-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JDxNHkaumfDR/IylVOVAjGdiNlly+ipROWjhunnVs1h0QvlI3ThFC4M38KfdoikT 8kr59U8QYc/XR7X8+eocag== 0000702808-99-000002.txt : 19990224 0000702808-99-000002.hdr.sgml : 19990224 ACCESSION NUMBER: 0000702808-99-000002 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19990223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACOR COMMUNICATIONS INC CENTRAL INDEX KEY: 0000702808 STANDARD INDUSTRIAL CLASSIFICATION: RADIO BROADCASTING STATIONS [4832] IRS NUMBER: 310978313 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-12404 FILM NUMBER: 99547937 BUSINESS ADDRESS: STREET 1: 50 E RIVERCENTER BLVD STREET 2: 12TH FLOOR CITY: COVINGTON STATE: KY ZIP: 41011 BUSINESS PHONE: 6066552267 MAIL ADDRESS: STREET 1: 50 EAST RIVERCENTER BLVD 12TH FLOOR CITY: COVINGTON STATE: KY ZIP: 41011 10-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-12404 JACOR COMMUNICATIONS, INC. A Delaware Corporation Employer Identification No. 31-0978313 50 East RiverCenter Blvd. 12th Floor Telephone (606) 655-2267 Covington, Kentucky 41011 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Common Stock Purchase Warrants expiring September 18, 2001 Common Stock Purchase Warrants expiring February 27, 2002 Liquid Yield Option Notes due 2011 Liquid Yield Option Notes due 2018 Other securities for which reports are submitted pursuant to Section 15(d) of the Act: 10 1/8% Senior Subordinated Notes due 2006 9 3/4% Senior Subordinated Notes due 2006 8 3/4% Senior Subordinated Notes due 2007 8% Senior Subordinated Notes due 2010 Indicate by check mark whether the Registrant, Jacor Communications, Inc., (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 twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by nonaffiliates of Registrant as of March 2, 1998 was $2,052,536,556. The number of common shares outstanding as of March 2, 1998 was 50,757,782. There are 95 pages in this document. The index of exhibits appears on page 80. Documents incorporated by Reference: Portions of Registrant's definitive Proxy Statement to be filed during April 1998 in connection with the Annual Meeting of Shareholders presently scheduled to be held on May 20, 1998 are incorporated by reference into Part III of this Form 10-K. Item 1. BUSINESS Jacor Communications, Inc. ("Jacor" or the "Company") is a holding company engaged primarily in radio broadcasting and providing related services to radio broadcasting companies. As of March 2, 1998, Jacor entities owned and/or operated 169 radio stations located across the United States in 42 broadcast areas and one television station located in the Cincinnati broadcast area. Jacor also has a joint sales agreement to sell advertising time for one station in Louisville. Jacor further provides programming to and sells air time for two stations in Baja California, Mexico pursuant to an exclusive sales agency agreement. Jacor has also entered into agreements to acquire an additional 24 radio stations, which will expand its presence in nine existing broadcast areas and allow the Company to enter nine new broadcast areas. Business Strategy Jacor's strategic objective is to maximize revenue and broadcast cash flow (defined herein) by becoming the leading radio broadcaster in geographically diverse broadcast areas and by leveraging its expertise in programming production, syndication and distribution. Jacor intends to acquire individual radio stations, radio groups and/or businesses that provide radio broadcasting services that strengthen its strategic position in the radio industry and enhance its operating performance. Specifically, Jacor's business strategy centers upon: Broadcast Area Revenue Leadership. Jacor strives to maximize its audience ratings in each of its broadcast areas in order to capture the largest share of the radio advertising revenue in that area and to attract advertising away from other media. Jacor believes that the most effective way to capture a higher percentage of advertising revenue is to operate multiple radio stations within a broadcast area, tailoring each station's programming to deliver highly effective access to a target demographic. In implementing its multi-station strategy, Jacor utilizes its programming expertise over a broad range of radio formats to create distinct station personalities within a broadcast area. Jacor further enhances its ability to increase its revenues through a more complete coverage of the listener base by being an industry leader in successfully operating AM stations. Development of "Stick" Properties. In addition to acquiring developed, cash flow producing stations, Jacor also strategically acquires underdeveloped "stick" properties (i.e., properties with insignificant ratings and/or little or no positive broadcast cash flow). Jacor believes that acquisitions of strategically located "stick" properties often provide greater potential for revenue and broadcast cash flow growth than do acquisitions of developed properties. Historically, Jacor has been able to improve the ratings, revenue and broadcast cash flow of its "stick" properties with increased marketing and focused programming that complements its existing radio station formats and by leveraging the management expertise and operational support of regional clusters. Additionally, Jacor increases the revenue and broadcast cash flow of "stick" properties by encouraging advertisers to buy advertising in a package with its more established stations. Jacor believes that the Company's portfolio of "stick" properties creates significant potential for revenue and broadcast cash flow growth. Development of Regional Clusters Around Core Broadcast Areas. Jacor believes it can leverage its position as the leader in a core broadcast area to create additional revenue and broadcast cash flow opportunities by building regional multi-station clusters around Jacor's core broadcast areas. Utilizing programming from its core broadcast areas, Jacor provides its regional clusters with high quality programming which would not otherwise be economically viable in such smaller broadcast areas, thereby spreading the costs associated with the delivery of such programming across a greater number of stations. By improving the ratings of its regional stations with such enhanced programming, Jacor believes it can generate incremental revenue and broadcast cash flow. Strategic Acquisitions of Complementary Stations. Jacor focuses its acquisition strategy on acquiring stations with powerful broadcast signals that complement its existing portfolio and strengthen its overall competitive position. By operating multiple stations within its broadcast areas, Jacor seeks to position itself as the most efficient advertising medium in a geographic location, providing advertisers with a wide access to a variety of demographic groups through a single purchase of advertising time. Through the acquisition of additional stations within an existing broadcast area, Jacor spreads its fixed costs over a larger base of stations and creates operating efficiencies enabling it to generate higher broadcast cash flow. Jacor may enter additional broadcast areas, domestic or international, through acquisitions of radio groups that have multiple station platforms and/or through acquisitions of individual stations in new locations where Jacor believes a revenue-leading position can be created. Acquisitions of Broadcast Related Businesses. Jacor strengthens its strategic position in the radio industry through the acquisition and operation of businesses that provide services to radio broadcasting companies. In 1997, Jacor significantly expanded its base of syndicated radio programming available to both Jacor's radio stations and other broadcasting companies. Jacor acquired for approximately $340.3 million, a leading producer and distributor of syndicated radio programming, research, and other services, two leading providers of syndicated talk radio programming, a leading provider of satellite and network services for the radio broadcasting industry and a leading provider of traffic reporting services in the San Diego and Los Angeles, California broadcast areas. In addition to generating cash flow, these broadcast related services enhance the Company's ability to (i) increase ratings for its existing stations, (ii) transform "stick" properties into broadcast cash flow producing properties and (iii) maintain long-term relationships with Jacor's on-air talent. By combining the national reach of the Company's radio stations with the network sales forces acquired by Jacor, the Company seeks to maximize the value of commercial broadcast inventory that it can then resell to national advertisers. Radio Station Overview The following table and the accompanying footnotes set forth certain information regarding the 193 radio stations that will be owned and/or operated by Jacor upon completion of all pending acquisitions and dispositions.
Target 1997 Combined Demographic Broadcast Pending Radio Revenue Target Share %/ Area/Station(1) Acquisition(P) Rank Format Demographic Rank(2) Los Angeles, CA 7 KIIS-FM Contemporary Hit Radio Adults 18-34 4.5/7 KXTA-AM(3) Sports Men 25-54 - Dallas, TX 4 KDMX-FM P Hot Adult Contemporary Adults 18-34 7.1/3 KEGL-FM P Rock Men 18-34 6.9/4 Houston, TX 5 KHMX-FM P Hot Adult Contemporary Adults 25-54 3.9/10 KTBZ-FM P Alternative Men 18-34 7.2/3 Atlanta, GA 1 WPCH-FM Soft Adult Contemporary Women 25-54 6.9/5 WGST-AM News Talk Men 25-54 1.5/17 WGST-FM(4) News Talk Men 25-54 2.4/15 WKLS-FM Rock Men 18-34 10.4/3 San Diego, CA (5) 1 KHTS-FM Rhythmic Adults 18-34 6.0/5 KSDO-AM News Talk Men 25-54 0.8/25(T) KJQY-FM Soft Adult Contemporary Women 25-54 2.8/10 KOGO-AM Talk Adults 25-54 2.8/12 KKLQ-FM Contemporary Hit Radio Adults 18-34 3.3/9 KIOZ-FM Rock Men 18-34 10.3/1 KGB-FM Classic Rock Men 25-54 9.5/1 KPOP-AM Nostalgia Adults 35-64 2.5/12 Denver, CO 1 KOA-AM News Talk / Sports Men 25-54 9.4/2 KRFX-FM Classic Rock Men 25-54 12.4/1 KBPI-FM Alternative Men 18-34 9.8/3 KTLK-AM Talk Adults 35-64 1.1/18 KHIH-FM Smooth Jazz Adults 25-54 5.0/8(T) KHOW-AM Talk Adults 25-54 4.5/10 KBCO-FM Adult Alternative Adults 25-54 6.9/3(T) KTCL-FM(4) P Alternative Men 18-34 4.9/8(T)
Target 1997 Combined Demographic Broadcast Pending Radio Revenue Target Share %/ Area/Station(1) Acquisition (P) Rank Format Demographic Rank(2) Minneapolis, MN 6 KSGS-AM(3) P Urban Oldies Adults 25-54 - KMJZ-FM P New Adult Contemporary Adults 25-54 3.4/11(T) Phoenix, AZ 6 KGLQ-FM P Classic Hits Adults 25-54 3.3/14 KZZP-FM P Hot Adult Contemporary Adults 25-54 4.6/6 St. Louis, MO 5 KATZ-AM Gospel Adults 35-64 2.7/13(T) KMJM-FM Urban Contemporary Adults 18-34 11.5/1 KATZ-FM Rhythm/Blues Adults 25-54 2.2/18 KSLZ-FM Contemporary Hit Radio Adults 18-34 3.2/13 Tampa, FL 1 WFLA-AM News Talk / Sports Adults 35-64 6.1/4(T) WFLZ-FM Contemporary Hit Radio Adults 18-34 16.8/1 WDUV-FM Easy Listening /Nostalgia Adults 35-64 6.1/4(T) WXTB-FM Rock Men 18-34 15.7/1 WTBT-FM Classic Rock Men 18-34 10.7/3 WAKS-FM Hot Adult Contemporary Women 18-34 6.4/5 WDAE-AM Sports Men 25-54 1.8/16 Cincinnati, OH 1 WLW-AM News Talk / Sports Men 25-54 12.9/1 WEBN-FM Album Oriented Rock Men 18-34 25.4/1 WOFX-FM Classic Rock Men 25-54 9.1/3 WCKY-AM(3)(4) Sports Men 25-54 - WAQZ-FM(4) Alternative Adults 18-34 5.0/8 WSAI-AM(4) Nostalgia Adults 35-64 2.3/13(T) WKRC-AM News Talk Adults 35-64 5.3/5 WVMX-FM Hot Adult Contemporary Women 25-54 7.5/5 Baltimore, MD 5 WPOC-FM P Country Adults 25-54 5.8/4 Portland, OR 1 KEX-AM Full Service/ Adult Cont. Adults 35-64 6.6/4 KKCW-FM Adult Contemporary Women 25-54 9.7/1 KKRZ-FM Contemporary Hit Radio Women 18-34 17.5/1 KEWS-AM News Talk Adults 35-64 4.1/10(T)
Target 1997 Combined Demographic Broadcast Pending Radio Revenue Target Share %/ Area/Station(1) Acquisition (P) Rank Format Demographic Rank(2) Cleveland, OH 1 WKNR-AM Sports Men 25-54 6.8/6 WTAM-AM News Talk Men 25-54 5.4/7(T) WGAR-FM P Country Adults 25-54 7.8/4 WMJI-FM P Oldies Adults 25-54 10.1/1 WMMS-FM P Rock Men 18-34 14.2/2 WMVX-FM Adult Contemporary Women 25-54 5.4/7 Columbus, OH 1 WTVN-AM News Talk / Sports Adults 35-64 8.9/3 WLVQ-FM Album Oriented Rock Men 18-34 9.4/2 WZAZ-FM Alternative Adults 18-34 6.3/6 WHOK-FM Country Adults 25-54 3.5/9 WAZU-FM Rock Men 18-34 5.2/7(T) WFII-AM P Talk Adults 35-64 0.5/27(T) WCOL-FM P Country Adults 25-54 9.4/2 WKFX-FM Classic Rock Men 25-54 0.9/22(T) WNCI-FM P Contemporary Hit Radio Adults 18-34 13.2/1 Salt Lake City, UT 2 KALL-AM Talk Adults 35-64 5.8/5 KODJ-FM Oldies Women 25-54 7.9/2 KKAT-FM Country Adults 25-54 4.4/8 KURR-FM Rock Men 18-34 5.8/4 KZHT-FM Contemporary Hit Radio Women 18-34 5.2/7(T) KNRS-AM(4) P News Talk Adults 35-64 0.1/30 KWLW-AM P Easy Listening Adults 35-64 0.4/27(T) Las Vegas, NV 1 KFMS-FM Country Adults 25-54 2.4/16 KWNR-FM Country Adults 25-54 5.1/7 KBGO-FM Oldies Women 25-54 3.2/10 KSNE-FM Adult Contemporary Women 25-54 12.5/1 San Jose, CA 3 KSJO-FM P Rock Adults 18-34 5.3/3 Jacksonville, FL 2 WJBT-FM Urban Contemporary Adults 18-34 8.2/4 WQIK-FM Country Adults 25-54 6.5/5 WSOL-FM Classic Soul Adults 25-54 7.5/3 WZAZ-AM Gospel Adults 35-64 3.2/10(T) WJGR-AM News Talk / Sports Adults 25-54 0.6/22 Louisville, KY(6) 2 WDJX-FM Contemporary Hit Radio Adults 18-34 10.9/3 WFIA-AM Religious Adults 25-54 0.3/25(T) WVEZ-FM Adult Contemporary Women 25-54 12.6/2 WSFR-FM Classic Rock Men 25-54 7.8/4 WLRS-FM Alternative Men 18-34 8.7/5
Target 1997 Combined Demographic Broadcast Pending Radio Revenue Target Share %/ Area/Station(1) Acquisition (P) Rank Format Demographic Rank(2) Rochester, NY 2 WVOR-FM Adult Contemporary Adults 25-54 6.0/7 WHAM-AM News Talk Adults 25-54 8.7/3 WHTK-AM Talk Adults 35-64 1.2/13(T) WNVE-FM New Rock Men 18-34 20.0/1 WYSY-FM Soft Adult Contemporary Women 25-54 3.6/10 WISY-FM Soft Adult Contemporary Women 25-54 0.3/21(T) WMAX-FM Contemporary Hit Radio Adults 18-34 0.5/21 Dayton, OH 1 WONE-AM Nostalgia Adults 35-64 4.4/7 WBTT-FM Urban Adults 18-34 5.8/7 WLQT-FM Adult Contemporary Women 25-54 9.9/3 WMMX-FM Hot Adult Contemporary Women 18-34 16.8/2 WTUE-FM Rock Men 18-34 22.5/1 WXEG-FM Modern Men 18-34 11.5/2 Des Moines, IA 1 WHO-AM News Talk Men 25-54 13.3/1 KLYF-FM Adult Contemporary Women 25-54 7.4/7 KYSY-FM(4) P Soft Adult Contemporary Women 25-54 1.7/11(T) Toledo, OH 1 WSPD-AM News Talk Adults 35-64 5.8/6 WVKS-FM Contemporary Hit Radio Adults 18-34 15.1/1 WRVF-FM Adult Contemporary Women 25-54 13.2/2(T) WIOT-FM Rock Men 18-34 16.6/1 WCWA-AM Nostalgia Adults 35-64 1.9/11 Lexington, KY 1 WMXL-FM Hot Adult Contemporary Women 18-34 11.3/3(T) WLAP-AM News Talk Men 25-54 2.3/11(T) WKQQ-FM Rock Men 18-34 25.2/1 WTKT-AM Rhythm/Blues Adults 35-64 2.9/10 WLKT-FM Contemporary Hit Radio Adults 18-34 13.9/2(T) WBUL-FM Country Adults 18-34 4.0/8
Target 1997 Combined Demographic Broadcast Pending Radio Revenue Target Share %/ Area/Station(1) Acquisition (P) Rank Format Demographic Rank(2) Youngstown, OH 2 WKBN-AM(4) P Talk Adults 25-54 7.5/6 WNIO-AM Nostalgia Adults 35-64 0.8/16(T) WKBN-FM(4) P Soft Adult Contemporary Adults 25-54 3.5/8 WNCD-FM Rock Adults 18-34 15.5/1 Charleston, SC 2 WEZL-FM Country Adults 25-54 9.8/1 WXLY-FM Oldies Adults 25-54 7.4/4 WLLC-FM Modern Adult Contemporary Adults 25-54 7.7/3 WRFQ-FM Classic Rock Adults 18-34 7.0/5 Boise, ID 2 KIDO-AM News Talk Adults 25-54 3.7/11 KARO-FM Classic Rock Men 25-54 7.1/4(T) KLTB-FM Oldies Adults 25-54 5.9/7 KFXD-AM Talk Adults 25-54 2.6/14 KCIX-FM(4) P Adult Contemporary Women 25-54 7.8/4(T) KXLT-FM(4) P Soft Adult Contemporary Women 25-54 10.9/1(T) Cedar Rapids, IA 1 WMT-AM Full Service Adults 35-64 10.1/4(T) WMT-FM Adult Contemporary Women 25-54 18.8/2 Santa Barbara, CA 1 KTYD-FM Rock Adults 18-34 9.4/2 KQSB-AM Talk Adults 35-64 4.4/6(T) KSBL-FM Adult Contemporary Adults 25-54 11.8/1 KLDZ-AM Oldies Adults 35-64 2.7/10(T) KLDZ-FM(3) P Oldies Adults 35-64 - Casper,WY N/A KTWO-AM Full Service/ Country Adults 35-64 15.6/2 KMGW-FM Adult Contemporary Women 25-54 12.5/3 Cheyenne, WY N/A KGAB-AM(3) Talk Adults 35-64 - KIGN-FM Rock Adults 18-34 25.0/1 KLEN-FM Soft Adult Contemporary Women 25-54 6.7/4 KOLZ-FM Country Adults 25-54 21.9/1 Chillicothe, OH(8) N/A WBEX-AM(4) P Talk Adults 35-64 - WKKJ-FM(4) P Country Adults 25-54 - Findlay, OH(8) N/A WQTL-FM Classic Hits Adults 25-54 - WHMQ-FM Country Adults 25-54 -
Target 1997 Combined Demographic Broadcast Pending Radio Revenue Target Share %/ Area/Station(1) Acquisition(P) Rank Format Demographic Rank(2) Fort Collins/Greeley, CO N/A KCOL-AM News Talk Adults 35-64 2.5/12(T) KPAW-FM Adult Cont./ Oldies Adults 25-54 5.1/4(T) KGLL-FM Country Adults 25-54 3.8/8 KIIX-AM(4) P Nostalgia Adults 35-64 1.0/21(T) Idaho Falls, ID(8) N/A KID-AM News Talk Adults 25-54 - KID-FM Country Adults 25-54 - Iowa City, IA N/A KXIC-AM(3) Talk Adults 25-54 - KKRQ-FM Classic Rock Adults 18-34 8.1/5 Lima, OH N/A WIMA-AM News Talk Adults 35-64 6.5/3 WIMT-FM Country Adults 25-54 17.0/1 WBUK-FM Oldies Adults 25-54 11.3/3 WMLX-FM(3) Hot Adult Contemporary Women 18-34 - Marion, OH(8) N/A WMRN-AM Talk Adults 25-54 - WDIF-FM Contemporary Hit Radio Adults 18-34 - WMRN-FM Country Adults 25-54 - Medford, OR(8) N/A KOPE-FM P Talk Adults 25-54 - Pocatello, ID(8) N/A KWIK-AM Sports Men 25-54 - KPKY-FM Oldies Adults 25-54 - KRSS-FM P Religion Adults 35-64 - Sandusky, OH(8) N/A WLEC-AM Nostalgia Adults 35-64 - WCPZ-FM Hot Adult Contemporary Women 25-54 - WNCG-FM Oldies Adults 25-54 - Sarasota/Bradenton, FL N/A WSRZ-FM Oldies Adults 25-54 8.1/1 WYNF-FM Rock Men 25-54 5.5/6(T) WSPB-AM(3) Talk Men 35-64 - Springfield, OH(8) N/A WIZE-AM P Nostalgia Adults 35-64 - Twin Falls, ID(8) N/A KLIX-AM News Talk Adults 25-54 - KEZJ-FM Country Adults 25-54 - KLIX-FM Oldies Adults 25-54 -
Target 1997 Combined Demographic Broadcast Pending Radio Revenue Target Share %/ Area/Station(1) Acquisition(P) Rank Format Demographic Rank(2) Venice/Englewood, FL(8) N/A WAMR-AM Talk Adults 25-54 - WCTQ-FM Country Adults 25-54 - WLTF-FM(7) - - - Washington Court House, OH(8) N/A WOFR-AM Country Adults 25-54 - WCHO-FM Country Adults 25-54 - ___________ (T) Designates tied. (1) Jacor also owns or has the right to purchase three insignificant stations in Sebring, Florida, and one each in Morro Bay, California, Santa Rosa, California and Thousand Oaks, California. Jacor also owns pending applications for construction permits in both Casper, Wyoming and Vancouver, Washington. (2) Share and rank information is derived from the Fall 1997 Arbitron Metro Area Rating Survey. (3) These stations do not have Arbitron ratings. (4) Jacor provides programming to and sells airtime for WGST-FM in Atlanta, Georgia; KYSY-FM in Des Moines, Iowa; WBEX-AM and WKKJ-FM in Chillicothe, Ohio; WKBN-AM and WKBN-FM in Youngstown, Ohio; WAQZ-FM, WSAI-AM and WCKY- AM in Cincinnati, Ohio; KNRS-AM in Salt Lake City, Utah; KCIX-FM and KXLT- FM in Boise, Idaho; KIIX-AM in Ft. Collins, Colorado; and KTCL-FM in Denver, Colorado pursuant to Local Marketing Agreements (LMAs). At any time after September 30, 1999 and before September 30, 2003, Cherokee Broadcasting can "put" WGST-FM to Jacor for a price of $31.0 million. At any time after May 21, 2003 and before September 30, 2003, Jacor can "call" the station for the same price. (5) Assumes the disposition of KXGL-FM and KMCG-FM currently owned by Nationwide. Also, excludes XTRA-AM and XTRA-FM, stations Jacor provides programming to and sells airtime for under an exclusive sales agency agreement. (6) Excludes WSJW-FM in Louisville, Kentucky on which Jacor sells advertising time pursuant to a Joint Sales Agreement (JSA). (7) WLTF-FM is an unconstructed station and, as such, is not yet operating. (8) These broadcast areas are not ranked by Arbitron.
All rankings by revenue or billings that are contained in the above table are based on 1996 information contained in Duncan's Radio Market Guide (1997 ed.). All information concerning ratings and audience listening information is derived from the Fall 1997 Arbitron Metro Area Ratings Survey (the "Fall 1997 Arbitron"). A Jacor affiliate owns a 40% interest in a limited liability company that purchased the assets formerly owned by Duncan American Radio, Inc. Broadcasting Related Businesses and Services Jacor currently owns, produces and distributes syndicated programming for radio broadcasting, including such programs as Rush Limbaugh, The Dr. Laura Schlessinger Show and Dr. Dean Edell. The Rush Limbaugh Show is a nationally syndicated talk radio program broadcast on more than 600 radio stations. The Dr. Laura Schlessinger Show is a nationally syndicated talk radio program broadcast on more than 400 radio stations. The Dr. Dean Edell Show is a health care and medicine talk radio program broadcast on more than 300 radio stations. Currently these programs are three of the four highest rated syndicated talk radio programs in the United States. Jacor is also the producer and distributor of other syndicated programs and services, including Leeza Gibbons Entertainment Tonight on the Radio, The Michael Reagan Show, After MidNite with Blair Garner and The Jim Rome Show. These nationally syndicated programs and services are currently broadcast on more than 4,000 radio stations pursuant to over 6,300 contracts. Jacor's broadcasting related services include comprehensive radio research services and a national, in-house sales force. Premiere Radio Networks, Inc.'s, ("Premiere"), mediabase research service provides music play-list and on-air promotion tracking and call-out research for seven radio formats, which research services help radio station affiliates increase their audience share and ratings. Instead of requiring cash payments, Jacor provides the research services in exchange for the right to broadcast an agreed amount of commercial advertisements during the radio station's broadcasts. This practice makes Jacor's services more attractive to radio stations which have limited cash resources and/or excess inventory of available advertising time. The total amount of broadcast time that Jacor has available for sale to advertisers constitutes Jacor's commercial broadcast inventory. Premiere's national, in-house network radio sales force and infrastructure sells commercial broadcast inventory to more than 350 national advertisers. Jacor leverages its sales force and generates additional revenues without significant additional overhead costs by providing network advertising sales representation services, on a commission basis, to third-party radio networks and independent syndicated programming and service suppliers that do not have their own sales forces. Jacor believes that Premiere is presently the second largest network radio advertising sales representative in the United States in terms of its gross billings. It presently represents nine independent radio networks, including WOR Radio Networks, One-on-One Sports Radio Network and Accuweather. Also, upon Jacor's acquisition of MultiVerse, Premiere became the network radio sales representative for shows such as Country Heartlines with John Crenshaw and Beyond the Beltway with Bruce Dumont. Television Jacor owns a television station in the Cincinnati broadcast area where it currently owns and operates multiple radio stations. By operating a television station in the broadcast area where Jacor has a significant radio presence, Jacor has realized operating efficiencies including shared news departments and reduction of administrative overhead. Jacor currently operates this television station under a temporary waiver of an FCC rule that restricts ownership of television and radio stations in the same market. This waiver will continue until at least six months after the FCC completes a pending rulemaking proceeding in which it is considering whether to substantially liberalize this rule. The following table sets forth certain information regarding the Cincinnati television station and the broadcast area in which it operates: Station Rank (1) Commercial National TV Stations in Broadcast Households Adults Broadcast Cable Broadcast Area in DMA(1) TV Aged Area Subscriber Network Area/Station Rank(1) (000s) Households 25-54 VHF UHF % Affiliation Cincinnati/WKRC 30 797 2(T) 3 3 3 62 CBS ___________ T Designates tied. (1) Rankings for Designated Market Area ("DMA"), 6:00 a.m. to 2:00 a.m., Sunday-Saturday for "TV Households" and "Adults aged 25-54." This market information is from the January 1998 Nielsen Station Index. Advertising Radio stations generate the majority of their revenue from the sale of advertising time to local and national spot advertisers and national network advertisers. Radio serves primarily as a medium for local advertising. The growth in total radio advertising revenue tends to be fairly stable and has generally grown at a rate faster than the Gross National Product ("GNP"). Advertising revenue has risen more rapidly during the past 10 years than either inflation or the GNP. Total advertising revenue in 1997 was in excess of $12.0 billion, as reported by the Radio Advertising Bureau, its highest level in the industry's history. During the year ended December 31, 1997, approximately 79% of Jacor's radio station broadcast revenue (adjusted to include the effect of Jacor's acquisitions), would have been generated from the sale of local advertising and approximately 21% from the sale of national advertising. Jacor believes that radio is one of the most efficient, cost-effective means for advertisers to reach specific demographic groups. The advertising rates charged by Jacor's radio stations are based primarily on (i) the station's ability to attract an audience in the demographic groups targeted by its advertisers (as measured principally by quarterly Arbitron rating surveys that quantify the number of listeners tuned to the station at various times), (ii) the number of stations in the market that compete for the same demographic group, (iii) the supply of and demand for radio advertising time and (iv) the supply and pricing of alternative advertising media. Jacor emphasizes an aggressive local sales effort because local advertising represents a large majority of Jacor's revenues. Jacor's local advertisers include automotive, retail, financial institutions and services and health care. Each station's local sales staff solicits advertising, either directly from the local advertiser or through an advertising agency for the local advertisers. Jacor pays a higher commission rate to the sales staff for generating direct sales because Jacor believes that through a strong relationship directly with the advertiser, it can better understand the advertiser's business needs and more effectively design an advertising campaign to help the advertiser sell its product. Jacor employs personnel in each market to produce commercials for the advertisers. National advertising sales for most of Jacor's stations are made by Jacor's national sales managers in conjunction with the efforts of an independent advertising representative who specializes in national sales and is compensated on a commission-only basis. Jacor believes that sports broadcasting, absent unusual circumstances, is a stable source of advertising revenues. There is less competition for the sports listener, since only one radio station can offer a particular game. In addition, due to the higher degree of audience predictability, sports advertisers tend to sign contracts which are generally longer term and more stable than Jacor's other advertisers. Jacor's sales staffs are particularly skilled in sales of sports advertising. According to the Radio Advertising Bureau's publication 1997 Radio Marketing Guide and Fact Book for Advertisers, each week radio reaches approximately 95.5% of all Americans over the age of 12. More than one-half of all radio listening is done outside the home, in contrast to other advertising mediums, and four out of five adults are reached by car radio each week. The average listener spends approximately three hours and 12 minutes per day listening to radio. The highest portion of radio listenership occurs during the morning, particularly between the time a listener wakes up and the time the listener reaches work. This "morning drive time" period reaches more than 82% of people over 12 years of age and, as a result, radio advertising sold during this period achieves premium advertising rates. Jacor believes operating multiple stations in a market gives it significant opportunities in competing for advertising dollars. Each multiple station platform better positions Jacor to access a significant share of a given demographic segment making Jacor stations more attractive to advertisers seeking to reach that segment of the population. Competition; Changes in the Broadcasting Industry The radio broadcasting industry is a highly competitive business. The success of each of Jacor's stations will depend significantly upon its audience ratings and its share of the overall advertising revenue within its market. Jacor's stations will compete for listeners and advertising revenue directly with other radio stations as well as many other advertising media within their respective markets. Radio stations compete for listeners primarily on the basis of program content and by hiring high-profile talent that appeals to a particular demographic group. By building in each of its markets a strong listener base comprised of a specific demographic group, Jacor will be able to attract advertisers seeking to reach those listeners. In addition to management experience, factors which are material to competitive position include the station's rank among radio stations in its market, transmitter power, assigned frequency, audience characteristics, local program acceptance and the number and characteristics of other stations in the market area, and other advertising media in that market. Jacor attempts to improve its competitive position with promotional campaigns aimed at the demographic groups targeted by its stations and by sales efforts designed to attract advertisers. The FCC's policies and rules permit joint ownership and joint operation of local radio stations in certain circumstances. Those stations taking advantage of these joint arrangements may in certain circumstances have lower operational costs and may be able to offer advertisers more attractive rates and services. Jacor's audience ratings and competitive position will be subject to change, and any adverse change in a particular market could have a material adverse effect on the revenue of Jacor's stations in that market. Although Jacor believes that each of its stations will be able to compete effectively in the market, there can be no assurance that any one of its stations will be able to maintain or increase its current audience ratings and advertising revenue. Although the radio broadcasting industry is highly competitive, some legal restrictions on entry exist. The operation of a radio broadcast station requires a license from the FCC and the number of radio stations that can operate in a given market is limited by the availability of the FM and AM radio frequencies that the FCC will license in that market. Jacor's stations also compete directly for advertising revenues with other media, including broadcast television, cable television, newspapers, magazines, direct mail, coupons and billboard advertising. In addition, the radio broadcasting industry is subject to competition from new media technologies that are being developed or introduced, such as the delivery of audio programming by cable television systems and the Internet and by digital audio broadcasting. The radio broadcasting industry historically has grown despite the introduction of new technologies for the delivery of entertainment and information, such as television broadcasting, cable television, audio tapes and compact discs. Greater 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 an adverse effect on the radio broadcasting industry. Jacor also competes with other radio station groups to purchase additional stations. The FCC has allocated and auctioned spectrum in the "S-band" between 2320 and 2345 MHz for a new technology, satellite digital audio radio services ("DARS"), to deliver audio programming. In March 1997, the FCC adopted and announced its final DARS service and auction rules. The FCC granted DARS licenses to two companies, Satellite CD Radio, Inc. and American Mobile Radio Corporation, in October 1997, authorizing each of them to launch and operate a satellite DARS system in order to offer continuous nationwide radio programming with compact disc quality sound. DARS may provide a medium for the delivery by satellite or terrestrial means of multiple new audio programming formats to local and/or national audiences. Digital technology also may be used in the future by terrestrial radio broadcast stations either on existing or alternate broadcasting frequencies, and the FCC has stated that it will consider making changes to its rules to permit AM and FM radio stations to offer digital sound following industry analysis of technical standards. In addition, the FCC has authorized an additional 100 kHz of band width for the AM band and has allocated frequencies in this new band to certain existing AM station licensees that applied for migration prior to the FCC's cut-off date. At the end of a transition period, those licensees will be required to return to the FCC either the license for their existing AM band station or the license for the expanded AM band station. None of the stations to be affiliated with the Company have sought authorizations for operations on the expanded AM band, because such signals operate at a lower power and have less coverage and thereby are not consistent with Jacor's strategic objectives. Television stations compete for audiences and advertising revenues with radio and other television stations and multichannel video program distributors ("MVPDs") in their market areas and with other advertising media such as newspapers, magazines, outdoor advertising and direct mail. Competition for sales of television advertising time is based primarily on the anticipated and actually delivered size and demographic characteristics of audiences as determined by various services, price, the time of day when the advertising is to be broadcast, competition from other television stations, including affiliates of television broadcast networks, cable television systems and other media and general economic conditions. Competition for audiences is based primarily on the selection of programming, the acceptance of which is dependent on the reaction of the viewing public, which is often difficult to predict. Additional elements that are material to the competitive position of television stations include management experience, authorized power and assigned frequency. The broadcasting industry is continually faced with technical changes and innovations, the popularity of competing entertainment and communications media, changes in labor conditions, and governmental restrictions or actions of Federal regulatory bodies, including the FCC, any of which could possibly have a material effect on a television station's operations and profits. There are sources of video service other than conventional television stations, the most common being cable television, which can increase competition for a broadcasting television station by bringing into its market distant broadcasting signals not otherwise available to the station's audience, serving as a distribution system for national satellite-delivered programming and other non-broadcast programming originated on a cable system and selling advertising time to local advertisers. Other principal sources of competition include home video exhibition, direct-to-home broadcast satellite television services ("DBS") and multichannel multipoint distribution services ("MMDS"). Moreover, technology advances and regulatory changes affecting programming delivery through fiber optic telephone lines and video compression could lower entry barriers for new video channels and encourage the development of increasingly specialized "niche" programming. The Telecom Act permits telephone companies to provide video distribution services via radio communication, on a common carrier basis, as "cable systems" or as "open video systems" ("OVS"), each pursuant to different regulatory schemes. Jacor is unable to predict the effect that technological and regulatory changes will have on the broadcast television industry and on the future profitability and value of a particular broadcast television station. Recent acquisitions of, or investments in, cable multiple-system operators ("MSOs") by local exchange carriers ("LECs"), including the Regional Bell Operating Companies ("RBOCs") in the United States, market tests by both LECs and cable MSOs in various states, and major infrastructure upgrades announced by both LECs and cable MSOs, presage major expansion of wired communications networks and consequently their capacities to deliver video programming. The Telecom Act repealed the "telephone company/cable television cross-ownership prohibition," thereby enabling LECs, including the RBOCs, to provide cable television service in their telephone service areas. LECs may not, however, acquire more than a 10 percent ownership interest in, or enter into joint ventures with, cable systems in their telephone service areas. The Telecom Act also gives LECs the option to provide video programming services over an OVS, in which programming on no more than one-third of the system's channels may be selected by the LEC or its affiliates. The OVS model may be attractive to LECs because it is not subject to many of the regulatory requirements applicable to traditional cable systems, such as the requirement to obtain a local cable television franchise. In addition, a number of LECs have announced their intention to provide video programming services over MMDS "wireless cable" systems. In addition, the FCC authorizes DBS services throughout the United States. Currently, three FCC permittees, DirecTv, United States Satellite Broadcasting and Echo Star, provide subscription DBS services via high power communications satellites and small dish receivers, and other companies provide direct-to-home video service using lower powered satellites and larger receivers. DBS and MMDS, as well as other new technologies, will further increase competition in the delivery of video programming. Jacor 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 business. Federal Regulation of Broadcasting The ownership, operation and sale of stations are subject to the jurisdiction of the FCC, which acts under authority granted by the Communications Act. Among other things, the FCC assigns frequency bands for broadcasting; determines the particular frequencies, locations and power of stations; issues, renews, revokes and modifies station licenses; determines whether to approve changes in ownership or control of station licenses; regulates equipment used by stations; adopts and implements regulations and policies that directly or indirectly affect the ownership, operation and employment practices of stations; and has the power to impose penalties for violations of its rules or the Communications Act. License Grants and Renewals. The Communications Act provides that a broadcast station license may be granted to an applicant if the grant would serve the public interest, convenience and necessity, subject to certain limitations referred to below. In making licensing determinations, the FCC considers the legal, technical, financial and other qualifications of the applicant, including compliance with the Communications Act's limitations on alien ownership, compliance with various rules limiting common ownership of broadcast, cable and newspaper properties, and the "character" of the licensee and those persons holding "attributable" interests in the licensee. Broadcast station licenses are granted for a term not to exceed eight years and, upon application, are renewable for additional terms. The Telecom Act amends the Communications Act to require the FCC to grant an application for renewal of a broadcast station license if: (1) the station has served the public interest, convenience and necessity; (2) there have been no serious violations by the licensee of the Communications Act or the rules and regulations of the FCC; and (3) there have been no other violations by the licensee of the Communications Act or the rules and regulations of the FCC which, taken together, would constitute a pattern of abuse. The Communications Act authorizes the filing of petitions to deny against license renewal applications during particular periods of time following the filing of renewal applications. Petitions to deny can be used by interested parties, including members of the public, to raise issues concerning the qualifications of the renewal applicant. The FCC accepts radio station license renewal applications during pre- designated cycles based on geographic location. The current radio license renewal cycle is nearly completed, and most of Jacor's radio station licenses have been renewed for full terms of eight years (with expiration dates ranging from 2003 to 2005. Still pending at the FCC are Jacor's renewal applications for its New York stations, which are still subject to public comment. Also pending are renewal applications for certain Jacor stations in California, Columbus, Idaho and Las Vegas. These applications remain pending while the FCC evaluates compliance with its environmental, equal employment opportunity ("EEO") and/or indecency guidelines. Regarding EEO compliance, certain Jacor station renewals have been the subject of petitions to deny and/or petitions for reconsideration filed by the Rainbow-PUSH Coalition. In those instances where the FCC has reviewed the matter, it has issued full term renewals to the Jacor station, and Jacor anticipates that all its pending renewal applications will likewise be renewed for full eight year terms. When the FCC considers a proposed transfer of control of an FCC licensee that holds multiple FCC licenses, some of which licenses are subject to pending renewal applications, FCC policy provides that so long as there are no unresolved issues pertaining to the qualifications of the transferor or the transferee and so long as the transferee is willing to substitute itself as the renewal applicant, the FCC will grant a transfer application for a licensee holding multiple licenses and permit consummation of the transfer notwithstanding the pendency of renewal applications for one or several of the licensee's stations. To date, the FCC has not extended this policy to transactions where all the stations being sold are subject to renewal applications. License Assignments and Transfers of Control. The Communications Act prohibits the assignment of a license or the transfer of control of a corporation holding such a license without the prior approval of the FCC. Applications to the FCC for such assignments or transfers are subject to petitions to deny by interested parties and must satisfy requirements similar to those for renewal and new station applicants. Ownership Rules. Current FCC regulations impose significant restrictions on certain positional and ownership interests in broadcast television stations, cable systems and other media. Under current FCC rules, an individual or other entity owning or having voting control of 5% or more of a corporation's voting stock is considered to have an attributable interest in the corporation and its stations, except that banks holding such stock in their trust accounts, investment companies, and certain other passive interests are not considered to have an attributable interest unless they own or have voting control over 10% or more of such stock. The FCC is currently evaluating whether to raise the foregoing benchmarks to 10% and 20%, respectively. An officer or director of a corporation or any general partner of a partnership also is deemed to hold an attributable interest in the media license. Jacor cannot predict whether the FCC will adopt these or any other proposals. Minority voting stockholders in corporations controlled by a single majority shareholder and holders of non-voting stock generally will not be attributed an interest in the issuing entity, and holders of debt and instruments such as warrants, convertible debentures, options, or other non-voting interests with rights of conversion to voting interests generally will not be attributed such an interest unless and until such conversion is effected. The FCC is currently considering whether it should attribute non-voting stock, or perhaps non-voting stock interests when combined with other rights, such as voting shares or contractual relationships, along with its review of its other attribution policies. Jacor cannot predict whether the FCC will adopt these or other changes in its attribution policies. Under the current rules, shareholders of the Company with 5% or more of the outstanding votes (except for qualified institutional investors, for which the 10% benchmark is applicable), if any, are considered to hold attributable interests in the Company. Such holders of attributable interests must comply with or obtain waivers of the FCC's multiple and cross ownership limits. Zell/Chilmark Fund L.P. is the holder of approximately 27.6% of Jacor's Common Stock. Jacor is in the process of determining whether any individual or entity has acquired 5% or more of the outstanding stock of Jacor; however certain qualified investors need not submit such a report until 45 days after the end of the calendar year. In the event that Jacor learns of a new attributable shareholder and if such shareholder holds interests that exceed the FCC limits on media ownership, Jacor has the corporate power to redeem stock of its shareholder to the extent necessary to be in compliance with FCC and Communications Act requirements, including limits on media ownership by attributable parties and alien ownership. The "local radio ownership rule" limits the number of stations in a radio market in which any one individual or entity may have a control position or attributable ownership interest, as follows: (a) in markets with 45 or more commercial radio stations, a party may own up to eight commercial radio stations, no more than five of which are in the same service (AM or FM); (b) in markets with 30-44 commercial radio stations, a party may own up to seven commercial radio stations, no more than four of which are in the same service; (c) in markets with 15-29 commercial radio stations, a party may own up to six commercial radio stations, no more than four of which are in the same service; and (d) in markets with 14 or fewer commercial radio stations, a party may own up to five commercial radio stations, no more than three of which are in the same service, provided that no party may own more than 50% of the commercial stations in the market. In addition, the FCC's "cross interest" policy may prohibit a party with an attributable interest in one station in a market from also holding either a "meaningful" non-attributable equity interest (e.g., non-voting stock, voting stock, limited partnership interests) or key management position in another station in the same market, or which may prohibit local stations from combining to build or acquire another local station. The FCC is currently evaluating its local ownership limits and the cross-interest policy as well as policies governing attributable ownership interests. Jacor cannot predict whether the FCC will adopt any changes in these policies or, if so, what the new policies will be. The rules also generally prohibit the acquisition of an ownership or control position in a television station and one or more radio stations serving the same market (termed the "one-to-a-market" rule). Current FCC policy looks favorably upon waiver requests relating to television and AM/FM radio combinations in the top 25 television markets where at least 30 separately owned broadcast stations will remain after the combination. One-to-a-market waiver requests in other markets, as well as those in the top 25 television markets that involve the combination of a television station and more than one same service (AM or FM) radio station, currently are evaluated by the FCC pursuant to a fact-based, five-part, case-by-case review. The FCC also has an established policy for granting waivers that involve "failed" stations. The FCC currently is considering changes to its one-to-a-market waiver standards in a pending rule-making proceeding. The FCC also is reviewing and may modify its current prohibitions relating to ownership or control positions in a daily newspaper and a broadcast station in the same market. In conjunction with Jacor's acquisition of the Citicasters stations, the FCC granted Jacor's request for waivers of the one-to-a-market rule to permit common ownership of radio stations and a television station in each of Cincinnati and Tampa-St. Petersburg, subject to the outcome in the pending rule-making proceeding. The FCC waiver directed that should divestiture be required as a result of that rule-making proceeding, Jacor will be required to file an application for FCC consent to sell the necessary stations within six months from the release of the FCC order in the rule-making proceeding. The Company disposed of WTSP-TV, St. Petersburg in December 1996. The sale of that station rendered moot the one-to-a-market waiver granted Jacor for radio and television ownership in Tampa-St. Petersburg. There can be no assurance that the FCC will adopt a revised one-to-a-market policy in its rule-making proceeding that would permit the Company to continue to own WKRC-TV, Cincinnati, along with all of its current Cincinnati-area radio stations. If divestitures are required, there can be no assurance that Jacor would be able to obtain full value for such stations or that such sales would not have a material adverse impact upon Jacor's business, financial condition or results of operations. The Communications Act prohibits the issuance of a broadcast license to, or the holding of a broadcast license by, any corporation of which more than 20% of the capital stock is beneficially or nominally owned or voted by non-U.S. citizens or their representatives or by a foreign government or a representative thereof, or by any corporation organized under the laws of a foreign country (collectively, "Aliens"). The Communications Act also authorizes the FCC, if the FCC determines that it would be in the public interest, to prohibit the issuance of a broadcast license to, or the holding of a broadcast license by, any corporation directly or indirectly controlled by any other corporation of which more than 25% of the capital stock is beneficially or nominally owned or voted by Aliens. Certain of the Company's indirect, wholly-owned subsidiaries hold all of the Company's broadcast licenses. Because all of those subsidiaries are owned entirely by U.S. entities, the Company fully satisfies the 20% Alien ownership test. The Company must also satisfy the 25% Alien ownership test because it is the parent holding company of those subsidiaries that hold broadcast licenses. The Company does not know the exact percent of the Company which is currently owned or voted, either directly or indirectly, by Aliens. However, the Company conducted a thorough survey in 1994 of its public shareholders relating to Alien ownership. The survey indicated that Alien ownership was substantially less than 25%. The Company has no reason to expect a substantial change in the proportion of Alien ownership of its publicly-held stock as a result of subsequent public offerings. All stock issued under the public offerings were through the Depository Trust Company, which requires its participants to segregate for recordation purposes those stock purchases made by or on the behalf of Aliens. The Company has not learned of any significant changes in Alien ownership. To the extent that the Company learns in the future of significant changes in Alien ownership, it has the corporate power to redeem stock of its shareholders to the extent necessary to remain in compliance with FCC and Communications Act requirements. The FCC has issued interpretations of existing law under which these restrictions in modified form apply to other forms of business organizations, including partnerships. The FCC also prohibits a licensee from continuing to control broadcast licenses if the licensee otherwise falls under Alien influence or control in a manner determined by the FCC to be in violation of the Communications Act or contrary to the public interest. No officers, directors or significant shareholders of Jacor are known by Jacor to be Aliens. Jacor does not believe that the FCC's existing ownership rules restrict its operations in any material manner. The FCC's existing station ownership rules may restrict Jacor from acquiring radio and/or television stations in markets where Jacor has, or would like to be, a significant presence. Jacor also considers the impact of the FCC's station ownership rules when evaluating possible acquisitions. If the FCC's numerical ownership limits would be exceeded as a result of an acquisition, Jacor would need to divest one or more of either the stations to be acquired or Jacor's existing stations as a prerequisite to obtaining FCC approval of the transaction. Regulation of Broadcast Operations. In order to retain licenses, broadcasters are obligated, under the Communications Act, to serve the "public interest." Since the late 1970s, the FCC gradually has relaxed or eliminated many of the more formalized regulatory procedures and requirements developed to promote the broadcast of certain types of programming responsive to the problems, needs, and interests of a station's community of license. The regulatory changes have provided broadcast stations with increased flexibility to design their program formats and have provided relief from some record keeping and FCC filing requirements. However, licensees continue to be required to present programming that is responsive to significant community issues and to maintain certain records demonstrating such responsiveness. Complaints from listeners concerning a station's programming have been considered by the FCC when evaluating licensee renewal applications and at other times. Stations still are required to follow various rules promulgated under the Communications Act that regulate political broadcasts, political advertisements, sponsorship identifications, technical operations and other matters. "Equal Opportunity" and affirmative action requirements also exist. Failure to observe these or other rules can result in the imposition of monetary forfeitures or in the grant of a "short" (less than full term) license term or license revocation. The Telecom Act states that the FCC may deny, after a hearing, the renewal of a broadcast license for serious violations of the Communications Act or the FCC's rules or where there have been other violations which together constitute a pattern of abuse. The FCC has adopted rules regarding human exposure to levels of radio frequency ("RF") radiation. These rules require applicants for new broadcast stations, renewals of broadcast licenses or modification of existing licenses to inform the FCC at the time of filing such applications whether a new or existing broadcast facility would expose people to RF radiation in excess of certain guidelines. Agreements With Other Broadcasters. Over the past several years a significant number of broadcast licensees, including certain of Jacor's subsidiaries, have entered into cooperative agreements with other stations in their market. These agreements may take varying forms, subject to compliance with the requirements of the FCC's rules and policies and other laws. One typical example is a TBA or LMA between two separately owned 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 for its own account. Another is a JSA pursuant to which a licensee sells advertising time on both its own station or stations and on another separately owned station. The FCC has held that LMAs do not per se constitute a transfer of control and are not contrary to the Communications Act provided that the licensee of the station maintains complete responsibility for and control over operations of its broadcast station (including, specifically, control over station finances, personnel and programming) and complies with applicable FCC rules and with antitrust laws. At present, the FCC is considering whether it should treat as attributable multiple business arrangements among local stations, such as joint sales accompanied by debt financing. Jacor cannot predict whether the FCC would require the termination or restructuring of Jacor's JSAs or other arrangements in the future. Under certain circumstances, the FCC will consider a radio station brokering time on another radio station serving the same market to have an attributable ownership interest in the brokered station for purposes of the FCC's radio multiple ownership rules. In particular, a radio station is not permitted to enter into a LMA giving it the right to program more than 15% of the broadcast time, on a weekly basis, of another local radio station which it could not own under the FCC's local radio ownership rules. The FCC's rules also prohibit a radio licensee from simulcasting more than 25% of its programming on another radio station in the same broadcast service (i.e., AM-AM or FM-FM) whether it owns both stations or operates both through a LMA where both stations serve substantially the same geographic area. Legislation and Regulation of Television Operations. Television stations are regulated by the FCC pursuant to provisions of the Communications Act and the FCC rules that are in many instances the same or similar to those applicable to radio stations. Besides technical differences between television and radio, principal variances in regulation relate to limits on national and local ownership, LMAs and simulcasts, children's programming requirements, advanced television service, signal carriage rights on cable systems, license terms, "V- chip" technology and network/affiliate relations. The current FCC rules prohibit common ownership or control of television stations with overlapping "Grade B" service contours (unless established waiver standards are met) (the "Duopoly Rule"). An FCC rule-making proceeding is in process to determine whether to retain, modify or eliminate the Duopoly Rule. The current FCC rules permit an entity to have an attributable interest in an unlimited number of television stations so long as such stations do not reach in the aggregate more than 35% of the national television audience. (For purposes of this limitation, UHF stations are attributed with 50% of the television households in their market.) Additionally, the rules prohibit (with certain qualifications) the holder of an attributable interest in a television station from also having an attributable interest in a radio station, daily newspaper or cable television system serving a community located within the relevant coverage area of that television station. As noted above, the radio/television one-to-a-market rule and the broadcast/daily newspaper restriction are currently under review. Currently, LMAs between television stations are not treated as attributable interests and there is no restriction on same-market television simulcasts. The FCC is considering in a pending rule-making proceeding whether to treat television LMAs similar to radio LMAs for multiple ownership rule purposes. Jacor's television station is not a participant in any LMAs. Pursuant to legislation enacted in 1991, the amount of commercial matter that may be broadcast during programming designed for children 12 years of age and younger has been limited to 12 minutes per hour on weekdays and 10.5 minutes per hour on weekends. In addition, television stations are required to broadcast a minimum of three hours per week of "core" children's educational programming, which, among other things, must have programming serving the educational and informational needs of children 16 years of age and under as a significant purpose. A television station found not to have complied with the "core" programming requirements or the children's commercial limitations could face sanctions, including monetary fines and the possible non-renewal of its broadcasting license. The FCC has taken a number of steps to implement digital television ("DTV") service (including high-definition television) in the United States. On February 17, 1998, the FCC adopted a final table of digital channel allotments and rules for the implementation of DTV. The table of digital allotments provides each existing television station licensee or permittee with a second broadcast channel to be used during the transition to DTV, conditioned upon the surrender of one of the channels at the end of the DTV transition period. The implementing rules permit broadcasters to use their assigned digital spectrum flexibly to provide either standard or high-definition video signals and additional services, including, for example, data transfer, subscription video, interactive materials, and audio signals, subject to the requirement that they continue to provide at least one free, over-the-air television service. The FCC has set a target date of 2006 for expiration of the transition period, subject to biennial reviews to evaluate the progress of DTV, including the rate of consumer acceptance. Conversion to DTV may reduce the geographic reach of Jacor's stations or result in increased interference, with, in either case, a corresponding loss of population coverage. DTV implementation will impose additional costs on Jacor, primarily due to the capital costs associated with construction of DTV facilities and increased operating costs both during and after the transition period. In addition, the Telecom Act requires the FCC to assess and collect a fee for any use of a broadcaster's DTV channel for which it receives subscription fees or other compensation other than advertising revenue. The FCC has pending a rulemaking proceeding to implement this requirement. Pursuant to the Cable Act of 1992 (the "1992 Act"), television broadcasters are required to make triennial elections to exercise either certain "must-carry" or "retransmission consent" rights in connection with their carriage by cable systems in each broadcaster's local market. By electing must-carry rights, a broadcaster demands carriage on a specified channel on cable systems within its Area of Dominant Influence ("ADI"), in general as defined by the Arbitron 1991- 92 Television Market Guide. Alternatively, if a broadcaster chooses to exercise retransmission consent rights, it can prohibit cable systems from carrying its signal or grant the appropriate cable system the authority to retransmit the broadcast signal for a fee or other consideration. The Telecom Act directed the broadcast and cable television industries to develop and transmit an encrypted rating in all video programming that, when used in conjunction with so-called "V-Chip" technology, would permit the blocking of programs with a common rating. On March 12, 1998, the FCC voted to accept an industry proposal providing for a voluntary ratings system under which all video programming will be designated in one of six categories in order to permit the electronic blocking of selected video programming. The FCC has begun a separate proceeding to address technical issues related to the "V- Chip". The FCC's closed captioning rules, which became effective January 1, 1998, provide for the phased implementation of a universal on-screen captioning requirement with respect to the vast majority of video programming. The rules divide programming into two groups: pre-rule programming (which is defined to be programming that was first published or exhibited on or before January 1, 1998 by any distribution method) and new programming (programming that was first published or exhibited after that date). Pre-rule programming is subject to no specific requirements until the first calendar quarter of 2008. In that quarter, 75% of all pre-rule programming actually aired is required to be captioned. Beginning in the first calendar quarter of 2000, new programming that is not otherwise exempt from captioning requirements is subject to a series of quarterly benchmarks, until by January 1, 2006, 95% of all new, non- exempt programming is to be captioned. Jacor's Cincinnati television station is a CBS-network affiliate and a VHF station. The FCC currently is reviewing certain of its rules governing the relationship between broadcast television networks and their affiliated stations. The FCC is conducting a rule-making proceeding to examine its rules prohibiting broadcast television networks from representing their affiliated stations for the sale of non-network advertising time and from influencing or controlling the rates set by their affiliates for the sale of such time. Separately, the FCC is conducting a rule-making proceeding to consider the relaxation or elimination of its rules prohibiting broadcast networks from (a) restricting their affiliates' right to reject network programming; (b) reserving an option to use specified amounts of their affiliates' broadcast time; and (c) forbidding their affiliates from broadcasting the programming of another network; and to consider the relaxation of its rule prohibiting network-affiliated stations from preventing other stations from broadcasting the programming of their network. Proposed Changes. The FCC has not yet implemented formally certain of the changes to its rules necessitated by the Telecom Act. Moreover, the Congress and the FCC have under consideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, (i) affect the operation, ownership and profitability of Jacor and its broadcast stations, (ii) result in the loss of audience share and advertising revenues of Jacor's radio broadcast stations, (iii) affect the ability of Jacor to acquire additional broadcast stations or finance such acquisitions, (iv) affect current cooperative agreements and/or financing arrangements with other radio broadcast licensees, or (v) affect Jacor's competitive position in relationship to other advertising media in its markets. Such matters include, for example, changes to the license authorization and renewal process; proposals to revise the FCC's equal employment opportunity rules and other matters relating to minority and female involvement in broadcasting; proposals to alter the benchmarks or thresholds for attributing ownership interest in broadcast media; proposals to change rules or policies relating to political broadcasting; changes to technical and frequency allocation matters, including those relative to the implementation of DTV and digital audio broadcasting on both a satellite and terrestrial basis; proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages on radio; changes in the FCC's cross-interest, multiple ownership and cross-ownership policies; proposals to allow greater telephone company participation in the delivery of audio and video programming; proposals to limit the tax deductibility of advertising expenses by advertisers; the implementation of "V-chip" technology; and changes to children's television programming requirements, signal carriage rights on cable systems and network affiliate relations. Jacor believes the foregoing discussion provides the reader with all material aspects of FCC regulations that affect Jacor. Reference is made to the Communications Act, FCC rules and the public notices and rulings of the FCC for further information. Antitrust Considerations. Certain acquisitions by Jacor of broadcasting companies, radio station groups or individual radio stations will be subject to review by the Antitrust Division and the FTC pursuant to the provisions of the HSR Act. Generally, acquisitions involving assets valued at $15.0 million or more, and certain acquisitions of voting securities, come within the purview of the Hart Scott Rodino Act ("HSR Act"). Although it is likely that many proposed acquisitions will not require the parties to the transaction to comply with the HSR Act, or if such compliance is required, will result in rapid clearance by the antitrust agencies, in certain instances, the antitrust agencies may choose to investigate the proposed acquisition, particularly if it appears that such acquisition will result in substantial concentration within a specific market. Any decision by an antitrust agency to challenge a proposed acquisition could affect the ability of Jacor to consummate the proposed acquisition, or to consummate the acquisition on the proposed terms. The Antitrust Division and the FTC determine between themselves which agency is to take a closer look at a proposed transaction. The Antitrust Division or the FTC, as the case may be, may then issue a formal request for additional information ("the Second Request"). Under the HSR Act, if a Second Request is issued, the waiting period then would be extended and would expire at 11:59 p.m., on the twentieth calendar day after the date of substantial compliance by both parties with such Second Request. Only one extension of the waiting period pursuant to a request for additional information is authorized by the HSR Act. Thereafter, such waiting period may be extended only by court order or with the consent of the parties. In practice, complying with a request for additional information or material can take a significant amount of time. In addition, if the Antitrust Division or the FTC raises substantive issues in connection with a proposed transaction, the parties frequently engage in negotiations with the relevant governmental agency concerning possible means of addressing those issues and may agree to delay consummation of the transaction while such negotiations continue. Subsequent to the passage of the Telecom Act, the radio broadcast industry has been subject to an increased amount of scrutiny by the Antitrust Division. Such scrutiny caused Jacor to experience delays in closing both its merger with Citicasters Inc. (now known as JCC) (the "Citicasters Merger") and its acquisition of Noble Broadcast Group, Inc. (the "Noble Acquisition") and to incur increased transaction costs. Jacor could experience similar delays and increased costs in connection with future transactions. The Antitrust Division or the FTC could also compel changes in the proposed terms of acquisitions. This is evidenced by Jacor's agreement with the Antitrust Division in connection with the Citicasters Merger pursuant to which Jacor agreed to divest WKRQ-FM in Cincinnati by February 1997 and to inform the Antitrust Division of certain transactions in Cincinnati that would not otherwise be reportable under the HSR Act. Antitrust Division scrutiny also resulted in Jacor terminating its agreement to finance the acquisition of WGRR- FM in Cincinnati by Tsunami Communications, Inc., the entity with whom Jacor has a joint sales agreement ("JSA") for a Denver radio station. Subsequent to such termination, Jacor received from the Antitrust Division a civil investigative demand relating to the proposed transaction. In November 1996, the Antitrust Division suspended Jacor's obligation to respond to this civil investigative demand. In addition, Jacor has received an industry-wide civil investigative demand relating to JSAs pursuant to which the Antitrust Division is examining the antitrust implications of such arrangements. Jacor antiticpates that the Antitrust Division's determinations of the permissibility of JSAs will depend on the specific characteristics of the markets, stations and relationships being reviewed. Jacor believes that its existing JSAs are appropriate under applicable antitrust laws and that its JSAs are not material to its business as such arrangements only account for less than 1.0% of Jacor's net revenues. Although Jacor does not believe that antitrust considerations will adversely affect Jacor's ability to successfully implement its business strategy, the effects of the Antitrust Division's heightened level of scrutiny on the radio broadcast industry and on Jacor are uncertain. There can be no assurance that these concerns will not negatively impact Jacor. Energy and Environmental Matters Jacor's source of energy used in its broadcasting operations is electricity. No limitations have been placed on the availability of electrical power, and management believes its energy sources are adequate. Management believes that Jacor is currently in material compliance with all statutory and administrative requirements as related to environmental quality and pollution control. Environmental Matters The Company is subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects (such as emissions to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes) or (ii) impose liability for the costs of cleanup or other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. In certain cases, such liabilities may result from historical operations conducted on the Company's properties by previous owners or operators of such properties. The Company has not incurred, and does not expect to incur, any material expenditures or liabilities related to environmental matters. Employees As of December 31, 1997, Jacor employed approximately 4,300 persons, 3,200 on a full-time and 1,100 on a part-time basis. Each Jacor broadcast area has its own complement of employees which generally include a general manager, sales manager, operations manager, business manager, advertising sales staff, on-air personalities and clerical personnel. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. GENERAL The following discussion should be read in conjunction with the financial statements beginning on page 43. This Report includes certain forward-looking statements within the meaning of Section 27A of the Securities Act. When used in this Report, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially from those described in the forward-looking statement as a result of the matters discussed in this Report generally. The Company undertakes no obligation to publicly release the results of any revisions to these forward- looking statements that may be made to reflect any future events or circumstances. In the following analysis, management discusses broadcast cash flow. Broadcast cash flow should not be considered in isolation from, or as a substitute for, operating income, net income or cash flow and other consolidated income or cash flow statement data computed in accordance with generally accepted accounting principles or as a measure of the Company's profitability or liquidity. Although this measure of performance is not calculated in accordance with generally accepted accounting principles, it is widely used in the broadcasting industry as a measure of a company's operating performance. Broadcast cash flow assists in comparing performance on a consistent basis across companies without regard to depreciation and amortization, which can vary significantly depending on accounting methods (particularly where acquisitions are involved). It also excludes non-operating factors such as historical cost bases, and the effect of corporate general and administrative expenses, which generally do not relate directly to the performance of broadcasting entities. The performance of a broadcasting group, such as the Company, is customarily measured by its ability to generate broadcast cash flow. The primary source of the Company's revenue is the sale of broadcasting time on its stations for advertising. The Company also generates revenue through the sale of broadcasting time on non-owned radio stations in exchange for providing syndicated programming and comprehensive radio research services to the stations, by providing sales representation services to third parties, and through syndicated program fees. The Company's significant operating expenses are employee salaries, sports broadcasting rights fees, programming expenses, advertising and promotion expenses, rental of premises for studios and transmitting equipment and music license royalty fees. Jacor has installed company-wide general ledger accounting software to assist local management in measuring and controlling operating expenses. The Company's radio station revenue is affected primarily by the advertising rates the Company's stations are able to charge. These rates are, in large part, based on a station's ability to attract audiences in the demographic groups targeted by its advertisers, as principally measured by Arbitron Metro Area Ratings Surveys. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES GENERAL, Continued Most advertising contracts are short-term and run only for a few weeks. Most of the Company's revenue is generated from local advertising, which is sold by the station's sales staff. In 1997, approximately 79% of the Company's gross station revenue was from local advertising and approximately 21% was from national advertising. A station's local sales staff solicits advertising, either directly from the local advertiser or through an advertising agency for the local advertiser. National advertising sales for most of the Company's stations are made by the Company's national sales managers in conjunction with the efforts of an independent advertising representative who specializes in national sales and is compensated on a commission-only basis. The Company's broadcasting services include the distribution of syndicated radio programs and comprehensive radio research services. The Company enters into contracts with radio stations throughout the country to supply them with syndicated programs such as "The Rush Limbaugh Show" and "The Dr. Laura Schlessinger Show". The Company generates revenue from distributing its syndicated programming in two ways: (i) by selling commercial broadcast inventory received in exchange for the syndicated programming, and (ii) cash programming fees. Aside from the "Rush Limbaugh Show" and "The Dr. Schlessinger Show", most of the Company's syndicated programs are sold in exchange for commercial broadcast inventory. In those cases, the Company's revenues depend on how successful the Company is in selling air time to advertisers at attractive rates. The Company, through its wholly owned subsidiary, Premiere Radio Networks, Inc. ("Premiere"), also provides research services, including music play-list and on- air promotion tracking and call-out research, for seven radio formats, in exchange for commercial broadcast inventory instead of on a cash basis. This practice makes the services more attractive to radio stations which have limited cash resources and/or excess commercial broadcast inventory. Premiere's in house sales force sells commercial broadcast inventory to more than 350 national advertisers. The Company leverages its sales force and generates additional revenues without significant additional overhead costs by providing network advertising sales representation services, on a commission basis, to third-party networks and independent syndicated programming and service suppliers that do not have their own sales forces. Sports broadcasting and the full-service programming features play an integral part in the Company's operating strategy. As a result, because of the rights fees and related costs of broadcasting professional baseball and football, the costs related to the full-service programming features of its AM radio stations, as well as the Company's business strategy to acquire "stick" properties (i.e., properties with insignificant ratings and/or little or no positive broadcast cash flow), the Company's broadcast cash flow margins are typically lower than its competitors'. General economic conditions have an impact on the Company's business and financial results. From time to time the broadcast areas in which the Company operates experience weak economic conditions that may negatively affect revenue of the Company. However, management believes that this impact is somewhat softened by the Company's diverse geographical presence. The financial results of the Company's business are seasonal. Revenues are generally higher in the second, third and fourth calendar quarters than in the first quarter. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES Recent liquidity needs have been driven by the Company's acquisition strategy. The Company's acquisitions since 1996 have been financed with funds raised through a combination of debt and equity instruments. An important factor in management financing decisions includes maintenance of leverage ratios consistent with their long-term growth strategy. The Company currently has sufficient funds to finance all pending acquisitions with availability to pursue other significant acquisitions. Based upon current levels of the Company's operations and anticipated growth, it is expected that operating cash flow will be sufficient to meet expenditures for operations, administrative expenses and debt service related to acquisitions for the foreseeable future. Financing Activities Cash provided by financing activities was $552.9 million for the year ended December 31, 1997, as compared to $905.1 million for the year ended December 31, 1996 and $24.2 million for the year ended December 31, 1995. The change between years is due primarily to funds raised for the acquisition of radio stations and broadcasting related service companies. Credit Facilities In September 1997, the Company entered into a new $1.15 billion credit facility (the "Credit Facility") with a syndicate of banks and other financial institutions. The interest rate pricing on the Credit Facility has been reduced to reflect the Company's improved capitalization and current market terms. The Credit Facility provides loans to the Company in two components: (i) a reducing revolving credit facility (the "Revolving Credit Facility") of up to $750 million under which the aggregate commitments will reduce on a semi- annual basis commencing in June 2000; and (ii) a $400 million amortizing term loan (the "Term Loan")that would reduce on a semi-annual basis commencing in December 1999. The Term Loan and the Revolving Credit Facility expire on December 31, 2004. Amounts repaid or prepaid under the Term Loan may not be reborrowed. The Credit Facility bears interest at a rate that fluctuates with an applicable margin, with a minimum applicable margin to a maximum of 1.75%, based on the Company's ratio of total debt to earnings before interest, taxes, depreciation and amortization for the four consecutive fiscal quarters then most recently ended (the "Leverage Ratio"), plus a bank base rate or a Eurodollar base rate, as applicable. At March 2, 1998, the average interest rate on Credit Facility borrowings was 6.51%. The Company pays interest on the unused portion of the Revolving Credit Facility at a rate ranging from 0.250% to 0.375% per annum, based on the Company's Leverage Ratio. As of March 2, 1998, the Company had $400.0 million of outstanding indebtedness under the Term Loan and available borrowings of $750.0 million pursuant to the Revolving Credit Facility. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES, Continued Debt and Equity Offerings In May 1997, the Company completed an offering of 6,650,000 shares of common stock at $31.00 per share (the "Offering"). The over-allotment option was also exercised by the underwriters resulting in the issuance of an additional 997,500 shares. After the payment of underwriting discounts of $1.31 per share, the proceeds to the Company from the Offering were approximately $227.0 million. Concurrently with the Offering, the Company sold 673,628 shares of common stock to affiliated designees of the Company's largest shareholder, The Zell/Chilmark Fund L.P., at the identical net per share price of $29.69 for proceeds of $20.0 million. In June 1997, the Company issued $150.0 million of 8 3/4% Senior Subordinated Notes (the "8 3/4% Notes") in a private placement offering. The 8 3/4% Notes were subsequently registered with the Securities and Exchange Commission. Net proceeds to the Company were $147.0 million. The 8 3/4% Notes will mature on June 15, 2007. Interest on the 8 3/4% Notes is payable semi-annually. The 8 3/4% Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after June 15, 2002. The redemption prices commence at 104.375% and are reduced by 1.458% annually until June 15, 2005 when the redemption price is 100%. 1998 Offerings In February 1998, the Company completed offerings of 5.1 million shares of common stock, 8% Senior Subordinated Notes due 2010, and 4 3/4% Liquid Yield Option Notes ("1998 LYONs") (collectively the "February 1998 Offerings"). Net proceeds from the February 1998 Offerings were $525.0 million, of which $197.5 million was used to pay off the then outstanding balance of the Revolving Credit Facility. The remaining proceeds are currently held in short-term highly liquid securities. Investing Activities Cash flows used for investing activities were $658.3 million for the year ended December 31, 1997 as compared to $859.3 million for the year ended December 31, 1996 and $64.3 million for the year ended December 31, 1995. The variations from year to year are related to varying station acquisition activity and capital expenditures, as described below. Completed Acquisitions and Dispositions During 1997, the Company completed the following: acquisitions of 86 radio stations in 33 different broadcast areas; three like-kind exchanges, whereby the Company exchanged five stations in three markets and net cash of $11.0 million for nine stations in two markets; acquisition of a producer and distributor of syndicated radio programming, research and other services; two providers of syndicated talk radio programming; a provider of satellite and network services for the radio broadcasting industry, and; a provider of traffic reporting services in the San Diego and Los Angeles, California broadcast areas. The Company paid cash consideration for the above acquisitions of approximately $680.2 million in 1997, in addition to approximately $29.8 million of cash deposited in escrow in 1996. The acquisitions were funded through: (i) net proceeds of $246.2 million from a common stock offering, (ii) net proceeds of $147.0 million from the issuance of 8 3/4% notes, (iii) borrowings under the Credit Facility, and (iv) proceeds of approximately $93.3 million from the sale of certain investments and two radio stations. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES, Continued Acquisitions and Dispositions Completed Subsequent to December 31, 1997 Through March 2, 1998, the Company completed acquisitions of eight radio stations in three existing broadcast areas and one new broadcast area for aggregate cash consideration of approximately $25.5 million, of which approximately $9.3 million was placed in escrow in 1997. The Company also completed a like-kind exchange of four radio stations in Kansas City, Missouri for six radio stations in Dayton, Ohio. In February, the Company completed the acquisition of two broadcast related businesses for approximately $3.1 million in cash, plus additional contingent cash consideration of up to $1.6 million over three years. These acquisitions were funded through borrowings under the Revolving Credit Facility. Pending Acquisitions and Dispositions In December 1997, the Company entered into a binding agreement to purchase the assets of Nationwide Communications, Inc.'s 17 radio stations (the "Nationwide Transaction") for $620.0 million, of which $30.0 million was placed in escrow in 1997. The stations are located in Dallas, Houston, Minneapolis, Phoenix, Baltimore, San Diego, Cleveland and Columbus. The Company anticipates this transaction will close in the second quarter of 1998. In January 1998, the Company entered into a binding agreement to acquire all of the stock of Chancellor Broadcasting Co., syndicator of Art Bell's national network radio programs, Talk Radio Network, Inc., syndicator of 17 radio programs, and radio station KOPE-FM in Medford, Oregon, for approximately $9.0 million. In February 1998, the Company entered into a binding agreement with Smith Broadcasting, Inc. to purchase a construction permit for a new FM radio station in Vancouver, Washington for approximately $20.7 million in cash, all of which was paid in escrow in 1998. The Company has entered into agreements to purchase FCC licenses and substantially all of the broadcast assets of 14 stations in nine of the Company's existing broadcast areas and in two new broadcast areas for a total purchase price of approximately $68.1 million in cash, of which $12.8 million has already been paid in escrow through March 2, 1998, and to exchange the assets of one station for another station in one broadcast area. The Company has also entered into agreements to sell the FCC licenses and substantially all of the broadcast assets of two radio stations in one broadcast area for approximately $0.2 million in cash. The Company will finance its pending acquisitions from a combination of the net proceeds from the February 1998 Offerings and borrowings under the Revolving Credit Facility. Additionally, the Company has signed a letter of intent to sell two radio stations in the San Diego broadcast area for $65.2 million upon the consummation of the Nationwide Transaction. See the table beginning on page 5 for a detailed list by market of the 180 radio stations owned and operated by the Company, assuming that all pending acquisitions and dispositions are completed. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES, Continued Capital Expenditures The Company had capital expenditures of $20.0 million, $11.9 million and $5.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. The Company's capital expenditures consist primarily of broadcasting equipment purchases and tower upgrades. Also, in 1997, the Company purchased and installed company-wide, general ledger accounting, accounts payable, and payroll and human resources software and related hardware components necessary to utilize those systems. Operating Activities For the year ended December 31, 1997, cash flow provided by operating activities was $56.0 million, as compared to $24.9 million for the year ended December 31, 1996 and $20.6 million for the year ended December 31, 1995. The change is primarily due to an increase in operating income related to acquisitions. RESULTS OF OPERATIONS The Year Ended 1997 Compared to The Year Ended 1996 Broadcast revenue for 1997 was $595.2 million, an increase of $344.7 million or 137.6% from $250.5 million during 1996. This increase resulted primarily from the revenue generated at those properties owned or operated during 1997 but not during 1996, including revenues generated from commercial broadcast time received and rights fees from recently acquired syndicated programming. On a "same station" basis - reflecting results from stations operated for the entire twelve months of both 1997 and 1996 - broadcast revenue for 1997 was $167.5 million, an increase of $17.7 million or 11.8% from $149.8 million for 1996. The increase resulted primarily from favorable ratings and a strong advertising environment. Agency commissions for 1997 were $64.7 million, an increase of $38.0 million or 142.3% from $26.7 million during 1996 due to the increase in broadcast revenue. On a "same station" basis, agency commissions for 1997 were $17.4 million, an increase of $1.6 million or 10.1% from $15.8 million for 1996, due to the increase in broadcast revenue. Broadcast operating expenses for 1997 were $356.8 million, an increase of $205.7 million or 136.1% from $151.1 million during 1996. These expenses increased primarily as a result of expenses incurred at those properties, including broadcast related service businesses, owned or operated during 1997 but not during 1996. On a "same station" basis, broadcast operating expenses for 1997 were $103.1 million, an increase of $8.2 million or 8.6% from $94.9 million for 1996. The increase resulted primarily from increased selling, programming, and promotion expenses. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS, Continued Depreciation and amortization for 1997 and 1996 was $78.5 million and $23.4 million, respectively. The increase was due to acquisitions during 1997 and the effects of a full year of depreciation and amortization for those additions occurring at various dates through 1996. Operating income for 1997 was $81.2 million, an increase of $41.8 million or 106.1% from an operating income of $39.4 million for 1996. The increase in operating income is primarily the result of acquisitions made at various dates in 1996 and 1997. Interest expense for 1997 was $82.3 million, an increase of $50.1 million or 155.6% from $32.2 million for 1996. Interest expense increased due to an increase in outstanding debt that was incurred in connection with acquisitions. The gain on the sale of assets in 1997 resulted primarily from the sale of the Company's investment in News Corp. Warrants in February 1997 and in Paxson Communications Corporation stock in May 1997. The gain on sale of assets in 1996 resulted from the sale of two FM radio stations in Knoxville. Income tax expense was $9.6 million for 1997 and $7.3 million for 1996. The effective tax rate increased in 1997 due to an increase in non-deductible goodwill resulting from acquisitions. The Company recognized extraordinary losses of $7.5 million and $3.0 million, net of income tax credit, in 1997 and 1996, respectively, related to the write off of debt financing costs due to significant amendments to the Company's Credit Facility (See Note 7 in the Notes to Consolidated Financial Statements). Net loss for 1997 was $4.1 million, compared to net income of $5.1 million reported by the Company for 1996. The Year Ended 1996 Compared to the Year Ended 1995 Broadcast revenue for 1996 was $250.5 million, an increase of $117.4 million or 88.2% from $133.1 million during 1995. This increase resulted from the revenue generated at those properties owned or operated during 1996 but not during the comparable 1995 period. On a "same station" basis - reflecting results from stations operated for the entire twelve months of both 1996 and 1995 - broadcast revenue for 1996 was $135.5 million, an increase of $13.8 million or 11.3% from $121.7 million for 1995. This increase resulted from an increase in advertising rates in both local and national advertising. Agency commissions for 1996 were $26.7 million, an increase of $12.5 million or 87.9% from $14.2 million during 1995 due to the increase in broadcast revenue. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS, Continued Broadcast operating expenses for 1996 were $151.1 million, an increase of $63.8 million or 73.1% from $87.3 million during 1995. These expenses increased as a result of expenses incurred at those properties owned or operated during 1996 but not during the comparable 1995 period. On a "same station" basis, broadcast operating expenses for 1996 were $82.9 million, an increase of $4.9 million or 6.3% from $78.0 million for 1995. This increase resulted from increased selling, payroll and programming costs. Depreciation and amortization for 1996 and 1995 was $23.4 million and $9.5 million, respectively. This increase was due to the acquisitions in 1996. Operating income for 1996 was $39.4 million, an increase of $20.8 million or 111.4% from an operating income of $18.6 million for 1995. Interest expense in 1996 was $32.2 million, an increase of $30.8 million from $1.4 million in 1995. Interest expense increased due to an increase in outstanding debt that was incurred in connection with acquisitions. Income tax was $7.3 million for 1996 and 1995. The effective tax rate increased in 1996 due to an increase in non-deductible goodwill resulting from the 1996 acquisitions. In 1996 the Company recognized an extraordinary loss of approximately $3.0 million related to the write off of debt financing costs. Net income for 1996 was $5.1 million, compared to net income of $11.0 million reported by the Company for 1995. Year 2000 Computer System Compliance The Year 2000 issue ("Y2K") is the result of computer programs written with date sensitive codes that contain two digits (rather than four) to define the year. As the year 2000 approaches, certain computer systems may be unable to accurately process certain date-based information as the program may interpret the year 2000 as 1900. The Company has embarked on a project to identify all of the potential impacts of Y2K on its business operations and to bring all necessary business systems to full compliance. The Company is currently in the process of performing an organization-wide assessment of its computer systems' compliance with Y2K. The Company hired a third party advisor, Coopers & Lybrand L.L.P., to assist in developing an assessment and compliance plan. Also, the Company has hired a Y2K project manager to oversee the implementation of the Company's Y2K plan throughout the Company and has identified a Y2K assessment coordinator in each broadcast area. In March 1998, the Company began implementing its assessment methodology in each broadcast area with a target inventory completion date of April 30, 1998. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS, Continued Assessments to date indicate that certain equipment and software will need to be replaced or updated to comply with Y2K. Management believes that necessary non-compliant operating systems will be replaced by December 1998 in conjunction with the Company's ongoing strategic technology plan initiated in 1996. During 1997, as a part of that strategic plan, the Company implemented a centralized computer system, which is Y2K compliant and includes general ledger, accounts payable, payroll and human resources functions. All broadcast areas are currently utilizing these standardized accounting systems. Management believes that costs to comply with Y2K will not result in a material increase in the Company's anticipated ongoing capital expenditures to advance the Company's technology. The Company believes that its Y2K compliance issues will be resolved on a timely basis and that any related costs will not have a material impact on the Company's operations, cash flows or financial condition of future periods. Recent Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 requires the reporting of comprehensive income in financial statements by all entities that provide a full set of financial statements. The term "comprehensive income" describes the total of all components of comprehensive income including net income. The statement only deals with reporting and display issues. It does not consider recognition or measurement issues. The Company will implement SFAS 130 in the first quarter of 1998. Also in June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 provides accounting guidance for reporting information about operating segments in annual financial statements and requires such enterprises to report selected information about operating segments in interim financial reports. The statement uses a "management approach" to identify operating segments and provides specific criteria for operating segments. SFAS 131 is effective for the year ended December 31, 1998 and will be required for interim periods in 1999. The Company is currently evaluating the impact SFAS 131 will have on its financial statements, if any. Item 8. Financial Statements and Supplementary Data Page Report of Independent Accountants 44 Consolidated Balance Sheets: December 31, 1997 and 1996 45 Consolidated Statements of Operations: Years ended December 31, 1997, 1996 and 1995 46 Consolidated Statements of Shareholders' Equity: Years ended December 31, 1997, 1996 and 1995 47 Consolidated Statements of Cash Flows: Years ended December 31, 1997, 1996 and 1995 49 Notes to Consolidated Financial Statements 51 Quarterly Financial Data 74 PART III The information required by the following items will be included in Jacor Communications, Inc.'s definitive Proxy Statement which will be provided within 120 days after the end of the Registrant's fiscal year: Item 10 Directors and Executive Officers of the Registrant Item 11 Executive Compensation Item 12 Security Ownership of Certain Beneficial Owners and Management Item 13 Certain Relationships and Related Transactions REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Jacor Communications, Inc. We have audited the accompanying consolidated balance sheets of Jacor Communications, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jacor Communications, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Cincinnati, Ohio February 11, 1998 JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (In thousands, except share amounts)
1997 1996 ASSETS Current assets: Cash and cash equivalents $ 28,724 $ 78,137 Accounts receivable, less allowance for doubtful accounts of $6,195 in 1997 and $3,950 in 1996 135,073 79,502 Prepaid expenses and other 33,790 8,963 Total current assets 197,587 166,602 Property and equipment, net 206,809 131,488 Intangible assets, net 2,128,718 1,290,172 Other assets 68,764 116,680 Total assets $ 2,601,878 $ 1,704,942 LIABILITIES Current liabilities: Accounts payable $ 17,294 $ 12,600 Accrued expenses and other 68,971 30,774 Accrued payroll 15,246 7,562 Accrued income taxes 16,738 4,596 Total current liabilities 118,249 55,532 Long-term debt 987,500 670,000 Liquid Yield Option Notes 125,300 118,682 Deferred tax liability 338,867 264,878 Other liabilities 115,611 108,914 Commitments and contingencies SHAREHOLDERS' EQUITY Preferred Stock, authorized and unissued 4,000,000 shares - - Common Stock, no par value, $0.01 per share stated value; authorized 100,000,000 shares, issued and outstanding shares: 45,689,677 in 1997 and 31,287,221 in 1996 457 313 Additional paid-in capital 863,086 432,721 Common stock warrants 31,500 26,500 Unrealized gain on investments - 2,042 Retained earnings 21,308 25,360 Total shareholders' equity 916,351 486,936 Total liabilities and shareholders' equity $ 2,601,878 $ 1,704,942 The accompanying notes are an integral part of the consolidated financial statements.
JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1997, 1996 and 1995 (In thousands, except per share amounts)
1997 1996 1995 Broadcast revenue $ 595,229 $ 250,461 $ 133,103 Less agency commissions 64,655 26,700 14,212 Net revenue 530,574 223,761 118,891 Broadcast operating expenses 356,783 151,065 87,290 Depreciation and amortization 78,485 23,404 9,483 Corporate general and administrative expenses 14,093 9,932 3,501 Operating income 81,213 39,360 18,617 Interest expense (82,315) (32,244) (1,444) Gain on sale of assets 11,135 2,539 - Other income 3,452 6,342 1,260 Other expense (481) (626) (168) Income before income taxes and extraordinary loss 13,004 15,371 18,265 Income tax expense (9,600) (7,300) (7,300) Income before extraordinary loss 3,404 8,071 10,965 Extraordinary loss, net of income tax benefit (7,456) (2,966) - Net (loss) income $ (4,052) $ 5,105 $ 10,965 Basic net (loss) income per common share: Before extraordinary loss $ .08 $ .32 $ .58 Extraordinary loss (.18) (.12) - Net (loss) income per common share $(.10) $ .20 $ .58 Diluted net (loss) income per common share: Before extraordinary loss $ .08 $ .30 $ .53 Extraordinary loss (.18) (.11) - Net (loss) income per common share $(.10) $ .19 $ .53 Number of common shares used in Basic calculation 40,460 25,433 18,908 Number of common shares used in Diluted calculation 42,163 26,442 20,532 The accompanying notes are an integral part of the consolidated financial statements.
JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended December 31, 1997, 1996 and 1995 (In thousands)
Common Stock Additional Common Unrealized Shares Stated Paid-In Stock Gain on Retained Value Capital Warrants Investments Earnings Total - --------------------------------------------------------------------------------------------- Balances, December 31, 1994 19,590 $196 $139,168 $390 - $9,290 $149,044 Purchase and retirement of stock (1,515) (15) (21,679) - - - (21,694) Employee stock purchases 44 1 474 - - - 475 Exercise of stock options 28 - 195 - - - 195 Other 10 - 90 (2) - - 88 Net income - - - - - 10,965 10,965 - --------------------------------------------------------------------------------------------- Balances, December 31, 1995 18,157 182 118,248 388 - 20,255 139,073 Common stock offering 11,250 113 301,636 - - - 301,749 Employee stock purchases 48 - 672 - - - 672 Exercise of stock options 106 1 650 - - - 651 Conversion of warrants 1,726 17 14,704 (374) - - 14,347 Purchase of warrants - - (5,080) (14) - - (5,094) Issuance of warrants - - - 26,500 - - 26,500 Unrealized gain on investments - - - - $2,042 - 2,042 Stock related compensation - - 1,891 - - - 1,891 Net income - - - - - 5,105 5,105 - --------------------------------------------------------------------------------------------- Balances, December 31, 1996 31,287 $313 $432,721 $26,500 $ 2,042 $25,360 $486,936 - --------------------------------------------------------------------------------------------- (Continued) The accompanying notes are an integral part of the consolidated financial statements.
JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended December 31, 1997, 1996 and 1995 (In thousands) (Continued)
Common Stock Additional Common Unrealized Shares Stated Paid-In Stock Gain on Retained Value Capital Warrants Investments Earnings Total - --------------------------------------------------------------------------------------------- Balances, December 31, 1996 31,287 $313 $432,721 $26,500 $ 2,042 $25,360 $486,936 Common stock offering 8,321 83 246,079 - - - 246,162 Stock issued for Acquisitions 5,774 58 179,370 - - - 179,428 Employee stock purchases 87 1 2,137 - - - 2,138 Exercise of stock options 220 2 3,030 - - - 3,032 Issuance of warrants - - - 5,000 - - 5,000 Sale of investments - - - - (2,042) - (2,042) Other - - (251) - - - (251) Net loss - - - - - (4,052) (4,052) - --------------------------------------------------------------------------------------------- Balances, December 31, 1997 45,689 $457 $863,086 $31,500 - $21,308 $916,351 The accompanying notes are an integral part of the consolidated financial statements.
JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 Cash flows from operating activities: Net (loss) income $ (4,052) $ 5,105 $ 10,965 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 17,836 7,661 3,251 Amortization of intangible assets 60,649 15,743 6,232 Extraordinary loss 7,456 2,966 - Non-cash interest expense 6,618 4,327 - Provision for bad debts and other 1,155 1,870 1,374 Deferred income taxes (6,648) (233) (560) Gain on sale of assets (11,135) (2,539) - Changes in operating assets and liabilities, net of effects of acquisitions and disposals: Accounts receivable (37,495) (18,626) (2,344) Prepaid expense and other assets (9,637) (4,076) 1,029 Accounts payable 4,694 10,054 (424) Accrued expenses and other liabilities 26,599 2,655 1,102 Net cash provided by operating activities 56,040 24,907 20,625 (Continued) The accompanying notes are an integral part of the consolidated financial statements.
JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1997, 1996 and 1995 (In thousands) (Continued)
1997 1996 1995 Cash flows from investing activities: Capital expenditures $ (19,980) $ (11,852) $ (4,969) Cash paid for acquisitions (680,206) (826,302) (34,008) Deposits on broadcast stations (51,410) (23,608) - Purchase of intangible assets - - (15,536) Proceeds from sale of assets 93,263 6,595 - Loans originated and other - (4,097) (9,827) Net cash used by investing activities (658,333) (859,264) (64,340) Cash flows from financing activities: Issuance of long-term debt 627,700 973,000 45,500 Issuance of common stock 246,161 316,726 758 Repayment of long-term debt (310,200) (471,600) - Payment of financing costs (13,659) (27,435) - Stock options exercised 2,272 - - Issuance of LYONs - 115,172 - Purchase of common stock - - (21,694) Other 606 (806) (387) Net cash provided by financing activities 552,880 905,057 24,177 Net (decrease) increase in cash and cash equivalents (49,413) 70,700 (19,538) Cash and cash equivalents at beginning of year 78,137 7,437 26,975 Cash and cash equivalents at end of year $ 28,724 $ 78,137 $ 7,437 Supplemental disclosures of cash flow information: Cash paid for: Interest $ 72,191 $ 5,300 $ 1,400 Income taxes $ 5,383 $ 4,992 $ 6,662 Supplemental schedule of non-cash investing and financing activities: Fair value of assets exchanged $ 120,000 $ 170,000 - Liabilities assumed in acquisitions $ 120,325 $ 296,187 - The accompanying notes are an integral part of the consolidated financial statements.
JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS Description of Business As of December 31, 1997 the Company owned and/or operated 159 radio stations and one television station in 39 broadcast areas throughout the United States. The Company also engages in businesses complementary to its radio and television stations, including producing and distributing syndicated programs, traffic reporting services for radio and television, and research services. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Jacor Communications, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenues Revenues for commercial broadcasting advertisements are recognized when the commercial is broadcast. Revenues from syndicated program fees are recognized over the term of the contracts. Barter Transactions Barter transactions are reported at the estimated fair value of the product or service received. Revenue from barter transactions (advertising provided in exchange for goods and services) is recognized as income when advertisements are broadcast, and merchandise or services received are charged to expense when received or used. If merchandise or services are received prior to the broadcast of the advertising, a liability (deferred barter revenue) is recorded. If the advertising is broadcast before the receipt of the goods or services, a receivable is recorded. Consolidated Statements of Cash Flows For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. The effect of barter transactions has been eliminated. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different geographic areas of the country. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS, Continued Property and Equipment Property and equipment are stated at cost less accumulated depreciation; depreciation is provided on the straight-line basis over the estimated useful lives of the assets as follows: Land improvements 20 Years Buildings 25 Years Equipment 3 to 20 Years Furniture and fixtures 5 to 12 Years Leasehold improvements Life of lease Intangible Assets Intangible assets are stated at cost less accumulated amortization; amortization is provided principally on the straight-line basis over the following lives: FCC Broadcasting licenses 40 Years Goodwill 40 Years Contracts and other intellectual property 3 to 25 Years Effective January 1, 1996, the Company adopted Statement of Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Prior to 1996, the Company accounted for the impairment of intangible assets under Accounting Principles Board (APB) opinion No. 17. The adoption of this statement did not impact the Company's policy for reviewing the carrying value of intangible assets. The carrying value of intangible assets is reviewed by the Company when events or circumstances suggest that the recoverability of an asset may be impaired. If this review indicates that goodwill, FCC licenses and other intangible assets will not be recoverable, as determined based on the undiscounted cash flows of the entity over the remaining amortization period, the carrying value of the goodwill, FCC licenses and other intangible assets will be reduced to their respective fair values. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Fair Value of Financial Instruments The fair value of the Company's publicly traded debt is based on quoted market prices. It was not practicable to estimate the fair value of borrowings under the Company's Credit Facility since there is no liquid market for this debt. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS, Continued Earnings Per Share Basic earnings per share equals net earnings divided by the weighted average number of common shares outstanding. Diluted earnings per share equals net earnings divided by the weighted average number of common shares outstanding after giving effect to other dilutive securities. Earnings per share calculations have been made in compliance with Statement on Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 became effective for the fourth quarter of 1997 calculations. Prior year calculations have been restated to reflect the adoption of SFAS 128. Stock Based Compensation Plans The Company accounts for its employee and director stock based compensation plans in accordance with APB Opinion No. 25. The Company has elected not to adopt the cost recognition provisions of Statement of Financial Accounting Standards No. 123, ("SFAS 123") "Accounting for Stock Based Compensation". The Company follows only the disclosure provisions of SFAS 123 as permitted by the statement. Reclassifications Certain prior year amounts have been reclassed to conform to 1997 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACQUISITIONS Completed 1997 Radio Station Acquisitions and Dispositions During 1997, the Company completed acquisitions of 86 radio stations in 33 broadcast areas for a purchase price consisting of (i) $344.4 million in cash, of which $26.1 million was placed in escrow in 1996, (ii) the issuance of approximately 4.3 million shares of common stock valued at $126.8 million, and (iii) the issuance of warrants to acquire 500,000 shares of common stock at $40 per share valued at $5.0 million. As a result of the acquisitions, approximately $49.8 million in goodwill was recorded by the Company, representing acquisition costs in excess of the fair value of identifiable tangible and intangible assets acquired. The Company also completed three separate like-kind exchanges of broadcast properties, exchanging five stations and net cash of $11.0 million, of which $3.6 million was placed in escrow in 1996, for nine stations. The Company sold one station in San Diego, California for $6.0 million and one station in Lexington, Kentucky for $3.5 million. Completed 1997 Broadcasting Services Acquisitions In June 1997, the Company acquired by merger a company that produces syndicated network radio programs and services which it distributes in exchange for commercial broadcast time that it resold to national advertisers. The total consideration paid by the Company including payment for certain Premiere Radio Networks, Inc. ("Premiere") warrants and stock options, was $189.8 million, consisting of $138.8 million in cash and the issuance of 1,416,886 shares of common stock. Approximately $104.0 million in goodwill was recorded by the Company in conjunction with the acquisition. In April 1997, the Company acquired substantially all of the assets relating to the broadcast distribution and related print and electronic media publishing businesses of Radio-Active Media (formerly EFM Media Management), for $50.0 million in cash. Additionally, in October 1997,the Company acquired the rights to The Dr. Laura Schlessinger Show from Synergy Broadcasting, Inc. and the assets of Multiverse Networks, L.L.C., a network radio sales representation firm for $71.5 million in cash. The Company completed the acquisition of two additional broadcasting service companies for a purchase price of approximately $29.0 million. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACQUISITIONS, Continued Completed 1996 Radio Station Acquisitions and Exchanges In 1996, the Company effected the following transactions: acquired 36 radio stations and two television stations in 14 broadcast areas; acquired the right to provide programming to and sell air time for two radio stations in one broadcast area; exchanged via like-kind exchange one television station for 6 radio stations in two existing broadcast areas and one new broadcast area, and; financed the purchase of a 40% interest in a newly formed, limited liability company. For the above transactions, the Company paid approximately $974.0 million in cash. All of the above acquisitions have been accounted for as purchases. The excess cost over the fair value of net assets acquired is being amortized over 40 years. The results of operations of the acquired businesses are included in the Company's financial statements since the respective dates of acquisition. Assuming each of the 1997 and 1996 acquisitions had taken place at the beginning of 1996 and 1997, unaudited pro forma consolidated results of operations would have been as follows: Pro Forma (Unaudited) Year Ended December 31, 1997 1996 Net revenue $ 591,093 $ 542,089 Net income (loss) before extraordinary loss 403 (12,614) Diluted income (loss) per common share $.01 ($.28) These unaudited pro forma amounts do not purport to be indicative of the results that might have occurred if the foregoing transactions had been consummated on the indicated dates. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACQUISITIONS, Continued Radio Station Acquisitions Completed Subsequent to December 31, 1997 The Company completed the purchase of eight radio stations in three existing broadcast areas and one new broadcast area for $25.5 million in cash, and completed a like-kind exchange of six radio stations in one broadcast area for four radio stations in one broadcast area. Broadcasting Services Acquisitions Completed Subsequent to December 31, 1997 The Company acquired two radio broadcasting service companies for $3.1 million in cash, plus additional contingent consideration of up to $1.6 million payable over three years. Pending Acquisitions and Dispositions In December 1997 the Company entered into a binding agreement to purchase the assets of Nationwide Communications, Inc.'s 17 radio stations (the "Nationwide Transaction") for $620.0 million, of which $30.0 million was placed in escrow in 1997. The stations are located in Dallas, Houston, Minneapolis, Phoenix, Baltimore, San Diego, Cleveland and Columbus. The Company anticipates this transaction will close in the second quarter of 1998. The Company has signed a letter of intent to sell two radio stations in the San Diego broadcast area for $65.2 million upon the consummation of the Nationwide Transaction. In January 1998, the Company entered into a binding agreement to acquire all of the stock of Chancellor Broadcasting Co., syndicator of Art Bell's national network radio programs, Talk Radio Network, Inc., syndicator of 17 radio programs, and radio station KOPE-FM in Medford, Oregon, for approximately $9.0 million. In February 1998, the Company entered into a binding agreement with Smith Broadcasting, Inc. to purchase a construction permit for a new FM radio station in Vancouver, Washington for approximately $20.7 million in cash, all of which was paid in escrow in 1998. The Company has entered into agreements to purchase FCC licenses and substantially all of the broadcast assets of 14 stations in nine of the Company's existing broadcast areas and in two new broadcast areas for a total purchase price of approximately $68.1 million in cash, of which $12.0 million has already been paid in escrow through December 31, 1997, and to exchange the assets of one station for another station in one broadcast area. The Company has also entered into agreements to sell the FCC licenses and substantially all of the broadcast assets of two radio stations in one broadcast area for approximately $0.2 million in cash. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. SUBSEQUENT OFFERINGS In February 1998, the Company completed offerings of debt and equity securities, as described below. The Company completed an offering of 5,073,000 shares of Common Stock at $50.50 per share net of underwriting discounts of $2.02 per share (the "Stock Offering"). Net proceeds to the Company from the Stock Offering were approximately $245.9 million. The Company issued $120.0 million in aggregate principal amount at maturity of 8% Senior Subordinated Notes (the "8% Notes") due 2010. Net proceeds to the Company were $117.1 million. The Company issued 4 3/4% Liquid Yield Option Notes due 2018 in the aggregate principal amount at maturity of $426.9 million. Each 1998 LYON had an issue price of $391.06 and a principal amount at maturity of $1,000. The 1998 LYONs are convertible, at the option of the holder, at any time on or prior to maturity, into Common Stock at a conversion rate of 6.245 shares per each 1998 LYON, for an aggregate of approximately 2.7 million shares of common stock. Net proceeds from the issuance of the 1998 LYONs were $161.9 million. A portion of the net proceeds from the above transactions was used to pay off the Revolving Credit Facility. The remainder will be used to fund the pending acquisitions, and are currently held in short-term, highly liquid securities. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997 and 1996 consist of the following (in thousands): 1997 1996 Land and land improvements $ 21,128 $ 14,269 Buildings 26,077 20,249 Equipment 162,885 97,491 Furniture and fixtures 19,919 7,524 Leasehold improvements 8,006 5,872 238,015 145,405 Less accumulated depreciation (31,206) (13,917) $206,809 $131,488 5. INTANGIBLE ASSETS Intangible assets at December 31, 1997 and 1996 consist of the following (in thousands): 1997 1996 Broadcasting licenses $1,465,020 $ 987,953 Goodwill 404,684 250,884 Contracts and other intellectual assets 355,668 86,489 2,225,372 1,325,326 Less accumulated amortization (96,654) (35,154) $2,128,718 $1,290,172 JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. OTHER ASSETS The Company's other assets at December 31, 1997 and 1996 consist of the following (in thousands): December 31, December 31, 1997 1996 News Corp Warrants $ - $ 39,800 Acquisition escrows 51,410 30,804 Marketable securities - 13,965 Other 17,354 32,111 $ 68,764 $116,680 In February 1997, the Company sold its investment in the News Corp Warrants for $44.5 million in cash and recorded a pretax gain of $4.7 million. In May 1997, the Company sold its investment in Paxson Communications Corporation stock for $20.3 million in cash and recorded a pretax gain of $6.1 million. JACOR COMMUNICATIONS,INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT The Company's debt obligations at December 31, 1997 and 1996 consist of the following (in thousands): 1997 1996 Credit Facility borrowings........ $567,500 $400,000 10 1/8% Senior Subordinated Notes, due 2006....................... 100,000 100,000 9 3/4% Senior Subordinated Notes, due 2006....................... 170,000 170,000 8 3/4% Senior Subordinated Notes, due 2007....................... 150,000 - $987,500 $670,000 New Credit Facility In September 1997, the Company, through Jacor Communications Company ("JCC"), entered into a new $1.15 billion credit facility (the "Credit Facility") with a syndicate of banks and other financial institutions. The Credit Facility replaces the Company's previous credit facility entered into in June 1996, as amended. The Credit Facility increased the Company's borrowing capacity by $400 million and consists of two components: (i) a revolving credit facility of up to $750 million with a mandatory commitment reduction of $50.0 million on June 30, 2000 continuing semi-annually through June 2003, and a final maturity date of December 31, 2004; and (ii) a term loan of up to $400 million with a scheduled reduction of $35.0 million on December 31, 1999 with increasing semi-annual reductions thereafter and a final maturity date of December 31, 2004. At December 31, 1997, the outstanding balance of the term loan was $400.0 million. Amounts repaid or prepaid under the Term Loan may not be reborrowed. The loans under the Credit Facility are guaranteed by each of the Company's direct and indirect subsidiaries other than certain immaterial subsidiaries. JCC's obligations under the Credit Facility are secured by a first priority lien on the capital stock of the Company's subsidiaries, an assignment of all intercompany debt and of certain time brokerage agreements, and by the guarantee of JCC's parent company, Jacor Communications Inc. ("Jacor"). The Credit Facility bears interest at a rate that fluctuates with an applicable margin, with a minimum applicable margin to a maximum of 1.75%, based on the Company's ratio of total debt to earnings before interest, taxes, depreciation and amortization for the four consecutive fiscal quarters then most recently ended (the "Leverage Ratio"), plus a bank base rate or a Eurodollar base rate, as applicable. At December 31, 1997, the average interest rate on Credit Facility borrowings was 6.60%. The Company pays interest on the unused portion of the Revolving Credit Facility at a rate ranging from 0.250% to 0.375% per annum, based on the Company's Leverage Ratio. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT, Continued The Credit Facility contains covenants and provisions that restrict, among other things, the Company's ability to: (i) incur additional indebtedness; (ii) incur liens on its property; (iii) make investments and advances; (iv) enter into guarantees and other contingent obligations; (v) merge or consolidate with or acquire another person or engage in other fundamental changes; (vi) engage in certain sales of assets; (vii) engage in certain transactions with affiliates; and (viii) make restricted junior payments. The Credit Facility also requires the satisfaction of certain financial performance criteria (including a consolidated interest coverage ratio, a debt-to-operating cash flow ratio and a consolidated operating cash flow available for fixed charges ratio) and the repayment of loans under the Credit Facility with proceeds of certain sales of assets and debt issuances. In 1997 and 1996, the Company recognized extraordinary losses of approximately $7.5 million and $3.0 million, respectively, net of income tax credit, related to the write off of debt financing costs due to significant amendments to the Company's Credit Facility. 10 1/8% Senior Subordinated Notes Due 2006 Interest on the 10 1/8% Senior Subordinated Notes (the "10 1/8% Notes") is payable semi-annually. The 10 1/8% Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after June 15, 2001. The redemption prices commence at 105.063% and are reduced by 1.688% annually until June 15, 2004 when the redemption price is 100%. At December 31, 1997, the market value of the 10 1/8% Notes exceeded carrying value by approximately $8.6 million. At December 31, 1996 the market value of the 10 1/8% Notes exceeded carrying value by approximately $3.0 million. 9 3/4% Senior Subordinated Notes Due 2006 Interest on the 9 3/4% Senior Subordinated Notes (the "9 3/4% Notes") is payable semi-annually. The 9 3/4% Notes will be redeemable at the option of the Company, in whole or part, at any time on or after December 15, 2001. The redemption prices commence at 104.875% and are reduced by 1.625% annually until December 15, 2004 when the redemption price is 100%. At December 31, 1997, the market value of the 9 3/4% Notes exceeded carrying value by approximately $12.1 million. At December 31, 1996 the market value of the 9 3/4% Notes exceeded carrying value by approximately $3.4 million. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT, Continued 8 3/4% Senior Subordinated Notes Due 2007 In June 1997, the Company completed an offering of $150 million of its 8 3/4% Senior Subordinated Notes (the "8 3/4% Notes"). The 8 3/4% Notes will mature on June 15, 2007. Interest on the 8 3/4% Notes is payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 1997. The 8 3/4% Notes will be redeemable at the option of the Company, in whole or in part, at anytime on or after June 15, 2002. The redemption prices commence at 104.375% and are reduced by 1.458% annually until June 15, 2005 when the redemption price is 100%. At December 31, 1997 the market value of the 8 3/4% Notes exceeded carrying value by approximately $3.8 million. The 10 1/8% Notes, 9 3/4% Notes and 8 3/4% Notes (the "Notes") are obligations of JCC, and are jointly and severally, fully and unconditionally guaranteed on a senior subordinated basis by Jacor and by all of the Company's subsidiaries (the "Subsidiary Guarantors"). JCC is a wholly-owned subsidiary of Jacor and the Subsidiary Guarantors are wholly-owned subsidiaries of JCC. Separate financial statements of JCC and each of the Subsidiary Guarantors are not presented because Jacor believes that such information would not be material to investors. The direct and indirect non-guarantor subsidiaries of Jacor are inconsequential, both individually and in the aggregate. Additionally, there are no current restrictions on the ability of the Subsidiary Guarantors to make distributions to JCC, except to the extent provided by law generally. JCC's credit facility and the terms of the indentures governing the Notes do restrict the ability of JCC and of the Subsidiary Guarantors to make distributions to the Registrant. Summarized financial information with respect to Jacor and with respect to the Subsidiary Guarantors on a combined basis as of December 31, 1997, 1996 and 1995 and for each of the three years in the period ended December 31, 1997; and with respect to JCC as of December 31, 1997 and 1996 and for the year ended December 31, 1997 and for the period from June 6, 1996 to December 31, 1996 is as follows: JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT, Continued Jacor _______JCC_______ 1997 1996 1995 1997 1996 Operating Statement Data (in thousands): Net revenue - - - - - Equity in earnings of subsidiaries $ (1,958) $10,237 $ 10,965 $ 3,191 $11,864 Operating (loss) income (15,387) 305 10,965 3,191 11,864 (Loss) income before extraordinary items (4,052) 5,105 10,965 5,498 13,203 Net (loss) income (4,052) 5,105 10,965 (1,958) 10,237 Balance Sheet Data (in thousands): Current assets $ 1,316 $ 1,538 $ 41,203 $ 75,626 Non-current assets 1,165,970 722,918 2,122,648 1,615,504 Current liabilities 28,853 16,253 13,184 9,975 Non-current liabilities 222,082 221,267 1,478,765 1,056,348 Shareholders' equity 916,351 486,936 671,902 273,384 Combined Subsidiary Guarantors 1997 1996 1995 Operating Statement Data (in thousands): Net revenue $ 530,574 $223,761 $118,891 Equity in earnings of subsidiaries - - - Operating income 95,306 49,292 18,617 Income before extraordinary items 3,191 11,864 18,617 Net income 3,191 11,864 10,965 Balance Sheet Data (in thousands): Current assets $ 155,068 $ 89,438 Non-current assets 2,446,810 1,615,504 Current liabilities 76,212 29,304 Non-current liabilities 1,609,315 1,188,702 Shareholders' equity 916,351 486,936 JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LIQUID YIELD OPTION NOTES In June 1996, the Company issued 5 1/2% Liquid Yield Option Notes ("LYONs") due 2011 in the aggregate principal amount at maturity of $259.9 million. Each LYON had an issue price of $443.14 and a principal amount at maturity of $1,000. At December 31, 1997 the accreted value of the LYONs was $125.3 million which included $6.6 million of interest accreted during 1997. At December 31, 1996 the accreted value of the LYONs was $118.7 million which included $3.5 million of interest accreted during 1996. Each LYON is convertible, at the option of the holder, at any time on or prior to maturity, into Common Stock at a conversion rate of 13.412 shares per LYON. The LYONs are not redeemable by the Company prior to June 12, 2001. Thereafter, the LYONs are redeemable for cash at any time at the option of the Company, in whole or in part, at redemption prices equal to the issue price plus accrued original issue discount to the date of redemption. The LYONs will be purchased by the Company, at the option of the holder, on June 12, 2001 and June 12, 2006, for a purchase price of $581.25 and $762.39 (representing issue price plus accrued original issue discount to each date), respectively, representing a 5 1/2% yield per annum to the holder on such date. The Company, at its option, may elect to pay the purchase price on any such purchase date in cash or common stock, or any combination thereof. At December 31, 1997, the market value of the LYONs exceeded the carrying value by approximately $64.4 million. At December 31, 1996, the market value of the LYONs was less than the carrying value by approximately $3.0 million. 9. CAPITAL STOCK Warrants In connection with a 1997 acquisition, the Company issued warrants to acquire 500,000 shares of common stock with an exercise price of $40 per share. The warrants expire in February 2002. In connection with a 1996 acquisition, the Company issued warrants to acquire 4,400,000 shares of common stock with an exercise price of $28 per share. The warrants expire in September 2001. In connection with a 1996 Stock Offering, the Company determined that it would convert the 1,983,605 outstanding 1993 Warrants into the right to receive the Fair Market Value (as defined) calculated to be $19.70 per Warrant. Prior to the conversion, the Company issued 1,726,004 shares of Common Stock with proceeds aggregating approximately $14.3 million upon exercise of such warrants by the holders. The Company used approximately $5.1 million of these proceeds to fund the conversion of the remaining 1993 Warrants presented for redemption. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. STOCK BASED COMPENSATION PLANS 1993 Stock Option Plan Under the Company's 1993 stock option plan (the "1993 Plan"), options to acquire up to 2,769,218 shares of common stock can be granted to directors, officers and key employees at no less than the fair market value of the underlying stock on the date of grant. The 1993 Plan permits the granting of non-qualified stock options (NQSOs)as well as incentive stock options(ISOs). Between 25% and 30% of the options vest on the date of grant and between 20% and 30% vest on each of the next three anniversaries of the grant date. Options expire 10 years after grant and the plan will terminate no later than February 7, 2003. At December 31, 1997, 618 shares were available for grant. 1997 Long-Term Incentive Stock Plan In April 1997, the Board of Directors of the Company adopted the 1997 Long- Term Incentive Stock Plan ("the Long-Term Plan"). The Long-Term Plan authorizes the issuance of up to 1,800,000 shares of Common Stock pursuant to the grant or exercise of stock options, including NQSOs and ISOs, restricted stock, stock appreciation rights (SARs), and certain other instruments to executive officers and other key employees, subject to board approval and certain other restrictions. Stock options may not be granted at less than the fair market value of the underlying stock on the date of grant. Twenty-five percent of the options vest on the date of the grant and 25% vest on each of the next three anniversaries of the grant date. Options expire 10 years after grant. At December 31, 1997, 1,166,312 shares were available for grant. 1997 Non-Employee Directors Stock Plan and Stock Purchase Plan In April 1997, the Board of Directors of the Company adopted the 1997 Non- Employee Directors Stock Plan (the "Directors Stock Plan"). The Directors Stock Plan authorizes the issuance of up to 350,000 shares of Jacor Common Stock pursuant to the grant or exercise of NQSOs, SARs, restricted stock and other performance instruments. Stock options may not be granted at less than the fair market value of the underlying stock on the date of grant. Twenty-five percent of the options vest on the date of the grant and 25% vest on each of the next three anniversaries of the grant date. Options expire 10 years after grant. At December 31, 1997, 310,000 shares were available for grant. Also, the Company adopted a stock purchase plan for its non-employee directors authorizing the issuance of up to 150,000 shares of Jacor common stock. Stock may be purchased at a 15% discount from fair value and purchases are limited to $100,000 per director in a calendar year. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. STOCK BASED COMPENSATION PLANS, Continued Information pertaining to the plans for the years ended December 31, 1995, 1996 and 1997 is as follows: Number of Weighted Average Shares Exercise Price 1995: Outstanding at beginning of year.. 1,351,310 $ 6.16 Granted........................... 245,000 $14.61 Exercised......................... (27,790) $ 5.81 Outstanding at end of year........ 1,568,520 $ 7.52 Exercisable at end of year........ 1,093,340 $ 6.57 Available for grant at end of year 1,092,618 1996: Outstanding at beginning of year.. 1,568,520 $ 7.52 Granted........................... 594,500 $23.63 Exercised......................... (106,410) $ 6.10 Outstanding at end of year........ 2,056,610 $12.26 Exercisable at end of year........ 1,507,000 $ 8.68 Available for grant at end of year 523,118 1997: Outstanding at beginning of year.. 2,056,610 $12.26 Granted........................... 1,196,188 $24.92 Exercised......................... (212,679) $11.61 Surrendered....................... (15,490) $26.71 Outstanding at end of year........ 3,024,629 $17.20 Exercisable at end of year........ 2,228,095 $13.72 Available for grant at end of year 1,476,930 JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. STOCK BASED COMPENSATION PLANS, Continued The fair value of each stock option granted is estimated on the date of grant using the Black-Sholes option-pricing model with the following assumptions for grants in 1997, 1996 and 1995, respectively: risk-free interest rates are different for each grant and range from 5.24% to 6.51%; the expected lives of options are 5 years; and volatility of approximately 35% for all grants. A summary of the fair value of options granted in 1997, 1996 and 1995 follows: 1997 1996 1995 Weighted-average fair value of options granted at-the-money $12.26 $ 9.42 $ 5.70 Weighted-average fair value of options granted at a premium - $ 8.46 $ 5.33 Weighted-average fair value of options granted at a discount $28.15 - - Weighted-average fair value of all options granted during the year $16.29 $ 9.07 $ 5.44 The options granted at a discount in 1997 were related to approximately 304,000 options outstanding to purchase Premiere common stock, which were converted to equivalent Jacor NQSOs at the time of the merger. The following table summarizes information about stock options outstanding at December 31, 1997: OPTIONS OUTSTANDING OPTIONS EXERCISABLE Weighted Weighted Weighted Range of Number Average Average Number Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at 12/31/97 Life Price at 12/31/97 Price $5.74 to $9.65 1,239,865 5.44 $ 6.29 1,239,865 $ 6.29 $12.70 to $19.96 356,641 7.91 $15.94 299,341 $15.89 $21.25 to $30.66 1,379,123 9.02 $26.53 676,638 $25.84 $37.25 to $45.94 49,000 9.56 $39.57 12,250 $39.80 $ 5.74 to $45.94 3,024,629 7.43 $17.20 2,228,095 $13.72 JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. STOCK BASED COMPENSATION PLANS, Continued Employee Stock Purchase Plan Under the 1995 Employee Stock Purchase Plan, the Company is authorized to issue up to 700,000 shares of common stock to its full-time and part-time employees, all of whom are eligible to participate. Under the terms of the Plan, employees can choose each year to have up to 10 percent of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of its beginning-of-period or end-of-period market price. Under the Plan, the Company sold 74,767 shares for approximately $23.27 per share and 12,376 shares for approximately $32.19 per share in 1997, 47,232 shares for $14.24 per share in 1996 and 43,785 shares for $10.84 per share in 1995. The fair market value of the right to acquire common stock under the Stock Purchase Plan was $8.40 per share granted on January 1 and $9.80 per share granted on July 1 in 1997, $4.81 per share in 1996 and $3.71 per share in 1995. Had the compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS 123, the Company's net income (loss) and net income (loss) per common share for 1997, 1996 and 1995 would approximate amounts below (in thousands, except per share amounts): 1997 1996 1995 Net (loss)income: As reported $ (4,052) $ 5,105 $10,965 Pro forma $(10,691) $ 3,826 $10,398 Diluted net (loss)income per common share: As reported $ (0.10) $ 0.19 $ 0.52 Pro forma $ (0.25) $ 0.14 $ 0.50 In 1996, the Company recorded compensation expense of approximately $1.9 million related to stock units issued to officers and directors and stock options issued to non-employees of the Company. The expense related to the stock units was equal to the fair value of the stock for which the units can be converted into on the date of grant. The fair value of the options was determined using the Black-Sholes option pricing model and the following assumptions: risk-free interest rate of 5.79%; expected life of 5 years; and volatility of approximately 35%. The options were 100% vested on the date of grant. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES Income tax expense for the years ended December 31, 1997, 1996 and 1995 is summarized as follows (in thousands): Federal State Total 1997: Current $13,200 $ 3,000 $16,200 Deferred (5,400) (1,200) (6,600) 7,800 1,800 9,600 Tax benefit from extraordinary loss (4,000) (900) (4,900) $ 3,800 $ 900 $ 4,700 1996: Current $ 6,185 $1,348 $7,533 Deferred (185) (48) (233) 6,000 1,300 7,300 Tax benefit from extraordinary loss (1,631) (346) (1,977) $ 4,369 $ 954 $5,323 1995: Current $ 6,600 $1,260 $7,860 Deferred (500) (60) (560) $ 6,100 $1,200 $7,300 The provisions for income tax differ from the amount computed by applying the statutory federal income tax rate due to the following: 1997 1996 1995 Federal income tax at the statutory rate $ 5,173 $ 5,627 $ 6,393 Amortization not deductible 3,449 1,262 606 State income taxes, net of any current federal income tax benefit 589 620 780 Other 389 (209) (479) $ 9,600 $ 7,300 $ 7,300 JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES, continued The tax effects of the significant temporary differences which comprise the deferred tax liability at December 31, 1997, 1996 and 1995 are as follows: 1997 1996 1995 Deferred tax assets: Accrued expenses and reserves $ (7,479) $(11,104) $(1,992) Net operating loss carryforwards (11,461) (12,000) - Other (4,047) (2,098) (142) (22,987) (25,202) (2,134) Deferred tax liabilities: Property and equipment 35,614 32,427 12,208 Intangibles 326,240 257,653 (1,457) 361,854 290,080 10,751 Net liability $338,867 $264,878 $ 8,617 At December 31, 1997 the Company had net operating loss carryforwards of $28,653. The loss carryforwards expire in the years 2008 through 2011 if not used. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. COMMITMENTS AND CONTINGENCIES Lease and Contractual Obligations The Company and its subsidiaries lease certain land and facilities used in their operations. The Company also has various employment agreements with broadcast personalities that provide base compensation. Future minimum payments under leases and employment agreements as of December 31, 1997 are payable as follows (in thousands): 1998 $18,122 1999 15,674 2000 11,328 2001 7,538 2002 4,799 Thereafter 9,980 $67,441 Rental expense was approximately $8,010, $3,996 and $3,471 for the years ended December 31, 1997, 1996 and 1995, respectively. Legal Proceedings From time to time, the Company becomes involved in various claims and lawsuits that are incidental to its business. In the opinion of the Company's management, there are no material legal proceedings pending against the Company. 13. RETIREMENT PLAN The Company maintains a defined contribution retirement plan covering substantially all employees who have met eligibility requirements. The Company matches participating employee contributions at a rate of 50% of the employee's first 4% contributed, up to $160,000 of annual compensation. Total expense related to this plan was $1,977,052, $756,618 and $334,253 in 1997, 1996 and 1995, respectively. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted Earnings Per Share ("EPS") computations for income before extraordinary items for the years ended December 31, as follows (in thousands except per share amounts): 1997 1996 1995 Net income before extraordinary item $ 3,404 $ 8,071 $10,965 Weighted average shares - basic 40,460 25,433 18,908 Effect of dilutive securities: Stock options 996 658 413 Warrants 357 - 911 Other 350 351 300 Weighted average shares - diluted 42,163 26,442 20,532 Basic EPS $ .08 $ .32 $ .58 Diluted EPS $ .08 $ .30 $ .53 The Company's LYONs can be converted into approximately 3.5 million shares of Jacor common stock at the option of the holder. Assuming conversion of the LYONs as of January 1, 1997 and 1996 would result in an increase in per share amounts before extraordinary items, therefore, the LYONs are not included in the computation of diluted EPS. In February 1998, the Company completed an offering of 5.1 million shares of common stock and Liquid Yield Option Notes which can be converted into approximately 2.7 million shares of common stock at the option of the holder. JACOR COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 requires the reporting of comprehensive income in financial statements by all entities that provide a full set of financial statements. The term "comprehensive income" describes the total of all components of comprehensive income including net income. The statement only deals with reporting and display issues. It does not consider recognition or measurement issues. The Company will implement SFAS 130 in the first quarter of 1998. Also in June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 provides accounting guidance for reporting information about operating segments in annual financial statements and requires such enterprises to report selected information about operating segments in interim financial reports. The statement uses a "management approach" to identify operating segments and provides specific criteria for operating segments. SFAS 131 is effective for the year ended December 31, 1998 and will be required for interim periods in 1999. The Company is currently evaluating the impact SFAS 131 will have on its financial statements, if any. Supplementary Data Quarterly Financial Data for the years ended December 31, 1997 and 1996 (Unaudited)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year 1997 Net revenue $ 88,828 $ 135,553 $ 144,560 $ 161,633 $ 530,574 Operating income 5,392 24,179 25,520 26,122 81,213 Net (loss) income before extraordinary loss (2,584) 4,145 483 1,360 3,404 Net (loss) income (8,140) 4,145 (1,417) 1,360 (4,052) Basic net (loss) income per common share: (1)(2) Before extraordinary loss (0.08) 0.ll 0.01 0.03 0.08 Extraordinary loss (0.17) 0.00 (0.04) 0.00 (0.18) Basic net (loss) income per common share (0.25) 0.11 (0.03) 0.03 (0.10) Diluted net (loss) income per common share: (1)(2) Before extraordinary loss (0.08) 0.10 0.01 0.03 0.08 Extraordinary loss (0.17) 0.00 (0.04) 0.00 (0.18) Diluted net (loss) income per common share (0.25) 0.10 (0.03) 0.03 (0.10)
Quarterly Financial Data for the years ended December 31, 1997 and 1996 (Unaudited), Continued
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year 1996 Net revenue $ 30,074 $ 43,120 $ 54,326 $ 96,241 $ 223,761 Operating income 2,544 9,372 9,229 18,215 39,360 Net income before extraordinary loss 1,842 3,761 2,100 368 8,071 Net income 891 3,761 85 368 5,105 Basic net income per common share: (1)(2) Before extraordinary loss 0.10 0.18 0.07 0.01 0.32 Extraordinary loss (0.05) 0.00 (0.06) 0.00 (0.12) Basic net income per common share 0.05 0.18 0.01 0.01 0.20 Diluted net income per common share: (1)(2) Before extraordinary loss 0.09 0.17 0.06 0.01 0.30 Extraordinary loss (0.05) 0.00 (0.06) 0.00 (0.11) Diluted net income per common share 0.04 0.17 0.00 0.01 0.19 NOTES: (1) Earnings per share calculations have been made in accordance with Statement on Financial Accounting Standards No. 128 "Earnings Per Share", ("SFAS 128"). SFAS 128 became effective for fourth quarter 1997 calculations. Prior quarter and prior year calculations have been restated to reflect the adoption of SFAS 128. (2) The sum of the quarterly net income (loss) per share amounts does not equal the annual amount reported as per share amounts are computed independently for each quarter.
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