UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
AND EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM __________________
TO __________________
COMMISSION FILE NUMBER 000-26497
SALEM COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE
(STATE OR
OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
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77-0121400
(I.R.S.
EMPLOYER
IDENTIFICATION NUMBER)
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4880 SANTA ROSA
ROAD
CAMARILLO, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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93012
(ZIP CODE)
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REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA
CODE: (805) 987-0400
Securities registered
pursuant to Section 12(b) of the Act: None
Securities registered
pursuant to Section 12(g) of the Act: Class A common stock, $0.01 par value per
share
Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if
the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants
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.
[X]
Indicate by check mark
whether the registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2). YES [X] NO [ ]
The aggregate market value
of the Registrants Class A common stock held by non-affiliates of the
Registrant was $171,512,143 computed by reference to the closing sales price of
the Registrants Class A common stock as reported on the NASDAQ National Market
System as of June 30, 2004. All of the Registrants Class B common stock
is held by affiliates.
As of March 11, 2005,
there were 20,409,992 shares of the Registrants Class A common stock and
5,553,696 shares of Registrants Class B common stock outstanding.
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1.
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Business
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3
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Item 2.
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Properties
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24
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Item 3.
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Legal Proceedings
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24
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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24
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PART II
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Item 5.
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Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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25
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Item 6.
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Selected Financial Data
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26
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of Operations
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31
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Item 7A.
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Quantitative and Qualitative Disclosures About Market
Risk
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49
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Item 8.
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Financial Statements and Supplementary Data
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51
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Item 9.
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Changes in
and Disagreements with Accountants on Accounting and Financial Disclosure
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89
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Item 9A.
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Controls and Procedures
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89
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Item 9B.
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Other Information
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89
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PART III
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Item 10.
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Directors
and Executive Officers of the Registrant
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90
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Item 11.
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Executive Compensation
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97
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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108
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Item 13.
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Certain
Relationships and Related Transactions
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108
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Item 14.
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Principal Accounting Fees and Services
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112
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PART IV
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Item 15.
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Exhibits and
Financial Statement Schedules
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113
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Signatures
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II-1
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Exhibit Index
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II-3
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FORWARD-LOOKING STATEMENTS
From time to time, in both
written reports (such as this report) and oral statements, Salem Communications
Corporation (Salem or the company, including references to Salem by we,
us and our) makes forward-looking statements within the meaning of federal
and state securities laws. Disclosures that use words such as the company
believes, anticipates, expects, intends, will, may or plans and
similar expressions are intended to identify forward-looking statements, as
defined under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect the companys current expectations and are
based upon data available to the company at the time the statements are made.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from expectations. These risks as well as
other risks and uncertainties are detailed below at CERTAIN FACTORS AFFECTING
SALEM and from time to time in Salems periodic reports on Forms 10-K, 10-Q and
8-K filed with the Securities and Exchange Commission. Forward-looking
statements made in this report speak as of the date hereof. The company
undertakes no obligation to update or revise any forward-looking statements made
in this report. Any such forward-looking statements, whether made in this report
or elsewhere, should be considered in context with the various disclosures made
by Salem about its business. These projections or forward-looking statements
fall under the safe harbors of Section 27A of the Securities Act of 1933, as
amended (the Securities Act), and Section 21E of the Securities Exchange Act
of 1934, as amended (the Exchange Act).
All metropolitan statistical
area (MSA) rank information used in this report, excluding information
concerning The Commonwealth of Puerto Rico, is from the Fall 2004 Radio
Market Survey Schedule & Population Rankings published by The Arbitron
Company. According to the Radio
Market Survey, the population estimates used were based upon 2000 U.S. Bureau
Census estimates updated and projected to January 1, 2004 by Claritas, Inc.
2
PART I
ITEM 1. BUSINESS.
GENERAL
We believe that we are the
largest commercial U.S. radio broadcasting company, measured by number of stations and
audience coverage, providing programming targeted at audiences interested in
Christian and family theme radio programming. Our core business is the ownership
and operation of radio stations in large metropolitan markets. Upon completion of all
announced transactions, we will own a national portfolio of 105 radio stations in 40 markets,
including 68 stations in 24 of the top 25 markets, which consists of 33 FM stations and 72 AM stations.
We are one of only four commercial radio broadcasters with radio stations in all of the
top 10 markets. We are the sixth largest operator measured by number of stations overall
and the third largest operator measured by number of stations in the top 25
markets.
We also own Salem Radio Network® (SRN), which is a developer, producer and
syndicator of Christian and family themed talk,
news and music programming (but not of general broadcast programming), with approximately
1,900 affiliated radio stations. In addition, we own complementary Internet and
publishing businesses which target our radio audiences.
Our business strategy is to
expand and improve our national radio platform in order to deliver compelling
content to audiences interested in Christian and family themes. We
program 44 of our stations with our Christian Teaching & Talk format, which is talk
programming with Christian and family themes. We also program 31 News Talk and
15 contemporary Christian music stations. SRN supports our strategy
by allowing us to reach listeners in markets where we do not own or operate
stations.
Both our chief executive
officer and our chairman are career radio broadcasters who have owned and
operated radio stations for more than 30 years.
GROWTH AND OPERATING STRATEGIES
Continue to Focus on and Serve Targeted Audiences.
A key attribute of our success is our consistent
focus on reaching the audiences interested in Christian and family themes. We have demonstrated a long-term
commitment to these audiences by operating radio stations with formats directed to our listeners specific needs
and interests. This consistent emphasis and commitment builds loyalty and trust from our listening audiences,
block programming purchasers and advertisers.
Emphasize Compelling Content.
As more listening, reading and viewing options become available, compelling content is a
key to expanding our listening audiences and increasing audience response to our advertisers.
3
Christian Teaching & Talk.
Christian Teaching & Talk is our foundational format. This format serves as
both a learning resource and personal support for listeners nationwide. We continually look for new block
programming producers for this format. In addition, we believe that the listening audiences for our radio
stations programmed in this format are responsive to affinity advertisers that promote products targeted
to audiences interested in Christian and family issues and are receptive to direct response appeals such as
those offered through infomercials. These audiences provide the financial support for producers of block
programming that is purchased on these radio stations. All of our stations utilizing this format have
affinity advertising customers in their respective markets. Local church groups and many community
organizations such as rescue missions and family crisis support services can often effectively reach their
natural constituencies by advertising on religious format stations. Advertising is also purchased by local
and national affiliated religious bookstores, publishers specializing in inspirational and religious
literature and other businesses that wish to reach audiences interested in religious and
family issues, and general market advertisers.
The Fish®Contemporary Christian Music.
Through our contemporary Christian music format, branded as The Fish®, we are able to bring
our listeners the words of inspirational recording artists with upbeat contemporary music. Salem
uses the trademarked tag-line Safe for the Whole Family for these music stations
to highlight for our listeners the fact that Salem provides stations with sounds that everyone enjoys
and lyrics that parents can appreciate. Our stations utilizing this format generate spot advertising
revenue from religious and general market advertisers.
News Talk.
Our News Talk stations specifically
target the listener who supports conservative views and family values and is complementary with our Christian
Teaching & Talk format. This format also provides us with an opportunity to
use syndicated talk programming of SRN. Our stations utilizing this format generate
spot advertising revenue primarily from general market advertisers.
Each of our primary formats enhances our strategy of delivering
compelling programming content and enables us to broaden our appeal to our target audiences. Our national radio
network will continue to look for new block programming, compete aggressively for talk show talent, expand and
refine our music networks, and develop compelling news and public affairs features.
Build Awareness.
We seek to build local awareness for each of our radio stations in order
to retain and increase our listening audiences, expand our base of advertisers and provide increased audience
response to our block programming clients. We emphasize the development of a radio stations identity to allow
each radio station to better compete by developing local on-air personalities, improving production quality and
technical facilities, and increasing promotional activities. Due to our programming strategy, we must almost
always reformat each acquired station, which means we must market and promote the new format to develop
listenership and cultivate a customer base to increase revenues. It can take five to six years of development for
an acquired radio station to reach maturity.
Consider Strategic Diversification.
In addition to our national network of terrestrial radio stations, Salem currently provides
programming to three channels on XM Satellite Radio. We will continue to consider additional
diversification into other forms of media
that complement our primary radio formats. This strategy will allow us to build upon our expertise in serving the
audiences interested in Christian and family themes programming and content.
Build Radio Station Clusters.
By operating clusters of
stations within the same market, we are able to
broaden our appeal to our target audiences by broadcasting a range of formats, offer customers multiple
programming options to advertise their products, and achieve cost savings by integrating our operations.
Pursue Strategic Radio Acquisitions in Large Metropolitan Markets.
We continue to pursue acquisitions of
radio stations in both new and existing markets, particularly in large metropolitan areas.
Upon the completion of all announced transactions, we will own stations in 32 of the top 50 markets.
Through our acquisition strategy, we reach a greater number and broader range of listeners. This enables
us to increase audience response for block programming clients and expand our advertising revenue base.
4
Utilize Market Research, Targeted Programming and Marketing.
We use market research to tailor the programming, marketing and promotion of our music and News Talk stations to maximize
audience share for these markets. This research helps us identify underserved markets and underserved or
unserved segments of the audiences interested in Christian and family themes in both current and new markets. It
also enables us to provide programming that more directly addresses the preferences of our listening audiences in
markets where research is conducted. We also desire to reinforce our primary formats by creating a distinct and
marketable identity for each of our radio stations. To achieve this objective, we employ and promote distinct,
high-profile on-air personalities at many of our stations, many of whom have strong ties to the Christian and
family themes community.
Pursue Excellence in Operations.
We focus on hiring highly motivated and talented individuals in each
area of our company who will assist us in successfully implementing our growth and operating strategies. Each of
the radio markets in which we own stations has a general manager who is responsible for day-to-day operations,
local spot advertising sales and, where applicable, local program sales for all of our stations in the market. To
enhance the quality of our management in these areas, we pay our general managers and our operations vice
presidents a base salary plus a percentage of the respective stations or cluster of stations operating
income. By adding a performance goal element to management compensation, we believe we are creating an incentive
for management to focus upon both sales growth and expense control. We pay our sales staff on a commission basis.
We have decentralized the
management of our operations. Our operations vice presidents, some of whom are
also station general managers, oversee several markets on a regional basis. Our
operations vice presidents are experienced radio broadcasters with expertise in
sales, programming, marketing and production. We anticipate continuing to rely on this
strategy of decentralization and encourage operations vice presidents to apply
innovative techniques to the operations they oversee which, if successful, can
be implemented at our other stations.
Our corporate headquarters personnel oversee the placement
and rate negotiation for all national block
programs. Centralized oversight of this component of our revenue is necessary because our key block program
customers purchase time in many of our markets. Corporate headquarters personnel also are responsible for
centralized accounting and finance functions, human resources, engineering, real estate and other support functions designed
to provide resources to local management.
CORPORATE INFORMATION
We maintain a website at
http://www.salem.cc. Our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and any amendments to those reports are
available free of charge through our website as soon as reasonably practicable
after those reports are electronically filed or furnished to the Securities and
Exchange Commission (SEC).
Salem Communications
Corporation was formed in 1986 as a California corporation and was
reincorporated in Delaware in 1999. Salem Communications Holding Corporation
(Salem Holding) was formed as a wholly-owned subsidiary of Salem
Communications Corporation in May 2000. In May 2000, Salem Communications
Corporation formed an additional wholly-owned subsidiary, Salem Communications
Acquisition Corporation (AcquisitionCo), which has since acquired nine radio stations
through its wholly-owned subsidiary SCA License Corporation. In August 2000,
Salem Communications Corporation assigned substantially all of its assets and
liabilities (other than stock of Salem Holding and AcquisitionCo) to Salem
Holding.
In June 2001, Salem
Holding effected a dividend to Salem Communications Corporation of Salem
Holdings publishing and Internet businesses. This transaction was effected as a
dividend of the capital stock and membership interests, respectively, of Salem
Holdings wholly-owned subsidiaries CCM Communications, Inc. (CCM) and OnePlace, LLC
(OnePlace). As a result, CCM and OnePlace became direct subsidiaries of Salem Communications
Corporation. Subsequently, the membership interests of OnePlace were contributed to SCA License Corporation, and OnePlace
became an indirect subsidiary of Salem. Salem Communications Corporation and all of its subsidiaries (other than
Salem Holding) are guarantors of the borrowings under Salem Holdings credit
facility and Salem Holdings $94.4 million
9% senior subordinated notes due 2011 (9% Notes) and $100.0 million 7¾%
senior subordinated notes due 2010 (7¾% Notes).
5
DEVELOPMENT OF THE BUSINESS
In 2004, we completed the
purchase of selected assets of the following radio stations:
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MSA
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Purchase
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Date
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Market
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Station
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Rank (1)
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Price
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(Dollars in thousands)
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May 28, 2004
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Honolulu, HI
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KJPN-AM
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61
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$
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500
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June 28, 2004
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Atlanta, GA
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WAFS-AM (now WGKA-AM)
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11
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16,545
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August 13, 2004
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Honolulu, HI
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KPOI-FM (now KHNR-FM)
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61
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1,850
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August 13, 2004
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Honolulu, HI
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KHUI-FM
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61
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1,850
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September 30, 2004
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Detroit, MI
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WQBH-AM (now WDTK-AM)
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10
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4,750
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November 2, 2004
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Oxnard-Ventura, CA
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KIIS-AM
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119
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800
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$
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26,295
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(1) MSA means metropolitan
statistical area per the Fall 2004 Radio Market Survey Schedule and Population
Rankings published by the Arbitron Company, excluding The Commonwealth of Puerto Rico.
On July 30, 2004, we acquired
selected assets of the Internet portal Christianjobs.com for $0.4 million.
6
RADIO STATIONS
Upon the close of all announced transactions, the
company will own and/or operate a national portfolio of 105 radio stations in 40 markets, including 33
FM stations and 72 AM stations. The following table sets forth information about
each of Salems stations, in order of market size:
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MSA
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Station
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Year
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Market (1)
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Rank (2)
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Call Letters
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Acquired
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Format
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New York, NY
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1, 17 (3)
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WMCA-AM
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1989
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Christian Teaching and Talk
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WWDJ-AM
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1994
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Christian Teaching and Talk
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Los Angeles, CA
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2
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KKLA-FM
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1985
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Christian Teaching and Talk
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KRLA-AM
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1998
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News Talk
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KFSH-FM
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2000
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Contemporary Christian Music
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KXMX-AM
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2000
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Ethnic Brokered Programming
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Chicago, IL
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3
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WYLL-AM
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2001
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Christian Teaching and Talk
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WIND-AM
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2005
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News Talk
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San Francisco, CA
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4, 32 (4)
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KFAX-AM
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1984
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Christian Teaching and Talk
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KNTS-AM
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2001
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News Talk
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Dallas-Fort Worth, TX
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5
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KLTY-FM
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1996
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Contemporary Christian Music
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KWRD-FM (5)
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2000
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Christian Teaching and Talk
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KSKY-AM
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2000
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News Talk
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KHCK-AM
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2005
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Southern Gospel
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Philadelphia, PA
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6
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WFIL-AM
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1993
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Christian Teaching and Talk
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WNTP-AM
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1994
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News Talk
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Houston-Galveston, TX
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7
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KNTH-AM
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1995
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News Talk
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KTEK-AM
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1998
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Christian Teaching and Talk
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KKHT-FM
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2005
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Christian Teaching and Talk
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Washington, D.C.
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8
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WAVA-FM
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1992
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Christian Teaching and Talk
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WABS-AM
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2000
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Christian Teaching and Talk
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Boston, MA
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9
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WEZE-AM
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1997
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Christian Teaching and Talk
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WROL-AM
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2001
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Christian Teaching and Talk
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WTTT-AM
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2003
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News Talk
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Detroit, MI
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10
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WDTK-AM (formerly WQBH-AM)
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2004
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News Talk
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Atlanta, GA
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11
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WNIV-AM
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2000
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Christian Teaching and Talk
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WLTA-AM
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2000
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Christian Teaching and Talk
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WAFS-AM (formerly WGKA-AM)
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2000
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Southern Gospel
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WFSH-FM
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2000
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Contemporary Christian Music
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WGKA-AM (formerly WAFS-AM)
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2004
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News Talk
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Miami, FL
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12
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WKAT-AM
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2004
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News Talk
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Seattle-Tacoma, WA
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13
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KGNW-AM
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1986
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Christian Teaching and Talk
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KLFE-AM
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1994
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Christian Teaching and Talk
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KTFH-AM (6)
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1997
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Ethnic Brokered Programming
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KKMO-AM
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1998
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Spanish
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KKOL-AM
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1999
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News Talk
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KIKN-AM
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2002
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News Talk
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Phoenix, AZ
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14
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KKNT-AM
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1996
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News Talk
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KPXQ-AM
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1999
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Christian Teaching and Talk
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Minneapolis-St. Paul, MN
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15
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KKMS-AM
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1996
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Christian Teaching and Talk
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KYCR-AM
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1998
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News Talk
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WWTC-AM
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2001
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News Talk
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San Diego, CA
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16
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KPRZ-AM
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1987
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Christian Teaching and Talk
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KCBQ-AM
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2000
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News Talk
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Baltimore, MD
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19
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WITH-AM
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1997
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News Talk
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7
RADIO STATIONS, CONT.
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MSA
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Station
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Year
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Market (1)
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Rank (2)
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Call Letters
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Acquired
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Format
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Tampa, FL
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20
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WTWD-AM (7)
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2000
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Christian Teaching and Talk
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WTBN-AM (7)
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2001
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Christian Teaching and Talk
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WYGL-AM
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2005
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News Talk
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Denver-Boulder, CO
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21
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KRKS-FM
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1993
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Christian Teaching and Talk
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KRKS-AM
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1994
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Christian Teaching and Talk
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KNUS-AM
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1996
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News Talk
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KBJD-AM (8)
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1999
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News Talk
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Pittsburgh, PA
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22
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WORD-FM
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1993
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Christian Teaching and Talk
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WPIT-AM
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1993
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Christian Teaching and Talk
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Portland, OR
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23
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KPDQ-FM
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1986
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Christian Teaching and Talk
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|
|
KPDQ-AM
|
|
1986
|
|
Christian Teaching and Talk
|
|
|
|
|
KFIS-FM
|
|
2002
|
|
Contemporary Christian Music
|
|
|
|
|
KAST-FM (8)
|
|
2005
|
|
Soft Adult/Contemporary
|
Cleveland, OH
|
|
24
|
|
WCCD-AM
|
|
1997
|
|
Christian Teaching and Talk
|
|
|
|
|
WHK-AM
|
|
2000
|
|
Christian Teaching and Talk
|
|
|
|
|
WKNR-AM
|
|
2000
|
|
Sports/Talk
|
|
|
|
|
WFHM-FM
|
|
2001
|
|
Contemporary Christian Music
|
|
|
|
|
WRMR-AM
|
|
2005
|
|
News Talk
|
Sacramento, CA
|
|
25
|
|
KFIA-AM
|
|
1995
|
|
Christian Teaching and Talk
|
|
|
|
|
KTKZ-AM
|
|
1997
|
|
News Talk
|
|
|
|
|
KKFS-FM
|
|
2002
|
|
Contemporary Christian Music
|
|
|
|
|
KCEE-FM
|
|
2003
|
|
News Talk
|
|
|
|
|
KOSL-FM
|
|
2005
|
|
Contemporary Christian Music
|
Cincinnati, OH
|
|
26
|
|
WTSJ-AM
|
|
1997
|
|
Christian Teaching and Talk
|
|
|
|
|
WBOB-AM
|
|
2000
|
|
News Talk
|
Riverside-San Bernardino, CA
|
|
27
|
|
KTIE-AM
|
|
2001
|
|
News Talk
|
San Antonio, TX
|
|
29
|
|
KSLR-AM
|
|
1994
|
|
Christian Teaching and Talk
|
|
|
|
|
KLUP-AM
|
|
2000
|
|
News Talk
|
Milwaukee-Racine, WI
|
|
31
|
|
WRRD-AM
|
|
2001
|
|
Christian Teaching and Talk
|
|
|
|
|
WFZH-FM
|
|
2001
|
|
Contemporary Christian Music
|
Columbus, OH
|
|
34
|
|
WRFD-AM
|
|
1987
|
|
Christian Teaching and Talk
|
Nashville, TN
|
|
43
|
|
WBOZ-FM (9)
|
|
2000
|
|
Southern Gospel
|
|
|
|
|
WVRY-FM (9)
|
|
2000
|
|
Southern Gospel
|
|
|
|
|
WFFH-FM (10)
|
|
2002
|
|
Contemporary Christian Music
|
|
|
|
|
WFFI-FM (10)
|
|
2002
|
|
Contemporary Christian Music
|
Jacksonville, FL
|
|
48
|
|
WBGB-FM
|
|
2003
|
|
Contemporary Christian Music
|
|
|
|
|
WZNZ-AM
|
|
2003
|
|
Sports/Talk
|
|
|
|
|
WZAZ-AM
|
|
2003
|
|
Southern Gospel
|
|
|
|
|
WJGR-AM
|
|
2003
|
|
News Talk
|
8
RADIO STATIONS, CONT.
|
|
|
|
|
|
|
|
|
|
|
MSA
|
|
Station
|
|
Year
|
Market (1)
|
|
Rank (2)
|
|
Call Letters
|
|
Acquired
|
|
Format
|
|
|
|
|
|
|
|
|
|
Louisville, KY
|
|
54
|
|
WFIA-FM
|
|
1999
|
|
Christian Teaching and Talk
|
|
|
|
|
WRVI-FM
|
|
1999
|
|
Contemporary Christian Music
|
|
|
|
|
WGTK-AM
|
|
2000
|
|
News Talk
|
|
|
|
|
WFIA-AM
|
|
2001
|
|
Christian Teaching and Talk
|
Richmond, VA
|
|
55
|
|
WBTK-AM
|
|
2001
|
|
Christian Teaching and Talk
|
Honolulu, HI
|
|
61
|
|
KAIM-AM
|
|
2000
|
|
Country
|
|
|
|
|
KAIM-FM
|
|
2000
|
|
Contemporary Christian Music
|
|
|
|
|
KGU-AM
|
|
2000
|
|
Christian Teaching and Talk
|
|
|
|
|
KHCM-AM
|
|
2004
|
|
Country Music
|
|
|
|
|
|
|
|
|
KHNR-FM
|
|
2004
|
|
News Talk
|
|
|
|
|
KHUI-FM
|
|
2004
|
|
Traditional Hawaiian Music
|
|
|
|
|
KGMZ-FM
|
|
2005
|
|
Adult Nostalgia
|
Omaha, NE
|
|
72
|
|
KBGI-FM
|
|
2005
|
|
Contemporary Christian Music
|
|
|
|
|
KCRO-AM
|
|
2005
|
|
Christian Teaching and Talk
|
Sarasota-Bradenton, FL
|
|
75
|
|
WLSS-AM
|
|
2005
|
|
News Talk
|
Colorado Springs, CO
|
|
96
|
|
KGFT-FM
|
|
1996
|
|
Christian Teaching and Talk
|
|
|
|
|
KBIQ-FM
|
|
1996
|
|
Contemporary Christian Music
|
|
|
|
|
KZNT-AM
|
|
2003
|
|
News Talk
|
Youngstown-Warren, OH
|
|
118
|
|
WHKW-AM
|
|
2001
|
|
Christian Teaching and Talk
|
Oxnard-Ventura, CA
|
|
119
|
|
KDAR-FM
|
|
1974
|
|
Christian Teaching and Talk
|
Tyler-Longview, TX
|
|
147
|
|
KPXI-FM (4)
|
|
2000
|
|
Christian Teaching and Talk
|
(1) Actual city of license
may differ from metropolitan market served.
(2) MSA means metropolitan
statistical area per the Fall 2004 Radio Market Survey Schedule and Population
Rankings published by the Arbitron Company, excluding the Commonwealth of Puerto
Rico.
(3) This market includes the
Nassau-Suffolk, NY Metro market which independently has a MSA rank of 17.
(4) This market includes the
San Jose, CA market which independently has a MSA rank of 32.
(5) KPXI-FM is simulcast
with KWRD-FM, Dallas-Fort Worth, TX.
(6) KTFH-AM is an expanded band AM station. Under
current Federal Communications Commission (FCC) rules, we will be required to
surrender to the FCC the license for either KTFH-AM or KLFE-AM on July 14, 2009.
(7) WTBN-AM is simulcast
with WTWD-AM, Tampa, FL.
(8) The FCC has adopted an order in
a rulemaking proceeding which, among other things, orders the
relocation of radio station KAST-FM from Astoria, Oregon to the Portland, Oregon MSA. The
station is currently operating from its preexisting Astoria transmitter site pending FCC
authorization to construct the new Portland MSA transmitter site, and is programmed by New
Northwest Broadcasters, LLC. pursuant to a local marketing agreement that can be terminated by
Salem on thirty days notice.
(9) KBJD-AM is an expanded
band AM station. Under current FCC rules, we will be required to surrender to
the FCC the license for either KBJD-AM or KRKS-AM on February 20, 2006.
(10) WBOZ-FM is simulcast
with WVRY-FM, Nashville, TN.
(11) WFFH-FM is simulcast
with WFFI-FM, Nashville, TN.
9
PROGRAM REVENUE.
For
the year ended December 31, 2004, we derived 20.0% and 12.5% of our gross
revenue, or $41.0 million and $25.5 million, respectively, from the sale of
nationally syndicated and local block program time. We derive nationally
syndicated program revenue from a programming customer base consisting primarily
of geographically diverse, well-established non-profit religious and educational
organizations that purchase time on stations in a large number of markets in the
United States. Nationally syndicated program producers typically purchase 13, 26
or 52 minute blocks on a Monday through Friday basis and may offer supplemental
programming for weekend release. We obtain local program revenue from community
organizations and churches that typically purchase time primarily for weekend
release and from local speakers who purchase daily releases. We believe our
management has been successful in assisting quality local programs expand into
national syndication.
ADVERTISING REVENUE.
For the year ended December 31, 2004, we derived 45.6% of our gross revenue, or
$93.2 million from the sale of local spot advertising and 8.3% of our gross
revenue, or $17.1 million from the sale of national spot advertising.
10
SALEM RADIO NETWORK® AND SALEM RADIO REPRESENTATIVES
In 1993, we established
SRN. Establishment of SRN was a part
of our overall business strategy to develop a national network of affiliated radio
stations anchored by our owned and operated radio stations in major markets.
SRN, which is headquartered in Dallas, Texas, develops, produces and
syndicates a broad range of programming specifically targeted to Christian and
family issues talk and music stations as well as general market News Talk
stations. Currently, we have rights to several full-time satellite channels and
all SRN product is delivered to affiliates via
satellite.
SRN has
approximately 1,900 affiliate stations, including our owned and operated stations,
that broadcast one or more of the offered programming options. These programming
options feature talk shows, news and music. The principal source of network
revenue is from the sale of advertising time. Network operations also include
commission revenue of Salem Radio Representatives from unaffiliated
customers.
We established Salem Radio
Representatives in 1992 as a sales representation company specializing in placing national advertising on
religious format radio stations. SRN and our radio stations each have exclusive
relationships with Salem Radio Representatives for the sale of available SRN
spot advertising. Salem Radio Representatives receives a
commission on all SRN sales. Salem Radio Representatives also
contracts with individual radio stations to sell air time to national
advertisers desiring to include selected company stations in national buys
covering multiple markets.
We recognize our advertising
and commission revenue from the sale of advertising and from the placement of
advertising on radio stations as the spots are aired. SRNs
gross revenue, including commission revenue for Salem Radio Representatives, for
the year ended December 31, 2004 was $15.4 million.
OTHER MEDIA
INTERNET.
In 1999, we
established an Internet business, OnePlace.com, in connection with our purchase
of the assets of OnePlace, LLC, AudioCentral, GospelMedia Network (which was
sold in 2000) and Involved Christian Radio Network. In October 2002, we acquired
the assets of and re-launched Crosswalk.com, an Internet portal that offers
Christian-based content including bible studies, devotionals, family issues
material and music. In January 2003, we renamed our Internet division Salem Web
Network. The divisions activities enhance and support our core radio strategy
by providing on-demand audio streaming for Salems program producers. In July 2004, we acquired
selected assets of Christianjobs.com, an Internet portal that offers
Christian-based content catering to individuals searching for a job or career. The Salem
Web Network business model mirrors our radio station business model, which is a
focus on revenue from ministries and advertising (banners and sponsorships). In January
2005, we acquired selected assets of Christianity.com, an Internet site providing compelling
Christian content and ministry resources.
PUBLISHING.
In 1999,
we purchased CCM. Based in Nashville,
Tennessee, CCM has published magazines since 1978 which follow the contemporary
Christian music industry. In January 2003, we renamed this division Salem
Publishing. Salem Publishings flagship publication, CCM Magazine®, is a
monthly music magazine offering interviews with artists, issue-oriented
features, album reviews and concert schedules. Through Salem Publishings trade
publications, we are uniquely positioned to track contemporary Christian music
audience trends. In February 2003, we launched Homecoming® Magazine. Homecoming®
Magazine contains a wide variety of features and regular columns focusing on
such topics as relationships, spirituality and health and fitness.
SATELLITE RADIO.
In
August 1998, we expanded our media presence by entering into an exclusive agreement with
XM Satellite Radio, Inc. to develop, produce, supply and market Christian and
family issues audio programming which is distributed by a subscriber-based
satellite digital audio radio service. XM Satellite Radio, Inc. is one of two
Federal Communications Commission (FCC) licensees for this service and it has the capability of providing up to 125
channels of audio programming. We provide Christian and family themes talk
programming on one channel and youth and adult Christian music programming on
two additional channels.
11
COMPETITION
RADIO.
The radio
broadcasting industry, including the segment
of this industry that focuses on Christian and family themes, is a highly competitive business. The financial success of
each of our radio stations that focuses on Christian teaching and talk
is dependent, to a significant degree, upon its ability to generate revenue from
the sale of block program time to national and local religious and educational
organizations. We compete for this program revenue with a number of different
commercial and noncommercial radio station licensees. While no group owner in
the United States specializing in Christian and family themes approaches Salem in size
of potential listening audience and presence in major markets, religious radio
stations exist and enjoy varying degrees of prominence and success in all
markets.
We also compete for revenue
in the spot advertising market with other commercial religious format and
general format radio station licensees. We compete in the spot advertising
market with other media as well, including broadcast television, cable
television, newspapers, magazines, direct mail, Internet and billboard advertising, some
of which may be controlled by horizontally-integrated companies.
Competition may also come
from new media technologies and services that are being developed or introduced.
These include delivery of audio programming by cable television and satellite
systems, digital audio radio services, personal communications services and the
service of low powered, limited coverage FM radio stations authorized by the
Federal Communications Commission (FCC). Digital audio broadcasting will deliver multiformat digital radio services
by satellite to national and regional audiences. The quality of programming
delivered by digital audio broadcasting would be equivalent to compact disc. The
delivery of live and stored audio programming through the Internet has also
created new competition. In addition, commencement of satellite delivered
digital audio radio services, which delivers multiple audio programming formats
to local and national audiences, has created competition. We have attempted to
address these existing and potential competitive threats through Salem Web
Network and through our exclusive arrangement to provide Christian and family
issues talk and music formats on one of the two FCC licensees of satellite
digital audio radio services.
NETWORK.
Salem Radio
Network® competes with other commercial radio networks that offer news and talk
programming to religious and general format stations and two noncommercial
networks that offer Christian music formats. SRN also competes
with other radio networks for the services of talk show personalities.
OTHER MEDIA.
Our
magazines compete for readers and advertisers with other publications that
follow the Christian music industry and publications that address themes of
interest to church leadership. Our Internet business competes with other
companies that deliver on-line audio programming and Christian family themed
Internet content.
EMPLOYEES
On February 28, 2005, Salem
employed 1,023 full-time and 350 part-time employees. None of Salems employees
are covered by collective bargaining agreements, and we consider our relations
with our employees to be good.
12
CERTAIN FACTORS AFFECTING SALEM
We may choose not to pursue potentially more
profitable business opportunities outside of our Christian and
family themes formats, or not to broadcast programming that violates our programming standards, either of which
may have a material adverse effect on our business.
We are fundamentally committed to broadcasting
formats and programming emphasizing Christian and family themes.
We may choose not to switch to other formats or pursue potentially more profitable business opportunities in
response to changing audience preferences. We do not intend to pursue business opportunities or air programming
that would conflict with our core commitment to Christian and family themes formats or that would violate our
programming standards, even if such opportunities or programming would be more profitable. Our decision not to
pursue other formats or air programming inconsistent with our programming standards might result in lower
operating revenues and profits than we might otherwise achieve.
We Must Respond To The Rapid Changes In Technology, Services And Standards Of Our Industry In
Order To Remain Competitive
The radio broadcasting industries are subject to rapid
technological change, evolving industry standards and the
emergence of competition from new media technologies and services. We cannot assure you that we will have the
resources to acquire new technologies or to introduce new services that could compete with these new
technologies. Various new media technologies and services are being developed or introduced, including:
-
satellite-delivered digital audio radio service, which has resulted in the introduction of new
subscriber-based satellite radio services with numerous niche formats;
-
audio programming by cable systems, direct-broadcast satellite systems, personal communications systems,
content available over the Internet and other digital audio broadcast formats;
-
in-band on-channel digital radio, which provides multi-channel, multi-format digital radio services in
the same bandwidth currently occupied by traditional AM and FM radio services; and
-
low-power FM radio, which could result in additional FM radio broadcast outlets.
We currently program three channels on a satellite digital audio radio
service. However, we cannot assure you that these
arrangements will continue, will be successful or enable us to adapt effectively to these new media technologies. We cannot
predict the effect, if any, that competition arising from new technologies or regulatory change may have on the
radio broadcasting industry or on our financial condition and results of operations.
13
If We Are Unable To Execute Our Acquisition Strategy Successfully,
Our Business May Not Continue To Grow
We intend to continue to acquire radio stations
as well as other complementary media businesses. Our acquisition
strategy has been, and will continue to focus on, the acquisition of radio stations in the top 50 markets.
However, we may not be able to identify and consummate future acquisitions successfully, and stations that we do
acquire may not increase our station operating income or yield other anticipated benefits. Acquisitions in
markets in which we already own stations may not increase our station operating income due to saturation of
audience demand. Acquisitions in smaller markets may have less potential to increase operating revenues. Our
failure to execute our acquisition strategy successfully in the future could limit our ability to continue to
grow in terms of number of stations or profitability.
We May Be Unable To Integrate The Operations And Management Of Acquired Stations
Or Businesses, Which Could Have A Material Adverse Effect On Our Business And Operating Results
Since January 1, 2003, we have acquired the assets of 13
radio stations and one Internet business, and we
expect to make acquisitions of other stations and related businesses in the future. We cannot assure you that we
will be able to successfully integrate the operations or management of acquired stations and businesses, or the
operations or management of stations and businesses that might be acquired in the future. Continued acquisitions of
stations will require us to manage a larger and likely more geographically diverse radio station portfolio than
historically has been the case. Our inability to integrate and manage newly acquired stations or businesses
successfully could have a material adverse effect on our business and operating results.
If We Are Unable To Implement Our Cluster Strategy, We May Not Realize Anticipated
Operating Efficiencies
As part of our operating strategy, we attempt to realize
efficiencies in operating costs and cross-selling of
advertising by clustering the operations of two or more radio stations in a single market. However, there can be
no assurance that this operating strategy will be successful. Furthermore, we cannot assure you that the
clustering of radio stations in one market will not result in downward pressure on advertising rates at one or
more of the existing or new radio stations within the cluster. There can be no assurance that any of our stations
will be able to maintain or increase its current listening audiences and operating revenue in circumstances where
we implement our clustering strategy.
Additionally, FCC
rules and policies allow a broadcaster to own a number of
radio stations in a given market and permit, within limits, joint arrangements with other stations in a market
relating to programming, advertising sales and station operations. We believe that radio stations that elect to
take advantage of these clustering opportunities may, in certain circumstances, have lower operating costs and
may be able to offer advertisers more attractive rates and services. The future development of our business in
new markets, as well as the maintenance of our business growth in those markets in which we do not currently have
radio station clusters, may be negatively impacted by competitors who are taking advantage of these clustering
opportunities by operating multiple radio stations within markets.
14
The restrictions on ownership of multiple stations
in each market may prevent us from implementing our cluster strategy.
As part of our growth strategy, we seek to acquire additional radio stations in markets in which we already have
existing stations. However, our ability to acquire, operate and integrate any such future acquisition as part of
a cluster may be limited by antitrust laws, FCC regulations, the amendment of the Federal Communications Act of
1934 (the Communications Act) through congressional action or other applicable laws and regulations. Such
changes may affect our ability to acquire additional stations in local radio markets where we already own one or
more radio stations.
In 2003, the FCC modified its definition of the term market for purposes of its local radio multiple ownership
rules. The text of the new radio multiple ownership rule, and the related text of the FCC order adopting the new
market definition, has become effective by order of the 3rd Circuit Court of Appeals; however, review by the U.S.
Supreme Court of the FCC order adopting the new radio multiple ownership rule and market definition has been
requested. That request is pending. Based solely on the current effective FCC rule, which may be modified or
eliminated as a result of pending legal and legislative action (the Effective Rule), it appears that, in other
than smaller radio markets, the FCC has replaced its signal contour method of defining local radio markets with
the use of geographic markets delineated by The Arbitron Company (Arbitron), which is a commercial radio ratings service.
In smaller radio markets for which Arbitron has not delineated geographic markets, the FCC is conducting a
rulemaking to establish defined markets comparable to the geographic markets delineated by Arbitron in larger
markets. The modified market definition rule remains subject to judicial review.
Based solely on the Effective Rule, the modified market definition is expected to more severely limit the number
of radio stations we may acquire in many markets and to more severely limit the buyers to whom we may sell
stations in the future and therefore adversely affect our ability to build or enhance our radio station clusters.
Based solely on the Effective Rule, it appears that the FCC will not apply the modified market definition
retroactively and instead will grandfather currently owned, operated, and controlled clusters of radio stations
which otherwise do not comply with the modified market definition. Thus, it appears
that the grandfathering provision of the modified market definition will not require a change in our current
ownership of radio broadcast stations.
We cannot predict whether the Effective Rule will become final (no longer subject to judicial review) in its
current form (i.e., a Final Rule) or whether it will vary materially from this summary as a Final Rule. For
this reason, we cannot predict the impact of the Final Rule on our business operations.
In addition, interest has been expressed by members of Congress to
further limit the level of ownership
concentration in local radio markets. We cannot predict whether there will be a change in the Communications Act
or other federal law governing ownership of radio stations, or whether the FCC, the Department of Justice (DOJ)
or the Federal Trade Commission (FTC) will modify their rules and policies restricting the acquisition of
additional stations in a local radio market. In addition, we cannot predict whether a private party will
challenge acquisitions we may propose in the future. These events could adversely affect our ability to implement
our cluster acquisition strategy.
15
Government Regulation Of The Broadcasting Industry By The FTC, DOJ And FCC
May Limit Our Ability To Acquire Or Dispose Of Radio Stations And Enter Into Certain Agreements
The Communications Act and FCC rules and policies require prior
FCC approval for transfers of control of, and
assignments of, FCC licenses. The FTC and the DOJ evaluate transactions to determine whether those transactions
should be challenged under federal antitrust laws. Over the past eight years, the FTC and the DOJ have been
increasingly active in their review of radio station acquisitions. This is particularly the case when a radio
broadcast company proposes to acquire an additional station in an existing market. As we have gained a presence
in a greater number of markets and percentage of the top 50 markets, our future proposed transactions may be
subject to more frequent and aggressive review by the FTC or the DOJ due to market concentration concerns. This
increased level of review may be accentuated in instances where we propose to engage in a transaction with
parties who themselves have multiple stations in the relevant market. The FCC might not approve a proposed radio
station acquisition or disposition when the DOJ has expressed market concentration concerns with respect to the
buy or sell side of a given transaction, even if the proposed transaction would otherwise comply with the FCCs
numerical limits on in-market ownership. We cannot be sure that the DOJ or the FTC will not seek to prohibit or
require the restructuring of our future acquisitions or dispositions on these or other bases.
As noted in the immediately preceding risk factor, the FCC
modified its definition of the term market for
purposes of its local radio multiple ownership rules. The new radio multiple ownership rule, and the related text
of the FCC order adopting the new market definition, is effective, but is not final because of pending requests
for review by the U.S. Supreme Court. Moreover, legislative action may further modify the definition of a radio
market or otherwise further limit the number of stations we may own in a market. Based solely on the Effective
Rule, it appears that the change will further limit our ability to make future radio station acquisitions and
will further limit any agreements whereby we provide programming to or sell advertising on radio stations that we
do not own. Based solely on the Effective Rule, it appears that the FCC will prohibit the sale to one entity of
an intact, grandfathered cluster of radio stations unless the entity is a small business as defined by the FCC.
Were a complaint to be filed against us or other FCC licensees involved in a transaction with us, the FCC could
delay the grant of, or refuse to grant, its consent to an assignment or transfer of control of licenses and
effectively prohibit a proposed acquisition or disposition.
16
Capital Requirements Necessary to Implement Acquisitions Could Pose Risks
We face stiff competition from other broadcasting
companies for acquisition opportunities. If the prices sought
by sellers of these companies were to rise, we may find fewer acceptable acquisition opportunities. In
addition, the purchase price of possible acquisitions could require additional debt or equity financing on our
part. Since the terms and availability of this financing depend to a large degree upon general economic
conditions and third parties over which we have no control, we can give no assurance that we will obtain the
needed financing or that we will obtain such financing on attractive terms. In addition, our ability to obtain
financing depends on a number of other factors, many of which are also beyond our control, such as interest rates
and national and local business conditions. If the cost of obtaining needed financing is too high or the terms of
such financing are otherwise unacceptable in relation to the acquisition opportunity we are presented with, we
may decide to forego that opportunity. Additional indebtedness could increase our leverage and make us more
vulnerable to economic downturns and may limit our ability to withstand competitive pressures. Additional equity
financing could result in dilution to our shareholders.
The Accounting Treatment Of Goodwill And FCC Licenses Could Cause Future Losses Due
To Asset Impairment
Under Statement of Financial Accounting Standards (SFAS) 142, goodwill and some
indefinite-lived intangibles, including FCC licenses, are not amortized into
results of operations, but instead are tested for impairment at least annually, with
impairment being measured as the excess of the carrying value of the goodwill or intangible
over its fair value. In addition, goodwill and intangible assets are tested more often for
impairment as circumstances warrant. Intangible assets that have finite useful lives
continue to be amortized over their useful lives and are measured for impairment in
accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Any impairment losses under SFAS No. 142 or SFAS No. 144 will be recorded
as operating expenses. Our future impairment reviews could result in asset write-downs.
Because Of Our Holding Company Structure, We Depend On Our Subsidiaries
For Cash Flow, And Our Access To This Cash Flow Is Restricted
We operate as a holding company. All of our
radio stations are currently owned and operated by our subsidiaries.
Salem Holding, our wholly owned subsidiary, is the borrower under our
credit facilities and our senior subordinated debt. All of our station-operating subsidiaries
are subsidiaries of Salem Communications Corporation. Further, we guaranteed Salem Holdings
obligations under the credit facilities and under the senior subordinated notes.
As a holding company, our only source of cash to pay our
obligations, including corporate overhead and other
trade payables, are distributions from our subsidiaries of their net earnings and cash flow. We currently expect
that the net earnings and cash flow of our subsidiaries will be retained and used by them in their operations,
including servicing their debt obligations, before distributions are made to us. Even if our subsidiaries elect
to make distributions to us, we cannot assure you that applicable state law and contractual restrictions,
including the dividend covenants contained in our credit facilities and senior subordinated notes, would permit
such dividends or distributions.
17
Our Business is Dependent Upon the Performance of Key Employees,
On-Air Talent and Program Hosts
Our business is dependent upon the performance and continued
efforts of certain key individuals, particularly Edward G. Atsinger III, our President and Chief Executive Officer,
and Stuart W. Epperson, our Chairman of the Board. The loss of the services of either of Messrs. Atsinger or Epperson
could have a material adverse effect upon us. We have entered into employment agreements with each of Messrs. Atsinger
and Epperson. Both agreements expire in June 2007. Mr. Epperson has radio interests unrelated to Salems operations that
will continue to impose demands on his time. Mr. Atsinger has an interest in an aviation business unrelated to Salems operations
that will continue to impose demands on his time.
We also employ or independently contract with
several on-air personalities and hosts of syndicated radio programs with significant loyal audiences both on a
national level and in their respective markets. Although we have entered into long-term agreements with some of
our executive officers, key on-air talent and program hosts to protect our interests in those relationships, we
can give no assurance that all or any of these key employees will remain with us or will retain their audiences.
Competition for these individuals is intense and many of our key employees are at-will employees who are under no
legal obligation to remain with us. Our competitors may choose to extend offers to any of these individuals on
terms, which we may be unwilling to meet. In addition, any or all of our key employees may decide to leave for a
variety of personal or other reasons beyond our control. Furthermore, the popularity and audience loyalty of our
key on-air talent and program hosts is highly sensitive to rapidly changing public tastes. A loss of such
popularity or audience loyalty is beyond our control and could limit our ability to generate revenues.
We May Be Adversely Affected By New Statutes Dealing With Indecency
Congress currently has under consideration legislation that
addresses the FCCs enforcement of its rules
concerning the broadcast of obscene, indecent, or profane material. Potential changes to enhance the FCCs
authority in this area include the ability to impose substantially higher monetary forfeiture penalties, consider
violations to be serious offenses in the context of license renewal applications, and, under certain
circumstances, designate a license for hearing to determine whether such license should be revoked. While we do
not anticipate these regulations to impact us as significantly as some of our competitors given the nature of our
programming, in the event that this or similar legislation is ultimately enacted into law, we could face
increased costs in the form of fines and a greater risk that we could lose one or more of our broadcasting
licenses.
If We Are Not Able To Obtain Financing Or Generate Sufficient Cash Flows From Operations,
We May Be Unable To Fund Future Acquisitions
We may require significant financing to fund our acquisition strategy.
This financing may not be available to us.
The availability of funds under the credit facility at any time will be dependent upon, among other factors, our
ability to satisfy financial covenants. Our future operating performance will be subject to financial, economic,
business, competitive, regulatory and other factors, many of which are beyond our control. Accordingly, we cannot
assure you that our future cash flows or borrowing capacity will be sufficient to allow us to complete future
acquisitions or implement our business plan, which could have a material negative impact on our business and
results of operations.
18
We may require significant financing to fund our acquisition
strategy. This financing may not be available to us. The availability of funds under the credit facility at any
time will be dependent upon, among other factors, our ability to satisfy financial covenants. Our future operating
performance will be subject to financial, economic, business, competitive, regulatory and other factors, many of
which are beyond our control. Accordingly, we cannot assure you that our future cash flows or borrowing capacity
will be sufficient to allow us to complete future acquisitions or implement our business plan, which could have a
material negative impact on our business and results of operations.
Our Substantial Indebtedness And Our Ability To Incur More Indebtedness Could Adversely Affect
Our Financial Condition
We currently have a significant amount of indebtedness. At
December 31, 2004, our total consolidated indebtedness was $278.4 million. Our substantial indebtedness could have important consequences to
owners of our Class A common stock, including:
-
making it more difficult for us to satisfy our obligations with respect to borrowings under the credit
facility and the subordinated notes;
-
limiting our ability to obtain additional financing to fund future working capital, capital
expenditures, acquisitions and other general corporate requirements;
-
requiring us to dedicate a substantial portion of our cash flow from operations to payments on our
indebtedness, thereby reducing our ability to use our cash flow to fund future working capital, capital
expenditures, acquisitions and other general corporate requirements;
-
placing us at a competitive disadvantage relative to those of our competitors that have less
indebtedness;
-
limiting our flexibility in planning for, or reacting to, changes in our business and the industry
that could make us more vulnerable to adverse changes in general economic, industry and competitive conditions
and adverse changes in government regulations; and
-
subjecting us to higher interest expense in the event of increases in interest rates because some of
our indebtedness is at variable rates of interest.
We may incur additional indebtedness to fund future acquisitions
and for other corporate purposes. If new indebtedness is added to our and our subsidiaries current indebtedness levels,
the related risks that we and they now face could intensify.
To Service Our Indebtedness And Other Obligations, We Will Require A Significant Amount Of Cash. Our Ability To
Generate Cash Depends On Many Factors Beyond Our Control
Our ability to make payments on and to refinance our indebtedness,
to pay dividends and to fund capital
expenditures will depend on our ability to generate cash in the future. This ability to generate cash, to a
certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors
that are beyond our control. Our businesses might not generate sufficient cash flow from operations. We might not
be able to complete future offerings, and future borrowings might not be available to us in an amount sufficient
to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a
portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of
our indebtedness on commercially reasonable terms or at all.
19
If We Cannot Attract The Anticipated Listener, Programmer And Advertiser Base For Our Newly
Acquired Radio Stations, We May Not Recoup Associated Promotional Costs Or Achieve Profitability For These
Radio Stations
We frequently acquire new radio stations that previously broadcast
in formats other than our primary formats. We continue to program some of these recently acquired stations in non-primary
formats and we re-program others to one of our primary formats. During, and for a period after, the conversion of a radio
stations format, the radio station typically generates operating losses. The magnitude and duration of these losses depends
on a number of factors, including the promotional and marketing costs associated with attracting listeners and advertisers to
our radio stations new format and the success of these efforts. There is no guarantee that the operation of
these newly acquired stations or our operations in new formats will attract a sufficient listener and advertiser
base. If we are not successful in attracting the listener and advertiser base we anticipate, we may not recoup
associated promotional costs or achieve profitability for these radio stations.
If We Do Not Maintain Or Increase Our Block Programming Revenues, Our Business And Operating
Results May Be Adversely Affected
The financial success of each of our radio stations that features
Christian Teaching and Talk programming is dependent, to a significant degree, upon our ability to generate revenue from
the sale of block programming time to national and local religious organizations, which accounted for 35.3% and 32.5%
of our gross broadcasting revenue during the years ended December 31, 2003, and 2004, respectively. We compete for this
program revenue with a number of commercial and non-commercial radio stations. Due to the significant competition for this block
programming, we may not be able to maintain or increase our current block programming revenue.
If We Are Unable To Maintain Or Grow Our Advertising Revenues, Our Business And Operating Results May Be
Adversely Affected
Our radio stations with our Christian Teaching and Talk, contemporary
Christian music and News Talk formats are substantially dependent upon advertising for their revenues. In the advertising
market, we compete for revenue with other commercial religious format and general format radio stations, as well as with
other media, including broadcast and cable television, newspapers, magazines, direct mail, Internet and billboard advertising.
Due to this significant competition, we may not be able to maintain or increase our current advertising revenue.
A Sustained Economic Downturn In Key Salem Markets Could Negatively Impact Our Ability To Generate Broadcasting Revenues
We derive a substantial part of our revenues from the sale of
advertising on our radio stations. For the years ended December 31, 2002, 2003 and 2004, 50.3%, 52.2%, and 53.9% of
our broadcasting revenues, respectively, were generated from the sale of advertising. We are particularly dependent on advertising revenue from stations in the Los Angeles and Dallas markets, which
generated 8.9% and 10.2%, respectively, of our gross broadcasting revenues in 2004. Because substantial portions of
our revenues are derived from local advertisers in these key markets, our
ability to generate advertising revenues in those markets could be adversely affected by local or regional economic
downturns.
20
Environmental, Health, Safety and Land Use Laws and Regulations May Limit or Restrict
Some of Our Operations
As the owner or operator of various real properties and facilities, we must comply with various federal, state
and local environmental, health, safety and land use laws and regulations. We and our properties are subject to
such laws and regulations relating to the use, storage, disposal, emission and release of hazardous and
non-hazardous substances and employee health and safety, as well as zoning restrictions which may affect, among
other things, the ability for us to improve or relocate our radio broadcasting facilities. Historically, we have
not incurred significant expenditures to comply with these laws. However, additional laws, which may be passed in the future, or a
finding of a violation of or liability under existing laws, could require us to make significant expenditures and
otherwise limit or restrict some of our operations.
Acts Of War And Terrorism May Reduce Our Revenue And Have Other Negative Effects On Our Business
In response to the September 11, 2001, terrorist attacks on New York City and Washington, D.C., we increased our
news and community service programming, which decreased the amount of broadcast time available for commercial
advertising and block programming. In addition, these events caused advertisers to cancel advertisements on our
stations. Continued acts of war and terrorism against the United States, and the countrys response thereto,
including the current military actions in Iraq, may also cause a general slowdown in the U.S. advertising market,
which could cause our revenues to decline due to advertising and/or programming cancellations, delays or defaults
in payment, and other factors. In addition, these events may have other negative effects on our business, the
nature and duration of which we cannot predict. If these acts of war or terrorism or weak economic conditions
continue or worsen, our financial condition and results of operations may be materially and adversely affected.
Our Controlling Stockholders May Cause Us To Act, Or Refrain From Acting, In A Way That Minority Stockholders Do
Not Believe Is In Their Best Interest
As of December 31, 2004, Edward G. Atsinger III, Stuart W. Epperson,
Nancy A. Epperson and Edward C. Atsinger controlled approximately 80.1% of the voting power of our capital stock.
These four stockholders thus have the ability to control fundamental corporate transactions requiring stockholder
approval, including but not limited to, the election of all of our directors, except for two directors elected by
holders of our Class A common stock, approval of merger transactions involving Salem and the sale of all or substantially
all of Salems assets. The interests of any of these controlling stockholders may differ from the interests of our other
stockholders and one or more of the controlling stockholders could take action or make decisions (or block action
or decisions) that are not in the minority stockholders best interest.
21
If We Fail To Maintain Our Licenses With The FCC, We Would Be Prevented From
Operating Affected Radio Stations
We operate each of our radio stations pursuant to one or more
FCC broadcasting licenses. As each license expires, we apply for renewal of the license. However, we cannot be sure
that any of our licenses will be renewed, and renewal is subject to challenge by third-parties or to denial by the FCC.
The Communications Act and FCC rules and policies require prior FCC approval for transfers of control of, and assignments
of, FCC licenses. Were a complaint to be filed against us or other FCC licensees involved in a transaction with us, the FCC could delay
the grant of, or refuse to grant, its consent to an assignment or transfer of control of licenses and effectively
prohibit a proposed acquisition or disposition. The failure to renew any of our licenses would prevent us from
operating the affected station and generating revenue from it. If the FCC decides to include conditions or
qualifications in any of our licenses, we may be limited in the manner in which we may operate the affected station.
Covenant Restrictions Under Salem Holdings Credit Facility And Its Indentures Governing Its Outstanding Senior
Subordinated Notes May Limit Our Ability To Operate Our Business
Salem Holdings credit facility and the indentures governing its notes
contain, among other things, covenants that restrict Salems, Salem Holdings and their subsidiaries ability to finance
future operations or capital needs or to engage in other business activities. The credit facility and each of such indentures
restrict, among other things, their ability to:
-
incur additional debt;
-
pay dividends or make distributions;
-
purchase or redeem stock;
-
make investments and extend credit;
-
engage in transactions with affiliates;
-
create liens on assets;
-
transfer and sell assets; and
-
effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or
substantially all of their assets.
These restrictions on managements ability to operate Salems
and Salem Holdings business in accordance with
their discretion could have a material adverse effect on our business.
The covenants in each indenture of Salem Holding are subject to a number of important limitations and exceptions.
These limitations and exceptions will, for example, allow Salem Holding to make certain restricted payments to,
and investments in, Salem, subject to specified limitations.
In addition, Salem Holdings credit facility requires us
to maintain specified financial ratios and satisfy
certain financial condition tests which may require that we take action to reduce our debt or to act in a manner
contrary to our business objectives. Events beyond our control, including changes in general economic and
business conditions, may affect our ability to meet those financial ratios and financial condition tests. We
cannot assure you that we will meet those tests or that the lenders will waive any failure to meet those tests.
A breach of any of these covenants would result in a default under Salem Holdings credit facility and its
existing indentures. If an event of default occurs under any of these agreements, the lenders could, under the
credit facility, elect to declare all amounts outstanding thereunder, together with accrued interest, to be
immediately due and payable.
If we are unable to pay our obligations to the lenders under
the credit facility or other future senior debt
instruments, the lenders could proceed against any or all of the collateral securing the indebtedness to them.
The collateral under the credit facility consists of substantially all of our existing assets. In addition, a
breach of certain of the restrictions or covenants in these agreements, or an acceleration by these lenders of
the obligations to them, would cause a default under Salem Holdings notes. We may not have, or be able to
obtain, sufficient funds to make accelerated payments, including payments on the notes, or to repay the notes in
full after we pay the senior secured lenders to the extent of their collateral.
22
We May be Adversely Affected by a General Deterioration in Economic Conditions
The risks associated with our businesses become more acute
in periods of a slowing economy or recession, which
may be accompanied by a decrease in advertising and in attendance at live entertainment events. A decline in the
level of business activity of our advertisers or a decline in attendance at live entertainment events could have
an adverse effect on our revenues and profit margins. During the recent economic slowdown in the United States,
many advertisers reduced their advertising expenditures. The impact of slowdowns on our business is difficult to
predict, but they may result in reductions in purchases of advertising and attendance at live entertainment
events.
Our Broadcasts Often Rely on Content Owned by Third Parties; Obtaining Such Content Could Be Costly And Require
Us To Enter Into Disadvantageous License Or Royalty Arrangements
We rely heavily upon content and software owned by third parties in order to provide programming for our
broadcasts. The cost of obtaining all necessary licenses and permission to use this third party content and
software continues to increase. Although we attempt to avoid infringing known proprietary rights of third
parties in our broadcasting efforts, we expect that we may be subject to legal proceedings and claims for alleged
infringement from time to time in the ordinary course of business. Any claims relating to the infringement of
third-party proprietary rights, even if not meritorious, could result in costly litigation, divert managements
attention and resources, or require us require us to enter into royalty or license agreements which are not
advantageous to us. In addition, parties making claims may be able to obtain an injunction, which could prevent
us from broadcasting all or certain portions of individual radio broadcasts containing content owned by third
parties. We also rely on software that we license from third parties, including software that is integrated with
internally developed software and used to perform key broadcasting and accounting functions. We could lose the
right to use this software or it could be made available to us only on commercially unreasonable terms. Although
we believe that alternative software is available from other third-party suppliers or internal developments, the
loss of or inability to maintain any of these software licenses or the inability of the third parties to enhance
in a timely and cost-effective manner their products in response to changing customer needs, industry standards
or technological developments could result in limitations or delays in broadcasting or accounting for programming
by us until equivalent software could be developed internally or identified, licensed and integrated, which would
harm our business.
23
ITEM 2. PROPERTIES.
The types of properties
required to support our radio stations include offices, studios and tower and
antenna sites. A stations studios are generally located in an office in a
downtown or business district. We generally select our tower and antenna sites
to provide maximum market coverage. Our network operations are supported by
offices and studios from which its programming originates or is relayed from a
remote point of origination. The operations of our other media businesses are
supported by office facilities.
Our radio stations studios
and offices and the operations of our other media businesses are located in
leased facilities. Our network leases satellite transponders used for delivery
of its programming. We either own or lease our radio station tower and antenna
sites. We believe we will be able to renew any such leases that expire within
the next several years or obtain other arrangements, as necessary. We own our
corporate office building, located in Camarillo, California, and the
headquarters of SRN and Salem Radio Representatives, located in
the Dallas, Texas area. In January 2004, we purchased the property upon which
our studio and office facilities for our Tampa, Florida stations are
located. In October 2004, we purchased the property upon which our studio and office
facilities for our Honolulu, Hawaii stations will be located once construction is complete.
We lease certain property
from our principal stockholders or trusts and partnerships created for the
benefit of the principal stockholders and their families. These leases are
described in CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS in Part III, Item
13 and in Note 8 of our consolidated financial statements. All such leases have cost of living
adjustments. Based upon our managements assessment and analysis of local market
conditions for comparable properties, we believe such leases have terms
that that are as favorable or more favorable to the company than those that would have been available from unaffiliated
parties.
No one physical property is
material to our overall operations. We believe that our properties are in good
condition and suitable for our operations; however, we continually evaluate
opportunities to upgrade our properties.
ITEM 3. LEGAL PROCEEDINGS.
On March 9, 2005, Pipefitters, Locals
522 & 633 Pension Trust Fund filed a Complaint for Violation of the Federal
Securities Laws in the Superior Court of California for the County of Ventura against the company, its directors,
certain of its officers and certain underwriters of the companys April 2004 public offering of Class A common
stock. In the purported class action, the plaintiff asserts claims under the Securities Act on behalf of
a putative class of all persons who purchased the companys equity securities pursuant or traceable to that
offering. The complaint alleges that the offering documents failed to disclose that the companys financial
statements overstated its fixed assets and that the companys internal controls were flawed with respect to its
ability to value fixed assets and, that the offering documents contained misstatements regarding the companys
fixed assets and internal controls. The complaint seeks rescission or damages in excess of $5 million, interest,
attorneys fees and other costs, as well as equitable and injunctive relief. The complaint was served on the
company on March 15, 2005.
Incident to our business activities,
we are a party to a number of legal proceedings, lawsuits, arbitration and
other claims including the purported class action described above. Such matters are subject to many uncertainties and outcomes that are not predictable with
assurance. Also, we maintain insurance which may provide coverage for such matters. Consequently, our management
is unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect
to these matters. Except with respect to the purported class action described above which has not yet been
assessed due to its recent commencement, our management believes, at this time, that the final resolution of
these matters, individually and in the aggregate, will not have a material adverse effect upon our annual
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to
a vote of stockholders, through the solicitation of proxies or otherwise, during
the fourth quarter of fiscal 2004.
24
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY; RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The companys Class A common
stock trades on the Nasdaq National Market® (NASDAQ-NMS) under the
symbol SALM. At March 2, 2005, the company had approximately 50 stockholders
of record (not including the number of persons or entities holding stock in
nominee or street name through various brokerage firms) and 20,409,992
outstanding shares of its Class A common stock and two stockholders of record
and 5,553,696 outstanding shares of its Class B common stock. The following
table sets forth for the fiscal quarters indicated the range of high and low trade price
information per share of the Class A common stock of the company as reported on
the NASDAQ-NMS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High (mid-day)
|
|
$
|
26.20
|
|
|
$
|
26.45
|
|
|
$
|
24.37
|
|
|
$
|
28.20
|
|
|
$
|
28.37
|
|
|
$
|
33.65
|
|
|
$
|
29.40
|
|
|
$
|
27.46
|
Low (mid-day)
|
|
$
|
15.00
|
|
|
$
|
16.30
|
|
|
$
|
19.09
|
|
|
$
|
19.12
|
|
|
$
|
23.08
|
|
|
$
|
27.13
|
|
|
$
|
24.18
|
|
|
$
|
24.10
|
|
There is no established
public trading market for the companys Class B common stock.
DIVIDEND POLICY
Historically, the company has not paid a dividend on either
class of its common stock. The company has historically retained earnings for use in its business and will
continue to do so unless its board of directors makes a determination to declare and pay dividends on its
common stock in light of and after consideration of its earnings, financial position, capital requirements,
its bank credit facility, the indentures governing its senior
subordinated notes and such other factors as the board of directors deems relevant. The companys sole source of
cash available for making dividend payments will be dividends paid to the company or payments made to the company
by its subsidiaries. The ability of subsidiaries of the company to make such payments may be restricted by
applicable state laws or terms of agreements to which they are or may become a party; the companys credit
facility and the terms of the indentures governing its outstanding senior subordinated notes restrict the payment
of dividends on its common stock unless certain specified conditions are satisfied.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides
information as of December 31, 2004 with respect to shares of our Class A common
stock that may be issued under the Amended and Restated 1999 Stock Incentive Plan, our only existing
equity compensation plan. The Amended and Restated 1999 Stock Incentive Plan was adopted by our board
of directors and approved by our stockholders on May 25, 1999. On March 20,
2003, the board of directors approved an amendment to the Amended and Restated 1999 Stock Incentive
Plan to reserve an additional 600,000 shares of the company's Class A common
stock for issuance under the plan. The amendment was approved by a vote of the
stockholders at the companys 2003 annual meeting of stockholders held on June
11, 2003. On November 10, 2004 the Board of Directors approved an amendment
to the Amended and Restated 1999 Stock Option Plan to reserve an additional 1,800,000 shares of the companys
Class A common stock for issuance under the plan. It is contemplated that the amendment will be
voted upon by the stockholders at the companys 2005 annual meeting of the stockholders
to be held on May 18, 2005.
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of securities
|
|
|
|
remaining available for
|
|
|
|
to be issued
|
|
Weighted-average
|
|
future issuance under
|
|
|
|
upon exercise of
|
|
exercise price of
|
|
equity compensation plans
|
|
|
|
outstanding options,
|
|
outstanding options,
|
|
(excluding securities
|
Plan Category
|
|
warrants and rights
|
|
warrants and rights
|
|
reflected in column (a))
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
Equity compensation plans approved by security holders
|
|
|
1,467,966
|
|
|
$
|
25.53
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,467,966
|
|
|
$
|
25.53
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets
forth selected financial data and other operating information of Salem. The selected
financial data in the table are derived from the consolidated financial
statements of Salem. The data should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included
(incorporated by reference) herein. The data below should be read in conjunction
with, and is qualified by reference to, our consolidated financial statements
and related notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations and specifically the
disclosure concerning a reconciliation for historical Non-GAAP measures
presented in Managements Discussion and Analysis of Financial
Condition and Results of OperationsNon-GAAP Financial Measures
included in Item 7 of this report.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except share and per share data)
|
Statement of Operations Data:
|
|
Net broadcasting revenue
|
|
$
|
113,010
|
|
|
$
|
136,106
|
|
|
$
|
156,216
|
|
|
$
|
170,483
|
|
|
$
|
187,543
|
|
Other media revenue
|
|
|
7,916
|
|
|
|
8,016
|
|
|
|
8,054
|
|
|
|
7,865
|
|
|
|
9,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
120,926
|
|
|
|
144,122
|
|
|
|
164,270
|
|
|
|
178,348
|
|
|
|
196,885
|
|
|
|
Operating expenses:
|
|
Broadcasting operating expenses
|
|
|
63,187
|
|
|
|
87,772
|
|
|
|
103,809
|
|
|
|
109,043
|
|
|
|
115,896
|
|
|
Cost of
denied / abandoned tower site and license upgrade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,202
|
|
|
|
746
|
|
|
Other
media operating expenses
|
|
|
14,863
|
|
|
|
9,282
|
|
|
|
7,709
|
|
|
|
7,942
|
|
|
|
8,600
|
|
|
Legal settlement
|
|
|
|
|
|
|
|
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
10,457
|
|
|
|
13,774
|
|
|
|
14,387
|
|
|
|
16,091
|
|
|
|
17,480
|
|
|
Cost of terminated offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
25,065
|
|
|
|
30,026
|
|
|
|
11,446
|
|
|
|
12,291
|
|
|
|
12,433
|
|
|
(Gain) loss on disposal of assets
|
|
|
(773
|
)
|
|
|
(26,276
|
)
|
|
|
567
|
|
|
|
214
|
|
|
|
3,266
|
|
|
Gain on sale of assets to related parties
|
|
|
(28,794
|
)
|
|
|
(3,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
84,005
|
|
|
|
111,018
|
|
|
|
140,218
|
|
|
|
148,434
|
|
|
|
158,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
36,921
|
|
|
|
33,104
|
|
|
|
24,052
|
|
|
|
29,914
|
|
|
|
38,464
|
|
|
|
Other income (expense):
|
|
|
Interest income
|
|
|
534
|
|
|
|
1,994
|
|
|
|
255
|
|
|
|
212
|
|
|
|
171
|
|
|
Interest expense
|
|
|
(17,452
|
)
|
|
|
(26,542
|
)
|
|
|
(27,162
|
)
|
|
|
(23,474
|
)
|
|
|
(19,931
|
)
|
|
Loss on early retirement of debt
|
|
|
(1,849
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,440
|
)
|
|
|
(6,588
|
)
|
|
Other expense
|
|
|
(857
|
)
|
|
|
(573
|
)
|
|
|
(458
|
)
|
|
|
(410
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(19,624
|
)
|
|
|
(25,121
|
)
|
|
|
(27,365
|
)
|
|
|
(30,112
|
)
|
|
|
(26,464
|
)
|
Income
(loss) before income taxes and discontinued operations
|
|
|
17,297
|
|
|
|
7,983
|
|
|
|
(3,313
|
)
|
|
|
(198
|
)
|
|
|
12,000
|
|
Provision
(benefit) for income taxes
|
|
|
6,675
|
|
|
|
2,442
|
|
|
|
(1,323
|
)
|
|
|
479
|
|
|
|
4,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before discontinued operations
|
|
|
10,622
|
|
|
|
5,541
|
|
|
|
(1,990
|
)
|
|
|
(677
|
)
|
|
|
7,424
|
|
|
Discontinued operations, net of tax
|
|
|
(513
|
)
|
|
|
(1,154
|
)
|
|
|
15,995
|
|
|
|
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (1)
|
|
$
|
10,109
|
|
|
$
|
4,387
|
|
|
$
|
14,005
|
|
|
$
|
(677
|
)
|
|
$
|
7,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands,
except share and per share data)
|
Basic
earnings (loss) per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share before discontinued operations
|
|
$
|
0.45
|
|
|
$
|
0.24
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.29
|
|
|
Income (loss) from discontinued
operations
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per
share
|
|
|
0.43
|
|
|
|
0.19
|
|
|
|
0.60
|
|
|
|
(0.03
|
)
|
|
|
0.29
|
|
|
|
Diluted earnings (loss) per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share before
discontinued operations
|
|
$
|
0.45
|
|
|
$
|
0.24
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.29
|
|
|
Income (loss) from discontinued
operations
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per
share
|
|
|
0.43
|
|
|
|
0.19
|
|
|
|
0.59
|
|
|
|
(0.03
|
)
|
|
|
0.29
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
23,456,088
|
|
|
|
23,456,828
|
|
|
|
23,473,821
|
|
|
|
23,488,898
|
|
|
|
25,220,678
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
23,466,849
|
|
|
|
23,518,747
|
|
|
|
23,582,906
|
|
|
|
23,488,898
|
|
|
|
25,371,649
|
|
|
|
|
|
|
|
|
|
|
|
28
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance Sheet Data:
|
|
Cash and cash equivalents
|
|
$
|
3,928
|
|
|
$
|
23,921
|
|
|
$
|
26,325
|
|
|
$
|
5,620
|
|
|
$
|
10,994
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
107,661
|
|
|
|
|
|
|
|
|
|
Broadcast licenses
|
|
|
340,201
|
|
|
|
323,848
|
|
|
|
363,203
|
|
|
|
381,740
|
|
|
|
406,290
|
|
Other
intangible assets including goodwill, net
|
|
|
18,281
|
|
|
|
20,211
|
|
|
|
17,305
|
|
|
|
15,391
|
|
|
|
14,176
|
|
Total assets
|
|
|
470,668
|
|
|
|
507,254
|
|
|
|
672,209
|
|
|
|
560,011
|
|
|
|
585,784
|
|
Long-term
debt, less current portion
|
|
|
286,050
|
|
|
|
311,621
|
|
|
|
350,908
|
|
|
|
336,091
|
|
|
|
281,024
|
|
Stockholders equity
|
|
|
152,948
|
|
|
|
157,370
|
|
|
|
171,928
|
|
|
|
171,822
|
|
|
|
247,637
|
|
|
Cash flows related to:
|
|
Operating activities
|
|
$
|
10,712
|
|
|
$
|
11,633
|
|
|
$
|
6,814
|
|
|
$
|
24,034
|
|
|
$
|
39,306
|
|
Investing activities
|
|
|
(219,848
|
)
|
|
|
(10,070
|
)
|
|
|
(27,018
|
)
|
|
|
(29,688
|
)
|
|
|
(44,359
|
)
|
Financing activities
|
|
|
178,940
|
|
|
|
18,430
|
|
|
|
22,608
|
|
|
|
(15,051
|
)
|
|
|
10,427
|
|
|
Other Data:
|
|
Station operating income (2)
|
|
$
|
49,823
|
|
|
$
|
48,334
|
|
|
$
|
52,407
|
|
|
$
|
61,440
|
|
|
$
|
71,647
|
|
Station operating income margin (3)
|
|
|
44.1%
|
|
|
|
35.5%
|
|
|
|
33.5%
|
|
|
|
36.0%
|
|
|
|
38.2%
|
|
|
|
|
|
|
(1) Had SFAS No. 142 been applied as of January 1, 2000, we
would have reported net income for the two years ended December 31, 2001 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share data)
|
|
|
|
|
Reported
net income
|
|
$
|
10,109
|
|
|
$
|
4,387
|
Add back goodwill and broadcast
licenses
amortization, net of tax
|
|
|
10,687
|
|
|
|
13,547
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
20,796
|
|
|
$
|
17,934
|
|
|
|
|
|
|
Basic and
diluted earnings per share
|
As reported
|
|
$
|
0.43
|
|
|
$
|
0.19
|
Goodwill and broadcast
licenses
amortization, net of tax
|
|
|
0.46
|
|
|
|
0.58
|
|
|
|
|
|
|
|
Adjusted earnings per share
|
|
$
|
0.89
|
|
|
$
|
0.76
|
|
|
|
|
|
|
Had SFAS No. 142 been
applied as of January 1, 2000, income before operations
would have been $21.3 million ($0.91 per share) and $19.1 million ($0.81 per share) for the years ended December 31,
2000 and 2001, respectively.
29
(2) We define station
operating income as net broadcasting revenue less broadcasting operating
expenses.
Station operating
income is not a measure of performance calculated in accordance with generally
accepted accounting principles (GAAP). Therefore it should be viewed as a supplement to
and not a substitute for results of operations presented on the basis of GAAP.
Management believes that station operating income is useful, when considered in
conjunction with operating income, the most directly comparable GAAP financial
measure, because it is generally recognized by the radio broadcasting industry
as a tool in measuring performance and in applying valuation methodologies for
companies in the media, entertainment and communications industries. This
measure is used by investors and by analysts who report on the industry to
provide comparisons between broadcast groups. Additionally, we use station
operating income as one of our key measures of operating efficiency and
profitability. Station operating income does not purport to represent cash
provided by operating activities. Our statement of cash flows presents our cash
flow activity and our income statement presents our historical performance
prepared in accordance with GAAP. Our station operating income is not
necessarily comparable to similarly titled measures employed by other
companies.
RECONCILIATION OF STATION OPERATING INCOME TO OPERATING INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Station operating income
|
|
$
|
49,823
|
|
|
$
|
48,334
|
|
|
$
|
52,407
|
|
|
$
|
61,440
|
|
|
$
|
71,647
|
|
Plus other media revenue
|
|
|
7,916
|
|
|
|
8,016
|
|
|
|
8,054
|
|
|
|
7,865
|
|
|
|
9,342
|
|
Less cost
of denied tower site and license upgrade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,202
|
)
|
|
|
(746
|
)
|
Less other media operating expenses
|
|
|
(14,863
|
)
|
|
|
(9,282
|
)
|
|
|
(7,709
|
)
|
|
|
(7,942
|
)
|
|
|
(8,600
|
)
|
Less depreciation and amortization
|
|
|
(25,065
|
)
|
|
|
(30,026
|
)
|
|
|
(11,446
|
)
|
|
|
(12,291
|
)
|
|
|
(12,433
|
)
|
Less gain (loss) on disposal of assets
|
|
|
773
|
|
|
|
26,276
|
|
|
|
(567
|
)
|
|
|
(214
|
)
|
|
|
(3,266
|
)
|
Less gain on sale of assets to related parties
|
|
|
28,794
|
|
|
|
3,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less corporate expenses
|
|
|
(10,457
|
)
|
|
|
(13,774
|
)
|
|
|
(14,387
|
)
|
|
|
(16,091
|
)
|
|
|
(17,480
|
)
|
Less cost of terminated offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(651
|
)
|
|
|
|
|
Less legal settlement
|
|
|
|
|
|
|
|
|
|
|
(2,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
36,921
|
|
|
$
|
33,104
|
|
|
$
|
24,052
|
|
|
$
|
29,914
|
|
|
$
|
38,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) Station operating income margin
is station operating income as a percentage of net broadcasting revenue.
30
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this report. Our consolidated financial statements are not
directly comparable from period to period because of our acquisition and
disposition of selected assets of radio stations and our acquisition of selected assets of other media businesses. See
note 2 to our consolidated financial statements under Item 8 for additional
information.
OVERVIEW
As a radio broadcasting
company with a national radio network, we derive our revenue primarily from the
sale of broadcast time and radio advertising on a national and local basis.
Historically, our principal
sources of revenue have been:
|
|
|
|
the sale of block program time, both to national
and local program producers,
|
|
|
|
the sale of advertising time on our radio stations,
both to national and local advertisers, and
|
|
|
|
the sale of advertising time on our national radio network.
|
The rates we are able to charge for broadcast time and advertising time are
dependent upon several factors, including:
|
|
|
|
audience share,
|
|
|
|
how well our stations perform for our clients,
|
|
|
|
the size of the market,
|
|
|
|
the number of stations in the market as well
as the number of stations in the market in our format that are competing
for the same listeners,
|
|
|
|
the general economic conditions in each market, and
|
|
|
|
supply and demand on both a local and national level.
|
Our sources of revenue and
product offerings also include other media businesses, including the Internet
and magazine publishing.
31
The following table shows
gross broadcasting revenue, the percentage of gross broadcasting revenue for
each broadcasting revenue source and net broadcasting revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Block program time:
|
|
|
National
|
$
|
40,447
|
|
|
23.8
|
%
|
|
$
|
41,033
|
|
|
22.1
|
%
|
|
$
|
40,901
|
|
|
20.0
|
%
|
|
Local
|
|
21,503
|
|
|
12.6
|
|
|
|
24,420
|
|
|
13.2
|
|
|
|
25,532
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,950
|
|
|
36.4
|
|
|
|
65,453
|
|
|
35.3
|
|
|
|
66,433
|
|
|
32.5
|
|
Advertising:
|
|
|
National
|
|
10,684
|
|
|
6.3
|
|
|
|
12,922
|
|
|
7.0
|
|
|
|
17,068
|
|
|
8.3
|
|
|
Local
|
|
74,928
|
|
|
44.0
|
|
|
|
83,987
|
|
|
45.2
|
|
|
|
93,184
|
|
|
45.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,612
|
|
|
50.3
|
|
|
|
96,909
|
|
|
52.2
|
|
|
|
110,252
|
|
|
53.9
|
|
|
Infomercials
|
|
6,114
|
|
|
3.6
|
|
|
|
6,639
|
|
|
3.6
|
|
|
|
8,924
|
|
|
4.4
|
|
|
SRN
|
|
13,524
|
|
|
7.9
|
|
|
|
13,375
|
|
|
7.2
|
|
|
|
15,399
|
|
|
7.5
|
|
|
Other
|
|
3,110
|
|
|
1.8
|
|
|
|
3,279
|
|
|
1.7
|
|
|
|
3,539
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross broadcasting revenue
|
|
170,310
|
|
|
100.0
|
%
|
|
|
185,655
|
|
|
100.0
|
%
|
|
|
204,547
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less agency commissions
|
|
14,094
|
|
|
|
|
|
|
15,172
|
|
|
|
|
|
|
17,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net broadcasting revenue
|
$
|
156,216
|
|
|
|
|
|
$
|
170,483
|
|
|
|
|
|
$
|
187,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Our broadcasting revenue is
affected primarily by the program rates our radio stations charge and by the
advertising rates our radio stations and networks charge. The rates for block
programming time are based upon our stations ability to attract audiences that
will support the program producers through contributions and purchases of their
products. Advertising rates are based upon the demand for advertising time,
which in turn is based on our stations and networks ability to produce results
for their advertisers. Historically we have not subscribed to traditional
audience measuring services. Instead, we have marketed ourselves to advertisers
based upon the responsiveness of our audiences. In selected markets we subscribe
to Arbitron, which develops quarterly reports to measure a radio stations
audience share in the demographic groups targeted by advertisers. Each of our
radio stations and our network has a general pre-determined level of time that
they make available for block programming and/or advertising, which may vary at
different times of the day.
As is typical in the radio
broadcasting industry, our second and fourth quarter advertising revenue
generally exceeds our first and third quarter advertising revenue. This seasonal
fluctuation in advertising revenue corresponds generally with quarterly
fluctuations in the retail advertising industry. Quarterly revenue from the sale
of block programming time does not tend to vary significantly, however, because
program rates are generally set annually.
Our cash flow is affected by
a transition period experienced by radio stations when, due to the nature of the
radio station, our plans for the market and other circumstances, we find it
beneficial to change its format. This transition period is when we
develop a radio stations customer and listener base. During this period, a
station may generate negative or insignificant cash flow.
In the broadcasting
industry, radio stations often utilize trade or barter agreements to exchange
advertising time for goods or services (such as other media advertising, travel
or lodging) in lieu of cash. In order to preserve the sale of our advertising
time for cash, we generally enter into trade agreements only if the goods or
services bartered to us will be used in our business. We have minimized our use
of trade agreements and have generally sold most of our advertising time for
cash. In 2004, we sold 95% of our advertising time for cash. In addition, it is
our general policy not to preempt advertising paid for in cash with advertising
paid for in trade.
The primary operating
expenses incurred in the ownership and operation of our radio stations include:
(i) employee salaries, commissions and related employee benefits and taxes,
(ii) facility expenses such as rent and utilities, (iii) promotional expenses and (iv)
music license fees. In addition to these
expenses, our network incurs programming costs and lease expenses for satellite
communication facilities. We also incur and will continue to incur significant
depreciation, amortization and interest expense as a result of completed and
future acquisitions of radio stations and existing and future borrowings.
Salem Web Network, our
Internet business, earns its revenue from sales of streaming services, sales of
banner advertising and sponsorships on the Internet, and, to a lesser extent,
sales of software and software support contracts. Salem Publishing,
our publishing business, earns its revenue by selling
advertising in and subscriptions to its publications. The revenue and related
operating expenses of these businesses are reported as other media on our
condensed consolidated statements of operations.
SAME STATION DEFINITION
In the discussion of our
results of operations below, we compare our results between periods on an as
reported basis (that is, the results of operations of all radio stations and
network formats owned or operated at any time during either period) and on a
same station basis. With regard to fiscal quarters, we include in our same
station comparisons the results of operations of radio stations and networks
that we own or operate in the same format during the quarter, as well as the
corresponding quarter of the prior year. Same station results for a full year
are based on the sum of the same station results for the four quarters of that
year.
33
RESULTS OF OPERATIONS
We have reclassified our statements of operations data for all
periods presented to reflect our sale on September 30, 2002, of the assets of
radio station WYGY-FM, which has been accounted for as a discontinued operation.
The following table sets
forth certain statements of operations data as a percentage of net revenue for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
2003 over 2002
|
|
2004 over 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
% change
|
|
|
|
|
|
|
Net
broadcasting revenue
|
|
$
|
156,216
|
|
|
$
|
170,483
|
|
|
$
|
187,543
|
|
|
9.1
|
%
|
|
10.0
|
%
|
Other
media revenue
|
|
|
8,054
|
|
|
|
7,865
|
|
|
|
9,342
|
|
|
(2.3
|
)%
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
164,270
|
|
|
|
178,348
|
|
|
|
196,885
|
|
|
8.6
|
%
|
|
10.4
|
%
|
Operating
expenses:
|
|
Broadcasting operating expenses
|
|
|
103,809
|
|
|
|
109,043
|
|
|
|
115,896
|
|
|
5.0
|
%
|
|
6.3
|
%
|
|
Cost of
denied / abandoned tower site and license upgrade
|
|
|
|
|
|
|
2,202
|
|
|
|
746
|
|
|
|
|
|
(66.1
|
)%
|
|
Other
media operating expenses
|
|
|
7,709
|
|
|
|
7,942
|
|
|
|
8,600
|
|
|
3.0
|
%
|
|
8.3
|
%
|
|
Legal
settlement
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
(100.0
|
)%
|
|
|
|
|
Corporate
expenses
|
|
|
14,387
|
|
|
|
16,091
|
|
|
|
17,480
|
|
|
11.8
|
%
|
|
8.6
|
%
|
|
Cost of
terminated offering
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
(100.0
|
)%
|
|
Depreciation
|
|
|
9,537
|
|
|
|
10,703
|
|
|
|
10,900
|
|
|
12.2
|
%
|
|
1.8
|
%
|
|
Amortization
|
|
|
1,909
|
|
|
|
1,588
|
|
|
|
1,533
|
|
|
(16.9
|
)%
|
|
(3.5
|
)%
|
|
Loss on disposal of assets
|
|
|
567
|
|
|
|
214
|
|
|
|
3,266
|
|
|
(62.3
|
)%
|
|
1,426.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
140,219
|
|
|
|
148,434
|
|
|
|
158,421
|
|
|
5.9
|
%
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
24,051
|
|
|
|
29,914
|
|
|
|
38,464
|
|
|
24.4
|
%
|
|
28.6
|
%
|
Other
income (expense):
|
|
Interest
income
|
|
|
|
|
|
|
212
|
|
|
|
171
|
|
|
(16.9
|
)%
|
|
(19.3
|
)%
|
|
Interest
expense
|
|
|
(27,162
|
)
|
|
|
(23,474
|
)
|
|
|
(19,931
|
)
|
|
(13.6
|
)%
|
|
(15.1
|
)%
|
|
Loss on
early retirement of debt
|
|
|
|
|
|
|
(6,440
|
)
|
|
|
(6,588
|
)
|
|
|
%
|
|
2.3
|
%
|
|
Other
expense, net
|
|
|
(458
|
)
|
|
|
(410
|
)
|
|
|
(116
|
)
|
|
(9.8
|
)%
|
|
(71.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and discontinued operations
|
|
|
(3,314
|
)
|
|
|
(198
|
)
|
|
|
12,000
|
|
|
(94.0
|
)%
|
|
(6,160.6
|
)%
|
Provision
(benefit) for income taxes
|
|
|
(1,323
|
)
|
|
|
479
|
|
|
|
4,576
|
|
|
(136.2
|
)%
|
|
855.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before discontinued operations
|
|
|
(1,991
|
)
|
|
|
(677
|
)
|
|
|
7,424
|
|
|
(66.0
|
)%
|
|
(1,196.6
|
)%
|
Income
(loss) from discontinued operations
|
|
|
15,995
|
|
|
|
|
|
|
|
(91
|
)
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
14,004
|
|
|
$
|
(677
|
)
|
|
$
|
7,333
|
|
|
(104.8
|
)%
|
|
(1,183.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
34
The following table presents selected financial data for the
periods indicated as a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
broadcasting revenue
|
|
|
95
|
|
%
|
|
|
96
|
|
%
|
|
|
95
|
|
%
|
Other
media revenue
|
|
|
5
|
|
%
|
|
|
4
|
|
%
|
|
|
5
|
|
%
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
100
|
|
%
|
|
|
100
|
|
%
|
|
|
100
|
|
%
|
Operating
expenses:
|
|
Broadcasting operating expenses
|
|
|
63
|
|
%
|
|
|
61
|
|
%
|
|
|
59
|
|
%
|
|
Cost of
denied/abandoned tower site and license upgrade
|
|
|
|
|
%
|
|
|
1
|
|
%
|
|
|
|
|
%
|
|
Other
media operating expenses
|
|
|
5
|
|
%
|
|
|
5
|
|
%
|
|
|
4
|
|
%
|
|
Legal settlement
|
|
|
1
|
|
%
|
|
|
|
|
%
|
|
|
|
|
%
|
|
Corporate
expenses
|
|
|
9
|
|
%
|
|
|
9
|
|
%
|
|
|
9
|
|
%
|
|
Cost of
terminated offering
|
|
|
|
|
%
|
|
|
|
|
%
|
|
|
|
|
%
|
|
Depreciation
|
|
|
6
|
|
%
|
|
|
6
|
|
%
|
|
|
6
|
|
%
|
|
Amortization
|
|
|
1
|
|
%
|
|
|
1
|
|
%
|
|
|
1
|
|
%
|
|
Loss on disposal of assets
|
|
|
|
|
%
|
|
|
|
|
%
|
|
|
1
|
|
%
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
85
|
|
%
|
|
|
83
|
|
%
|
|
|
80
|
|
%
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
15
|
|
%
|
|
|
17
|
|
%
|
|
|
20
|
|
%
|
Other
income (expense):
|
|
Interest
income
|
|
|
|
|
%
|
|
|
|
|
%
|
|
|
|
|
%
|
|
Interest
expense
|
|
|
(17
|
)
|
%
|
|
|
(13
|
)
|
%
|
|
|
(10
|
)
|
%
|
|
Loss on
early retirement of debt
|
|
|
|
|
%
|
|
|
(4
|
)
|
%
|
|
|
(4
|
)
|
%
|
|
Other
expense, net
|
|
|
|
|
%
|
|
|
|
|
%
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and discontinued operations
|
|
|
(2
|
)
|
%
|
|
|
|
|
%
|
|
|
6
|
|
%
|
Provision
(benefit) for income taxes
|
|
|
(1
|
)
|
%
|
|
|
|
|
%
|
|
|
2
|
|
%
|
|
|
|
|
|
|
|
|
Income
(loss) before discontinued operations
|
|
|
(1
|
)
|
%
|
|
|
|
|
%
|
|
|
4
|
|
%
|
Income (loss) from discontinued operations
|
|
|
10
|
%
|
|
|
|
|
|
%
|
|
|
|
|
%
|
Net income
(loss)
|
|
|
9
|
|
%
|
|
|
|
|
%
|
|
|
4
|
|
%
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004 compared to year ended December 31, 2003
NET BROADCASTING
REVENUE.
Net broadcasting revenue
increased $17.0 million or 10.0% to $187.5 million in 2004 from $170.5 million in
2003. On a same station basis, net revenue improved $15.9 million or 9.8% to $177.7 million in 2004 from $161.8
million in 2003. The growth is primarily attributable to an increase in net broadcasting revenue from
our music stations acquired since the middle of 2000, the development of our
News Talk platform and increases in national spot revenue and network revenue.
Revenue from advertising as a percentage of our gross broadcasting revenue increased to 53.9%
in 2004 from 52.2% in 2003. Revenue from block program time as a percentage of
our gross broadcasting revenue decreased to 32.5% in 2004 from 35.3% in 2003.
This change in our revenue mix was primarily due to the growth of advertising revenues at our
contemporary Christian music and News Talk radio stations and our continued
efforts to develop more advertising revenue in all of our markets.
35
OTHER MEDIA REVENUE.
Other media revenue increased $1.4
million or 18.8% to $9.3 million in 2004 from $7.9 million in 2003. This increase
was due primarily to increased Internet display advertising, print pages and custom print sold,
as well as our acquisition of the assets of the Internet portal operations of
Christianjobs.com in the third quarter of 2004.
BROADCASTING OPERATING
EXPENSES.
Broadcasting operating
expenses increased $6.9 million or 6.3% to $115.9 million in 2004 from $109.0
million in 2003. On a same station basis, broadcasting operating expenses
increased $3.1 million or 3.1% to $106.7 million in 2004 from $103.6 million in
2003. The increase is primarily due to incremental selling expenses incurred to
produce the increased revenue in the period and increased promotional expenses
related to the rollout of our News Talk format in new markets, partially offset by reduced bad
debt expense as a result of improved collections.
OTHER MEDIA OPERATING
EXPENSES.
Other media operating expenses
increased $0.7 million or 8.3% to $8.6 million in 2004 from $7.9 million in
2003. The increase is attributable primarily to costs associated with our
acquisition of the assets of the Internet portal operations of Christianjobs.com in the third quarter of 2004,
the early termination of a lease of one of our Salem Web Network offices
and increased circulation costs due to additional production at Salem Publishing.
CORPORATE
EXPENSES.
Corporate expenses increased
$1.4 million or 8.6% to $17.5 million in 2004 from $16.1 million in 2003,
primarily due to: (a) additional overhead costs incurred for all of 2004 as
compared to a portion of 2003 in connection with the acquisitions of the assets of radio
stations during 2003, (b) an increase in salaries and accrued executive bonuses in
2004,(c) additional overhead costs associated with the
acquisitions of the assets of radio stations and an Internet business during 2004,
and (d) costs associated with the
implementation of the requirements of the Sarbanes-Oxley Act of 2002.
COST OF TERMINATED
OFFERING.
During the third quarter of
2003, Salem incurred a one-time charge of $0.7 million to write-off costs
associated with a contemplated debt offering that was terminated during that
quarter. This charge is identified in Salem's Statement of Operations as Cost
of Terminated Offering.
DEPRECIATION AND
AMORTIZATION.
Depreciation expense
increased $0.2 million or 1.8% to $10.9 million in 2004 from $10.7 million in
2003. The increase was due to: (a) the additional depreciation expense incurred
for all of 2004 as compared to a portion of 2003 in connection with our
acquisitions of the assets of radio stations during 2003, and (b)
additional depreciation expenses associated with the acquisition of the assets of radio
stations and an Internet portal operation during 2004. Amortization expense
decreased $0.1 million or 3.5% to $1.5 in 2004 from $1.6 million in 2003.
LOSS ON DISPOSAL OF ASSETS.
Loss on disposal of assets of $3.3 million
in 2004 was primarily due to the write-off of various fixed assets and equipment as a result of a comprehensive
physical inventory of our property, plant and equipment. Loss on
disposal of assets of $0.2 million in 2003 was primarily due to the disposition of certain property, plant and
equipment, partially offset by the recovery of a bad debt related to a note
acquired in the sale of property, plant, equipment and intangible assets.
36
OTHER INCOME (EXPENSE).
Interest income of $0.2 million in 2004
was primarily from interest earned on excess cash. Interest income of
$0.2 million in 2003 was primarily from interest earned on the cash which was held
in a trust account that was used to redeem all of our $100.0 million
9½% senior subordinated notes due 2007 (9½% Notes) and from
interest earned on excess cash. Interest expense decreased $3.6 million or 15.1% to
$19.9 million in 2004 from $23.5 million in 2003. The decrease is primarily due
to savings of approximately $2.6 million in interest due to a combination of redemptions and
open market repurchases (the Redemption) of $55.6
million of the 9% Notes, as well as savings resulting from the
refinancing of our 9½% Notes. Additionally, as part of the refinancing
of our 9½% Notes, both the 9½% Notes and the 7¾%
Notes were
outstanding until January 22, 2003, resulting in an additional $0.6 million of
interest expense in the prior year (see ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK - Derivative Instruments). Loss on
early retirement of debt of $6.4 million in 2003 relates to the early retirement
of our 9½% Notes on January 22, 2003. Other expense, net decreased to $0.1
million in 2004 from $0.4 million in 2003, due primarily to an increase in bank
commitment fees partially offset by a brokerage fee earned from the sale of WGST-FM,
Atlanta, Georgia.
PROVISION FOR
INCOME TAXES.
Provision for income taxes
was $4.6 million for the year ended December 31, 2004 as compared to $0.5 million
for the year ended December 31, 2003. Provision for
income taxes as a percentage of income (loss) before income taxes and discontinued
operations (that is, the effective tax rate) was 38.1%
in 2004 and 241.9% in 2003. For the years ended December 31, 2004 and 2003,
respectively, the effective tax rate differs from the federal statutory income
rate of 34.0% primarily due to the effect of state income taxes and certain
expenses that are not deductible for tax purposes and changes in the valuation
allowance from the use of certain state net operating loss carryforwards.
LOSS FROM
DISCONTINUED OPERATIONS, NET OF TAX.
Loss from discontinued
operations was approximately $0.1 million net of income taxes for the year ended December
31, 2004. This amount relates to an increase in a liability, which has been resolved,
arising from the sale of WYGY-FM, Cincinnati, Ohio, which was sold on September 30, 2002.
NET INCOME
(LOSS).
We recognized net income of $7.3 million in 2004 as compared to a net loss of $0.7
million in 2003. The change is primarily due to an increase in operating income
of $8.4 million in 2004 over 2003 and a reduction in interest expense
of $3.6 million in 2004 over 2003, partially offset by an increase in the provision for income taxes
of $4.1 million in 2004 over 2003.
37
Year ended December 31, 2003 compared to year ended December 31, 2002
NET BROADCASTING
REVENUE.
Net broadcasting revenue
increased $14.3 million or 9.1% to $170.5 million in 2003 from $156.2 million in
2002. The growth was attributable to an increase in net revenue from our music
stations acquired since the middle of 2000, an increase in program rates and the
acquisitions of the assets of radio stations during 2002 and 2003. On a same station basis,
net revenue improved $13.0 million or 8.3% to $169.2 million in 2003 from $156.2
million in 2002. The improvement was primarily due to an increase in program
rates and the acquisitions of the assets of radio stations during 2002 and 2001. Revenue from
advertising as a percentage of our gross broadcasting revenue increased to 52.2%
in 2003 from 50.3% in 2002. Revenue from block program time as a percentage of
our gross broadcasting revenue decreased to 35.3% in 2003 from 36.4% in 2002.
This change in our revenue mix was primarily due to the launch of our
contemporary Christian music format in several of our markets and our continued
efforts to develop more advertising revenue in all of our markets.
OTHER MEDIA REVENUE.
Other media revenue decreased $0.2
million or 2.3% to $7.9 million in 2003 from $8.1 million in 2002. This decrease
was due primarily to decreased subscription and advertising revenue from our
publishing business partially offset by increased banner advertisements and
sponsorships from our Internet business.
BROADCASTING OPERATING
EXPENSES.
Broadcasting operating
expenses increased $5.2 million or 5.0% to $109.0 million in 2003 from $103.8
million in 2002. On a same station basis, broadcasting operating expenses
increased $4.0 million or 3.8% to $107.7 million in 2003 from $103.7 million in
2002. The increase was primarily due to incremental selling expenses incurred to
produce the increased revenue, partially offset by the impact of cost
containment initiatives initiated during the first quarter of 2003.
OTHER MEDIA OPERATING
EXPENSES.
Other media operating expenses
increased $0.2 million or 3.0% to $7.9 million in 2003 from $7.7 million in
2002. The increase was attributable primarily to an increase in selling and
editorial costs associated with the integration of our Internet portal
Crosswalk.com, which was acquired in October 2002, offset by a reduction in
costs associated with our publishing business, reduced audio streaming costs for
our Internet business and reduced overhead costs.
CORPORATE
EXPENSES.
Corporate expenses increased
$1.7 million or 11.8% to $16.1 million in 2003 from $14.4 million in 2002,
primarily due to: (a) additional overhead costs incurred for all of 2003 as
compared to a portion of 2002 in connection with the acquisitions of the assets of radio
stations and an Internet business during 2002 and 2003, (b) additional overhead costs
associated with the acquisitions of the assets of radio stations during 2003, and (c) an
increase in management bonuses in 2003.
COST OF TERMINATED
OFFERING.
During the third quarter of
2003, Salem incurred a one-time charge of $0.7 million to writeoff costs
associated with a contemplated debt offering that was terminated during that
quarter. This charge is identified in Salem's Statement of Operations as Cost
of Terminated Offering.
LEGAL SETTLEMENT.
On December 6, 2000, Gospel
Communications International (GCI) made a demand for arbitration upon us, as
disclosed in our annual report on Form 10-K for the year ended December 31, 2001
and our quarterly report on Form 10-Q for the quarter ended March 31, 2002. On
July 15, 2002, we reached a settlement with GCI for $2.3 million.
As a result of this settlement, we recorded a one-time charge of approximately
$2.3 million in the second quarter of 2002.
DEPRECIATION AND
AMORTIZATION.
Depreciation expense
increased $1.2 million or 12.2% to $10.7 million in 2003 from $9.5 million in
2002. The increase was due to: (a) the additional depreciation expense incurred
for all of 2003 as compared to a portion of 2002 in connection with our
acquisitions of the assets of radio stations and an Internet business during 2002, and (b)
additional depreciation expenses associated with the acquisition of the assets of radio
stations during 2003. Amortization expense decreased $0.3 million or 16.9% to
$1.6 in 2003 from $1.9 million in 2002. The decrease was primarily due to a
network affiliation contract becoming fully amortized during 2002.
LOSS ON DISPOSAL OF ASSETS
Loss on sale of assets of $0.2 million
in 2003 was primarily due to the disposition of certain property, plant and
equipment, partially offset by the recovery of a bad debt related to a note
acquired in the sale of property, plant, equipment and intangible assets.
38
OTHER INCOME (EXPENSE).
Interest income decreased $0.1 million
to $0.2 million in 2003 from $0.3 million in 2002. Interest income was primarily
from interest earned on the cash which was held in a trust account from December
23, 2002, until January 22, 2003, that was used to redeem all of our 9½% Notes
and from interest earned on excess cash. Interest expense decreased $3.7 million or 13.6% to $23.5 million in 2003 from
$27.2 million in 2002. The decrease was due to savings of $3.3 million in
interest related to our interest rate swap agreements entered into in April 2002
and July 2003, compared to savings of $1.8 million in the prior year and a
reduction in the balance of long-term debt. Additionally, we refinanced our
9½% Notes with our 7¾% Notes, further reducing annual
interest expense by $1.8 million in 2003 (See ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Instruments). Loss on
early retirement of debt of $6.4 million in 2003 relates to the early retirement
of our 9½% Notes on January 22, 2003. Other expense, net decreased to $0.4
million in 2003 from $0.5 million in 2002, due primarily to a decrease in bank
commitment fees.
PROVISION (BENEFIT) FOR
INCOME TAXES.
Provision for income taxes
was $0.5 million for the year ended December 31, 2003 as compared to a benefit for
income taxes of $1.3 million for the year ended December 31, 2002. Provision (benefit) for
income taxes as a percentage of income (loss) before income taxes, discontinued
operations and extraordinary item (that is, the effective tax rate) was 241.9%
in 2003 and (39.9)% in 2002. For the years ended December 31, 2003 and 2002,
respectively, the effective tax rate differs from the federal statutory income
rate of 34.0% primarily due to the effect of state income taxes and certain
expenses that are not deductible for tax purposes and changes in the valuation
allowance from the use of certain state net operating loss carryforwards.
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS, NET OF TAX.
Income from discontinued
operations was $16.0 million net of income tax expense of $12.0 million for
2002. Discontinued operations relate to the operations of WYGYFM, Cincinnati,
Ohio, which was sold on September 30, 2002, for $45.0 million and includes a
gain on the sale of the assets of the radio station of $15.9 million net of
income tax expense of $12.0 million.
NET INCOME
(LOSS).
We recognized a net loss of $0.7 million in 2003 as compared to
net income of $14.0 million in 2002. The variance is primarily due to
the recognition of income from discontinued operations, net of taxes, of $16.0
million in 2002, an increase in the provision for income taxes of $1.8 million
in 2003 over 2002 and a loss on early retirement of debt of $6.4 million in 2003, partially offset by an
increase in operating income of $5.9 million in 2003 over 2002 and a reduction
in interest expense of $3.7 million in 2003 over 2004.
39
NON-GAAP FINANCIAL MEASURES
The performance of a radio
broadcasting company is customarily measured by the ability of its stations to
generate station operating income. We define station operating income (SOI) as net
broadcasting revenue less broadcasting operating expenses.
SOI is
not a measure of performance calculated in accordance with GAAP; as a result it
should be viewed as a supplement to and not a substitute for our results of
operations presented on the basis of GAAP. Management believes that SOI
is a useful non-GAAP financial measure to investors, when
considered in conjunction with operating income, the most directly comparable
GAAP financial measure, because it is generally recognized by the radio
broadcasting industry as a tool in measuring performance and in applying
valuation methodologies for companies in the media, entertainment and
communications industries. This measure is used by investors and analysts who
report on the industry to provide comparisons between broadcasting groups.
Additionally, our management uses SOI as one of the key
measures of operating efficiency and profitability. SOI
does not purport to represent cash provided by operating activities. Our
statement of cash flows presents our cash flow activity and our income
statement presents our historical performance prepared in accordance with GAAP.
Our SOI is not necessarily comparable to similarly titled
measures employed by other companies.
Year ended December 31, 2004 compared to year ended December 31, 2003
STATION OPERATING INCOME.
SOI increased $10.2
million or 16.6% to $71.6 million in 2004 from $61.4 million in 2003. As a
percentage of net broadcasting revenue, SOI increased to
38.2% in 2004 from 36.0% in 2003. The increase was primarily attributable to the
effect of radio stations acquired during 2003 and 2004 that previously operated
with formats other than their current format and the effect of the growth of our
contemporary Christian music format. Acquired and reformatted radio stations
typically produce low margins during the first few years following conversion.
SOI margins improve as we implement scheduled program rate
increases, sell more of the available inventory on the station, and increase advertising revenue on our stations. On a same station
basis, SOI improved $12.7 million or 21.8% to $70.9 million
in 2004 from $58.2 million in 2003. As a percentage of same station net
broadcasting revenue, same station SOI increased to 39.9% in 2004 from 36.0% in 2003.
The following table provides
a reconciliation of SOI (a non-GAAP financial measure) to
operating income (as presented in our financial statements) for the twelve
months ended December 31, 2003 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Station operating income
|
$
|
|
|
61,440
|
|
|
|
|
|
|
$
|
|
|
|
71,647
|
|
|
Plus other media revenue
|
|
|
|
7,865
|
|
|
|
|
|
|
|
|
|
|
9,342
|
|
|
Less cost
of denied / abandoned tower site and license upgrade
|
|
|
|
(2,202
|
)
|
|
|
|
|
|
|
|
|
|
(746
|
)
|
|
Less other
media operating expenses
|
|
|
|
(7,942
|
)
|
|
|
|
|
|
|
|
|
|
(8,600
|
)
|
|
Less
depreciation and amortization
|
|
|
|
(12,291
|
)
|
|
|
|
|
|
|
|
|
|
(12,433
|
)
|
|
Less loss on disposal of assets
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
(3,266
|
)
|
|
Less
corporate expenses
|
|
|
|
(16,091
|
)
|
|
|
|
|
|
|
|
|
|
(17,480
|
)
|
|
Less cost
of terminated offering
|
|
|
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
|
|
29,914
|
|
|
|
|
|
|
$
|
|
|
|
38,464
|
|
|
|
|
|
|
|
|
|
|
|
40
Year ended December 31, 2003 compared to year ended December 31, 2002
STATION OPERATING INCOME.
SOI increased $9.0
million or 17.2% to $61.4 million in 2003 from $52.4 million in 2002. As a
percentage of net broadcasting revenue, SOI increased to
36.0% in 2003 from 33.5% in 2002. The increase was primarily attributable to the
effect of radio stations acquired during 2002 and 2003 that previously operated
with formats other than their current format and the effect of the growth of our
contemporary Christian music format. Acquired and reformatted radio stations
typically produce low margins during the first few years following conversion.
SOI margins improve as we implement scheduled program rate
increases, sell more of the available inventory on the station, and increase advertising revenue on our stations. On a same station
basis, SOI improved $9.0 million or 17.3% to $61.5 million
in 2003 from $52.5 million in 2002. As a percentage of same station net
broadcasting revenue, same station SOI increased to 36.4%
in 2003 from 33.6% in 2002.
The following table provides
a reconciliation of SOI (a non-GAAP financial measure) to
operating income (as presented in our financial statements) for the twelve
months ended December 31, 2002 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Station operating income
|
$
|
|
|
52,407
|
|
|
|
|
|
|
$
|
|
|
|
61,440
|
|
|
Plus other
media revenue
|
|
|
|
8,054
|
|
|
|
|
|
|
|
|
|
|
7,865
|
|
|
Less cost
of denied tower site and license upgrade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,202
|
)
|
|
Less other
media operating expenses
|
|
|
|
(7,709
|
)
|
|
|
|
|
|
|
|
|
|
(7,942
|
)
|
|
Less
depreciation and amortization
|
|
|
|
(11,446
|
)
|
|
|
|
|
|
|
|
|
|
(12,291
|
)
|
|
Less loss on disposal of assets
|
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
|
(214
|
)
|
|
Less corporate expenses
|
|
|
|
(14,387
|
)
|
|
|
|
|
|
|
|
|
|
(16,091
|
)
|
|
Less cost of terminated offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(651
|
)
|
|
Less legal settlement
|
|
|
|
(2,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
|
|
24,052
|
|
|
|
|
|
|
$
|
|
|
|
29,914
|
|
|
|
|
|
|
|
|
|
|
|
41
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The discussion and analysis
of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
GAAP. The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to allowance for doubtful accounts, acquisitions and upgrades of radio
station and network assets, goodwill and other intangible assets, income taxes,
and long-term debt and debt covenant compliance. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following
accounting policies and the related judgments and estimates are critical
accounting policies which affect the preparation of our consolidated financial
statements.
Accounting for acquisitions and upgrades of radio station
and network assets
Most of our radio station acquisitions have been acquisitions of selected assets and
not of businesses. Such asset acquisitions have consisted primarily of the FCC licenses to broadcast in a
particular market. We often do not acquire the existing format, or we change the format upon acquisition when we
find it beneficial. As a result, a substantial portion of the purchase price for the assets of a radio station is
allocated to the FCC license. It is our policy to retain third-party appraisers to value radio
stations, networks or other media properties under consideration for acquisition. The allocations assigned to
acquired FCC licenses and other assets are subjective by their nature and require our careful consideration and
judgment. We believe the allocations represent appropriate estimates of the fair value of the assets acquired. As
part of the valuation and appraisal process, the third-party appraisers prepare reports which assign values to
the various asset categories in our financial statements. Our management reviews these reports and determines the
reasonableness of the assigned values used to record the acquisition of the radio station, network or other media
properties at the close of the transaction.
From time to time we undertake projects to upgrade our radio station technical
facilities and/or FCC licenses. Our policy is to capitalize costs up to the point where the project is complete,
at which point we transfer the costs to the appropriate fixed asset and/or intangible asset categories. In
certain cases where a projects completion is contingent upon FCC or other regulatory approval, we assess the
probable future benefit of the asset at the time that it is recorded and monitor it through the FCC or other
regulatory approval process. In the event the required approval is not considered probable, we write-off the
capitalized costs of the project.
Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. An analysis is performed by applying various percentages
based on the age of the receivable and other subjective and historical analysis. A considerable amount of
judgment is required in assessing the likelihood of ultimate realization of these receivables including the
current creditworthiness of each customer. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional allowances may be required.
42
Intangible assets
Under the Financial Accounting Standards Boards rules, SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, we no longer amortize goodwill and
intangible assets deemed to have indefinite lives, but perform annual impairment tests in accordance with these
statements. We believe our FCC licenses have indefinite lives and accordingly amortization
expense is no longer recorded for our FCC licenses as well as our goodwill. Other intangible assets continue to
be amortized over their useful lives.
We perform an annual test of impairment on our FCC licenses and our goodwill. These
tests include comparing the recorded values to the appraised values, calculations of discounted cash flows,
operating income and other analyses. As of December 31, 2004, based on our application of the impairment rules,
no impairment was recorded. The assessment of the fair values of these assets and the underlying businesses are
estimates which require careful consideration and judgments by our management. If conditions in the markets in
which that our stations and other media businesses operate or if the operating results of our stations and other
media businesses change or fail to develop as anticipated, our estimates of the fair values may change in the
future and result in impairment charges.
Valuation allowance (deferred taxes)
For financial reporting purposes, the company has recorded a valuation allowance of
$3.1 million as of December 31, 2004, to offset a portion of the deferred tax assets related to the state net
operating loss carryforwards. Management regularly reviews our financial forecasts in an effort to
determine our ability to utilize the net operating loss carryforwards for tax purposes. Accordingly, the valuation allowance is
adjusted periodically based on managements estimate of the benefit the company will receive from such
carryforwards.
Long-term debt and debt covenant compliance
Our classification of our borrowings under our credit facility as
long-term debt on our balance sheet is based on our assessment that, under the borrowing restrictions and covenants in our credit
facility and after considering our projected operating results and cash flows for the coming year, no principal
payments will be required pursuant to the credit agreement. These projections are estimates dependent upon a
number of factors including developments in the markets in which we are operating in and economic and political
factors, among other factors. Accordingly, these projections are inherently uncertain and our actual results
could differ from these estimates. Should our actual results differ materially from these estimates, payments may
become due under our credit facility or it may become necessary to seek an amendment to our credit facility.
Based on our managements current assessment, we do not anticipate principal payments becoming due under our
credit facility or a further amendment of our credit facility becoming necessary.
43
RECENT ACCOUNTING PRONOUNCEMENTS
FASB Interpretation No. 46 - Consolidation
of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which establishes criteria to identify variable interest entities and the primary
beneficiary of such entities. An entity that qualifies as a variable interest entity must be consolidated by its
primary beneficiary. All other holders of interests in a variable interest entity must disclose the nature,
purpose, size and activity of the variable interest entity as well as their maximum exposure to losses as a
result of involvement with the variable interest entity. We do not have any special-purpose entities, as
defined. We adopted Interpretation No. 46 on January 1, 2004. The adoption of Interpretation No. 46 did not have
a material effect on our financial statements.
Statement of Financial
Accounting Standards No. 145
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that statement, SFAS Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. In
addition, SFAS No. 145 amends FASB Statement No. 13, Accounting for Leases.
Salem adopted this statement on January 1, 2003 and its adoption resulted in the
classification of any loss on early retirement of debt in other income and
expense rather than as an extraordinary item under the prior rules.
Statement of Financial
Accounting Standards No. 123R
On October 13, 2004, the
FASB reached a conclusion on Statement 123R,
Share-Based Payment. The Statement would require all public companies
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments to
account for these types of transactions using a fair-value-based method. The
Statement would eliminate the ability to account for share-based compensation
transactions using APB Opinion No. 25, Accounting for Stock Issued to
Employees for interim or annual periods beginning after June 15, 2005. The
company will be required to apply Statement 123R beginning July 1, 2005 and it applies to
unvested options granted prior to that date in addition to any new option grants.
The Statement offers the company alternative methods of adopting this final rule. At
the present time, the company has not yet determined which method it will use
nor has it determined the financial statement impact.
Statement of Financial
Accounting Standards No. 148
In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of SFAS No. 123. This statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirement of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Salem adopted this statement and its adoption did not have a material
impact on Salems financial position, results of operations or cash flows. As
permitted under the statement, Salem continues to measure any expense related to
stock options under the intrinsic value method and provides the required
disclosures under the fair value method in Note 1 of its consolidated financial statements.
44
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed acquisitions through borrowings, including borrowings
under credit facilities and, to a lesser extent, from operating cash flow and selected asset dispositions. We
expect to fund future acquisitions from cash on hand, proceeds from our debt and equity offerings, borrowings
under the credit facility and operating cash flow. We have historically funded, and will continue to fund,
expenditures for operations, administrative expenses, capital expenditures and debt service required by our
credit facility and our senior subordinated notes from operating cash flow and borrowings under our credit
facility. We believe that cash on hand, cash flow from operations,
and borrowings under the credit facility will be sufficient to permit us to meet our financial obligations, fund
pending acquisitions and fund operations for at least the next twelve months.
On May 5, 2004, we completed
a follow-on public offering of our Class A common stock. We used the net proceeds
of $65.7 million from this offering for working capital and general
corporate purposes, including the Redemption of $55.6 million of our 9% Notes.
Cash
. Cash and cash
equivalents were $11.0 million on December 31, 2004. Working capital was $28.9
million on December 31, 2004. Cash and cash equivalents were $5.6 million on
December 31, 2003. Working capital was $27.8 million on December 31, 2003.
The increase in cash and cash equivalents is primarily due to cash provided by
operating activities of $39.3 million and the proceeds of
our follow-on offering of $65.7 million during 2004, which was substantially offset by
the Redemption of $55.6 million of our 9% Notes and capital expenditures of $17.9 million. In addition, $26.5 million in cash was used
to acquire selected assets of six radio stations and the assets of an Internet
portal operation during 2004. During 2004 we had borrowings of $24.0 million from our
credit facilities which were offset by payments of $20.0 million against our credit
facilities.
Net cash provided by
operating activities increased to $39.3 million for the year ended December 31,
2004 compared to $24.0 million in 2003, primarily due to an increase in station
operating income, a $2.2 million write-off during 2003 of costs of
denied / abandoned tower site and license upgrade as compared to a $0.7 million
write-off during 2004, a $0.7 million write-off of costs of a
terminated offering in 2003, lower interest expense in 2004 and improved accounts
receivable collections and an increase in accrued expenses
partially offset by a decrease in accounts payable
and an increase in prepaid expenses.
Net cash used by investing
activities increased to $44.4 million for the year ended December 31, 2004,
compared to $29.7 million in 2003. The increase is due to cash used for
acquisitions ($26.5 million cash used to purchase selected assets of six radio
stations and selected assets of an Internet business during 2004 as compared
to $19.7 million cash used to purchase selected assets of seven radio stations during
2003) and capital expenditures of $17.9 million in 2004 compared to $9.0 million in 2003.
Net cash provided by financing
activities was $10.4 million in 2004, compared to net cash used by financing activities
of $15.1 million for 2003. The decrease was primarily due to the proceeds of
$65.7 million from our follow-on offering of our Class A common stock offset
by the Redemption of $55.6 million of our 9% Notes, net borrowings under our credit facilities
of $4.0 million in 2004 as compared to net repayments of $13.1 million in 2003,
proceeds of $2.3 million from the exercises of stock options in 2004 as compared to
proceeds of $0.4 million in 2003, partially
offset by a payment of $5.0 million for a bond premium in 2004.
45
Credit Facilities.
Our wholly-owned subsidiary, Salem Holding, is the borrower under our credit facilities.
The credit facilities were amended and restated as of September 25, 2003 and amended in May 2004 and
include a $75.0 million senior secured reducing revolving credit facility (revolving credit facility) as well
as a $75.0 million term loan facility (term loan facility). The description of the credit facilities as set
forth below reflects the terms of the amendment and restatement. As of December 31, 2004, the borrowing capacity and
aggregate commitments under our revolving credit facility was $75.0 and under our term loan facility was $75.0 million.
The amount we can borrow, however, is subject to certain restrictions as described below. At December 31, 2004, $75.0 million was
outstanding under the term loan facility and $9.0 million was outstanding under our revolving
credit facility. The borrowing capacity under the revolving credit facility steps down in three 10%
increments commencing June 30, 2007, and matures on March 25, 2009. The borrowing capacity under the term loan
facility steps down 0.5% each December 31 and June 30, commencing December 31, 2004. The term loan facility
matures on the earlier of March 25, 2010, or the date that is six months prior to the maturity of any
subordinated indebtedness of Salem or Salem Holding. The credit facilities require us, under certain
circumstances, to prepay borrowings under the credit facilities with excess cash flow and the net proceeds from
the sale of assets, the issuance of equity interests and the issuance of subordinated notes. If we are required
to make these prepayments, our borrowing capacity and the aggregate commitments under the facilities will be
reduced, but such reduction shall not, in any event, reduce the borrowing capacity and aggregate commitments
under the facilitates below $50.0 million.
Amounts outstanding under
the credit facilities bear interest at a rate based on, at Salem Holdings option, the banks
prime rate or LIBOR, in each case plus a spread. For purposes of determining the
interest rate under our revolving credit facility, the prime rate spread ranges
from 0.25% to 1.75%, and the LIBOR spread ranges from 1.5% to 3.0%. For the term
loan, the prime rate spread ranges from 0.5% to 1.0%, and the LIBOR spread
ranges from 1.75% to 2.25%. In each case, the spread is based on the total
leverage ratio on the date of determination. At December 31, 2004, the blended
interest rate on amounts outstanding under the credit facilities was 4.38%. If
an event of default occurs, the rate may increase by 2.0%.
The maximum amount that
Salem Holding may borrow under our credit facilities is limited by a ratio of our
consolidated existing total adjusted funded debt to pro forma twelve-month cash
flow (the Total Leverage Ratio). Our credit facilities will allow us to adjust
our total debt as used in such calculation by the lesser of (i) 50% of the
aggregate purchase price of acquisitions of newly acquired non-Christian
formatted radio stations that we reformat to a Christian talk, conservative talk
or Christian music format or (ii) $45.0 million, and the cash flow from such
stations will not be considered in the calculation of the ratio during the
period in which such acquisition gives rise to an adjustment to total debt. The
Total Leverage Ratio allowed under the credit facilities was 6.75 to 1 as of
December 31, 2004. The ratio will decline periodically until
December 31, 2006, at which point it will remain at 5.5 to 1 through March 2009.
The Total Leverage Ratio under our credit facilities at December 31, 2004, on a
pro forma basis, was 4.49 to 1, resulting in a borrowing availability of
approximately $65.6 million.
Our credit facilities contain additional restrictive covenants
customary for facilities
of their size, type and purpose which, with specified exceptions, limits our ability to incur debt, have liens,
enter into affiliate transactions, pay dividends, consolidate, merge or effect certain asset sales, make
specified investments, acquisitions and loans and change the nature of our business. Our credit facilities also
require us to satisfy specified financial covenants, which covenants require us on a consolidated basis to
maintain specified financial ratios and comply with certain financial tests, including ratios for maximum
leverage as described above, minimum interest coverage (not less than 1.5 to 1 through June 29, 2005 increasing
in increments to 2.5 to 1 after June 30, 2008), minimum debt service coverage (a static ratio of not less than
1.25 to 1), a maximum consolidated senior leverage ratio (a static ratio of 3.0 to 1 prior to the issuance of
$50.0 million in new subordinated notes, after any such issuance the ratio shall not exceed 2.5 to 1), and
minimum fixed charge coverage (a static ratio of not less than 1.1 to 1). Salem and all of its subsidiaries,
except for Salem Holding, are guarantors of borrowings under the credit facilities. The credit facilities are
secured by liens on all of our and our subsidiaries assets and pledges of all of the capital stock of our
subsidiaries.
46
As of December 31, 2004,
management believes we were in compliance with all of the covenants under our
terms of the credit facilities.
9½% Notes.
In
September 1997, we issued $150.0 million principal amount of 9½% Notes. In July
1999, we repurchased $50.0 million in principal amount of those notes with a
portion of the net proceeds of our initial public offering. In January 2003, we redeemed
the remaining $100.0 million in principal amount of the 9½% Notes from the
proceeds of the issuance of $100.0 million principal amount of 7¾% Notes. As a
result of this redemption, we incurred a non-cash charge in the first quarter of
2003 of approximately $1.7 million for the write-off of unamortized bond issue
costs. This was in addition to the $4.8 million premium paid in connection with
this redemption.
9% Notes.
In September 2001, Salem Holding issued
$150.0 million principal amount of 9% Notes.
The indenture for the 9% Notes contains restrictive covenants that, among other things, limit the
incurrence of debt by Salem Holding and its subsidiaries, the payment of dividends, the use of proceeds of
specified asset sales and transactions with affiliates. During the second quarter of 2004, Salem completed the Redemption
of $55.6 million of the 9% Notes, leaving $94.4 million outstanding. After giving effect
to the Redemption, Salem Holding is required to pay $8.5 million per year in interest on the outstanding 9% Notes. We and all of our subsidiaries
(other than Salem Holding) are guarantors of the 9% Notes.
As a result of the Redemption of $55.6 million of 9% Notes,
we incurred a non-cash
charge in the second quarter of 2004 of approximately $1.6 million for the write-off of unamortized bond issue
costs in addition the $5.0 million premium paid in connection with the Redemption. The $6.6 million was reported
as loss on early redemption of long-term debt in the Statements of Operations.
As of December 31, 2004,
management believes we were in compliance with all of the covenants under the
indenture for the 9% Notes.
7¾% Notes.
In
December 2002, Salem Holding issued $100.0 million principal amount of 7¾% Notes.
Salem Holding used the net proceeds to redeem the $100.0 million 9½% Notes on January
22, 2003. The indenture for the 7¾% Notes contains restrictive covenants that,
among other things, limit the incurrence of debt by Salem Holding and its subsidiaries, the
payment of dividends, the use of proceeds of specified asset sales and
transactions with affiliates. Salem Holding is required to pay $7.8 million per year in
interest on the 7¾% Notes. We and all of our subsidiaries (other than Salem Holding)
are guarantors of the 7¾% Notes.
As of December 31, 2004,
management believes we were in compliance with all of the covenants under the
indenture for the 7¾% Notes.
47
|
|
|
|
|
|
|
Summary of Long-Term Debt Obligations
|
|
As of December 31, 2004
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Term loan under credit facility
|
|
|
|
$
|
75,000
|
|
Revolving line of credit under credit facility
|
|
|
|
|
9,000
|
|
9% senior subordinated notes due 2011
|
|
|
|
|
94,370
|
|
7¾% senior subordinated notes due 2010
|
|
|
|
|
100,000
|
|
Fair market value of interest swap agreement
|
|
|
|
|
3,732
|
|
Capital leases and other loans
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
282,169
|
|
Less current portion
|
|
|
|
|
1,145
|
|
|
|
|
|
|
|
|
|
|
$
|
281,024
|
|
|
|
|
|
|
|
|
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2004 and
2003, Salem did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, Salem is not materially exposed to any financing,
liquidity, market or credit risk that could arise if Salem had engaged in such
relationships.
CONTRACTUAL OBLIGATIONS
Future minimum contractual
obligations, including capital and operating leases, revolving bank and bond
issue debt, excluding associated interest costs, as well as other long-term
obligations as of December 31, 2004, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
Less
|
Contractual
|
|
|
|
|
than 1
|
|
1-3
|
|
3-5
|
|
More Than 5
|
Obligations
|
|
Total
|
|
year
|
|
years
|
|
years
|
|
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Long-term debt
|
|
$
|
278,370
|
|
$
|
1,125
|
|
$
|
1,500
|
|
$
|
10,500
|
|
$
|
265,245
|
Capital lease obligations and other loans
|
|
|
67
|
|
|
20
|
|
|
40
|
|
|
7
|
|
|
|
Operating leases
|
|
|
60,836
|
|
|
8,516
|
|
|
13,503
|
|
|
9,062
|
|
|
29,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
339,273
|
|
$
|
9,661
|
|
$
|
15,043
|
|
$
|
19,569
|
|
$
|
295,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
DERIVATIVE INSTRUMENTS
We are exposed to
fluctuations in interest rates. We actively monitor these fluctuations and use
derivative instruments from time to time to manage the related risk. In
accordance with our risk management strategy, we use derivative instruments only
for the purpose of managing risk associated with an asset, liability, committed
transaction, or probable forecasted transaction that is identified by
management. Our use of derivative instruments may result in short-term gains or
losses and may increase volatility in our earnings.
At December 31, 2004, an
interest rate swap agreement with a notional principal amount of $66.0 million
was outstanding. This agreement related to our $94.4 million 9% Notes.
This agreement was scheduled to expire in 2011 when the 9% Notes mature,
and effectively swapped the 9.0% fixed interest rate on $66.0 million of the 9%
Notes for a floating rate equal to the LIBOR rate plus 3.09%. The estimated fair
value of this swap agreement and the excess of fair value over the book value of
the debt hedged by the swap, based on current market rates, were each $3.7 million
at December 31, 2004. Changes in the fair value of the swap and the changes in
the fair value of debt being hedged are recorded as part of interest expense.
The fair value of the swap agreement is included with long-term assets, and the
fair value of the debt hedged by the swap is recorded in long-term debt consistent
with the maturity date of the swap and related debt. Because this fair value hedge
was effective (that is, the change in the fair value of the hedge instrument was
designed to be equal to the change in the fair value of the item being hedged),
there was no income statement effect relative to the change in the fair value of
the swap agreement. Interest expense for the year ended December 31, 2004
was reduced by $2.8 million as a result of the difference between the 9.0% fixed
interest rate on the 9% hedged debt and the floating interest rate under the swap agreement,
which was 4.31% for the six month period ended June 30, 2004 and was 5.03% for the six
month period ending December 31, 2004. On February 18, 2005, we sold our entire interest
in this swap and received a payment of approximately $3.7 million, which will be amortized
as a reduction of interest expense over the remaining life of the 9% Notes.
We had a second interest
rate swap agreement with a notional principal amount of $24.0
million. This agreement also related to our 9% Notes. This agreement was to expire
in 2011 when the 9% Notes mature, and effectively swapped the 9.0% fixed interest
rate on $24.0 million of the 9% Notes for a floating rate equal to the LIBOR rate
plus 4.86%. On August 20, 2004, we sold our interest in $14.0 million of this swap.
As a result of this transaction, we paid and capitalized $0.3 million in buyout
premium which will be amortized into interest expense over the remaining life of
the 9% Notes. On October 22, 2004, we sold our remaining $10.0 million
interest in this swap. As a result of this second transaction, we paid and capitalized $0.1 million in buyout
premium which will be amortized into interest expense over the remaining life of
the 9% Notes. We recognized approximately $25,000 in interest expense related to the
amortization of capitalized buyout premium for the year ended December 31, 2004.
Because this fair value hedge
was effective (that is, the change in the fair value of the hedge instrument was
designed to be equal to the change in the fair value of the item being hedged),
there was no income statement effect relative to the change in the fair value of
the swap agreement. Interest expense for the year ended December 31, 2004 was reduced by $0.5 million
as a result of the difference between the 9.0% fixed interest rate on our debt
and the floating interest rate under the swap agreement, which was 6.08% for the
six months ended June 30, 2004 and was 6.80% for the six month period ending
December 31, 2004.
49
MARKET RISK
In addition to the
interest rate swap agreements discussed above under Derivative
Instruments, borrowings under the credit facilities are subject to market risk exposure, specifically to changes
in LIBOR and in the prime rate in the United States. As of September 30, 2004, we had borrowed $84.0 million
under the credit facilities. As of December 31, 2004, we could borrow up to an additional $65.6 million under the credit facilities.
Amounts outstanding under the credit facilities bear interest at a base rate, at our option, of the banks prime rate or LIBOR,
plus a spread. For purposes of determining the interest rate under the revolving credit facilities, the prime rate spread ranges
from 0.25% to 1.75%, and the LIBOR spread ranges from 1.5% to 3.0%. As of December 31, 2004, the blended interest rate on
amounts outstanding under the credit facilities was 4.38%. At December 31, 2004, a hypothetical 100 basis point increase in the
prime rate or LIBOR, as applicable, would result in additional interest expense of $0.8 million on an annualized basis.
In addition to the variable rate
debt disclosed above, we have fixed rate debt with a carrying value of $194.4
million (relating to the outstanding 9% Notes and the 7¾% Notes)
as of December 31, 2004, with an aggregate fair value of $211.7 million.
We are exposed to changes in the fair value of these financial instruments based
on changes in the market rate of interest on this debt. The ultimate value of
these notes will be determined by actual market prices, as all of these notes
are tradable. We estimate that a hypothetical 100 basis point increase in
market interest rates would result in a decrease in the aggregate fair value of
the notes to approximately $201.8 million and a hypothetical 100 basis point
decrease in market interest rates would result in the increase of the fair value
of the notes to approximately $222.2 million.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
PAGE
|
|
|
|
Report of
Independent Registered Public Accounting Firm
|
|
52
|
|
|
Consolidated Balance Sheets as of December 31, 2003 and 2004
|
|
53
|
|
|
Consolidated Statements of Operations for the years ended December 31, 2002,
2003 and 2004
|
|
54
|
|
|
Consolidated Statements of Stockholders Equity for the years ended
December 31, 2002, 2003 and 2004
|
|
56
|
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2003 and 2004
|
|
57
|
|
|
Notes to
Consolidated Financial Statements
|
|
58
|
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Salem
Communications Corporation
We have audited the
accompanying consolidated balance sheets of Salem Communications Corporation as
of December 31, 2003 and 2004, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three years in
the period ended December 31, 2004. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements
and schedule are the responsibility of Salem Communications Corporations
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United
States). 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 Salem Communications Corporation at
December 31, 2003 and 2004, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
Los Angeles,
California
March 11, 2005
52
|
|
|
|
|
|
|
|
|
|
|
|
|
SALEM COMMUNICATIONS CORPORATION
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
(Dollars in thousands, except share
and per share data)
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
Cash and
cash equivalents
|
|
$
|
5,620
|
|
|
$
|
10,994
|
|
|
Accounts
receivable (less allowance for doubtful accounts of $9,423 in 2003 and
$8,109 in 2004)
|
|
|
31,509
|
|
|
|
29,535
|
|
|
Other
receivables
|
|
|
3,071
|
|
|
|
1,629
|
|
|
Prepaid
expenses
|
|
|
1,747
|
|
|
|
2,083
|
|
|
Due from
stockholders
|
|
|
83
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
4,754
|
|
|
|
4,683
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
46,784
|
|
|
|
48,924
|
|
Property,
plant and equipment, net
|
|
|
97,393
|
|
|
|
102,987
|
|
Broadcast
licenses
|
|
|
381,740
|
|
|
|
406,290
|
|
Goodwill
|
|
|
11,129
|
|
|
|
11,419
|
|
Amortizable intangible assets, net of accumulated amortization of
$4,736 in 2003 and $6,269 in 2004
|
|
|
4,262
|
|
|
|
2,757
|
|
Bond issue
costs
|
|
|
5,631
|
|
|
|
3,342
|
|
Bank loan fees
|
|
|
3,988
|
|
|
|
3,710
|
|
Fair value
of interest rate swap
|
|
|
6,045
|
|
|
|
4,142
|
|
Other
assets
|
|
|
3,039
|
|
|
|
2,213
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
560,011
|
|
|
$
|
585,784
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
Accounts
payable
|
|
$
|
535
|
|
|
$
|
581
|
|
|
Accrued
expenses
|
|
|
5,454
|
|
|
|
6,471
|
|
|
Accrued
compensation and related
|
|
|
4,661
|
|
|
|
5,310
|
|
|
Accrued
interest
|
|
|
7,127
|
|
|
|
5,136
|
|
|
Deferred
revenue
|
|
|
1,163
|
|
|
|
1,402
|
|
|
Current
portion of long-term debt and capital lease obligations
|
|
|
15
|
|
|
|
1,145
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
18,955
|
|
|
|
20,045
|
|
Long-term
debt and capital lease obligations, less current portion
|
|
|
330,046
|
|
|
|
277,292
|
|
Fair value
in excess of book value of debt hedged with interest rate
swap
|
|
|
6,045
|
|
|
|
3,732
|
|
Deferred
income taxes
|
|
|
28,999
|
|
|
|
32,715
|
|
Deferred
revenue
|
|
|
3,472
|
|
|
|
3,364
|
|
Other
liabilities
|
|
|
672
|
|
|
|
999
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
Class A common stock, $0.01 par value; authorized 80,000,000
shares; issued and outstanding 17,956,567 shares and 20,408,742 in 2003
and 2004, respectively
|
|
|
180
|
|
|
|
204
|
|
|
Class B common stock, $0.01 par value; authorized 20,000,000
shares; issued and outstanding 5,553,696 shares
|
|
|
56
|
|
|
|
56
|
|
|
Additional
paid-in capital
|
|
|
148,538
|
|
|
|
216,996
|
|
|
Retained
earnings
|
|
|
23,048
|
|
|
|
30,381
|
|
|
|
|
|
|
|
|
|
Total
stockholders equity
|
|
|
171,822
|
|
|
|
247,637
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
|
$
|
560,011
|
|
|
$
|
585,784
|
|
|
|
See accompanying notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
Net
broadcasting revenue
|
|
$
|
156,216
|
|
|
$
|
170,483
|
|
|
$
|
187,543
|
|
Other
media revenue
|
|
|
8,054
|
|
|
|
7,865
|
|
|
|
9,342
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
164,270
|
|
|
|
178,348
|
|
|
|
196,885
|
|
Operating
expenses:
|
|
Broadcasting operating expenses (including $1,146, $1,191 and
$1,101 for the years ended December 31, 2002, 2003 and 2004, respectively,
paid to related parties)
|
|
|
103,809
|
|
|
|
109,043
|
|
|
|
115,896
|
|
|
Cost of
denied / abandoned tower site and license upgrade
|
|
|
|
|
|
|
2,202
|
|
|
|
746
|
|
|
Other
media operating expenses
|
|
|
7,709
|
|
|
|
7,942
|
|
|
|
8,600
|
|
|
Legal
settlement
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
Corporate
expenses (including $307, $277 and $342 for the years ended December 31,
2002, 2003 and 2004, respectively, paid to related
parties)
|
|
|
14,387
|
|
|
|
16,091
|
|
|
|
17,480
|
|
|
Cost of
terminated offering
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
Depreciation (including $429, $515 and $414 for the years ended
December 31, 2002, 2003 and 2004, respectively, for other media
businesses)
|
|
|
9,537
|
|
|
|
10,703
|
|
|
|
10,900
|
|
|
Amortization (including $286, $644 and $620 for the years ended
December 31, 2002, 2003 and 2004, respectively, for other media
businesses)
|
|
|
1,909
|
|
|
|
1,588
|
|
|
|
1,533
|
|
|
Loss on disposal of assets
|
|
|
567
|
|
|
|
214
|
|
|
|
3,266
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
140,218
|
|
|
|
148,434
|
|
|
|
158,421
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
24,052
|
|
|
|
29,914
|
|
|
|
38,464
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
255
|
|
|
|
212
|
|
|
|
171
|
|
|
Interest
expense
|
|
|
(27,162
|
)
|
|
|
(23,474
|
)
|
|
|
(19,931
|
)
|
|
Loss on
early retirement of debt
|
|
|
|
|
|
|
(6,440
|
)
|
|
|
(6,588
|
)
|
|
Other
expense, net
|
|
|
(458
|
)
|
|
|
(410
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and discontinued operations
|
|
|
(3,313
|
)
|
|
|
(198
|
)
|
|
|
12,000
|
|
|
Provision
(benefit) for income taxes
|
|
|
(1,323
|
)
|
|
|
479
|
|
|
|
4,576
|
|
|
|
|
|
|
|
|
|
Income
(loss) before discontinued operations
|
|
|
(1,990
|
)
|
|
|
(677
|
)
|
|
|
7,424
|
|
|
Income
(loss) from discontinued operations (including gain on sale of $15,909 net
of taxes of $11,967 for the year ended December 31, 2002)
|
|
|
15,995
|
|
|
|
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
14,005
|
|
|
$
|
(677
|
)
|
|
$
|
7,333
|
|
|
|
|
|
|
|
|
|
54
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except share and
per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share data:
|
|
Earnings (loss) before discontinued
operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.29
|
|
Income (loss) from discontinued
operations
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per
share
|
|
|
0.60
|
|
|
|
(0.03
|
)
|
|
|
0.29
|
|
|
Diluted
earnings (loss) per share data:
|
|
Earnings (loss) before discontinued
operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.29
|
|
Income (loss) from discontinued
operations
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per
share
|
|
|
0.59
|
|
|
|
(0.03
|
)
|
|
|
0.29
|
|
|
Basic
weighted average shares outstanding
|
|
|
23,473,821
|
|
|
|
23,488,898
|
|
|
|
25,220,678
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
23,582,906
|
|
|
|
23,488,898
|
|
|
|
25,371,649
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
55
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands, except share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
Class B
|
|
|
|
|
|
|
Common Stock
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
|
Paid-In
|
|
Retained
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity, January 1, 2002
|
|
17,904,942
|
|
$
|
179
|
|
5,553,696
|
|
$
|
56
|
|
$
|
147,415
|
|
$
|
9,720
|
|
|
$
|
157,370
|
|
Options exercised
|
|
25,475
|
|
|
|
|
|
|
|
|
|
|
553
|
|
|
|
|
|
|
553
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,005
|
|
|
|
14,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity, December 31, 2002
|
|
17,930,417
|
|
|
179
|
|
5,553,696
|
|
|
56
|
|
|
147,968
|
|
|
23,725
|
|
|
|
171,928
|
|
Options exercised
|
|
26,150
|
|
|
1
|
|
|
|
|
|
|
|
402
|
|
|
|
|
|
|
403
|
|
Tax benefit related to stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
168
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(677
|
)
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity, December 31, 2003
|
|
17,956,567
|
|
|
180
|
|
5,553,696
|
|
|
56
|
|
|
148,538
|
|
|
23,048
|
|
|
|
171,822
|
|
Public issuance of class A common stock
|
|
2,325,000
|
|
|
23
|
|
|
|
|
|
|
|
65,691
|
|
|
|
|
|
|
65,714
|
|
Options exercised
|
|
127,175
|
|
|
1
|
|
|
|
|
|
|
|
2,272
|
|
|
|
|
|
|
2,273
|
|
Tax benefit related to stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
495
|
|
|
|
|
|
|
495
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,333
|
|
|
|
7,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity, December 31, 2004
|
|
20,408,742
|
|
$
|
204
|
|
5,553,696
|
|
$
|
56
|
|
$
|
216,996
|
|
$
|
30,381
|
|
|
$
|
247,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALEM COMMUNICATIONS
CORPORATION
|
CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
(Dollars in thousands)
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
|
14,005
|
|
|
$
|
|
(677
|
)
|
|
$
|
|
7,333
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on
sale of discontinued operations, net of tax
|
|
|
(15,909
|
)
|
|
|
|
|
|
|
|
|
91
|
|
|
Depreciation and amortization
|
|
|
11,446
|
|
|
|
|
12,291
|
|
|
|
|
12,433
|
|
Amortization of bank loan fees
|
|
|
633
|
|
|
|
|
853
|
|
|
|
|
775
|
|
|
Amortization of bond issue costs
|
|
|
976
|
|
|
|
|
761
|
|
|
|
|
711
|
|
|
Provision
for bad debts
|
|
|
4,237
|
|
|
|
|
6,136
|
|
|
|
|
3,821
|
|
|
Deferred
income taxes
|
|
|
(2,123
|
)
|
|
|
|
80
|
|
|
|
|
3,787
|
|
|
Loss on disposal of assets
|
|
|
567
|
|
|
|
|
214
|
|
|
|
|
3,266
|
|
|
Tax
benefit related to stock options exercised
|
|
|
|
|
|
|
|
168
|
|
|
|
|
496
|
|
|
Loss on
early extinguishment of debt, before taxes
|
|
|
|
|
|
|
|
6,440
|
|
|
|
|
6,588
|
|
|
Costs of
denied tower site and license upgrade
|
|
|
|
|
|
|
|
2,202
|
|
|
|
|
746
|
|
|
Cost of
terminated offering
|
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
Changes in
operating assets and liabilities:
|
|
Accounts
receivable
|
|
|
|
(7,238
|
)
|
|
|
|
(6,949
|
)
|
|
|
|
(1,847
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
|
(992
|
)
|
|
|
|
(1,042
|
)
|
|
|
|
1,189
|
|
|
Accounts
payable and accrued expenses
|
|
|
|
982
|
|
|
|
|
1,075
|
|
|
|
|
(370
|
)
|
|
Deferred
revenue
|
|
|
|
(221
|
)
|
|
|
|
2,580
|
|
|
|
|
131
|
|
|
Other
liabilities
|
|
|
|
(117
|
)
|
|
|
|
(137
|
)
|
|
|
|
156
|
|
|
Income
taxes
|
|
|
|
568
|
|
|
|
|
(612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by operating activities
|
|
|
6,814
|
|
|
|
|
24,034
|
|
|
|
|
39,306
|
|
|
INVESTING ACTIVITIES
|
Purchases
of property, plant and equipment
|
|
|
(15,320
|
)
|
|
|
|
(8,978
|
)
|
|
|
|
(17,869
|
)
|
Deposits
on acquisitions of radio station assets
|
|
|
(100
|
)
|
|
|
|
(125
|
)
|
|
|
|
(425
|
)
|
Purchases
of radio station assets
|
|
|
(55,215
|
)
|
|
|
|
(19,816
|
)
|
|
|
|
(26,460
|
)
|
Proceeds
from sale of property, plant and equipment and broadcast licenses
|
|
|
45,000
|
|
|
|
|
406
|
|
|
|
|
1
|
|
Other
assets
|
|
|
(1,383
|
)
|
|
|
|
(1,175
|
)
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
Net cash
used in investing activities
|
|
|
(27,018
|
)
|
|
|
|
(29,688
|
)
|
|
|
|
(44,359
|
)
|
|
FINANCING ACTIVITIES
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
65,714
|
|
Payments for redemption
of 9% Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,630
|
)
|
Proceeds
from issuance of long-term debt
|
|
|
99,750
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds of long-term debt and notes payable
|
|
|
48,450
|
|
|
|
|
95,400
|
|
|
|
|
24,000
|
|
Payments
of long-term debt and notes payable
|
|
|
(17,000
|
)
|
|
|
|
(108,450
|
)
|
|
|
|
(20,000
|
)
|
Proceeds
from exercise of stock options
|
|
|
553
|
|
|
|
|
403
|
|
|
|
|
2,272
|
|
Issuance of loans
and capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Payments
on capital lease obligations
|
|
|
(589
|
)
|
|
|
|
(36
|
)
|
|
|
|
(18
|
)
|
Payments for
interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
(440
|
)
|
Payments
of costs related to bank credit facility
|
|
|
|
|
|
|
|
(1,517
|
)
|
|
|
|
(497
|
)
|
Payments
of bond issue costs
|
|
|
(895
|
)
|
|
|
|
(851
|
)
|
|
|
|
|
|
Payment of bond
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,998
|
)
|
Deposit to
redeem long-term debt
|
|
|
(107,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) financing activities
|
|
|
22,608
|
|
|
|
|
(15,051
|
)
|
|
|
|
10,427
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
2,404
|
|
|
|
|
(20,705
|
)
|
|
|
|
5,374
|
|
Cash and
cash equivalents at beginning of period
|
|
|
23,921
|
|
|
|
|
26,325
|
|
|
|
|
5,620
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents at end of period
|
$
|
|
26,325
|
|
|
$
|
|
5,620
|
|
|
$
|
|
10,994
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash paid
during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
|
26,854
|
|
|
$
|
|
28,115
|
|
|
$
|
|
23,627
|
|
|
Income taxes
|
|
|
|
368
|
|
|
|
|
1,225
|
|
|
|
|
300
|
|
|
See accompanying notes
|
|
57
|
SALEM COMMUNICATIONS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Reorganization
The accompanying
consolidated financial statements of Salem Communications Corporation (Salem
or the Company) include the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
The Company is a holding
company with substantially no assets, operations or cash flows other than its
investments in subsidiaries. The Company excluding its subsidiaries is herein
referred to as Parent. In May 2000, the Company formed two new wholly-owned
subsidiaries, Salem Communications Holding Corporation (HoldCo) and Salem
Communications Acquisition Corporation (AcquisitionCo), each a Delaware
corporation. HoldCo is the issuer of the 9% Senior Subordinated Notes due 2011
(9% Notes) and the 7¾% Senior Subordinated Notes due 2010 (7¾% Notes).
HoldCo is a holding company with substantially no assets, operations or cash
flows other than its investments in subsidiaries. In July 2000, the Company
formed SCA License Corporation (SCA), a Delaware corporation. HoldCo and
AcquisitionCo are direct subsidiaries of the Company; SCA is a wholly-owned
subsidiary of AcquisitionCo. Parent, AcquisitionCo and all of its subsidiaries
and all of the subsidiaries of HoldCo are Guarantors of the 9% Notes and the 7¾%
Notes discussed in Note 5. The Guarantors (i) are wholly-owned subsidiaries of
the Company, (ii) comprise substantially all the Companys direct and indirect
subsidiaries and (iii) have fully and unconditionally guaranteed on a joint and
several basis, the 9% Notes and the 7¾% Notes. SCA owns the assets of nine radio
stations as of December 31, 2004. See Note 12 for certain consolidating
information with respect to the Company.
Description of Business
Salem is a domestic U.S.
radio broadcast company, which has traditionally provided talk and music
programming targeted at audiences interested in Christian and family issues.
Salem operated 98 and 92 radio stations across the United States at December 31,
2004 and 2003, respectively. The Company also owns and operates Salem Radio
Network® (SRN), SRN News Network (SNN), Salem Music Network (SMN), Reach
Satellite Network (RSN) and Salem Radio Representatives (SRR). SRN, SNN, SMN
and RSN are radio networks, which produce and distribute talk, news and music
programming to radio stations in the U.S., including some of Salems stations.
SRR sells commercial air time to national advertisers for Salems radio stations
and networks, and for independent radio station affiliates.
Salem also owns and operates
Salem Web Network (SWN) and Salem Publishing. SWN provides on-demand audio
streaming and related services. Salem Publishing publishes magazines that follow
the Christian music industry. The revenue and related operating expenses of
these businesses are reported as other media on the consolidated
Statements of Operations.
58
Cash and Cash Equivalents
The Company considers all
highly liquid debt instruments, purchased with an initial maturity of three
months or less, to be cash equivalents. The carrying value of the Companys cash equivalents
approximated fair value at each balance sheet date.
Revenue Recognition
Revenues are recognized when
pervasive evidence of an arrangement exists, delivery has occurred or the
service has been rendered, the price to the customer is fixed or determinable
and collection of the arrangement fee is reasonably assured.
Revenue from radio programs
and commercial advertising is recognized when broadcast. Salems broadcasting
customers principally include not-for-profit charitable organizations and
commercial advertisers.
Revenue from the sale of
products and services from the Companys other media businesses is recognized
when the products are shipped and the services are rendered. Revenue from the
sale of advertising in Salem Publishings publications is recognized upon publication.
Revenue from the sale of subscriptions to Salem Publishings publications is recognized over
the life of the subscription.
Advertising by the radio
stations exchanged for goods and services is recorded as the advertising is
broadcast and is valued at the estimated value of goods or services received or
to be received. The value of the goods and services received in such barter
transactions is charged to expense when used. Barter advertising revenue
included in broadcasting revenue for the years ended December 31, 2002, 2003 and
2004 was approximately $4.6 million, $5.5 million and $5.4 million,
respectively, and barter expenses were approximately the same as barter revenue
for each period. The Company records its broadcast advertising provided in
exchange for goods and services as broadcasting revenue and the goods or
services received in exchange for such advertising as broadcasting operating
expenses.
Accounting For Stock Based Compensation
Employee stock options are
accounted for under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, which requires the recognition of expense when the
option price is less than the fair value of the stock at the date of
grant.
The Company generally awards
options for a fixed number of shares at an option price equal to the fair value
at the date of grant. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation and SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure. See Note
7.
SFAS No. 123, as amended by
SFAS No. 148, permits companies to recognize, as expense over the vesting
period, the fair value of all stock-based awards on the date of grant. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. Because the Companys stock-based compensation plans have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, management believes that the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of awards from
the plan. Therefore, as permitted, the Company applies the existing accounting
rules under APB No. 25 and provides pro forma net income (loss) and pro forma
income (loss) per share disclosures for stock-based awards made during the year
as if the fair value method defined in SFAS No. 123, as amended, had been
applied. Net income (loss) and net income (loss) per share for each of the years
ended December 31, 2002, 2003 and 2004 would have changed to the following pro
forma amounts:
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
Net income
(loss), as reported
|
$
|
14,005
|
|
|
$
|
(677
|
)
|
|
$
|
7,333
|
|
Add:
Stock-based compensation, as reported
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based compensation determined under fair value based method
for all awards, net of tax
|
|
586
|
|
|
|
790
|
|
|
|
4,920
|
|
|
|
|
|
|
|
|
|
|
Pro forma
net income (loss)
|
$
|
13,419
|
|
|
$
|
(1,467
|
)
|
|
$
|
2,413
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share - as reported
|
$
|
0.60
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.29
|
|
Basic
income (loss) per share - pro forma
|
$
|
0.57
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.10
|
|
Diluted
income (loss) per share - as reported
|
$
|
0.59
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.29
|
|
Diluted
income (loss) per share - pro forma
|
$
|
0.57
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.10
|
|
Using the Black-Scholes
valuation model, the per share weighted-average fair value of stock options
granted during the years ended December 31, 2002, 2003 and 2004 was $13.21,
$9.25, and $14.64, respectively. The pro forma effect on the Companys net income (loss)
and basic and diluted income (loss) per share for 2002, 2003 and 2004 is not
representative of the pro forma effect in future years. The fair value of each
option is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions were used for grants made in
2002: dividend yield of 0%; expected volatility of 55.9%; risk-free interest
rate of 4.5%; expected life of 4 years. The following assumptions were used for
grants made in 2003: dividend yield of 0%; expected volatility of 132.8%;
risk-free interest rate of 4.35%; expected life of 4 years. The following assumptions
were used for grants made in 2004: dividend yield of 0% expected volatility with
a range of 134.3% to 138.1%; risk-free interest rate of 4.61%; expected life of 4 years.
60
Accounting for upgrades of radio station and network assets
From time to time the
Company undertakes projects to upgrade its radio station technical facilities
and/or FCC licenses. The Companys policy is to capitalize costs up to the point
where the project is complete, at which point the Company transfers the costs to
the appropriate fixed asset and/or intangible asset categories. In certain cases
where a projects completion is contingent upon FCC or other regulatory
approval, the Company will assess the probable future benefit of the asset at
the time that it is recorded and monitor it through the FCC or other regulatory
approval process. If the required approval is not considered probable, the Company
will write-off the capitalized costs of the project. The write-offs are included in Cost of denied / abandoned
tower site and license upgrade in the Companys Consolidated Statements of Operations.
Recent Accounting Pronouncements
In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities, which establishes
criteria to identify variable interest entities and the primary beneficiary of
such entities. An entity that qualifies as a variable interest entity must be
consolidated by its primary beneficiary. All other holders of interests in a
variable interest entity must disclose the nature, purpose, size and activity of
the variable interest entity as well as their maximum exposure to losses as a
result of involvement with the variable interest entity. The Company does not have
any special-purpose entities, as defined. The Company adopted
Interpretation No. 46 on January 1, 2004. The adoption of Interpretation No.
46 did not have a material effect on the Companys financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that statement, SFAS Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. In
addition, SFAS No. 145 amends FASB Statement No. 13, Accounting for Leases.
The Company adopted this statement on January 1, 2003 and its adoption resulted in the
classification of any loss on early retirement of debt in other income and
expense rather than as an extraordinary item under the prior rules.
On October 13, 2004, the
FASB reached a conclusion on Statement 123R,
Share-Based Payment. The Statement would require all public companies
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments to
account for these types of transactions using a fair-value-based method. The
Statement would eliminate the ability to account for share-based compensation
transactions using APB Opinion No. 25, Accounting for Stock Issued to
Employees for interim or annual periods beginning after June 15, 2005. The
Company will be required to apply Statement 123R beginning July 1, 2005 and it applies to
unvested options granted prior to that date in addition to any new option grants. The
Statement offers the Company alternative methods of adopting this final rule. At
the present time, the Company has not yet determined which method it will use
nor has it determined the financial statement impact.
In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of SFAS No. 123. This statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirement of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company adopted this statement and its adoption did not have a material
impact on the Companys financial position, results of operations or cash flows. As
permitted under the statement, the Company continues to measure any expense related to
stock options under the intrinsic value method and provides the required
disclosures under the fair value method in Note 1.
61
Property, Plant and Equipment
Property, plant and equipment
are recorded at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over estimated useful lives as
follows:
|
|
Buildings
|
40 years
|
Office furnishings and
equipment
|
5-10 years
|
Antennae, towers and transmitting
equipment
|
20 years
|
Studio and Production
equipment
|
10 years
|
Computer software
|
3-5 years
|
Record and tape libraries
|
20 years
|
Automobiles
|
5 years
|
Leasehold improvements
|
15 years or life of
lease
|
The carrying value of
property, plant and equipment is evaluated periodically in relation to
the operating performance and anticipated future cash flows of the underlying
radio stations and businesses for indicators of impairment. When indicators of
impairment are present and the undiscounted cash flows estimated to be generated
from these assets are less than the carrying value of these assets an adjustment
to reduce the carrying value to the fair market value of the assets is recorded,
if necessary. No adjustments to the carrying amounts of property, plant and
equipment have been made during the years ended December 31, 2002, 2003 and
2004.
Amortizable Intangible Assets
Intangible assets acquired
in conjunction with the acquisition of various radio stations and other media
businesses are being amortized over the following estimated useful lives using
the straight-line method:
|
|
Customer lists and contracts
|
5 years or life of
contract
|
Favorable and assigned leases
|
Life of the lease
|
Other
|
5-10
years
|
62
Based on the amortizable
intangible assets as of December 31, 2004, the Company estimates amortization
expense for the next five years to be as follows:
|
|
|
|
Year Ending December 31,
|
|
Amortization
Expense
|
|
|
|
|
|
(Dollars in
thousands)
|
2005
|
|
$
|
1,287
|
2006
|
|
|
737
|
2007
|
|
|
442
|
2008
|
|
|
68
|
2009
|
|
|
65
|
The carrying value of
intangibles is evaluated periodically in relation to the operating performance
and anticipated future cash flows of the underlying radio stations and
businesses for indicators of impairment. When indicators of impairment are
present and the undiscounted cash flows estimated to be generated from these
assets are less than the carrying amounts of these assets, an adjustment to
reduce the carrying value to the fair market value of these assets is recorded,
if necessary. No adjustments to the carrying amounts of intangible assets have
been made during the years ended December 31, 2002, 2003 and 2004.
Goodwill and Indefinite Lived Intangible Assets
Goodwill and assets with indefinite lives
are not amortized but these accounts must be reviewed for impairment, at least
annually, or when events indicate that an impairment exists. The Company
completed the impairment tests in the fourth quarter of 2004 and continues to
review the accounts for impairment on an on-going basis. The Company estimates
fair value of its indefinite lived intangibles using a combination of market
analysis, review of appraisals and cash flow analysis.
Bond Issue Costs
Bond issue costs are being
amortized over the terms of each of the 9% Notes and the 7¾% Notes,
respectively, as an adjustment to interest expense.
63
Derivative Instruments
The Company is exposed to
fluctuations in interest rates. Salem actively monitors these fluctuations and
uses derivative instruments from time to time to manage the related risk. In
accordance with the Companys risk management strategy, Salem uses derivative
instruments only for the purpose of managing risk associated with an asset,
liability, committed transaction, or probable forecasted transaction that is
identified by management. The Companys use of derivative instruments may result
in short-term gains or losses and may increase volatility in Salems
earnings.
The Company had one interest
rate swap agreement outstanding as of December 31, 2004, which was used to
manage the Companys exposure to changes in the fair value of recognized assets
or liabilities that may have resulted due to changes in interest rates. The counter
party to this interest rate swap agreement was a major financial institution.
Although the Company was exposed to credit loss in the event of nonperformance by
the counter party, Salem did not anticipate nonperformance by the counter
party nor did Salem expect any such loss to be material.
On January 1, 2001, the
Company adopted SFAS No. 133, as amended, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging ActivitiesDeferral of the Effective Date of SFAS No.
133, and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities. SFAS No. 133, as amended, requires all derivative
instruments to be measured at fair value and recognized as either assets or
liabilities. In addition, all derivative instruments used in hedging
transactions must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133, as amended.
Under SFAS No. 133, as
amended, the accounting for changes in the fair value of a derivative instrument
at each new measurement date is dependent upon its intended use. The change in
the fair value of a derivative instrument designated as a hedge of the exposure
to changes in the fair value of a recognized asset or liability or a firm
commitment, referred to as a fair value hedge, is recognized as gain or loss in
earnings in the period of the change together with an offsetting gain or loss
for the change in fair value of the hedged item attributable to the risk being
hedged. The differential paid or received on the interest rate swap is
recognized in earnings as an adjustment to interest expense.
At December 31, 2004, an
interest rate swap agreement with a notional principal amount of $66.0 million
was outstanding. This agreement related to the Companys $94.4 million 9% Notes.
This agreement was scheduled to expire in 2011 when the 9% Notes matured,
and effectively swapped the 9.0% fixed interest rate on $66.0 million of the 9%
Notes for a floating rate equal to the LIBOR rate plus 3.09%. The estimated fair
value of this swap agreement and the excess of fair value over the book value of
the debt hedged by the swap, based on current market rates, were each $3.7 million
at December 31, 2004. Changes in the fair value of the swap and the changes in
the fair value of debt being hedged are recorded as part of interest expense.
The fair value of the swap agreement was included with long-term assets, and the
fair value of the debt hedged by the swap was recorded in long-term debt consistent
with the maturity date of the swap and related debt. Because this fair value hedge
was effective (that is, the change in the fair value of the hedge instrument was
designed to be equal to the change in the fair value of the item being hedged),
there was no income statement effect relative to the change in the fair value of
the swap agreement. Interest expense for the year ended December 31, 2004
was reduced by $2.8 million as a result of the difference between the 9.0% fixed
interest rate on the 9% hedged debt and the floating interest rate under the swap agreement,
which was 4.31% for the six month period ended June 30, 2004 and was 5.03% for the six
month period ending December 31, 2004. On February 18, 2005, the Company sold its entire interest
in this swap and received a payment of approximately $3.7 million, which will be amortized
as a reduction of interest expense over the remaining life of the 9% Notes.
64
The Company had a second interest
rate swap agreement with a notional principal amount of $24.0
million. This agreement also related to the Companys 9% Notes. This agreement was to expire
in 2011 when the 9% Notes mature, and effectively swapped the 9.0% fixed interest
rate on $24.0 million of the 9% Notes for a floating rate equal to the LIBOR rate
plus 4.86%. On August 20, 2004, the Company sold its interest in $14.0 million of this swap.
As a result of this transaction, the Company paid and capitalized $0.3 million in buyout
premium which will be amortized into interest expense over the remaining life of
the 9% Notes. On October 22, 2004, the Company sold its remaining $10.0 million
interest in this swap. As a result of this second transaction, the Company paid and capitalized $0.1 million in buyout
premium which will be amortized into interest expense over the remaining life of
the 9% Notes. The Company recognized approximately $25,000 in interest expense related to the
amortization of capitalized buyout premium for the year ended December 31, 2004.
Because this fair value hedge
was effective (that is, the change in the fair value of the hedge instrument was
designed to be equal to the change in the fair value of the item being hedged),
there was no income statement effect relative to the change in the fair value of
the swap agreement. Interest expense for the year ended December 31, 2004 was reduced by $0.5 million
as a result of the difference between the 9.0% fixed interest rate on the debt
and the floating interest rate under the swap agreement, which was 6.08% for the
six month period ended June 30, 2004 and was 6.80% for the six month period ending
December 31, 2004.
Income Taxes
The Company accounts for
income taxes in accordance with the liability method of providing for deferred
income taxes. Deferred income taxes arise from temporary differences between the
tax basis of assets and liabilities and their reported amounts in the financial
statements.
Comprehensive Income
SFAS No. 130, Reporting
Comprehensive Income establishes standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The Company
has not had any transactions that are required to be reported as a component of
other Comprehensive Income other than the net income (loss) reported in the
Statements of Operations.
Basic and Diluted Net Earnings Per Share
Basic net earnings per share
has been computed using the weighted average number of Class A and Class B
shares of common stock outstanding during the period. Diluted net earnings per
share is computed using the weighted average number of shares of Class A and
Class B common stock outstanding during the period plus the dilutive effects of
stock options.
Options to purchase 7,500
and 762,875 shares of Class A common stock with exercise prices greater
than the average market prices of Class A common stock were outstanding at December 31,
2002 and 2004, respectively. Options to purchase 745,915 shares of Class A
common stock were outstanding as of December 31, 2003. These options were
excluded from the respective computations of diluted net income or loss per
share because their effect would be anti-dilutive.
65
The following table sets
forth the shares used to compute basic and diluted net earnings per share for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
23,473,821
|
|
|
|
23,488,898
|
|
|
|
25,220,678
|
|
|
Effect of
dilutive securities - stock options
|
|
109,085
|
|
|
|
|
|
|
|
150,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares adjusted for dilutive securities
|
|
23,582,906
|
|
|
|
23,488,898
|
|
|
|
25,371,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
The Company presents its
segment information in Note 12.
Concentrations of Business and Credit Risks
The majority of the
Companys operations are conducted in multiple locations across the country. The
Companys credit risk is spread across a large number of customers, none of
which account for a significant volume of revenue or outstanding receivables.
The Company does not normally require collateral on credit sales; however,
credit histories are reviewed before extending substantial credit to any
customer. The Company establishes an allowance for doubtful accounts based on
customers payment history and perceived credit risks. Bad debts have been
within managements expectations.
Use of Estimates
The preparation of financial
statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. Significant areas for which management uses estimates are
allowance for bad debts, income tax valuation allowance and impairment analysis
for intangible assets including broadcast licenses and goodwill as well as other
long-lived assets.
Reclassifications
Certain reclassifications
were made to the prior year financial statements to conform to the current year
presentation.
66
2. ACQUISITIONS AND DISPOSITIONS OF ASSETS
During the year ended December 31, 2004, the
Company purchased selected assets (principally broadcast licenses) of the following radio stations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
|
|
|
|
|
|
|
Purchase
|
|
Format
|
Acquisition Date
|
|
Station
|
|
Market Served
|
|
Price
|
|
Changed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
|
|
|
|
|
|
|
in thousands)
|
May 28, 2004
|
|
KJPN-AM
|
|
Honolulu, HI
|
|
$
|
500
|
|
|
Yes
|
June 28, 2004
|
|
WAFS (now WGKA-AM)
|
|
Atlanta, GA
|
|
|
16,545
|
|
|
Yes
|
August 13, 2004
|
|
KHUI-FM
|
|
Honolulu, HI
|
|
|
1,850
|
|
|
Yes
|
August 13, 2004
|
|
KPOI-FM (now KHNR-FM)
|
|
Honolulu, HI
|
|
|
1,850
|
|
|
Yes
|
September 30, 2004
|
|
WQBH-AM (now WDTK-AM)
|
|
Detroit, MI
|
|
|
4,750
|
|
|
Yes
|
November 2, 2004
|
|
KIIS-AM
|
|
Oxnard-Ventura, CA
|
|
|
800
|
|
|
Yes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,295
|
|
|
|
|
|
|
|
|
|
|
|
|
The purchase price has been
allocated to the assets acquired as follows:
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
(Dollars
|
|
|
in
thousands)
|
Asset
|
|
|
|
|
Property and equipment
|
$
|
1,865
|
|
Broadcast licenses
|
|
24,430
|
|
|
|
|
|
|
$
|
26,295
|
|
|
|
|
On July 30, 2004, the company acquired the
assets of the Internet portal operations of Christianjobs.com for $0.4 million.
On September 29, 2004, the Company entered
into an agreement to exchange selected assets of radio stations WZFS-FM, Chicago, Illinois and
KSFB-FM, San Francisco, California for selected assets of radio stations WIND-AM, Chicago, Illinois,
KOBT-FM, Houston, Texas, KHCK-AM, Dallas, Texas and KOSL-FM, Sacramento, California. The Company
began to operate WIND-AM, Chicago, Illinois, KOBT-FM, Houston, Texas and KHCK-AM, Dallas, Texas
effective November 1, 2004 and KOSL-FM, Sacramento, California effective November 15, 2004
under local marketing agreements. Additionally, the company discontinued operating the stations
it will be divesting under a local marketing agreement effective November 1, 2004.
67
During the year ended
December 31, 2003, the Company purchased the assets (principally broadcast licenses) of
the following radio stations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
|
|
|
|
|
|
|
Purchase
|
|
Format
|
Acquisition Date
|
|
Station
|
|
Market Served
|
|
Price
|
|
Changed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
|
|
|
|
|
|
|
in thousands)
|
August 1, 2003
|
|
WBGB-FM, WGJR-AM, WZNZ-AM, WZAZ-AM
|
|
Jacksonville, FL
|
|
$
|
8,693
|
|
|
No
|
October 6, 2003
|
|
KKCS-AM(now KZNT-AM)
|
|
Colorado Springs, CO
|
|
|
1,500
|
|
|
Yes
|
October 7, 2003
|
|
KCEE-FM
|
|
Sacramento, CA
|
|
|
986
|
|
|
Yes
|
October 31, 2003
|
|
WBPS-AM (now WTTT-AM)
|
|
Boston, MA
|
|
|
8,480
|
|
|
Yes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,659
|
|
|
|
|
|
|
|
|
|
|
|
|
The purchase price has been
allocated to the assets acquired as follows:
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
(Dollars
|
|
|
in
thousands)
|
Asset
|
|
|
|
|
Property and equipment
|
$
|
1,605
|
|
Broadcast licenses
|
|
18,054
|
|
|
|
|
|
|
$
|
19,659
|
|
|
|
|
68
During the year ended
December 31, 2002, the Company purchased the assets (principally broadcast licenses) of
the following radio stations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
|
|
|
|
|
|
|
Purchase
|
|
Format
|
Acquisition Date
|
|
Station
|
|
Market Served
|
|
Price
|
|
Changed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
|
|
|
|
|
|
|
in thousands)
|
January 12, 2002
|
|
KLNA-AM (now KKFS-FM)
|
|
Sacramento, CA
|
|
$
|
8,650
|
|
|
Yes
|
February 15, 2002
|
|
KIKN-AM
|
|
Seattle, WA
|
|
|
525
|
|
|
Yes
|
May 2, 2002
|
|
KJUN-AM (now KFIS-FM)
|
|
Portland, OR
|
|
|
35,800
|
|
|
Yes
|
August 13, 2002
|
|
KJPN-AM (now KHCM-AM)
|
|
Honolulu, HI
|
|
|
650
|
|
|
Yes
|
December 18, 2002
|
|
WRLG-FM and WYYB-FM
|
|
Nashville, TN
|
|
|
5,600
|
|
|
Yes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,225
|
|
|
|
|
|
|
|
|
|
|
|
|
The purchase price has been
allocated to the assets acquired as follows:
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
(Dollars
|
|
|
in
thousands)
|
Asset
|
|
|
|
|
Property and equipment
|
$
|
1,070
|
|
Broadcast licenses
|
|
50,155
|
|
|
|
|
|
|
$
|
51,225
|
|
|
|
|
On September 30, 2002, the
Company sold the assets of radio stations WYGY-FM, Cincinnati, Ohio for $45.0
million. Of the proceeds, $30.0 million was placed in an account with a
qualified intermediary under a like-kind exchange agreement in order to preserve
the Companys ability to effect a tax-deferred exchange. The sale of WYGY-FM was treated
as a discontinued operation, and accordingly, the gain on sale of the assets of
WYGY-FM of $15.9 million (net of deferred taxes of $12.0 million) and the
operations of the WYGY-FM were reflected in income (loss) from discontinued
operations in the accompanying statement of operations. All prior periods were
restated to reflect the operations of WYGY-FM net in income (loss) from
discontinued operations to be consistent with the current period presentation.
Net broadcasting revenue from the operations of WYGY-FM was
$2.3 million for the year ended December 31, 2002. Loss
before income taxes was $0.2 million for the year ended December 31, 2002.
On October 4, 2002, the
Company acquired the assets of the Internet portal operations of Crosswalk.com
for $4.1 million. The Company began to operate Crosswalk.com pursuant to a local
marketing agreement on September 3, 2002.
69
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment
consisted of the following:
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
Land
|
$
|
11,183
|
|
$
|
15,911
|
Buildings
|
|
16,643
|
|
|
16,960
|
Office
furnishings and equipment
|
|
29,337
|
|
|
26,248
|
Antennae,
towers and transmitting equipment
|
|
53,284
|
|
|
51,170
|
Studio and
production equipment
|
|
29,275
|
|
|
27,002
|
Computer
software
|
|
3,741
|
|
|
1,930
|
Record and
tape libraries
|
|
469
|
|
|
282
|
Automobiles
|
|
787
|
|
|
922
|
Leasehold
improvements
|
|
10,034
|
|
|
10,668
|
Construction-in-progress
|
|
5,145
|
|
|
11,120
|
|
|
|
|
|
|
159,898
|
|
|
162,213
|
Less
accumulated depreciation
|
|
62,505
|
|
|
59,226
|
|
|
|
|
|
$
|
97,393
|
|
$
|
102,987
|
|
|
|
|
|
|
During 2004 Salem conducted
a comprehensive physical inventory of its property, plant and equipment.
Based on the results of the inventory, Salem wrote-off
certain assets, with a net book value of approximately $3.1 million which was
charged to loss on disposal of assets during the year ended December 31, 2004.
70
4. LONG-TERM DEBT
Long-term debt consisted of
the following:
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
Term loan
under credit facility
|
$
|
75,000
|
|
$
|
75,000
|
Revolving
line of credit under credit facility
|
|
5,000
|
|
|
9,000
|
9% Senior
Subordinated Notes due 2011
|
|
150,000
|
|
|
94,370
|
7¾% Senior
Subordinated Notes due 2010
|
|
100,000
|
|
|
100,000
|
Fair value
of interest swap
|
|
6,045
|
|
|
3,732
|
Capital
leases and other loans
|
|
61
|
|
|
67
|
|
|
|
|
|
|
336,106
|
|
|
282,169
|
Less
current portion
|
|
15
|
|
|
1,145
|
|
|
|
|
|
$
|
336,091
|
|
$
|
281,024
|
|
|
|
|
|
|
Since the revolving line of
credit under credit the facility and the term loan under the credit facility
carry floating interest rates, the carrying amounts approximate fair market
value. The 9% Notes were issued in June 2001 at par. The 7¾% Notes were
issued in December 2002 at par. At December 31, 2004, the fair market value of
the 9% Notes and the 7¾% Notes was approximately $103.6 million and $108.1
million, respectively.
71
Revolving Line of Credit with Banks
HoldCo has a credit
agreement with a syndicate of lending institutions (the Credit Agreement) to
provide for borrowing capacity of up to $75.0 million under a term loan and up
to $75.0 million under a revolving line of credit. The maximum amount that
HoldCo may borrow under the Credit Agreement is limited by a ratio of Holdco's
existing total adjusted funded debt to pro forma twelve-month cash flow as
defined in the Credit Agreement (the Total Leverage Ratio). At December 31,
2004, the Total Leverage Ratio allowed under the credit facility was 6.75 to 1.
The Total Leverage Ratio under the Credit Agreement at December 31, 2004 was
4.49 to 1, resulting in a borrowing availability of approximately $65.6 million.
The maximum Total Leverage Ratio allowed under the Credit Agreement will decline
periodically until December 31, 2006, at which point it will remain at 5.5 to 1
through March 2009.
The Credit Agreement
contains additional restrictive covenants customary for a credit facility of the
size, type and purpose contemplated which, with specified exceptions, limits the Companys
ability to incur debt, have liens, enter into affiliate transactions, pay
dividends, consolidate, merge or effect certain asset sales, make specified
investments, acquisitions and loans and change the nature of its business. The
Credit Agreement also requires the Company to satisfy specified financial covenants,
which covenants require the Company on a consolidated basis to maintain specified
financial ratios and comply with certain financial tests, including ratios for
maximum leverage as described above, minimum interest coverage (not less than
1.5 to 1 through June 29, 2005, increasing in increments to 2.5 to 1 after June
30, 2008), minimum debt service coverage (a static ratio of not less than 1.25
to 1), a maximum consolidated senior leverage ratio (a static ratio of 3.0 to 1
prior to the issuance of $50.0 million in New Subordinated Notes, after any such
issuance the ratio shall not exceed 2.5 to 1), and minimum fixed charge coverage
(a static ratio of not less than 1.1 to 1). The Company and all of its
subsidiaries, except for HoldCo, are guarantors of borrowings under the Credit
Agreement. The Credit Agreement is secured by liens on all of the Companys and
its subsidiaries assets and pledges of all of the capital stock of the
Companys subsidiaries.
The Credit Agreement with
the banks (a) provides for restrictions on additional borrowings and leases; (b)
prohibits Salem, without prior approval from the banks, from paying dividends,
liquidating, merging, consolidating or selling its assets or business, and (c)
requires HoldCo to maintain certain financial ratios and other covenants. Salem
has pledged all of its assets as collateral under the Credit Agreement.
9% Senior Subordinated Notes due 2011
In June 2001, HoldCo issued
$150.0 million principal amount of 9% Notes due 2011. HoldCo used the net
proceeds to repay approximately $145.5 million in borrowings under the credit
facility. The 9% Notes have interest payment dates on January 1 and July 1,
commencing January 1, 2002. Principal is due on the maturity date, July 1, 2011.
The 9% Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after July 1, 2006, at the redemption prices specified in the
indenture. The Notes are fully and unconditionally guaranteed, jointly and
severally, on a senior subordinated basis by the Guarantors (Salem
Communications Corporation and all of its subsidiaries (other than HoldCo)). The
Notes are general unsecured obligations of the Company, subordinated in right of
payment to all existing and future senior indebtedness, including the Companys
obligations under the Credit Agreement. The indenture limits the incurrence of
additional indebtedness by the Company, the payment of dividends, the use of
proceeds of certain asset sales, and contains certain other restrictive
covenants affecting the Company.
During the quarter ended June 30, 2004, the Company
repurchased an aggregate amount of $55.6 million of its 9% Notes through a combination of redemptions
and open market repurchases (the Redemption) pursuant
to the terms of the indenture governing the 9% Notes. The Redemption resulted in a loss on early retirement
of long-term debt of approximately $6.6 million. The Company used the proceeds from its follow-on offering
of 2.3 million shares of Class A common stock issued in May 2004, to complete the Redemption.
72
9½% Senior Subordinated Notes due 2007
On August 24, 2000, the
Company supplemented the indenture for the 9½% Notes in connection with the
assignment of substantially all of the assets and liabilities of the Company to
HoldCo, including the obligations as successor issuer under the indenture. The
9½% Notes are fully and unconditionally guaranteed, jointly and severally, on a
senior subordinated basis by the Guarantors (Salem Communications Corporation
and all of its subsidiaries (other than HoldCo)). The 9½% Notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior indebtedness, including the Companys obligations
under the Credit Agreement. The indenture limits the incurrence of additional
indebtedness by the Company, the payment of dividends, the use of proceeds of
certain asset sales, and contains certain other restrictive covenants affecting
the Company.
In December 2002, the Company issued
$100.0 million of 7¾% Notes, the proceeds of which were used to redeem all of
the then outstanding 9½% Notes on January 22, 2003 (see
7¾% Senior Subordinated
Notes due 2010
below). As a result of this redemption, the Company incurred a
non-cash charge in 2003 of $1.7 million for the write-off of unamortized bond
issue costs. This was in addition to the $4.75 million premium paid in 2003 in
connection with this redemption.
In January 2003, the Company redeemed
the remaining $100.0 million in principal amount of the 9½% Notes from the
proceeds of the issuance of $100.0 million principal amount of 7¾% Notes. As a
result of this redemption, the Company incurred a non-cash charge in the first quarter of
2003 of approximately $1.7 million for the write-off of unamortized bond issue
costs. This was in addition to the $4.8 million premium paid in connection with
this redemption.
7¾% Senior Subordinated Notes due 2010
In December 2002, HoldCo
issued $100.0 million of the Companys 7¾% Senior Subordinated Notes, the proceeds of
which were used to redeem the 9½% Notes on January 22, 2003.
The 7¾% Notes have interest
payment dates on June 15 and December 15, commencing June 15, 2003. Principal is
due on the maturity date, December 15, 2010. The 7¾% Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after December 15,
2007, at the redemption prices specified in the indenture. In addition, until
December 15, 2005, HoldCo may redeem up to 35% of the aggregate principal amount of the 7¾% Notes.
The 7¾% Notes are fully and
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis by the Guarantors (Salem Communications Corporation and all of its
subsidiaries (other than HoldCo)). The 7¾% Notes are general unsecured
obligations of the Company, subordinated in right of payment to all existing and
future senior indebtedness, including the Companys obligations under the Credit
Agreement. The indenture limits the incurrence of additional indebtedness by the
Company, the payment of dividends, the use of proceeds of certain asset sales,
and contains certain other restrictive covenants affecting the Company.
Other Debt
The Company has several
capital leases related to various data processing equipment. The obligation
recorded at December 31, 2003 and 2004 represents the present value of future
commitments under the lease agreements.
73
Maturities of Long-Term Debt
Principal repayment
requirements under all long-term debt agreements outstanding at December 31,
2004, for each of the next five years and thereafter are as follows:
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
2005
|
|
$
|
1,145
|
2006
|
|
|
773
|
2007
|
|
|
767
|
2008
|
|
|
755
|
2009
|
|
|
9,752
|
|
Thereafter
|
|
265,245
|
|
|
|
|
|
|
|
278,437
|
|
Fair value of interest rate swap
|
|
3,732
|
|
|
|
|
|
|
$
|
282,169
|
|
|
|
|
5. INCOME TAXES
The consolidated provision
(benefit) for income taxes for Salem consisted of the following at December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
State
|
|
729
|
|
|
|
399
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
729
|
|
|
|
399
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
7,893
|
|
|
|
(942
|
)
|
|
|
5,940
|
|
|
State
|
|
2,022
|
|
|
|
328
|
|
|
|
(2,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,915
|
|
|
|
(614
|
)
|
|
|
3,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
and deferred taxes
|
|
10,644
|
|
|
|
(215
|
)
|
|
|
3,545
|
|
|
Change in
valuation allowance
|
|
|
|
|
|
694
|
|
|
|
1,027
|
|
|
Current
tax benefit reflected in discontinued operations
|
|
(11,967
|
)
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
provision (benefit)
|
$
|
(1,323
|
)
|
|
$
|
479
|
|
|
$
|
4,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
The consolidated deferred
tax asset and liability consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
Deferred tax assets:
|
|
Financial
statement accruals not currently deductible
|
|
$
|
4,664
|
|
|
$
|
4,621
|
|
|
Net
operating loss, AMT credit and other carryforwards
|
|
|
25,800
|
|
|
|
34,129
|
|
|
State
taxes
|
|
|
89
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
30,553
|
|
|
|
38,814
|
|
|
Valuation
allowance for deferred tax assets
|
|
|
(2,048
|
)
|
|
|
(3,075
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
28,505
|
|
|
|
35,739
|
|
Deferred tax liabilities:
|
|
Excess of
net book value of property, plant, equipment and software for financial
reporting purposes over tax basis
|
|
|
12,207
|
|
|
|
13,257
|
|
|
Excess of
net book value of intangible assets for financial reporting purposes over
tax basis
|
|
|
40,543
|
|
|
|
50,514
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax liabilities
|
|
|
52,750
|
|
|
|
63,771
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$
|
24,245
|
|
|
$
|
28,032
|
|
|
|
|
|
|
|
|
|
|
75
The following table
reconciles the above net deferred tax liabilities to the financial statements:
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
Deferred
income tax asset per balance sheet
|
$
|
4,754
|
|
$
|
4,683
|
|
Deferred
income tax liability per balance sheet
|
|
(28,999
|
)
|
|
(32,715
|
)
|
|
|
|
|
|
$
|
(24,245
|
)
|
$
|
(28,032
|
)
|
|
|
|
|
|
|
A reconciliation of the
statutory federal income tax rate to the effective tax rate, as a percentage of
income (loss) before income taxes and discontinued operations, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
(35.0)
|
%
|
|
|
(35.0)
|
%
|
|
|
35.0
|
%
|
State
income taxes, net
|
|
(5.8
|
)
|
|
|
223.0
|
|
|
|
5.0
|
|
Nondeductible expenses
|
|
5.9
|
|
|
|
51.4
|
|
|
|
0.9
|
|
Change in
valuation allowance
|
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
Other,
net
|
|
|
|
|
|
2.7
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39.9
|
)%
|
|
|
242.1
|
%
|
|
|
38.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, the
Company has net operating loss carryforwards for federal income tax purposes of
approximately $73.6 million which expire in 2010 through 2023 and for state
income tax purposes of approximately $198.7 million which expire in years 2005
through 2023. For financial reporting purposes at December 31, 2004 the Company
has a valuation allowance of $3.1 million, net of federal benefit, to offset a
portion of the deferred tax assets related to state net operating loss
carryforwards which may not be realized.
76
6. COMMITMENTS AND CONTINGENCIES
On March 9, 2005, Pipefitters, Locals 522 & 633 Pension Trust Fund filed a Complaint for Violation of the Federal
Securities Laws in the Superior Court of California for the County of Ventura against Salem, its directors,
certain of its officers and certain underwriters of the Companys April 2004 public offering of Class A common
stock. In the purported class action, the plaintiff asserts claims under the Securities Act of 1933 on behalf of
a putative class of all persons who purchased the Companys equity securities pursuant or traceable to that
offering. The complaint alleges that the offering documents failed to disclose that the Companys financial
statements overstated its fixed assets and that the Companys internal controls were flawed with respect to its
ability to value fixed assets and, that the offering documents contained misstatements regarding the Companys
fixed assets and internal controls. The complaint seeks rescission or damages in excess of $5 million, interest,
attorneys fees and other costs, as well as equitable and injunctive relief. The complaint was served on the
Company on March 15, 2005.
The Company and its subsidiaries, incident
to its business activities, are parties to a number of legal proceedings, lawsuits, arbitration and
other claims including the purported class action described above. Such matters are subject to many uncertainties and outcomes that are not predictable with
assurance. Also, the Company maintains insurance which may provide coverage for such matters. Consequently, the Company
is unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect
to these matters. Except with respect to the purported class action described above which has not yet been
assessed due to its recent commencement, the Company believes, at this time, that the final resolution of
these matters, individually and in the aggregate, will not have a material adverse effect upon the Companys annual
consolidated financial position, results of operations or cash flows.
Salem leases various land,
offices, studios and other equipment under operating leases that expire over the
next 10 years. The majority of these leases are subject to escalation clauses
and may be renewed for successive periods ranging from one to five years on
terms similar to current agreements and except for specified increases in lease
payments. Rental expense included in operating expense under all lease
agreements was $8.3 million, $9.0 million and $9.5 million in 2002, 2003 and
2004, respectively.
On December 6, 2000, Gospel Communications International
(GCI) made a demand for arbitration upon the Company. On July 15, 2002, the Company reached a
settlement with GCI for $2.3 million.
Future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 2004, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
|
|
Parties
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
2005
|
|
$
|
1,218
|
|
|
$
|
7,298
|
|
|
$
|
8,516
|
2006
|
|
|
1,152
|
|
|
|
6,466
|
|
|
|
7,618
|
2007
|
|
|
853
|
|
|
|
5,032
|
|
|
|
5,885
|
2008
|
|
|
803
|
|
|
|
4,119
|
|
|
|
4,922
|
2009
|
|
|
491
|
|
|
|
3,649
|
|
|
|
4,140
|
Thereafter
|
|
|
475
|
|
|
|
29,280
|
|
|
|
29,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,992
|
|
|
$
|
55,844
|
|
|
$
|
60,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
7. STOCK OPTION PLAN
The Amended and Restated 1999 Stock Incentive
Plan (the Plan) allows the Company to grant stock options to employees,
directors, officers and advisors of the Company. A maximum of 1,600,000 shares
are authorized under the Plan. Options generally vest over four or five years
and have a maximum term of five years from the vesting date. The Plan provides
that vesting may be accelerated in certain corporate transactions of the
Company. The Plan provides that the Board of Directors, or a committee appointed
by the Board, has discretion, subject to certain limits, to modify the terms of
outstanding options. At December 31, 2004, the Company had 684 shares
available for future grants under the Plan.
A summary of stock option
activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
Exercisable
|
|
Average
|
|
|
Options
|
|
Exercise Price
|
|
Options
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2002
|
530,230
|
|
$
|
18.65
|
|
126,580
|
|
$
|
19.82
|
|
Granted
|
65,565
|
|
$
|
23.08
|
|
|
|
|
|
|
Cancelled
|
15,375
|
|
$
|
16.52
|
|
|
|
|
|
Exercised
|
25,475
|
|
$
|
20.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
554,945
|
|
$
|
19.17
|
|
238,320
|
|
$
|
19.31
|
|
Granted
|
224,320
|
|
$
|
23.21
|
|
|
|
|
|
|
Cancelled
|
7,200
|
|
$
|
18.33
|
|
|
|
|
|
Exercised
|
26,150
|
|
$
|
15.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
745,915
|
|
$
|
20.54
|
|
353,515
|
|
$
|
19.07
|
|
Granted
|
860,126
|
|
$
|
28.63
|
|
|
|
|
|
|
Cancelled
|
10,900
|
|
$
|
18.84
|
|
|
|
|
|
Exercised
|
127,175
|
|
$
|
17.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
1,467,966
|
|
$
|
25.53
|
|
650,399
|
|
$
|
23.81
|
|
|
|
|
|
|
|
|
|
|
|
Additional information
regarding options outstanding as of December 31, 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Contractual Life
|
|
Weighted
|
|
|
|
Weighted
|
Range of
|
|
|
|
|
Remaining
|
|
Average
|
|
Exercisable
|
|
Average
|
Exercise Prices
|
|
Options
|
|
(Years)
|
|
Exercise Price
|
|
Options
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$9.00 -
$12.00
|
|
|
38,750
|
|
3.7
|
|
$
|
11.60
|
|
38,750
|
|
$
|
11.60
|
$12.00 -
$15.00
|
|
|
89,375
|
|
3.8
|
|
$
|
14.77
|
|
59,625
|
|
$
|
14.76
|
$15.00 -
$18.00
|
|
|
24,920
|
|
5.8
|
|
$
|
16.88
|
|
24,170
|
|
$
|
16.92
|
$21.00 -
$24.00
|
|
|
397,420
|
|
5.0
|
|
$
|
22.55
|
|
227,520
|
|
$
|
22.64
|
$24.00 -
$27.00
|
|
|
159,626
|
|
7.4
|
|
$
|
25.11
|
|
60,376
|
|
$
|
25.49
|
$27.00 -
$30.00
|
|
|
757,875
|
|
5.8
|
|
$
|
29.44
|
|
239,958
|
|
$
|
29.40
|
|
|
|
|
|
|
|
|
|
|
|
|
$9.00 -
$30.00
|
|
|
1,467,966
|
|
5.6
|
|
$
|
25.53
|
|
650,399
|
|
$
|
23.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
8. RELATED PARTY TRANSACTIONS
Leases with Principal Stockholders
A trust controlled by the President
and Chief Executive Officer of the Company, Edward G. Atsinger III, owns
real estate on which assets of one radio station are located. Salem has
entered into a lease agreement with this trust.
Rental expense included in operating expense for 2002, 2003 and 2004 amounted to
$52,000, $126,000 and $123,000, respectively.
Land and buildings occupied
by various Salem radio stations are leased from the principal stockholders of Salem.
Rental expense under these leases included in operating expense for 2002, 2003
and 2004 amounted to $1.1 million in each of the years.
Radio Stations Owned by the Eppersons
Nancy A. Epperson, the wife of
the Chairman of the Board, Stuart W. Epperson, has personally acquired four
radio stations in the Norfolk-Virginia Beach-Newport News, Virginia market.
Additionally, Mr. Eppersons son, Stuart W. Epperson, Jr., has acquired certain
radio stations in the Greensboro-Winston-Salem, North Carolina market. These
Virginia and North Carolina markets are not currently served by stations owned
and operated by the Company. Acquisitions in such markets are not part of the
Companys current business and acquisition strategies. Under his employment
agreement, Mr. Epperson is required to offer the Company a right of first
refusal of opportunities related to the Companys business.
Radio Stations Owned by Mr. Hinz
Mr. Hinz, a director of the Company,
through companies or entities controlled by him, operates 19 radio stations in Southern California.
These radio stations are formatted in Christian teaching and talk
programming in the Spanish language. Operating radio stations with such
programming in the markets reached by such stations is not part of the Salems
current business strategy.
Focus on the Family and Mr. Hodel
Until February 24, 2005, Mr. Hodel,
a director of the Company, was President and Chief Executive Officer
of Focus on the Family, a non-profit organization that is a substantial customer of Salem.
Mr. Hodel resigned from his position as of February 24, 2005. During 2004, the
Company was paid approximately $3.4 million by Focus on the Family for airtime.
Truth For Life and Mr. Hinz
Mr. Hinz is a member of the board
of directors of Truth For Life, a non-profit organization that is a substantial customer of Salem.
During 2004, the Company was paid approximately $1.1 million by Truth For Life for airtime.
Split-Dollar Life Insurance
The Company purchased
split-dollar life insurance policies for its Chairman and Chief Executive
Officer in 1997. The premiums were $226,000, $134,000 and $219,000 for the years
ended December 31, 2002, 2003 and 2004, respectively. In 2003, the Company
became the owner of the policies. The Company is entitled to recover all of the
premiums paid on these policies, which have been reserved completely as they
have been recorded at the lower of the receivable or insurance cash surrender
value. Benefits above and beyond the cumulative premiums paid will go to the
beneficiary trusts established by the Chairman and Chief Executive
Officer.
79
Transportation Services Supplied by Atsinger Aviation
From time to time, the
Company rents aircraft from a company which is owned by Edward G. Atsinger III, one
of the principal stockholders. As approved by the independent members of the
Companys board of directors, the Company rents these aircraft on an hourly
basis at what the Company believes are favorable rates and uses them for general corporate needs. Total
rental expense for these aircraft for 2002, 2003 and 2004 amounted to
approximately $307,000, $277,000 and $342,000, respectively.
9. DEFINED CONTRIBUTION PLAN
In 1993, the Company
established a 401(k) defined contribution plan (the 401(k) Plan), which covers
all eligible employees (as defined in the 401(k) Plan). Participants are allowed
to make nonforfeitable contributions up to 60% of their annual salary, but may
not exceed the annual maximum contribution limitations established by the
Internal Revenue Service. The Company currently matches 50% on the first 3% of
the amounts contributed by each participant and 25% on the next 3% contributed
but does not match participants contributions in excess of 6% of their
compensation per pay period. Prior to January 1, 2003, the company
matched 25% of the amounts contributed by each participant but did not match
participants contributions in excess of 6% of their compensation per pay
period. The Company contributed and expensed $551,000, $511,000 and $922,000 to
the 401(k) Plan in 2002, 2003 and 2004, respectively.
10. STOCKHOLDERS EQUITY
Holders of Class A common
stock are entitled to one vote per share and holders of Class B common stock are
entitled to ten votes per share, except for specified related party
transactions. Holders of Class A common stock and Class B common stock vote
together as a single class on all matters submitted to a vote of stockholders,
except that holders of Class A common stock vote separately for two independent
directors.
On May 5, 2004, Salem sold
2,325,000 shares of its Class A common stock at $30.00 per share in a public
offering, generating offering proceeds of approximately $65.7 million, net of
approximately $4.0 million of offering commissions and costs.
In addition, the Chairman
and Chief Executive Officer sold 290,000 shares and 485,000 shares of Class A common stock,
respectively, in the public offering in May 2004, that were beneficially owned by them. Salem did
not receive any monies from the sale of shares by these selling stockholders.
80
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The financial results for
all periods presented have been reclassified to reflect gains and losses from
disposal of assets as part of operating income. Gains and losses from disposal of assets had
previously been reported in Other Income (Expense).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
September
30
|
|
December
31
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands, except per share data)
|
|
|
|
Total revenue
|
|
$
|
40,627
|
|
|
$
|
45,103
|
|
|
$
|
45,662
|
|
|
$
|
50,152
|
|
|
$
|
44,462
|
|
|
$
|
49,659
|
|
|
$
|
47,597
|
|
|
$
|
51,971
|
Operating income
|
|
|
3,158
|
|
|
|
7,772
|
|
|
|
8,944
|
|
|
|
11,871
|
|
|
|
7,851
|
|
|
|
8,137
|
|
|
|
9,961
|
|
|
|
10,684
|
|
Net income (loss) before
|
discontinued
operations
|
|
|
(9,833
|
)
|
|
|
1,243
|
|
|
|
1,842
|
|
|
|
172
|
|
|
|
1,456
|
|
|
|
2,316
|
|
|
|
2,113
|
|
|
|
3,693
|
|
|
Net income (loss)
|
|
$
|
6,088
|
|
|
$
|
1,243
|
|
|
$
|
1,842
|
|
|
$
|
(163
|
)
|
|
$
|
1,456
|
|
|
$
|
2,560
|
|
|
$
|
2,113
|
|
|
$
|
3,693
|
|
Basic and diluted earnings
|
(loss) per share
before
|
discontinued
operations
|
|
$
|
(0.26
|
)
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.14
|
|
Basic and diluted earnings
|
(loss) per share
|
|
$
|
(0.26
|
)
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.06
|
|
|
$
|
0.10
|
|
|
$
|
0.09
|
|
|
$
|
0.14
|
|
81
12. SEGMENT DATA
SFAS No. 131, Disclosures
About Segments of An Enterprise and Related Information requires companies to
provide certain information about their operating segments. The Company has one
reportable operating segment - radio broadcasting. The remaining non-reportable
segments consist of SWN and Salem Publishing, which do not meet the reportable segment
quantitative thresholds and accordingly are aggregated below as other media.
The radio broadcasting segment also operates various radio
networks.
Management uses operating
income before depreciation, amortization, legal settlement, costs of denied / abandoned tower site and
license upgrade, cost of terminated offering and loss on disposal of assets as its measure of profitability for
purposes of assessing performance and allocating resources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Net
revenue
|
|
|
Radio
broadcasting
|
$
|
156,216
|
|
|
$
|
170,483
|
|
|
$
|
187,543
|
|
Other
media
|
|
8,054
|
|
|
|
7,865
|
|
|
|
9,342
|
|
|
|
|
|
|
|
|
|
Consolidated net revenue
|
|
$
|
164,270
|
|
|
$
|
178,348
|
|
|
$
|
196,885
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses before depreciation, amortization, legal settlement, costs of denied / abandoned tower site and
license upgrade, cost of terminated offering and loss on disposal of assets
|
|
|
Radio
broadcasting
|
$
|
103,809
|
|
|
$
|
109,043
|
|
|
$
|
115,896
|
|
|
Other
media
|
|
7,709
|
|
|
|
7,942
|
|
|
|
8,600
|
|
|
Corporate
|
|
14,387
|
|
|
|
16,091
|
|
|
|
17,480
|
|
|
|
|
|
|
|
|
|
Consolidated operating expenses before depreciation, amortization, legal settlement, costs of
denied / abandoned tower site and license upgrade, cost of terminated offering and loss on disposal of assets
|
|
$
|
125,905
|
|
|
$
|
133,076
|
|
|
$
|
141,976
|
|
|
|
|
|
|
|
|
|
|
Operating
income before depreciation, amortization, legal settlement and costs of
denied / abandoned tower site and license upgrade, cost of terminated
offering and loss on disposal of assets
|
|
Radio
broadcasting
|
$
|
52,407
|
|
|
$
|
61,440
|
|
|
$
|
71,647
|
|
|
Other
media
|
|
345
|
|
|
|
(77
|
)
|
|
|
742
|
|
|
Corporate
|
|
(14,387
|
)
|
|
|
(16,091
|
)
|
|
|
(17,480
|
)
|
|
|
|
|
|
|
|
|
Consolidated operating income before depreciation, amortization, legal settlement and costs of
denied / abandoned tower site and license upgrade, cost of terminated
offering and loss on disposal of assets
|
|
$
|
38,365
|
|
|
$
|
45,272
|
|
|
$
|
54,909
|
|
82
12. SEGMENT DATA (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
Radio
broadcasting
|
$
|
8,565
|
|
|
$
|
9,479
|
|
|
$
|
9,608
|
|
|
Other
media
|
|
429
|
|
|
|
515
|
|
|
|
414
|
|
|
Corporate
|
|
543
|
|
|
|
709
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation expense
|
|
$
|
9,537
|
|
|
$
|
10,703
|
|
|
$
|
10,900
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
Radio
broadcasting
|
$
|
1,620
|
|
|
$
|
934
|
|
|
$
|
901
|
|
|
Other
media
|
|
286
|
|
|
|
644
|
|
|
|
620
|
|
|
Corporate
|
|
3
|
|
|
|
10
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Consolidated amortization expense
|
|
$
|
1,909
|
|
|
$
|
1,588
|
|
|
$
|
1,533
|
|
|
|
|
|
|
|
|
|
|
Operating
income before legal settlement, costs of denied / abandoned tower site and license
upgrade, cost of terminated offering and loss on disposal of assets
|
|
Radio
broadcasting
|
$
|
42,222
|
|
|
$
|
51,027
|
|
|
$
|
61,138
|
|
|
Other
media
|
|
(370
|
)
|
|
|
(1,236
|
)
|
|
|
(292
|
)
|
|
Corporate
|
|
(14,933
|
)
|
|
|
(16,810
|
)
|
|
|
(18,370
|
)
|
|
|
|
|
|
|
|
|
Consolidated operating income before legal settlement, costs of denied / abandoned tower site and license
upgrade, cost of terminated offering and loss on disposal of assets
|
|
$
|
26,919
|
|
|
$
|
32,981
|
|
|
$
|
42,476
|
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net
|
|
Radio
broadcasting
|
$
|
94,594
|
|
|
$
|
93,055
|
|
|
$
|
98,809
|
|
|
Other
media
|
|
1,939
|
|
|
|
1,542
|
|
|
|
1,048
|
|
|
Corporate
|
|
2,661
|
|
|
|
2,796
|
|
|
|
3,130
|
|
|
|
|
|
|
|
|
|
Consolidated property, plant and equipment, net
|
|
$
|
99,194
|
|
|
$
|
97,393
|
|
|
$
|
102,987
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income before depreciation,
amortization, legal settlement, costs of denied / abandoned tower site and license
upgrade, cost of terminated offering and loss on disposal of assets to pretax
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Operating
income before depreciation, amortization, legal settlement, costs of
denied / abandoned tower site and license upgrade, cost of terminated
offering and loss on disposal of assets
|
$
|
38,365
|
|
|
$
|
45,272
|
|
|
$
|
54,909
|
|
|
Depreciation expense
|
|
(9,537
|
)
|
|
|
(10,703
|
)
|
|
|
(10,900
|
)
|
|
Amortization expense
|
|
(1,909
|
)
|
|
|
(1,588
|
)
|
|
|
(1,533
|
)
|
|
Legal
settlement
|
|
(2,300
|
)
|
|
|
|
|
|
|
|
|
|
Costs of
denied / abandoned tower site and license upgrade
|
|
|
|
|
|
(2,202
|
)
|
|
|
(746
|
)
|
|
Cost
terminated offering
|
|
|
|
|
|
(651
|
)
|
|
|
|
|
|
Interest
income
|
|
255
|
|
|
|
212
|
|
|
|
171
|
|
|
Loss on disposal of assets
|
|
(567
|
)
|
|
|
(214
|
)
|
|
|
(3,266
|
)
|
|
Interest
expense
|
|
(27,162
|
)
|
|
|
(23,474
|
)
|
|
|
(19,931
|
)
|
|
Loss on
early retirement of debt
|
|
|
|
|
|
(6,440
|
)
|
|
|
(6,588
|
)
|
|
Other
expense, net
|
|
(458
|
)
|
|
|
(410
|
)
|
|
|
(521
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes and discontinued operations
|
|
$
|
(3,313
|
)
|
|
$
|
(198
|
)
|
|
$
|
12,000
|
|
|
|
|
|
|
|
|
|
84
13. CONSOLIDATING FINANCIAL INFORMATION
The following is the
consolidating information of Salem Communications Corporation for purposes of
presenting the financial position and operating results of HoldCo as the issuer
of the 9% Notes and the 7¾% Notes and its guarantor subsidiaries on a
consolidated basis and the financial position and operating results of the other
guarantors, which are consolidated within the Company. Separate financial
information of HoldCo on an unconsolidated basis is not presented because HoldCo
has substantially no assets, operations or cash other than its investments in
subsidiaries. Each guarantor has given its full and unconditional guarantee, on
a joint and several basis, of indebtedness under the 9% Notes and the 7¾% Notes.
HoldCo and AcquisitionCo are 100% owned by Salem and HoldCo owns 100% of all of
its subsidiaries. All subsidiaries of HoldCo are guarantors. The net assets of
HoldCo are subject to certain restrictions which, among other things, require
HoldCo to maintain certain financial covenant ratios, and restrict HoldCo and
its subsidiaries from transferring funds in the form of dividends, loans or
advances without the consent of the holders of the 9% Notes and the 7¾% Notes.
The restricted net assets of HoldCo as of December 31, 2004, amounted to $134.5
million. Included in intercompany receivables of HoldCo presented in the
consolidating balance sheet below is $14.8 million of amounts due from Salem and
AcquisitionCo as of December 31, 2004.
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATING
BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2004
|
|
|
|
|
|
|
|
|
|
Issuer and
|
|
|
|
|
|
Guarantor
|
|
|
|
Guarantors
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Salem
|
|
|
|
|
Parent
|
|
AcquisitionCo
|
|
Media
|
|
HoldCo
|
|
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
522
|
|
|
$
|
601
|
|
|
$
|
9,871
|
|
|
$
|
|
|
|
$
|
10,994
|
|
Accounts receivable
|
|
|
|
|
|
|
1,746
|
|
|
|
1,654
|
|
|
|
26,512
|
|
|
|
(377
|
)
|
|
|
29,535
|
|
|
Other receivables
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
2,329
|
|
|
|
(826
|
)
|
|
|
1,629
|
|
Prepaid expenses
|
|
|
|
|
|
|
85
|
|
|
|
113
|
|
|
|
1,885
|
|
|
|
|
|
|
|
2,083
|
|
|
Due from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
(15
|
)
|
|
|
163
|
|
|
|
4,774
|
|
|
|
(239
|
)
|
|
|
4,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
2,338
|
|
|
|
2,657
|
|
|
|
45,371
|
|
|
|
(1,442
|
)
|
|
|
48,924
|
|
Property, plant and equipment
|
|
|
|
|
|
|
6,716
|
|
|
|
710
|
|
|
|
95,561
|
|
|
|
|
|
|
|
102,987
|
|
Broadcast licenses
|
|
|
|
|
|
|
93,602
|
|
|
|
|
|
|
|
312,688
|
|
|
|
|
|
|
|
406,290
|
|
Goodwill
|
|
|
|
|
|
|
8
|
|
|
|
5,301
|
|
|
|
6,110
|
|
|
|
|
|
|
|
11,419
|
Amortizable intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
2,722
|
|
|
|
|
|
|
|
2,757
|
|
Bond issue costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,342
|
|
|
|
|
|
|
|
3,342
|
|
Bank loan fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,710
|
|
|
|
|
|
|
|
3,710
|
|
Fair value of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,142
|
|
|
|
|
|
|
|
4,142
|
|
Intercompany receivables
|
|
|
267,902
|
|
|
|
1,670
|
|
|
|
|
|
|
|
1,381
|
|
|
|
(270,953
|
)
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
319
|
|
|
|
1,894
|
|
|
|
|
|
|
|
2,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
267,902
|
|
|
$
|
104,334
|
|
|
$
|
9,022
|
|
|
$
|
476,921
|
|
|
$
|
(272,395
|
)
|
|
$
|
585,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
13. CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATING
BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2004
|
|
|
|
|
|
|
|
|
|
Issuer and
|
|
|
|
|
|
Guarantor
|
|
|
|
Guarantors
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Salem
|
|
|
|
|
Parent
|
|
AcquisitionCo
|
|
Media
|
|
HoldCo
|
|
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
58
|
|
|
$
|
516
|
|
|
$
|
|
|
|
$
|
581
|
|
|
Accrued expenses
|
|
|
|
|
|
|
198
|
|
|
|
724
|
|
|
|
5,852
|
|
|
|
(303
|
)
|
|
|
6,471
|
|
|
Accrued compensation and related
|
|
|
|
|
|
|
256
|
|
|
|
337
|
|
|
|
4,717
|
|
|
|
|
|
|
|
5,310
|
|
|
Accrued interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,136
|
|
|
|
|
|
|
|
5,136
|
|
|
Deferred subscription revenue
|
|
|
|
|
|
|
|
|
|
|
1,346
|
|
|
|
56
|
|
|
|
|
|
|
|
1,402
|
|
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(232
|
)
|
|
|
232
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145
|
|
|
|
|
|
|
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
461
|
|
|
|
2,465
|
|
|
|
17,190
|
|
|
|
(71
|
)
|
|
|
20,045
|
|
Intercompany payables
|
|
|
16,448
|
|
|
|
8,401
|
|
|
|
13,888
|
|
|
|
1,669
|
|
|
|
(40,406
|
)
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277,292
|
|
|
|
|
|
|
|
277,292
|
|
Fair value in excess of book value of debt
hedged with interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,732
|
|
|
|
|
|
|
|
3,732
|
Deferred income taxes
|
|
|
(1,304
|
)
|
|
|
(1,675
|
)
|
|
|
(1,900
|
)
|
|
|
42,514
|
|
|
|
(4,920
|
)
|
|
|
32,715
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,364
|
|
|
|
|
|
|
|
3,364
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
999
|
|
|
|
|
|
|
|
999
|
|
Stockholders equity
|
|
|
252,758
|
|
|
|
97,147
|
|
|
|
(5,431
|
)
|
|
|
130,161
|
|
|
|
(226,998
|
)
|
|
|
247,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity
|
|
$
|
267,902
|
|
|
$
|
104,334
|
|
|
$
|
9,022
|
|
|
$
|
476,921
|
|
|
$
|
(272,395
|
)
|
|
$
|
585,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
13. CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATING
INCOME STATEMENT
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
(UNAUDITED)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2004
|
|
|
|
|
|
|
|
|
|
Issuer and
|
|
|
|
|
|
Guarantor
|
|
|
|
Guarantors
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Salem
|
|
|
|
|
Parent
|
|
AcquisitionCo
|
|
Media
|
|
HoldCo
|
|
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net broadcasting revenue
|
|
$
|
|
|
|
$
|
12,156
|
|
|
$
|
|
|
|
$
|
177,411
|
|
|
$
|
(2,024
|
)
|
|
$
|
187,543
|
|
Other media revenue
|
|
|
|
|
|
|
|
|
|
|
11,103
|
|
|
|
|
|
|
|
(1,761
|
)
|
|
|
9,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
|
|
|
12,156
|
|
|
|
11,103
|
|
|
|
177,411
|
|
|
|
(3,785
|
)
|
|
|
196,885
|
|
Operating expenses:
|
|
Broadcasting operating expenses
|
|
|
|
|
|
|
8,904
|
|
|
|
|
|
|
|
108,028
|
|
|
|
(1,036
|
)
|
|
|
115,896
|
|
|
Costs of denied / abandoned tower site and license upgrade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
746
|
|
|
|
|
|
|
|
746
|
|
|
Other media operating expenses
|
|
|
|
|
|
|
|
|
|
|
11,647
|
|
|
|
(504
|
)
|
|
|
(2,543
|
)
|
|
|
8,600
|
|
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,480
|
|
|
|
|
|
|
|
17,480
|
|
|
Cost of terminated offerings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
472
|
|
|
|
349
|
|
|
|
10,079
|
|
|
|
|
|
|
|
10,900
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
221
|
|
|
|
1,312
|
|
|
|
|
|
|
|
1,533
|
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
65
|
|
|
|
224
|
|
|
|
2,977
|
|
|
|
|
|
|
|
3,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
9,441
|
|
|
|
12,441
|
|
|
|
140,118
|
|
|
|
(3,579
|
)
|
|
|
158,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
2,715
|
|
|
|
(1,338
|
)
|
|
|
37,293
|
|
|
|
(206
|
)
|
|
|
38,464
|
|
Other income (expense):
|
|
|
|
|
|
Interest income
|
|
|
5,035
|
|
|
|
35
|
|
|
|
32
|
|
|
|
7,083
|
|
|
|
(12,014
|
)
|
|
|
171
|
|
|
Interest expense
|
|
|
(5,775
|
)
|
|
|
(5,031
|
)
|
|
|
(1,179
|
)
|
|
|
(19,960
|
)
|
|
|
12,014
|
|
|
|
(19,931
|
)
|
|
Loss on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,588
|
)
|
|
|
|
|
|
|
(6,588
|
)
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and discontinued operations
|
|
|
(740
|
)
|
|
|
(2,281
|
)
|
|
|
(2,485
|
)
|
|
|
17,712
|
|
|
|
(206
|
)
|
|
|
12,000
|
|
Provision (benefit) for income taxes
|
|
|
(281
|
)
|
|
|
(873
|
)
|
|
|
(948
|
)
|
|
|
6,678
|
|
|
|
|
|
|
|
4,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued operations
|
|
|
(459
|
)
|
|
|
(1,408
|
)
|
|
|
(1,537
|
)
|
|
|
11,034
|
|
|
|
(206
|
)
|
|
|
7,424
|
|
Discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(459
|
)
|
|
$
|
(1,480
|
)
|
|
$
|
(1,537
|
)
|
|
$
|
10,943
|
|
|
$
|
(206
|
)
|
|
$
|
7,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
14. SUBSEQUENT EVENTS
On January 3, 2005, the
Company exchanged selected assets of its radio stations KHNR-AM and KHCM-AM
in Honolulu, Hawaii for selected assets of KGMZ-FM, Honolulu, Hawaii.
On January 19, 2005, the
Company acquired selected assets of radio station
KAST-FM, Portland, Oregon for $8.0 million.
On January 31, 2005, the
Company acquired selected assets of radio station
WKAT-AM, Miami, Florida for $10.0 million.
On January 31, 2005, the
Company acquired selected assets of radio station
KGBI-FM, Omaha, Nebraska from for $10.0 million.
On February 11, 2005, the
Company acquired selected assets of the Internet portal operations of Christianity.com
for $3.4 million.
On February 18, 2005, the
Company sold its interest in its $66.0 million
interest rate swap. As a result of this transaction, the Company received $3.7
million, which will be amortized as a reduction of interest expense over the remaining
term of the 9% Notes.
88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a)Evaluation of Disclosure
Controls and Procedures.
We maintain disclosure controls and procedures that
are designed to ensure that information required to be disclosed in our reports
pursuant to the Exchange Act, as amended, is recorded accurately, processed, summarized and
reported within the time periods specified in the
U.S. Securities and Exchange Commissions (SEC) rules and forms and that
such information is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule13a-15(b) of the Securities Exchange of
1934, as amended, we carried out an evaluation,
under the supervision and with the participation of our management, including our chief executive officer and
chief financial officer, of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the foregoing, our chief executive
officer and chief financial officer concluded that our disclosure controls and procedures were effective.
(b)Managements Annual Report on Internal
Control Over Financial Reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we are required to furnish a report of our managements assessment of the
effectiveness of our internal controls over financial reporting and our auditors are required to provide an
attestation report on managements assessment. We have omitted the internal control report and related
attestation report from this Annual Report on Form 10-K in reliance on the SECs November 30, 2004 exemptive
order, which grants certain smaller accelerated filers an additional 45 days in which to furnish the internal
control report and related attestation report. We have prepared an internal plan of action for compliance, and
we are in the process of assessing our managements report on internal controls over financial reporting.
We expect to be able to furnish the internal control report and related attestation report within the required
45-day period.
(c)Attestation Report of Registered Public Accounting Firm.
Omitted in reliance on the SECs November 30,
2004 exemptive order, which grants certain smaller accelerated filers an additional 45 days in which to furnish
the internal control report and related attestation report required by Section 404 of the Sarbanes-Oxley Act of 2002.
(d)Changes in Internal Controls.
There was no change in
our internal control over financial reporting
during our fourth fiscal quarter for 2004 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Not applicable.
89
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.
Committees of the Board of Directors
The companys board of directors has three committees: the Audit Committee, the
Compensation Committee and the Nominating and Corporate Governance Committee. The
following table lists the members and chairman of each of these committees:
COMMITTEE MEMBERSHIP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominating and
|
|
|
|
|
Audit
|
|
Compensation
|
|
Corporate Governance
|
Name
|
|
Independent
|
|
Committee
|
|
Committee
|
|
Committee
|
|
|
|
|
|
|
|
|
|
Stuart W. Epperson
|
|
|
|
|
|
|
|
|
Edward G. Atsinger III
|
|
|
|
|
|
|
|
|
David Davenport
|
|
X
|
|
|
|
X
|
|
X
|
Eric H. Halvorson
|
|
|
|
X
|
|
|
|
|
Roland S. Hinz
|
|
X
|
|
|
|
C
|
|
X
|
Donald P. Hodel
|
|
X
|
|
X
|
|
|
|
X
|
Judge Paul Pressler
|
|
X
|
|
|
|
|
|
C
|
Richard A. Riddle
|
|
X
|
|
C
|
|
X
|
|
X
|
|
X = Current member of committee
|
C = Current member and chairman of the committee
|
90
Audit Committee
The Audit Committee currently consists of Messrs. Riddle (Chairman), Halvorson and Hodel. The board of directors
has determined that Mr. Riddle, the Audit Committee Chairperson, is independent under the NASDAQ Rules and
qualifies as an audit committee financial expert, as defined and required by applicable SEC rules and
regulations.
The Audit Committee met four times in 2004 and operates under a written charter adopted by the board of
directors, a copy of which was attached as appendix A to the companys Proxy Statement filed with the SEC on
April 29, 2003. This charter is also available on Salems Internet website (www.salem.cc) and a copy of the
charter may be obtained upon written request from the Secretary of the company. Any information found on the
companys website is not a part of, or incorporated by reference into, this or any other report of the company
filed with, or furnished to, the SEC.
The Audit Committees responsibilities are generally to assist the board in fulfilling its legal and fiduciary
responsibilities relating to accounting, audit and reporting policies and practices of the company and its
subsidiaries. The Audit Committee also, among other things, oversees the companys financial reporting process,
recommends to the board of directors the engagement of the companys independent registered public accounting
firm, approves the fees for the companys independent registered public accounting firm, monitors and reviews the
quality, activities and functions of the companys independent registered public accounting firm, and monitors
the adequacy of the companys operating and internal controls and procedures as reported by management and the
companys independent registered public accounting firm. The Audit Committee Report set forth later in this
Annual Report provides additional details about the duties and activities of this committee.
All members of the Audit Committee, except Eric H. Halvorson, have been determined by the board to be independent
under the NASDAQ Rules. Mr. Halvorson formerly served with the company in several capacities, including as its
chief operating officer for five years and its general counsel for 12 years. He resigned from the company in
2000, but continued to render legal services to the company thereafter pursuant to an independent contractor
agreement. Mr. Halvorson ceased providing such services to the company in 2002.
Mr. Halvorson could not be determined by the board to be independent because, in 2002, he received more than
$60,000 in total compensation from the company in connection with consulting services provided by Mr. Halvorson
under the independent contractor agreement. This consulting arrangement was terminated in 2002 and Mr. Halvorson
did not perform any consulting services for the company in 2003 or 2004. The company believes that Mr. Halvorson
will be eligible to be determined by the board as independent under the NASDAQ Rules in January 2006.
The companys board of directors initially determined that the addition of Mr. Halvorson to the Audit Committee
as of November 15, 2001, was required in the best interests of the company and its stockholders because of his
extensive industry and professional expertise. In March 2004, the board of directors determined that the
continued membership of Mr. Halvorson on the Audit Committee remains in the best interests of the company and
complies with applicable NASDAQ Rules permitting the appointment of one non-independent director to the Audit
Committee in exceptional and limited circumstances.
91
Compensation Committee
The Compensation Committee currently consists of Messrs. Hinz (Chairman), Davenport and Riddle. The Compensation
Committee is authorized to review and approve compensation, including non-cash benefits, and severance
arrangements for the companys senior officers and employees and to recommend to the board salaries, remuneration
and other forms of additional compensation and benefits as it deems necessary. The Compensation Committee also
administers the companys Amended and Restated 1999 Stock Incentive Plan. The Compensation Committee Report set
forth later in this Annual Report provides additional details concerning the committees determination of
compensation for the companys senior management.
The Compensation Committee held four meetings in 2004. The Compensation Committee meets at least twice annually
and at additional times as are necessary or advisable to fulfill all of its duties and responsibilities.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee currently consists of Messrs. Pressler (Chairman), Davenport,
Hinz, Hodel and Riddle, each of whom is independent under the NASDAQ Rules. This committee was established as a
standing committee by the board in March 2004 and the committee met two times in 2004. The board has directed
this committee to meet at least twice annually and at additional times as are necessary or advisable to fulfill
all of its duties and responsibilities.
The board of directors has adopted a written charter for the Nominating and Corporate Governance Committee. This
charter is available on Salems Internet website (www.salem.cc) and a copy of the charter may be obtained upon
written request from the Secretary of the company. Any information found on the companys website is not a part
of, or incorporated by reference into, this or any other report of the company filed with, or furnished to, the
SEC.
The Nominating and Corporate Governance Committee is authorized to: (i) develop and recommend a set of corporate
governance standards to the board of directors for adoption and implementation, (ii) identify individuals
qualified to become members of the board of directors, (iii) recommend that director nominees be elected at the
companys next annual meeting of stockholders, (iv) recommend nominees to serve on each standing committee of the
board of directors, (v) lead in the annual review of board performance and evaluation of the boards
effectiveness, (vi) ensure that succession planning takes place for the position of chief executive officer and
other key company senior management positions, and (vii) analyze, review and, where appropriate, approve all
related party transactions to which the company or its subsidiaries or affiliates are a party, all in accordance
with applicable rules and regulations.
To qualify as a nominee for service on the board of directors, a candidate must have sufficient time and
resources available to successfully carry out the duties required of a Salem board member. The committee desires
to attract and retain highly qualified directors who will diligently execute their responsibilities and enhance
their knowledge of the companys core businesses.
The Nominating and Corporate Governance Committee implements Salems policy regarding shareholder nominations by
considering nominees for director positions that are made by the companys stockholders. Any stockholder desiring
to make such a nomination must submit in writing the name(s) of the recommended nominees to the Secretary of the
company at least 90 days before the annual meeting of stockholders. The written submission must also contain
biographical information about the proposed nominee, a description of the nominees qualifications to serve as a
member of the board of directors, and evidence of the nominees valid consent to serve as a director of the
company if nominated and duly elected.
92
The companys directors provide oversight of Salems management and play a key role in shaping the strategic
direction of the company. Consistent with the companys Nominating and Corporate Governance Charter, the
Committee considers various criteria in Board candidates, including, among others, independence, character,
judgment and business experience, as well as their appreciation of the companys core purpose, core values, and
whether they have time available to devote to Board activities. The Committee also considers whether a potential
nominee would satisfy:
1. NASDAQs criteria of director independence; and
2. The SECs definition of audit committee financial expert.
Whenever a vacancy exists on the Board due to expansion of the Boards size or the resignation or retirement of
an existing director, the Committee will identify and evaluate potential director nominees. The Committee
considers recommendations of management, stockholders and others. The Committee has sole authority to retain and
terminate any search firm to be used to identify director candidates, including approving its fees and other
retention terms.
Director candidates are evaluated using the criteria described above and in light of the then-existing
composition of the Board, including its overall size, structure, backgrounds and areas of expertise of existing
directors and the relative mix of independent and management directors. The Committee also considers the specific
needs of the various Board committees. The Committee recommends potential director nominees to the full Board,
and final approval of a candidate for nomination is determined by the full Board. This evaluation process is the
same for director nominees who are recommended by our stockholders.
The Committee did not receive any recommendations from stockholders proposing candidate(s) for election at the
2005 Annual Stockholders Meeting. None of the directors serving on the Audit Committee, the Compensation
Committee, or the Nominating and Corporate Governance Committee are employees of the company.
93
DIRECTORS
Each of the directors of the company
serves a one-year term and all directors are subject to re-election at each annual meeting of stockholders.
The following table sets forth
certain information as of March 11, 2005 except where otherwise indicated, with respect
to the directors of the company.
|
|
|
|
|
|
|
|
|
|
|
First became
|
|
Position(s) held
|
Name of Director
|
|
Age
|
|
director of Company
|
|
with the Company
|
|
|
|
|
|
|
|
Stuart Epperson
|
|
68
|
|
1986
|
|
Chairman of the Board
|
Edward G. Atsinger
|
|
65
|
|
1986
|
|
President, Chief Executive Officer and Director
|
David Davenport
|
|
54
|
|
2001
|
|
Director
|
Eric H. Halvorson
|
|
55
|
|
1988
|
|
Director
|
Roland S. Hinz
|
|
65
|
|
1997
|
|
Director
|
Donald P. Hodel
|
|
69
|
|
1999
|
|
Director
|
Richard A. Riddle
|
|
60
|
|
1997
|
|
Director
|
Paul Pressler
|
|
74
|
|
2002
|
|
Director
|
Set forth below is certain
information concerning the principal occupation and business experience of each
of the directors during the past five years and other relevant experience.
Mr. Epperson has been Chairman of the Board of Salem since its inception. He is also
a director of Salem Communications
Holding Corporation, a wholly-owned subsidiary of Salem. Mr. Epperson has been engaged in the ownership and
operation of radio stations since 1961. In addition, he is a member of the board of directors of the National
Religious Broadcasters. Mr. Epperson is married to Nancy A. Epperson who is Mr. Atsingers sister.
Mr. Atsinger has been President, Chief Executive Officer and a director
of Salem and a director of each of
Salems subsidiaries since their inception. He has been engaged in the ownership and operation of radio stations
since 1969. Mr. Atsinger has been a member of the board of directors of the National Religious Broadcasters for a
number of years; he was re-elected to a three-year term on that board in February 2004. Mr. Atsinger has also been a
member of the board of directors of Oaks Christian High School.
Mr. Atsinger is the brother-in-law of Mr. Epperson.
Mr. Davenport has been a director of Salem since November 2001. Mr.
Davenport is a distinguished professor
of public policy at Pepperdine University and has served in that position since August 2003. He is also a
research fellow at the Hoover Institution and has served in that position since August 2001. Mr. Davenport was
the Chief Executive Officer of Starwire Corporation, a software service company formerly known as
Christianity.com, from June 2000 to June 2001. Mr. Davenport served as President of Pepperdine University from
1985 to 2000 and from 1980 through 1985, he served as a Professor of Law, General Counsel, and Executive Vice
President of the University. Mr. Davenport currently serves on the governing and advisory boards of Hope Network
Ministries, Forest Lawn Memorial Parks Association and National Legal Center for the Public Interest. He also
serves on the advisory board of Inside Track. Mr. Davenport also serves on the board of
directors of Ameron International Corporation.
94
Mr. Halvorson has been a director of Salem since 1988.
Mr. Halvorson is currently the Chairman of The Thomas Kinkade Company and was the President and Chief Executive
Officer of The Thomas Kinkade Company from 2003 to 2005. Mr. Halvorson was a Visiting Professor at Pepperdine
University from 2000 to 2003. Mr. Halvorson was Chief Operating Officer of Salem from 1995 to 2000 and Executive
Vice President of the company from
1991 to 2000. From 1991 to 2000, Mr. Halvorson also served as General Counsel to the company. Mr. Halvorson was
the managing partner of the law firm of Godfrey & Kahn, S.C.-Green Bay from 1988 until 1991. From 1985 to 1988,
he was Vice President and General Counsel of Salem. From 1976 until 1985, he was an associate and then a partner
of Godfrey & Kahn, S.C.-Milwaukee. Mr. Halvorson was a Certified Public Accountant with Arthur Andersen & Co.
from 1971 to 1973. Mr. Halvorson is a member of the board of directors of Intuitive Surgical, Inc.
Mr. Hinz has been a director of Salem since September 1997.
Mr. Hinz has been the owner, President and
Editor-in-Chief of Hi-Torque Publishing Company, a publisher of magazines covering the motorcycling and biking
industries, since 1982. Mr. Hinz is also the managing member of Hi-Favor Broadcasting, LLC, which operates 19
hispanic radio stations in Southern California. Mr. Hinz also
serves on the board of directors of the Association of Community Education, Inc., a not-for-profit corporation
operating radio station KLTX-AM, Long Beach, California, and KEZY-AM, San Bernardino, California. Mr. Hinz also
serves on the board of directors of Truth for Life, non-profit organization that is a customer of the company.
Mr. Hodel has been a director of Salem since May 1999.
Mr. Hodel is a founder and has been the Managing
Director of Summit Group International, Ltd., an energy and natural resources consulting firm, since 1989. He has
served as Vice Chairman of Texon Corporation, an oil and natural gas marketing company, since 1994. From May 15,
2003 to February 24, 2005, Mr. Hodel served as President and Chief Executive Officer of Focus on the Family, a non-profit organization
that is a customer of the company. Mr. Hodel has served on the board of directors of Focus on the Family
intermittently since 1995. Previously, Mr. Hodel served as Executive Vice President of Focus on the Family from
January 1996 to August 1996. In addition to serving as a director of Focus on the Family, Mr. Hodel currently
serves on the boards of directors of Integrated Electrical Services, Inc. and the North American Electric
Reliability Council, and has previously served on the boards of a number of public
companies. Mr. Hodel served as President of the Christian Coalition from June 1997 to January 1999. During the
Reagan Administration, Mr. Hodel served as Secretary of Energy and Secretary of the Interior.
Judge Pressler has been a director of Salem since March 2002,
and is also a board member of the Free Market
Foundation and KHCB Network, a non-profit corporation which owns Christian radio stations in Texas and Louisiana,
and a board member of National Religious Broadcasters. He has been an active leader in the Southern Baptist
Convention. Additionally, he is a member of the Texas Philosophical Society. Since 2000, Judge Pressler has
been a partner in the law firm of Woodfill Pressler, a director of Revelation, Inc., and has been in private
mediation practice for several years as well. A retired justice of the Texas Court of Appeals, Judge Pressler was
appointed Justice of the Texas Court of Appeals in 1978, serving until 1992. Judge Pressler also served as
District Judge from 1970 to 1978. From 1958 to 1970, he was associated with the law firm of Vinson & Elkins.
Mr. Riddle has been a director of Salem since September 1997. Mr. Riddle is an independent businessman
specializing in providing financial assistance and consulting to individuals and manufacturing companies. He
was President and a majority stockholder of I. L. Walker Company from 1988 to 1997 when that company was sold. He
also was Chief Operating Officer and a major stockholder of Richter Manufacturing Corp. from 1970 to 1987.
95
Directors Fees.
Officers of Salem who also serve as directors do not receive compensation for their services
as directors, other than the compensation they receive as officers of Salem. In 2004, directors of Salem who are
not also officers or employees of Salem received a quarterly retainer of $5,000, $2,500 for attending each regularly
scheduled meeting of the board of directors, $1,000 for attending each regularly scheduled meeting of any committee of
the board of directors, and $1,000 for acting as the chairperson of each regularly scheduled meeting of any
committee of the board of directors. Directors of Salem are entitled to reimbursement of their reasonable out-of-pocket
expenses in connection with their travel to and attendance at board and committee meetings.
Stock Option Grants.
In return for their service, directors of Salem who are not also officers or employees of
Salem were each granted options to purchase 2,500 shares of Salems Class A common stock on
September 8, 2004. All of these options vested immediately upon grant.
EXECUTIVE OFFICERS
Set forth below are the executive officers of the company,
together with the positions held by those persons as of March 11, 2005. The executive officers are elected
annually and serve at the pleasure of the companys board of directors; however, the company has entered into
Employment Agreements with Messrs. Atsinger, Epperson and Evans, which agreements are described under the section
of this Proxy Statement entitled EXECUTIVE COMPENSATION below.
|
|
|
|
|
|
|
|
|
Position(s) Held
|
Name of Executive Officer
|
|
Age
|
|
with the Company
|
|
|
|
|
|
Stuart W. Epperson
|
|
68
|
|
Chairman of the Board
|
Edward G. Atsinger III
|
|
65
|
|
President, Chief Executive Officer and Director
|
Joe D. Davis
|
|
60
|
|
Executive Vice President and Chief Operating Officer
|
David A.R. Evans
|
|
42
|
|
Executive Vice President and Chief Financial Officer
|
Greg R. Anderson
|
|
58
|
|
Vice President of SRN
|
James R. Cumbee
|
|
52
|
|
President of Non-Broadcast Media
|
Jonathan L. Block
|
|
38
|
|
Vice President, General Counsel and Secretary
|
Evan D. Masyr
|
|
33
|
|
Vice President of Accounting and Corporate
Controller
|
Set forth below is certain information concerning the business
experience during the past five years and
other relevant experience of each of the individuals named above (excluding Messrs. Atsinger and Epperson, whose
business experience is described in the above section entitled DIRECTORS).
Mr. Davis has been Salems Executive Vice President and Chief Operating Officer
since March 2005. Prior to that time, Mr. Davis was Executive Vice President of Radio
since 2003, Executive Vice President, Operations since 2001, Senior Vice President of Salem since 2000, Vice President,
Operations of Salem since 1996 and General Manager of WMCA-AM since 1989. He was also the General Manager of
WWDJ-AM since 1994. He has previously served as Vice President and Executive Director of the Christian Fund for
the Disabled as well as President of Practice Resources, Inc., Davis Eaton Corporation and Vintage Specialty
Advertising Company. He has been involved professionally in various aspects of broadcasting since 1967.
Mr. Evans has been Executive Vice President and Chief Financial Officer of Salem since September 2003. From
2000 to 2003, Mr. Evans served as the companys Senior Vice President and Chief Financial Officer. From 1997 to
2000, Mr. Evans served as Senior Vice President and Managing DirectorEurope, Middle East, and Africa of Warner
Bros. Consumer Products in London, England. He also served at Warner Bros. Consumer Products in Los Angeles,
California, as Senior Vice PresidentLatin America, International Marketing, Business Development from 1996 to
1997 and Vice PresidentWorldwide Finance, Operations, and Business Development from 1992 to 1996. From 1990 to
1992, he served as Regional Financial ControllerEurope for Warner Bros. based in London, England.
Prior to 1990, Mr. Evans was an audit manager with Ernst & Young LLP in Los Angeles, California and worked as a
U.K. Chartered Accountant for Ernst & Young LLP in London, England.
Mr. Anderson has been President of SRN
since 1996. From 1993 to 1994, Mr. Anderson was the
Vice President-General Manager of this network. Mr. Anderson was employed by Multimedia, Inc. from 1980 to 1993.
After serving as General Manager at Multimedia stations in Greenville, South Carolina, Shreveport, Louisiana and
Milwaukee, Wisconsin, he was named Vice President, Operations, of the Multimedia radio division in 1987 and was
subsequently appointed as Executive Vice President and group head of Multimedias radio division.
96
Mr. Cumbee has been the President of Non-Broadcast Media
of Salem since January 2000. He was the President
of Reach Satellite Network, Inc. in Nashville, Tennessee from 1996 through 1999. Salem purchased all of the
shares of stock of Reach Satellite Network, Inc. in March 2000. From 1994 to 1996, he served as Vice President of
Disney Vacation Development Company.
Mr. Block has been General Counsel of Salem since May 2000,
Vice President since 1999 and Corporate
Secretary since 1997. Since August 2000, Mr. Block has been a director of each subsidiary of Salem other than
Salem Communications Holding Corporation. From 1995 to 2000, Mr. Block served as Associate General Counsel of
Salem.
Mr. Masyr has been Vice President of Accounting and Corporate
Controller since March 2004. From January 2003 to March 2004, he was Vice President and Corporate Controller. From February
2000 to December 2002, he served as Controller. From 1993 to February 2000, Mr. Masyr worked for
PricewaterhouseCoopers LLP (formerly, Coopers & Lybrand LLP). Mr. Masyr has been a Certified Public Accountant
since 1995.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Exchange Act and the rules
promulgated thereunder and requirements of the
NASD, officers and directors of the company and persons who beneficially own more than 10% of the common stock of
the company are required to (i) file with the SEC and the NASD, and (ii) furnish to the company reports of
ownership and change in ownership with respect to all equity securities of the company.
Based solely on its review of the copies of such reports received
by it during or with respect to the year ended December 31, 2004, and/or written representations from such
reporting persons, the company believes that its officers, directors and more than ten-percent stockholders
complied with all Section 16(a) filing requirements applicable to such individuals.
Financial Code of Conduct
The company has adopted a Financial Code of Conduct that applies to each director and employee of Salem
(including without limitation the companys Chief Executive Officer, Chief Financial Officer and Controller).
This Financial Code of Conduct has been adopted by the board as a code of ethics that satisfies applicable SEC
requirements and NASDAQ Rules. The Financial Code of Conduct is available on Salems Internet website
(www.salem.cc) and a copy of the code may be obtained upon written request from the Secretary of the company.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets
forth all compensation paid by the company for 2004, 2003 and 2002 to the
companys Chief Executive Officer and the four highest paid executive officers
of the company serving as of December 31, 2004 (the Named Executive
Officers).
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Annual
|
|
All Other
|
Name and Principal Positions
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Compensation
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward G. Atsinger III
|
|
2004
|
|
$
|
775,000
|
|
$
|
257,558
|
|
$
|
|
|
$
|
45,910
|
(1)
|
President, Chief
Executive
|
|
2003
|
|
|
700,000
|
|
|
|
|
|
|
|
|
44,016
|
(1)
|
|
Officer and Director
|
|
2002
|
|
|
700,000
|
|
|
|
|
|
|
|
|
41,184
|
(1)
|
|
Stuart W. Epperson
|
|
2004
|
|
|
650,000
|
|
|
185,442
|
|
|
|
|
|
39,633
|
(2)
|
Chairman of the Board
|
|
2003
|
|
|
600,000
|
|
|
|
|
|
|
|
|
37,739
|
(2)
|
|
|
2002
|
|
|
600,000
|
|
|
|
|
|
|
|
|
34,904
|
(2)
|
|
Joe D. Davis
|
|
2004
|
|
|
328,600
|
|
|
75,000
|
|
|
|
|
|
4,009
|
(3)
|
Executive Vice President and Chief Operating Officer
|
|
2003
|
|
|
329,215
|
|
|
|
|
|
|
|
|
3,500
|
(3)
|
|
|
2002
|
|
|
285,000
|
|
|
32,000
|
|
|
|
|
|
2,000
|
(3)
|
|
David A.R. Evans
|
|
2004
|
|
|
318,548
|
|
|
66,500
|
|
|
|
|
|
4,613
|
(3)
|
Executive Vice President and
|
|
2003
|
|
|
298,548
|
|
|
20,000
|
|
|
|
|
|
3,000
|
(3)
|
Chief Financial Officer
|
|
2002
|
|
|
277,632
|
|
|
47,500
|
|
|
|
|
|
2,750
|
(3)
|
|
Robert C. Adair
|
|
2004
|
|
|
313,748
|
|
|
60,000
|
|
|
|
|
|
4,613
|
(3)
|
Senior Vice President,
Operations
|
|
2003
|
|
|
308,700
|
|
|
|
|
|
|
|
|
3,100
|
(3)
|
|
|
2002
|
|
|
280,000
|
|
|
35,000
|
|
|
|
|
|
2,938
|
(3)
|
(1) Represents imputed income in connection with amounts
paid by Salem for split-dollar life insurance covering the
lives of Mr. Atsinger and his spouse, such policy owned by Salem as of December 31, 2004 (See
Item 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONSSplit-Dollar Life
Insurance for further information). For each year, such imputed income represents
the interest-free use of the aggregate periodic contributions made by Salem towards premium payments under the
split-dollar life insurance arrangements. Salem contributed $108,960, $66,966 and $112,860 in 2004, 2003 and
2002, respectively, towards such premium payments.
(2) Represents imputed income in connection with amounts
paid by Salem for split-dollar life insurance covering the
lives of Mr. Epperson and his spouse, such policy owned by Salem as of December 31, 2004 (See
Item 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONSSplit-Dollar Life
Insurance for further information). For each year, such imputed income represents
the interest-free use of the aggregate periodic contributions made by Salem towards premium payments under the
split-dollar life insurance arrangements. Salem contributed $109,760, $66,966 and $113,060 in 2004, 2003 and
2002, respectively, towards such premium payments.
(3) Represents employer matching contributions
to individuals 401(k) accounts.
98
Stock Option Grants
The following table sets
forth information regarding grants of stock options under the Amended and Restated 1999 Stock
Incentive Plan by the company during 2004 to Named Executive Officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual
Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential
Realizable
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Value of
Assumed
|
|
|
Shares of
|
|
Percent
|
|
|
|
|
|
|
Annual Rates
|
|
|
Class A
|
|
of Total
|
|
|
|
|
|
|
of Stock Price
|
|
|
Common
|
|
Options
|
|
|
|
|
|
|
Appreciation
for
|
|
|
Stock
|
|
Granted to
|
|
|
|
|
|
|
Option
|
|
|
Underlying
|
|
Employees
|
|
Exercise
|
|
|
|
Term
|
|
|
Options
|
|
in Fiscal
|
|
of Base
|
|
Expiration
|
|
|
|
|
Granted (#)
|
|
Year
|
|
Price ($/SH)
|
|
Date
|
|
5%($)
|
|
10%($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward G. Atsinger III
|
|
24,850
|
|
2.9%
|
|
$
|
25.50
|
|
03/08/2009
|
|
$
|
175,073
|
|
$
|
386,865
|
|
|
133,333
|
|
15.5%
|
|
|
29.41
|
|
06/17/2009
|
|
|
1,083,389
|
|
|
2,394,007
|
|
|
133,333
|
|
15.5%
|
|
|
29.41
|
|
06/17/2010
|
|
|
1,333,625
|
|
|
3,025,540
|
|
|
133,334
|
|
15.5%
|
|
|
29.41
|
|
06/17/2011
|
|
|
1,596,384
|
|
|
3,720,255
|
|
Stuart W. Epperson
|
|
17,892
|
|
2.1%
|
|
|
25.50
|
|
03/08/2009
|
|
|
126,052
|
|
|
278,543
|
|
|
100,000
|
|
11.6%
|
|
|
29.41
|
|
06/17/2009
|
|
|
812,544
|
|
|
1,795,510
|
|
|
100,000
|
|
11.6%
|
|
|
29.41
|
|
06/17/2010
|
|
|
1,000,221
|
|
|
2,269,161
|
|
|
100,000
|
|
11.6%
|
|
|
29.41
|
|
06/17/2011
|
|
|
1,197,282
|
|
|
2,790,177
|
|
Joe D. Davis
|
|
1,025
|
|
0.1%
|
|
|
25.50
|
|
03/08/2009
|
|
|
7,221
|
|
|
15,957
|
|
David A.R. Evans
|
|
359
|
|
0.0%
|
|
|
25.50
|
|
03/08/2009
|
|
|
2,529
|
|
|
5,589
|
|
|
5,000
|
|
0.6%
|
|
|
29.41
|
|
06/17/2009
|
|
|
40,627
|
|
|
89,775
|
|
Robert Adair
|
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
99
Employment Agreements
Edward G. Atsinger III and
Stuart W. Epperson entered into separate employment agreements with Salem
effective as of July 1, 2004, pursuant to which Mr. Atsinger serves as President
and Chief Executive Officer of Salem and Mr. Epperson serves as Chairman of
Salem. The employment term under each agreement expires June 30, 2007.
Pursuant to the employment agreements, each of Messrs. Atsinger and Epperson
will be paid an annual base salary and an annual bonus determined at the
discretion of the board of directors. Effective as of July 1, 2004,
the annual base salary payable increased to $850,000 from $700,000 for Mr. Atsinger and
to $700,000 from $600,000 for Mr. Epperson. The employment agreements each provide that, in the
event of a termination of employment by Salem without cause (or a constructive
termination by Salem) during the term of employment, Salem will pay a
severance benefit in the form of salary continuation payments for the longer of
six months or the remainder of the initial term, plus accrued bonus through the
date of termination. Following the initial term of employment, a termination of
employment by Salem without cause (or a constructive termination by Salem) or a
failure by Salem to renew the initial or any subsequent term of employment for
an additional annual term would entitle Messrs. Atsinger and Epperson to three
months of severance plus accrued bonus through the date of termination.
Additionally, the employment
agreements with Messrs. Atsinger and Epperson provide Salem with a right of
first refusal on corporate opportunities, which includes acquisitions of radio
stations in any market in which Salem is interested, and includes a noncompete
provision for a period of two years from the cessation of employment with Salem
and a nondisclosure provision which is effective for the term of the employment
agreements and indefinitely thereafter.
David A.R. Evans entered
into an employment agreement with Salem pursuant to which he will serve as
Executive Vice President and Chief Financial Officer of Salem. Effective as of
September 16, 2003, his annual salary was $310,000. Effective as of September
16, 2004 his annual salary increased to $330,000. Effective as of September 16,
2005 his annual salary will increase to $350,000. His employment agreement expires
on September 15, 2006.
401(k) Plan
The company adopted a 401(k)
savings plan in 1993 for the purpose of providing, at the option of the
employee, retirement benefits to full-time employees of the company and its
subsidiaries. Participants are allowed to make nonforfeitable contributions to
the savings plan of up to 60% of their annual salary, but may not exceed the
annual maximum contribution limitations established by the Internal Revenue
Service. The company currently matches 50% on the first 3% of the amounts contributed by each participant
and 25% of the next 3% contributed but does not match participants
contributions in excess of 6% of their compensation per pay period. Prior to January 1, 2003,
the company matched 25% of the amounts contributed by each participant but did not match participants
contributions in excess of 6% of their compensation per pay period. The company made a contribution of $922,000
to the 401(k) savings plan during 2004.
Compensation Committee Interlocks and Insider Participation in Compensation Decisions
The companys Compensation
Committee consists of Messrs. Hinz (Chairman), Riddle and Davenport. No member
is, or formerly was, an officer or employee of the company or any of its
subsidiaries and neither had any relationship with the company requiring
disclosure herein under applicable rules. In addition, to the companys
knowledge, no executive officer or director of Salem has served as a director or
a member of the compensation committee of another entity that requires
disclosure herein under applicable rules.
100
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
This Audit Committee
Report shall not be deemed soliciting material or to be filed with the SEC, nor shall any information in this
report be incorporated by reference by any
general statement into any past or future filing under the Securities Act, as amended, or under the
Exchange Act, as amended, except to the extent that the company and its
subsidiaries specifically incorporates this information by reference into such filing, and
shall not otherwise be deemed filed under such Acts.
The purpose of the Audit Committee (the Committee) is to oversee, on behalf of the entire board of
directors (the Board): (a) the accounting and financial reporting processes of the Corporation, (b) the audits
of the Corporations financial statements, (c) the qualifications of the public accounting firm engaged as the
Corporations Independent Registered Public Accounting Firm to prepare or issue an audit report on the financial statements of the
Corporation, and (d) the performance of the Corporations internal auditors and Independent Registered Public Accounting Firm.
The Committees has adopted, and annually reviews, a charter outlining the practices it follows. The
charter complies with all current regulatory requirements, including requirements pertaining to the NASD listing
standards definitions, provisions and applicable exceptions concerning the independence of audit committee
members.
In 2004, the Committee held four meetings, each of which was regularly scheduled. The Committees
meeting agendas are established by the Committee chairman based upon the Committees charter and an annual
meeting planner approved by the entire Committee. At each of these meetings, the Committee met with the senior
members of the Corporations financial management team and General Counsel. Additionally, the Corporations
internal auditor and Independent Registered Public Accounting Firm met with the full Committee at two of the four meetings and the full
Committee met in executive session with the Corporations internal auditors at one meeting. Prior to each
meeting, the Chairman of the Committee also met privately with the Corporations Independent Registered Public Accounting Firm and,
separately, with the Corporations internal auditor, at which times candid discussions of financial management,
accounting and internal control issues took place.
The Committee appointed Ernst & Young LLP as the Corporations Independent Registered Public Accounting Firm for the year ended
December 31, 2004 and reviewed with the Corporations financial managers, the Independent Registered Public Accounting Firm, and the
Corporations internal auditor, overall audit scopes and plans, the results of internal and external controls and
the quality of the Corporations financial reporting. Although the Committee has the sole authority to appoint
the Independent Registered Public Accounting Firm, the Committee will continue its established practice of recommending that the Board ask
the Corporations stockholders, at their annual meeting, to approve the Committees selection of the Independent Registered Public Accounting Firm.
The Corporations management is primarily responsible for the preparation, presentation, and integrity
of the Corporations financial statements, accounting and financial reporting principles, internal controls, and
procedures designed to ensure compliance with accounting standards, applicable laws, and regulations. As the
Corporations Independent Registered Public Accounting Firm, Ernst & Young LLP is responsible for performing an independent audit of the
Corporations consolidated financial statements in accordance with generally accepted accounting standards and
for expressing an opinion on the conformity of the audited financial statements to accounting principles
generally accepted in the United States of America.
101
The Committee has reviewed and discussed with management the Corporations audited financial statements
as of and for the year ended December 31, 2004. The Committee has also discussed with the Independent Registered Public Accounting Firm
the matters required to be discussed by: (a) the Statement on Auditing Standards No. 61, as amended by Statement
on Auditing Standards No. 90 (regarding Communications with Audit Committees), and as further amended, by the
Auditing Standards Board of the American Institute of Certified Public Accountants, and (b) Securities and
Exchange Commission (SEC) Regulation S-X, Rule 2-07.
The Committee has received and reviewed the written disclosures and the letter from the Independent Registered Public Accounting Firm required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees), as amended, by the Independence Standards Board, and the Committee has discussed with the
Independent Registered Public Accounting Firm that firms independence from the Corporation and its management. The Committee has also
considered whether the independent auditors provision of non-audit services to the Corporation is compatible
with the auditors independence.
Based on the Committees reviews and discussions referred to above, the Committee recommended to the
Board that the audited consolidated financial statements referred to above be included in the Corporations
Annual Report on Form 10-K for the year ended December 31, 2004, to be filed with the SEC.
The Audit Committee is currently comprised of Richard A. Riddle, Chairman, Eric H. Halvorson and
Donald P. Hodel.
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AUDIT COMMITTEE
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Richard A. Riddle (Chairman)
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Eric H. Halvorson
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Donald P. Hodel
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March 8, 2005
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102
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The companys compensation
program is administered by the Compensation Committee of the board of directors,
which is comprised of three outside, non-employee directors. Following review
and approval by the Compensation Committee, issues pertaining to compensation
benefits and severance arrangements for the companys executive officers and
other key employees are submitted to the full board of directors for
approval.
The following is the
Compensation Committee report addressing the compensation of the companys
executive officers and other key employees for the 2004 fiscal year.
103
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This Compensation
Committee Report shall not be deemed soliciting material or to be filed with the SEC,
nor shall any information in this report be incorporated by reference by any general statement into any past or
future filing under the Securities Act, as amended, or under the Exchange Act, as
amended, except to the extent that the company and its subsidiaries specifically incorporates this information by reference into
such filing, and shall not otherwise be deemed filed under such Acts.
The Compensation Committee
(the Committee) of the Board of Directors of Salem Communications
Corporation (the Corporation) is currently comprised of Roland S. Hinz, David Davenport and Richard A. Riddle,
each an independent director. The Committee is responsible for establishing the Corporations compensation
programs for its executive officers and key employees, and administering the Corporations stock option incentive
plan. For executive officers and key employees, the Committee evaluates performance and determines compensation
policies and levels.
Compensation Philosophy and Policy
The compensation philosophy of the Committee is to motivate the Corporations executive officers and key
management employees to attain financial, operational and strategic objectives through a competitive compensation
program while also aligning the financial goals of such executives and management with those of the Corporations
stockholders. In administering the program, the Committee assesses the performance of the Corporations business
and employees relative to those objectives. The Committee also considers the performance of the Corporations
business as compared to the performance of its competitors. To ensure that pay is competitive, the Committee
regularly compares its pay practices with those of the Corporations competitors and sets pay parameters based on
this review.
The Committees compensation program generally provides incentives to achieve both annual and
longer-term objectives. The principal elements of the compensation plan include base salary, cash incentive bonus
awards and stock awards in the form of grants of stock options and restricted common stock. These elements
generally are blended in order to implement the Committees compensation philosophy.
Accordingly, the following principles are inherent in all of the Committees considerations regarding
compensation:
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1.
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In order to attract and retain highly qualified and experienced personnel necessary to
fulfill the Corporations objectives, Salem must offer competitive compensation,
including a competitive base salary, incentive cash bonuses and stock-based incentives;
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2.
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Cash compensation in excess of an employees base salary should be tied to the
individuals performance, the performance of the business unit for which the employee is
responsible and the overall performance of the Corporation; and
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3.
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The financial interests of the executive officers and key employees of the Corporation
should be closely aligned with the financial interests of the Corporations stockholders.
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104
Base Salary
Base salaries of executive and key management employees are determined in respect of comparable salaries
by other employers in the radio broadcasting and similar industries. The salaries of all executive officers and
key management employees except the Chairman and Chief Executive Officer (CEO) are determined through mutual
negotiations between the executive and the CEO, with the approval of the Committee, and are based on both past
performance and expected future performance.
In setting base salaries for executive officers and key management employees, the Committee also
considers the experience of the individual, the scope and complexity of the position, the Corporations size and
growth rate and the compensation paid by the Corporations competitors. Due to the increasingly competitive
nature of the radio industry, compensation amounts paid by the Corporations competitors are expected to continue
to grow in importance as the Committee assesses its future compensation structure to ensure the Corporations
ability to continue to attract and retain highly qualified executives.
Cash Incentive Bonuses
All of the Corporations executive officers are eligible to receive bonuses that are determined after a
review of Corporation performance. In 2004, Edward G. Atsinger III, CEO, and each of the Corporations four
highest paid executive officers serving as of December 31, 2004 (including Stuart W. Epperson, Chairman) (the
Named Executive Officers), received discretionary bonuses determined by the Committee as described in the
Summary Compensation Table section of this Form 10-K.
Stock Awards
To promote the Corporations long-term objectives and to more closely align the interests of key members
of Salems management to that of our stockholders, stock awards are periodically made by the Committee. These
stock awards are granted to employees of the Corporation and employees of subsidiaries of the Corporation
(including employees who are officers or directors), non-employee directors of the Corporation and certain
advisors and consultants who are in a position to make a significant contribution to the Corporations long-term
success. The stock awards are made pursuant to Salems Amended and Restated 1999 Stock Incentive Plan, which permits the award of
incentive stock options, nonqualified stock options and restricted stock awards. The Committee has the authority
to determine the individuals that shall be given awards and the terms of such awards.
In 2004, the Corporation granted to the Named Executive Officers options for the purchase of Class A
common stock as compensation for managements performance during 2003 as more specifically described in the
section of this Form 10-K entitled Stock Option Grants. With the exception of those certain stock options that
vested immediately upon grant as specifically described in the Stock Option Grants section of this Form 10-K,
the majority of all remaining stock options granted to executive officers and key employees during 2004 vest over
several years. This deferred vesting is designed to increase stockholder value over a longer term because the
full benefit of an executives compensation cannot be realized unless a stock price appreciation occurs over a
number of years. All stock options granted during 2004 have an exercise price equal to or exceeding the fair
market price of the Class A common stock on the date of the grant.
105
Chairmans and Chief Executive Officers Compensation
In 2004, the Committee approved new Employment Agreements with Stuart W. Epperson, Chairman of the
Board, and Edward G. Atsinger III, CEO, following the principles set forth above. These new Employment
Agreements commenced on July 1, 2004, replacing existing agreements that expired on June 30, 2004. The new
agreements are scheduled to expire on June 30, 2007.
The Committee considered a number of specific factors in determining Mr. Eppersons and Mr. Atsingers
total compensation for 2004, including without limitation: (a) the key role played by both of them in achieving
favorable financial results for the Corporation in an uncertain economic environment, and (b) comparable
compensation packages and employment agreements within the Corporations peer group.
Base Salary
Mr. Eppersons base salary for the period of January 1, 2004, through June 30, 2004, was paid at the
rate of $600,000 annually and was increased, effective July 1, 2004, to the rate of $700,000 annually. This
resulted in 2004 paid base salary to Mr. Epperson of $650,000. Mr. Atsingers base salary for the period of
January 1, 2004, through June 30, 2004, was paid at the rate of $700,000 and was increased, effective July 1,
2004, to the rate of $850,000 annually. This resulted in 2004 paid base salary to Mr. Atsinger of $775,000.
Cash Incentive Bonus
In March 2004, Mr. Atsinger was awarded an incentive cash bonus of $257,558 and Mr. Epperson was awarded
an incentive cash bonus of $185,442. These bonuses, while paid in 2004, rewarded the performance of the CEO and
Chairman in assisting the Corporation to achieve favorable financial results in 2003.
Stock Awards
The Committee also granted stock options to Messrs. Epperson and Atsinger in 2004. Mr. Epperson was
granted a total of 317,892 options as follows: (a) 17,892 immediately vested options in March 2004, and (b)
300,000 additional options in June 2004, of which 100,000 were immediately vested with the remaining 200,000 to
vest in equal installments in June 2005 and June 2006, respectively. Mr. Atsinger was granted a total of 424,850
options as follows: (a) 24,850 immediately vested options in March 2004, and (b) 400,000 additional options in
June 2004, of which 133,333 were immediately vested with 133,333 to vest in June 2005 and the remaining 133,334
to vest in June 2006. All stock options granted in 2004 to Mr. Epperson and Mr. Atsinger have an exercise price
equal to or exceeding the fair market price of the Corporations Class A common stock on the date of the grant.
Tax Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), imposes
limitations upon the federal income tax deductibility of compensation paid to the Corporations chief executive
officer and to each of the Corporations other four most highly compensated executive officers. Under these
limitations, the Corporation may deduct such compensation only to the extent that during any year the
compensation paid to any such officer does not exceed $1,000,000 or meets certain specified conditions (such as
certain performance-based compensation that has been approved by the Corporations stockholders). Based on the
Corporations current compensation plans and policies and proposed regulations interpreting the Internal Revenue
Code, the Committee believes that, for the near future, there is not a significant risk that the Corporation will
lose any significant tax deduction for executive compensation. The Corporations compensation plans and policies
may be modified if the Committee determines that such an action is in the best interests of the Corporations
stockholders.
Conclusion
Through the plans described above, a significant portion of the Corporations compensation programs
(including the compensation of Edward G. Atsinger, III and Stuart W. Epperson) are contingent on the
Corporations performance, and realization of benefits is closely linked to increases in long-term stockholder
value. The Committee remains committed to this philosophy of pay for performance, recognizing that the
competitive market for talented executives may result in highly variable compensation for a particular time
period.
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COMPENSATION COMMITTEE
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Roland S. Hinz (Chairman)
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David Davenport
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Richard A. Riddle
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March 9, 2005
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106
Stock Price Performance Graph
The graph below compares the
cumulative total stockholder return of the companys Class A common stock with
the cumulative total return of the NASDAQ - NMS equity index and the Bloomberg Broadcast and
Cable Radio Index for a five year period commencing December 31, 1999 and ending December
31, 2004. The companys Class B common stock is not publicly
traded and is not registered. The graph assumes that the value of an investment
in the Companys Class A common stock and each index was $100 on December 31, 1999
and that any dividends were reinvested. No cash dividends have been declared on
the companys Class A common stock since the companys initial public offering.
Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
The stock price performance
graph above shall not be deemed incorporated by reference by any general
statement incorporating by reference this report into any filing under the
Securities Act or the Exchange Act, except to the extent that the company
specifically incorporates this information by reference and shall not otherwise
be deemed filed under such Acts.
107
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets
forth information regarding the beneficial ownership of the companys Class A
and Class B common stock as of March 11, 2005 by (i) each person believed by the
company to be the beneficial owner of more than 5% of either class of the
outstanding Class A or Class B common stock, (ii) each director, (iii) each of
the Named Executive Officers and (iv) all directors and executive officers as a
group.
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Percent of
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Class A
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Class B
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Votes of
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Common Stock
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Common Stock
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All Classes
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of Common
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Name and Address(1)
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Number
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% Vote(2)
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Number
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% Vote(2)
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Stock(2)
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Stuart W. Epperson
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4,036,688
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(3)
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19.65%
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2,776,848
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(4)
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50.00%
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41.81%
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Nancy A. Epperson
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2,850,776
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(3)
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13.97%
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2,776,848
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(4)
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50.00%
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40.32%
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Edward G. Atsinger III
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4,125,913
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(5)
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20.05%
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2,776,848
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(5)
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50.00%
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41.90%
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Edward C. Atsinger
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1,093,078
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(6)
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5.36%
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*
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1.44%
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Robert C. Adair
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2,250
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(7)
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*
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*
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*
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David Davenport
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7,500
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(8)
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*
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*
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*
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Joe D. Davis
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24,025
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(9)
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*
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*
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*
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David A.R. Evans
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63,234
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(10)
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*
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*
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*
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Eric H. Halvorson
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12,500
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(11)
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*
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*
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*
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Roland S. Hinz
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84,027
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(12)
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*
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*
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*
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Donald P. Hodel
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14,000
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(13)
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*
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*
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*
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Paul Pressler
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7,500
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(14)
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*
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*
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*
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Richard A. Riddle
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69,667
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(15)
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*
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*
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*
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FMR Corp.
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2,948,634
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(16)
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14.45%
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*
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3.88%
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82 Devonshire Street
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Boston, MA 02109
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Columbia Wanger Asset Management,
L.P.
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2,216,000
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(17)
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10.86%
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*
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2.92%
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227
West Monroe St., Suite 3000
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Chicago, IL 60606
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Westport Asset Management
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1,227,522
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(18)
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6.26%
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*
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1.68%
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253
Riverside Avenue
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Westport, CT 06880
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Capital Research and Management Company
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1,105,000
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(19)
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5.41%
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*
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1.45%
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333 South Hope Street
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Los Angeles, CA 90071
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All directors and executive
officers as a group (14 persons)
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8,503,399
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40.65%
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5,553,696
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100.00%
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83.76%
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* Less than 1%.
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(1)
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Except as otherwise indicated, the
address for each person is c/o Salem Communications Corporation, 4880
Santa Rosa Road, Camarillo, California 93012. Calculated pursuant to Rule
13d-3(d) under the Exchange Act, shares of Class A common stock not
outstanding that are subject to options exercisable by the holder thereof
within 60 days of March 11, 2005 are deemed outstanding for the purposes
of calculating the number and percentage ownership by such stockholder,
but not deemed outstanding for the purpose of calculating the percentage
owned by each other stockholder listed. Unless otherwise noted, all shares
listed as beneficially owned by a stockholder are actually
outstanding.
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(2)
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Percentage voting power is based upon
20,409,992 shares of Class A common stock and 5,553,696 shares of Class B
common stock all of which were outstanding as of March 11, 2005, and the
general voting power of one vote for each share of Class A common stock
and ten votes for each share of Class B common stock.
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(3)
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Includes shares of Class A common stock
held by a trust of which Mr. Epperson is trustee and shares held directly
by Mr. Epperson. As husband and wife, Mr. and Mrs. Epperson are each
deemed to be the beneficial owner of shares held by the other and,
therefore their combined beneficial ownership is shown in the table.
Includes 128,392 shares of Class A common stock subject to options that are
exercisable within 60 days.
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(4)
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Includes shares of Class B common stock
held by a trust of which Mr. and Mrs. Epperson are trustees.
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108
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(5)
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These shares of Class A and Class B
common stock are held by trusts of which Mr. Atsinger is trustee. Includes
173,183 shares of Class A common stock subject to options that are
exercisable within 60 days.
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(6)
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Includes 1,090,078 shares of Class A common stock
held in a trust for the benefit of Edward C. Atsinger, who is Edward G. Atsinger
IIIs son. Edward G. Atsinger III is the trustee of the trust and these
shares are included in the shares beneficially owned by Edward G. Atsinger
III as reflected in this table. Also includes 3,000 shares of Class A common stock held by
Edward C. Atsinger, individually, which shares are not included in shares beneficially
owned by Edward G. Atsinger III as reflected in this table.
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(7)
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Includes 2,250 shares of Class A common
stock subject to options that are exercisable within 60 days.
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(8)
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Includes 7,500 shares of Class A common
stock subject to options that are exercisable within 60 days.
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(9)
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Includes 20,525 shares of Class A common
stock subject to options that are exercisable within 60 days.
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(10)
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Includes 2,450 shares of Class A common
stock held by a trust for which Mr. Evans is trustee, 600 shares held in
custody his minor daughter and 2,750 shares held by Mr. Evans spouse as a
joint tenant with Mr. Evans father-in-law. Mr. Evans disclaims beneficial
ownership of all of the 2,750 shares of Class A common stock beneficially owned by his
spouse. Includes 57,434 shares of Class A common stock subject to options that are exercisable
within 60 days.
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(11)
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These shares of Class A common stock are
held by trusts for which Mr. Halvorson and his wife are trustees. Includes
10,000 shares of Class A common stock subject to options that are
exercisable within 60 days.
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(12)
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Includes 1,411 shares held by Mr. Hinzs wife
and 444 shares held by Mr. Hinzs son. Mr. Hinz disclaims beneficial ownership of
shares of Class A common stock held by his wife and his son. Includes
16,000 shares of Class A common stock subject to options that are
exercisable within 60 days.
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(13)
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Includes 14,000 shares of Class A common
stock subject to options that are exercisable within 60 days.
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(14)
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Includes 7,500 shares of Class A common stock subject to options that are
exercisable within 60 days.
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(15)
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Includes 44,778 shares of Class A common
stock held by a trust for which Mr. Riddle is trustee. Includes 16,000
shares of Class A common stock subject to options that are exercisable
within 60 days.
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(16)
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This information is based on a Schedule 13G filed by FMR Corp. (FMRC), Edward C. Johnson 3d (ECJ),
Abigail P. Johnson (APJ and, together with ECJ and FMRC, FMR), with the SEC on February 14, 2005.
FMR reported that as of such date it was the beneficial owner of 2,948,634 shares of our issued and
outstanding Class A common stock. FMR reported that it has sole voting power with respect to 514,205
shares and sole dispositive power with respect to 2,948,634 shares.
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(17)
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This information is based on the Schedule 13G/A filed by Columbia Wanger Asset Management, L.P.
(CWAM), WAM Acquisition GP, Inc. (WAM GP), and Columbia Acorn Trust (Acorn and, together with CWAM
and WAM GP, Columbia), with the SEC on January 10, 2005. Columbia reported that it has shared voting
and shared dispositive power with respect to 2,216,000 shares.
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(18)
|
This information is based on a Schedule 13G/A filed by Westport Asset Management, Inc. (and certain
affiliates hereafter described) with the SEC on February 14, 2005. Westport Asset Management, Inc. reported
that as of such date it was the beneficial owner of 1,277,522 shares of our issued and outstanding Class A
common stock which were acquired on behalf of Westport Asset Management, Inc.s discretionary clients, including Westport Advisors, LLC. Westport Asset Management, Inc. reported that it has
sole voting power with respect to 596,925 shares, shared voting power with respect to 560,800 shares, sole
dispositive power with respect to 596,925 shares and shared dispositive power with respect to 680,597 shares.
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(19)
|
This information is based on the Schedule 13G filed by Capital Research and
Management Company (Capital) with the SEC on February 14, 2005. Capital reported that it has sole voting power
and sole dispositive power with respect to 1,105,000 shares.
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109
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
Leases With Principal Stockholders
As of March 2005, the
company leases the studios and tower and antenna sites described in the table
below from Messrs. Atsinger and Epperson or trusts or partnerships created for
the benefit of Messrs. Atsinger and Epperson and their families. All such leases
have cost of living adjustments. Based upon managements assessment and analysis
of local market conditions for comparable properties, the company believes that
such leases do not have terms that vary materially from those that would have
been available from unaffiliated parties.
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|
|
|
Current
|
|
|
|
|
|
|
|
|
Annual
|
|
Expiration
|
Market
|
|
Station Call Letters
|
|
Facilities Leased
|
|
Rental
|
|
Date(1)
|
|
|
|
|
|
|
|
|
|
Leases with both Messrs. Atsinger
and Epperson:
|
Los Angeles, CA
|
|
KRLH-AM
|
|
Office/Studios
|
|
$
|
25,896
|
|
2011
|
Chicago, IL
|
|
WZFS-FM
|
|
Antenna/Tower
|
|
|
148,452
|
|
2009
|
San Francisco, CA
|
|
KFAX-AM
|
|
Antenna/Tower
|
|
|
167,544
|
|
2008
|
Philadelphia, PA
|
|
WFIL-AM/WZZD-AM
|
|
Antenna/Tower/Studios
|
|
|
128,940
|
|
2009
|
Houston-Galveston, TX
|
|
KKHT-AM/KTEK-AM
|
|
Antenna/Tower
|
|
|
37,020
|
|
2010
|
|
|
|
|
Antenna/Tower
|
|
|
19,320
|
|
2008
|
Seattle-Tacoma, WA
|
|
KGNW-AM
|
|
Antenna/Tower
|
|
|
41,916
|
|
2007
|
|
|
KLFE-AM
|
|
Antenna/Tower
|
|
|
30,468
|
|
2009
|
Minneapolis-St. Paul, MN
|
|
KKMS-AM/KYCR-AM
|
|
Antenna/Tower/Studios
|
|
|
155,400
|
|
2006
|
Pittsburgh, PA
|
|
WORD-FM
|
|
Antenna/Tower
|
|
|
31,224
|
|
2008
|
Denver-Boulder, CO
|
|
KRKS-AM/KNUS-AM
|
|
Antenna/Tower
|
|
|
65,616
|
|
2009
|
|
|
|
|
Antenna/Tower
|
|
|
21,636
|
|
2006
|
Portland, OR
|
|
|
|
Antenna/Tower
|
|
|
16,116
|
|
2007
|
Cincinnati, OH
|
|
WTSJ-AM
|
|
Antenna/Tower
|
|
|
14,004
|
|
2007
|
Sacramento, CA
|
|
KFIA-AM
|
|
Antenna/Tower
|
|
|
94,920
|
|
2006
|
San Antonio, TX
|
|
KSLR-AM
|
|
Antenna/Tower
|
|
|
39,276
|
|
2007
|
|
|
|
|
Antenna/Tower
|
|
|
10,932
|
|
2009
|
Phoenix, AZ
|
|
KPXQ-AM
|
|
Antenna/Tower
|
|
|
43,764
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,092,444
|
|
|
|
Lease with Mr.
Atsinger:
|
San Diego, CA
|
|
KPRZ-AM
|
|
Antenna/Tower
|
|
|
125,208
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,217,652
|
|
|
|
|
|
|
|
|
|
(1) The expiration date
reported for certain facilities represents the expiration date assuming exercise
of all lease term extensions at Salems option.
Rental expense paid by the
company to Messrs. Atsinger and Epperson or trusts or partnerships created for
the benefit of their families for 2004 amounted to approximately $1.1 million.
Rental expense paid by the company to Mr. Atsinger or trusts created for the
benefit of his family for 2004 amounted to approximately $52,000.
110
Radio Stations Owned by the Eppersons
Nancy A. Epperson, the wife of
the Chairman of the Board, Stuart W. Epperson, has personally acquired four
radio stations in the Norfolk-Virginia Beach-Newport News, Virginia market.
Additionally, Mr. Eppersons son, Stuart W. Epperson, Jr., has acquired certain
radio stations in the Greensboro-Winston-Salem, North Carolina market. These
Virginia and North Carolina markets are not currently served by stations owned
and operated by the company. Acquisitions in such markets are not part of the
companys current business and acquisition strategies. Under his employment
agreement, Mr. Epperson is required to offer the company a right of first
refusal of opportunities related to the companys business.
Radio Stations Owned by Mr. Hinz
Mr. Hinz, a director of the Company,
through companies or entities controlled by him, has acquired 19 radio stations in
Southern California.
These radio stations are formatted in Christian teaching and talk
programming in the Spanish language. Operating radio stations with such
programming in the markets reached by such stations is not part of the companys
current business strategy.
Professional Services
Salem provides professional
and consulting services to, and receives cash consideration from, Salem
Broadcasting Company (SBC) for these services. SBC is owned directly by Stuart
W. Epperson and Edward G. Atsinger III. In 2004, the company billed SBC
approximately $3,000.
111
Focus on the Family and Mr. Hodel
Until February 24, 2005, Mr. Hodel,
a director of the Company, was President and Chief Executive Officer
of Focus on the Family, a non-profit organization that is a substantial customer of Salem.
Mr. Hodel resigned from his position as of February 24, 2005. During 2004, the
Company was paid approximately $3.4 million by Focus on the Family for airtime.
Truth For Life and Mr. Hinz
Mr. Hinz is a member of the board
of directors of Truth For Life, a non-profit organization that is a substantial customer of Salem.
During 2004, the Company was paid approximately $1.1 million by Truth For Life for airtime.
Transportation Services Supplied by Atsinger Aviation
From time to time, the
Company rents aircraft from a company which is owned by one
of the principal stockholders. As approved by the independent members of the
Companys board of directors, the Company rents these aircraft on an hourly
basis at what the Company believes are favorable rates and uses them for general corporate needs. Total
rental expense for these aircraft for 2002, 2003 and 2004 amounted to
approximately $307,000, $277,000 and $342,000, respectively.
Split-Dollar Life Insurance
In 1997, the company purchased split-dollar life
insurance policies for its Chairman and Chief Executive
Officer. The premiums were $226,000, $134,000 and $219,000 for the years ended December 31, 2002, 2003 and 2004,
respectively. The amounts paid by the company, which will be repaid by the beneficiaries of the insurance
policies, have been reserved completely. On December 31, 2003, the Chairman and Chief Executive Officer
transferred ownership of these insurance policies to the company with the company retaining the right to recover
all amounts paid by the company under said policies and the Chairman and Chief Executive Officer designating
beneficiaries for the remainder of the policy proceeds.
Agreement with Eric H. Halvorson
On July 1, 2001, Eric H. Halvorson entered into a
consulting agreement with Salem whereby he provided legal
and other consulting services to Salem and was compensated on an hourly basis. In 2003, Mr. Halvorson did not
perform any consulting services for the company. This agreement was terminated by the mutual agreement of the
parties in June 2003.
Employment of Edward C. Atsinger
Edward C. Atsinger, son of Edward G. Atsinger,
III and beneficial owner of approximately 6.55% of our Class
A common stock, is employed in the capacity of Producer. In 2004, he was paid $77,000 for his services.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item
is incorporated by reference to our Definitive Proxy Statement under the heading
PRINCIPAL ACCOUNTING FEES AND SERVICES, expected to be filed within
120 days of our fiscal year end.
112
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
1. Financial Statements. The
financial statements required to be filed hereunder are included in Item 8.
2. Schedule II to Financial
Statements is set forth as follows:
SALEM COMMUNICATIONS CORPORATION
Schedule II
Valuation & Qualifying Accounts
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
Deductions
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Charged to
|
|
|
|
Beginning of
|
|
Cost and
|
|
Bad Debt
|
|
Balance at
|
|
Description
|
|
Period
|
|
Expense
|
|
Write-offs
|
|
End of Period
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2002 Allowance for Doubtful Accounts
|
|
$
|
5,749
|
|
$
|
4,260
|
|
$
|
(2,206
|
)
|
$
|
7,803
|
Year Ended
December 31, 2003 Allowance for Doubtful Accounts
|
|
|
7,803
|
|
|
6,136
|
|
|
(4,516
|
)
|
|
9,423
|
Year Ended
December 31, 2004 Allowance for Doubtful Accounts
|
|
|
9,423
|
|
|
3,821
|
|
|
(5,135
|
)
|
|
8,109
|
|
3. Exhibits.
113
EXHIBIT LIST
|
|
|
Exhibit
|
Number
|
|
Description of
Exhibits
|
|
|
|
3.01
|
|
Amended and Restated Certificate of
Incorporation of Salem Communications Corporation, a Delaware corporation.
(1)
|
3.02
|
|
Bylaws of Salem Communications
Corporation, a Delaware Corporation. (1)
|
3.03
|
|
Certificate of Incorporation of
Salem Communications Holding Corporation (incorporated by reference to
previously filed exhibit 2.01). (2)
|
3.04
|
|
Bylaws of Salem Communications
Holding Corporation (incorporated by reference to previously filed exhibit
2.02). (2)
|
3.05
|
|
Certificate of Incorporation of
Salem Communications Acquisition Corporation (incorporated by reference to
previously filed exhibit 2.03). (2)
|
3.06
|
|
Bylaws of Salem Communications
Acquisition Corporation (incorporated by reference to previously filed
exhibit 2.04). (2)
|
3.07
|
|
Certificate of Incorporation of SCA
License Corporation (incorporated by reference to previously filed exhibit
2.05). (2)
|
3.08
|
|
Bylaws of SCA License Corporation
(incorporated by reference to previously filed exhibit 2.06).
(2)
|
4.01
|
|
Indenture between Salem
Communications Corporation, a California corporation, certain named
guarantors and The Bank of New York, as Trustee, dated as of September 25,
1997, relating to the 9½% Series A and Series B Senior
Subordinated Notes due 2007. (3)
|
4.02
|
|
Form of 9½% Senior Subordinated
Note (filed as part of exhibit 4.01). (3)
|
4.03
|
|
Form of Note Guarantee (filed as
part of exhibit 4.01). (3)
|
4.04
|
|
Specimen of Class A common
stock certificate. (4)
|
4.05
|
|
Supplemental Indenture No.1,
dated as of March 31, 1999, to the Indenture, dated as of
September 25, 1997, by and among Salem Communications Corporation, a
California corporation, Salem Communications Corporation, a Delaware
corporation, The Bank of New York, as Trustee, and the Guarantors named
therein. (4)
|
4.06
|
|
Supplemental Indenture No. 2,
dated as of August 24, 2000, by and among Salem Communications
Corporation, a Delaware corporation, Salem Communications Holding
Corporation, a Delaware corporation, the guarantors named therein and The
Bank of New York, as Trustee (incorporated by reference to previously
filed exhibit 4.11). (2)
|
4.07
|
|
Supplemental Indenture No. 3,
dated as of March 9, 2001, by and among Salem Communications
Corporation, a Delaware corporation, Salem Communications Holding
Corporation, a Delaware corporation, the guarantors named therein and The
Bank of New York, as Trustee. (5)
|
4.08
|
|
Supplemental Indenture No. 4,
dated as of June 25, 2001, by and among Salem Communications Holding
Corporation, a Delaware corporation, the guarantors named therein and The
Bank of New York, as Trustee. (6)
|
E-1
|
|
|
4.09
|
|
Fifth Amended and Restated Credit
Agreement, dated as of September 25, 2003, by and among Salem
Communications Corporation, Salem Communications Holding Corporation,
General Electric Capital Corporation, as Syndication Agent, Suntrust Bank,
as Syndication Agent, Fleet National Bank, as Documentation Agent, ING
(U.S.) Capital, LLC, as Documentation Agent, The Bank of New York, as
Administrative Agent, and the Lenders party thereto. (18)
|
4.10
|
|
Second Amended and Restated Parent
Security Agreement dated as of June 15, 2001, by and among Salem
Communications Corporation, a Delaware corporation, Salem Communications
Holding Corporation, a Delaware corporation, and The Bank of New York, as
Administrative Agent. (6)
|
4.11
|
|
Amendment #1, dated as of May 19, 2004,
to the Fifth Amended and Restated Credit Agreement, dated as of September
25, 2003, by and among Salem Communications Corporation, Salem Communications
Holding Corporation, General Electric Capital Corporation, as Syndication Agent,
Suntrust Bank, as Syndication Agent, Fleet National Bank, as Documentation Agent,
ING (U.S.) Capital, LLC, as Documentation Agent, The Bank of New York, as
Administrative Agent, and the Lenders party thereto. (19)
|
4.15
|
|
Indenture between Salem
Communications Holding Corporation, a Delaware corporation, certain named
guarantors and The Bank of New York, as Trustee, dated as of June 25,
2001, relating to the 9% Series A and Series B Senior Subordinated Notes
due 2011. (6)
|
4.16
|
|
Form of 9% Senior Subordinated
Notes (filed as part of exhibit 4.15).
|
4.17
|
|
Form of Note Guarantee (filed as
part of exhibit 4.15). (6)
|
4.18
|
|
Registration Rights Agreement dated
as of June 25, 2001, by and among Salem Communications Holding
Corporation, the guarantors and initial purchasers named therein.
(6)
|
4.19
|
|
Indenture, dated as of December 23,
2002, relating to the 7¾% Senior Subordinated Notes due 2010 by and among
Salem Holding, the Company and The Bank of New York, as trustee, with form
of Note incorporated (incorporated by reference to previously filed
exhibit 4.1). (9)
|
4.20
|
|
Form of 7¾% Senior Subordinated
Notes (filed as part of exhibit 4.19). (9)
|
4.21
|
|
Form of Note Guarantee (filed as
part of exhibit 4.19). (9)
|
4.22
|
|
Supplemental Indenture No. 1 to the
7¾% Senior Subordinated Notes, dated as of December 16, 2002, between
Salem Communications Corporation and its guarantors, and Bank of New York.
(11)
|
4.23
|
|
Supplemental Indenture No. 1 to the
9% Senior Subordinated Notes, dated as of December 23, 2002, between Salem
Communications Corporation and its guarantors, and Bank of New York.
(11)
|
4.24
|
|
Supplemental Indenture No. 2 to the
7¾% Senior Subordinated Notes, dated as of June 12, 2003, between Salem
Communications Corporation and its guarantors, and Bank of New York.
(17)
|
4.25
|
|
Supplemental Indenture No. 2 to the
9% Senior Subordinated Notes, dated as of June 12, 2003, between Salem
Communications Corporation and its guarantors, and Bank of New York.
(17)
|
4.26
|
|
Consent No. 2, dated as of July 23,
2003, under the Fourth Amended and Restated Credit Agreement between Salem
Communications Corporation and its guarantors, and The Bank of New York.
(17)
|
E-2
|
|
|
10.01.01
|
|
Employment Agreement, dated July 1,
2004, between Salem Communications Holding Corporation and Edward G.
Atsinger III.
|
10.01.02
|
|
Split-Dollar Life Insurance
Agreement effective as of April 2, 1997, by and between Salem
Communications Corporation, Edward G. Atsinger III and Eric H. Halvorson,
as Trustee under that certain Declaration of Trust (Atsinger Trust No. 1)
dated as of April 1, 1997.
|
10.02.01
|
|
Employment Agreement, dated July 1,
2004, between Salem Communications Holding Corporation and Stuart W.
Epperson.
|
10.02.02
|
|
Split-Dollar Life Insurance
Agreement effective as of April 2, 1997, by and between Salem
Communications Corporation, Stuart W. Epperson and Edward G. Atsinger III,
as Trustee under that certain Declaration of Trust (Epperson Trust No. 1)
dated as of April 1, 1997.
|
10.04
|
|
Employment Agreement, dated
September 16, 2003, between Salem Communications Holding Corporation and
David A.R. Evans. (18)
|
10.05.01
|
|
Antenna/tower lease between Caron
Broadcasting, Inc. (WHLO-AM/Akron, Ohio) and Messrs. Atsinger and
Epperson expiring 2007. (3)
|
10.05.02
|
|
Antenna/tower/studio lease between
Caron Broadcasting, Inc. (WTSJ-AM/ Cincinnati, Ohio) and Messrs. Atsinger
and Epperson expiring 2007. (3)
|
10.05.03
|
|
Antenna/tower lease between Caron
Broadcasting, Inc. (WHK-FM/Canton, Ohio) and Messrs. Atsinger and
Epperson expiring 2007. (3)
|
10.05.04
|
|
Antenna/tower/studio lease between
Common Ground Broadcasting, Inc. (KKMS-AM/Eagan, Minnesota) and Messrs.
Atsinger and Epperson expiring in 2006. (3)
|
10.05.05
|
|
Antenna/tower lease between Common
Ground Broadcasting, Inc. (WHK-AM/ Cleveland, Ohio) and Messrs. Atsinger
and Epperson expiring 2008. (3)
|
10.05.06
|
|
Antenna/tower lease
(KFAX-FM/Hayward, California) and Salem Broadcasting Company, a
partnership consisting of Messrs. Atsinger and Epperson, expiring in
2003. (3)
|
10.05.07
|
|
Antenna/tower/studio lease between
Inland Radio, Inc. (KKLA-AM/San Bernardino, California) and Messrs.
Atsinger and Epperson expiring 2002. (3)
|
10.05.08
|
|
Antenna/tower lease between
Inspiration Media, Inc. (KGNW-AM/Seattle, Washington) and Messrs. Atsinger
and Epperson expiring in 2002. (3)
|
E-3
|
|
|
10.05.09
|
|
Antenna/tower lease between
Inspiration Media, Inc. (KLFE-AM/Seattle, Washington) and The Atsinger
Family Trust and Stuart W. Epperson Revocable Living Trust expiring in
2004. (3)
|
10.05.11.01
|
|
Antenna/tower/studio lease between
Pennsylvania Media Associates, Inc. (WZZD-AM/WFIL-AM/Philadelphia,
Pennsylvania) and Messrs. Atsinger and Epperson, as assigned from
WEAZ-FM Radio, Inc., expiring 2004. (3)
|
10.05.11.02
|
|
Antenna/tower/studio lease between
Pennsylvania Media Associates, Inc. (WZZD-AM/WFIL-AM/Philadelphia,
Pennsylvania) and The Atsinger Family Trust and Stuart W. Epperson
Revocable Living Trust expiring 2004. (3)
|
10.05.12
|
|
Antenna/tower lease between Radio
1210, Inc. (KPRZ-AM/Olivenhain, California) and The Atsinger Family Trust
expiring in 2002. (3)
|
10.05.13
|
|
Antenna/tower lease between Salem
Media of Texas, Inc. and Atsinger Family Trust/Epperson Family Limited
Partnership (KSLR-AM/San Antonio, Texas). (13)
|
10.05.14
|
|
Antenna/turner/studio leases
between Salem Media Corporation (KLTX-AM/Long Beach and Paramount,
California) and Messrs. Atsinger and Epperson expiring in 2002.
(3)
|
10.05.15
|
|
Antenna/tower lease between Salem
Media of Colorado, Inc. (KNUS-AM/Denver-Boulder, Colorado) and Messrs.
Atsinger and Epperson expiring 2006. (3)
|
10.05.16
|
|
Antenna/tower lease between Salem
Media of Colorado, Inc. and Atsinger Family Trust/Epperson Family Limited
Partnership (KRKS-AM/KBJD-AM/Denver, Colorado). (13)
|
10.05.17.01
|
|
Studio Lease between Salem Media of
Oregon, Inc. (KPDQ-AM/FM/Portland, Oregon) and Edward G. Atsinger III,
Mona J. Atsinger, Stuart W. Epperson, and Nancy K. Epperson expiring 2002.
(3)
|
10.05.17.02
|
|
Antenna/tower lease between Salem
Media of Oregon, Inc. (KPDQ-AM/FM/Raleigh Hills, Oregon), and Messrs.
Atsinger and Epperson expiring 2002. (3)
|
10.05.18
|
|
Antenna/tower lease between Salem
Media of Pennsylvania, Inc. (WORD-FM/WPIT-AM/Pittsburgh, Pennsylvania) and
The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust
expiring 2003. (3)
|
10.05.19
|
|
Antenna/tower lease between Salem
Media of Texas, Inc. (KSLR-AM/San Antonio, Texas) and Epperson-Atsinger
1983 Family Trust expiring 2007. (3)
|
10.05.20
|
|
Antenna/tower lease between South
Texas Broadcasting, Inc. (KENR-AM/Houston-Galveston, Texas) and Atsinger
Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2005.
(3)
|
10.05.21
|
|
Antenna/tower lease between Vista
Broadcasting, Inc. (KFIA-AM/Sacramento, California) and The Atsinger
Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2006.
(3)
|
10.05.22
|
|
Antenna/tower lease between South
Texas Broadcasting, Inc. (KKHT-FM/Houston-Galveston, Texas) and Sonsinger
Broadcasting Company of Houston, LP expiring 2008. (14)
|
10.05.23
|
|
Antenna/tower lease between
Inspiration Media of Texas, Inc. (KTEK-AM/Alvin, Texas) and the Atsinger
Family Trust and The Stuart W. Epperson Revocable Living Trust expiring
2009. (14)
|
|
|
|
10.06
|
|
Asset Purchase Agreement, dated
June 2002, by and between Caron Broadcasting, Inc. and Susquehana Radio
Corp. (WYGY-FM, Cincinnati, OH). (15)
|
10.08.01
|
|
Amended and Restated 1999 Stock Incentive Plan
(incorporated by reference to previously filed Appendix B).
(19)
|
10.08.02
|
|
Form of stock option grant for Amended and Restated
1999 Stock Incentive Plan.
|
10.09
|
|
Management Services Agreement by
and among Salem and Salem Communications Holding Corporation, dated
August 25, 2000 (incorporated by reference to previously filed
exhibit 10.11). (7)
|
21.01
|
|
Subsidiaries of Salem
Communications Corporation.
|
23.1
|
|
Consent of Ernst & Young,
Independent Registered Public Accounting Firm.
|
31.1
|
|
Certification of Edward G. Atsinger
III Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.
|
31.2
|
|
Certification of David A.R. Evans
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.
|
32.1
|
|
Certification of Edward G. Atsinger
III Pursuant to 18 U.S.C. Section 1350.
|
32.2
|
|
Certification of David A.R. Evans
Pursuant to 18 U.S.C. Section 1350.
|
E-4
|
|
|
(1)
|
|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, of Salems Current
Report on Form 8-K, filed with the Securities and Exchange Commission
on April 14, 1999.
|
(2)
|
|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Current
Report on Form 8-K; filed with the Securities and Exchange Commission
on September 8, 2000.
|
(3)
|
|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, of Salems
Registration Statement on Form S-4 (No. 333-41733), as amended, as
declared effective by the Securities and Exchange Commission on
February 9, 1998.
|
(4)
|
|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to the Companys
Registration Statement on Form S-1 (No.333-76649) as amended,
as declared effective by the Securities and Exchange Commission on June
30, 1999.
|
(5)
|
|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, of the Companys
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on October 16, 2001.
|
(6)
|
|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Quarterly
Report on Form 10-Q, filed with the Securities and Exchange
Commission on August 14, 2001.
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(7)
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Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Annual
Report on Form 10-K, filed with the Securities and Exchange
Commission on April 2, 2001.
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(8)
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|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Quarterly
Report on Form 10-Q, filed with the Securities and Exchange
Commission on May 15, 2002.
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(9)
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|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Current
Report on Form 8-K, filed with the Securities and Exchange Commission
on December 23, 2002.
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(10)
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|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Current
Report on Form 8-K, filed with the Securities and Exchange Commission
on April 2, 2001.
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(11)
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|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted of Salems Annual
Report on Form 10-K, filed with the Securities and Exchange
Commission on March 31, 2003.
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(12)
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Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Quarterly
Report on Form 10-Q, filed with the Securities and Exchange
Commission on November 14, 2001.
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(13)
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Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Annual
Report on Form 10-K, filed with the Securities and Exchange
Commission on March 30, 2000.
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(14)
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Incorporated by reference to the
exhibit of the same number, unless otherwise noted, of Salems Annual
Report on Form 10-K, filed with the Securities and Exchange
Commission on March 31, 1999.
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(15)
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|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Quarterly
Report on Form 10-Q, filed with the Securities and Exchange
Commission on August 14, 2002.
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(16)
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|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Annual
Report on Form 10-K, filed with the Securities and Exchange
Commission on April 1, 2002.
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(17)
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|
Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Quarterly
Report on Form 10-Q, filed with the Securities and Exchange
Commission on August 6, 2003.
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(18)
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Incorporated by reference to the
exhibit of the same number, unless otherwise noted, to Salems Quarterly
Report on Form 10-Q, filed with the Securities and Exchange
Commission on November 6, 2003.
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(19)
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Incorporated by reference to Appendix B to Salems Proxy
Statement on Schedule 17A, filed with the Securities and Exchange Commission
on April 29, 2003.
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E-5
(b)
Index to Exhibits. See Exhibit List on pages E-1 to E-5 above.
(c)
Financial statements required by Regulation S-X excluded from the annual
report to shareholders by Rule 14(a)-3(b)(1).
Not applicable.
E-6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
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SALEM COMMUNICATIONS CORPORATION
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March 16, 2005
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By: /s/ EDWARD G. ATSINGER
III
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Edward G. Atsinger III
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President and Chief Executive
Officer
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March 16, 2005
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By: /s/ DAVID A.R. EVANS
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David A.R. Evans
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Executive Vice President and Chief
Financial Officer
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(Principal Financial
Officer)
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II-1
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ EDWARD G. ATSINGER III
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President and Chief Executive
Officer
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(Principal Executive Officer)
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March 16, 2005
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Edward G. Atsinger III
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/s/ DAVID A.R. EVANS
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Executive Vice President and Chief
Financial Officer
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(Principal Financial Officer)
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March 16, 2005
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David A.R. Evans
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/s/ EVAN D. MASYR
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Vice President of Accounting and
Corporate Controller
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(Principal Accounting
Officer)
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March 16, 2005
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Evan D. Masyr
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/s/ STUART W. EPPERSON
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Director
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March 16, 2005
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Stuart W. Epperson
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/s/ ERIC H. HALVORSON
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Director
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March 16, 2005
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Eric H. Halvorson
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/s/ RICHARD A. RIDDLE
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Director
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March 16, 2005
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Richard A. Riddle
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/s/ ROLAND S. HINZ
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Director
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March 16, 2005
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Roland S. Hinz
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/s/ DONALD P. HODEL
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Director
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March 16, 2005
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Donald P. Hodel
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/s/ DAVID DAVENPORT
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Director
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March 16, 2005
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David Davenport
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/s/ PAUL PRESSLER
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Director
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March 16, 2005
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Paul Pressler
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II-2
EXHIBIT INDEX
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Exhibit
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Number
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Description of
Exhibits
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10.08.02
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Form of stock option grant for Amended and Restated
1999 Stock Incentive Plan.
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23.1
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Consent of Ernst & Young LLP,
Independent Registered Public Accounting Firm.
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31.1
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Certification of Edward G. Atsinger
III Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange
Act.
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31.2
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Certification of David A.R. Evans
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange
Act.
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32.1
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Certification of Edward G. Atsinger
III Pursuant to 18 U.S.C. Section 1350.
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32.2
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Certification of David A.R. Evans
Pursuant to 18 U.S.C. Section 1350.
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II-3
EXHIBIT 10.08.02
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Salem Communications
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Optionee:
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Corporation
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Option Grant Date:
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Purchase Price per Share:
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Stock Option Grant
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Type of Option:
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[Incentive Stock Option (ISO)/
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Nonqualified Stock Option]
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Plan:
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1999 Stock Incentive Plan (the Plan)
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SALEM COMMUNICATIONS CORPORATION, a Delaware corporation (the Company),
has elected to grant Optionee an option to purchase shares of the Companys Class A Common Stock
on the terms and conditions set forth below. Terms not
otherwise defined in this Stock Option Grant will have the meanings ascribed to them in the Plan.
1.
Governing Plan
. This Stock Option Grant is subject
in all respects to the applicable provisions of the
Plan, which are incorporated herein by reference. In the case of any conflict between the provisions of the Plan
and this Stock Option Grant, the provisions of the Plan will control.
2.
Grant of Option
. Effective as of the Option Grant Date,
the Company grants to the Optionee a stock
option (the Option) to purchase the Number of Shares of the Companys Class A Common
Stock at the Purchase Price Per Share. The Purchase Price Per Share equals or exceeds the Fair Market
Value of the Companys Class A Common Stock on the Option Grant Date.
3.
Vesting and Exercise of Option
. The Option will vest
and become exercisable cumulatively as follows:
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Number of Shares
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Vesting Date
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Termination Date
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4.
Term and Termination
. The unexercised portion of the Option (whether or not vested) will automatically
expire and become unexercisable on the earliest of (a) one (1) year from the date on which the Optionee ceases to
be an Eligible Person for any reason other than death; (b) one (1) year from the date of the Optionee's death; or
(c) with respect to each installment of Options, the fifth (5th) anniversary of the date each installment
vests. If the Optionee ceases for any reason to be an Eligible Person, that portion of the Option that has not
yet vested will automatically terminate, unless the Board of Directors or Committee administering the Plan
accelerates the vesting schedule in its sole discretion (in which case, the Board of Directors or Committee may
impose whatever conditions it considers appropriate on the accelerated portion). Notwithstanding any vesting
provisions of the Option or anything else herein to the contrary, all shares of Common Stock underlying the
Option will vest and become exercisable immediately prior to any Change in Control, if the Optionee is an
employee of the Company or any Affiliated Entity at that time.
5.
Governing Law
. This Stock Option Grant and the Option will be governed by, interpreted under, and
construed and enforced in accordance with the internal laws, and not the laws pertaining to conflicts or choice
of laws, of the State of Delaware.
6.
Tax Treatment
. [IF Option is an ISO, insert - It is the intention of the Company that, to the extent
possible, the Option will be treated as an ISO for tax purposes. However, it is the responsibility of Optionee
to ensure that the Option does not lose ISO treatment. Please consult with your tax advisor and refer to Section
6.1(e) of the Plan and Section 422 of the Internal Revenue Code.] The Company shall not be responsible for any
tax liability of Optionee resulting from the Option or its exercise.
IN WITNESS WHEREOF, the Company has executed this Stock Option Grant effective as of the Option Grant Date.
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SALEM COMMUNICATIONS CORPORATION,
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a Delaware corporation
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By:
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Jonathan L. Block
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Vice President and Secretary
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II-4
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-40494 and 333-113794)
pertaining to the Amended and Restated 1999 Stock Incentive Plan of Salem Communications Corporation
and in the Registration Statement (Form S-3 No. 333-86580) of Salem Communications Corporation and in
the related Prospectus of our report dated March 11, 2005, with
respect to the consolidated financial statements and schedule of Salem Communications Corporation included in this
Annual Report (Form 10-K) for the year ended December 31, 2004.
Los Angeles,
California
March 11, 2005
II-5
EXHIBIT 31.1
I, Edward G. Atsinger III, certify that:
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1.
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I have reviewed this annual report
on Form 10-K of Salem Communications Corporation;
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2.
|
Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
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3.
|
Based on my knowledge, the financial
statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
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4.
|
The registrants other certifying
officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
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(a)
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Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the
period in which this report is being prepared;
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|
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(b)
|
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
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|
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(c)
|
Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based
on such evaluation; and
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(d)
|
Disclosed in this report any change in the
registrants internal control over financial reporting that occurred
during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
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5.
|
The registrants other certifying
officers and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrants auditors
and the audit committee of registrants board of directors (or persons
performing the equivalent function):
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|
|
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|
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(a)
|
all significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information;
and
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|
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|
(b)
|
any fraud, whether or not material, that
involves management or other employees who have a significant role in the
registrants internal controls over financial reporting.
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|
Date: March 16, 2005
|
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|
|
/s/ EDWARD G. ATSINGER
III
|
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|
|
|
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|
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Edward G. Atsinger III
|
|
|
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Chief Executive Officer
|
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|
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|
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|
|
II-6
EXHIBIT 31.2
I, David A.R. Evans, certify that:
|
|
|
|
1.
|
I have reviewed this annual report
on Form 10-K of Salem Communications Corporation;
|
|
|
|
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|
2.
|
Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
|
|
|
|
|
|
|
3.
|
Based on my knowledge, the financial
statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
|
|
|
|
|
|
|
4.
|
The registrants other certifying
officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
|
|
|
|
|
|
|
|
(a)
|
Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the
period in which this report is being prepared;
|
|
|
|
|
|
|
(b)
|
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
|
|
|
|
|
|
|
(c)
|
Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based
on such evaluation; and
|
|
|
|
|
|
|
(d)
|
Disclosed in this report any change in the
registrants internal control over financial reporting that occurred
during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
|
|
|
|
|
|
5.
|
The registrants other certifying
officers and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrants auditors
and the audit committee of registrants board of directors (or persons
performing the equivalent function):
|
|
|
|
|
|
|
|
(a)
|
all significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information;
and
|
|
|
|
|
|
|
(b)
|
any fraud, whether or not material, that
involves management or other employees who have a significant role in the
registrants internal controls over financial reporting.
|
|
|
|
|
|
|
|
Date: March 16, 2005
|
|
|
|
|
|
|
|
/s/ DAVID A.R. EVANS
|
|
|
|
|
|
|
|
David A.R. Evans
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
II-7
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
The undersigned hereby certifies, in his capacity as President
and Chief Executive Officer of Salem Communications Corporation (the Company),
for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that based on his knowledge:
|
Dated: March 16, 2005
|
|
|
|
|
By: /s/ EDWARD G. ATSINGER
III
|
|
|
|
|
|
|
|
Edward G. Atsinger III
|
|
|
|
President and Chief Executive
Officer
|
|
II-8
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
The undersigned hereby certifies, in his capacity as Senior Vice
President and Chief Financial Officer of Salem Communications Corporation (the
Company), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that based on his
knowledge:
|
Dated: March 16, 2005
|
|
|
|
|
By: /s/ DAVID A.R. EVANS
|
|
|
|
|
|
|
|
David A.R. Evans
|
|
|
|
Senior Vice President and Chief
Financial Officer
|
|
|
|
|
|
II-9