> **Strategies for Advancing**
>
> **Minority Ownership**
>
> **Opportunities in**
>
> **Telecommunications**
>
> The Final Report
>
> of the
>
> Advisory Committee on Alternative Financing
>
> for Minority Opportunities in Telecommunications
>
> to the Federal Communications Commission
>
> May 1982

Advisory Committee on Alternative Financing

for Minority Opportunities in Telecommunications

Final Report to the

Federal Communications Commission

May 27, 1982

> This report primarily discusses nongovernment strategies for
>
> financing the acquisition of telecommunications properties
>
> by minorities and is not meant to reflect final FCC policy.
>
> Commissioner Henry K. Rivera, Chairman

ADVISORY COMMITTEE ON ALTERNATIVE FINANCING

FOR MINORITY OPPORTUNITIES IN TELECOMMUNICATIONS

FCC Commissioner Henry M. Rivera, Chairman

Edmund H. Cardona, Special Assistant

[Executive Committee]{.underline} [Policy Panel]{.underline}

Anne P. Jones Michael R. Gardner

FCC Commissioner Bracewell and Patterson

Joe L. Allbritton Pluria Marshall

Allbritton Communications. Inc. National Black Media Coalition

Virginia A. Dwyer L.E. Guzman

American Telephone & Telegraph Co. Chase Manhattan Bank. N.A.

Coy Eklund Margita White

The Equitable Life Assurance Society Taft Broadcasting Co.

of the United States William A. Russell Jr.

Joseph Laitin FCC Public Affairs Office

Private Consultant Erwin Krasnow

Charls E. Walker National Association of Broadcasters

Charls E. Walker Associates, Inc. Robert L. Johnson

Black Entertainment Television

[Financial Panel]{.underline}

[Management and Technical Assistance Panel]{.underline}

Tenney I. Deane

First Energy Associates Victor M. Rivera

Chris Flor Department of Commerce

Heller-Oak Communications Corp. Bazil O\'Hagan

Lee M. Hague The WNDU Stations

Hague and Company Fernando Oaxaca

Ragan A. Henry Coronado Communications Corp.

Broadcast Enterprises National, Inc. Alex P. Mercure

Eugene D. Jackson Mercure Telecommunications, Inc.

National Black Network

Joseph La Bonte

Twentieth Century Fox Corp. [Associate Members]{.underline}

Thomas A. Marinkovich

Daniels and Associates Eddie Pena

Raul Masvidal National Cable Television Association

Biscayne Bank John Oxendine

C. Douglas Mercer II Broadcast Capital Fund, Inc.

First National Bank of Boston

Fernando Oaxaca

Coronado Communications Corp.

Marianne Camille Spraggins

Salomon Brothers, Inc.

Howa\'rd Stason

Blackburn and Associates

Donald A. Thurston

Berkshire Broadcasting Company

Zelbie Trogden

Security Pacific National Bank

Herbert P. Wilkens

Syndicated Communications, Inc.

LETTER OF TRANSMITTAL

Dear Chairman and Commissioners:

> Attached for your consideration is the Final Report of this Advisory
> Committee. The Report contains recommendations that relate to the
> FCC\'s internal organization, policy and rulemaking jurisdiction; the
> private sector; and the Congress.
>
> The Advisory Committee attempted to discuss and report on topics that
> are of major concern to the FCC in fulfilling its commitment to
> increase minority ownership of telecommunications facilities.
>
> Respectfully submitted this 27th day of May, 1982

Henry K. Rivera

Chairman

Advisory Committee on

Alternative Financing for Minority

Opportunities in Telecommunications

Washington, D.C. 20554

CONTENTS

Introduction 1

Policy Panel 3

Distress Sale Policy 3

Tax Certificates 7

Multiple Ownership Rules/Venture Capital 14

Management Panel 19

Backg round 19

Needs 20

Toward a Formal Linkage System 23

Financing Panel 25

Structural Problems in the Marketplace 25

Solutions 30

General Recommendations 35

Legislative Proposal 39

Appendix

EXECUTIVE SUMMARY

The Advisory Committee on Alternative Financing for Minority
Opportunities in Telecommunications was created by the Federal
Communications Commission on September 28, 1981, to explore ways of
financing the acquisition of telecommunications properties by
minorities. Since 1978, when the Commission adopted tax certificate and
distress sale policies, there has been a growing realization that,
although progress has been made, financing has remained the single
greatest obstacle in preventing further gains.

The Committee, composed of leaders in finance and telecommunications was
charged with presenting recommendations to the FCC about Commission
rules that may inhibit minority acquisition of telecommunications
properties; the availability to minorities of successful management
models; and mechanisms for increasing minority ownership of and
participation in nonbroadcast telecommunications industries, especially
financing mechanisms.

A summary of the Committee\'s major recommendations to the FCC follows,
organized according to the Committee\'s working panels on policy,
management and financing. More detailed information is presented in the
body of the report.

[Recommendations]{.underline}

Policy Panel:

-   Develop a position in the Office of Public Affairs that can present
    the Commission with information to maximize opportunities for
    minority ownership in entry policies and licensing procedures for
    new technology; and to present information on the impact of
    deregulatory and structural proposals on minority ownership.

-   Consider amending the percentage ownership requirement in
    partnerships for determining the sufficiency of minority ownership
    interest in distress sales and expedite the processing of distress
    sale requests.

-   Clarify the 1978 [Statement of Policy on Minority Ownership of
    Broadcasting Facilities]{.underline} to indicate that minority
    general partners holding more than 20 but less than 50 percent
    interest can exercise control and meet the test for tax certificates
    and distress sales.

-   Expand the tax certificate policy to include such nonbroadcast
    properties as cable, common carrier and land mobile.

-   Adopt a "capitalizing feature" for tax certificates to enable
    shareholders with less than controlling interest in a minority-
    owned or controlled entity to sell their interest to the controlling
    shareholder(s) and become eligible for a tax certificate.

-   Amend the multiple ownership rules so venture capital companies can
    increase their equity participation in minority-operated entities
    seeking to acquire telecommunications facilities.

-   Encourage the establishment of a nonprofit public foundation in
    Washington, D.C., to complement existing resources that would
    provide minorities with comprehensive, expert information about the
    telecommunications industry.

Management Panel: (Needs identified)

-   Development of specific literature and courses that address the
    critical management and technical aspects of telecommunications
    businesses.

-   An increase of sponsored or financed interchanges (workshop,
    seminars, etc.) between experts and minorities entrepreneurs
    experiencing serious problems.

-   An increase in the level of awareness in the minority business
    community of the risks involved in telecommunications ventures. A
    minority entrepreneur would have a more professional financial
    perspective from which to determine the soundness of business
    ventures [prior to any commitments]{.underline} and from which to
    successfully operate a business.

-   Active advocacy by advertising clients in promoting the use of
    minority-owned telecommunications businesses especially those
    businesses in the broadcasting industry. A satisfied client
    advocating the use of a minority-owned business greatly enhances
    that firm\'s marketing efforts.

-   A better flow of information to the minority community about
    telecommunications business opportunities.

-   More extensive follow-through assistance from the entry stage to an
    appreciable period of the business operation.

-   Sign memorandum of understanding with the Department of Commerce
    whereby interested entrepreneurs would be referred to appropriate
    minority business development centers that have access to a national
    network of specialized consultant center and technology
    commercialization centers.

Financing Panel:

-   Grant rules waivers to permit an established broadcaster to acquire
    an equity interest in a minority-controlled property that otherwise
    would exceed multiple ownership limits or adversely affect
    diversification.

-   Explore expanding the rights of sellers as creditors, including the
    rights of a reversionary interest in a broadcast license, in those
    cases where the seller provides financing.

-   Survey financial institutions to augment existing surveys to
    determine the kinds of financing available for telecommunications
    ventures.

-   Develop a primer to help minority entrepreneurs present attractive
    proposals to potential clients.

-   Prepare a tax bibliography and collect materials that discuss
    various tax advantages.

-   Help lender become more aware of the existence and availability of
    federal and state loan guarantee programs.

-   Explore the benefits that investment bankers could provide to
    minorities.

> INTRODUCTION

The emergence of new telecommunications technologies offer a wide range
of opportunities for minority entrepreneurs to compete in providing new
services and products. Specific policies to expand the sources for
financing minority acquisition of telecommunications properties are
needed, but they cannot succeed unless the Federal Communications
Commission considers the impact of regulation and deregulation on
minority ownership.

Particularly, the FCC in structuring entry and establishing licensing
procedures for new and developing technologies must continually consider
whether its proposed policies will encourage or preclude minority
entrants.

At the same time, the Commission must carefully review the impact of
deregulation on minority ownership in order not to undermine minority
ownership goals or President Reagan\'s stated commitment "to expanded
development and encouragement of minority business."

In pursuing a competitive marketplace, the Commission cannot ignore that
through decades of rules and regulations it has structured the
telecommunications industry. Because the current marketplace is
regulated, deregulation itself can lead to a government-imposed
restructured marketplace in which competitive advantages or handicaps
are influenced or determined by previous FCC policies.

For example, the FCC promulgated ownership and other rules to promote
diversity of media control, including minority ownership. But there is
considerable evidence that these rules have actually limited
competition. Yet, their abrupt removal could result in greater market
dominance by established entities, less diversity and fewer

opportunities for new entrants into broadcast ownership, including
minorities. The Commission cannot be blind to the restructuring
consequences of deregulation.

It would not be appropriate nor does the Committee intend to take
positions on matters pending before the Commission. However, we urge the
Commission to provide the personnel and procedures to ensure that the
effect on minority ownership opportunities be deliberated in all
relevant proceedings.

> [Recommendation]{.underline}: Through a cooperative effort between an
> advocate[^1] in the Office of Public Affairs and the relevant bureau,
> the Commission should be presented with
>
> 1\) Recommendations for maximizing opportunities for minority
> ownership in cases involving entry policies and licensing procedures
> for new technologies;
>
> 2\) Information concerning the impact on minority ownership of
> deregulatory and structural proposals; and

3)  Information and recommendations in all other proceedings that
    potentially affect minority business opportunities in
    telecommunications.

We recognize that in making decisions on issues of regulation and
deregulation the Commission must be guided by perceptions of how the
total public interest may best be served. Our fundamental concern is
that minority ownership interests be considered along with other policy
issues.

As President Reagan said in a letter to the FCC Chairman, "As the
minority business sector secures its position in the American
marketplace, not only minority Americans but all of our citizens will
benefit."

PANEL ON FCC POLICIES

The Policy Panel\'s goals were to recommend amendments to existing
policies and adoption of new policies to encourage increased minority
ownership. Toward that end, the panel surveyed the status of the
Commission\'s tax certificate and distress sale policies, among others;
explored opportunities in such nonbroadcast telecommunications areas as
cable television, satellite communications and radio common carriers;
and reviewed possible licensing procedures.

Distress Sale Policy-Background

In May 1978, the Commission issued a [Statement of Policy on Minority
Ownership of Broadcasting Facilities,]{.underline}[^2][^/^]{.underline}
in which it observed that that there was "a dearth of minority ownership
in the broadcast industry" and that an increase in such ownership would
"inevitably enhance the diversity of control of a limited resource, the
spectrum."[^3]^/^

It reaffirmed its commitment to increased minority ownership of
broadcast facilities and announced the adoption of a new policy on
distress sales to further that goal. Licensees whose licenses were
designated for a revocation hearing or whose renewal applications were
designated for hearing on basic qualification issues would be permitted
to transfer or assign their licenses at a distress sale price to
applicants with significant minority ownership interests. [^4]^/^

The FCC said that extension of its distress sale policy to further
minority ownership was limited to situations where the buyer had a
significant minority ownership interest, the sale was at a "distress
price" of no more than 75 percent of fair market value and the distress
sale election took place before the hearing began.

As a result of the Commission\'s distress sale policy, 28 distress sales
have been approved resulting in transfers to 25 minority buyers. While
the addition of these 25 minority licensees indicates that the
Commission\'s initiative to increase minority ownership is succeeding,
it appears that further improvements may be made by revisiting the use
of the percentage ownership requirement in partnerships for determining
when the level of minority ownership is sufficient to warrant granting a
distress sale request and by expediting the processing of requests for
distress sale relief.

The following sections explain these recommendations.

[Limited Partnerships]{.underline}

Although the [Policy Statement]{.underline} did not define the precise
level of ownership that would make a minority buyer eligible for a
distress sale, it did indicate that tax certificates could be issued
where minority ownership exceeded 50 percent or constituted a
controlling interest. This standard has since been applied to distress
sales as well.

The Commission further indicated that the question of whether
"certificates would be granted in other cases will depend on whether
minority involvement is significant enough to justify the certificate in
light of the purpose of the policy announced herein."[^5]^/^

In [Long-Pride Broadcasting Company,]{.underline} [^6]^/^ the Commission
rejected a request for a tax certificate because the minority owner\'s
interest in the buyer was only 43 percent, even though he was able to
vote an additional 10 percent of the stock held in a voting trust. The
Commission said this did not establish control by this individual, and a
tax certificate was not issued because the stockholding fell below a
specified level.

In limited partnerships, unlike in the corporate situation, the general
partner customarily holds less than a 50 percent equity interest. Even
so, the general partner is given exclusive authority to operate the
partnership and can be said to control it. The limited partners who hold
a majority share are often passive investors who do not exercise
significant control over the partnership\'s affairs.[^7]^/^

Under these circumstances, a 1imited partnership in which the general
partner is a minority should be able to meet the test of showing that
[control]{.underline} would be in the hands of minorities. In fact, the
Commission did issue a tax certificate for a sale to a limited
partnership in which the general partner was a minority holding a 45.5
percent interest.[^8]^/^

As the Commission noted, he was given sole control over the partnership
and met the [Policy Statement]{.underline} test. While the FCC expressed
concern over situations in which a minority partner had control but no
substantial interest in the partnership, a 45.5 percent interest is well
above any such threshold. In our view, the FCC should allow a threshold
interest of 20 to 30 percent.

The limited partnership offers an avenue to increase minority ownership
because it provides an opportunity for another method of financing a
broadcast purchase. While the Commission did approve the certificate in
the one case that came before it (Bernard), parties continue to be
guided by the [Policy Statement,]{.underline} which is interpreted as
requiring a 50 percent-plus interest.

[Recommendation]{.underline}: Therefore, we recommend that the FCC
clarify the [Policy]{.underline}

> [Statement]{.underline} to indicate that general partners holding less
> than a 50 percent-plus interest, but more than 20 percent, can
> exercise control and meet the test of the [Policy
> Statement]{.underline}. We also recommend that this policy be applied
> to requests for tax certificates.

[Expedited Processing]{.underline}

Currently, a petition for distress sale is processed by the Broadcast
Bureau and the Adjudication Division of the General Counsel\' s Office
(formerly Office of Opinions and Review).

[Recommendation]{.underline}: To expedite the processing of distress
sale petitions, we

recommend that the FCC delegate to the Broadcast Bureau authority to
process and grant distress sale petitions that are consistent with
Commission policy.

Tax Certificates

The Commission concluded its l978 [Policy Statement]{.underline} by
noting that "while the immediate area of concern of this statement has
been broadcasting, it is expected that in the future attention will also
be directed towards improving minority participation in such services as
cable television and common carrier." The formation in 1981 of the
Advisory Committee on Alternative Financing for Minority Opportunities
in Telecommunications has focused attention on the FCC\'s goal of
improving minority participation in [all]{.underline} aspects of
telecommunications.

Today, it is clear that the tax certificate policy has become a
successful mechanism for increasing minority broadcast ownership. Thus,
the tax certificate, which is the cornerstone of the Commission\'s
minority ownership policies, is a logical starting point for extending
the benefits of these policies to other areas.

[Recommendation]{.underline}: Accordingly, the Policy Panel recommends
that the tax

certificate be available for the sale to minority entrepreneurs of
nonbroadcast properties such as cable, common carrier and land mobile.

[The Tax Certificate as a Creative Financing Mechanism]{.underline}

Forty-three tax certificates have been issued since 1978.[^9]^/^
Minority stations acquired through tax certificates represent over 25
percent of all commercial minority stations. There is no question that
the policy has served as a major incentive to those selling broadcast
stations to seek minority buyers.

Most significant, the tax certificate has achieved its successes with a
minimum of government intrusion into the workings of the marketplace
providing a very real incentive for carrying out the goal of the
Commission and the courts[^10]^/^ to increase minority ownership in
broadcasting.

Tax certificates are issued pursuant to Section 1071 of the I.R.S.
Code,[^11]^0/^ which empowers the Commission to certify that the .ale or
exchange of a broadcast property is "necessary or appropriate to
effectuate a change in a policy of or the adoption of a new policy by,
the Commission with respect to the ownership and control of radio
broadcasting stations."

When a tax certificate is issued the seller may treat the transfer as an
involuntary conversion under Section 1033 (such treatment contingent on
reinvestment in qualifying replacement property within a specified
period) or may reduce the basis of certain depreciable
property.[^12]^/^

In either event, the tax certificate enables the holder to defer tax on
the capital gains realized on the sale of the broadcast property to a
minority entrepreneur. The tax certificate is effective only in those
situations where the seller\'s capital gains savings exceed the
difference in purchase prices offered by a nonminority and a minority
purchaser. As such, the tax certificate effectively subsidizes the
bargaining position of minority entrepreneurs seeking to enter the
telecommunications marketplace.[^13]^2/^

But the tax certificate may be issued to the seller only after the
transaction is [completed]{.underline}.[^14]^3/^ Thus the tax
certificate does not remedy directly the very pressing dilemma that this
Committee was established to explore: the lack of financing available to
minority entrepreneurs to successfully finance telecommunications
transactions.

The solution to this financing dilemma may be found in part, in an
expansion of the tax certificate policy to transform it into a creative
financing tool, allowing minority entrepreneurs to share more
meaningfully in the benefits of Section 1071.

[Recommendation]{.underline}: Therefore, the Policy Panel proposes that
the Commission

adopt a policy to enable entities already controlled by racial or ethnic
minorities to attract new investors by means of the tax certification.
This would be accomplished by the adoption of a policy to enable any
shareholders in an enterprise partially owned but controlled by
minorities to become eligible for a tax certificate upon the sale of
their interests to the minority shareholders, provided that such a sale
enhanced minority control of the enterprise.

For example, assume Shareholder X, an Hispanic, owns 60 percent of
Corporation A, while Shareholders Y and Z each own 20 percent. Our
proposal would permit Y and/or Z to sell their interest to X and defer
capital gains tax on the proceeds, provided they apply and qualify for a
tax certificate (that is, they must reinvest the proceeds in
"replacement property" within two years and the Commission must find
that issuance of a tax certificate would further the public interest,
etc.).[^15]^4/^

This expansion of the tax certificate would enable minority
entrepreneurs to attract investors before the transaction is completed,
when securing financing is critical, by promising them significant
capital gains deferral on the sale of their interest to the controlling
shareholder.[^16]^5/^

This "capitalizing feature" of the tax certificate would enable
investors to sell their interest at any time and apply for a tax
certificate. Therefore, the capitalizing feature would also serve as a
major incentive for investment in minority businesses
[after]{.underline} the entity has acquired a broadcast property,
thereby stabilizing the capital base of existing minority-owned or
controlled businesses.[^17]^6/^

This stabilizing component of the "capitalizing feature" is similar in
intent to the Commission's policies of granting rule waivers, where
appropriate, to enable minority broadcasters to enter and remain in the
communications marketplace.[^18]^7/^

Congress has accorded the Commission the flexibility to adopt the
capitalizing feature pursuant to Section 1071. This section was enacted
in the Revenue Act of 1943 in response to the Commission\'s promulgation
of multiple ownership rules that same year.

Congress gave the Commission broad powers to implement the section,
mandating only that certificates issue to effectuate new or changed
policies with respect to the ownership or control of broadcast
stations.[^19]^8/^

> There is no indication in the statute or its legislative history that
> the Treasury has been granted any power to determine whether the
> FCC\'s action in issuing a tax certificate is appropriate. \* \* \*
> (T)he service appears to view its role as limited to examination of
> the certificate to insure that it adequately describes the sale. Thus
> a full understanding of Section 1071 requires an examination of the
> FCC\'s policies in granting tax certificates.[^20]^9/^

Analysis of the Commission\'s tax certificate policy indicates that the
adoption of a policy statement implementing the capitalizing feature
would be permissible and entirely consistent with that policy.

For several years the Commission limited its application of Section 1071
to involuntary divestitures occasioned by compliance with the multiple
ownership rules.[^21]^0/^ In 1970, however, the agency expanded tax
certificate policy to some cases involving [voluntary]{.underline}
dispositions of properties grandfathered under the multiple ownership
rules.[^22]^1/^

In so doing, the Commission set forth guidelines for determining the
proper circumstances for issuance of a tax certificate and concluded
that a well-defined causal relationship should exist between the
adoption of a policy and the sale for which a tax certificate was
sought.

Factors for determining such a causal relationship were whether the sale
occurred within a reasonable time after the adoption of the new policy,
whether the policy was a significant factor in the sale and whether the
showing was consistent with the Commission\'s general experience in
broadcasting.[^23]^/^

In 1976, the Commission revisited Section 1071 and abolished the
requirement that there be a showing of a \"reasonable time span\" and a
\"causal relationship\" between the sale and the change in Commission
po1icy.[^24]^3/^ This ruling eliminated any uncertainty as to whether
the Commission would permit [voluntary]{.underline} sales to qualify for
a tax certificate whenever a new or changed policy has grandfathered an
existing combination. It also effectively facilitated the use of tax
certificates to encourage the voluntary sales of communications
properties if such sales furthered the Commission\'s ownership goals.

Thus, with the adoption of the 1978 [Policy Statement]{.underline}, the
Commission extended availability of tax certificates for voluntary
dispositions beyond the multiple ownership context to effectuate another
major ownership goalminority ownership.

The [Policy Statement]{.underline} is a recognition by the Commission
that there is a necessary correlation between a regulatory policy
advocating increased minority ownership and the creation of meaningful
incentives to promote that end. The success of the tax certificate is
testimony to the validity of that approach, and the capitalizing feature
is but a logical and wholly permissible extension of it.

Multiple Ownership Rules and Their Effect

on Venture Capital Companies

The FCC\'s multiple ownership rules seek to promote competition and
diversity in the ownership of mass media and include the seven-station,
duopoly, one-to-a-market, newspaper-broadcast cross-ownership, regional
concentration of control and TV-cable cross-ownership rules.[^25]^4/^

Under these rules, an equity party may not directly or indirectly "own,
operate or control" a "reportable interest" in a prohibited combination.
A "reportable interest" is generally any voting stock in a corporate
licensee having fewer than 50 stockholders and one percent of the voting
stock in a licensee with more than 50 shareholders.

Currently, under a special exception to the multiple ownership rules,
certain financial institutions such as banks, mutual funds and insurance
companies may own up to 5 percent of the outstanding voting stock in a
corporation with broadcast interests that has more than 50
stockholders.[^26]^5/^

Under the seven-station rule a venture capital company or individual may
not have a reportable interest in more than seven AM, FM or TV stations
(only five VHF). This rule especially inhibits the ability of minority
entrepreneurs to acquire equity capital.

Venture capital companies\--both private and those licensed by the Small
Business Administration\--have traditionally provided "gap" financing
for minorities wishing to purchase telecommunications facilities; that
is, they provide the difference between what conventional lenders
(commercial banks, insurance companies, commercial lenders) can supply
as debt and the equity provided by the minority entrepreneur.

The gap arises because of the manner in which most telecommunications
acquisitions are financed. For example, radio stations are usually
purchased at prices that range from eight to ten times current cash
flow. Conventional lenders are generally willing to lend three to five
times the facility\'s cash flow, and the remainder of the purchase price
is financed through equity.

If a station\'s current cash flow is \$500,000 and the agreed upon price
is eight times cash flow, the station will sell for \$4 million. Assume
further that the conventional lender is willing to lend four times cash
flow, or \$2 million. The remaining purchase price of four times cash
flow will have to be financed through equity. Most minority
entrepreneurs have about 10 percent equity participation, or in this
case about \$500,000, leaving an equity gap of \$1.5 million.

This equity gap is usually filled by private venture capital investment
companies, or Small Business Investment Companies (SBICs) or Section
301(d) SBICs (formerly known as Minority Enterprise Small Business
Investment Companies or KESBICs). However, because all voting stock
interests in closely held licensees are "reportable" under the
seven-station rule, the private venture capital investment companies
SBICs and Section 301(d) SBICs may be precluded from taking an equity
position in the acquisition.

These venture capital companies can participate as lenders because debt
is not an ownership interest that will trigger the ownership rules.
However, as the funds of the venture capital companies are usually at
higher risk because they are subordinate to those of the conventional
lender, venture capitalists usually seek higher returns and equity
participation.

[Recommendation]{.underline}: The Commission should consider amending
its multiple

ownership rules to facilitate equity participation by venture capital
companies in the acquisition of telecommunications facilities by
minority entrepreneurs. The Commission may wish to consider acting on
the rulemaking petition filed in October 1981 by the National
Association of Black Owned Broadcasters. The NABOB petition (see
Appendix A) discusses the importance of Section 301(d) SBICs in making
capital available to minority entrepreneurs and urges that they be
exempt from the multiple ownership rules.

Such an exemption would promote the Commission's minority ownership
goals and would be consistent with the intent of the multiple ownership
rules insofar as they enhance overall diversity in the ownership of mass
communications.

An alternative to an exemption would be to raise the threshold level at
which the interest of a Section 301(d) SBIC becomes relevant under the
multiple ownership rules. The "reportable interest" cognizable by the
rules could be increased to a percentage below conventional levels of
actual or working control. Both alternatives are compelling because
Section 30l(d) companies supply gap financing in amounts smaller than
the equity supplied by conventional lenders and typically cannot dictate
managerial decisions, influence program content or even prevent the
entity from inadvertently placing the Section 301(d) SBIC in violation
of the multiple ownership rules.

Nongovernment Minority Telecommunications Assistance Office

[Recommendation]{.underline}: The Policy Panel recommends the Commission
encourage

the establishment of a 501(c)(3) tax-exempt public foundation to be
funded by the private sector (such as telecommunications corporations,
communications law firms), to provide a single point of contact in
Washington where minority investors could gain access to comprehensive
information on which to base business decisions. This office would be a
coordinating vehicle for the diverse resources already available to
minorities. An alternative to a new foundation would be the
establishment of such an office in an existing institution (such as a
university or foundation).

This office would [not]{.underline} be a subsidizing vehicle, nor would
it displace existing resources (attorneys, consultants). It would
provide [informed]{.underline} and experienced counsel in such diverse
areas as:

\--Government resources available (FCC, SBA, Commerce Department)

\--Private sector resources (Storer program, NABOB, etc.)

\--Technical requirements, costs and availability

\--Financing requirements and possible sources

\--Legal requirements and possible strategies

\--Public relations programs

A key function of the office would be to develop an information system
to effectively alert potential minority investors about new
opportunities and regulatory initiatives that would affect their
interests. Recent actions taken at the Commission might have had
different results had minorities been fully informed. Accordingly a
system for alerting this community about actions well in advance is
desirable.

Staff should include professionals from a variety of
disciplines\--engineering, law, accounting, finance, public
relations\--working part- or full-time, depending on need.

Contributors would be sought primarily from telecommunications
corporations and communications law firms. The corporations also would
be encouraged to lend expert personnel to this public foundation for one
year.

Under the alternative approach, the office would be funded by the host
university or foundation.

PANEL ON MANAGEMENT AND TECHNICAL ASSISTANCE

The Panel on Management and Technical Assistance was formed to address
activities that are essential to the successful acquisition and
operation of a telecommunications facility. The panel\'s members, who
work in both the private and government sectors, were particularly well
suited to address those problems.

It is significant that Victor M. Rivera, director of the Minority
Business Development Agency, Department of Commerce, served as panel
coordinator because his agency is primarily responsible for providing
management and technical assistance to minority entrepreneurs.

Background

The rapid growth and diversification of the telecommunications industry
will open the way for many new opportunities for existing businesses and
for entrepreneurs interested in entering the field. Minorities
historically have not been represented in any significant numbers in
telecommunications. Recent data suggest that minority-owned broadcasting
businesses represent slightly less than 2 percent of the broadcasting
businesses in the United States.[^27]^6/^

Minority participation is even smaller when viewing the
telecommunications industry as a whole. Chief among the reasons for the
low minority participation rate is the lack of adequate access to
capital and a lack of management and technical expertise. Even so, there
are signs indicating a gradual increase in the number of minorities
either starting or acquiring telecommunications businesses.

Such evidence when viewed together with the greatly expanding business
opportunities in the field dramatizes the need for developing a
coordinated delivery system to furnish minorities with the critical
components\--capital and management expertise\--of a telecommunications
business.

Needs

The Panel on Management and Technical Assistance was asked to formulate
a general plan to identify minority-owned telecommunications businesses
across the country and assess their management/technical assistance
needs; provide a general action plan to address the specific and
realistic training needed to prepare minorities to enter the industry
and to assist existing minority-owned businesses to expand; and identify
existing public and private resources that, through networking and
improved coordination, can be channeled into an efficient delivery
system to furnish minorities with management expertise.

Following is an outline of the types of management/technical assistance
most needed by minorities as identified by the panel:

-   Development of specific literature and educational courses that
    address the critical management and technical aspects of
    telecommunications businesses.

-   An increase of sponsored or financed interchanges (workshops,
    seminars, etc.) between experts and minority entrepreneurs
    experiencing serious problems.

-   An increase in the level of awareness in the minority business
    community of the risks involved in telecommunications ventures. A
    minority entrepreneur would have a more professional financial
    perspective from which to determine the soundness of business
    ventures [prior to any commitments]{.underline} and from which to
    successfully operate a business.

-   Active advocacy by advertising clients in promoting the use of
    minority-owned telecommunications businesses, especially those
    businesses in the broadcasting industry. A satisfied client
    advocating the use of a minority-owned business greatly enhances
    that firm\'s marketing efforts.

-   A better flow of information to the minority community about
    telecommunications business opportunities.

-   More extensive follow-through assistance from the entry stage to an
    appreciable period of the business operation.

[Action Steps MBDA Plans to Complete by September 30,
1982]{.underline}[^28]^[7/]{.underline}^

-   Compile a directory of minority-owned and managed telecommunications
    businesses.

-   Identify, by region, the key or larger, more successful
    minority-owned businesses to serve as role models and mentors.

-   Develop a management and technical assistance program specifically
    geared to minority-owned firms with growth potential. This
    assistance would offer growth opportunities through acquisitions,
    joint ventures and even creative steps for market expansion.

-   Develop a delivery system through which minority-owned firms
    currently in the telecommunications industry and minorities
    interested in the industry could gain information on technologies as
    well as the capital resources to finance such ventures.

-   Identify the types and extent of assistance associated with small
    and less-experienced telecommunications businesses so that existing
    and potential problems can be anticipated and recommendations can be
    developed for dealing with these problems. This information would be
    reduced to matrix form for discussion and quick identification of
    issues that serve .as disincentives to increase minority
    participation in the industry. (Appendix B indicates the type of
    management and technical assistance that might be required in
    various industries.)

-   Develop a mentor program to provide on-the-job training and
    internships. Internships would be matched with successful minority
    or nonminority firms to develop a cadre of minorities experienced in
    all phases of telecommunications.

-   Develop a training manual.

-   Identify and attempt to interconnect existing government and private
    sector resources that can provide management/technical assistance
    specializing in telecommunications.

Need for Formal Linkage System

The panel realizes that an extensive array of government and private
programs currently exists in addition to certain minority and
nonminority trade associations that can provide many of the kinds of

.assistance most needed by minorities in starting and operating a
telecommunications business.

What does not exist, however, is a formal linkage system to identify
minorities in telecommunications, refer them to appropriate sources of
assistance and deliver the type, quality and intensity of
management/technical assistance needed.

Federal agencies such as the Bureau of Census, National
Telecommunications and Information Administration, Minority Business
Development Agency, Federal Communications Commission, Bureau of
Industrial Economics and Small Business Administration represent a small
sampling of information and management and technical assistance
resources that can be captured for the benefit of minorities in
telecommunications, as evidenced by the matrix preliminarily identifying
the existing .management and technical resources (Appendix B).

Once identified, a means must be developed to link resources. One way
would be through the use of interagency agreements or informal memoranda
of understanding.

Recommendation: The FCC and the Minority Business Development Agency

should develop a formal agreement whereby interested entrepreneurs would
be referred to appropriate minority business development centers,
located across the country, that would have access to a national network
of specialized consultant centers and technology commercialization
centers. Such an inter-agency accord would serve as a model for other
agencies.

The special relationship between the National Association of
Broadcasters and the Broadcast Capital Fund, which provides financial
and management/technical assistance to minority broadcasters, is another
good example of the kind of referral-assistance partnership that should
be explored on a wider scale.

FINANCING PANEL

As noted earlier in this report, shortage of capital is a principal
problem facing minorities seeking ownership of telecommunications
facilities. The Financing Panel believes there are enough properties\--
particularly broadcast properties\--for sale and there are sufficient
numbers of minority entrepreneurs willing to purchase them. The problem
lies in the great difficulties minorities face in obtaining the
capital\--either debt or equity\--to make an acquisition.

The shortage of capital is due to two fundamental problems. First, many
minority broadcasters do not know how to obtain financing and financial
institutions have misconceptions about potential minority broadcasters.
The second and perhaps more serious problem is a structural problem in
the marketplace that affects [all]{.underline} broadcasters,
particularly small ones. Thus, the Financing Panel believes that any
attempt to solve the capital shortage problems must begin with an
analysis of the structural problem affecting the marketplace.

This is not to minimize the other problems. The lack of experience in
obtaining financing and the misconceptions about minority entrepreneurs
by some financial institutions are serious problems, and they have been
addressed before. The experience factor is shared by all small
businesses and can only be solved by programs that inform and educate
the beginning entrepreneur. This can best be done through cooperative
efforts by government, industry and financial institutions.

Structural Problems in the Financial Marketplace

There are a number of institutional and industry-related factors that
combine to hinder the ability of minority entrepreneurs to acquire
capital to purchase telecommunications facilities.

[Institutional Factors]{.underline}

One problem results directly from the fact that lending institutions
must charge high interest rates. This problem is compounded for the
small or minority entrepreneur who does not have access to fixed-rate
long-term funds. As a result, that entrepreneur is subject to the
vicissitudes of short-term rates.

Sustained high interest rates[^29]^8/^ reduce the comfort level of
lenders in all investments, thereby increasing the level of equity
required to attain a given capitalization. This is significant because
minority entrepreneurs, at least in broadcasting, historically have not
had sufficient capital to provide all the equity funds required in a
broadcast acquisition.

High interest rates also mean that debt service consumes cash flow,
reducing immediate returns on equity. Moreover, the higher level of
equity required creates a broader base on which these returns are
spread, again reducing the yield to the investor. The net result is that
investment stagnates and lenders see fewer acceptable deals and
potential owners are frustrated.

[Industry-related Factors]{.underline}

Compounding the problems resulting from high interest rates is the fact
that broadcasting is not providing a high enough return on equity
invested to attract venture capital participation. And because
minorities historically have not had sufficient capital to provide all
the equity funds required in a broadcast acquisition, they have had to
turn to venture capitalists for a substantial portion of their equity.

Meanwhile, with lower industry earnings growth, broadcasting, and to an
extent cable,[^30]^9/^ has lost much of its glamour and fast-track
appeal as a venture capital opportunity. Increasingly, venture capital
investors are looking for hard numbers to justify their interest in
these industries.

(The applicability of this phenomenon to telecommunications industries
other than broadcasting and possibly cable is not clear and further
study is warranted, particularly because many of the committee members
feel that new nonbroadcast telecommunications technology may offer real
growth opportunities for minorities.)

[Illustration: Radio Station Financing]{.underline}

The panel analyzed radio station financing to illustrate the effect that
high interest rates and low return on equity have had on financial
opportunities. We conclude that given current lending and investment
practices, including realistic interest rates and expected return on
equity, as well as purchase multiples in today\'s market, radio station
financing cannot simultaneously service its debt and provide an
acceptable return on equity to its investors.

The variables considered in our analysis were: the purchase price of the
station, which normally is determined as a multiple of cash flow in the
year of purchase; the amount of money the lender is willing to lend,
also usually determined as a multiple of current cash flow; and interest
rates.

Investors in radio stations generally expect to realize a return on
equity of 30 to 40 percent over 5 years. Our analysis (see details in
Appendix D) indicates that these rates of return are not achievable
under current market conditions, with interest rates between 16 and 22
percent and station purchase prices of 8 to 10 times cash flow, while
banks usually are lending 3, 4 or 5 times cash flow.

To provide investors with the return they require while still satisfying
the lenders that the station will have sufficient cash to service its
debt, certain variables in the analysis must change\--namely, the
purchase price of the station must fall or loan interest rates must be
reduced. If less equity were invested in the station at the time of
purchase, investors could achieve their goals but an equity shortfall
would result. Clearly, the lender would not be willing to pick up this
shortfall by increasing its loan to 6 or 7 times cash flow because the
station has difficulty servicing its debt even with a loan of 5 times
cash flow.

By lowering the purchase price of the station, i.e., the mult1ple of
cash flow at which the station sells, while keeping the bank loan at a
constant multiple of initial cash flow, a 30-40 percent rate of return
to investors could be achieved. This lower purchase price could vary
from 6.9 times cash flow to 5.3 times cash flow, depending on interest
rate and desired rate of return on equity. Given the current market,
however, it seems unlikely that purchase prices will fall to within that
range.

It also is unlikely that interest rates will reach the low level
required to improve the station's cumulative cash flow.

Lengthening the term of the loan at current interest rates does not
improve the return to investors because, upon sale of the station after
5 years, the amount of principal that must be repaid to the bank is
greater than it otherwise would have been under a shorter-term loan.
This additional principal payment will more than offset any improvement
in cumulative cash flow caused by the longer amortization schedule,
thereby reducing the amount of cash remaining for equity investors.

It may, of course, be possible to persuade investors to accept lower
rates of return in certain cases, but that is not likely in today\'s
market. Therefore, attracting equity is still a significant problem for
minority entrepreneurs. This equity would have to be supplied by private
venture capital firms or by SBICs or Section 30l(d) SBICs licensed by
the Small Business Administration. However, industries providing higher
rates of return would also compete for these funds.

[Properties Priced at Lower Multiples of Cash Flow]{.underline}

Broadcast opportunities with relatively low purchase prices seem
tailor-made for minorities. However, these typically are "turn-around"
situations that contemplate changing format to attract a larger
audience. The format change destroys the station\'s existing cash flow,
an accepted indicator of its business, and requires considerable
management and financial resources to attract the new audience.

The risks are high, regardless of leverage, and the investment decision
is highly subjective. On the other hand, major market properties priced
at low multiples are practically nonexistent, closing the door to all
but the stronger buyers.

The environment facing the minority candidate, then, is one of usually
high risk in an industry of diminishing investor appeal at a time of
uncommonly high interest rates, reduced leverage opportunities and
falling yields on investment.

Solutions

[Joint Ventures and Management Contracts]{.underline}

Minority candidates may be able to improve their chances of obtaining
financing by combining their fiscal and management resources with those
of experienced broadcasters.

For example, management agreements with established communications
operations should allay the fears of investors concerned about the
minority firm\'s managerial expertise. In cases involving seller
financing, for instance, the seller might feel more comfortable selling
to a minority entity that had ties to experienced management. Further,
the management assistance that can be given by an experienced operator
is crucial to the success of certain turnaround properties. These
stations, often acquired at low multiples, require particular attention
to management and sales development.

Management contracts do not violate FCC regulations or policies,
provided that the licensee retains ultimate control over operations.
(See [Southwest Texas Public Broadcasting Council]{.underline}, 85 FCC
2d 713, 1981.) However, Section 73.613(c) of the rules requires that
certain management contracts be filed within 30 days.

Joint venturing may also be a vehicle for directly financing a minority
buyer.

Neither the Committee nor the Financing Panel intends to suggest that
one cannot find minority entrepreneurs who possess management
experience. There is a pool of such persons in telecommunications. But
there are also accomplished minority persons in other fields whose entry
into telecommunications can be encouraged if they can get management
assistance from experienced operators.

An excellent example of such cooperation is the mentor relationship
between Capital Cities Communications, Inc., and Seaway Communications.
Inc. In 1977, 34 black business and professional men and women in
Chicago incorporated as Seaway Communications and placed \$1 million of
personal capital in an escrow account. Capital Cities, an established
company, provided counsel in the examination and analysis of available
television properties.

On April 24, 1979, the Commission granted Seaway approval to acquire 100
percent of the stock in Northland Television, Inc., licensee of WAEO-TV,
Channel 12 (NBC), Rhinelander, Wis. It was the first grant of an
operating license for a network-affiliated VHF television station to a
100 percent minority-owned company and the first distress sale approved
by the Commission. Capital Cities has no stock ownership or management
position in Seaway.

The Financing Panel explored the effect of the Commission\'s multiple
ownership and diversification policies on joint venturing and equity
participation involving established telecommunications operators. We
urge the Commission to consider changes in those policies that now have
a detrimental effect on the availability of financing to minority
entrepreneurs. Some suggestions essentially involve the grant of waivers
or expansion of multiple ownership and diversification requirements to
established entrepreneurs who participate in telecommunications ventures
with minorities.

[Recommendation]{.underline}: For example. FCC policies should allow an
established

entrepreneur to acquire an equity interest in a minority-controlled
property that otherwise would exceed multiple ownership limits or
adversely affect diversification. The policy could encourage
participation in varying degrees, from a simple equity position by a
venture capitalist with no management activity, to a situation where
minorities hold a controlling interest while the established operator
develops the property. The latter venture enables the investor to
protect his return on equity and provides an inexperienced minority
entrepreneur with management and technical support. Another possibility
would be to allow the established multiple operator to acquire the
additional prohibited property provided he assisted a minority in the
financing of another comparable venture.

[Seller-Financed Properties]{.underline}

Although our analysis is pessimistic, the fact is that broadcast
properties are being sold. Most sales are fully or partially
seller-financed. In 1981, of the 487 station transfers filed with the
FCC, two-thirds involved some form of seller financing.[^31]^0/^ We
think minorities should be purchasing seller-financed properties because
it is obviously one of the ways that properties can be bought given
today\'s economic conditions.

There are some important points to consider. One of the analyses in
Appendix D concludes that a 30 percent return on equity is possible is
where the cost of financing does not exceed 14 percent. Financing priced
at 14 percent or less is not generally available, except from sellers.
Assuming that the purchase price does not exceed 8 times cash flow and
the seller is willing to finance 5 times the cash flow at an interest
rate of 14 percent or below, a 30 percent return on equity could be
achieved. Providing a 30 percent return on equity would solve the
capital shortage by attracting venture capital participation.

But the panel notes that in a seller-financed deal the seller, who is at
risk, [must]{.underline} feel confident about the buyer\'s ability to
operate the station at a profit. Sellers can only protect themselves in
two ways: either by selling to someone who can generate enough cash flow
to service the debt or through provisions in the sales contract. Sellers
consider the protections afforded in the contract a last line of defense
and prefer to sell to someone they believe can operate the station
profitably.

Naturally, sellers feel more comfortable with buyers who have
successfully operated stations. Consequently, we recommend that if the
potential buyer wants seller financing and has not run a station
previously, that buyer either should become associated (either fiscally
or by signing a management contract) with others who have run a station.

The Commission could do much to facilitate seller financing. Currently,
sellers retain no interest in the license after the sale. Although
sellers may take a security interest in the physical assets of the
station or in the stock of a corporate licensee, if a station fails, the
seller cannot become reinvolved in its operation and management because
the seller does not have the license. The seller\'s only remedies are
those available to creditors.

[Recommendation]{.underline}: The Commission should explore expanding
the rights of

seller creditors, including the right of a reversionary interest in the
license, in those cases where the seller provides financing.

[Pooling]{.underline}

The telecommunications industry must build higher-yielding offerings to
regain its success as a viable investment area. One way to do this could
be the creation of a pool of financial commitments. Pooling investments
would minimize the effect of any single failure, thereby reducing the
risk to an investor who would, in effect, be offered participations in
the pool.

Ideally, the pool should be backed up by banks, insurance companies,
commercial lenders, pension trusts and equipment companies, commercial
lenders, pension trusts and equipment vendors. A hedge against the
high-risk, low-yield characteristics of the pool is essential. In this
regard, government agencies such as the Small Business Administration
should be approached as guarantors of principal or the rate of
differential between the pool and free-standing investments.

The pool could be administered by a traditional lender and carry low
interest rates, liberal terms and future equity participations. The
quasi-equity nature of the pooled funds may have ramifications in the
multiple ownership and diversification policies that the Commission may
wish to explore.

The pool concept could also be used to create a secondary market for
seller paper. Seller notes generally are of too small denominations to
attract major financing, but a pool of these notes might be large enough
to create a secondary market. Discounted seller notes provide liquidity
to the seller and low-cost debt to the buyer. Pooled notes could attract
attention nationwide and provide a large block of capital to the
industry.

General Recommendations

The panel believes that the following general recommendations, if
implemented, could assist minority entrepreneurs in their quest for
financing.

[Recommendation]{.underline}: [Survey of Financial
Institutions]{.underline}

The panel found a dearth of information on potential

sources of funds for minority entrepreneurs. The Commission should
explore the idea of conducting surveys of financial institutions to
determine the degree and types of financing available for
telecommunications ventures where such surveys are not currently
available.[^32]^1/^ Specifically, the surveys, should elicit information
on whether the institution currently finances telecommunications
ventures and. if so, the aggregate amount outstanding; also unfunded
commitments and the projected new volume of loans; the surveys also
should determine whether the institution has a program specifically for
minority entrepreneurs and the lending criteria for all programs.

[Recommendation]{.underline}: [Financial Primer]{.underline}

In December 1979, the Commission published [A Model]{.underline}

[Financing Proposal for the Entrepreneur]{.underline} as part of its
[Report on Minority Ownership of Broadcast Facilities]{.underline}. We
believe the usefulness of this publication can be enhanced and
accordingly recommend that the Commission develop a primer to help
minority entrepreneurs present an attractive proposal to potential
investors. We believe that presentation can affect the investor\'s
willingness to undertake the risk. Thus, it is possible that investor
interest in a particular deal could be generated by an effective
presentation, even where risk is high and expected rate of return is
low.

The primer should draw heavily from the Commission\'s model financing
proposal, updating that information and applying it to
telecommunications ventures other than broadcast. It also should include
more detailed information regarding the business and realities of
financing and the types of financial assistance available, and should
extend beyond a model to provide specific guidelines to the
entrepreneur.

[Recommendation]{.underline}: [Tax Bibliography]{.underline}

As pointed out above, we believe that one way to increase

the availability of financing to telecommunications entrepreneurs is to
encourage investment at a lower expected rate of return by making the
deal advantageous for other reasons, such as for tax advantages. The
Commission should undertake the preparation of a bibliography and the
collection of materials that discuss such tax advantages as tax leasing,
which can flow from investment in telecommunication enterprises.

[Recommendation]{.underline}: [Information-Sharing by Banks]{.underline}

There should be greater sharing of resources and

information between the larger regional banks experienced in
telecommunications financing and smaller local lenders that may lack
such expertise. This participation might include cooperation in credit
analyses, shared documentation or information and, perhaps,
participation, as lead bank in a consortium. The American Bankers
Association should be encouraged to promote such sharing among its
members.

[Recommendation]{.underline}: [Information about Guarantee
Programs]{.underline}

There is a need to ensure that lenders are aware of the

existence and availability of federal and state programs that provide
guarantees of certain private loans. It is particularly important that
line officers of lending institutions know of the programs. In this
manner, the goal of enhancing the financial approval process by
minimizing the lender\'s risk can be achieved. Again, the American
Bankers Association could be helpful.

The Commission may wish to identify these programs and disseminate
information about them to lenders and telecommunications business
applicants. One example of such a program is SBA\'s guaranteed loan
program and its related lender certification program.

[Recommendation]{.underline}: [Investment Bankers]{.underline}

The panel believes that the services provided by investment bankers
could greatly benefit minority entrepreneurs and that additional
consideration should be given to methods of making such services more
readily available.

Financing Panel members have alluded to the increase in use of
investment bankers as intermediaries in the acquisition of capital. Such
intermediaries determine the appropriate financial structure and procure
the necessary funds from various capital sources. As their compensation
is based in part on the size of the transaction, however, many such
firms set minimums (generally considered to be \$500,000-1 million)
below which it is uneconomical to become involved. The transaction size
of many minority enterprises in broadcasting and cable television would
fall below the minimum, making the utilization of investment bankers
doubtful. Nonetheless, this area should be explored by the Commission
and the Minority Business Development Agency so that minority
entrepreneurs could be directed to investment bankers when their
involvement would be helpful.

Opportunities in Nonbroadcast Telecommunications Technologies

The Financing Panel has reviewed the alternatives in debt financing as
they relate to present investment opportunities in radio and television.
The panel also believes there are significant ownership opportunities
for minority entrepreneurs in nonbroadcast technologies such as cable
television, radio common carrier services and satellite-delivered
services.

These new technology areas are rapidly being developed, and they provide
the general investment community with significant new investment
opportunities at extremely favorable yields. Many believe that through
the 1980s and well into the 1990s the development of these services will
provide a substantial part of the growth in telecommunications.
Accordingly, minority entrepreneurs should actively seek out ownership
opportunities in these new services.

[Recommendation]{.underline}: The Commission should make available as
much

information as possible to the minority entrepreneurial community
regarding new ownership opportunities.

In cable television, significant investment opportunities will soon
exist in major urban markets. However, because of the very high costs in
developing cable television systems in these markets, minorities will
have to involve themselves in ownership and business opportunities
principally as partners with larger companies. Significant opportunities
also exist for minority entrepreneurs to develop cable systems in rural
towns, particularly in the southeastern and southwestern United States,
and financing is available.

In the radio common carrier services, the nationwide cellular radio
service authorized by the Commission should provide opportunities for
minority entrepreneurs, particularly in marketing services to the
licensed cellular radio common carrier. Again, minorities should explore
joint ventures with major corporations.

Additional opportunities will develop for minorities in
satellite-delivered services, especially as program suppliers.

[Recommendation]{.underline}: The Commission should continue to foster
programming

diversity by encouraging licensed satellite operators to ensure the
participation of minorities in delivery of new programming.

As previously indicated, minorities should secure the services of
investment bankers. Investment banking firms should have a greater
interest in supporting minority development of financing for the newer
technologies.

[Recommendation]{.underline}: The Commission should ascertain the level
of interest in

the investment banking community in supporting minority ownership of
such services through the raising of capital by public stock offerings
and private placements.

LEGISLATIVE PROPOSAL

Entry into the telecommunications business can be accomplished in two
ways: by building a new telecommunications system, or by purchasing an
existing system. The Committee\'s legislative proposal focuses on the
second alternative\--the acquisition of existing systems.

Much of the telecommunications industry is highly capital intensive
(note the costs involved in building a new cable system) and there is a
considerable premium in creative structuring of deals. As an example of
the creative financing used, some of the largest multiple system
operators (MSO\'s) have relied on tax shelter financing for building new
cable systems. This is particularly true of the privately-held MSO\'s.
In most instances, the capital contribution from the sponsoring MSO\'s
is very small relative to the overall size of the project.

The Committee believes that significant opportunities exist for
minorities in purchasing existing telecommunications systems. There are
many small and medium size systems in this country, almost all privately
held, mostly by the original owners. As they retire, seek liquidity or
for any reason want to sell, who will buy? The Commission can ask
Congress to take actions to ensure that a portion of them will be
purchased by minorities.

As mentioned earlier, tax shelter financing has been used extensively in
financing the construction of new cable systems. Also, in the last two
years, there has been even more tax-sheltered financing to purchase
existing cable systems. Tax shelter financing presents a number of
attractive features for the minority entrepreneur. Because these deals
are generally structured as limited partnerships with the entrepreneur
as general partner, the entrepreneur has complete control over the
business, subject to his fiduciary duty to the limited partners. In
addition, because the entrepreneur is transferring the tax benefits to
the limited partner, he is able to retain a larger portion of the
ownership than would be the case in a non-tax oriented investment, such
as that available from venture capital firms.

Under the new tax law, different depreciation rates no longer exist for
new or used equipment. There is, however, one major difference between
tax shelter financing for new or used systems\--the availability of
investment tax credit. Investors in new systems receive an investment
tax credit equal to 10 percent of the total equipment investment for a
new system. The same credit is available for used systems but is subject
to a limit of \$125,000 in total equipment invested per partnership.

[Recommendation]{.underline}: The FCC should explore with Congress the
possibility of

amending Section 48(c) of the Internal Revenue Code to raise the
limitation of equipment purchased to a much larger number, e.g., \$5
million in cases where a minority-controlled firm is purchasing,
directly or through a partnership, an operating telecommunications
system. This would give a needed advantage to minority entrepreneurs
competing for tax shelter funding for the acquisition of existing
telecommunications systems. This change also would be applicable to
financing obtained through tax-oriented leasing; this alternative could
significantly reduce the cost of senior financing.

To restate the investment proposal: at present, the overall limitation
in the tax law on the value of used equipment that can be used for a tax
credit is \$125,000. This translates into an investment tax credit of
\$12,500. A limitation of \$5 million is a tax credit of \$500,000 if
all the property is at least "a 5-year property." This proposal provides
several important benefits:

-   This program does not involve any government loans, grants or
    guarantee to any group. It is a direct tapping of private capital.
    The impact of this change on the federal budget, even if wildly
    successful, would be minimal.

-   The effectiveness of this program resides in the fact that it
    addresses itself to the most scarce source of capital, equity
    capital.

-   The level of managerial and technical resources needed to buy an
    established system are considerably less than is required to build a
    new system. Hence this program makes cable television ownership
    feasible for a larger number of minority-owned firms.

Members of the Committee would be happy to assist the Commission in
exploring with Congress the possibility of amending the Internal Revenue
Code.

APPENDIX A

Before the

FEDERAL COMMUNICATIONS COMMISSION

Washington, D.C. 20554

In the Matter of: )

)

Amendment of the Commission\'s Rules )

relating to its Distress Sale )

Policy; Merger Policy; Deferred )

Capital Gains Treatment; Financing; ) File No.\_ \_\_\_\_\_\_\_\_\_\_\_

Multiple Ownership Sections (73.35, )

73.240, and 73.636): Procedures on )

Transfer and Assignment Applica- )

tions Section 73.3597): and )

Minority Ownership of Common )

Carrier Facilities )

To: The Commission

[PETITION FOR RULEMAKING]{.underline}

[ON MINORITY OWNERSHIP]{.underline}

The National Association of Black Owned Broadcasters (\"NABOB\"),
through counsel, pursuant to Section 1.401 of the Commission\'s Rules,
hereby petitions the Federal Communications Commission ("FCC" or
"Commission") to adopt rules which would further foster minority[^33]^/^
ownership. This Petition is submitted because despite the Commission\'s
adoption of the [Statement of Policy on Minority Ownership of Broadcast
Facilities]{.underline} 68 F.C.C.2d 979, 42 R.R.2d 1689 (1978) (\"Policy
Statement"), and although some increases may have been occasioned
thereby, in 1981 minorities continue to own less than 2% of the total
number of operating radio and television stations. Moreover, it appears
that the prospects for significant increases in the near future are
extremely bleak. The rules herein proposed by NABOB would advance the
important Commission policies propounded in the [Policy
Statement]{.underline}.

A-2 -21-

2\. [Section 30l(d) SBIC\'s]{.underline}

Section 30l(d) SBIC\'s, formerly known as Minority Enterprise Small
Business Investment Companies (MESBICs), are chartered by §30l(d) of the
Small Business Investment Act of 1958, as amended, Public Law 85-699.
MESBICs provide assistance to small businesses which are at least 50%
owned and managed by socially or economically disadvantaged groups.
These groups tend primarily to be comprised of minorities. The MESBICs
are authorized to call upon SBA funds for leverage in providing such
assistance. In the years since their creation, MESBIC have proven to be
an important source of financing for minority broadcast acquisitions and
operations.^15/^

[\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_]{.underline}

^15/^ The §30l(d) Small Business Investment Companies most active in
providing assistance to minority broadcast concerns include: Syncom
Capital Corporation; Fulcrum Venture Capital Corporation; Alliance
Enterprises Corporation; Equico Capital Corporation; Urban National
Corporation; Minority Enterprise Capital Corporation; Presbyterian
Economic Development Corporation; MCA New Ventures, Inc.; Minority
Broadcast Investment Corporation; Broadcast Capital Corporation.

-22-

The MESBIC program was established on April 21, 1958, for the purpose of
providing venture capital to small businesses under the Small Business
Investment Act, Public Law 85-699. The funding is provided by private
investment companies licensed and regulated by the Small Business
Administration. The purposes of the Act were identified in §l02 thereof
as being:

> to improve and stimulate the national economy in general and the small
> business segment thereof in particular by establishing a program to
> stimulate and supplement the flow of private equity capital and long-
> term loan funds which small-business concerns need for the sound
> financing of their business operations and for their growth,
> expansion, and modernization, and which are not available in adequate
> supply.

In 1969 President Nixon announced a program to stimulate minority
business enterprise and made possible by Executive Order the formation
of MESBICs. MESBICs differed from other SBICs in that they were
established to provide assistance solely to small business concerns that
are at least 50 percent owned and managed by socially or economically
disadvantaged individuals. The Secretary of Commerce established the
Office of Minority Business Enterprise in the Commerce Department.

A-3

In 1972 Public Law 92-592 amended the Small Business

Investment Act in the following respects:

\(1\) Section 30l(d) was added to authorize licensing by the SBA of a
company organized as either a for-profit or non-profit corporation. In
addition, the use of the acronym MESBIC was discouraged because of its
suggestion that the program was intended only for minorities. The
program for \"socially and economically disadvantaged\" is officially
known as the Section 30l(d) program.

\(2\) Special benefits for 30l(d) licensees were created. Unlike other
investment companies which could only receive \$2.00 for every dollar of
combined paid-in surplus and a third dollar of leverage for licensee
capitalized at \$1 million or more, 301(d) licensees capitalized at
\$500,000 could obtain up to \$3.00 of leverage funds for each dollar of
private capital and leverage funds could be obtained under debentures as
well as non-voting 3 percent cumulative preferred stock.

-23-

Further amendments, made in 1976, Public Law 94-305, increased the
leverage available to 301(d) companies from 3 to 1 to 4 to 1.

Section 30l(d) companies have been involved in numerous aspects of the
acquisition of broadcast properties by minority entrepreneurs, including
the packaging of acquisition efforts and assisting entrepreneurs in
obtaining financing from other sources. Specifically, these companies
have provided four basic services:

\(1\) Venture capital through the purchase of equity interest in
businesses;

\(2\) Long-term capital by providing loan funds, often in a subordinate
position and/or with warrants permitting the 30l(d) company to purchase
an equity position;

\(3\) Guarantee loans made by third parties to businesses; and

\(4\) General management and technical assistance to businesses.

A-4

3\. [Discussion]{.underline}

Because of the financing problems hereinabove discussed, minority
entrepreneurs who seek an ownership position in the broadcast industry
most often turn to §30l(d) SBICs for assistance. In short, there are not
many alternative sources to which to turn.

For this reason, §30l(d) SBICS, as well as potential minority
entrepreneurs, are concerned that as more minority enterprises turn to
investment opportunities in broadcasting, these companies will be
limited in the assistance they can provide, or prohibited from future
minority ownership financing, because of the Multiple Ownership Rules,
particularly with regard to AM and FM facilities, which is where most of
the activity involving minority persons occurs.

Because of the Multiple Ownership Rules, §30l(d) SBICs are very limited
in the number of entrepreneurs that they can assist, and the total
number of stations that they can individually or collectively help
minority persons acquire.

Moreover, the §30l(d) SBICs are hampered in making long range plans with
regard to the type of assistance that they will provide. Each
entrepreneurial group assisted is potentially a group broadcaster. A
§30l(d) SBIC may presently establish relations with individual
entrepeneurs,

-24-

who in the future may want to acquire more or even a full complement of
stations. Such acquisitions would place the §30l(d) SBIC in violation of
the Multiple Ownership Rules. The §30l(d) SBICs should not be forced
into the position of determining today, and favoring, those groups which
might become chain broadcasters in the future. If they must be so
selective, financing only groups which might become multiple owners,
small market stations or entrepreneurs with only limited broadcast
experience will probably not be considered, since assistance to them
would count toward the multiple ownership ceiling of 21.
[See]{.underline}, [e.g.]{.underline}, [Evening Star,
supra.]{.underline}

Furthermore, the Commission should take into account that §30l(d) SBICs
generally take only a limited equity participation in a station. Because
they do not control or attempt to influence management decisions, they
are thus unable to prevent well-meaning entrepreneurs from inadvertently
placing it in violation of the Multiple Ownership Rules.

A-5

NABOB strongly supports the basic objectives of the Multiple Ownership
Rules, to wit, the promotion of competition and diversity. However, the
utility of these Rules must be weighed against fundamental Commission
policy and the important public interest goal of increased minority
participation in ownership and control of broadcast media.

In recognition of the need to facilitate the financing of minority
ownership, as well as to adopt other policies to foster such activity,
and because the §30l(d) SBICs are likely to continue to be among the
more accessible sources of financial assistance to minority
broadcasters, it is imperative that the Commission, to encourage their
continued activity in the area, exempt them from the Multiple Ownership
Rules. To do so would thus enable the small number of §30l(d) SBICs
active in financing broadcast acquisitions to continue to provide
assistance to future minority entrepreneurs, and would keep available to
such minority broadcasters what has proven to be an essential source of
funding.[^34]^6/^

[Appendix B]{.underline}

<table style="width:100%;">
<colgroup>
<col style="width: 15%" />
<col style="width: 4%" />
<col style="width: 4%" />
<col style="width: 4%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 4%" />
<col style="width: 5%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 2%" />
<col style="width: 4%" />
<col style="width: 4%" />
</colgroup>
<tbody>
<tr class="odd">
<td><strong>TELECOM INDUSTRY ASSISTANCE LOCATOR</strong></td>
<td colspan="9"><strong>MINORITY BUSINESS DEVELOPMENT
AGENCY</strong></td>
<td colspan="16"><strong>OTHER FEDERAL, PUBLIC AND PRIVATE</strong></td>
</tr>
<tr class="even">
<td rowspan="2">Identity of minority firms or individuals with the
capacity &amp; interest in owning/diversifying into
telecommunications</td>
<td><blockquote>
<p>Business Development</p>
<p>Center</p>
</blockquote></td>
<td><blockquote>
<p>Specialized Consultant</p>
<p>Program</p>
</blockquote></td>
<td><blockquote>
<p>Industry &amp; Technology</p>
<p>Program</p>
</blockquote></td>
<td><blockquote>
<p>Acquisition Program</p>
</blockquote></td>
<td><blockquote>
<p>PROFILE</p>
</blockquote></td>
<td><blockquote>
<p>State/Local Government</p>
<p>Program</p>
</blockquote></td>
<td><blockquote>
<p>Nat Minority</p>
<p>Supplier</p>
<p>Development Program</p>
</blockquote></td>
<td><blockquote>
<p>Office of R&amp;I</p>
</blockquote></td>
<td><blockquote>
<p>Trade Assoc Program</p>
</blockquote></td>
<td><blockquote>
<p>Commerce Dept. NTIS</p>
</blockquote></td>
<td><blockquote>
<p>Census Bureau</p>
</blockquote></td>
<td><blockquote>
<p>FCC</p>
</blockquote></td>
<td><blockquote>
<p>SBA</p>
</blockquote></td>
<td><blockquote>
<p>PBS/ETV</p>
</blockquote></td>
<td><blockquote>
<p>MESBICs</p>
</blockquote></td>
<td><blockquote>
<p>Local Banks</p>
</blockquote></td>
<td><blockquote>
<p>City/County</p>
</blockquote></td>
<td><blockquote>
<p>Major Networks</p>
</blockquote></td>
<td><blockquote>
<p>Equipment Mfrs</p>
</blockquote></td>
<td><blockquote>
<p>Academia</p>
</blockquote></td>
<td><blockquote>
<p>Unions &amp; Guilds</p>
</blockquote></td>
<td><blockquote>
<p>NAB</p>
</blockquote></td>
<td><blockquote>
<p>Broadcap</p>
</blockquote></td>
<td><blockquote>
<p>Nat’l Assn of Black</p>
<p>Broadcasters</p>
</blockquote></td>
<td><blockquote>
<p>Spanish Broadcasters</p>
<p>Assns</p>
</blockquote></td>
</tr>
<tr class="odd">
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
</tr>
<tr class="even">
<td>Source of public information regarding opportunities in
telecommunications</td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td>Source of financing for potential entrepreneurs</td>
<td><strong>X</strong></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td>Product, “State of the Art”, information</td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td><p>Management development/</p>
<p>personnel recruitment</p></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
</tr>
<tr class="even">
<td>Acquisition/merger/brokerage opportunities &amp; assistance</td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td>Market analysis and projections</td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td>Pending applications (broadcast, cable, LPTV)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td>Program production opportunities</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
</tr>
<tr class="even">
<td>Construction/installation information &amp; assistance</td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>X</strong></td>
<td><strong>X</strong></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>

[APPENDIX C]{.underline}

TECHNICAL AND MANAGEMENT REQUIREMENTS FOR TELECOMMUNICATIONS

**ENTRY**

**FINANCIAL TECHNICAL MANAGEMENT**

**[TYPE REQUIREMENTS REQUIREMENTS REQUIREMENTS]{.underline}**

**1 RADIO -- FM LOW/MEDIUM/HIGH MEDIUM INTENSIVE**

**SPECIALIZED**

**2 RADIO -- AM LOW/MEDIUM/HIGH MEDIUM SAME**

**3 TV/BROADCASTING MEDIUM MEDIUM INTENSIVE**

**SPECIALIZED**

**4 VHF HIGH HIGH SAME**

**5 UHF HIGH HIGH SAME**

**6 LOW POWER LOW/MEDIUM MEDIUM/HIGH SAME**

**7 STV-MDS MEDIUM/HIGH MEDIUM/HIGH SAME**

**8 PRIVATE SYSTEM SALES MEDIUM/HIGH HIGH MEDIUM**

**9 RESALE COMMON CARRIER MEDIUM/HIGH MEDIUM MEDIUM**

**10 TECHNICAL SERVICE MEDIUM HIGH SPECIALIZED**

**11 CONSTRUCTION MEDIUM/HIGH HIGH SPECIALIZED**

**12 MARKETING & SERVICE PRODUCTS MEDIUM/HIGH MEDIUM/HIGH SPECIALIZED**

**13 MANUFACTURING HIGH HIGH SPECIALIZED**

**[FINANCIAL REQUIREMENTS]{.underline} [TECHNICAL
REQUIREMENTS]{.underline}**

**HIGH - \$1,000,000+ HIGH -- SPECIALIZED LICENSED PERSONNEL/EDUCATION**

**MEDIUM - \$500,000 - \$1,000,000 MEDIUM -- LICENSED PERSONNEL, LESS
STRINGENT THAN HIGH**

**LOW -- UNDER \$500,000 LOW -- NO LICENSE OR PERSONNEL REQUIRED**

[Appendix D]{.underline}

[Bank Financing of Radio Stations]{.underline}

This is an analysis of how radio station financing can be structured in
such a way that the station is able to both service its debt and provide
a return on equity invested of at least 30 percent to its investors,
given current bank lending practices and purchase multiples in today\'s
market. The purpose of this memo is to illustrate that these two goals
cannot be achieved simultaneously at realistic interest rates and
station purchase prices. Three variables were considered in this
analysis: a) the purchase price of the station, normally determined as a
multiple of cash flow in the year of purchase, b) the amount of money
the bank is willing to lend, also usually determined as a multiple of
current cash flow and c) interest rates.

The following assumptions were made:

1\. The station\'s cash flow (operating profit before depreciation,

interest and taxes) in the year of purchase is \$500,000 and grows at a
rate of 10 percent per year thereafter.

2\. The term of the bank loan is 7 years with a 2 year grace period on

interest and equal amortization of principal over the last 5 years.

3\. Capital expenditures are \$25,000 per year.

4\. Pricing on the loan is prime plus 2 percent.

5\. The station is originally purchased for either 8 times current cash

flow (8 times \$500,000 -\$4,000,000) or 10 times cash flow (10 times
\$500,000 -\$5,000,000). The purchase is financed entirely by bank debt
and equity. An 8 to 10 times cash flow multiple seems reasonable in
light of current market conditions. In general, AM/FM stations have been
selling at about 10 times cash flow, whereas AM facilities are currently
harder to sell and are changing hands at 6 to 7 times cash flow. An FM
station which is already fully developed and is rated among the top few
stations in one of the top markets may sell for 8 times cash flow,
whereas in a similar market, an underdeveloped station which has a
greater potential for growth may sell for 10 times cash flow.

6\. The bank is willing to lend 3, 4 or 5 times the initial \$500,000
cash

flow of the station (i.e. \$1,500,000, 2,000,000 or \$2,500,000). The
remainder of the purchase price is financed by equity. A bank loan of 3
or 5 time initial cash flow seems consistent with current practices in
financing radio stations. Banks are generally willing to lend 4 to 5
times cash flow to stations with good operating records in promising
markets, and perhaps 2 to 3 times cash flow to new, smaller stations in
markets already saturated, or to stations with weaker operating records.

D-2

7.  For the purposes of calculating the investors\' return on equity
    invested, it is assumed that after 5 years the station is sold (at
    the same multiple of cash flow at which it was purchased) and the
    remaining principal outstanding is prepaid. The investors\' return
    is realized solely through the sale of the station \-- it is assumed
    that no dividends are paid.

Six cases were considered: (M = millions)

[Station purchase price]{.underline} [Bank loan]{.underline}
[Equity]{.underline}

IA) 10 times cash flow (\$5 M) 5 times cash flow (\$2.5 M) \$2.5 M

IB) 8 times cash flow (\$4 M) 5 times cash flow (\$2.5 M) \$1.5 M

IIA) 10 times cash flow (\$5 M) 4 times cash flow (\$2 M) \$3 M

IIB) 8 times cash flow (\$4 M) 4 times cash flow (\$2 M) \$2 M

IIIA) 10 times cash flow (\$5 M) 3 times cash flow (\$1.5 M) \$3.5 M

IIIB) 8 times cash flow (\$4 M) 3 times cash flow (\$1.5 M) \$2.5 M

Cumulative cash flows and returns on equity invested were calculated for
each of the six cases, and each case was considered under four different
interest rate scenarios.

Results \-- See Appendix E

> [Cases IA & IB]{.underline}: When the bank loan is 5 times cash flow,
> the station does not have sufficient cash to service its debt
> particularly at 18, 20 and 22 percent interest rates, and would
> probably only be able to pay interest for a period of time. Given a
> purchase price of 10 times cash flow (and consequently a debt to
> equity ratio of 1/1) the investors\' return on equity invested ranges
> from 23 percent at the lowest interest rate to 20.5 percent at the
> highest rate. An 8 times cash flow multiple, which increases leverage
> to 1.67, provides the best returns on equity invested \-- ranging from
> 29.3 percent at a 16 percent interest rate to 25.9 percent at a 22
> percent rate.
>
> [Cases IIA & IIB]{.underline}: With a bank loan of 4 times cash flow,
> the company is able to service its debt at all interest rates. At a
> purchase price of 8 times cash flow (debt to equity = 1) the
> investors\' return on equity invested ranges from 25.7 percent at low
> interest rates to 23.5 percent at higher rates. Return on equity
> invested is somewhat lower when the cash flow multiple is 10 times, as
> the investors are putting up a greater percentage of the purchase
> price.
>
> Cases IlIA & IIIB: With a bank loan of 3 times cash flow, the station
> has ample cash to service debt at all interest rates, but even at a
> sale price of 8 times cash flow, the investors\' return is fairly low
> (ranging from 23.3 percent to 21.9 percent).

D-3

[Discussion]{.underline}

Investors in radio stations generally expect to realize a return on
equity invested of 30 to 40 percent over 5 years. The results of this
analysis indicate that these rates of return are not achievable in the
six cases considered. If less equity were invested in the station at the
time of purchase, investors could achieve their goal of 30 to 40 percent
return, but an equity shortfall would result. Clearly the banks would
not be willing to pick up this shortfall by increasing the loan to 6 or
7 times cash flow, because the station has difficulty servicing its debt
even at a loan of 5 times the cash flow.

To provide investors with the return they require while still satisfying
the banks that the station will have sufficient cash to service its
debt, certain variables in the analysis must change; namely, the
purchase price of the station or the interest rate on the bank loan.

1\. [Purchase price of the station]{.underline}: By lowering the
multiple of cash

flow at which the station sells (while keeping the bank loan at a
constant multiple of initial cash flow) a 30 to 40 percent rate of
return to investors can be achieved. In this analysis, the bank loan is
assumed to be 4 times cash flow (case II in the preceding memo). A bank
loan of 5 times cash flow was not considered because regardless of the
sales price of the station (for cash flow multiple), the company will
not have enough cash to service its debt if it takes on a bank loan of 5
times its initial cash flow (see Appendix E). Alternatively, a bank loan
of 3 times cash flow was not considered in order for investors to
realize a 30 to 40 percent return on the relatively large amount of
equity they would have to invest in this case, the cash flow multiples
would be unrealistically low. With a bank loan of 4 times cash flow, the
station\'s cumulative cash flow is as shown in Appendix E, case II. In
order for equity investors to realize a return of 30, 35 or 40 percent,
the station must sell for the following cash flow multiples:

[Pretax return on equity]{.underline}

[30 percent]{.underline} [35 percent]{.underline} [40
percent]{.underline}

[Interest rate on loan]{.underline} 16 6.9 times 6.1 times 5.6 times

(in percentage) 18 6.7 times 6.0 times 5.5 times

20 6.6 times 5.9 times 5.4 times

22 6.4 times 5.8 times 5.3 times

2\. [Bank loan: interest rate and term]{.underline}: Lengthening the
term of the

bank loan at the interest rates used in this analysis does not improve
the return to investors, because upon sale of the station at the end of
year five, the amount of principal which must be repaid to the bank is
greater than it would

D-4

> otherwise have been under a loan of a shorter term. This additional
> principal payment will more than offset any improvement in cumulative
> cash flow caused by the longer amortization schedule, thereby reducing
> the amount of cash remaining for equity investors. For example, case
> IIB shows that return on equity invested is 25.7 percent when the loan
> is 7 years, the interest rate is 16 percent and the cash flow multiple
> is 8 times. When the term of the loan is lengthened to 10 years,
> return on equity is invested is only 25.3 percent.
>
> Lower interest rates on the loan improve the company\'s cumulative
> cash flow and therefore increase return on equity invested somewhat,
> but in order to reach a return on equity of 30 to 40 percent, rates
> would have to be unrealistically low. At a purchase price of 8 times
> cash flow and a loan of 5 times cash flow (case IB) a 30 percent
> return can be achieved at an interest rate of 14 percent. Under all
> other cases in Appendix E, the interest rate would have to be below 10
> percent for an investor to realize a 30 percent return.

In summary, a financing structure which enables the station to generate
sufficient cash to service its debt and also provide investors with a 30
to 40 percent return is not feasible at 16 to 22 percent interest rates,
8 to 10 times cash flow multiples, and the other assumptions stated in
this analysis. It seems unlikely that cash flow multiples will fall to
the roughly 5 to 7 times range required to generate a 30 to 40 percent
return on equity invested, given the current market in which even AM
facilities are selling for 6 to 7 times cash flow. Further, it appears
even more unlikely that interest rates on radio station loans will drop
to the levels required to generate high returns on equity invested
unless the government or some other outside agency is willing to
guarantee low rates on the debt. As as result, if cash flow multiples do
not fall significantly, investors will have to expect a return of
approximately 24 to 26 percent. (This is the return achievable at a loan
of 4 times cash flow and a purchase price 8 times cash flow \-- case IIB
\-- a scenario with which the banks will feel comfortable because the
station can adequately service its debt.) This return may be acceptable
to many broadcast investors after all, since the pure economic motive is
not always their sole reason for investing in the station. Finally, one
way a station can generate higher returns for its investors is to
generate cash flow growth in excess of 10 percent per year, either
through operating efficiency or increased market share.

[APPENDIX E]{.underline}

(A.) (B.)

[Cumulative Net Cash Flow]{.underline} [Pretax]{.underline}
[Pretax]{.underline}

(\'OOO\'s) [Return on Equity]{.underline} [Return on Equity]{.underline}

at a 10 x cash flow at an 8 x cash flow

multiple multiple

(purchase price: \$5,000M (purchase price: \$4,000M

Interest Rate Year Year Year Year Year Year Year debt: 2,500M debt:
2,500M

on Loan 1 2 3 4 5 6 7 [equity: 2,500M)]{.underline} [equity:
1,500M)]{.underline}

Bank loan: 16% 125 305 46 (67) (27) 173 542 23% 29.3%

5 x initial cash flow

(5 x \$500M -\$2,500H) 18% 75 205 (104) (257) (247) 67) 292 22.2% 28.2%

20% 25 105 (254) (447) (467) (307) 42 21.4% 27%

22% (25) 5 (404) (637) (687) (547) (208) 20.5% 25.9%

(A.) (B.)

[Pretax R.O.E]{.underline}. [Pretax R.O.E.]{.underline}

at a 10 x cash flow at an 8 x cash flow

multip1e multip1e

(purchase price: \$5,000M (purchase price: \$4,000M

debt: 2,000M debt: 2,000M

[equity: 3,000M)]{.underline} [equity: 2,000M)]{.underline}

Bank loan: 16% 205 465 386 437 625 957 1,442 21.2% 25.7%

4 x initial cash flow

(4 x \$500M -\$2,000M) 18% 165 385 266 285 449 765 1,242 20.7% 24.9%

20% 125 305 146 133 273 573 1,042 20.2% 24.2%

22% 85 225 26 (19) 97 381 842 19.6% 23.5%

(A.) (B.)

[Pretax R.O.E.]{.underline} [Pretax R.O.E.]{.underline}

at a 10 x cash flow at an 8 x cash flow

multip1e multip1e

(purchase price: \$5,000M (purchase price: \$4,000M

debt: 1,500M debt: 1,500M

[equity: 3,500M)]{.underline} [equity: 2,500M)]{.underline}

Bank loan: 16% 285 625 726 941 1,277 1.741 2,342 20% 23.3%

3 x initial cash flow

(3 x \$500M - \$l,500M) 18% 255 565 636 827 1,145 1,597 2,192 19.7%
22.8%

20% 225 505 546 713 1,013 1,453 2,042 19.3% 22.3%

22% 195 445 456 599 881 1,309 1,892 18.9% 21.9%

[^1]: ^^ We are pleased to report that meetings have been held with FCC
    staff and that substantial progress has been made in this area. The
    Commission recently created the position of Assistant Director of
    Public Affairs for Minority Enterprise.

[^2]: ^/^ 68 F.C.C. 2d 979 (1978).

[^3]: ^/^ Id. at 981.

[^4]: ^/^ Prior to the issuance of the [Policy Statement,]{.underline}
    the Comm1ssion generally prohibited the sale of a station while the
    propriety of ) a licensee\'s operation of that station was in
    ser10us quest1on.

    Two exceptions existed: (1) where the licensee was seriously ill or
    disabled, [Cathryn Murphy,]{.underline} 42 F.C.C. 2d 346 (1973);
    [Tinker, Inc]{.underline}. 8 F.C.C. 2d 22 (1967); and (ii) where the
    licensee corporation was bankrupt and was effecting a sale for the
    benefit of innocent creditors, La Rose v. F.C.C., 494 F. 2d1145
    (D.C. Cir. 1974); [Second Thursday Corporation]{.underline}, 25
    F.C.C. 2d 112 (1970).

[^5]: ^/^ [Id.]{.underline}, at 982 n.20.

[^6]: ^/^ 48 RR 2d 1243.

[^7]: ^/^ The proposition that control is in the hands of the general
    partner was recognized by the FCC in [Anax Broadcasting.
    Inc.,]{.underline} 49 RR 2d 1589 (1981).

[^8]: ^/^ [William M. Bernard,]{.underline} 44 RR 2d 525 (1978).

[^9]: ^/^ AM and FH counted separately.

[^10]: ^/^ See, e.g., [NAACP v. FPC,]{.underline} 425 U.S. 662, 670 n.
    7 (1976); [TV 9, Inc.]{.underline}

    [v. FCC.]{.underline} 495 F. 2d 929, 937-8 (D.C. Cir. 1973). [cert.
    denied,]{.underline} 418 U.S. 986 (1974).

[^11]: ^0/^ Section 1071. (26 U.S.C. Section 1071.)

[^12]: ^1/^ The election to reduce the basis of depreciable property is
    seldom made because the asset of greatest value in most broadcast
    properties is the operating license, which is nondepreciable.

[^13]: ^2/^ As the rate of capital gains tax for individuals has been
    lowered recently by the Economic Recovery Tax Act of 1981, the value
    of this subsidy in many cases has been decreased accordingly. This
    suggests that the Commission must adopt ways to enhance the value of
    the tax certificate policy as a meaningful incentive for sales to
    minority entrepreneurs.

[^14]: ^3/^ See [J.A.W. Iglehart,]{.underline} 38 FCC 2d 541 (1972)
    \[certificate withheld until transaction completed\].

[^15]: ^4/^ Whether Y and Z are racial or ethnic minorities is, of
    course, inconsequential.

[^16]: ^5/^ The I.R.S. permits the deferral of capital gains tax
    pursuant to section 1071 only upon the sale of assets in a
    telecommunications enterprise. Investors planning to invest in a
    minority telecommunications property might choose to negotiate
    repurchase agreements or other contractual arrangements with the
    entity to guarantee its investment in telecommunications.

[^17]: ^6/^ In situations where the holder of a tax certificate
    realizes, in a single transaction, capital gains on the sale of
    broadcast and nonbroadcast-related interests, the I.R.S. apportions
    the benefits of Section 1071 only to the gains realized on the
    broadcast interests. Thus, the capitalizing feature is feasible for
    investments in a diversified minority enterprise that owns both
    broadcast and nonbroadcast assets.

[^18]: ^7/^ See [Mem. Opinion and Order]{.underline}, FCC 78-773, 69
    FCC 2d 1591, 1596-7, 1601 released November 22, 1978; [Atlass
    Communications, Inc.]{.underline}, 61 FCC 2d 995 (1976).

[^19]: ^8/^ Revenue Act of 1943, P.L. No. 78-235, Section 123, 58 Stat.
    21 (1944); H.R. Rep. No. 1079, 78th Cong., 2d Sess. 50 (1943).

[^20]: ^9/^ Blake & McKenna, \"Section 1071: Deferral of Tax on FCC
    Sanctioned Dispositions of Communications Properties,\" 36 Tax Law
    Rev. 101, 103 (Fall 1980), [citing]{.underline} LTR 783094 (June 23,
    1978).

[^21]: ^0/^ Public Notice No. 36410, FCC 56-919, released September 27,
    1956. This limitation prevents the issuance of a tax certificate to
    a seller already holding the maximum number of facilities permitted
    under the multiple ownership rules. Congress reaffirmed this
    restrictive policy in 1958 by amending Section 1071 to allow
    issuance of a tax certificate to effectuate \"a change in policy of,
    or the adoption of new policy by, the Commission.\" See Technical
    Amendments Act of 1958. P.L. No. 85-866, Section 48, 72 Stat. 1606
    (1958). H.R. Rep. No. 775, 85th Cong., 1st Sess. 29 (1957).

[^22]: ^1/^ Public Notice, FCC 70-774, 19 RR 2d 1831, released July 16,
    1970.

[^23]: ^2/^ [Id.]{.underline}, at 1832.

[^24]: ^3/^ Public Notice, FCC 76-337, 59 FCC 2d 91, released April 20,
    1976. This application of Section 1071 is also consistent with an
    earlier judicial construction of the section holding that the sale
    or exchange need not be strictly involuntary to qualify for the tax
    certificate. [Jefferson Standard Broadcasting Co. v.
    FCC]{.underline}, 305 F. Supp. 744 (W.D.N.C. 1969).

[^25]: ^4/^ See Section 73.25 (AM). 73.240 (FM), 73.636 (TV) and 76.501
    (cable) of the Commission\'s rules.

[^26]: ^5/^ See Notes 4, 5 and 6 to Section 73.25; and Section 73.340.

[^27]: ^6/^ Broadcasting Facts, Minority Ownership Section, National
    Association of Broadcasters, Department of Minority and Special
    Services, indicates that out of 10,134 commercial stations, 164 are
    owned by minorities. Report issued in February 1982.

[^28]: ^7/^ After September 1982, this information will be available
    through the Office of Public Affairs, Minority Business Development
    Agency, U.S. Department of Commerce.

[^29]: ^8/^ According to March 1982 Economic Indicators, prepared for
    the Joint Economic Committee by the Council of Economic Advisors,
    banks charged an average effective prime rate of 18.87 percent in
    1981.

[^30]: ^9/^ Not all panel members agree that cable growth has tapered
    off.

[^31]: ^0/^ [Broadcast Investor]{.underline}, April 22, 1982, Issue No.
    10, p.l, Paul Kagan Associates. Inc., Carmel, Calif.

[^32]: ^1/^ Examples of available surveys are [Summary of Projected
    Availability of debt Funds for Cable Television
    Industry]{.underline}, published annually by Werburg Pavibas Becker,
    Inc.; [Cable T.V. Data Book]{.underline}, published annually by Paul
    Kagan Associates. Inc., Carmel, Calif.; and subscribers to
    [Broadcast Investor]{.underline}, published by Kagan Associates,
    also receive an annual supplement called [Banks Making Loans to
    Broadcasters]{.underline}.

[^33]: ^/^ As used herein, the term "Minority\" includes persons of
    Black, Hispanic, Eskimo, Aleut, American Indian, and Asiatic
    American extraction.

[^34]: ^6/^ See, also, the comments that have been submitted by 301(d)
    SBICs in response to the Petition of Ford Foundation for waiver of
    the 1% Benchmark of the Multiple Ownership Rules, which was filed on
    April 24, 1980.