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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13D OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 000-22349
FISHER COMPANIES INC.
(Exact name of registrant as specified in its charter)
Washington 91-0222175
(State of Incorporation) (IRS Employer Identification No.)
1525 One Union Square
600 University Street, Seattle, Washington 98101-3185
(Address of principal executive offices) (Zip Code)
(206) 624-2752
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.25 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 15, 1999, based on the last sale price quoted on the OTC
Bulletin Board, was approximately $320,161,000.
The number of shares outstanding of each of the registrant's classes of
common stock as of March 15, 1999 was:
Title of Class Number of Shares Outstanding
-------------- ----------------------------
Common Stock, $1.25 Par Value 8,542,384 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of Shareholders
to be held on April 29, 1999, are incorporated by reference under Part III of
this Report.
PART I
ITEM 1. BUSINESS.
Through its operating subsidiaries, Fisher Companies Inc. (the "Company")
is actively engaged in television and radio broadcasting, the operation of
satellite teleports, the exploitation of other emerging technologies, and
television programming production and syndication; flour milling and bakery
products distribution; and real estate investment and proprietary property
management. The Company provides direction and guidance to its operating
subsidiaries.
Note 10 to the Consolidated Financial Statements contains information
regarding the Company's industry segments for the years ended December 31, 1998,
1997, and 1996.
BROADCASTING OPERATIONS
INTRODUCTION
The Company's broadcasting operations are conducted through Fisher
Broadcasting Inc. ("Fisher Broadcasting"), a Washington corporation. The Company
owns all of the outstanding capital stock of Fisher Broadcasting, except that 3%
of the outstanding shares of a class of nonvoting participating preferred stock
is owned by third parties. Fisher Broadcasting owns and operates, directly or
through subsidiaries in Washington, Oregon and Montana, two network-affiliated
television stations, 25 radio stations, and two broadcast satellite teleports,
and provides emerging media development services. Fisher Broadcasting's
television stations reach nearly 2,500,000 households, or 2.5% of all U.S.
television households. Its radio stations collectively represent the 25th
largest radio group in the U.S. by revenue size, with over $38,000,000 in annual
advertising sales. (Broadcasting and Cable, Oct. 12, 1998). Fisher
Broadcasting's satellite teleports serve many of the Northwest's businesses and
news organizations.
Both of Fisher Broadcasting's television stations are located in top 25
television markets: KOMO TV 4 (ABC) Seattle-Tacoma, Washington, market rank 12;
and KATU Television 2 (ABC), Portland, Oregon, market rank 23. See Broadcasting
Operations - "Television - KOMO TV" and - "Television - KATU Television." Fisher
Broadcasting's stations are rated either number one or two in overall audience
delivery in their respective markets. Fisher Broadcasting's radio operations are
concentrated in large, medium and small markets located in Washington, Oregon
and Montana (see "Broadcasting Operations - Radio - Seattle Radio Market;
Portland Radio Market; and - Medium - and Small - Market Radio Operations").
Fisher Communications Inc. ("FishComm"), a wholly owned subsidiary of Fisher
Broadcasting, owns and operates Fisher Broadcasting's satellite teleport
services, Internet services, and emerging media development operations.
As of December 31, 1998, Fisher Broadcasting employed 740 full- and part-time
employees.
TELEVISION
General Overview
Commercial television broadcasting began in the United States on a regular
basis in the 1940s. There are a limited number of channels available for
broadcasting in any one geographic area, and the license to operate a television
station is granted by the FCC. Television stations that broadcast over the very
high frequency ("VHF") band (channels 2-13) of the spectrum generally have some
competitive advantage over television stations that broadcast over the ultra-
high frequency ("UHF") band (channels above 13) of the spectrum because VHF
channels usually have better signal coverage and operate at a lower transmission
cost. However, the improvement of UHF transmitters and receivers, the complete
elimination from the marketplace of VHF-only television receivers and the
expansion of cable and satellite television systems have reduced the competitive
advantage of stations broadcasting over the VHF band.
Television station revenues are primarily derived from the sale of local,
regional and national advertising and, to a much lesser extent, from network
compensation and studio rental and commercial production activities. Broadcast
television stations' heavy reliance on advertising revenues renders the stations
vulnerable to cyclical changes in the economy. The size of advertisers' budgets,
which are affected by broad economic trends, affect the broadcast industry in
general and, specifically, the revenues of individual broadcast television
stations. Events outside the Company's control can adversely affect advertising
revenues. For example, the Company has experienced declines in advertising
revenue during some periods
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as a result of strikes in major industries and as a result of acquisitions of
advertising clients by buyers that do not place advertising with company
stations.
Television stations in the country are grouped by A.C. Nielsen & Co.
("Nielsen"), a company that provides audience measuring services, into
approximately 210 generally recognized television markets that are ranked in
size according to various formulae based upon an actual or potential audience.
Each market is designated as an exclusive geographic area consisting of all
counties in which the home-market commercial stations receive the greatest
percentage of total viewing hours.
Nielsen periodically publishes data on estimated audiences for television
stations in the various markets throughout the country. These estimates are
expressed in terms of the percentage of the total potential audience viewing a
station in the market (the station's "rating") and of the percentage of the
audience actually watching television (the station's "share"). Nielsen provides
such data on the basis of total television households and selected demographic
groupings in the market. The specific geographic markets are called Designated
Market Areas, or "DMAs."
Historically, three major broadcast networks, ABC, CBS, and NBC, dominated
broadcast television. In recent years, The Fox Network ("Fox") has effectively
evolved into the fourth major network, although the hours of network programming
produced by Fox for its affiliated stations are fewer than those produced by the
other three major networks. In addition, the United-Paramount Network ("UPN")
and the Warner Brothers Network ("WB") have launched new television networks
with a limited amount of weekly programming (see "Broadcasting Operations -
Television - Network Affiliations").
The affiliation by a television station with one of the four major networks
has a significant impact on the composition of the station's programming,
revenues, expenses and operations. A typical affiliated station receives
approximately 9 to 10 hours of each day's programming from the network. This
programming, along with cash payments ("network compensation"), is provided to
the affiliate by the network in exchange for a substantial majority of the
advertising time sold during the airing of network programs. The network then
sells this advertising time for its own account. The affiliate retains the
revenues from time sold during designated breaks for local sale in and between
network programs, and during programs produced by the affiliate or purchased
from non-network sources. In acquiring programming to supplement network
programming, network affiliates compete primarily with other affiliates and
independent stations in their markets. In addition, a television station may
acquire programming through bartering arrangements. Under such arrangements,
which are becoming increasingly popular with both network affiliates and
independents, a national program distributor may receive advertising time in
exchange for the programming it supplies, with the station paying no cash or a
reduced fee for such programming.
An affiliate of UPN or WB receives a smaller portion of its programming from
the network compared to an affiliate of NBC, ABC, CBS or Fox. Currently, UPN and
WB provide 10 hours and 11 hours, respectively, of programming per week to their
affiliates. As a result of the smaller amount of programming provided by their
networks, affiliates of UPN or WB must purchase or produce a greater amount of
their programming, resulting in generally higher programming costs. These
stations, however, retain a larger portion of the inventory of advertising time
and the revenues obtained from the sale of such time than stations affiliated
with the major networks.
Broadcast television stations compete for advertising revenues primarily with
other broadcast television stations and, to a lesser extent, with radio
stations, cable system and other multichannel operators and programmers and
newspapers serving the same market. Traditional network programming, and
recently Fox programming, generally achieves higher audience levels than
syndicated programs aired by independent stations. However, as greater amounts
of advertising time are available for sale by independent stations and Fox
affiliates in syndicated programs, those stations typically achieve a share of
the television market advertising revenues that is greater than their share of
the market's audience.
Through the 1970s, network television broadcasting enjoyed virtual dominance
in viewership and television advertising revenues because network-affiliated
stations only competed with each other in local markets. Beginning in the 1980s,
this level of dominance began to change as the FCC authorized more local
stations, and marketplace choices expanded with the growth of independent
stations, cable television services, wireless cable, and direct broadcast
satellites.
Cable television systems were first installed in significant numbers in the
1970s and were initially used to retransmit broadcast television programming to
paying subscribers in areas with poor broadcast signal reception. In the
aggregate, cable-originated programming has emerged as a significant competitor
for viewers of broadcast television programming, although no single cable
programming network regularly attains audience levels amounting to more than a
small fraction of
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any of the major broadcast networks. The advertising share of cable networks
increased during the 1980s and 1990s as a result of the growth in cable
penetration (the percentage of television households that are connected to a
cable system). Notwithstanding such increases in cable viewership and
advertising, over-the-air broadcasting remains the dominant distribution system
for mass-market television advertising.
Fisher Broadcasting believes that the market shares of television stations
affiliated with NBC, ABC and CBS declined during the 1990's primarily because of
the emergence of Fox and certain strong independent stations and, secondarily,
because of increased cable penetration. Independent stations have emerged as
viable competitors for television viewership share, particularly as a result of
the availability of first-run, network-quality programming. In addition, there
has been substantial growth in the number of home satellite dish receivers and
video cassette recorders, which have further expanded the number of programming
alternatives available to household audiences.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now in use with direct
broadcast satellites and cable or wireless cable, are expected to permit greater
numbers of channels to be carried within existing bandwidth. These compression
techniques, as well as other technological developments, are applicable to all
digital delivery systems, including over-the-air broadcasting, and have the
potential to provide vastly expanded programming to highly targeted audiences.
Reduction in the cost of creating additional channel capacity could lower entry
barriers for new channels and encourage the development of increasingly
specialized niche programming. This ability to reach very narrowly defined
audiences is expected to alter the competitive dynamics for advertising
expenditures. Fisher Broadcasting is unable to predict the effect that
technological changes will have on the broadcast television industry or the
future results of Fisher Broadcasting's operations.
Competition
Competition in the television industry, including the markets in which Fisher
Broadcasting's stations compete, takes place on several levels: competition for
audience, competition for programming (including news), competition for
advertisers and competition for local staff and management. Additional factors
material to a television station's competitive position include signal coverage
and assigned frequency. The television broadcasting industry is continually
faced with technological change and innovation, the possible rise in popularity
of competing entertainment and communications media, changing business practices
such as use of local marketing agreements ("LMAs") and joint sales agreements
("JSAs"), and governmental restrictions or actions of federal regulatory bodies,
including the FCC and the Federal Trade Commission, any of which could have a
material effect on the broadcasting business in general and Fisher
Broadcasting's business in particular.
Audience. Stations compete for audiences on the basis of program popularity,
which has a direct effect on advertising rates. A majority of the daily
programming on network-affiliated stations is supplied by the network with which
such stations are affiliated. During periods of network programming, the
stations are totally dependent upon the performance of the network programs in
attracting viewers. The competition between the networks is intense and the
success of any network's programming can vary significantly over time. Each
station competes in non-network time periods on the basis of the performance of
its programming during such time periods, using a combination of self-produced
news, public affairs and other entertainment programming that each station
believes will attract viewers. The competition between stations in non-network
time periods is intense and here, too, success can vary over time.
Fisher Broadcasting's stations compete for television viewership share against
local network-affiliated and independent stations, as well as against cable and
alternate methods of television distribution. These other transmission methods
can increase competition for a station by bringing into its market distant
broadcasting signals not otherwise available to the station's audience, and also
by serving as a distribution system for non-broadcast programming originated on
the cable system. Historically, cable operators have not sought to compete with
broadcast stations for a share of the local news audience. To the extent cable
operators elect to do so in the future, the increased competition for local news
audiences could have an adverse effect on Fisher Broadcasting's advertising
revenues.
Other sources of competition for Fisher Broadcasting's television stations
include home entertainment systems (including video cassette recorder and
playback systems, videodisks and television game devices), Internet, multipoint
distribution systems, multichannel-multipoint distribution systems, wireless
cable and satellite master antenna television systems. Fisher Broadcasting's
stations also face competition from high-powered, direct broadcast satellite
services, such as DIRECT-TV, which transmit programming directly to homes
equipped with special receiving antennas or to cable television systems for
transmission to their subscribers. Fisher Broadcasting competes with these
sources of competition both on the
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basis of service and product performance (quality of reception and number of
channels that may be offered) and price (the relative cost to utilize these
systems compared to television viewing).
Programming. Competition for non-network programming involves negotiating with
national program distributors, or syndicators, which sell first-run and rerun
packages of programming. Fisher Broadcasting's stations compete against
in-market broadcast stations for exclusive access to off-network reruns and
first-run product. Cable systems generally do not compete with local stations
for programming, although various national cable networks continue to acquire
programs that would have otherwise been offered to local television stations.
Advertising. Advertising rates are based upon the size of the market in which
a station operates, a program's popularity among the viewers an advertiser
wishes to attract in that market, the number of advertisers competing for the
available time, the demographic make-up of the market served by the station, the
availability of alternative advertising media in the market area, the presence
of aggressive and knowledgeable sales forces, and the development of projects,
features and programs that tie advertiser messages to programming. Advertising
rates are also determined by a station's overall ability to attract viewers in
its market, as well as the station's ability to attract viewers among particular
demographic groups that an advertiser may be targeting. Fisher Broadcasting's
stations compete for advertising revenues with other television stations in
their respective markets, as well as with other advertising media, such as
newspapers, radio, magazines, outdoor advertising, transit advertising, yellow
page directories, direct mail and local cable systems. In addition, another
source of revenue is paid political and advocacy advertising, the amount of
which fluctuates significantly, particularly being higher in national election
years and very low in years in which there is little election or other ballot
activity. Competition for advertising dollars in the television broadcasting
industry occurs primarily within individual markets on the basis of the above
factors as well as on the basis of advertising rates charged by competitors.
Generally, a television broadcasting station in one market area does not compete
with stations in other market areas. Fisher Broadcasting's television stations
are located in highly competitive markets.
Network Affiliations
Fisher Broadcasting's television stations are both affiliated with the ABC
Television Network. The stations' affiliation agreements with ABC provide each
station with the right to broadcast all programs transmitted by the network. In
return, the network has the right to sell most of the advertising time during
such broadcasts. Each station receives a specified amount of network
compensation for broadcasting network programs. To the extent a station's
preemption of network programming exceeds a designated amount, such compensation
may be reduced. The payments are also subject to decreases by the network during
the term of the affiliation agreement under other circumstances, with provisions
for advanced notice. Fisher Broadcasting's ABC affiliation agreements for KOMO
TV and KATU expire in 2004. Although Fisher Broadcasting expects to continue to
be able to renew its affiliation agreements with ABC, no assurance can be given
that such renewals will be obtained. Also, the networks are seeking to modify
the terms of their contracts with affiliates. It is uncertain how the nature of
network-affiliate relations will change in the future. The non-renewal or
modification of one or both of those agreements could have a material adverse
effect on Fisher Broadcasting's results of operations.
KOMO TV, Seattle, Washington
Market Overview. KOMO TV, an ABC affiliate, operates in the Seattle-Tacoma
market, the 12th largest DMA in the nation, with approximately 1.5 million
television households and a population of approximately 3.9 million. In 1998,
approximately 74% of the population in the DMA subscribed to cable. Major
industries in the market include aerospace, biotechnology, forestry, software,
telecommunications, transportation, retail and international trade. In 1998
television advertising revenue for the Seattle-Tacoma DMA was over $300 million,
as reported by Miller, Kaplan, Arase & Co., an accounting firm that provides the
television industry with revenue figures.
Station Performance. KOMO TV had an average audience share of 13.6%, sign-on
to sign-off during 1998. KOMO TV ranked second in its market in 1998, sign-on to
sign-off, among six competitors (A.C. Nielsen Company average ratings Feb-Nov,
1998). Fisher Broadcasting believes that KOMO TV has established a strong local
presence in the Seattle-Tacoma market through the station's community
involvement, local news operation and local non-news programming.
KOMO TV broadcasts 30 hours per week of scheduled live local news programs.
KOMO News 4 has been recognized for excellence by the National Association of
Broadcasters, the Radio and Television News Directors' Association, the National
Association of Television Arts and Sciences and other organizations that present
broadcasting awards.
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KOMO TV broadcasts from its studios in Seattle. During the spring of 1998,
Fisher Broadcasting began construction of a new broadcast center with digital
equipment that will greatly expedite the transition from analog to digital high
definition television broadcasting. Estimated cost of the new building and
parking facility is $79,000,000. The project, named Fisher Plaza, is expected to
be ready for occupancy during the second quarter of 2000.
KATU Television, Portland, Oregon
Market Overview. Portland, Oregon ranks as the 23rd largest DMA in the nation,
with a population of approximately 2.5 million and approximately 994,000
television households. Approximately 62% of Portland's population subscribed to
cable in 1998. Portland maintains a balanced economy based upon services,
wholesale/retail and manufacturing. Major employers include high-technology
companies such as Intel Corporation, Hewlett-Packard Company and Tektronix,
Inc., as well as Nike, Inc., Kaiser Permanente, the United States Government and
the State of Oregon.
Station Performance. KATU, an ABC affiliate, had an average audience share
of 15% during 1998, sign-on to sign-off. KATU ranked first in its market in
1998, sign-on to sign-off, among six competitors (A.C. Nielsen Company). KATU
currently broadcasts 26 hours per week of scheduled live local news programs.
The station has won numerous awards for excellence and has a strong commitment
to public affairs and local interest programming. KATU operates from studios in
the city of Portland.
Digital/High Definition Television
In January 1997, KOMO ABC 4 made history by becoming the third television
station in the United States to transmit High Definition Digital Television.
These transmissions took place over several days and were witnessed by several
civic and industry leaders from throughout the Northwest. This milestone was
made possible by on-site cooperative efforts of LARCAN Inc., Zenith Electronics
Corporation, DiviCom Inc., Dielectric Communications, and the KOMO ABC 4
Engineering Department.
Finding a way to transmit vast amounts of information in the same size channel
(6 MHz) as the current analog standard television system proved to be quite a
challenge. The new Digital Television ("DTV") standard, developed after years of
research by the broadcast and electronics design community and approved by the
FCC in December 1996, was the breakthrough that made such transmission possible.
By utilizing this new technology, KOMO became the first station West of the
Mississippi to transmit High Definition images.
DTV brings with it three major changes to the way viewers experience
television. First, DTV sets display pictures using a rectangular, wide-screen
format, as opposed to the nearly square screens used by current analog TV sets.
(In technical terms, this means DTV screens use a "16 by 9" aspect ratio while
current analog TV sets use a "4 by 3" aspect ratio. Aspect ratio is the ratio of
screen width to screen height.) Because of this new screen shape, watching
programs on digital TV sets will be more like watching a movie at the theater,
giving more life-like images and allowing the viewer to feel more involved in
the action on screen. Second, DTV delivers 6 channels of CD-quality, digital
surround sound using the same Dolby Digital technology heard in many movie
theaters. Third, DTV can deliver high definition pictures with crisp,
photographic quality, and greatly enhanced detail.
KOMO began transmitting Standard Definition Digital Television signals on
KOMO-DT Channel 38, 24 hours a day, for experimental test purposes during Spring
1998. KATU transmitted its first digital signals on KATU-DT Channel 43 during
November 1998, which also marked the first High Definition broadcasts by ABC
with the airing of feature length films. Both KOMO-DT and KATU-DT are currently
equipped with temporary equipment to successfully receive and rebroadcast this
programming, which amounts to approximately 4 hours per week, and are therefore
transmitting digital signals before the FCC's required "DTV" start-of-service
date, which is November 1, 1999.
During Fall and Winter of 1998-99 KOMO engineers and consultants recorded
test measurements of the KOMO channel 38 digital signal from 400 locations
throughout the Puget Sound region, utilizing a van that KOMO had specially
constructed for this purpose. The results of these tests are now being compiled
and will provide information about digital signal coverage over hilly terrain.
The test results will assist KOMO engineers to verify antenna performance and
determine optimum configuration when KOMO transitions to its full power DTV
transmitter and antenna. This information, along with similar tests conducted
around the country by other broadcasters, will also help manufacturers design
receivers that are capable of handling the reflection and ghosting
characteristics of digital television signals.
Both KOMO and KATU currently pass through the ABC digital signals at reduced
power levels pending arrival of new full power digital transmitters, and for
KATU completion of a shared use tower currently under construction in Portland,
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Oregon. KATU is one of four members in the Sylvan Tower LLC that is constructing
the tower, currently anticipated to be complete in late 1999. Production and
switching equipment necessary to generate local programming in high definition
will ultimately be added. However the speed with which this equipment is
installed will depend on several factors. First, the new equipment must become
available from vendors. Second, a determination must be made as to the cost vs.
technical performance of first generation equipment. Finally, the ultimate
success of the conversion to digital television will depend on public acceptance
and willingness to buy new digital television sets. Unless initial consumers
embrace digital television and purchase enough units to cause home receiver
prices to decline, the general public may not switch to the new technology,
delaying or preventing its ultimate economic viability.
KOMO-TV anticipates that it will begin broadcasting from its new studio
building during the early part of the year 2000. The new facility is being
designed for digital television production, and equipment purchases are being
conditioned upon future compatibility with Fisher Broadcasting's digital
broadcasting plans.
KATU anticipates that it will equip its studios for digital program
origination as the public begins purchasing digital receivers in large enough
quantities to justify the transition.
Forward Looking Statements
The discussion above under "KOMO TV, Seattle, Washington" regarding
construction of the new broadcasting facility for Fisher Broadcasting, and the
discussion above under "Digital/High Definition Television" regarding the
intention of KOMO TV and KATU Television to transmit a digital/high definition
signal on or before the date stipulated in FCC regulations, include certain
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PLSRA"). This statement is included for the
express purpose of availing the Company of the protections of the safe harbor
provisions of the PLSRA. Management's ability to predict results or the effect
of future plans is inherently uncertain, and is subject to factors that may
cause actual results to differ materially from those projected. With respect to
the construction of the new broadcasting center, such factors could include
unanticipated construction costs or delays in construction in connection with
the building and parking facility, and delays or additional costs associated
with the new equipment necessary to transmit a digital/high definition signal,
as discussed below.
With respect to the intention of KOMO TV and KATU Television to transmit a
digital/high definition signal on or before the date stipulated in FCC
regulations, factors that may cause actual results to differ materially from
those projected include the increased costs of new equipment; the necessity of
training current staff to operate new technology or hiring new staff
knowledgeable in the technology; the timely availability of necessary new
equipment from manufacturers; the purchase of newly developed equipment that has
little or no track record of in-service broadcasting; the risk of purchasing
equipment that could soon be outdated due to rapid technological change; the
possibility that new transmission tower sites may be required; the necessity of
obtaining all required licenses and permits; material changes in, or material
additional requirements imposed by, FCC regulations; and the challenges and
risks involved in the conversion to digital/high definition signal transmission
generally, such as are described under "Licensing and Regulation Applicable to
Television and Radio Broadcasting - Proposed Legislation and Regulations."
RADIO
General Overview
Commercial radio broadcasting began in the United States in the early 1920s.
There are a limited number of frequencies available for broadcasting in any one
geographic area. The license to operate a radio station is granted by the FCC.
There are currently two commercial radio broadcast bands, each of which employ
different methods of delivering the radio signal to radio receivers. The AM band
(amplitude modulation) consists of frequencies from 550 kHz to 1700 kHz. The FM
(frequency modulation) band consists of frequencies from 88.1 MHz to 107.9 MHz.
Radio listeners have gradually shifted over the years from AM to FM stations.
Stations on the FM band are generally considered to have a competitive advantage
over stations that broadcast on the AM band. FM reception is generally clearer
than AM and provides greater tonal range and higher fidelity. Music formats that
appeal to the younger demographics desired by the majority of advertisers are
found almost exclusively on the FM band because of the disparity in the quality
of reception. A radio station on the FM band, therefore, has an abundance of
choices in format while AM stations tend to be limited to either spoken word
formats or musical formats that appeal to adults 55 years of age and older.
Nationally, the FM listener share is now in excess of 75%, and approximately 56%
of all commercial stations are on the FM band.
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Radio station revenues are derived almost exclusively from local, regional
and national advertising. Radio stations generally employ a local sales force to
call on local and regional advertisers and contract with a national firm to
represent business from outside the market and/or region. Both sales forces are
generally compensated by way of a commission on advertising time sold. Because
radio stations rely on advertising revenues, they are sensitive to cyclical
changes in the economy as well as the quality of the sales force.
Radio is generally viewed as a highly targetable medium for advertisers.
Radio stations are generally classified by their format, such as country,
alternative, rock, news/talk, adult contemporary or oldies. A station's format
and style of presentation enable it to target certain demographics and
psychographics. By capturing a specific audience share of a market's radio
listeners, a station is able to market its broadcasting time to advertisers
seeking to reach a specific audience.
Most of a radio station's programming is produced locally, although
syndicated programs contribute to many stations daily and weekly programming
line-ups. These syndicated programs are obtained with either cash payments,
barter agreements for air time on the station, or a combination of both.
However, the emphasis on local programming provides radio stations with maximum
flexibility in programming, retention of nearly its entire commercial inventory,
and the revenue from sale of that time.
Through the early 1970s, a handful of AM radio stations in each market
dominated the listening shares. The rise of FM listening, brought about by an
industry standard for FM stereo broadcast, essentially doubled the number of
viable competitors in each market. In the early and mid-1980s, the FCC awarded
additional FM signals to many communities, and a number of broadcasters moved
the signals of suburban or rural stations closer to major metropolitan areas, to
better cover the larger markets. In the early 1990s, the FCC expanded the AM
band to 1700 kHz. The result of this increase in the number of viable
competitors has been a significant decline in the listening shares reasonably
available to the average radio station. By the late 1980s, the Radio Advertising
Bureau estimated that one-third of all licensees were losing money. This, in
part, led the FCC to relax its ownership regulations on radio stations and led
to the creation of duopolies (ownership of more than one AM or FM station in a
given market). The Telecommunications Act of 1996 further eased radio station
ownership regulations governing multiple ownership (see "Broadcasting
Operations-Licensing and Regulation Applicable to Television and Radio
Broadcasting -Multiple Ownership Rules and Cross-Ownership Restrictions"). The
common ownership of multiple stations in a single market allows for more
aggressive marketing and can drive up the cost per rating point in such market.
Further advances in technology may increase competition for radio listening
shares. New media technologies, such as the delivery of audio programming by
satellite, the internet, micro radio, digital audio broadcasting ("DAB") and
cable television systems, are either in use currently or in development.
Historically, the radio broadcasting industry has grown despite the introduction
of new technologies for the delivery of entertainment and information, such as
broadcast television, cable television, audio tapes and compact discs. A growing
population and greater availability of radios, particularly car and portable
radios, have contributed to this growth. There can be no assurance, however,
that the development or introduction in the future of any new media technology
will not have a material adverse effect on the radio broadcasting industry. The
FCC has authorized the use of DAB to deliver audio programming direct from
satellite. The Commission is also reviewing a proposal to allow In-Band-On-
Channel DAB by existing radio broadcasters. This new technology would allow
digital broadcasting by existing radio stations on their existing AM or FM
frequencies. Because digital broadcasting is of a high quality, the adoption of
proposed rules to allow this technology may increase the value of AM radio
stations, by allowing them to broadcast a higher quality audio signal, more
closely at parity with FM signals.
Competition
In recent years, a few companies have acquired large numbers of radio
stations. Some of these companies also syndicate radio programs that are aired
by Fisher Broadcasting's stations. Some of these large companies also operate
radio stations in markets in which Fisher Broadcasting operates, and have much
greater overall financial resources available for their operations.
Competition in the radio industry, including each of the markets in which
Fisher Broadcasting's radio stations compete, takes place primarily on two
levels: competition for audience, and competition for advertisers. Additional
significant factors affecting a radio station's competitive position include
assigned frequency and signal strength. Another factor is competition for
programming. The radio broadcasting industry is continually faced with
technological change and innovation, the possible rise in popularity of
competing entertainment and communications media, as well as governmental
restrictions or actions of federal regulatory bodies, including the FCC and the
Federal Trade Commission, any of which could have a material adverse effect on
the broadcasting business.
8
Audience. Fisher Broadcasting's radio stations compete for audience on the
basis of programming popularity, which has a direct effect on advertising rates.
As a program or station grows in ratings (percentage of total population
reached), the station is capable of charging a higher rate to advertising
agencies, in particular, and direct advertisers, in general. Formats, stations
and music in major markets are highly researched through large-scale perceptual
studies, auditorium-style music tests and weekly call-outs. All are designed to
evaluate the distinctions and unique tastes of formats and listeners. In the
early days of radio, and until the early to mid-1970s, many stations programmed
a variety of elements to attract larger shares of audience. In today's
competitive market, new formats and audience niches have created very targeted
advertising vehicles and programming that is highly focused and tightly
regulated to appeal to a narrow segment of the population. Formats in one market
targeting similar audiences with slight variances in demographic or
psychographic appeal may be Classic Rock, Alternative Rock, Adult Album
Alternative, and/or Album-Oriented-Rock. Tactical and strategic plans are
utilized to attract larger shares of audience through marketing campaigns and
promotions. Marketing campaigns through television, transit, outdoor,
telemarketing or direct mail advertising are designed to improve a station's
cume audience (total number of people listening) while promotional tactics such
as cash giveaways, trips and prizes are utilized by stations to extend the TSL
(time-spent-listening), which works in correlation to cume as a means of
establishing a station's share of audience. In the effort to increase audience,
the format of a station may be changed. Format changes can result in increased
costs and create other difficulties which can adversely effect the performance
of the station. Fisher Broadcasting has experienced this effect.
Advertising. Advertising rates are based upon the number and mix of media
outlets, the audience size of the market in which a radio station operates, the
total number of listeners the station attracts in a particular demographic group
that an advertiser may be targeting, the number of advertisers competing for the
available time, the demographic make-up of the market served by the station, the
availability of alternative advertising media in the market area, the presence
of aggressive and knowledgeable sales forces and the development of projects,
features and programs that tie advertisers' messages to programming. The amount
of paid political advertising on radio fluctuates significantly and follows no
particular pattern. Fisher Broadcasting's radio stations compete for revenue
primarily with other radio stations and, to a lesser degree, with other
advertising media such as television, cable, newspaper, yellow pages
directories, direct mail, and outdoor and transit advertising. Competition for
advertising dollars in the radio broadcasting industry occurs primarily within
the individual markets on the basis of the above factors, as well as on the
basis of advertising rates charged by competitors. Generally, a radio station in
one market area does not compete with stations in other market areas.
Staff. There is also competition for radio staff. The loss of key staff,
including on-air personalities and sales staff, to competitors can, and in some
instances has, significantly and adversely affected revenues and earnings of
individual Fisher Broadcasting stations.
Seattle Radio Market
Introduction. Seattle, Washington was recently reclassified from the 13th to
the 14th largest radio metropolitan area in the nation due to the introduction
of Puerto Rico as a continuously rated market. The Seattle radio market has 20
FM and 31 AM stations licensed to the metro area according to BIA Research Inc.
"Investing in Radio 1998."
Fisher Broadcasting has owned and operated KOMO-AM since December 31, 1926
when the station signed on the air. When changes to FCC regulations allowed
multiple station ownership in one market, Fisher Radio Seattle was formed, and
Fisher Broadcasting purchased the assets of KVI-AM and KPLZ-FM. Since then, the
staffs of all three stations and many operating functions have been consolidated
into one facility in downtown Seattle. Station personnel work side-by-side to
maximize available resources and talent at a considerable cost savings. In
addition, fiber optic links between the radio and television facilities allow
resources to be shared with KOMO TV. A more detailed description of Fisher
Broadcasting's Seattle radio stations is set forth below.
KOMO-AM [1000 kHz / 50 kW (day/night), Affiliation: ABC Information Network].
KOMO-AM, known as "KOMO News/Talk 1000," is one of the United States' heritage
50,000 watt radio stations. The station was ranked 14th in the market in 1998
among 51 competitors with a 3.4% share of listening among Persons 12+, Monday-
Sunday, 6:00 a.m. to 12 midnight, according to the Arbitron Company (four-book
average). The station's primary target audience is Adults 35-54. KOMO News/Talk
1000 programs a combination of news and talk, featuring a variety of information
services such as hourly news, weather, traffic, sports and talk programs
concerning local and national news issues. With a staff of eight news
journalists, KOMO has one of the largest radio news staffs in the Northwest.
KOMO is also the home of University of Washington Husky Sports.
9
KVI-AM [570 kHz / 5 kW (day/night), Affiliation: ABC Entertainment
Network]. KVI-AM is known as "Talk Radio 570-KVI." During 1998, KVI was a
leading talk radio station in Seattle, and ranked sixth overall among the 51
competitors in the market with a 4.2% share of listening among Persons 12+,
Monday-Sunday, 6:00 a.m. to 12 midnight (Arbitron Co. four-book average). The
station is a mixture of local talk programming featuring local and national
hosts. While KVI and KOMO are complimentary formats, they maintain unique
identities and format niches in the market.
KPLZ-FM [101.5 MHz / 100 kW, Affiliation: Independent]. KPLZ-FM is known
as "Star 101.5," playing a mix of music from the 80s, 90s and today. During
1998, the station was tied for sixth in the market with a 4.2% share of
listening among Persons 12+, Monday-Sunday, 6:00 a.m. to 12 midnight (Arbitron
Co. four-book average).
Portland Radio Market
Introduction. Portland, Oregon was recently reclassified from the 24th to
the 25th largest radio metropolitan area in the nation due to the introduction
of Puerto Rico as a continuously rated market. The FCC has licensed 14 FM and 25
AM stations in the Portland radio metro area according to BIA Research Inc.
"Investing in Radio 1998."
KOTK AM [1080 kHz / 50 kW (day), 10 kW (night), Affiliation: CNN]. KOTK-AM
is known as "Hot Talk 1080 KOTK." During 1998, KOTK-AM was the 20th ranked radio
station in the market, with a 1.2% share of listening Persons 12+, Monday-
Sunday, 6:00 a.m. to 12:00 midnight, according to the Arbitron Company (four-
book average). The station programs locally and nationally originated talk
programming on contemporary topics. KOTK is also the home of University of
Portland college basketball.
KWJJ FM [99.5 MHz/52 kW, Affiliation: Independent]. During 1998, KWJJ-FM
was the seventh-ranked radio station in the Portland market, with a 4.7% share
of listening Persons 12+, Monday-Sunday, 6:00 a.m. to 12:00 midnight, according
the the Arbitron Company (four-book average). KWJJ-FM, also known as "New
Country `JJ 99-5," plays country music from the late 80's to today.
Medium- and Small-Market Radio Operations
Through Sunbrook, Fisher Broadcasting operates radio stations in five small
and medium markets in the northwestern United States. Sunbrook is the leading
radio broadcaster in Montana, with 15 radio stations and one construction permit
in the four largest markets in the state. Additionally, Sunbrook owns five radio
stations that serve the Wenatchee market, a market of approximately 55,000
people in the center of Washington State.
Sunbrook has sought to acquire under-performing stations in small and medium
markets at cash flow multiples that are considerably lower than in larger
markets. The relaxation of federal multiple ownership rules has led Sunbrook to
expand its holdings within its existing markets. The resulting synergy allows
Sunbrook to better serve its communities while enjoying certain economies of
scale.
10
The following table sets forth general information for each of Sunbrook's
stations and the markets they serve.
# of Ratings/(1)/ Market Revenue
Commercial ------------ --------------
Radio
Stations
Dial in the Rank in Station Station $ (in
Market Station Position Power Market Market Share Share Thousands) Format
- -----------------------------------------------------------------------------------------------------------------------------------
Billings, MT 14 $5,800
KRKX 94.1 FM 100 kW 1 22.0% 14% Classic Rock
KYYA 93.3 FM 100 kW 6 6.0% 10% Adult Contemp
KBLG(2) 910 AM 1 kW 9 4.0% 4% News/Talk
KCMT(3) 96.3 FM 100 kW New New New Country
Missoula, MT 8(4) $4,800
KZOQ 100.1 FM 14 kW 1 24.7% 28% Classic Rock
KGGL 93.3 FM 43 kW 4 13.7% 23% Country
KYLT 1340 AM 1 kW 7 2.8% 3% Oldies
KGRZ 1450 AM 1 kW 8 (9) 1% Sports/Talk
KBEB(4) 98.1 FM 15.5 kW (4) (4) (4) (4)
Great Falls, MT 9 $3,100
KQDI FM 106.1 FM 100 kW 1 20.4% 18% Classic Rock
KAAK 98.9 FM 100 kW 4 11.1% 19% Adult Contemp
KXGF 1400 AM 1 kW 7 3.7% 2% Pop Standard
KQDI AM 1450 AM 1 kW 7 3.7% 2% News/Talk
Butte, MT 5 $1,900
KMBR 95.5 FM 50 kW 1 40.7% 23% Classic Rock
KAAR 92.5 FM 4.5 kW 3 25.9% 28% Country
KXTL 1370 AM 5 kW 5 (9) 5% Oldies/Talk
Wenatchee, WA 9 $3,000
KZPH(5) 106.7 FM 3 kW 1 14.4% 8% Classic Rock
KWWW(6) 96.7 FM .4 kW 2 14.0% 15% Adult Contemp
KYSN(7) 97.7 FM 3 kW 3 10.3% 21% Country
KXAA(8) 99.5 FM 5 kW 7 7.7% 8% Oldies
KWWX 1340 AM 1 kW 8 3.6% 7% Spanish
- ------------------
(1) Ratings information in the above chart refers to average-quarter-hour share
of listenership among total persons, Adults 25-54, Monday through Sunday, 6
a.m. to midnight, and is subject to the qualifications listed in each
report. Sources: Billings, Montana: Arbitron Ratings, Spring, 1998 Billings
Market Report Missoula, Montana: Willhight Research, Spring, 1998, Missoula
Market Report Great Falls, Montana: Arbitron Ratings, Spring, 1998 Great
Falls Market Report Butte, Montana: Arbitron Ratings, Spring, 1998 Butte-
Bozema "Region 8" DMA Report Wenatchee, Washington: Hambleton Resources
Audience Measurement, Fall, 1998 Wenatchee Market Report.
(2) KBLG's power is 1,000 watts days, 63 watts nights.
(3) KCMT signed on the air November, 1998, and is not listed in any ratings.
(4) Sunbrook is the permittee of a construction permit for FM station KBEB. The
station is not yet on the air. Sunbrook has applied to the FCC for approval
to amend the permit to allow increased power to 100,000 watts and a change
in frequency to 98.5. The station will be licensed to the city of Hamilton,
Montana. The number of stations in the Missoula market will increase to 9
when KBEB signs on the air.
(5) KZPH is licensed to the city of Cashmere, Washington.
(6) KWWW is licensed to the city of Quincy, Washington.
(7) KYSN is licensed to the city of East Wenatchee, Washington
(8) KXAA is licensed to the city of Rock Island, Washington.
(9) Listenership below minimum reporting standards.
PENDING ACQUISITION
In November 1998, the Company entered into an asset purchase and sale
agreement with Retlaw Enterprises, Inc. and its subsidiaries ("Sellers") to
purchase substantially all of the Sellers' broadcasting assets. Sellers'
broadcasting assets include ten television stations and 50% of the outstanding
stock of Southwest Oregon Television Broadcasting Corporation ("SWOT"), an
Oregon corporation that owns and operates one television station. The aggregate
purchase price is $215 million, including approximately $6 million of working
capital. The Company has a commitment from a bank for senior credit facilities
to fund the acquisition (see Note 5 to the Consolidated Financial Statements).
The closing is subject to FCC approval for transfer of the applicable broadcast
licenses. Following the closing, the Company will take ownership of Sellers' ten
television stations in the following cities: Yakima and Pasco, Washington;
Lewiston, Boise, and Idaho Falls, Idaho; Eugene and Coos Bay, Oregon; Fresno,
California; and Columbus and Augusta, Georgia. The Company, following
11
the closing, will also take ownership of 50% of the outstanding stock of SWOT,
which is the licensee of a television station in Roseburg, Oregon.
Although the Company believes that it will receive FCC approval for the
transfer of the licenses, there can be no assurance that such approval will be
granted. However, pending approval, the Company expects the closing to take
place during the latter part of the second quarter of 1999. Risks associated
with this acquisition include: increased debt and debt service obligations;
Fisher Broadcasting's inexperience in the Retlaw markets and operating
television stations in markets smaller than Seattle and Portland; Fisher
Broadcasting's inexperience with the Retlaw stations' personnel and possible
loss of key personnel; the geographic dispersion of the Retlaw stations; the
increased demands on Fisher Broadcasting's executive resources to supervise
operations at many more television stations, some of which are distant from
Fisher Broadcasting's current operations; and costs and possible difficulties in
integrating Retlaw station operations and financial reporting into Fisher
Broadcasting.
LICENSING AND REGULATION APPLICABLE
TO TELEVISION AND RADIO BROADCASTING
The following is a brief discussion of certain provisions of the
Communications Act of 1934, as amended (the "Communications Act"), most recently
amended by the Telecommunications Act of 1996 (the "Telecommunications Act"),
and of FCC regulations and policies that affect the television and radio
broadcasting business conducted by Fisher Broadcasting. Reference should be made
to the Communications Act, FCC rules and the public notices and rulings of the
FCC, on which this discussion is based, for further information concerning the
nature and extent of FCC regulation of television and radio broadcasting
stations.
License Renewal, Assignments and Transfers
Broadcasting licenses for both radio and television stations are currently
granted for a maximum of eight years and are subject to renewal upon application
to the FCC. The FCC prohibits the assignment of a license or the transfer of
control of a television or radio broadcasting license without prior FCC
approval. In determining whether to grant or renew a broadcasting license, the
FCC considers a number of factors pertaining to the applicant, including
compliance with limitations on alien ownership, common ownership of
broadcasting, cable and newspaper properties, and compliance with character and
technical standards. During certain limited periods when a renewal application
is pending, petitions to deny a license renewal may be filed by interested
parties, including members of the public. Such petitions may raise various
issues before the FCC. The FCC is required to hold evidentiary, trial-type
hearings on renewal applications if a petition to deny renewal raises a
"substantial and material question of fact" as to whether the grant of the
renewal application would be inconsistent with the public interest, convenience
and necessity. The FCC is required to renew a broadcast license if: the FCC
finds that the station has served the public interest, convenience and
necessity; there have been no serious violations by the licensee of either the
Communications Act or the FCC's rules; and there have been no other violations
by the licensee which taken together would constitute a pattern of abuse.
Additionally, in the case of renewal of television licenses, the FCC considers
the station's compliance with FCC programming and commercialization rules
relating to programming for children. If the incumbent licensee fails to meet
the renewal standard, and if it does not show other mitigating factors
warranting a lesser sanction, such as a conditional renewal, the FCC has the
authority to deny the renewal application and permit the submission of competing
applications for that frequency.
Failure to observe FCC rules and policies, including, but not limited to,
those discussed herein, can result in the imposition of various sanctions,
including monetary forfeitures, the grant of short-term (i.e., less than the
full eight years) license renewals or, for particularly egregious violations,
the denial of a license renewal application or revocation of a license.
While the vast majority of such licenses are renewed by the FCC, there can
be no assurance that Fisher Broadcasting's licenses will be renewed at their
expiration dates, or, if renewed, that the renewal terms will be for eight
years. Both of Fisher Broadcasting's television stations were granted license
renewals effective February 1, 1999 for eight year terms ending February 1,
2007. Fisher Broadcasting's and Sunbrook's radio stations in Washington and
Oregon were granted license renewals effective February 1, 1998 for eight year
terms ending February 1, 2006. The license terms for all of Sunbrook's Montana
radio stations expire on April 1, 2005. The non-renewal or revocation of one or
more of Fisher Broadcasting's FCC licenses could have a material adverse effect
on Fisher Broadcasting's television or radio broadcasting operations.
Multiple Ownership Rules and Cross Ownership Restrictions
12
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding broadcast licenses, the interests of officers,
directors and those who, directly or indirectly, have the right to vote 5% or
more of the corporation's stock (or 10% or more of such stock in the case of
insurance companies, mutual funds, bank trust departments and certain other
passive investors that are holding stock for investment purposes only) are
generally deemed to be attributable, as are interests held by officers and
directors of a corporate parent of a broadcast licensee. Pursuant to the
Telecommunications Act, the FCC has eliminated the restrictions on the total
number of television stations in which a person or entity may have an
attributable interest, but instead establishes a national television reach limit
of 35%. The Telecommunications Act requires the FCC to conduct a rulemaking
proceeding to determine whether the local "duopoly" television ownership rules
should be retained, modified or eliminated. The present "duopoly" rules prohibit
attributable interests in two or more television stations with overlapping
service areas. The FCC initiated the rulemaking proceeding required by the
Telecommunications Act in November 1996. Initial comments to the FCC's proposals
were received by the FCC on February 7, 1997. This proceeding is currently
pending before the FCC without resolution. While the FCC has proposed to allow
ownership of television stations where the stations do not have substantial
signal overlap and are in separate Designated Market Areas, the majority of
comments in the proceeding urged the FCC to adopt a looser standard, thereby
allowing more duopolies.
The statutory prohibition against television station/cable system
cross-ownership is repealed in the Telecommunications Act, but the FCC's
parallel cross-ownership rule remains in place. The television station/daily
newspaper cross-ownership prohibition in the FCC rules was not repealed by the
Telecommunications Act. The FCC, however, is conducting a proceeding regarding
waivers of that restriction. The Telecommunications Act requires the FCC to
review its ownership rules biennially as part of its regulatory reform
obligations.
The FCC imposes less severe restraints on the control or ownership of AM
and FM radio stations that serve the same area than are imposed with regard to
television stations. Pursuant to the Telecommunications Act, the limits on the
number of radio stations one entity may own locally have been increased as
follows: (i) in a market with 45 or more commercial radio stations, an entity
may own up to eight commercial radio stations, not more than five of which are
in the same service (AM or FM); (ii) in a market with between 30 and 44
(inclusive) commercial radio stations, an entity may own up to seven commercial
radio stations, not more than four of which are in the same service; (iii) in a
market with between 15 and 29 (inclusive) commercial radio stations, an entity
may own up to six commercial radio stations, not more than four of which are in
the same service; and (iv) in a market with 14 or fewer commercial radio
stations, an entity may own up to five commercial radio stations, not more than
three of which are in the same service, except that an entity may not own more
than 50% of the stations in such market. These numerical limits apply regardless
of the aggregate audience share of the radio stations sought to be commonly
owned. FCC ownership rules continue to permit an entity to own one FM and one AM
station in a local market regardless of market size. Irrespective of FCC rules
governing radio ownership, however, the Department of Justice and the Federal
Trade Commission have the authority to determine, and in certain radio
transactions have determined, that a particular transaction presents antitrust
concerns. Moreover, in certain recent cases the FCC has signaled a willingness
to independently examine issues of market concentration notwithstanding a
transaction's compliance with the numerical radio station limits. The FCC has
also indicated that it may propose further revisions to its radio multiple
ownership rules.
FCC rules also preclude the grant of applications for station acquisitions
that would result in the creation of new radio-television combinations in the
same market under common ownership, or the sale of such a combination to a
single party, subject to the availability of a waiver. Under FCC policy, waiver
applications that involve radio-television station combinations in the top 50 TV
markets where there would be at least 30 separately owned, operated and
controlled broadcast licensees after the proposed combination will generally be
favorably received. At present, the FCC imposes no limits on the number of radio
stations that may be directly or indirectly owned nationally by a single entity.
National ownership of television stations by one entity, direct or indirect, is
limited to a 35% national share, computed by dividing the aggregate number of
households in each market in which the licensee owns a station by the total
number of households nationally. In the case of UHF television stations, the
number of households in such markets is halved for purposes of the foregoing
formula.
In addition, under its cross-interest policy, the FCC considers certain
meaningful relationships among competing media outlets in the same market, even
if the ownership rules do not specifically prohibit the relationship. Under this
policy, the FCC may consider significant nonattributable equity or debt
interests in a media outlet combined with an attributable interest in another
media outlet in the same market, joint ventures, and common key employees among
competitors. The cross-interest policy does not necessarily prohibit all of
these interests, but requires that the FCC consider whether, in a particular
market, the meaningful relationships between competitors could have a
significant adverse effect upon economic competition and program diversity.
13
A number of television stations have entered into LMAs. While these
agreements may take varying forms, pursuant to a typical LMA, separately owned
and licensed television stations agree to enter into cooperative arrangements of
varying sorts, subject to compliance with the requirements of antitrust laws and
with the FCC's rules and policies. Under these types of arrangements, separately
owned stations agree to function cooperatively in terms of programming,
advertising sales, etc., subject to the requirement that the licensee of each
station maintain independent control over the programming and operations of its
own station. One typical type of LMA is a programming agreement between two
separately owned television stations serving a common service area, whereby the
licensee of one station programs substantial portions of the broadcast day on
the other licensee's station, subject to ultimate editorial and other controls
being exercised by the latter licensee, and sells advertising time during such
program segments.
At present, FCC rules permit television station LMAs, and the licensee of a
television station brokering time on another television station is not
considered to have an attributable interest in the brokered station. However, in
connection with its ongoing rulemaking proceeding regarding the television
duopoly rule, the FCC has proposed to adopt rules providing that the licensee of
a television station which brokers more than 15% of the time on another
television station serving the same market would be deemed to have an
attributable interest in the brokered station for purposes of the national and
local multiple ownership rules.
As in television, a number of radio stations have entered into LMAs. The
FCC's multiple ownership rules specifically permit radio station LMAs to be
entered into and implemented, so long as the licensee of the station which is
being programmed under the LMA maintains complete responsibility for and control
over programming and operations of its broadcast station and assures compliance
with applicable FCC rules and policies. For the purposes of the multiple
ownership rules, in general, a radio station being programmed pursuant to an LMA
by an entity is not considered an attributable ownership interest of that entity
unless that entity already owns a radio station in the same market. However, a
licensee that owns a radio station in a market, and brokers more than 15% of the
time on another station serving the same market (i.e., a station whose principal
community contour overlaps that of the owned station), is considered to have an
attributable ownership interest in the brokered station for purposes of the
FCC's multiple ownership rules. The FCC's rules also prohibit a broadcast
licensee from simulcasting more than 25% of its programming on another station
in the same broadcast service (i.e., AM-AM or FM-FM) through a time brokerage or
LMA arrangement where the brokered and brokering stations serve substantially
the same area.
A number of radio (and television) stations have entered into cooperative
arrangements commonly known as JSAs. While these agreements may take varying
forms, under the typical JSA, a station licensee obtains, for a fee, the right
to sell substantially all of the commercial advertising on a separately-owned
and licensed station in the same market. The typical JSA also customarily
involves the provision by the selling licensee of certain sales, accounting, and
"back office" services to the station whose advertising is being sold. The
typical JSA is distinct from an LMA in that a JSA (unlike an LMA) normally does
not involve programming.
The FCC has determined that issues of joint advertising sales should be left
to enforcement by antitrust authorities, and therefore does not generally
regulate joint sales practices between stations. Currently, stations for which a
licensee sells time under a JSA are not deemed by the FCC to be attributable
interests of that licensee. However, in connection with its ongoing rulemaking
proceeding concerning the attribution rules, the FCC is considering whether JSAs
should be considered attributable interests or within the scope of the FCC's
cross-interest policy, particularly when JSAs contain provisions for the supply
of programming services and/or other elements typically associated with LMAs.
If an attributable stockholder of the Company has or acquires an attributable
interest in other television or radio stations, or in daily newspapers or cable
systems, depending on the size and location of such stations, newspapers, or
cable systems, or if a proposed acquisition by the Company or Fisher
Broadcasting would cause a violation of the FCC's multiple ownership rules or
cross-ownership restrictions, Fisher Broadcasting may be unable to obtain from
the FCC one or more authorizations needed to conduct its business and may be
unable to obtain FCC consents for certain future acquisitions.
Fisher Broadcasting is unable to predict the ultimate outcome of possible
changes to these FCC rules and the impact such changes may have on its
broadcasting operations.
14
Alien Ownership
Under the Communications Act, broadcast licenses may not be granted to or held
by any foreign corporation, or a corporation having more than one-fifth of its
capital stock owned of record or voted by non-U.S. citizens (including a non-
U.S. corporation), foreign governments or their representatives (collectively,
"Aliens"). The Communications Act also prohibits a corporation, without an FCC
public interest finding, from holding a broadcast license if that corporation is
controlled, directly or indirectly, by a foreign corporation, or a corporation
in which more than one-fourth of the capital stock is owned of record or voted
by Aliens. The FCC has issued interpretations of existing law under which these
restrictions in modified form apply to other forms of business organizations,
including general and limited partnerships. As a result of these provisions, and
without an FCC public interest finding, the Company, which serves as a holding
company for its television station licensee subsidiaries, cannot have more than
25% of its capital stock owned of record or voted by Aliens. While the Company
does not track the precise percentage of stock owned by Aliens at any particular
time, it does take steps to confirm continued compliance with these alien
ownership restrictions when it files FCC applications for new stations or major
changes in its stations.
Programming and Operation
The Communications Act requires broadcasters to serve the "public interest."
Since the late 1970s, the FCC gradually relaxed or eliminated many of the more
formalized procedures it had developed to promote the broadcast of certain types
of programming responsive to the needs of a station's community of license.
Broadcast station licensees continue, however, to be required to present
programming that is responsive to community problems, needs and interests and to
maintain certain records demonstrating such responsiveness. Complaints from
viewers concerning a station's programming may be considered by the FCC when it
evaluates license renewal applications, although such complaints may be filed,
and generally may be considered by the FCC, at any time. Stations must also
follow various FCC rules that regulate, among other things, children's
television programming, political advertising, sponsorship identifications,
contest and lottery advertising, obscene and indecent broadcasts, and technical
operations, including limits on radio frequency radiation. In addition, in
November 1998, the FCC released the text of a Notice of Proposed Rulemaking,
which seeks to fashion a new equal employment opportunities ("EEO") rule. The
FCC's former EEO rule as it relates to affirmative action was ruled
unconstitutional in 1998 by the U.S. Court of Appeals for the District of
Columbia Circuit in Lutheran Church - Missouri Synod v. FCC. Essentially, the
FCC's Notice seeks to create an "outreach efforts" rule. The Notice, among other
things, seeks comment on whether broadcasters and cable television system
operators should be required to use a minimum number of recruiting sources on
both a nationwide and local level when filling job vacancies, and, if so, what
that minimum number should be. The proposed EEO rule specifically states that
broadcasters are not required to consider race or gender in making hiring
decisions. In addition, under the proposed rule, the FCC will no longer compare
a broadcast station's workforce to the labor force in its community, nor will it
require licensees to engage in such comparisons. This EEO proceeding is
currently pending before the FCC and Fisher Broadcasting is unable to predict
the outcome of this proceeding.
Syndicated Exclusivity/Territorial Exclusivity
Effective January 1, 1990, the FCC reimposed syndicated exclusivity rules and
expanded the existing network non-duplication rules. The syndicated exclusivity
rules allow local broadcast stations to require that cable television operators
black out certain syndicated, non-network programming carried on "distant
signals" (i.e., signals of broadcast stations, including so-called
superstations, that serve areas substantially removed from the local community).
Under certain circumstances, the network non-duplication rule allows local
broadcast network affiliates to require that cable television operators black
out duplicative network broadcast programming carried on more distant signals.
Restrictions on Broadcast Advertising
The advertising of cigarettes on broadcast stations has been banned for many
years. The broadcast advertising of smokeless tobacco products has more recently
been banned by Congress. Certain Congressional committees have examined
legislative proposals to eliminate or severely restrict the advertising of
alcohol, including beer and wine. Fisher Broadcasting cannot predict whether any
or all of such proposals will be enacted into law and, if so, what the final
form of such law might be. The elimination of all beer and wine advertising
would have an adverse effect on Fisher Broadcasting's stations' revenues and
operating income, as well as the revenues and operating incomes of other
stations that carry beer and wine advertising.
Additionally, the FCC has promulgated a number of regulations prohibiting,
with certain exceptions, advertising relating to lotteries and casinos. The U.S.
Court of Appeals for the Ninth Circuit recently ruled that the limits on casino
15
advertising are unconstitutional and therefore invalid. The U.S. Supreme Court
has declined to review that decision. As a result, the FCC has suspended
enforcement of the casino advertising rule in the Ninth Circuit, which includes
Washington, Oregon and Montana. The FCC has also placed limits upon the amount
of commercialization during, and adjacent to, television programming intended
for an audience of children ages 12 and under.
Closed Captioning
In late 1998, on reconsideration of its decision earlier that year regarding
requirements for closed captioning of video programming, the FCC adopted rules
requiring that 100% of all new English-language video programming be closed
captioned by January 2006, and all new Spanish-language programming be closed
captioned by January 2010. The FCC was required to develop closed captioning
rules by the Telecommunications Act. English and Spanish language programming
first exhibited prior to January 1, 1998, is subject to different compliance
schedules. In all cases, the FCC's new rules require programming distributors to
continue to provide captioning at substantially the same level as the average
level of captioning that they provided during the first six months of 1997, even
if that amount exceeds the benchmarks applicable under the new rules. Certain
station and programming categories are exempt from the closed captioning rules,
including stations or programming for which the captioning requirement has been
waived by the FCC after a showing of undue burden has been made.
Other Programming Restrictions
The Telecommunications Act requires that any newly manufactured television
set with a picture screen of 13 inches or greater be equipped with a feature
designed to enable viewers to block all programs with a certain violence rating
(the "v-chip"). In an Order adopted March 12, 1998, the FCC required that at
least one-half of all television receiver models with screen sizes 13 inches or
greater produced after July 1, 1999 have the v-chip technology installed, and
that all such television receivers have v-chips by January 1, 2000. The
television industry has adopted, effective January 1, 1997, and subsequently
revised, August 1, 1997, a voluntarily rating scheme regarding violence and
sexual content contained in television programs. The March 12, 1998 order found
that the industry scheme meets the standards of the Telecommunications Act.
Fisher Broadcasting cannot predict whether the v-chip and a ratings system will
have any significant effect on the operations of its business.
The FCC has adopted regulations effectively requiring television stations to
broadcast a minimum of three hours per week of programming designed to meet
specifically identifiable educational and informational needs, and interests, of
children. Present FCC regulations require that each television station licensee
appoint a liaison responsible for children's' programming. Information regarding
children's programming and commercialization during such programming is required
to be compiled quarterly and made available to the public. This programming
information is also required to be filed with the FCC annually. Fisher
Broadcasting does not believe that the FCC children's programming regulations
described above have, or will have, an adverse effect on the operation of its
business.
Cable "Must-Carry" or "Retransmission Consent" Rights
The 1992 Cable Act requires television broadcasters to make an election to
exercise either "must-carry" or "retransmission consent" rights in connection
with the carriage of television stations by cable television systems in the
station's local market. If a broadcaster chooses to exercise its must-carry
rights, it may demand carriage on a specified channel on cable systems within
its market, which, in certain circumstances, may be denied. Must-carry rights
are not absolute, and their exercise is dependent on variables such as the
number of activated channels on and the location and size of the cable system
and the amount of duplicative programming on a broadcast station. If a
broadcaster chooses to exercise its retransmission consent rights, it may
prohibit cable systems from carrying its signal, or permit carriage under a
negotiated compensation arrangement. Fisher Broadcasting has executed
retransmission consent agreements with all of the cable systems operating within
the DMAs of its two television stations. It is the cable industry's desire to
eliminate the must-carry provision as the television converts of DTV.
Elimination of must-carry could adversely affect Fisher Broadcasting's results
of operations.
16
Satellite Home Viewer Act
The Satellite Home Viewer Act ("SHVA") permits satellite carriers and direct
broadcast satellite carriers to provide to certain satellite dish subscribers a
package of network affiliated stations as part of their service offering. This
service is not intended to be offered to subscribers who are capable of
receiving their local affiliates off the air through the use of conventional
rooftop antennas or who have received network affiliated stations by cable
within the past 90 days. Furthermore, the package of affiliate stations is
intended to be offered only for private home viewing, and not to commercial
establishments. The purpose of the SHVA is to facilitate the ability of viewers
in so-called "white areas" to receive broadcast network programming when they
are unable to receive such programming from a local affiliate, while protecting
local affiliates from having the programming of their network imported into
their market by satellite carriers. Satellite carriers, however, reportedly have
been offering program packages that include the package of network affiliates to
large numbers of subscribers residing in the markets of local affiliates. The
Courts, the Congress and the FCC have been asked to review the SHVA and the
practices of satellite carriers thereunder. Fisher Broadcasting cannot predict
what changes, if any, to the SHVA or the practices of satellite carriers
thereunder may occur as a result. Nor can Fisher Broadcasting predict whether
the SHVA will be reauthorized upon its expiration.
Proposed Legislation and Regulations
In February 1998, the FCC issued regulations regarding the implementation
of advanced television in the United States. These regulations govern a new form
of digital telecasting ("DTV") based on technical standards adopted by the FCC
in December 1996. DTV is the technology that allows the broadcast and reception
of a digital binary code signal, in contrast to the current analog signal, which
is transmitted through amplitude and frequency variation of a carrier wave.
Digitally transmitted sound and picture data can be compressed, allowing
broadcasters to transmit several standard definition pictures within the same
amount of spectrum currently required for a single analog channel. DTV also
allows broadcasters to transmit enough information to create a high definition
television ("HDTV") signal. The FCC's regulations permit, but do not require,
broadcasters to provide an HDTV signal, which features over 1,000 lines of
resolution, rather than the 525 lines of resolution used in analog television
sets. The greater number of lines of resolution will allow HDTV to provide a far
more detailed picture than existing television sets can produce.
Under the FCC's DTV rules each existing station will be given a second channel
on which to initiate DTV broadcasts. The FCC has specified the channel and the
maximum power that may be radiated by each station. DTV stations will be limited
to 1 million watts Effective Radiated Power, and no station has been assigned
less than 50 thousand watts Effective Radiated Power. The FCC has stated that
the new channels will be paired with existing analog channels, and broadcasters
will not be permitted to sell their DTV channels, while retaining their analog
channels, and vice versa. KOMO-TV was allotted DTV Channel 38, and KATU (TV) was
allotted DTV Channel 43.
Affiliates of the ABC, CBS, Fox and NBC television networks in the top 10
television markets will be given until May 1, 1999, to construct and commence
operation of DTV facilities on their newly allocated DTV channels. Affiliates of
those networks in markets 11 through 30 will be given until November 1, 1999 to
do the same. All other commercial television stations will be given until May 1,
2002 to place a DTV signal on the air, and all non-commercial stations will have
until May 1, 2003. As ABC affiliates operating in markets 12 and 23, Fisher
Broadcasting's Seattle and Portland television stations will be required to
commence DTV broadcasts by November 1, 1999. Stations will have one-half of the
specified construction periods in which to apply to the FCC for a construction
permit authorizing construction of the new DTV facilities. The FCC has indicated
its intention to act expeditiously on such applications. While the FCC has
announced its intention to grant extensions of the construction deadlines in
appropriate cases, the impact of failing to meet these applications and
construction deadlines cannot be predicted at this time.
Once a Fisher Broadcasting station begins operation of its new DTV facilities
it will be required to deliver, at a minimum, a free programming service with
picture resolution at least as good as that of the current analog service
provided by the station, and will have to be aired during the same time periods
as the current service. It may prove possible to provide more than one of such
"analog equivalent" signals over a single DTV channel, or to mix an "analog
equivalent" signal with other forms of digital material. The FCC will not
require a broadcaster to transmit a higher quality, HDTV signal over a DTV
channel; the choice as to whether to transmit an HDTV signal or one or more
"analog equivalent" channels will be left up to the station licensee. It is not
believed possible, under the present state of the art, to transmit additional
program material over the DTV signal while it is transmitting in the HDTV mode.
It cannot be predicted whether competitors of Fisher Broadcasting's television
stations will operate in the HDTV or "analog equivalent" mode or the economic
impact of such choices on the stations' operations.
17
Stations operating in the DTV mode will be subject to existing public
service requirements. The FCC has announced that it will consider imposing
additional public service requirements, such as free advertising time for
federal political candidates, and increased news, public affairs, and children's
programming requirements, in the future. It cannot be predicted whether such
changes will be adopted, or any impact they might have on station operations.
By 2003, DTV stations will have to devote at least one-half of their
broadcast time to duplication of the programming on their paired analog
stations. In 2004, this simulcasting requirement will increase to 75%, and to
100% in 2005.
The FCC has indicated that the transition from analog to digital service
will end in 2006, at which time one of the two channels being used by
broadcasters will have to be relinquished to the government, and DTV
transmissions will be "repacked" into channels 2-51. Congress has established
certain conditions that, if met, would allow the FCC to delay the termination of
analog broadcasting beyond 2006.
In addition, the FCC, in November 1998, voted to impose a fee on DTV
licensees providing ancillary and supplementary services via their digital
spectrum. The fee will equal five percent of gross revenues obtained from the
provision of such ancillary and supplementary services, but will not be assessed
against revenues generated by the traditional sale of broadcast time for
advertising. The FCC said that it was following the stated goals of the
Telecommunications Act to recover a portion of the value of the DTV spectrum,
avoid unjust enrichment of broadcasters, and recover an amount equal to that
which would have been obtained if the spectrum had been auctioned for such
ancillary services.
Implementation of DTV is expected to generally improve the technical quality
of television signals received by viewers. Under certain circumstances, however,
conversion to DTV may reduce a station's geographic coverage area or result in
some increased interference. Also, the FCC's allocations could reduce the
competitive advantage presently enjoyed by Fisher Broadcasting's Seattle and
Portland television stations, which operate on low VHF channels serving broad
areas. Implementation of DTV will impose substantial additional costs on
television stations because of the need to replace equipment and because some
stations will operate at higher utility costs. Fisher Broadcasting estimates
that the adoption of DTV would require a broad range of capital expenditures to
provide facilities and equipment necessary to produce and broadcast DTV
programming. The introduction of this new technology will require that customers
purchase new receivers (television sets) for DTV signals or, if available by
that time, adapters for their existing receivers.
Under certain circumstances, broadcast stations currently are required to
provide political candidates with discounted air time in the form of lowest unit
rates. A number of changes have been proposed before Congress to mandate public
service obligations on broadcast stations such as the provision of free or
discounted air time for political candidates. Fisher Broadcasting is unable to
predict the outcome of this debate regarding political advertising and campaign
finance reform.
Other matters that could affect Fisher Broadcasting's stations include
technological innovations affecting the mass communications industry such as
technical allocation matters, including assignment by the FCC of channels for
additional broadcast stations, low-power television stations and wireless cable
systems and their relationship to and competition with full-power television
broadcasting service. In addition, in January 1999, the FCC adopted a Notice of
Proposed Rulemaking proposing the creation of a low power FM radio service.
Congress and the FCC also have under consideration, or may in the future
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could, directly or indirectly, affect the operation, ownership
and profitability of Fisher Broadcasting's broadcasting business, resulting in
the loss of audience share and advertising revenues of the stations, and
affecting Fisher Broadcasting's ability to acquire additional, or retain
ownership of existing, broadcast stations, or finance such acquisitions. Such
matters include, for example, (i) changes to the license renewal process; (ii)
imposition of spectrum use or other governmentally imposed fees upon a licensee;
(iii) new EEO rules and other matters relating to minority and female
involvement in broadcasting; (iv) proposals to increase the benchmarks or
thresholds for attributing ownership interest in broadcast media; (v) proposals
to change rules or policies relating to political broadcasting; (vi) technical
and frequency allocation matters, including those relative to the implementation
of DTV; (vii) proposals to restrict or prohibit the advertising of beer, wine
and other alcoholic beverages on broadcast stations; (viii) changes in the FCC's
cross-interest, multiple ownership, alien ownership and cross-ownership
policies; (ix) changes to broadcast technical requirements; (x) proposals to
restrict local marketing and time brokerage agreements; and (xi) proposals to
limit the tax deductibility of advertising expenses by advertisers. Fisher
Broadcasting cannot predict what other matters might be considered in the
future, nor can it judge in advance what impact, if any, the implementation of
any of these proposals or changes might have on its broadcasting business.
18
The foregoing is a summary of the material provisions of the Communications
Act, the Telecommunications Act, and other Congressional acts or related FCC
regulations and policies applicable to Fisher Broadcasting. Reference is made to
the Communications Act, the Telecommunications Act, and other Congressional
acts, such regulations, and the public notices promulgated by the FCC, on which
the foregoing summary is based, for further information. There are many
additional FCC regulations and policies, and regulations and policies of other
federal agencies, that govern political broadcasts, public affairs programming,
equal employment opportunities and other areas affecting Fisher Broadcasting's
broadcasting business and operations.
SATELLITE, INTERNET, AND EMERGING MEDIA OPERATIONS
Introduction
Fisher Communications (FishComm) is a regional satellite teleport operator,
Internet service provider and emerging media development company. FishComm was
created in 1995 to expand on Fisher Broadcasting's capacity to develop revenue
from existing resources, such as satellite communications receive and transmit
facilities, and to investigate the potential for revenue streams from new
technologies such as the Internet. Since its inception, FishComm has operated
satellite communications teleports in Portland and Seattle, primarily supplying
news and sporting event video originating from these two markets for distant
multi- and single market consumption. The Portland teleport consists of two
C-band transmit and receive satellite dishes, while the Seattle Teleport
consists of four such dishes. The teleports are connected to each other via a
digital microwave line and to all major NW sports venues via fiber lines.
KU-band satellite transmissions are handled by a mobile truck. The list of
FishComm's current clients includes ABC, CNN, ESPN, MSNBC, ESPN, Fox News,
Microsoft and Conus for occasional use video purposes and PrimeTime 24 and
Canadian Communications Corporation for continuous use purposes. FishComm also
operates a fiber optic terminal with connectivity to Vyvx national fiber optic
network for point to point transmission of audio and video signals. In addition
FishComm offers studio facilities for satellite interviews and distance
learning, satellite and fiber booking services and tape playout capability in
both Portland and Seattle markets. Fisher Broadcasting believes that the
combination of fiber optic and satellite communication capabilities provides
FishComm with a competitive advantage in the efficient transmission of point-to-
point and point-to-multi-point video and audio from the Pacific Northwest.
FishComm's Internet division currently provides bandwidth and e-mail services
internally to other divisions of Fisher Companies Inc. and to a few outside
clients. Current revenues attributable to FishComm's operations are not material
to the Company's results of operations. As the Internet continues to expand,
potential applications internally and externally are expected to grow.
Company Performance
From its inception, FishComm has focused on profitably marketing the excess
capacity of Fisher Broadcasting's existing resources and adding to those
resources to increase service offerings as the business expands and grows.
Revenues generated through existing satellite transmission equipment and other
associated services (i.e. studio use, tape playout, fiber transmission) have
increased 12% in the past year. The addition of a KU-band truck has given
FishComm the ability to offer on-site transmission services to clients, which in
itself has increased revenues substantially. FishComm's revenues and earnings
remain mainly event driven. News and sporting events occurring in the Northwest,
primarily Portland and Seattle, create the demand for the transmission services
that FishComm provides.
PROGRAM CONTENT PRODUCTION AND SYNDICATION
Introduction
A new operating division of Fisher Broadcasting named Fisher Entertainment
was formed in November, 1998 as part of an overall strategy to expand Fisher
Broadcasting's program creation and ownership. The mission of Fisher
Entertainment is to supply programming for cable networks, broadcast syndication
and emerging media, and it plans to fulfill this mission by developing program
content on its own, by exploiting the library of programming created by Fisher
Broadcasting over the years, and by establishing alliances with other producers
to enhance creative output and merge complementary skills.
Fisher Broadcasting has significant experience in producing original
programming. For example, KOMO-TV's weekday program, Northwest Afternoon, is the
most successful and longest running locally produced daytime program in the
U.S.. In addition, both KOMO and KATU have won numerous awards over the years
for their locally produced programs.
19
"See Broadcasting Operations - "Television - KOMO TV" and "Television - KATU
Television." As a content provider, Fisher Entertainment will take advantage of
Fisher Broadcasting's expertise and the opportunities presented in the Fisher
Plaza digital production facility anticipated to open in early 2000. This state-
of-the-art production facility is expected to provide Fisher Entertainment with
a competitive advantage in producing cost effective television content. Fisher
Entertainment's focus will be primarily on supplying original productions for
national cable television networks, secondarily for broadcast syndication, and
thirdly, with a longer term focus, for emerging internet-based service
providers.
General Overview
There are nearly 100 million U.S. television households of which approximately
67 million are wired cable households and 8 million receive television via
direct broadcast satellite. Over the past five years, total U.S. TV households
have increased by approximately 5 million, while cable households have increased
by 8.5 million and virtually all of the 8 million DBS households have been
added. Thus, the potential audience for programming delivered by satellite and
cable networks has increased at a rate more than three times that of all U.S. TV
households during that period.
Overall household television viewing has risen to slightly more than 50 hours
per week. The average home receives 43 channels and views 10 (watches 10 or more
continuous minutes in a week). With the proliferation of viewing alternatives,
the time spent per channel has decreased to 4.9 hours per channel per week.
While adult viewing is increasing, viewing among teens and children is
decreasing. The proliferation of viewing alternatives has increased the demand
for more quality programming by cable channels and over the air broadcasters.
Syndication revenue is comprised of national advertising in off-network reruns
and original first-run daily and weekly programs produced for sale on a market
by market basis. Syndicated programs fill the available time periods when there
are no network programs Syndication is an effective vehicle for national
advertisers when a program achieves 80+% coverage of U.S. TV households through
local market station sales. Syndicated programming is a staple for many cable
networks, as well as over the air broadcasters.
It is currently estimated that 42% of TV households have video games, 40% have
home computers and 10% have home internet access. Including the home, the
workplace and school, 39% of persons 16 or older in the U.S. and Canada (88
million) have access to the internet, 21% (47 million) have used the world wide
web in the past three months and 15% of those (5.6 million) have used it to
purchase a product or service on-line.
Internet advertising revenues were virtually non-existent in 1995. It is
projected that advertisers will spend $2.3 billion on internet advertising in
1999, an increase of 75% over 1998.
Competitive Marketplace
Cable. It is projected that national cable networks spend $2.25 billion on
original program production and as advertising revenues grow, budgets for
original production are forecast to expand. The demand for original productions
is expected to continue to escalate.
Most cable networks rely on outside suppliers to fill their needs for non-
fiction original productions. The majority of these original programs are
commissioned from independent (non-studio affiliated) suppliers with whom the
cable networks have long-term relationships. The cable networks often retain all
ownership rights under these agreements.
There are forty ad supported basic cable networks that achieve reported
ratings. Twenty-four are fully distributed networks with more than 50 million
households. Sixteen are mid-size networks with up to 50 million households.
Fisher Entertainment has targeted seventeen ad supported cable networks for
developing production alliances either because they are heavily reliant on
externally produced product or because they pay consequential license fees. Ten
are fully distributed (USA, Lifetime, Fox Family, A&E, Discovery Networks, The
Nashville Network, The Learning Channel, Sci-Fi, The History Channel and E!).
Seven are mid-size (Disney Channel, Animal Planet, Home & Garden, Food Network,
Odyssey, Court TV and Travel Channel).
As a producer of creative television content for cable networks, Fisher
Entertainment will compete primarily with approximately 45 small to mid-size
production entities. However, because of preferential access to KOMO-TV's new
digital production facilities, Fisher Entertainment is also positioned to be a
partner to these entities by providing production services at favorable rates.
Fisher Entertainment's goal is to establish its market presence through such
programming partnerships. Fisher Entertainment also will attempt to bring to
these partnerships marketing and sales skills that many program producers
20
lack. Despite the growth in advertising revenues for the cable sector,
individual networks continue to seek economies in original production to bolster
operating cash flow. Fisher Entertainment is positioning itself to become a
recognized cable content provider. Unlike its competitors, which primarily
operate on a work-for-hire basis, Fisher Entertainment's business plan is
predicated on strategic alliances in which it retains rights and equity in the
creative television content it produces for cable.
Broadcast Syndication. First-run syndication is the production of original
programs that are sold on a station-by-station, market-by-market basis. Stations
pay for the programs with cash, with a portion of the commercial time within the
program (barter), or a combination of the two. The competition for station time
periods is extreme among hundreds of distributors. Fisher Entertainment's goal
is to enter the syndication marketplace in the 2000/2001 broadcast season with
weekly series and specials. The strategy is to position Fisher Entertainment as
a leader in the production and distribution of targeted, high quality, low cost
information/entertainment programming.
Broadcast syndication has shown the same downward pressure on rating delivery
as network primetime due to the proliferation of viewing alternatives. As a
result, profit pressures have increased. Strong production partnerships and
production economies are as essential to profits in syndication as they are in
cable. Secondary revenue opportunities such as foreign sales, ancillary revenues
and back-end cable sales are key to determining which syndication projects to
launch. The goal of Fisher Entertainment is to select and/or co-venture
broadcast syndication productions with the highest potential in domestic
syndication and the maximum opportunities to generate secondary revenues.
Emerging Media. Internet content is in its infancy. Fisher Entertainment is
focused on supplying digital programming for internet distribution when the
Fisher Plaza digital production facility is completed, which is expected to be
in early 2000. It is also a goal of Fisher Entertainment to establish strategic
program production alliances with internet service providers with a view to
creating content for broadcast television and cable that extends the internet
brand to a mass television audience.
Forward Looking Statements
The current and proposed business plans of Fisher Entertainment discussed
above include certain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "PSLRA"). This statement
is included for the express purpose of availing the Company of the protections
of the safe harbor provisions of the PSLRA. Management's ability to predict
results or the effect of future plans is inherently uncertain, and is subject to
factors that may cause actual results to differ materially from those projected.
Factors that could affect the actual results include unanticipated changes in
the very rapidly developing cable, syndication and internet industries, the
effects of intense competition and related performance and price pressures, both
from existing competitors and new competitors that can be expected to enter into
these markets, and uncertainties inherent in the start up of any new business
venture, particularly in industries that are evolving as quickly and
dramatically as those in which Fisher Entertainment will compete. While Fisher
Broadcasting has created significant programming in the past, neither Fisher
Broadcasting nor Fisher Companies has experience in the creation and
distribution of programming on the scale contemplated by Fisher Entertainment.
In addition to this inexperience and the other factors set out above, the risks
associated with this new division include: startup costs, performance of certain
key personnel new to the Company, the difficulties of retaining high content
standards while producing mass appeal entertainment and the unpredictability of
audience tastes.
FLOUR MILLING AND FOOD DISTRIBUTION OPERATIONS
INTRODUCTION
The Company's flour milling and food distribution operations are conducted
through Fisher Mills Inc. ("FMI"), a wholly owned subsidiary of the Company. FMI
is a manufacturer of wheat flour and a distributor of bakery products. Wheat
flour is produced at FMI's milling sites in Seattle, Washington; Portland,
Oregon and Modesto, California. FMI and Koch Agriculture Company of Wichita,
Kansas are each 50% owners of a limited liability company called Koch Fisher
Mills L L C which owns and operates a flour milling facility in Blackfoot,
Idaho. FMI has operating and sales responsibilities for the Blackfoot Facility.
The Blackfoot facility commenced operations in April 1997, and was significantly
expanded during 1998 with construction of a conventional flour mill, which began
operations in December.
During 1998, FMI produced approximately 2 million pounds of flour daily. FMI
anticipates that, when the Blackfoot mill expansion achieves full commercial
production, the Blackfoot facility will add an additional 1.25 million pounds of
daily flour capacity. Fluctuations in wheat prices can result in fluctuations in
FMI's revenues and profits. FMI
21
seeks to hedge flour sales through the purchase of wheat futures or cash wheat.
FMI does not speculate in the wheat market. Wheat is purchased from grain
merchandisers in Washington, Idaho, Montana and California, and is delivered
directly to the mills by rail or truck. During 1998, FMI operated its mills more
than 310 days.
Bakery products purchased from other food manufacturers are warehoused and
distributed, along with FMI-manufactured flour, from FMI's three warehouses in
Seattle, Washington; Portland, Oregon and Rancho Cucamonga, California. FMI's
distribution division markets its products primarily in the retail bakery and
food manufacturing industries. FMI makes deliveries using company owned and
leased vehicles with primarily company drivers.
As of December 31, 1998 FMI had 215 full-time employees.
BUSINESS PRODUCTS
FMI's mills produce wheat flour for sale to a wide variety of end-users.
FMI primarily serves specialty niche markets with bag product for smaller
manufacturers, institutional markets such as restaurants and hotels, retail and
in-store bakeries. Bulk flour shipped in rail cars and tanker trucks is
delivered to large wholesale bakeries and mix manufacturers.
FMI produces approximately 50 grades of flour, ranging from high-gluten
spring wheat flour to low-protein cake and cookie flour. FMI believes that it
differentiates itself from competitors by producing high quality specialty
flours for specific applications. FMI also produces millfeed for sale to the
animal feed industry. Millfeed is incorporated into feed rations for dairy
cattle and other livestock.
FMI's food distribution division purchases and markets approximately 2,000
bakery related items, including grain commodities (such as corn, oats, rye and
barley products), mixes, sugars and shortenings, paper goods, and other items.
Where appropriate, FMI takes advantage of bulk buying discounts and exclusive
supplier agreements to purchase bakery products at favorable market prices. FMI
intends to evaluate and, as appropriate, engage in new mill construction and
acquisition of food distribution operations. The food distribution division
continues to evaluate expansion opportunities through acquisitions in its
current marketing area.
COMPETITION
The U.S. milling industry is currently composed of 195 flour mills, down
from 252 in 1981, with a median mill size of approximately 7,500 cwts. per day
capacity. During the same period, the number of milling companies has decreased
from 166 to 95. Despite a decline in the number of milling companies, milling
capacity has increased. The largest five manufacturers account for approximately
74% of total U.S. production. FMI, at 36,500 cwts of daily capacity (including
the output of the Blackfoot facility), ranks 8th in the U.S.
MARKETING
FMI's milling division markets its products principally in the states of
Washington, Oregon and California. The majority of FMI's flour sales are made
under contractual agreements with large wholesale bakeries, mix manufacturers,
blending facilities, food service distributors, and finished food manufacturers.
No flour customer accounted for more than fifteen percent of FMI's total
revenues during 1998.
FMI's food distribution division, including its wholly-owned subsidiary,
Sam Wylde Flour Co., Inc., markets its products primarily within a 100-mile
radius of FMI's warehouses. FMI's customer base consists primarily of retail and
wholesale bakeries, in-store bakeries, retail and wholesale donut shops, retail
and wholesale bagel shops and small food manufacturers.
FMI's milling division strives to differentiate itself from its competition
with a strong service and technical department, an emphasis on branded products,
new product development, and growth through the development of conventional and
compact milling units. FMI targets its marketing in food groups that are in
emerging or growth product life cycles. These food groups are characterized by
growth rates higher than average, fragmented market share and a need for
technological assistance in product formulation. FMI evaluates market conditions
related to each of its products and will exit certain product categories where
market consolidation, over capacity and lack of growth lead to lower flour
margins.
FMI's milling division also utilizes its technical service department as a
value-added sales tool. The technical service department is accountable for
developing and training salespersons in the company's network of food service
22
distributors. The technical service department also provides on-site product
trouble-shooting and formulation assistance to small retail bakers and
restaurants.
FMI markets its flour through the use of branded products such as
Mondako(R), Golden Mountain(R), and Power(R) and product category branded
ingredients under the name Sol BrillanteO. This marketing strategy builds brand
identity and differentiates a group of products from other products in the
market. Trademarks are also registered in selected international markets in
which FMI is engaged in business. In the past three years, FMI has sold products
in Russia, Mexico, Japan and Canada. The global currency crisis of 1998 severely
restricted export sales to Asia and Russia in the past year. FMI's international
sales are not, in the aggregate, material to FMI's financial condition or
results of operation. See Note 10 to the Consolidated Financial Statements
regarding the amount of international sales.
In 1991, FMI became the first milling company in the country to install a
new milling concept called a KSU shortflow. The "shortflow" or "compact" process
reduces the amount of building and equipment required to mill flour. The
electronically controlled modular units can be installed at approximately 60
percent of the cost of a conventional mill and in one-third of the construction
time. While compact units do not replace the need for conventional milling
capacity, they do provide flexible milling capacity for niche milling segments.
Since 1991, FMI has installed five additional compact units, including two units
at the Blackfoot facility. To FMI's knowledge, there are only 16 compact milling
units in operation in the world. FMI operates six compact milling units
(including the Blackfoot facility), and to its knowledge no other milling
company operates more than one. FMI thus believes that it is the world leader in
compact flour production.
RISKS ASSOCIATED WITH FOOD PRODUCTION
The food manufacturing and distribution industry is subject to significant
risk. The size and distribution of the U. S. wheat crop in any given year can
adversely impact, and to date in 1999 adversely impacted, the economics of the
Blackfoot mill, which sells most of its product to customers in locations
distant from that mill in competition with mills much closer to those customers.
Competition in the food industry is intense. Food production is a heavily
regulated industry, and federal laws or regulations promulgated by the Food and
Drug Administration, or agencies having jurisdiction at the state level, could
adversely effect FMI's revenues and results of operations. Certain risks are
associated with the production and sale of food products. Food producers can be
liable for damages if contaminated food causes injury to consumers. Although
flour is not a highly perishable product, FMI is subject to some risk as a
result of its need for timely and efficient transportation of its flour. Costs
associated with compliance with environmental laws can adversely affect
profitability, although FMI's historical and currently anticipated costs of
compliance have not had, and are not expected to have in the foreseeable future,
a material effect on the capital expenditures, earnings or competitive position
of FMI.
The amount of wheat available for milling, and consequently the price of
wheat, is affected by weather and growing conditions. There is competition for
certain staff, including competition for sales staff in the food distribution
portion of FMI's business. Loss of key sales staff can, and in some instances
has, significantly and adversely affected certain food distribution operations.
Production of food products also depends on transportation and can be adversely
affected if a key carrier serving a facility (e.g., a railroad) experiences
operational difficulties.
REAL ESTATE OPERATIONS
INTRODUCTION
The Company's real estate operations are conducted through Fisher Properties
Inc. ("FPI") a wholly owned subsidiary of the Company. FPI is a proprietary real
estate company engaged in the acquisition, development, ownership and management
of a diversified portfolio of real estate properties, principally located in the
Seattle, Washington metropolitan area. FPI had 34 employees as of December 31,
1998.
As of December 31, 1998, FPI's portfolio of real estate assets included 24
commercial and industrial buildings containing over 1.1 million square feet of
leaseable space with approximately 150 tenants and a 201 slip marina. FPI also
owns approximately 320 acres of unimproved land. A partnership in which FPI has
a 50% interest has an option to acquire this land and an adjacent 160 acres for
future residential development.
FPI estimates that, based on capitalization of real estate net operating
income, the total fair market value of FPI's real estate holdings was
approximately $130 million as of December 31, 1998, excluding any related
liabilities and potential liquidation costs. Although the foregoing fair market
value estimate is based on information and assumptions considered to be adequate
and reasonable by FPI, such estimate requires significant subjective judgments
to be made by FPI. Such
23
estimate is not based on technical appraisals and will change from time to time,
and could change materially, as economic and market factors change, and as
management evaluates those and other factors.
FPI's owned real estate is managed, leased, and operated by FPI. More than
half of FPI's employees are engaged in activities related to service of FPI's
existing buildings and their tenants. FPI does not manage properties for third-
party owners, nor does it anticipate doing so in the future.
BUSINESS
FPI focuses on reducing debt, enhancing the revenue stream of FPI's existing
properties, and acquiring or developing selected strategic properties. The cash
flow from real estate operations is used entirely to pay real estate debt,
maintain properties and otherwise finance real estate operations. As stated in
Note 10 to the Consolidated Financial Statements, income from operations
reported for the real estate segment excludes interest expense. When interest
expense is taken into account, real estate operations have historically had
negative income or nominal profit, including negative income in 1997 and 1998.
FPI also would have incurred a loss in 1996, except for gain from the sale of
real property. The majority of FPI's existing operating properties were
developed by FPI. FPI anticipates that most future acquisition and development
activities will be located near existing facilities to promote business
efficiencies. FPI believes that developing, owning, and managing a diverse
portfolio of properties in a relatively small geographic area, minimizes
ownership risk.
DEVELOPMENT AND ACQUISITION ACTIVITIES
FPI plans to increase its ownership of industrial and office properties in
the Seattle area. The timing and amount of such increase is uncertain and is
subject to a variety of factors, including: interest rates; available real
estate opportunities; the relationship of those opportunities to the Company's
other business decisions on how much of its capital and borrowing capacity
should be devoted to real estate at any given time and how much should be
devoted to other aspects of the Company's business. FPI is significantly
involved in planning and development of new studio space and corporate offices
for Fisher Broadcasting on a block of land owned partially by Fisher
Broadcasting and partially by FPI at Fourth Avenue and Denny Way in Seattle
known as Fisher Plaza (see "Broadcasting Operations - KOMO TV"). FPI has Board
of Directors approval to undertake pre-development activities for additional
development of Fisher Plaza at an estimated cost of $2,000,000.
From time to time, FPI may consider selling a property when it reaches a
certain maturity, no longer fits FPI's investment goals, or is under threat of
condemnation. FPI is aware of interest by the Washington State Department of
Transportation to acquire, under threat of condemnation for its fair market
value, all or a portion of FPI's property on Fourth Avenue South in Seattle (See
Note 13 to the Consolidated Financial Statements). Other than the
aforementioned, FPI has no current plans to sell any of its properties.
24
OPERATING PROPERTIES
FPI's portfolio of operating properties are classified into three business
categories: (i) marina properties; (ii) office; and (iii) warehouse and
industrial. Note 4 to the Consolidated Financial Statements sets forth the
minimum future rentals from leases in effect as of December 31, 1998 with
respect to FPI's properties. The following table includes FPI's significant
properties:
Land Approx.
Ownership FPI's Year Area Rentable % Leased
Name and Location Interest Interest Developed (Acres) Space 12/31/98
- ----------------- -------- -------- --------- ------- ----- --------
MARINA
Marina Mart Moorings Fee & Leased 100% 1939 5.01 Fee 201 Slips 98%
Seattle, WA to & 2.78 Leased
1987
OFFICE
West Lake Union Center Fee 100% 1994 1.24 185,000 SF 100%
Seattle, WA 487 car garage
I-90 Building Fee 100% Renovated .34 28,265 SF 94%
Seattle, WA 1990 22 car garage
Fisher Business Center Fee 100% 1986 9.75 195,000 SF 99%
Lynnwood, WA Parking for 733
cars
Marina Mart Fee 100% Renovated * 18,950 SF 100%
Seattle, WA 1993
Latitude 47 Restaurant Fee 100% Renovated * 15,470 SF 100%
Seattle, WA 1987
1530 Building Fee 100% Renovated * 10,160 SF 100%
Seattle, WA 1985
INDUSTRIAL
Fisher Industrial Park Fee 100% 1982 and 22.08 398,600 SF 96%
Kent, WA 1992
Fisher Commerce Center Fee 100% NA 10.21 171,400 SF 100%
Kent, WA
Fisher Industrial Center Fee 100% Redeveloped 3.3 80,475 SF 100%
Seattle, WA 1980
Pacific North Equipment Co. Fee 100% NA 5.5 38,000 SF 100%
Kent, WA
1741 Building Fee 100% Renovated .41 5,212 SF 100%
Seattle, WA 1989
* Undivided land portion of Marina.
In addition to the above listed properties, FPI owns a 2.6 acre parking lot
that serves Fisher Mills Inc. in Seattle which is expected to be reconfigured by
the Port of Seattle during 1999, a one acre parking lot in Seattle that has
served Fisher Broadcasting and is part of the redevelopment of the Fisher Plaza
discussed above, 320 acres of unimproved land, held for future development, and
a small residential property in Seattle. FPI does not currently intend to
acquire other parking or residential properties.
West Lake Union Center, Fisher Business Center, Fisher Industrial Park, and
Fisher Commerce Center are encumbered by liens securing non-recourse, long-term
debt financing that was obtained by FPI in connection with the development or
refinancing of such properties. Each of these properties produces cash flow
that exceeds debt service, and in no case does such debt exceed 75% of the
estimated value of the financed property. Total FPI debt is approximately 45%
of the estimated value of the total owned real estate. It is FPI's objective to
reduce this ratio over time with excess cash flow not needed for capital
investments. FPI believes that it currently has sufficient credit and cash flow
to meet its investment objectives.
25
RISKS ASSOCIATED WITH REAL ESTATE
The development, ownership and operation of real property is subject to
varying degrees of risk. FPI's revenue, operating income and the value of its
properties may be adversely affected by the general economic climate, the local
economic climate and local real estate conditions, including the perceptions of
prospective tenants of attractiveness of the properties and the availability of
space in other competing properties; FPI's ability to provide adequate
management, maintenance and insurance; the inability to collect rent due to
bankruptcy or insolvency of tenants or otherwise; and increased operating costs.
Several of FPI's properties are leased to, and occupied by, single tenants which
occupy substantial portions of such properties. Real estate income and values
may also be adversely affected by such factors as applicable laws and
regulations, including tax and environmental laws, interest rate levels and the
availability of financing.
FPI carries comprehensive liability, fire, extended coverage and rent loss
insurance with respect to its properties, with policy specifications and insured
limits customary for similar properties. There are, however, certain types of
losses that may be either uninsurable or not economically insurable. If an
uninsured loss occurs with respect to a property, FPI could lose both its
invested capital in and anticipated profits from such property.
INVESTMENT IN SAFECO CORPORATION
A substantial portion of the Company's assets is represented by an investment
in 3,002,376 shares of the common stock of SAFECO Corporation, an insurance and
financial services corporation ("SAFECO"). The Company has been a stockholder of
SAFECO since 1923. At December 31, 1998, the Company's investment constituted
2.2% of the outstanding common stock of SAFECO. The market value of the
Company's investment in SAFECO common stock as of December 31, 1998 was
approximately $128,915,000, representing 29% of the Company's total assets as of
that date. Dividends received with respect to the Company's SAFECO common stock
constituted 17.1% of the Company's net income for 1998. A significant decline in
the market price of SAFECO common stock or a significant reduction in the amount
of SAFECO's periodic dividends could have a material adverse effect on the
financial condition or results of operation of the Company. The Company has no
present intention of disposing of its SAFECO common stock or its other
marketable securities, although such securities are classified as investments
available for sale under applicable accounting standards (see "Notes to
Consolidated Financial Statements; Note 1: Operations and Accounting Policies:
Marketable Securities"). Mr. William W. Krippaehne, Jr., President, CEO, and a
Director of the Company, is a Director of SAFECO. SAFECO's common stock is
registered under the Securities Exchange Act of 1934, as amended, and further
information concerning SAFECO may be obtained from reports and other information
filed by SAFECO with the Securities and Exchange Commission (the "Commission").
SAFECO common stock trades on The NASDAQ Stock Market under the symbol "SAFC".
ITEM 2. DESCRIPTION OF PROPERTIES.
Fisher Broadcasting's television stations operate from offices and studios
owned by Fisher Broadcasting and located in Seattle, Washington and Portland,
Oregon. Television transmitting facilities and towers are also owned by Fisher
Broadcasting. Radio studios are generally located in leased space. Radio
transmitting facilities and towers are owned by Fisher Broadcasting, except
KWJJ-FM and the stations operated by Sunbrook, where such facilities are
situated on leased land.
The Seattle flour mill and food distribution facility operate from FMI-owned
facilities in Seattle, Washington. The compact flour mill and food distribution
facilities located in Portland, Oregon, are owned by FMI. In California, FMI's
food distribution activities and compact flour mill operate from leased
facilities in Rancho Cucamonga and Modesto, respectively.
Property operated by the Company's real estate subsidiary, FPI, is described
under "Real Estate Operations - Operating Properties." Real estate projects that
are subject to non-recourse mortgage loans are West Lake Union Center, Fisher
Business Center, Fisher Industrial Park, and Fisher Commerce Center.
The Company believes that the properties owned or leased by its operating
subsidiaries are generally in good condition and well maintained, and are
adequate for present operations.
26
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims, legal
actions and complaints in the ordinary course of their businesses. In the
Company's opinion, all such matters are adequately covered by insurance, are
without merit or are of such kind, or involve such amounts, that unfavorable
disposition would not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders in the fourth
quarter of 1998.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Bid and ask prices for the Company's Common Stock are quoted in the Pink
Sheets and on the OTC Bulletin Board. As of December 31, 1998, there were five
Pink Sheet Market Makers and nine Bulletin Board Market Makers. The range of
high and low bid prices for the Company's Common Stock for each quarter during
the two most recent fiscal years is as follows (adjusted to reflect the two-for-
one stock split that was effective March 6, 1998):
Quarterly Common Stock Price Ranges /(1)/
-----------------------------------------
1998 1997
---- ----
Quarter High Low High Low
- ------- ---- --- ---- ---
1st $64.25 $59.00 $60.50 $48.82
2nd 73.25 63.75 64.00 56.25
3rd 72.50 63.00 65.50 60.50
4th 68.50 57.50 61.50 59.50
- -------------
(1) This table reflects the range of high and low bid prices for the Company's
Common Stock during the indicated periods, as published in the NQB Non-
NASDAQ Price Report by the National Quotation Bureau. The quotations merely
reflect the prices at which transactions were proposed, and do not
necessarily represent actual transactions. Prices do not include retail
markup, markdown or commissions.
The approximate number of record holders of the Company's Common Stock as of
December 31, 1998 was 439.
In December 1997 the Board of Directors authorized a two-for-one stock
split effective March 6, 1998 for shareholders of record on February 20, 1998.
In connection with the stock split, the par value of the Company's Common Stock
was adjusted from $2.50 per share to $1.25 per share. All share and per share
amounts reported in this Form 10-K have been adjusted to reflect the split.
The Company paid cash dividends on its Common Stock of $.98 and $1.00 per
share (adjusted to reflect the two-for-one stock split described above),
respectively, for the fiscal years 1997 and 1998. Commencing in 1998, dividends
were declared on a quarterly basis, as opposed to the Company's past practice of
declaring an annual dividend payable on quarterly payment dates. Accordingly,
the Company declared, on December 2, 1998, a dividend of $.26 per share, payable
on March 5, 1999 to shareholders of record on February 19, 1999. Annual cash
dividends have been paid on the Company's Common Stock every year since the
Company's reorganization in 1971. The Company currently expects that comparable
cash dividends will continue to be paid in the future, although its ability to
do so may be affected by the terms of the senior secured credit facilities
described in Liquidity and Capital Resources in Management's Discussion and
Analysis of Financial Position and Results of Operations.
ITEM 6. SELECTED FINANCIAL DATA.
The following financial data of the Company are derived from the Company's
historical audited financial statements and related footnotes. The information
set forth below should be read in conjunction with "Management's Discussion and
27
Analysis of Financial Condition and Results of Operations" and the financial
statements and related footnotes contained elsewhere in this Registration
Statement.
Selected Financial Data
Year ended December 31,
1998 1997 1996 1995 1994
--------- -------- -------- -------- ---------
(All amounts in thousands except per share data)
Sales and other revenue
Broadcasting $127,637 $120,792 $111,967 $101,192 $ 87,112
Milling 108,056 123,941 135,697 112,360 93,277
Real estate 12,265 11,446 13,556 10,941 8,659
Corporate and other, primarily
dividends and interest income (1) 4,224 3,855 4,000 4,087 3,460
-------- -------- -------- -------- --------
$252,182 $260,034 $265,220 $228,580 $192,508
======== ======== ======== ======== ========
Operating income
Broadcasting $ 33,937 $ 36,754 $ 34,025 $ 31,518 $ 26,066
Milling (1,440) 2,431 3,410 2,907 1,078
Real estate 4,117 3,231 5,749 3,267 2,199
Corporate and other (59) 863 1,948 2,152 2,236
-------- -------- -------- -------- --------
$ 36,555 $ 43,279 $ 45,132 $ 39,844 $ 31,579
======== ======== ======== ======== ========
Income before effect of a change
in accounting method $ 21,057 $ 24,729 $ 26,086 $ 22,683 $ 18,152
Cumulative effect of a change in
method of accounting for
postretirement benefits (2) (1,305)
-------- -------- -------- -------- --------
Net income $ 21,057 $ 24,729 $ 26,086 $ 22,683 $ 16,847
======== ======== ======== ======== ========
Per common share data (3)
Income before effect of a
change in accounting method $ 2.47 $ 2.90 $ 3.06 $ 2.66 $ 2.13
Cumulative effect of a change in
method of accounting for
postretirement benefits (2) (0.15)
-------- -------- -------- -------- --------
Net income $ 2.47 $ 2.90 $ 3.06 $ 2.66 $ 1.98
======== ======== ======== ======== ========
Income per common share
assuming dilution: (3)
Income before effect of a
change in accounting method $ 2.46 $ 2.88 $ 3.05 $ 2.66 $ 2.13
Cumulative effect of a change in
method of accounting for
postretirement benefits (2) (0.15)
-------- -------- -------- -------- --------
Net income assuming dilution $ 2.46 $ 2.88 $ 3.05 $ 2.66 $ 1.98
======== ======== ======== ======== ========
Cash dividends declared (4) $ 1.01 $ 0.25 $ 1.84 $ 0.76 $ 0.67
======== ======== ======== ======== ========
28
December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Working capital $ 34,254 $ 36,336 $ 42,271 $ 49,744 $ 47,227
Total assets (5) 439,522 438,753 394,149 353,035 308,072
Total debt 76,736 73,978 74,971 71,869 75,859
Stockholders' equity (5) 266,548 266,851 232,129 203,681 170,751
(1) Included in this amount are dividends received from the Company's
investment in SAFECO Corporation common stock amounting to $4,023 in 1998;
$3,663 in 1997; $3,333 in 1996; $3,062 in 1995; and $2,822 in 1994.
(2) In 1994, the Company adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" (FAS 106), which requires
that the cost of health care and life insurance benefits provided to
certain retired employees be accrued during the years that employees render
service. Health care and life insurance benefits are provided to all non-
broadcasting employees. The Company elected to immediately recognize the
accumulated benefit obligation, measured as of December 31, 1993.
Accordingly, the $2,012 cumulative effect of this change in accounting
method on years prior to 1994 ($1,305 after income tax effects) is deducted
from the results of operations for 1994.
(3) Per-share amounts have been adjusted for a two-for-one stock split that was
effective March 6, 1998 and a four-for-one stock split that was effective
May 15, 1995.
(4) 1998 amount includes $.26 per share declared for payment in 1999. 1997
amount was declared for payment in first quarter 1998. 1996 includes $.98
per share declared for payment in 1997. 1994 and 1995 amounts were
declared and paid.
(5) The Company applies Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" (FAS 115), which requires investments in
equity securities, be designated as either trading or available-for-sale.
While the Company has no present intention to dispose of its investments in
marketable securities, it has classified its investments as available-for-
sale and, beginning in 1994, those investments are reported at fair market
value. Accordingly, total assets include unrealized gain on marketable
securities as follows: December 31, 1998 - $131,132; December 31, 1997 -
$148,506; December 31, 1996 - $120,468; December 31, 1995 - $105,401;
December 31, 1994 - $79,531. Stockholders' equity includes unrealized gain
on marketable securities, net of deferred income tax, as follows: December
31, 1998 - $85,236; December 31, 1997 - $96,529; December 31, 1996 -
$78,304; December 31, 1995 - $68,510; December 31, 1994 - $51,695.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
This discussion is intended to provide an analysis of significant trends
and material changes in the Company's financial position and operating results
during the period 1996 through 1998.
During this three-year period, the Company's broadcasting subsidiary
acquired seven small-market radio stations in Montana and eastern Washington and
two radio stations in Portland, Oregon. In July 1996 the milling subsidiary
became a 50% member of a Limited Liability Company formed to construct and
operate a flour milling facility in Blackfoot, Idaho. During 1997 a second
compact milling unit was installed at the Blackfoot site, and construction of a
conventional flour mill commenced. Construction of the conventional flour mill
was completed in December 1998.
In 1996 the Company's real estate subsidiary sold, under threat of
condemnation, certain unimproved property in Seattle, Washington and, in 1997,
reinvested the proceeds of the sale in income producing property adjacent to an
existing industrial park.
Each of these transactions had an effect on the comparative results of
operations in terms of revenue, costs and expenses, and operating income
referred to in the following analysis.
The Company plans to continue to implement strategic actions to further
improve its competitiveness. These actions include a continuing focus on revenue
and net income growth to enhance long-term shareholder value, while at the same
time maintaining a strong financial position.
29
CONSOLIDATED RESULTS OF OPERATIONS
Sales and other revenue
1998 % Change 1997 % Change 1996
$252,182,000 -3.0% $260,034,000 -2.0% $265,220,000
Sales and other revenue increased 5.7% and 7.2% for broadcasting and real
estate operations, respectively, in 1998, while milling operations experienced a
decline of 12.8%.
In 1997 sales and other revenue increased 7.9% for broadcasting operations,
while milling and real estate operations experienced declines of 8.7% and 15.6%,
respectively.
Revenue of the corporate segment increased 9.6% in 1998 due to an increase
in dividends from marketable securities, and declined by 3.6% in 1997 as
increases in dividends from marketable securities were more than offset by
reduced interest income as short-term cash investments were liquidated to
partially fund acquisition of the Portland radio properties.
Cost of products and services sold
1998 % Change 1997 % Change 1996
$157,526,000 -3.2% $162,715,000 -4.3% $170,016,000
Percentage of 62.5% 62.6% 64.1%
revenue
The decrease in cost of products and services sold in 1998 is attributable
to lower cost of wheat used to produce flour and lower volume of flour sold by
the milling segment, offset by increased costs to acquire, produce, and promote
broadcast programming.
Lower costs to produce flour offset by increased costs to acquire and
produce broadcast programming caused a decrease in cost of products and services
sold in 1997. Improved margins at broadcasting and milling operations
contributed to a reduction in cost of products and services sold as a percentage
of revenue.
Selling expenses
1998 % Change 1997 % Change 1996
$20,203,000 10.8% $18,228,000 7.6% $16,941,000
Percentage of 8.0% 7.0% 6.4%
revenue
Selling expenses have increased each year as a result of increased
commissions and related expenses resulting from increased broadcasting revenue.
During 1998 the milling segment experienced increases in provision for doubtful
accounts and advertising and promotion expenses.
General and administrative expenses
1998 % Change 1997 % Change 1996
$37,898,000 5.8% $35,812,000 8.1% $33,131,000
Percentage of 15.0% 13.8% 12.5%
revenue
The increase in general and administrative expenses incurred in 1998
relates to additional depreciation of the Seattle broadcasting facility to be
replaced by the new Fisher Plaza project in 2000, as well as to increased
personnel and other expenses relating to growth and new strategic initiatives at
the corporate segment. The fluctuations in general and administrative expenses
expressed as a percentage of revenue are due to the fact that such expenses are
relatively fixed, and do not vary directly with revenue, while revenues,
especially in the flour milling segment, move substantially up or down with
wheat markets.
The increase in general and administrative expenses incurred in 1997
relates primarily to general and administrative expenses at recently acquired
radio stations, as well as increased personnel and other administrative expense
at each segment.
30
Interest expense
1998 % Change 1997 % Change 1996
$4,451,000 -18.6% $5,467,000 -3.6% $5,671,000
Interest expense declined in 1998 compared with 1997 due to lower average
borrowing outstanding during 1998 and to the capitalization of interest related
to borrowing for acquisition of property, plant and equipment. The average
interest rate was 6.98% in 1998 and 7.0% in 1997.
Interest expense declined in 1997 compared with 1996 due to lower average
borrowing outstanding during 1997. The average interest rate was 7.0% in 1997
and 1996.
Provision for federal and state income taxes
1998 % Change 1997 % Change 1996
$11,047,000 -15.6% $13,083,000 -2.2% $13,375,000
Effective tax rate 34.4% 34.6% 33.9%
The provision for federal and state income taxes varies directly with pre-
tax income. The effective tax rate is less than the statutory rate for all years
primarily due to a deduction for dividends received, offset by the impact of
state income taxes, net of the federal income tax benefit. The lower effective
tax rate in 1996 compared to 1997 is due primarily to lower state income taxes
which included a refund of state tax paid in prior years.
Broadcasting Operations
Sales and other revenue
1998 % Change 1997 % Change 1996
$127,637,000 5.7% $120,792,000 7.9% $111,967,000
Notwithstanding that strong demand for television time by political
advertisers contributed to record revenues for the broadcasting segment in 1998,
overall revenues fell short of management's expectations. This was due in large
measure to reduced automotive advertising during the second half of the year.
Labor strikes in the automotive, airline, and telecommunications sectors, and
consolidation of businesses in the telecommunications and banking industries,
resulted in reduction or elimination of advertising budgets compared to previous
years. KATU Television in Portland was able to produce a revenue increase of
$3,400,000 despite reduced advertising by key automotive and telecommunications
accounts. Increased political advertising accounted for nearly 40% of KATU's
growth and most of the remaining growth was generated through development of new
local advertising accounts and non-traditional revenue. In general, advertiser
demand was stronger in the Portland market during 1998 than was the case
throughout much of the country, including the Seattle market. For KOMO
Television (Seattle), increases in political and national advertising offset a
decrease in local business, resulting in an overall revenue increase of
$850,000. Automotive advertising in 1998 was nearly $1,200,000 less than the
prior year, which accounted for a substantial portion of the station's local
revenue decrease. KOMO sales were also impacted by lower audience ratings during
the ABC network "prime time" evening period. Newly acquired syndicated
programming resulted in improved ratings and revenue during the early afternoon
time periods.
Radio operations reported a combined revenue increase of $2,500,000 in
1998. Seattle and Portland radio market conditions were strong throughout 1998
with double digit advertising growth noted in each market during the year.
Revenue growth for the Seattle radio stations was slightly lower than the
market, although STAR 101.5, an Adult Contemporary format FM, benefited from
improved audience ratings that moved the station into the top 5 in the market.
STAR's revenue growth exceeded that of the market as a result. Revenue for the
Portland radio operations improved 3.4% for 1998, less than that of the overall
market. A format change on the Portland AM station resulted in a decline in
revenue for Portland radio operations during the first half of 1998, with
accelerating growth during the second half of the year, as audience ratings
began to register and then grow. Revenue growth for the smaller-market radio
station group, which has stations in Eastern Washington and Montana, was 8.5%.
The increase in 1997 broadcasting revenue compared with 1996, is due in
part to revenue earned at KWJJ AM/FM in Portland, Oregon and six radio stations
in eastern Washington and Montana acquired between May 1996 and January 1997.
These stations contributed net revenue of approximately $8,500,000 during 1997,
compared with $4,600,000 in 1996. Revenue from the Company's Seattle radio
stations (KOMO AM, KVI AM and STAR 101.5) increased $3,000,000 over 1996 due to
a strong advertising market during 1997. Revenue from KOMO Television in Seattle
increased approximately
31
$3,000,000 in 1997 as a result of increased local and national advertising
revenue, offset by lower revenue from political advertising in 1997 which was
not a major political year.
Income from operations
1998 % Change 1997 % Change 1996
$33,937,000 -7.7% $36,754,000 8.0% $34,025,000
Percentage of 26.6% 30.4% 30.4%
revenue
Following the strongest year in the broadcasting subsidiary's history,
operating income declined in 1998. The decline resulted from revenue growth that
did not meet management's expectations and did not fully offset increased
expenses at several of the operations. Specifically, programming costs increased
due to the acquisition of new syndicated programs, investment in news
programming, and emphasis on promotion. Both KOMO Television in Seattle and KATU
Television in Portland expanded news programming in response to intense
competition for local news audience. Syndicated programming costs also increased
at both stations. KOMO's 1998 results reflect the full-year cost of programming
acquired during the Fall of 1997. KATU incurred additional costs to renew
existing programs at higher license fees. The Portland radio group also incurred
higher programming costs in 1998 as a consequence of changing the format of the
AM station from music to talk. This change, which occurred during the fourth
quarter of 1997, entailed the licensing of syndicated programming as well as
hiring of local program hosts. The Seattle radio group also added new syndicated
programming on its AM stations and increased promotion of its FM station, STAR
101.5.
The increase in 1997 operating income compared with 1996 is primarily due
to higher revenue at most broadcasting properties. Increased costs to acquire
and produce broadcast programming were offset by cost control on operating
expenses.
Milling Operations
Sales and other revenue
1998 % Change 1997 % Change 1996
$108,056,000 -12.8% $123,941,000 -8.7% $135,697,000
Flour prices are largely dependent on the cost of wheat purchased to
produce flour. During 1998 and 1997 wheat prices were lower than the
historically high levels experienced in 1996. Average flour prices in 1998 were
8.4% lower than in 1997, and flour sales volume declined 3.9%, with the result
that milling division revenue was $13,995,000, or 17.9% below the 1997 level.
Average flour prices in 1997 were 13% lower than in 1996. An increase in
flour sales volume of 6.9% during 1997 was not sufficient to offset the effect
of lower prices, and 1997 milling division revenue declined $4,916,000 or 5.9%.
1998 food distribution revenue was $1,890,000, or 4.1% below 1997 levels.
Food distribution division revenue decreased $6,761,000 or 12.9% in 1997. The
declines in both years are due to a combination of lower sales prices,
particularly for flour products, and lower sales volume, particularly in the
Southern California market served by the Los Angeles Food Distribution Center
where reorganization of sales territories, changes in sales personnel and strong
competition negatively impacted volume.
Income from operations
1998 % Change 1997 % Change 1996
$(1,440,000) -159.2% $2,431,000 -28.7% $3,410,000
Percentage of -1.3% 2.0% 2.5%
revenue
Income from operations is determined by deducting operating expenses from
gross margin on sales. 1998 proved to be an extraordinarily difficult year for
the milling segment. Flour margins were depressed for several reasons. As
discussed above, wheat markets remained in retreat, forcing flour prices lower.
At the same time industry milling capacity increased approximately 19,000 daily
hundred-weights (cwts), and the industry experienced a substantial decrease in
export sales of wheat and flour. For Fisher, where the largest export sales
market was Eastern Russia, shipments dropped from 475,000 cwts in 1997 to 60,000
in 1998 with a corresponding loss in margin of approximately $400,000. Bad debt
expense was adversely impacted by several failures of export and domestic
customers to honor their contracts and to pay their debts. Also the industry,
and Fisher, suffered substantial reductions in revenues and margins on millfeed,
that portion of the wheat that does not yield flour and is sold into the animal
feed markets resulting in a decline in monthly margin of approximately $70,000
from January to December, 1998.
32
The distribution division had mixed results during 1998. The Seattle and
Portland units operated well, building sales revenues, market share and
improving profitability over the previous year. In contrast, the Southern
California unit suffered significant losses. Partly due to management turnover
the unit was unable to effectively control operations and compete. Management
believes that core business unit performance of the Southern California
operations showed improvement in the fourth quarter of 1998.
Flour milling operations were dominated by the construction and startup of
the new conventional mill in Blackfoot, Idaho, which is owned by the Koch Fisher
Mills L.L.C., in which Fisher Mills has a 50% ownership interest. The
conventional mill was under construction throughout 1998 and began initial
operations in December. Earnings of the L.L.C. were negatively impacted by costs
incurred to recruit, hire and train personnel pending start up of the new unit.
Fisher Mills has operating and sales responsibilities under the L.L.C.
agreement, and incurred significant sales, marketing, and promotional expenses
related to the development and startup of the new mill. Fisher's Seattle mill
also incurred overtime costs and significant packaging and logistics expenses as
it serviced customers which will be transferred to the L.L.C. when the new
milling unit is in full commercial operation.
In 1997 the gross margin percentage increased at both the milling and food
distribution divisions. However, lower wheat prices and lower food distribution
volume, particularly at Los Angeles, offset the improvements through a reduction
in revenue. Operating expenses remained consistent during 1997 and 1996.
Real Estate Operations
Sales and other revenue
1998 % Change 1997 % Change 1996
$12,265,000 7.2% $11,446,000 -15.6% $13,556,000
A gain on sale of real estate amounting to $2,300,000 that occurred in
April 1996 affects comparability of sales and other revenue between the periods.
If the 1996 amount is adjusted to exclude that transaction, 1998 and 1997
revenue increased 9.0% and 1.7%, respectively, over 1996. Real estate market
conditions were strong in the Seattle area, and contributed to an average
occupancy level of 98.2% during 1998, and higher rental rates for new and
renewing leases. Average occupancy levels in 1997 and 1996 were 94.0% and 95.1%,
respectively. The decline in average occupancy for 1997 was largely attributable
to a vacancy during part of the year resulting from bankruptcy of a tenant.
Income from operations
1998 % Change 1997 % Change 1996
$4,117,000 27.4% $3,231,000 -43.8% $5,749,000
Percentage of 33.6% 28.2% 42.4%
revenue
The 1996 real estate gain similarly affects comparability of income from
operations between the periods. When the gain is excluded, operating income as a
percentage of revenue is 30.6% in 1996. The improvement in 1998 income from
operations compared with 1997, and as a percent of revenue, is due to increased
revenue, and to lower administrative and net operating expenses. Lower occupancy
plus higher personnel costs and other expenses incurred during 1997 in
connection with systems improvement, and in anticipation of future business
opportunities, contributed to the change in operating income as a percentage of
revenue.
Liquidity and Capital Resources
As of December 31, 1998, the Company had working capital of $34,254,000 and
cash and short-term cash investments totaling $3,968,000. The Company intends to
finance working capital, debt service, capital expenditures, and dividend
requirements primarily through operating activities. However, the Company will
consider using available lines of credit to fund acquisition activities and
significant real estate project development activities. In this regard, the
Company has obtained a five-year unsecured revolving line of credit from a bank
in a maximum amount of $100,000,000 to finance construction of a new digital
broadcasting facility for KOMO Television (to be called Fisher Plaza), and for
general corporate purposes. The revolving line of credit is governed by a
credit agreement which provides that borrowings under the line will bear
interest at a variable rate not to exceed the bank's publicly announced
reference rate. The agreement also places limitations on the disposition or
encumbrance of certain assets and requires the Company to maintain certain
financial ratios. The Company has a commitment from a bank for eight-year senior
secured credit facilities in the amount of $230,000,000 to finance the Retlaw
acquisition and for general corporate purposes. See Note 12 to the consolidated
financial statements for information concerning the acquisition. The senior
credit facilities will be secured by a first priority perfected security
33
interest in the voting capital stock of the broadcasting subsidiary. The
facilities will also place limitations on the disposition or encumbrance of
certain assets and require the Company to maintain certain financial ratios. In
addition to an amortization schedule which will require repayment of all
borrowings under the facilities by June 2007, the amount available under the
facilities will reduce each year beginning in 2002. Amounts borrowed under the
facilities will bear interest at variable rates based on the Company's ratio of
funded debt to operating cash flow, however will not exceed the bank's prime
rate plus 75 basis points.
For the year ended December 31, 1998 net cash provided by operating activities
was $38,994,000. Net cash provided by operating activities consists of the
Company's net income, increased by non-cash expenses such as depreciation and
amortization, and adjusted by changes in operating assets and liabilities. Net
cash used in investing activities during 1998 was $35,541,000. The principle
uses of cash in investing activities were $10,648,000 invested in the 50% owned
Koch Fisher Mills L.L.C., and $25,075,000 to purchase property, plant and
equipment used in operations, including $11,772,000 for construction of the
Fisher Plaza project. Net cash used in financing activities was $5,822,000. Cash
provided for financing activities was obtained through borrowings of $12,000,000
under the line of credit to finance the Fisher Plaza project. Proceeds from
these net borrowings were used to reduce net borrowings under lines of credit
and notes from shareholders and directors, to finance acquisition of assets of
the radio stations, investment in the L.L.C. referred to above, and purchase of
property, plant and equipment to the extent such purchases exceeded net cash
provided by operating activities. In addition, during 1998 the Company repaid
$4,218,000 due on borrowing agreements and mortgage loans, and received proceeds
of $57,000 from the exercise of stock options. Cash paid for dividends to
stockholders totaled $8,637,000 or $1.00 per share.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The market risk in the Company's financial instruments represents the
potential loss arising from adverse changes in financial and commodity market
prices and rates. The Company is exposed to market risk in the areas of interest
rates, securities prices and grain prices. These exposures are directly related
to its normal funding and investing activities and to its use of agricultural
commodities in its operations.
Interest Rate Exposure
The Company's strategy in managing exposure to interest rate changes is to
maintain a balance of fixed- and variable-rate instruments. See Note 5 to the
consolidated financial statements for information regarding the contractual
interest rates of the Company's debt. The Company will also consider entering
into interest rate swap agreements at such times as it deems appropriate. At
December 31, 1998, the fair value of the Company's debt is estimated to
approximate the carrying amount. Market risk is estimated as the potential
change in fair value resulting from a hypothetical 10 percent change in interest
rates, and on the Company's fixed rate debt, amounts to $2,117,000 at December
31, 1998.
The Company also has $24,121,000 in variable-rate debt outstanding at
December 31, 1998. A hypothetical 10 percent change in interest rates underlying
these borrowings would result in a $121,000 annual change in the Company's pre-
tax earnings and cash flows.
Marketable Securities Exposure
The fair value of the Company's investments in marketable securities at
December 31, 1998 is $132,281,000. Marketable securities consist of equity
securities traded on a national securities exchange or reported on the NASDAQ
securities market. A significant portion of the marketable securities consists
of 3,002,376 shares of SAFECO Corporation. As of December 31, 1998, these shares
represented 2.2% of the outstanding common stock of SAFECO Corporation. While
the Company has no intention to dispose of its investments in marketable
securities, it has classified its investments as available-for-sale under
applicable accounting standards. Mr. William W. Krippaehne, Jr., President, CEO,
and a Director of the Company, is a Director of SAFECO. A hypothetical 10
percent change in market prices underlying these securities would result in a
$13,228,000 change in the fair value of the marketable securities portfolio.
Although changes in securities prices would affect the fair value of the
marketable securities portfolio and cause unrealized gains or losses, such gains
or losses would not be realized unless the investments are sold.
34
Commodity Price Exposure
The Company has exposure to adverse price fluctuations associated with its
grain and flour inventories, product gross margins, and certain anticipated
transactions in its milling operations. Commodities such as wheat are purchased
at market prices that are subject to volatility. As an element of its strategy
to manage the risk of market price fluctuations, the Company enters into various
exchange-traded futures contracts. The Company closely monitors and manages its
exposure to market risk on a daily basis in accordance with formal policies
established for this activity. These policies limit the level of exposure to be
hedged. All transactions involving derivative financial instruments are required
to have a direct relationship to the price risk associated with existing
inventories or future purchase and sales of its products.
The Company enters into both forward purchase and sales commitments for
wheat flour. At the same time, the Company enters into generally matched
transactions using offsetting forward commitments and/or exchange-traded futures
contracts to hedge against price fluctuations in the market price of wheat.
The Company determines the fair value of its exchange-traded contracts
based on the settlement prices for open contracts, which are established by the
exchange on which the instruments are traded. The margin accounts for open
commodity futures contracts, which reflect daily settlements as market values
change, represent the Company's basis in those contracts. As of December 31,
1998, the carrying value of the Company's investment in commodities futures
contracts and the total net deferred gains and losses on open contracts are
immaterial. At December 31, 1998, the actual open positions of these instruments
and the potential near-term losses in earnings, fair value, and/or cash flows
from changes in market rates or prices are not material.
YEAR 2000
The Year 2000 or Y2K problem is somewhat predictable in its timing, but
unpredictable in its effects. In order to conserve limited computer memory, many
computer systems, software programs, and other microprocessor dependent devices
were created using only two digit dates, such that 1998 was represented as 98.
These systems may not recognize certain 1999 dates, and the year 2000 and
beyond, with the result that processors and programs may fail to complete the
processing of information or revert back to the year 1900. As we approach the
year 2000, we expect computer systems and software used by many companies in a
wide variety of applications to experience operating difficulties unless they
are modified or upgraded to process information involving, related to, or
dependent upon the century change. Failures could incapacitate systems essential
to the functioning of commerce, building systems, consumer products, utilities,
and government services locally as well as worldwide. Significant uncertainty
exists concerning the scope and magnitude of problems associated with Y2K.
State Of Readiness
The Company recognized the need to reduce the risks of Year 2000 related
failures, and in August 1998 established a Y2K Task Force to address these
risks. The Y2K Task Force, comprised of senior management from each of the
Company's business segments and third party consultants, is leading the Year
2000 risk management efforts. The Y2K Task Force is coordinating the
identification and testing of computer hardware and software applications, with
a goal to ensure availability and integrity of the information systems and the
reliability of the operational systems and manufacturing processes utilized by
the Company and its subsidiaries.
The Company has adopted a five-step process toward Year 2000 readiness:
Projected Completion Date
Internal Systems Inventory 2nd Quarter 1999
Systems Testing and Repairs 2nd Quarter 1999
External Risk Assessment 2nd Quarter 1999
Contingency Planning 4th Quarter 1999
Financial Risk Transfer On-going
The Company has approached the first two items in its five-step process
(Internal systems Inventory and Systems Testing and Repair) as a single task,
and has divided this task into four major categories.
. Building Systems
. Information Systems
. Broadcast Equipment
. Milling Equipment
35
The Company has conducted a comprehensive evaluation of a majority of its
building systems, related computer equipment and components that could be
potentially impacted. Building computer system testing is also underway. To
date, problems discovered in our building systems are minor and usually relate
to building security systems. These problems are being addressed.
Information systems are being tested with a licensed software program; a
diagnostic tool designed for personal computers and servers that will identify
Y2K issues related to computer hardware, software and data. To date, this
testing appears to have been successful and has yielded no significant problems.
With the constant introduction of new computer equipment and software,
information systems testing will continue throughout the year.
The Company has arranged with a systems integration company to provide a
comprehensive Y2K assessment program for television and radio broadcast
equipment. The systems integration company has considerable experience in the
design and integration of conventional and digital communications, computer and
broadcast facilities, as well as in large system integration. The systems
integration company also has extensive experience working with major television
networks and broadcasting companies in systems assessment.
The Company is nearing completion of a comprehensive inventory of potential
Y2K effected equipment at each of the milling locations. Compliance letters have
been received from key vendors and testing of equipment will begin early in the
second quarter, and will continue throughout the year as we increase our
knowledge base.
Risks
The Company also faces risk to the extent suppliers of products, services,
and systems relied upon by the Company and others with whom the Company or its
subsidiaries transact business do not comply with Year 2000 requirements. In the
event such third parties cannot provide the Company or its subsidiaries with
products, services, or systems that meet the Year 2000 requirements on a timely
basis, or in the event Year 2000 issues prevent such third parties from timely
delivery of products or services required by the Company or its subsidiaries,
the Company's results of operations could be materially adversely affected. To
the extent Year 2000 issues cause significant delays in, or cancellation of,
decisions to purchase, the Company's products or services, the Company's
business, results of operations, and financial position would be materially
adversely affected. The Company is assessing these risks and in some cases has
initiated formal communications with significant suppliers and customers to
determine the extent to which the Company is vulnerable to these third parties'
failure to remediate their own Year 2000 issues. There can be no assurance the
Company will identify and remediate all significant Year 2000 risks, or that
such risks will not have a material adverse effect on the Company's business,
results of operations, or financial position. Accordingly, the Company will
continue to develop contingency plans in anticipation of unexpected Year 2000
events. Based on its assessment of year 2000 risks to date, the Company does not
believe any material exposure to significant business interruption exists as a
result of Year 2000 compliance issues.
Contingency Plans
Since the Year 2000 problem is pervasive, few, if any, companies can make
absolute assurances that they will identify and remediate all Y2K risks.
Accordingly, the Company expects the risk assessment and contingency planning to
remain an ongoing process leading up to and beyond the year 2000. In addition,
the potential Year 2000 problem is being addressed as part of the Company's
overall emergency preparedness program that includes contingency planning for
other potential major catastrophes like earthquakes, fires and floods.
The Companies approach to Financial Risk Transfer has two main areas of
focus.
. Secure the broadest insurance coverage available at a reasonable cost
and avoid exclusions or restrictions of coverage.
. Explore other Financial Risk Transfer products and/or Y2K specific
insurance coverage to the extent that it becomes available at
economically feasible levels.
Estimated Costs
The Company is continuing to assess the potential impact of the century
change on its business, results of operations, and financial position. The total
cost of these Year 2000 compliance activities is not anticipated to be material
to the Company's financial position or its results of operations. The cost of
internal resources dedicated to the Year 2000 has not been estimated at this
time. The Company currently estimates that the cost of assessment and testing of
broadcast equipment will approximate $300,000.
36
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The discussion above under "Year 2000" includes certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "PSLRA"). This statement is included for the express purpose of
availing the Company of the protections of the safe harbor provisions of the
PSLRA. Management's ability to predict results or the effect of future plans is
inherently uncertain, and is subject to factors that may cause actual results to
differ materially from those projected. Factors that could affect the actual
results include the possibility that remediation programs will not operate as
intended, the Company's failure to timely or completely identify all software or
hardware applications requiring remediation, unexpected costs, and the
uncertainty associated with the impact of year 2000 issues on the Company's
customers, vendors and others with whom it does business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related documents listed in the index set
forth in Item 14 in this report are filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the headings "Information With Respect
to Nominees and Directors Whose Terms Continue", "Security Ownership of Certain
Beneficial Owners and Management", and "Compliance With Section 16(a) Filing
Requirements" contained in the definitive Proxy Statement for the Company's
Annual Meeting of Shareholders to be held on April 29,1999, is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the heading "Executive Compensation"
and "Information With Respect to Nominees and Directors Whose Terms Continue"
contained in the definitive Proxy Statement for the Company's Annual Meeting of
Shareholders to be held on April 29, 1999, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the heading "Security Ownership of
Certain Beneficial Owners and Management" contained in the definitive Proxy
Statement for the Company's Annual Meeting of Shareholders to be held on April
29, 1999, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the heading "Transactions With
Management" contained in the definitive Proxy Statement for the Company's Annual
Meeting of Shareholders to be held on April 29, 1999, is incorporated herein by
reference.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Reports of Management and Independent Accountants.
(2) Consolidated Statement of Income for the years ended December 31,
1998, December 31, 1997 and December 31, 1996.
(3) Consolidated Statements of Stockholders' Equity.
(4) Consolidated Balance Sheets at December 31, 1998 and
December 31, 1997.
(5) Consolidated Statements of Cash Flows for the years ended December
31, 1998, December 31, 1997 and December 31, 1996.
(6) Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, December 31, 1997 and December 31, 1996.
(7) Notes to Consolidated Financial Statements.
(8) Financial Statement Schedule:
8.1 Report of Independent Accountants
8.2 Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1998
(b) Exhibits: See "Exhibit Index."
(c) Forms 8-K filed during fiscal year 1998.
A Form 8-K was filed on November 18, 1998 with respect to the
announcement of the Company's proposed acquisition of the
broadcasting assets of Retlaw Enterprises, Inc. and
related entities.
38
Report of Management
Management is responsible for the preparation of the Company's consolidated
financial statements and related information appearing in this annual report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions and that the financial statements
reasonably present the Company's financial position and results of operations in
conformity with generally accepted accounting principles. Management also has
included in the Company's financial statements amounts that are based on
estimates and judgments which it believes are reasonable under the
circumstances.
The independent accountants audit the Company's consolidated financial
statements in accordance with generally accepted auditing standards and provide
an objective, independent review of the fairness of reported operating results
and financial position.
The Board of Directors of the Company has an Audit Committee composed of
five non-management Directors. The Committee meets periodically with management
and the independent accountants to review accounting, control, auditing and
financial reporting matters.
/s/ William W. Krippaehne, Jr.
William W. Krippaehne, Jr.
President and Chief Executive Officer
/s/ David D. Hillard
David D. Hillard
Senior Vice President and Chief Financial
Officer
Report of Independent Accountants
To the Stockholders and
Board of Directors of
Fisher Companies Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity, of comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of Fisher Companies Inc. and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
March 3, 1999
39
FISHER COMPANIES INC. AND SUBSIDIARIES
Consolidated Statement of Income
Year Ended December 31 1998 1997 1996
--------- -------- --------
(In Thousands Except Per Share Amounts)
Sales and other revenue
Broadcasting $127,637 $120,792 $111,967
Milling 108,056 123,941 135,697
Real estate 12,265 11,446 13,556
Corporate and other, primarily dividends and interest income 4,224 3,855 4,000
-------- -------- --------
252,182 260,034 265,220
-------- -------- --------
Costs and expenses
Cost of products and services sold 157,526 162,715 170,016
Selling expenses 20,203 18,228 16,941
General, administrative and other expenses 37,898 35,812 33,131
-------- -------- --------
215,627 216,755 220,088
-------- -------- --------
Income from operations
Broadcasting 33,937 36,754 34,025
Milling (1,440) 2,431 3,410
Real estate 4,117 3,231 5,749
Corporate and other (59) 863 1,948
-------- -------- --------
36,555 43,279 45,132
Interest expense 4,451 5,467 5,671
-------- -------- --------
Income before provision for income taxes 32,104 37,812 39,461
Provision for federal and state income taxes 11,047 13,083 13,375
-------- -------- --------
Net income $ 21,057 $ 24,729 $ 26,086
-------- -------- --------
Net income per share $2.47 $ 2.90 $ 3.06
Net income per share assuming dilution $2.46 $ 2.88 $ 3.05
Weighted average number of shares outstanding 8,541 8,534 8,530
Weighted average number of shares outstanding assuming dilution 8,575 8,577 8,552
See accompanying notes to consolidated financial statements.
40
FISHER COMPANIES INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Accumulated
Capital in Other
Common Stock Excess Deferred Comprehensive Retained Total
Shares Amount of Par Compensation Income Earnings Equity
--------- ------- ---------- ------------- -------------- --------- ---------
(In thousands except share amounts)
Balance Dec. 31, 1995 8,530,344 $10,663 $ 48 $ 68,510 $124,460 $203,681
Net income 26,086 26,086
Other comprehensive
income-unrealized gain
on securities net of
deferred income taxes 9,794 9,794
Dividends (7,432) (7,432)
--------- ------ ------ ---------- -------- -------- --------
Balance Dec. 31, 1996 8,530,344 10,663 48 78,304 143,114 232,129
Net income 24,729 24,729
Other comprehensive
income-unrealized gain
on securities net of
deferred income taxes 18,225 18,225
Issuance of common stock
under rights and options,
and related tax benefit 5,088 6 229 235
Dividends (8,467) (8,467)
--------- ------ ------ ---------- -------- -------- --------
Balance Dec. 31, 1997 8,535,432 10,669 277 96,529 159,376 266,851
Net income 21,057 21,057
Other comprehensive
income-unrealized gain
on securities net of
deferred income taxes (11,293) (11,293)
Issuance of common
stock rights 1,169 $(1,169)
Amortization of deferred
compensation 436 436
Issuance of common stock
under rights and options,
and related tax benefit 6,952 9 346 355
Dividends (10,858) (10,858)
--------- ------- ---------- ---------- --------- -------- --------
Balance Dec. 31, 1998 8,542,384 $10,678 $1,792 $ (733) $ 85,236 $169,575 $266,548
--------- ------- ---------- ---------- --------- -------- --------
See accompanying notes to consolidated financial statements.
41
FISHER COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31
1998 1997
--------- --------
(In thousands except share and per share amounts)
Assets
Current Assets
Cash and short-term cash investments $ 3,968 $ 6,337
Receivables 44,481 44,623
Inventories 11,009 14,537
Prepaid expenses 6,993 6,922
Television and radio broadcast rights 8,190 6,912
-------- --------
Total current assets 74,641 79,331
-------- --------
Marketable Securities, at market value 132,281 149,616
-------- --------
Other Assets
Cash value of life insurance and retirement deposits 10,900 10,052
Television and radio broadcast rights 49 170
Intangible assets, net of amortization 48,650 49,533
Investments in equity investees 15,126 4,478
Other 3,285 3,117
-------- --------
78,010 67,350
-------- --------
Property, Plant And Equipment, net 154,590 142,456
-------- --------
$439,522 $438,753
-------- --------
liabilities and stockholders' equity
Current Liabilities
Notes payable $ 13,479 $ 18,363
Trade accounts payable 8,454 8,117
Accrued payroll and related benefits 5,071 5,274
Television and radio broadcast rights payable 7,675 6,846
Income taxes payable 457 617
Dividends payable 2,221
Other current liabilities 3,030 3,778
-------- --------
Total current liabilities 40,387 42,995
-------- --------
Long-Term Debt, net of current maturities 63,257 55,615
-------- --------
Other Liabilities
Accrued retirement benefits 13,298 12,059
Deferred income taxes 55,048 60,495
Television and radio broadcast rights payable, long-term portion 24
Deposits and retainage payable 951 681
-------- --------
69,297 73,259
-------- --------
Minority Interests 33 33
-------- --------
Commitments and Contingencies (Note 12)
Stockholders' Equity
Common stock, shares authorized 12,000,000, $1.25 par value;
issued 8,542,384 in 1998 and 8,535,432 in 1997 10,678 10,669
Capital in excess of par 1,792 277
Deferred compensation (733)
Accumulated other comprehensive income-unrealized gain on marketable securities,
net of deferred income taxes of $45,935 in 1998 and $51,977 in 1997 85,236 96,529
Retained earnings 169,575 159,376
-------- --------
266,548 266,851
-------- --------
$439,522 $438,753
-------- --------
See accompanying notes to consolidated financial statements.
42
FISHER COMPANIES INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year Ended December 31 1998 1997 1996
--------- --------- ---------
(in thousands)
Cash flows from operating activities
Net Income $ 21,057 $ 24,729 $ 26,086
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 13,176 11,975 10,753
Increase in noncurrent deferred income taxes 595 1,199 1,505
Issuance of stock pursuant to vested stock rights
and related tax benefit 298 191
Amortization of deferred compensation 436
Loss (Gain) on sale of property, plant and equipment 466 (2,300)
Change in operating assets and liabilities:
Receivables 142 (14) (2,934)
Inventories 3,528 (1,338) (1,406)
Prepaid expenses (71) 937 (1,475)
Cash value of life insurance and retirement deposits (848) (690) (481)
Income taxes payable (160) (530) (907)
Trade accounts payable, accrued payroll and related benefits
and other current liabilities (614) (1,285) 4,120
Other assets (168) 570 (385)
Accrued retirement benefits 1,239 135 428
Deposits and retainage payable 270 5 (271)
Amortization of television and radio broadcast rights 11,822 9,396 8,575
Payments for television and radio broadcast rights (12,174) (9,240) (8,243)
-------- -------- --------
Net cash provided by operating activities 38,994 36,040 33,065
-------- -------- --------
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 609 2,860
Investments in equity investees (10,648) (3,755) (554)
Purchase assets of radio stations (427) (3,949) (36,684)
Purchase of property, plant and equipment (25,075) (17,699) (8,730)
-------- -------- --------
Net cash used in investing activities (35,541) (25,403) (43,108)
-------- -------- --------
Cash flows from financing activities
Net (payments) borrowings under notes payable (5,024) 9,004 (4,698)
Borrowings under borrowing agreements and mortgage loans 12,000 120 44,000
Payments on borrowing agreements and mortgage loans (4,218) (10,117) (36,200)
Proceeds from exercise of stock options 57 44
Cash dividends paid (8,637) (8,467) (7,432)
-------- -------- --------
Net cash used in financing activities (5,822) (9,416) (4,330)
-------- -------- --------
Net (decrease) increase in cash and
short-term cash investments (2,369) 1,221 (14,373)
Cash and short-term cash investments,beginning of year 6,337 5,116 19,489
-------- -------- --------
Cash and short-term cash investments, end of year $ 3,968 $ 6,337 $ 5,116
-------- -------- --------
Supplemental cash flow information is included in Notes 5, 7 and 8.
See accompanying notes to consolidated financial statements.
FISHER COMPANIES INC. AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income
Year Ended December 31 1998 1997 1996
--------- ------- -------
(in thousands)
Net Income $ 21,057 $24,729 $26,086
Other comprehensive income-unrealized gain on securities
net of deferred income taxes of $(6,042) in 1998, $9,813 in 1997
and $5,273 in 1996 (11,293) 18,225 9,794
-------- ------- -------
43
Comprehensive Income $ 9,764 $42,954 $35,880
-------- ------- -------
See accompanying notes to consolidated financial statements.
44
FISHER COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1
Operations And Accounting Policies
The principal operations of Fisher Companies Inc. and subsidiaries are
television and radio broadcasting, flour milling and distribution of bakery
supplies, and proprietary real estate development and management. The Companies
conduct business primarily in Washington, Oregon, California and Montana. A
summary of significant accounting policies is as follows:
Principles of consolidation The consolidated financial statements include the
accounts of Fisher Companies Inc. and its majority-owned subsidiaries. All
material intercompany balances and transactions have been eliminated.
Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Short-term cash investments Short-term cash investments comprise repurchase
agreements collateralized by U.S. Government securities held by major banks. The
recorded amount represents market value because of the short maturity of the
investments. The Company considers short-term cash investments which have
original maturities of 90 days or less to be cash equivalents.
Inventories Inventories of grain and the grain component of finished products
are valued at cost. Grain forward contracts are entered into by the milling
subsidiary to protect the Company from risks related to commitments to buy grain
and sell flour. Gains and losses arising from grain hedging activity are a
component of the cost of the related inventory. The market value of hedges is
based on spot prices obtained from brokers. All other inventories and inventory
components are valued at the lower of average cost or market.
Revenue recognition Television and radio revenue is recognized when the
advertisement is broadcast. Sales of flour and food products are recognized when
the product is shipped. Rentals from real estate leases are recognized over the
term of the lease.
Television and radio broadcast rights Costs of television and radio broadcast
rights are charged to operations using accelerated or straight-line methods of
amortization selected to match expense with anticipated revenue over the
contract life. Asset costs and liabilities for television and radio broadcast
rights are recorded without discount for any noninterest-bearing liabilities.
Those costs attributable to programs scheduled for broadcast after one year have
been classified as noncurrent assets in the accompanying financial statements.
Marketable securities Marketable securities consist of equity securities
traded on a national securities exchange or reported on the NASDAQ securities
market. A significant portion of the marketable securities consists of 3,002,376
shares of SAFECO Corporation at December 31, 1998 and 1997. As of December 31,
1998, these shares represented 2.2% of the outstanding common stock of SAFECO
Corporation. Market value is based on closing per share sale prices. While the
Company has no intention to dispose of its investments in marketable securities,
it has classified its investments as available-for-sale and those investments
are reported at fair market value. Unrealized gains and losses are a separate
component of stockholders' equity.
Investments in equity investees Investments in equity investees represent
investments in 50% owned entities, primarily the Koch Fisher Mills L.L.C. (See
Note 11).
Intangible assets Intangible assets represent the excess of purchase price of
certain broadcast properties over the fair value of tangible net assets acquired
(goodwill) and are amortized based on the straight-line method over the
estimated useful life of 40 years. Accumulated amortization at December 31, 1998
and 1997 is $3,777,000 and $2,467,000, respectively. The Company periodically
reviews its intangible assets to determine whether impairment has occurred.
Property, plant and equipment Replacements and improvements are capitalized
while maintenance and repairs are charged as expense when incurred.
Real estate taxes, interest expense and certain other costs related to real
estate projects constructed for lease to third parties are capitalized as a cost
of such projects until the project, including major tenant improvements, is
substantially completed. A project is generally considered to be substantially
completed when a predetermined occupancy level has been reached or the project
has been available for occupancy for a period of one year. Costs, including
depreciation, applicable to a project are charged to expense based on the ratio
of occupied space to total rentable space until the project is substantially
completed, after which costs are expensed as incurred.
For financial reporting purposes, depreciation of plant and equipment is
determined primarily by the straight-line method over the estimated useful lives
of the assets as follows:
Buildings and improvements 30-55 years
Machinery and equipment 3-20 years
Land improvements 10-55 years
45
Impairment of long-lived assets The Company assesses the recoverability of
intangible and long-lived assets by reviewing the performance of the underlying
operations, in particular the operating cash flows (earnings before income
taxes, depreciation and amortization) of the operation. No losses from
impairment of value have been recorded in the financial statements.
Income taxes Deferred income taxes are provided for all significant temporary
differences in reporting for financial reporting purposes versus income tax
reporting purposes.
Advertising The Company expenses advertising costs at the time the
advertising first takes place. Net advertising expense was $3,588,000,
$2,191,000 and $2,507,000 in 1998, 1997 and 1996, respectively.
Earnings per share Net income per share represents net income divided by the
weighted average number of shares outstanding during the year. Net income per
share assuming dilution represents net income divided by the weighted average
number of shares outstanding including the potentially dilutive impact of the
stock options and restricted stock rights issued under the Fisher Companies
Incentive Plan of 1995. Common stock options and restricted stock rights are
converted using the treasury stock method.
A reconciliation of the number of shares outstanding to the weighted average
number of shares outstanding assuming dilution is as follows:
Year Ended December 31 1998 1997 1996
--------- --------- ---------
Shares outstanding at beginning of period 8,535,432 8,530,344 8,530,344
Weighted average of shares issued 5,239 3,846
--------- --------- ---------
8,540,671 8,534,190 8,530,344
Dilutive effect of:
Restricted stock rights 15,460 23,391 16,166
Stock options 18,785 19,250 5,892
--------- --------- ---------
8,574,916 8,576,831 8,552,402
--------- --------- ---------
Fair value of financial instruments The carrying amount of cash and
short-term cash investments, receivables, inventories, marketable securities,
trade accounts payable and broadcast rights payable approximate fair value.
The fair value of notes payable and long-term debt approximates the recorded
amount based on borrowing rates currently available to the Company.
Recent accounting pronouncements In June 1998, Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133), was issued. This pronouncement standardizes the accounting
for derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the financial statements and measure them at fair
value. FAS 133 is required to be adopted by the Company for the year ended
December 31, 2000. Early adoption is permitted. The Company is currently
reviewing the requirements of FAS 133 and assessing its impact on the Company's
financial statements. The Company has not made a decision regarding the period
of adoption.
Note 2
Receivables
Receivables are summarized as follows (in thousands):
December 31 1998 1997
------- -------
Trade accounts $45,424 $45,446
Other 413 436
------- -------
45,837 45,882
Less-Allowance for doubtful accounts 1,356 1,259
------- -------
$44,481 $44,623
------- -------
Note 3
Inventories
Inventories are summarized as follows (in thousands):
December 31 1998 1997
------- -------
Finished products $ 3,906 $ 5,114
Raw materials 6,983 9,258
Spare parts and supplies 120 165
------- -------
$11,009 $14,537
------- -------
46
Note 4
Property, Plant And Equipment
Property, plant and equipment are summarized as follows (in thousands):
December 31 1998 1997
-------- --------
Buildings and improvements $126,575 $125,066
Machinery and equipment 95,532 93,075
Land and improvements 17,733 18,565
-------- --------
239,840 236,706
Less-Accumulated depreciation 107,664 100,455
-------- --------
132,176 136,251
Construction in progress 22,414 6,205
-------- --------
$154,590 $142,456
-------- --------
The Company's real estate subsidiary receives rental income principally from
the lease of warehouse, office and retail space, boat moorages and unimproved
properties under gross and net leases which expire at various dates through
2005. These leases are accounted for as operating leases. The subsidiary
generally limits lease terms to periods not in excess of five years. Minimum
future rentals from leases which were in effect at December 31, 1998 are (in
thousands):
Year Rentals
---- -------
1999 $10,176
2000 7,751
2001 5,619
2002 4,568
2003 3,810
Thereafter 2,160
-------
$34,084
-------
Property held by the real estate subsidiary includes property leased to third
parties and to other subsidiaries of the Company and property held for future
development. The investment in property held for lease to third parties included
in property, plant and equipment at December 31, 1998 includes buildings,
equipment and improvements of $99,734,000, land and improvements of $13,357,000
and accumulated depreciation of $32,995,000.
Interest capitalized relating to construction of property, plant and equipment
amounted to approximately $630,000 in 1998. No interest was capitalized in 1997
and 1996.
Note 5
Notes Payable And Long-Term Debt
Notes payable The Company maintains bank lines of credit which totaled
$25,000,000 at December 31, 1998. The lines are unsecured and bear interest at
rates no higher than the prime rate. $5,760,000 was outstanding under the lines
at December 31, 1998.
The notes payable to directors, stockholders and others comprise notes payable
on demand. Such notes bear interest at rates equivalent to those available to
the Company for short-term cash investments. Interest on such notes amounted to
$534,000, $573,000 and $430,000 in 1998, 1997 and 1996, respectively.
Notes payable are summarized as follows (in thousands):
December 31 1998 1997
------- -------
Banks $ 5,760 $ 7,605
Directors, stockholders and others 6,361 9,540
Current maturities of long-term debt 1,358 1,218
------- -------
$13,479 $18,363
------- -------
Long-term debt
Lines of credit The Company maintains an unsecured reducing revolving line of
credit with a bank in the amount of $100,000,000 to finance construction of the
Fisher Plaza project (See Note 12) and for general corporate purposes. The line
is in the initial amount of $35,000,000, increasing to a maximum amount of
$100,000,000 in the fourth year. The revolving line of credit is governed by a
credit agreement which provides that borrowings under the line will bear
interest at a variable rate not to exceed the bank's publicly announced
47
reference rate. The agreement also places limitations on the disposition or
encumbrance of certain assets and requires the Company to maintain certain
financial ratios. The line matures in 2003 and may be extended for two
additional years. At December 31, 1998 $12,000,000 was outstanding under the
line at an interest rate of 5.93%.
The Company has a commitment from a bank for eight-year senior secured credit
facilities in the amount of $230,000,000 to finance the Retlaw acquisition (See
Note 12) and for general corporate purposes. The senior credit facilities will
be secured by a first priority perfected security interest in the voting capital
stock of the broadcasting subsidiary. The facilities will also place limitations
on the disposition or encumbrance of certain assets and require the Company to
maintain certain financial ratios. In addition to an amortization schedule which
will require repayment of all borrowings under the facilities by June 2007, the
amount available under the facilities will reduce each year beginning in 2002.
Amounts borrowed under the facilities will bear interest at variable rates based
on the Company's ratio of funded debt to operating cash flow, however will not
exceed the bank's prime rate plus 75 basis points.
Mortgage loans The real estate subsidiary maintains the following mortgage
loans:
Principal amount of $4,294,000 secured by an industrial park with a book value
of $5,873,000 at December 31, 1998. The nonrecourse loan requires monthly
payments including interest of $30,000. The loan matures in May 2006 and bears
interest at 6.88%. The interest rate is subject to adjustment in May 2001 to the
then prevailing market rate for loans of a similar type and maturity; the real
estate subsidiary may prepay all or part of the loan on that date.
Principal amount of $10,006,000 secured by an industrial park with a book
value of $11,764,000 at December 31, 1998 and principal amount of $12,995,000
secured by two office buildings with a book value of $16,992,000 at December 31,
1998. The loans mature in 2008, bear interest at 7.04% and require monthly
payments of $78,000 and $101,000, respectively, including interest. These
mortgage loans are nonrecourse; however, the real estate subsidiary has
guaranteed 20% of the combined outstanding principal balance until certain loan
to value ratios are reached. The interest rates are subject to adjustment in
December 2003 to the then prevailing rate for loans of a similar type and
maturity; all or a portion of the outstanding principal balance may be prepaid
on those dates. The agreements provide that the real estate subsidiary maintain
a stipulated minimum net worth and hold marketable securities with a market
value equal to 75% of the outstanding principal balance of the loans.
Principal amount of $25,203,000 secured by an office building and parking
structure with a book value of $31,797,000 at December 31, 1998. The nonrecourse
loan matures in February 2006, bears interest at 7.72% and requires monthly
payments of principal and interest amounting to $221,000.
Long-term debt is summarized as follows (in thousands):
December 31 1998 1997
--------- -------
Notes payable under bank line of credit $12,000 $ 3,000
Mortgage loans payable 52,498 53,702
Other 117 131
--------- -------
64,615 56,833
Less-Current maturities 1,358 1,218
--------- -------
$63,257 $55,615
--------- -------
Future maturities of notes payable and long-term debt are as follows (in thousands):
Directors, Mortgage
Stockholders Bank Line Loans
Banks and Others of Credit and Other Total
------ ------------ --------- --------- -------
1999 $5,760 $ 6,361 $ 1,358 $13,479
2000 1,460 1,460
2001 1,571 1,571
2002 1,690 1,690
2003 1,858 1,858
Thereafter $12,000 44,678 56,678
------ ------ ------- --------- -------
$5,760 $6,361 $12,000 $52,615 $76,736
------ ------ ------- --------- -------
Cash paid for interest (net of amounts capitalized) during 1998, 1997 and 1996
was $4,408,000, $5,512,000 and $6,184,000, respectively.
48
Note 6
Television And Radio Broadcast Rights
Television and radio broadcast rights acquired under contractual arrangements
were $ 12,981,000 and $10,778,000 in 1998 and 1997, respectively.
At December 31, 1998, the broadcasting subsidiary had executed license
agreements amounting to $45,631,000 for future rights to television and radio
programs. As these programs will not be available for broadcast until after
December 31, 1998, they have been excluded from the financial statements.
Note 7
Stockholders' Equity
The Board of Directors authorized a two-for-one stock split effective March 6,
1998 for stockholders of record on February 20, 1998. In connection with the
stock split, the par value of the Company's common stock was adjusted from $2.50
per share to $1.25 per share. All share and per share amounts reported in the
financial statements have been adjusted to reflect the stock split.
During 1995 the stockholders approved the Fisher Companies Incentive Plan of
1995 (the Plan) which provides that up to 560,000 shares of the Company's common
stock may be issued or sold to eligible key management employees pursuant to
options and rights through 2002.
Stock options The Plan provides that eligible key management employees may be
granted options to purchase the Company's common stock at the fair market value
on the date the options are granted. The options generally vest over five years
and generally expire ten years from the date of grant.
Restricted stock rights The Plan also provides that eligible key management
employees may be granted restricted stock rights which entitle such employees to
receive a stated number of shares of the Company's common stock. The rights
generally vest over five years and expire upon termination of employment.
Compensation expense of $436,000, $357,000 and $145,000 related to the rights
was recorded during 1998, 1997 and 1996, respectively.
A summary of stock options and restricted stock rights from the first date of
grant on February 28, 1996 is as follows:
Restricted
Stock Options Stock Rights
-------------------------------- -------------
Weighted
Number Average Exercise Number
of Shares Price Per Share of Shares
-------------- ---------------- -------------
Shares granted February 28, 1996 42,000 $37.25 19,400
------- ------ ------
Balance, December 31, 1996 42,000 37.25 19,400
Shares granted 69,770 57.50 10,080
Options exercised (1,180) 37.25
Stock rights vested (3,988)
Shares forfeited (1,810) 57.50 (1,290)
------- ------ ------
Balance, December 31, 1997 108,780 49.90 24,202
Shares granted 67,250 65.50 5,990
Options exercised (1,402) 40.46
Stock rights vested (5,778)
Shares forfeited (1,550) 61.37 (716)
------- ------ ------
Balance, December 31, 1998 173,078 $55.94 23,698
------- ------ ------
The weighted average remaining contractual life of options outstanding at
December 31, 1998 is 8 years. At December 31, 1998 and 1997, options for 28,935
and 7,446 shares are exercisable at a weighted average exercise price of $47.08
and $37.25 per share, respectively.
The Company accounts for common stock options and restricted common stock
rights issued pursuant to the Plan in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25).
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), requires companies who elect to adopt its provisions to
utilize a fair value approach for accounting for stock compensation. The Company
has elected to continue to apply the provisions of APB 25 in its financial
statements. If the provisions of FAS 123 were applied to the Company's stock
options, net income, net income per share and net income per share assuming
dilution would have been reduced by approximately $443,000, $277,000 and
$163,000, or $0.05, $0.03 and $0.02 per share during 1998, 1997 and 1996,
respectively. The fair value of each stock option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 1.89%, 2.05% and 2.07%, volatility of 17.38%, 15.16% and 17.77%, risk-free
interest rate of 5.61%, 6.38% and 5.74%,
49
assumed forfeiture rate of 0%, and an expected life of 5 years in all three
years. Under FAS 123, the weighted average fair value of stock options granted
during 1998, 1997 and 1996, respectively, was $14.40, $12.36 and $8.06.
50
Cash dividends are as follows (in thousands except per share amounts):
Year Ended December 31 1998 1997 1996
------ ------ ------
Fisher Companies Inc. common stock,
$1.00, $.98 and $.86 per share, respectively $8,540 $8,363 $7,337
Subsidiary's preferred stock held by minority interest 97 104 95
------ ------ ------
$8,637 $8,467 $7,432
------ ------ ------
On December 3, 1998 the Board of Directors declared a dividend in the amount
of $.26 per share payable March 5, 1999 to stockholders of record February 19,
1999.
Note 8
Income Taxes
Income taxes have been provided as follows (in thousands):
Year Ended December 31 1998 1997 1996
------- ------- -------
Payable currently $10,968 $12,052 $11,630
Current and noncurrent deferred income taxes 79 1,031 1,745
------- ------- -------
$11,047 $13,083 $13,375
------- ------- -------
Reconciliation of income taxes computed at federal statutory rates to the
reported provisions for income taxes is as follows (in thousands):
Year Ended December 31 1998 1997 1996
-------- --------- ---------
Normal provision computed at 35% of pretax income $11,236 $ 13,234 $ 13,811
Dividends received credit (1,013) (925) (844)
State taxes, net of federal tax benefit 715 654 309
Other 109 120 99
------- -------- --------
$11,047 $ 13,083 $ 13,375
------- -------- --------
Deferred tax assets (liabilities) are summarized as follows (in thousands):
December 31 1998 1997
-------- --------
Current:
Accrued employee benefits $ (528) $ (839)
Allowance for doubtful accounts 490 453
Accrued property tax (349) (321)
Other 349 207
-------- --------
$ (38) $ (500)
-------- --------
Noncurrent:
Unrealized gain on marketable securities $(45,935) $(51,977)
Property, plant and equipment (12,350) (11,538)
Accrued employee benefits 3,237 3,020
-------- --------
$(55,048) $(60,495)
-------- --------
The current deferred tax liability is reflected in other current liabilities.
Cash paid for income taxes during 1998, 1997 and 1996 was $11,011,000,
$12,457,000 and $12,636,000, respectively.
Note 9
Retirement Benefits
The Company and its subsidiaries have qualified defined benefit pension plans
covering substantially all of their employees not covered by union plans.
Benefits are based on years of service and, in one of the pension plans, on the
employees' compensation at retirement. The Companies accrue annually the normal
costs of their pension plans plus the amortization of prior service costs over
periods ranging to 15 years. Such costs are funded in accordance with provisions
of the Internal Revenue Code.
51
Changes in the projected benefit obligation and the fair value of assets for
the Companies' pension plans are as follows (in thousands):
December 31 1998 1997
-------- --------
Projected benefit obligation-beginning of year $27,973 $25,668
Service cost 1,345 1,334
Interest cost 2,032 1,882
Liability experience 2,640 1,042
Benefit payments (1,909) (1,953)
------- -------
Projected benefit obligation-end of year $32,081 $27,973
------- -------
Fair value of plan assets-beginning of year $30,258 $26,745
Actual return on plan assets 601 4,427
Contributions by employer 1,101
Benefits paid (1,909) (1,953)
Plan expenses (134) (62)
------- -------
Fair value of plan assets-end of year $28,816 $30,258
------- -------
The composition of the prepaid pension cost and the funded status are as
follows (in thousands):
December 31 1998 1997
------- -------
Projected benefit obligation $32,081 $27,973
Fair value of plan assets 28,816 30,258
------- -------
Funded status (3,265) 2,285
Unrecognized transition asset (56)
Unrecognized prior service cost 269 319
Unrecognized net (gain) loss 4,624 (32)
------- -------
Prepaid pension cost $ 1,628 $ 2,516
------- -------
The net periodic pension cost for the Companies' qualified defined benefit
pension plans is as follows (in thousands):
Year Ended December 31 1998 1997 1996
-------- -------- --------
Service cost $ 1,345 $ 1,334 $ 1,182
Interest cost 2,032 1,882 1,739
Expected return on assets (2,483) (2,202) (1,988)
Amortization of transition asset (56) (67) (67)
Amortization of prior service cost 50 375 449
Amortization of loss 18 18
------- -------
Net periodic pension cost $ 888 $ 1,340 $ 1,333
------- ------- -------
The discount rate used in determining the actuarial present value of the
projected benefit obligation at December 31, 1998 and 1997 was 7.5%; the rate of
increase in future compensation was 4.5%. The expected long-term rate of return
on assets ranged from 8.5% to 9.25% in both years.
The Company and its subsidiaries have a noncontributory supplemental
retirement program for key management. The program provides for vesting of
benefits under certain circumstances. Funding is not required, but generally the
Companies have acquired annuity contracts and life insurance on the lives of the
individual participants to assist in payment of retirement benefits. The
Companies are the owners and beneficiaries of such policies; accordingly, the
cash value of the policies as well as the accrued liability are reported in the
financial statements. The program requires continued employment through the date
of expected retirement and the cost of the program is accrued over the
participants' remaining years of service.
52
Changes in the projected benefit obligation and accrued pension cost of the
Companies' supplemental retirement program are as follows (in thousands):
December 31 1998 1997
-------- --------
Projected benefit obligation-beginning of year $11,372 $11,256
Service cost 443 344
Interest cost 649 618
Liability experience (465)
Assumption changes 330 332
Benefit payments (694) (713)
------- -------
Projected benefit obligation-end of year 12,100 11,372
Appreciation of policy value 301 142
Unrecognized net loss (1,171) (1,196)
------- -------
Accrued pension cost $11,230 $10,318
------- -------
The net periodic pension cost for the Companies' supplemental retirement
program is as follows (in thousands):
Year Ended December 31 1998 1997 1996
------ ------- -------
Service cost $ 443 $ 344 $ 336
Interest cost 649 618 577
Amortization of transition asset (1) (1) (1)
Amortization of loss 47 26 35
------ ------- -------
Net periodic pension cost $1,138 $ 987 $ 947
------ ------- -------
The discount rate used in determining the actuarial present value of the
projected benefit obligation at December 31, 1998 and 1997 was 7.5%; the rate of
increase in future compensation was 4.5%.
The Companies have two defined contribution retirement plans which are
qualified under Section 401(k) of the Internal Revenue Code. All U.S. employees
who are age 21 or older and have completed one year of service are eligible to
participate. The Companies match employee contributions up to a maximum of 3% of
gross pay. Employer contributions to the plans were $1,036,000, $876,000 and
$940,000 in 1998, 1997 and 1996, respectively.
The Companies' net periodic postretirement cost was $109,000, $64,000 and
$112,000 in 1998, 1997 and 1996, respectively. The accrued postretirement
benefit cost at December 31, 1998 and 1997 was $1,859,000 and $1,866,000,
respectively.
The discount rate used in determining the actuarial present value of the
accumulated postretirement benefit obligation at December 31, 1998 and 1997 was
6.75% and 7.5%, respectively. A one percent increase in the health care cost
trend rate would not have had a significant effect on plan costs or the
accumulated benefit obligation in 1998 and 1997. Plan costs are generally based
on a defined maximum employer contribution which is not directly subject to
health care cost trend rates.
53
Note 10
Segment Information
The operations of the Company are organized into three principal business
segments, broadcasting, milling and real estate. Operating results and other
financial data for each segment are as follows (in thousands):
Corporate,
Eliminations
Broadcasting Milling Real Estate & Other Consolidated
------------ --------- ----------- ------------- ------------
Sales and other revenue
1998 $127,637 $108,056 $12,265 $ 4,224 $252,182
1997 120,792 123,941 11,446 3,855 260,034
1996 111,967 135,697 13,556 4,000 265,220
Income from operations
1998 $ 33,937 $ (1,440) $ 4,117 $ (59) $ 36,555
1997 36,754 2,431 3,231 863 43,279
1996 34,025 3,410 5,749 1,948 45,132
Interest expense
1998 $ 20 $ 4,053 $ 378 $ 4,451
1997 4,156 1,311 5,467
1996 4,365 1,306 5,671
Identifiable assets
1998 $148,046 $ 66,097 $86,766 $138,613 $439,522
1997 135,896 60,007 88,770 154,080 438,753
1996 120,911 57,638 86,600 129,000 394,149
Capital expenditures
1998 $ 20,091 $ 1,948 $ 2,961 $ 75 $ 25,075
1997 8,978 2,933 5,729 59 17,699
1996 5,092 2,207 1,365 66 8,730
Depreciation and amortization
1998 $ 6,304 $ 2,353 $ 4,455 $ 64 $ 13,176
1997 5,325 2,239 4,355 56 11,975
1996 4,391 2,009 4,314 39 10,753
Intersegment sales are not significant. Income from operations by business
segment is total sales and other revenue less operating expenses. In computing
income from operations by business segment, interest income and dividends from
marketable securities have not been added, and interest expense, income taxes
and unusual items have not been deducted. Income before provision for income
taxes is computed by deducting interest expense from income from operations.
Identifiable assets by business segment are those assets used in the operations
of each segment. Corporate assets are principally marketable securities. Capital
expenditures are reported exclusive of acquisitions.
No geographic areas outside the United States were material relative to
consolidated sales and other revenue, income from operations or identifiable
assets. Export sales by the milling subsidiary were $723,000 in 1998, $6,100,000
in 1997 and $2,600,000 in 1996.
Note 11
Acquisitions
In June 1996 assignment of FCC licenses for radio broadcasting stations KWJJ
AM/FM in Portland, Oregon was completed, and the broadcasting subsidiary
acquired the assets, including real estate, of those stations for $35.2 million.
Additionally, during May and June 1996, upon assignment of FCC licenses, the
broadcasting subsidiary acquired the assets of four radio broadcasting stations
in eastern Washington and Montana for $1.5 million.
In January 1997 assignment of Federal Communication Commission (FCC) licenses
for two radio broadcasting stations in Missoula, Montana was completed, and the
broadcasting subsidiary acquired the assets, including real estate, of those
stations for $3.9 million. In November 1997, upon assignment of FCC licenses,
the broadcasting subsidiary acquired the assets of a radio broadcasting station
in Wenatchee, Washington for $335,000 plus certain additional costs in 1998.
The above transactions are accounted for under the purchase method.
Accordingly, the Company has recorded identifiable assets and liabilities of the
acquired stations at their fair market value. The excess of the purchase price
over the fair market value of the assets acquired has been allocated to
goodwill. The results of operations of the acquired radio stations are included
in the financial statements from the date of acquisition. Unaudited pro forma
results as if the acquired stations had been included in the financial results
during the
54
year of acquisition and the year prior to acquisition are as follows
(1997 is excluded as there is no material difference between the pro forma
results and the results reported in the financial statements):
Year Ended December 31 1996
--------
(In thousands except per share amounts. All amounts are unaudited)
Sales and other revenue $269,031
Net income $ 26,091
Income per share $ 3.06
Income per share assuming dilution $ 3.05
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire period
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
In July 1996 the milling subsidiary entered into an agreement to become a 50%
member of a Limited Liability Company formed to construct and operate a flour
milling facility in Blackfoot, Idaho to be owned and operated by Koch Fisher
Mills L.L.C. The agreement provides for each 50% member to share equally in
initial capital contributions, profits and losses, additional capital
contributions, if any, and distributions. The milling subsidiary's investment in
the L.L.C. is accounted for by the equity method and is reported in investments
in equity investees in the accompanying balance sheet. The Company's share of
earnings of the L.L.C. was a loss of $64,000 in 1998, income of $32,000 in 1997
and $0 in 1996.
Note 12
Commitments
In May 1998 the Company began redevelopment of the site on which KOMO
Television is currently located. The project, known as Fisher Plaza, encompasses
several elements including a new building and associated underground parking
facilities that will serve the needs of KOMO Television and Fisher Broadcasting
Inc. Estimated cost of the new building and parking facility is $79,000,000.
Completion is anticipated in Spring 2000. In addition, the real estate
subsidiary intends to undertake pre-development activities for additional
development of the KOMO Block at an estimated cost of $2,000,000.
In November 1998 the Company and its broadcasting subsidiary entered into a
purchase and sale agreement to acquire all the broadcasting assets of Retlaw
Enterprises Inc. Retlaw owns eleven network-affiliated television stations in
seven markets located in California, the Pacific Northwest, and Georgia. Total
consideration for the stations is $215 million, which includes $6 million of
working capital at closing. The transaction, subject to regulatory approvals, is
expected to close in the second quarter of 1999, and will be funded utilizing
the senior secured credit facilities described in Note 5.
Note 13
Subsequent Events
On March 3, 1999 the Board of Directors approved a proposal to amend the
Company's Articles of Incorporation to increase the authorized common stock to
50 million shares, divided into two series, each series no par value per share.
If the Proposal is approved by the shareholders at the Annual Meeting to be
held April 29, 1999, the Company's Articles of Incorporation will be amended to
provide for two series of common stock: Series A with 30 million shares
authorized, and Series B with 20 million shares authorized. The currently
outstanding Company common stock will be redesignated as Series A common stock,
and the par value will be eliminated, but will not otherwise be changed in any
way. The new Series B common stock will have enhanced voting rights and will
have significant restrictions on transfer. If the Proposal is approved, the
Company intends to issue, as a stock split effected in the form of a share
dividend, one share of Series B common stock for each share of Series A common
stock issued and outstanding on a distribution record date to be established by
the Board of Directors.
The Company is aware of interest by the Washington State Department of
Transportation to acquire, under threat of condemnation for its fair market
value, all or a portion of the real estate subsidiaries' property on Fourth
Avenue South in Seattle. The book value of the property at December 31, 1998 was
$3,383,000. The real estate subsidiary plans to invest any proceeds received
from such sale in other revenue-producing property.
55
Note 14
Interim Financial Information (Unaudited)
Data may not add due to rounding (in thousands except per share amounts).
First Second Third Fourth
Quarter Quarter Quarter Quarter Annual
------- ------- ------- ------- --------
Sales and other revenue
1998 $58,237 $63,903 $60,350 $69,692 $252,182
1997 60,510 67,397 63,788 68,339 260,034
1996 57,518 68,669 66,360 72,673 265,220
Income from operations
1998 $ 6,267 $11,334 $ 7,599 $11,355 $ 36,555
1997 7,160 12,214 9,542 14,363 43,279
1996 6,138 14,858 10,083 14,053 45,132
Net income
1998 $ 3,375 $ 6,557 $ 4,092 $ 7,033 $ 21,057
1997 3,881 7,035 5,399 8,414 24,729
1996 3,244 8,770 5,597 8,475 26,086
Net income per share
1998 $ 0.40 $ 0.77 $ 0.48 $ 0.82 $ 2.47
1997 0.45 0.82 0.63 0.99 2.90
1996 0.38 1.03 0.66 0.99 3.06
Net income per share assuming dilution
1998 $ 0.39 $ 0.76 $ 0.48 $ 0.82 $ 2.46
1997 0.45 0.82 0.63 0.98 2.88
1996 0.38 1.03 0.65 0.99 3.05
Dividends paid per share
1998 $ 0.250 $ 0.250 $ 0.250 $ 0.250 $ 1.00
1997 0.245 0.245 0.245 0.245 0.98
1996 0.215 0.215 0.215 0.215 0.86
Common stock closing market prices (see Note 7)
1998
High $ 66.00 $ 75.75 $ 73.75 $ 69.50 $ 75.75
Low 59.00 64.00 64.00 57.00 57.00
1997
High $ 66.00 $ 66.00 $ 70.00 $ 63.50 $ 70.00
Low 49.00 57.00 60.50 59.50 49.00
56
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Fisher Companies Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 3, 1999 appearing in this Form 10-K also included an audit of
Financial Statement Schedule III. In our opinion, the Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
March 3, 1999
57
Schedule III
FISHER COMPANIES INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation (note 1)
December 31, 1998
Life on
Cost capitalized which
Initial cost to Subsequent to Gross amount at which carried Accumu- depre-
Company Acquisition at December 31, 1998 lated ciation
------------------- ------------------ ----------------------------- depre- Date of in latest
Buildings Land Buildings ciation comple- income
and Carrying and and and tion of Date state-
Encum- Improve- Improve- costs Improve- Improve- amorti- construc- acquired ment is
Description brances Land ments ments (note 2) ments ments Total zation tion (Note 3) computed
- ----------- ------ ----- --------- ------- ---------- -------- ------- ------ ------- -------- -------- --------
(in thousands)
MARINA
Marina Mart Various to
Moorings - (note 4) (note 4) $ 3,130 $ 107 $ 3,023 $ 3,130 $ 1,168 1987 1939 (note 9)
Seattle, WA
OFFICE
West Lake Union
Center $25,203 $ 266 $36,253 2,319 1,371 37,467 38,838 7,041 1994 (note 9)
Seattle, WA
I-90 Building Renovated
Seattle, WA - (note 4) (note 4) 3,485 41 3,444 3,485 1,141 1990 (note 9)
Fisher Business
Center 12,995 2,230 17,850 5,353 3,155 22,278 25,433 8,441 1986 1980 (note 9)
Lynnwood, WA
Marina Mart Renovated
Seattle, WA - (note 4) (note 4) 3,507 122 3,385 3,507 771 1993 (note 9)
Latitude 47 Renovated
Restaurant - (note 4) (note 4) 2,295 (note 5) 2,295 2,295 931 1987 (note 9)
Seattle, WA
1530 Building Renovated
Seattle, WA - (note 4) (note 4) 2,196 (note 5) 2,196 2,196 932 1985 (note 9)
INDUSTRIAL
Fisher 1982 and
Industrial Park 10,006 2,019 4,739 11,012 4,461 13,309 17,770 6,006 1992 1980 (note 9)
Kent, WA
Fisher Commerce
Center 4,294 1,804 4,294 2,003 2,132 5,969 8,101 2,228 Purchased 1989 (note 9)
Kent, WA
Pacific North
Equipment 1,582 1,344 - 1,582 1,344 2,926 392 Purchased 1997 (note 9)
Kent, WA
Fisher Redeveloped
Industrial 255 2,015 2,318 338 4,250 4,588 3,549 1980 (note 9)
Center
Seattle, WA
MISCELLANEOUS
INVESTMENTS,
less than 5% of - 154 - 668 48 774 822 395 various various (note 9)
total ------- ------ ------- ------- ------- ------- -------- -------
$52,498 $8,310 $66,495 $38,286 $13,357 $99,734 $113,091 $32,995
======= ====== ======= ======= ======= ======= ======== =======
(Continued)
58
Schedule III, continued
FISHER COMPANIES INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation (note 1)
December 31, 1998
Notes:
(1) Schedule III includes property held for lease to third parties by the
Company's real estate subsidiary. Reference is made to notes 1, 4 and 5 to
the consolidated financial statements.
(2) The determination of these amounts is not practicable and, accordingly,
they are included in improvements.
(3) Where specific acquisition date is not shown property investments were
acquired prior to 1971 and have been renovated or redeveloped as indicated.
(4) Initial cost is not readily available as property has been renovated or
redeveloped. Initial cost is included in subsequent improvements.
(5) Undivided land portion of Marina.
(6) The changes in total cost of properties for the years ended December 31,
1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996
--------- --------- ---------
Balance at beginning of year $112,253 $107,874 $108,704
Cost of improvements 993 5,191 1,162
Cost of properties sold (560)
Cost of improvements retired (155) (812) (1,432)
-------- -------- --------
Balance at end of year $113,091 $112,253 $107,874
======== ======== ========
(7) The changes in accumulated depreciation and amortization for the years
ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996
-------- -------- --------
Balance at beginning of year $29,076 $25,740 $23,064
Depreciation and amortization charged to operations 4,055 4,056 3,997
Retirements and other (136) (720) (1,321)
------- ------- -------
Balance at end of year $32,995 $29,076 $25,740
======= ======= =======
(3) The aggregate cost of properties for Federal income tax purposes is
approximately $105,942,000 at December 31, 1998.
(4) Reference is made to note 1 to the consolidated financial statements for
information related to depreciation.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 25th day of
March, 1999.
FISHER COMPANIES INC.
-------------------------------------
(Registrant)
By: /s/ Donald G. Graham, Jr.
-------------------------------------
Donald G. Graham, Jr.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
Signatures Title Date
- --------------------------------------------- --------------------------- ----------------------
Principal Executive Officer:
/s/ William W. Krippaehne, Jr. President, Chief Executive March 25, 1999
- --------------------------------------------- Officer, and Director
William W. Krippaehne, Jr.
Chief Financial and Accounting Officer:
/s/ David D. Hillard Senior Vice President and March 25, 1999
- --------------------------------------------- Chief Financial Officer,
David D. Hillard and Secretary
A Majority of the Board of Directors:
/s/ Robin E. Campbell Director March 23, 1999
- ---------------------------------------------
Robin E. Campbell
/s/ James W. Cannon
- --------------------------------------------- Director March 17, 1999
James W. Cannon
/s/ George D. Fisher
- --------------------------------------------- Director March 17, 1999
George D. Fisher
/s/ Phelps K. Fisher
- --------------------------------------------- Director March 25, 1999
Phelps K. Fisher
/s/ William O. Fisher
- --------------------------------------------- Director March 25, 1999
William O. Fisher
/s/ Carol H. Fratt
- --------------------------------------------- Director March 10, 1999
Carol H. Fratt
/s/ Donald G. Graham, III
- --------------------------------------------- Director March 25, 1999
Donald G. Graham, III
60
Signatures Title Date
- ---------- ------ -----
/s/ John D. Mangels Director March 19, 1999
- ---------------------------------------------
John D. Mangels
/s/ Jean F. McTavish Director March 25, 1999
- ---------------------------------------------
Jean F. McTavish
/s/ Jacklyn F. Meurk Director March 22, 1999
- ---------------------------------------------
Jacklyn F. Meurk
/s/ George F. Warren, Jr. Director March 25, 1999
- ---------------------------------------------
George F. Warren, Jr.
/s/ William W. Warren, Jr. Director March 17, 1999
- ---------------------------------------------
William W. Warren, Jr.
61
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3.1* Articles of Incorporation.
3.2** Articles of Amendment to the Amended and Restated Articles of
Incorporation filed December 10, 1997.
3.3* Bylaws.
10.1* Primary Television Affiliation Agreement between Fisher Broadcasting
Inc. and American Broadcasting Companies, Inc., dated April 17, 1995,
regarding KOMO TV.
10.2* Primary Television Affiliation Agreement between Fisher Broadcasting
Inc. and American Broadcasting Companies, Inc., dated April 17, 1995,
regarding KATU TV.
10.3* Fisher Companies Incentive Plan of 1995.
10.4* Fisher Companies Inc. Supplemental Pension Plan, dated February 29,
1996.
10.5* Fisher Broadcasting Inc. Supplemental Pension Plan, dated March 7,
1996.
10.6* Fisher Mills Inc. Supplemental Pension Plan, dated March 1, 1996.
10.7* Fisher Properties Inc. Supplemental Pension Plan, dated March 1, 1996.
10.8 Asset Purchase and Sale Agreement Among Fisher Companies Inc., and
Fisher Broadcasting Inc., as the Purchaser and Retlaw Enterprises,
Inc., Retlaw Broadcasting, L.L.C., Retlaw Broadcasting of Boise,
L.L.C., Retlaw Broadcasting of Fresno, L.L.C., Retlaw Broadcasting of
Idaho Falls, L.L.C., Retlaw Broadcasting of Yakima, L.L.C., Retlaw
Broadcasting of Eugene, L.L.C., Retlaw Broadcasting of Columbus,
L.L.C., and Retlaw Broadcasting of Augusta, L.L.C., as the Sellers
dated November 18, 1998, as amended November 30, 1998 and December 7,
1998
10.9 Credit Agreement among Fisher Companies Inc. and Bank of America
National Trust and Savings Association, doing business as Seafirst
Bank as Agent, and Bank of America National Trust and Savings
Association, doing business as Seafirst Bank and U. S. Bank National
Association as Banks dated May 26, 1998
22* Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule fiscal year end 1998.
* Incorporated by reference to the Exhibit of the same number filed as part of
the Company's Registration Statement on Form 10 (File No. 000-22349).
** Incorporated by reference to the Exhibit of the same number filed as part of
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 (File No. 000-22349).