of the shares.
DESCRIPTION OF CAPITAL STOCK
Pursuant to its Certificate of Incorporation, the Company has authority to issue
1,000,000 shares of capital stock in three classes, as follows:
(i) 700,000 shares of Class A Voting Common Stock, $.01 par value
per share;
(ii) 100,000 shares of Class B Non-Voting Common Stock, $.01 par
value per share; and
(iii) 200,000 shares of Class C Non-Voting Common Stock, $.01 par
value per share.
The Class A Voting Common Stock shares are the only shares entitled to vote on
matters on which the shareholders are entitled to vote, with one vote per share.
Holders of Class B Non-Voting Common Stock and Class C NonVoting Common Stock
are not entitled to vote on any matters, other than voting as a class on
amendments to Article IV of the Company' Certificate of Incorporation (Capital
Structure) or any other provision of the Certificate of Incorporation which may
adversely affect the rights or such stock. Each class may receive dividends as
declared by the Board of Directors, and are equally entitled to assets upon
liquidation or dissolution.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
FINANCIAL STATEMENTS AND SCHEDULES
See index on page F-1 hereof
REPORTS ON FORM 8-K
Current Report on Form 8-K filed October 10, 1997 reporting under Item 5 that
the sole owner of the voting common stock of Petracom Holdings, Inc. had entered
into an agreement to sell all of its voting common stock of the Company.
Current Report on Form 8-K filed March 31, 1998 reporting under Item 5 that in
connection with the pending sale of the voting common stock of Petracom
Holdings, Inc., by its sole owner, the Company had entered into an agreement to
sell the assets of its radio stations.
<PAGE> 21
PETRACOM HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Stockholder's Deficit for the years
ended December 31, 1995, 1996 and 1997 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
March 6, 1998
To the Board of Directors and Stockholders of
Petracom Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows, and of stockholders'
deficit present fairly, in all material respects, the financial position of
Petracom Holdings, Inc. and its subsidiaries at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- -------------------------
Price Waterhouse LLP
Atlanta, GA
F-2
<PAGE> 23
PETRACOM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,831 $ 1,164
Accounts receivable, less allowance for doubtful accounts
of $602 and $605, respectively 5,861 5,740
Trade receivables 375 213
Current portion of broadcast program rights 1,825 2,347
Prepaid expenses and other current assets 884 1,503
-------- --------
Total current assets 10,776 10,967
Property and equipment, net 12,351 11,452
Broadcast program rights 1,341 1,918
Intangible assets, net 61,023 55,143
-------- --------
Total assets $ 85,491 $ 79,480
======== ========
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES
AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 1,603 $ 4,700
Current portion of broadcast program rights contracts payable 2,041 2,320
Accounts payable 924 789
Accrued expenses 983 880
Income taxes payable - 52
Trade payables 710 674
Accrued interest 179 -
-------- --------
Total current liabilities 6,440 9,415
Broadcast program rights contracts payable 1,247 1,962
Long-term debt 97,198 100,920
-------- --------
Total liabilities 104,885 112,297
-------- --------
Mandatorily redeemable securities
Class B, non-voting, common stock, $.01 par value, 100,000
shares authorized, 60,000 shares issued and outstanding 1,966 2,379
Warrants 827 4,000
-------- --------
Total mandatorily redeemable securities 2,793 6,379
-------- --------
Stockholders' deficit
Class A, voting, common stock, $.01 par value, 700,000
shares authorized, 240,000 shares issued and outstanding 3 3
Class C, non-voting, common stock, $.01 par value, 200,000
shares authorized, no shares issued and outstanding - -
Accumulated deficit (22,190) (39,199)
-------- --------
Total stockholders' deficit (22,187) (39,196)
-------- --------
Commitments and contingencies (Note 10) - -
-------- --------
Total liabilities, mandatorily redeemable securities
and stockholders' deficit $ 85,491 $ 79,480
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 24
PETRACOM HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN 000'S)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 17,550 $ 32,224 $ 32,101
Less - commissions (2,618) (4,728) (3,887)
---------- ---------- ----------
14,932 27,496 28,214
Barter and trade revenues 2,171 2,486 2,675
---------- ---------- ----------
Total net revenues 17,103 29,982 30,889
---------- ---------- ----------
Expenses
Operating 775 1,395 1,572
Selling, general and administrative 7,100 12,228 13,526
Programming 4,416 6,379 6,829
Depreciation and amortization 3,170 7,109 7,033
---------- ---------- ----------
15,461 27,111 28,960
---------- ---------- ----------
Income from operations 1,642 2,871 1,929
Other expense
Interest expense (5,532) (13,187) (14,566)
Other (250) (95) (155)
---------- ---------- ----------
Loss before income taxes (4,140) (10,411) (12,792)
Provision for income taxes (273) (182) (161)
---------- ---------- ----------
Net loss $ (4,413) $ (10,593) $ (12,953)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 25
PETRACOM HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (4,413) $ (10,593) $ (12,953)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation 955 1,954 1,885
Amortization of intangible assets 2,215 5,155 5,148
Amortization of deferred financing costs 321 718 732
Amortization of debt discount - - 122
Amortization of broadcast program rights 986 1,464 1,488
Loss on sale of property and equipment - - 4
Payments for broadcast program rights (793) (1,477) (1,593)
Trade revenue/expense, net 51 (18) 75
Deferred federal income taxes 236 - -
Changes in assets and liabilities, net of
the effect of acquisitions
Accounts receivable (732) (460) 121
Prepaid expenses and other current assets (493) (196) (619)
Accounts payable 324 234 (135)
Accrued expenses 724 (161) (103)
Income taxes payable (29) (105) 52
Accrued interest, including interest
included in long-term debt 3,683 7,415 9,326
---------- ---------- ----------
Net cash provided by operating activities 3,035 3,930 3,550
---------- ---------- ----------
Cash flows from investing activities
Acquisition of television stations (84,005) - -
Capital expenditures (616) (750) (954)
Additions to intangible assets - (63) -
Proceeds from sale of property and equipment 306 - 16
---------- ---------- ----------
Net cash used for investing activities (84,315) (813) (938)
---------- ---------- ----------
Cash flows from financing activities
Proceeds from long-term debt 91,788 3,600 1,000
Payments on long-term debt (4,763) (7,066) (3,809)
Issuance of mandatorily redeemable securities 2,212 - -
Repurchase of preferred stock (5,907) - (470)
---------- ---------- ----------
Net cash provided by (used for) financing
activities 83,330 (3,466) (3,279)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 2,050 (349) (667)
Cash and cash equivalents, beginning of year 130 2,180 1,831
---------- ---------- ----------
Cash and cash equivalents, end of year $ 2,180 $ 1,831 $ 1,164
========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 1,528 $ 5,032 $ 4,524
========== ========== ==========
Cash paid during the period for income taxes $ 67 $ 287 $ 109
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 26
PETRACOM HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK PREFERRED STOCK COMMON STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 - $ - 100,000 $ 1 50,000 $ 5 $ (697) $ (691)
Repurchase of preferred stock (Note 9) - - (99,000) (1) - - (5,906) (5,907)
Recapitalization on August 1, 1995
Petracom, Inc. shares retired - - (1,000) - (50,000) (5) - (5)
Petracom Holdings, Inc.
shares issued 240,000 3 - - - - - 3
Dividends accrued on mandatorily
redeemable securities - - - - - - (125) (125)
Net loss - 1995 - - - - - - (4,413) (4,413)
------- ------ -------- ------ -------- ------ ----------- ---------
Balance, December 31, 1995 240,000 3 - - - - (11,141) (11,138)
Dividends accrued on mandatorily
redeemable securities - - - - - - (341) (341)
Accretion recorded on warrants - - - - - - (115) (115)
Net loss - 1996 - - - - - - (10,593) (10,593)
------- ------ -------- ------ -------- ------ ----------- ---------
Balance, December 31, 1996 240,000 3 - - - - (22,190) (22,187)
Repurchase of preferred stock (Note 9) - - - - - - (470) (470)
Dividends accrued on mandatorily
redeemable securities - - - - - - (413) (413)
Accretion recorded on warrants - - - - - - (3,173) (3,173)
Net loss - 1997 - - - - - - (12,953) (12,953)
------- ------ -------- ------ -------- ------ ----------- ---------
Balance, December 31, 1997 240,000 $ 3 - - $ - $ (39,199) $ (39,196)
------- ------ -------- ------ -------- ------ ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 27
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND, RECAPITALIZATION AND ACQUISITIONS
BACKGROUND
Petracom Holdings, Inc. and its subsidiaries own and operate five
network-affiliated broadcast television stations located in Illinois,
Indiana, Texas, Louisiana and Missouri and four radio stations located
in Texas.
The consolidated financial statements include the accounts of Petracom
Holdings, Inc. and its wholly-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been
eliminated.
RECAPITALIZATION
Effective August 1, 1995, the sole common stockholder of Petracom, Inc.
exchanged all outstanding common stock of Petracom, Inc. for 100% of
the outstanding shares of the Company, which totaled 240,000 shares of
Class A voting common stock. The shares were subsequently contributed
to Petracom Equity Partners, L.P. As a result of the exchange of
shares, Petracom, Inc. became a wholly-owned subsidiary of the Company.
The acquisition of Petracom, Inc. has been accounted for as a
recapitalization with no change in the historical basis of assets and
liabilities.
ACQUISITIONS
On August 1, 1995, the Company acquired substantially all the assets of
four television stations for $77,200,000, plus acquisition costs of
$6,805,000 and liabilities assumed of $3,064,000. The acquisition was
accounted for using the purchase method of accounting and, accordingly,
the results of operations of these television stations have been
included in the consolidated financial statements from the date of the
acquisition. The acquisition was financed with a $50,000,000 term loan,
a $4,000,000 revolving credit facility, $25,000,000 of Senior Discount
Notes with warrants and a $13,500,000 Subordinated Note, as well as the
sale of 60,000 shares of Class B non-voting common stock for
$1,500,000. The Company was required to exchange publicly registered
notes (the "Exchange Notes") for the Senior Discount Notes. The
exchange occurred on March 1, 1996.
The purchase price was allocated as follows (in 000's):
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 3,629
Property and equipment 11,896
Noncurrent broadcast program rights 2,370
Intangible and other assets 69,174
--------
87,069
Liabilities assumed (3,064)
Acquisition expenses (6,805)
--------
$ 77,200
========
</TABLE>
F-7
<PAGE> 28
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 15, 1994, a subsidiary of the Company purchased substantially
all of the operating assets of two radio stations for $700,000. The
acquired assets were recorded at their fair market value of $550,000.
The Company previously operated the two radio stations under a local
marketing agreement whereby the Company received substantially all of
the radio station's operating revenues and paid their operating
expenses. Accordingly, the acquisition did not have a significant
effect on the Company's results of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The more significant
estimates made by management include those relating to the allowance
for doubtful accounts, the recoverability of broadcast program rights
and the useful lives of intangible assets. Actual results could differ
from those estimates.
REVENUE RECOGNITION
Advertising revenues are recognized in the period during which the
spots are aired. Revenues from other sources are recognized in the
period when the services are provided.
CASH AND CASH EQUIVALENTS
The Company has defined cash and cash equivalents as cash and
investments with an original maturity when purchased of three months or
less.
CONCENTRATION OF CREDIT RISK
A significant portion of the Company's accounts receivable are due from
local and national advertising agencies. Such accounts are generally
unsecured.
BARTER AND TRADE TRANSACTIONS
The Company barters advertising time for certain programming. These
transactions are recorded at the fair value of the advertising time
involved as determined by management. At December 31, 1996 and 1997,
broadcast program rights and broadcast program rights contracts payable
include $1,021,000 and $1,400,000, respectively, for program material
obtained through barter arrangements.
The Company trades certain advertising time for various goods and
services. These transactions are recorded at the estimated fair value
of the goods or services received. The related revenue is recognized
when the advertisements are broadcast while expenses are recognized
when the goods or services are utilized.
F-8
<PAGE> 29
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BROADCAST PROGRAM RIGHTS AND CONTRACTS PAYABLE
Broadcast program rights, primarily in the form of syndicated programs
and feature films, represent amounts paid or payable to program
suppliers for the limited right to broadcast the suppliers' programming
and are recorded when available for use. Broadcast program rights are
stated at the lower of unamortized cost or net realizable value.
Broadcast program rights are amortized over the lives of the underlying
contracts on the greater of straight-line over the license term or on a
per-play basis. Amounts expected to be amortized within one year are
classified as current assets.
Broadcast program rights contracts payable represent the gross amounts
to be paid to program suppliers over the life of the contracts. The
portion of broadcast program rights contracts payable within one year
are classified as current liabilities.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed
over the estimated useful lives of the assets which range from 5 to 31
years on a straight-line basis.
INTANGIBLE ASSETS
Intangible assets acquired in the purchase of the television stations
have been recorded based on their fair values at the date of
acquisition. Such amounts are being amortized on a straight-line basis
over their estimated useful lives.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of ("FAS 121"). FAS 121
states that if the carrying value of an asset, including associated
intangibles, exceeds the sum of estimated undiscounted cash flows from
the operation of the asset, an impairment loss should be recognized for
the difference between the asset's estimated fair value and carrying
value.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred in obtaining
long-term financing. These costs are expensed as interest over the
lives of the related loans, using the effective interest method.
INTEREST RATE RISK MANAGEMENT
The Company enters into interest rate cap and floor agreements with
commercial banks to mitigate the risk of possible changing interest
rates. These agreements are designated as hedges of interest rates, and
the differential to be paid or received on the agreements is accrued as
an adjustment to interest expense. The Company is exposed to credit
loss in the event of nonperformance by the other parties to the
agreements; however, the Company does not anticipate nonperformance by
the counterparties.
F-9
<PAGE> 30
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Deferred income taxes are provided for differences in the treatment of
income and expense items for financial reporting and income tax
purposes. A valuation allowance is provided for deferred income taxes
for which the future utilization is not reasonably assured.
EARNINGS PER SHARE
As a result of the recapitalization of the Company as discussed in Note
1, historical earnings per share for the year ended December 31, 1995
is not meaningful and therefore has not been presented. Pro forma
earnings per share for the year ended December 31, 1995 is disclosed in
Note 11, as well as historical earnings per share for the years ended
December 31, 1996 and 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
broadcast program rights, accounts payable and accrued expenses
approximate fair value due to the short maturity of those instruments.
The Company believes the December 31, 1996 and 1997 value of the
Exchange Notes, the Subordinated Note and the mandatorily redeemable
securities approximate fair value as there has been no significant
fluctuation in market interest rates since the recapitalization of the
Company during fiscal 1995. The fair value of cash program rights
contracts payable approximates $2,000,000 and $2,500,000 at December
31, 1996 and 1997, respectively, based on the Company's incremental
borrowing rate.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Broadcasting equipment $ 12,996 $ 13,057
Land, buildings and improvements 3,176 3,238
Furniture and other equipment 1,253 1,990
Construction in progress 21 14
-------- --------
17,446 18,299
Less - accumulated depreciation and amortization (5,095) (6,847)
-------- --------
Property and equipment, net $ 12,351 $ 11,452
======== ========
</TABLE>
F-10
<PAGE> 31
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INTANGIBLE ASSETS
Intangible assets consist of the following (in 000's):
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD DECEMBER 31,
(YEARS) 1996 1997
<S> <C> <C> <C>
FCC license 15 $ 40,079 $ 40,079
Network affiliation agreements 10 23,290 23,290
Deferred financing costs 6 to 8 5,313 5,313
Other 5 704 704
------------ ------------
69,386 69,386
Less - accumulated amortization (8,363) (14,243)
------------ ------------
Intangible assets, net $ 61,023 $ 55,143
------------ ------------
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Term loan $ 44,671 $ 43,171
Revolving credit facility 5,000 3,800
Exchange Notes 31,728 37,517
Less - unamortized discount (712) (590)
--------- ---------
31,016 36,927
Subordinated Note 17,696 21,413
Other 418 309
--------- ---------
98,801 105,620
Less - current maturities (1,603) (4,700)
--------- ---------
$ 97,198 $ 100,920
========= =========
</TABLE>
The term loan accrues interest at the LIBOR rate plus a variable margin
(8.69% at December 31, 1997). Quarterly principal payments are due in
varying amounts ranging from $1,000,000 to $4,724,000, with the balance
due September 30, 2002. Interest payments are due quarterly or upon
expiration of each LIBOR contract, if earlier.
F-11
<PAGE> 32
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The revolving credit facility accrues interest at the same rate and
payment terms as the term loan. The $5,000,000 revolving credit
facility availability will be reduced by $2,500,000 on June 30, 2002
and $2,500,000 on September 30, 2002.
The term loan and revolving credit facility are collateralized by
substantially all of the Company's assets.
At December 31, 1997, the Company has several interest rate agreements
with a notional principal amount of $28,500,000 related to the term
loan and revolving credit facility which established LIBOR interest
rate caps and floors. The interest rate agreements establish caps at
8.00% and floors at 4.99% to 5.48%. The agreements expire from August
to September 1998.
The Exchange Notes accrue interest at 17.5% per annum. Interest will
accrete on the unpaid balance through August 1, 1998 and will be
payable in cash thereafter until maturity on February 1, 2003, unless
such payment of cash interest would not be allowed under the term loan
and revolving credit facility agreements, in which case such interest
may be paid in kind by issuing additional notes up to $20,000,000
accruing interest at 17.75%. The note balance as of December 31, 1996
and 1997 includes interest of $6,728,000 and $12,517,000, respectively.
The Exchange Notes were issued with detachable warrants to purchase
shares of the Company's Class C non-voting common stock. An estimated
value of $712,000 was assigned to the warrants resulting in a discount
of the same amount on the Exchange Notes.
The Subordinated Note accrues interest at 20% per annum. Interest will
accrue and be added to the unpaid balance until maturity on August 1,
2003. The note balance as of December 31, 1996 and 1997 includes
interest of $4,196,000 and $7,912,000, respectively.
These agreements contain various restrictive covenants including the
maintenance of certain financial ratios and restrictions on the
incurrence of additional debt, making dividend payments, sales of stock
or assets and certain other transactions. The Company is in compliance
with these debt covenants, as amended, at December 31, 1997.
At December 31, 1997, aggregate principal maturities of long-term debt
are as follows (in 000's):
<TABLE>
<S> <C>
1998 $ 4,700
1999 6,088
2000 8,141
2001 11,000
2002 17,972
Thereafter 57,719
---------
$ 105,620
=========
</TABLE>
F-12
<PAGE> 33
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. MANDATORILY REDEEMABLE SECURITIES
The Class B common stock is subject to a put option which results in
the accretion of a minimum 20% return. The stockholder may require the
Company to repurchase the Class B common stock upon retirement of the
Subordinated Note. The Class B common stock can be converted into Class
A common stock upon the occurrence of certain events defined in the
Subordinated Note agreement.
The Exchange Notes were issued with detachable warrants to purchase
shares of the Company's Class C non-voting common stock. The number of
warrants granted will depend on the future cash flows of the Company
with the minimum and maximum number of warrants being granted ranging
from 33,000 to 100,000, respectively. There were 100,000 warrants
issued and outstanding as of December 31, 1996 and 1997. The number of
warrants issued can be reduced in future periods if the Company meets
certain operating results as defined in the agreement. The warrants are
exercisable at $0.01 per share commencing August 1, 1998 or at an
earlier date depending on certain transactions occurring as defined in
the agreement. These transactions include an initial public offering, a
merger, sale or change in control of the Company and certain other
transactions. The warrants may be redeemed for cash at their fair
market value at the option of the warrant holder after February 1, 2003
or at an earlier date depending on certain transactions occurring as
defined in the agreement. The warrants expire on August 1, 2005.
7. INCOME TAXES
The income tax expense consists of the following (in 000's):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
Current
<S> <C> <C> <C>
Federal $(197) $ -- $ --
State (13) (182) (161)
Deferred (63) -- --
----- ----- -----
$(273) $(182) $(161)
===== ===== =====
</TABLE>
F-13
<PAGE> 34
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income tax expense differs from the U.S. federal
statutory tax rate as a result of the following differences (in 000's):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
U.S. federal statutory tax rate, applied to
loss before income taxes, of 34% $(1,408) $(3,540) $(4,349)
Increase (decrease) in taxes resulting from
utilization of net operating loss carryforwards (102) -- --
Increase in valuation allowance 1,357 2,600 3,268
Nondeductible interest expense 351 949 1,172
State taxes, net -- 120 106
Other permanent differences 75 53 (36)
------- ------- -------
$ 273 $ 182 $ 161
======= ======= =======
</TABLE>
The deferred tax assets (liabilities) were comprised of the following
(in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Assets
Accrued interest $ 2,456 $ 4,593
Net operating loss carryforwards 1,454 2,496
Amortization of intangible assets 742 1,148
Alternative minimum tax credit carryforwards 64 64
Bad debt provision 94 95
------- -------
4,810 8,396
Liabilities
Depreciation of property, plant and equipment (948) (1,266)
------- -------
3,862 7,130
Less - valuation allowance (3,862) (7,130)
------- -------
$ -- $ --
======= =======
</TABLE>
The Company has provided a full valuation allowance for net deferred
tax assets as the realization of these future benefits is not
reasonably assured at December 31, 1997.
F-14
<PAGE> 35
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
Officers and certain other key employees of the Company are eligible to
participate in the 1996 Option Plan (the "Plan") of Petracom Equity
Partners, L.P. (the "Partnership"), the owner of the 240,000
outstanding shares of Class A common stock. Pursuant to the Plan,
participants may receive rewards of nonqualified options to purchase
Class C Limited Partnership interests in the Partnership. No options
have been awarded under the Plan. Under the terms of the Plan, the
option price will be equal to the fair value of the stock at the date
of the grant.
PENSION PLAN
The Company sponsors a defined contribution 401(k) retirement plan
covering substantially all of its employees. Contributions to the
401(k) retirement plan are determined annually by the Company and
totaled $36,000, $80,000 and $98,000 for the years ended December 31,
1995, 1996, and 1997, respectively.
9. PREFERRED STOCK
On August 1, 1995, all of the outstanding 50,000 shares of the Class B
preferred stock and 49,000 shares of the Class A preferred stock of
Petracom, Inc. were repurchased for $5,907,000. The remaining 1,000
shares of Class A preferred stock in a subsidiary of the Company were
repurchased in 1997.
10. COMMITMENTS AND CONTINGENCIES
BROADCAST PROGRAM RIGHTS
At December 31, 1997, the Company has executed contracts for broadcast
program rights totaling approximately $1,717,000 for which the
broadcast period has not yet begun. Accordingly, the asset and related
liability are not recorded at December 31, 1997.
LEASES
The Company has operating lease agreements for broadcast studios,
office space and tower sites. Rent expense for the years ended
December 31, 1995, 1996 and 1997 totaled $125,000, $220,000 and
$261,000, respectively. Minimum required annual payments under
noncancelable operating leases are approximately as follows (in 000's):
<TABLE>
<S> <C>
1998 $ 159
1999 64
2000 43
2001 14
2002 11
Thereafter 289
------
$ 580
======
</TABLE>
F-15
<PAGE> 36
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOX GUARANTEE
Fox Television Stations, Inc. ("FOX") has given the Company certain
guarantees pertaining to the net revenues of one of the Company's
television stations after it became a FOX affiliate on December 4,
1995. FOX will pay the Company a total of $1,500,000 for the first two
years after the station's switch to FOX affiliation, subject to
reduction in such payments by which the station's net revenues exceed
certain amounts each year as defined in the agreement. However, the
Company must repay these amounts to FOX if net revenues exceed certain
established thresholds in the subsequent three year period. The Company
recognized $812,500 and $687,500 related to this agreement for the
years ended December 31, 1996 and 1997. At December 31, 1997, a
receivable from FOX in the amount of $750,000 is included in other
current assets. No contingent liability has been recorded as management
believes that these guarantees will not be paid back to FOX, based on
the Company's revenue projections.
ADVERTISING EXPENSE
Advertising expense for the years ended December 31, 1995, 1996 and
1997 totaled $409,000, $464,000 and $681,000, respectively.
STOCK PURCHASE AGREEMENT
On September 30, 1997, the sole owner of the voting common stock of the
Company entered into an agreement to sell 100% of the outstanding
common stock of the Company. The agreement is subject to various
conditions including primarily, regulatory approval. The transaction is
expected to close in April, 1998.
11. EARNINGS PER SHARE
The following table reflects the primary earnings per share for the
year ended December 31, 1997. Additionally, the table reflects the
unaudited pro forma combined results of operations of the Company
assuming that the August 1, 1995 acquisition of the television stations
occurred at the beginning of 1995 (in 000's except per share
information):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
Net revenue $ 29,244 $ 29,982 $ 30,889
Net loss (11,187) (10,593) (12,953)
Loss per share applicable to
common shareholders (38.29) (44.14) (53.97)
</TABLE>
The pro forma information does not purport to be indicative of the
results which would have been obtained had the acquisition occurred on
the dates indicated or to project those that will be realized in the
future.
F-16
<PAGE> 37
PETRACOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENT
On March 6, 1998, the Company entered into an agreement to sell
substantially all of the assets of its radio stations. This transaction
is expected to close in April, 1998.
F-17
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PETRACOM HOLDINGS, INC.
By /s/ HENRY A. ASH
---------------------------------
Henry A. Ash
President
Date: April 11, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on April 11, 1998.
/s/ HENRY A. ASH President and Director (principal executive officer
- ------------------------ and sole director)
Henry A. Ash
/s/ JOSEPH M. FRY Vice President, Chief Financial Officer, Treasurer
- ---------------------- and Assistant Secretary (principal financial officer
Joseph M. Fry and principal accounting officer)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15 (D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy materials have been sent to security-holders of the
company
<PAGE> 39
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PETRACOM HOLDINGS, INC. FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,164
<SECURITIES> 0
<RECEIVABLES> 6,345
<ALLOWANCES> 605
<INVENTORY> 0
<CURRENT-ASSETS> 10,967
<PP&E> 18,299
<DEPRECIATION> 6,847
<TOTAL-ASSETS> 79,480
<CURRENT-LIABILITIES> 9,415
<BONDS> 100,920
2,379
0
<COMMON> 3
<OTHER-SE> (39,199)
<TOTAL-LIABILITY-AND-EQUITY> 79,480
<SALES> 30,889
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 28,960
<OTHER-EXPENSES> 155
<LOSS-PROVISION> 388
<INTEREST-EXPENSE> 14,566
<INCOME-PRETAX> (12,792)
<INCOME-TAX> 161
<INCOME-CONTINUING> (12,953)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,953)
<EPS-PRIMARY> (54)
<EPS-DILUTED> (54)
</TABLE>
