Federal Communications Commission_________DA 98-784 Federal Communications Commission Washington, D.C. 20554 April 23, 1998 In reply refer to: 1800C1-CMW Released: April 24, 1998 Richard R Zaragoza, Esq. Fisher Wayland Cooper Leader & Zaragoza L.L.P. 2001 Pennsylvania Avenue, N.W. Suite 400 Washington, D.C. 20006-1851 and John Tongjer, Esq. Holbrook, Heaven, and Osborn, PA P.O. Box 3867 Memam,KS 66203-0867 Re: Station KXBZ(FM) Manhattan, KS File No. BRH-970207YA FileNo.BTCH-961029GI Dear Counsel: 1. This letter is in reference to (i) the above-captioned application for renewal of license of Station KXBZ(FM) (formerly KTDF(FM)), Manhattan, Kansas (File No. BRH-970207YA); (ii) the above- captioned application for transfer of control of Station KXBZ, licensed to Little Apple Broadcasting, Inc. ("LABI"), fiom Michael D. Law to Manhattan Broadcasting Co., Inc. ("MBC") (File No. BTCH- 961029GI); (iii) a complaint dated August 9, 1994, filed by The Eagle Broadcasting Company, Inc. ("Eagle"); (iv) a Petition for Revocation Hearing dated August 9, 1994, filed by Topeka Broadcomm, Inc. (©Topeka"); (v) a Petition for Revocation Hearing dated August 23, 1994, filed by Platinum Broadcasting, Inc. (Tlatinum"); and (vi) a complaint dated August 26, 1994, filed by Montgomery Publications, Inc. ("Montgomery")-1 1 For ease of reference, the petitions and complaints will hereinafter collectively be referred to as "me complaints" and the petitioners and complainants will hereinafter collectively be referred to as "the complainants." MBC and LABI both filed consolidated oppositions to the complaints on October 3, 1994. Platinum and Topeka both filed replies. Eagle filed numerous requests for additional time in which to file a reply, but mere is no record that Eagle ever did so. No informal objections or petitions to deny were filed against either the renewal or the transfer of control application. 1732 ________________Federal Communications Commission________DA 98-784 BACKGROUND 2. On March 9, 1990, the Commission granted the application of Little Apple Broadcasting, a partnership ("LABP"), for a construction permit for a new commercial FM station in Manhattan, Kansas. On November 2, 1993, LABP filed an application for the pro forma assignment of the permit to LABI (File No. BAPH-931102GG). The application was granted on November 24, 1993. Notification of consummation was filed with the Commission on June 21, 1994, stating that the closing was "effective" as of June 1, 1994. Pursuant to grant of that application, and the consummation thereof, the managing general partner of LABP, Michael D. Law ("Law"), became the sole officer, director, and 100% shareholder of LABI. 3. Law states that he was approached by three different broadcast groups interested in investing in his station. In mid-1993 he entered negotiations with MBC. MBC is the licensee of Stations KMAN(AM) and KMKF(FM) in Manhattan, Kansas, and the principals of MBC hold attributable ownership interests in Seaton Publishing Co., Inc. ("Seaton"), which publishes a daily newspaper in Manhattan, The Manhattan Mercury. Negotiations continued between LABI, Law, and MBC for over a year. During that time, Law informed the Commission of his ongoing discussions with MBC, reporting that a prelirninary agreement had been reached See e.g. Exhibit 1 to LABFs October 26, 1993, Application for Minor Modification of Construction Permit (File No. BMPH-931027EF). In mid-1994, the agreements between Law and MBC were formalized, resulting in the execution of an Option Agreement, Promissory Note, Security Agreement, Stock Pledge Agreement, Studio Lease, Tower Lease, Joint Sales Agreement, and Employment Agreement (collectively, "the Agreements"). In sum, pursuant to the Agreements, LABI: borrowed construction monies from MBC pursuant to a Promissory Note secured by the station©s assets and a stock pledge; contracted to lease transmitter and studio space from MBC; granted MBC the right to sell KXBZs commercial air time and receive a percentage of tiie monies derived from the sale thereof; agreed to share some of MBCs non-management staff; and granted MBC the exclusive right to acquire stock in LABI. MBC has now exercised its right to acquire stock in LABI, and the pending application seeks transfer of control of 100% of LABI stock from Law to MBC. 4. As part of the pending assignment application, MBC has promised to eliminate existing attributable cross-ownership interests between MBC and Seaton that were grandfathered when the Commission adopted the daily newspaper cross-ownership rule in 1975. See Multiple Ownership of Sfaryknr^ FM and Television Broadcast Stations. Second Report and Order. 50 FCC 2d 1046, recon. granted in part 53 FCC 2d 589 (1975), aff d sub nom. FCC v. National Citizens Committee for Broadcasting: 436 U.S. 775 (1978). Specifically, MBC proposes that as of the closing of the instant transfer of control, Edward L. Seaton will have resigned as president and a director of MBC, retaining only a non-attributable 3.8% stock interest in MBC. Edward L. Seaton is presently the controlling stockholder (53.1024%), as well as president, secretary, treasurer, and a director of Seatoa Additionally, MBC asserts that three other members of the Seaton family will have resigned their positions as officers or directors of Seatoa MBC stales that, as a result of these changes, no individual will hold attributable interests in both MBC and Seatoa THE AGREEMENTS 5. The Option Agreement, executed June 14,1994, grants MBC two separate options to purchase the stock of LABI, although both could be exercised simultaneously. The first option grants MBC the right to purchase 49% of the stock of LABI at anytime from the date of execution until ten years after the commencement of program tests (Section 2.1). In consideration for that option, MBC paid LABI $53,800, with $100 more to be paid in consideration of the transfer and delivery to MBC of the stock (Sections 2.1 and 2.2). Moreover, in consideration for the construction loan and other "Collateral Agreements," the 1733 ________________Federal Communications Commission________DA 98-784 Option Agreement grants MBC die right to purchase 51% of all of the outstanding LABI stock at anytime during the ten year period following the commencement of program tests (Section 3.1). The consideration for the transfer and delivery to MBC of 51% of LABFs stock varies depending upon when the option is exercised, but, at a minimum, is $56,100 (Section 3.1 and 3.2).2 6. Pursuant to the Option Agreement, in the event that the 49% option is exercised and MBC and Law are both shareholders of LABI, Law has a right of first refusal for the 49% interest during the ten year period following commencement of program test authority and both MBC and Law have a right of first refusal thereafter (Section 2.3). Moreover, upon the transfer of Law©s 49% interest in LABI to MBC, MBC agrees to pledge such stock to Law to secure the performance of its obligations under the Option Agreement (Section 2.4). Additionally, if the agreement is terminated, depending on why termination has occurred, MBC is entitled to a refund from Law of all amounts paid by MBC to Law (Section 7). Finally, if MBC acquires the 49% interest, but fails to exercise the 51% option, Law must either repurchase the 49% or seek an independent party to purchase such interest for the fair market value of such stock (Section 10). 7. The parties also executed a Promissory Note on June 14,1994, whereby MBC agreed to lend LABI up to a specified sum to be used to finance the construction of Station KXBZ. Specific requirements for payment of the loan plus interest are contained in that agreement The loan is secured by the station©s assets (Security Agreement dated June 14,1996) and Law©s stock in LABI (Stock Pledge Agreement dated June 14, 1994). 8. On that same date, LABI and MBC also entered into a Studio Lease and a Tower Lease whereby LABI leases space on MBCs tower and in MBCs studio building. Both agreements are for a period of five years, but may be renewed, and both contain specific provisions regarding rent and the payment thereof. 9. MBC and LABI also entered into a Joint Sales Agreement on June 14,1994. Pursuant to that agreement, which is for a five year renewable term, MBC is authorized to represent LABI in the sale of all of the commercial advertising time on Station KXBZ and to provide any general and administrative services necessary to facilitate the sale of commercial air time on the station (Section 1). Under the Joint Sales Agreement, MBC retains a certain percentage of all revenues derived from the sale of time jointly on Station KXBZ and on any other radio statioa All other station income is to be given to LABI, although MBC is to receive a certain percentage of any station profit after the payment of expenses. If the station revenues are insufficient to pay expenses, MBC has agreed to pay the shortfall, up to a certain sum, but LABI must repay that amount or it may be considered a liability at closing (Section 4). The Joint Sales Agreement provides that "decisions regarding the program format... shall remain the sole and exclusive province and responsibility of Owner [LABI]" (Section 8). Moreover, it specifies that "Owner shall continue to retain full authority and control over the operation of the Station" (Section 8). 10. Finally, Law, LABI, and MBC, to a limited degree, entered into an Employment Agreement. Under that agreement, Law committed to be General Manager of the station, overseeing its day-to-day operation, in exchange for a specified "Monthly Fee" (Section 4). Pursuant to the agreement, MBC is to 2 The amount of possible consideration was increased pursuant to a settlement agreement entered into by and between LABI, Law, and MBC, in connection with a case filed in the District Court of Riley County, Kansas.