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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _______________
COMMISSION FILE NUMBER 333-41733
SALEM COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0121400
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4880 SANTA ROSA ROAD, SUITE 300
CAMARILLO, CALIFORNIA 93012
- ---------------------------------------- ----------------------
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S 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
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 registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Aggregate market value of voting common stock held by non-affiliates of
the registrant based upon the average bid and asked price of its Class A common
stock, on March 23, 2000, on the Nasdaq National Market System was approximately
$119,950,933.
As of March 23, 2000 there were 17,902,392 shares of Class A common
stock and 5,553,696 shares of Class B common stock of Salem Communications
Corporation outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Annual Meeting of
Stockholders to be held May 24, 2000 are incorporated by reference in Part III
hereof.
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TABLE OF CONTENTS
PART I
Page
----
Item 1. Business..........................................................3
Item 2. Properties........................................................10
Item 3. Legal Proceedings.................................................11
Item 4. Submission of Matters to a Vote of Security Holders...............11
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters...............................................12
Item 6. Selected Consolidated Financial Information.......................13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................15
Item 7A Quantitative and Qualitative Disclosures About Market Risk........25
Item 8. Financial Statements and Supplementary Data.......................25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................25
PART III
Item 10. Directors and Executive Officers of the Registrant................26
Item 11. Executive Compensation............................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management....27
Item 13. Certain Relationships and Related Transactions....................27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...27
Signatures........................................................32
Financial Statements..............................................F-1
Schedule II -- Valuation and Qualifying Accounts..................S-1
Index to Exhibits.................................................E-1
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PART I
ITEM 1. BUSINESS.
From time to time, in both written reports (such as this report) and
oral statements, Salem Communications Corporation ("Salem" or the "company")
makes "forward-looking statements" within the meaning of Federal and state
securities laws. Disclosures that use words such as the company "believes,"
"anticipates," "expects," "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
company's current expectations and are based upon data available to the company
at the time of the statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
expectations; the risks and uncertainties, include but are not limited to,
Salem's ability to successfully integrate acquisitions into its organization,
competition in the radio broadcast industry and from new media technologies, and
adverse economic conditions, as well as other risks and uncertainties detailed
from time to time in Salem's 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 and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Securities Exchange
Act").
All metropolitan statistical area ("MSA") rank information used in this
report is from the Fall 1999 Radio Market Survey Schedule & Population Rankings
published by The Arbitron Company, excluding the Commonwealth of Puerto Rico.
According to the Radio Market Survey, the population estimates used were based
upon 1990 U.S. Bureau Census estimates updated and projected to January, 2000 by
Market Statistics, based on the data from Sales & Marketing Management's 1998
Survey of Buying Power. Information regarding the number of radio stations in
the United States featuring religious talk and music formats, the number of
stations featuring religious formats and the size of the listening audience for
religious programming have been obtained from the 1999 Broadcasting & Cable
Yearbook, The M Street Journal (November 18, 1998) and Religion & Media
Quarterly (July 1997).
GENERAL
We are the largest U.S. radio broadcasting company, measured by number
of stations and audience coverage, providing programming targeted at audiences
interested in religious and family issues. Our core business, developed over the
last 25 years, is the ownership and operation of radio stations in large
metropolitan markets. After completing our pending transactions, we will own or
operate 70 radio stations, including 52 stations which broadcast to 21 of the
top 25 markets. We also operate Salem Radio Network(R), a national radio network
offering syndicated talk, news and music programming to over 1,300 affiliated
radio stations, after completing our pending transactions.
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Our primary strategy has been, and will continue to be, to acquire and
operate radio stations in large metropolitan markets. Traditionally, we have
programmed acquired stations with our primary format, talk programming with
religious and family themes. This format generally features nationally
syndicated and local programs produced by organizations that purchase block
program time on our radio stations. We have expanded our acquisition strategy in
recent years by acquiring additional radio stations in markets in which we
already have a presence. We program these radio stations to feature news/talk
and music formats. Salem Radio Network(R) supports our strategy by enabling us
to offer a variety of program content on newly acquired radio stations in both
new and existing markets.
Our founders, our current CEO and chairman, are career radio
broadcasters who have owned and operated radio stations for the last 25 years.
As Salem has grown, we have recruited managers with strong radio backgrounds and
a commitment to our format. Our senior managers have an average of 25 years of
industry experience and 10 years with Salem. Our management has a track record
of successfully identifying, acquiring and operating new radio stations.
We continue to seek new ways to expand and integrate our distribution
and content capabilities. We have acquired magazine, Internet and software
businesses that direct their content to persons with interests that are similar
to those of our primary radio audience. We will continue to opportunistically
pursue acquisitions of new media and other businesses that serve our audience.
We plan to use these businesses, together with our radio stations and network,
to attract and retain a larger audience and customer base.
Salem Communications Corporation was formed in 1986, as a California
corporation, in connection with a combination of most of the radio station
holdings of Edward G. Atsinger III and Stuart W. Epperson. Initially, Messrs.
Atsinger and Epperson each owned fifty-percent of Salem Communications
Corporation-California. New Inspiration Broadcasting Company, Inc., the licensee
of KKLA-FM, Los Angeles, and Golden Gate Broadcasting Company, Inc., the
licensee of KFAX-AM, San Francisco, were owned by the principal shareholders and
Mr. Epperson's wife, Nancy A. Epperson. New Inspiration and Golden Gate were
both "S corporations," as that term is defined in the Internal Revenue Code of
1986, as amended. In August 1997, Salem Communications Corporation-California,
New Inspiration and Golden Gate effected a reorganization pursuant to which New
Inspiration and Golden Gate became wholly-owned subsidiaries of Salem
Communications Corporation-California. The S corporation status of each of New
Inspiration and Golden Gate was terminated in the reorganization. In 1999 the
company was reincorporated in Delaware.
DEVELOPMENT OF THE BUSINESS
In 1999, we completed the purchase of the following radio stations:
PURCHASE
DATE MARKET STATION MSA RANK(1) PRICE
---- ----------------- ------- ----------- -------------
April Seattle-Tacoma,WA KKOL-AM 13 $1,750,000(2)
July Phoenix,AZ KPXQ-AM(3) 15 $5,000,000
September Louisville,KY WLSY-FM 52 $5,000,000(4)
WRVI-FM
In 1999, we completed the purchase of the following other media
businesses:
PURCHASE
DATE ENTITY PRICE
------- -------------------------------- -----------
January OnePlace $ 6,150,000
January CCM Communications, Inc. 1,886,000
March Christian Research Report 300,000
August AudioCentral 1,000,000
October Gospel Media Network, Inc. 475,000
November Involved Christian Radio Network 3,000,000
-----------
$12,811,000
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(1) "MSA" means metropolitan statistical area.
(2) Acquired from Sonsinger, Inc., a corporation owned by Messrs. Atsinger and
Epperson.
(3) KPXQ-AM formerly had been known as KCTK-AM, KGME-AM and KFDJ-AM.
(4) Combined purchase price for WLSY-FM and WRVI-FM.
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RADIO STATIONS
After completing our pending transactions, we will own and operate 70
radio stations in 32 markets. The following table sets forth information about
each of Salem's stations in order of market size:
MSA STATION
MARKET(1) RANK(2) CALL LETTERS YEAR ACQUIRED
- --------- ------- ------------ -------------
New York, NY(3).................. 1 WMCA-AM 1989
WWDJ-AM 1994
Los Angeles, CA.................. 2 KKLA-FM 1985
KIEV-AM 1998
KLTX-AM 1986
KEZY-AM (4)
KXMX-FM (4)
Chicago, IL...................... 3 WYLL-FM 1990
San Francisco, CA................ 4 KFAX-AM 1984
KJQI-FM 2000
Philadelphia, PA................. 5 WFIL-AM 1993
WZZD-AM 1994
Dallas-Ft. Worth, TX............. 6 KWRD-FM 1996
KSKY-AM (5)
KDGE-FM (4)
Boston, MA....................... 8 WEZE-AM 1997
Washington, D.C.................. 9 WAVA-FM 1992
WABS-AM 2000
Houston-Galveston, TX............ 10 KKHT-FM 1995
KENR-AM 1995
KTEK-AM 1998
Atlanta, GA...................... 11 WNIV-AM 2000
WLTA-AM 2000
WGKA-AM (6)
Seattle-Tacoma, WA............... 13 KGNW-AM 1985
KLFE-AM 1994
KKOL-AM 1999
KAZJ-AM 1999
KKMO-AM 1998
San Diego, CA.................... 14 KPRZ-AM 1986
KCBQ-AM (7)
Phoenix, AZ...................... 15 KCTK-AM 1996
KPXQ-AM 1999
Minneapolis-St. Paul, MN......... 16 KKMS-AM 1996
KYCR-AM 1998
Baltimore, MD.................... 19 WITH-AM(8) 1997
Pittsburgh, PA................... 21 WORD-FM 1993
WPIT-AM 1993
Denver-Boulder, CO............... 22 KRKS-FM 1993
KRKS-AM 1994
KBJD-AM 1999
KNUS-AM 1996
KALC-FM (4)
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MSA STATION
MARKET(1) RANK(2) CALL LETTERS YEAR ACQUIRED
- --------- ------- ------------ -------------
Cleveland, OH.................... 23 WHK-AM 1997
WCCD-AM 1997
WRMR-AM (4)
WKNR-AM (4)
Portland, OR..................... 24 KPDQ-FM 1986
KPDQ-AM 1986
Cincinnati, OH................... 25 WTSJ-AM 1997
WBOB-AM (4)
WYGY-FM (4)
Riverside-San Bernardino, CA..... 27 KLTH-AM(9) 1986
Sacramento, CA................... 28 KFIA-AM 1995
KTKZ-AM 1997
San Antonio, TX.................. 31 KSLR-AM 1994
Columbus, OH..................... 33 WRFD-AM 1982
Nashville, TN.................... 42 WBOZ-FM (10)
WVRY-FM (10)
Louisville, KY................... 52 WLSY-FM 1999
WRVI-FM 1999
Honolulu, HI..................... 59 KAIM-AM 2000
KAIM-FM 2000
KGU-AM 2000
KHNR-AM 2000
Akron, OH........................ 67 WHLO-AM 1997
Colorado Springs, CO............. 93 KGFT-FM 1996
KBIQ-FM 1996
KPRZ-FM 1996(5)
Oxnard, CA....................... 107 KDAR-FM 1974
Canton, OH....................... 122 WHK-FM(11) 1997
- ------------------
(1) Actual city of license may differ from metropolitan market served.
(2) "MSA" means metropolitan statistical area. We have obtained all Metro
Survey rank information used in this report from the Fall 1999 Radio
Market Survey Schedule & Population Rankings published by The Arbitron
Company, excluding the Commonwealth of Puerto Rico. According to the Radio
Market Survey, the population estimates used were based upon 1990 U.S.
Bureau Census estimates updated and projected to January 1, 2000 by Market
Statistics, based on the data from Sales & Marketing Management's 1998
Survey of Buyer Power.
(3) This market includes the Nassau-Suffolk, NY Metro market which
independently has a MSA rank of 17.
(4) A contract to acquire KEZY-AM, KXMX-FM, KDGE-FM, KALC-FM, WRMR-AM,
WKNR-AM, WBOB-AM and WYGY-FM for $185.6 million has been signed and
regulatory approval of the acquisition is pending.
(5) A contract to exchange Salem's station KPRZ-AM and $7.5 million for
KSKY-AM has been signed and FCC approval of the transaction is pending.
(6) A contract to acquire WGKA-AM for $8.0 million has been signed. The FCC
has approved the acquisition.
(7) The company operates KCBQ-AM under a local marketing agreement. The
company has an option to purchase this station.
(8) WITH-AM is simulcast with WAVA-FM, Washington, D.C.
(9) KLTH-AM is simulcast with KLTX-AM, Los Angeles.
(10) A contract to acquire 100% of the stock of Reach Satellite Network, Inc.,
licensee of radio stations WBOZ-FM and WVRY-FM, for $3.1 million has been
signed. The FCC has approved the acquisition.
(11) WHK-FM is simulcast with WHK-AM, Cleveland.
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PROGRAM REVENUE. For the year ended December 31, 1999, we derived 32.9%
and 16.6% of our gross revenue, or $31.3 million and $15.8 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 have been successful in assisting
quality local programs to expand into national syndication.
ADVERTISING REVENUE. For the year ended December 31, 1999, we derived
31.2% of our gross revenue, or $29.7 million from the sale of local spot
advertising and 6.1% of our gross revenue, or $5.9 million from the sale of
national spot advertising.
OPERATIONS. Each of the radio markets in which we have a presence 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. We pay our general managers a base salary plus a
percentage of the respective station's net operating income. For each station we
also have a staff of full and part-time engineering, programming and sales
personnel. We pay our sales staff on a commission basis.
We have decentralized our operations in response to the rapid growth we
have experienced in recent years. 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 and production. We will continue 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 in our other stations.
Our corporate headquarters personnel oversee the placement and rate
negotiation for all nationally syndicated programs. Centralized oversight of
this component of company revenue is necessary because our key program customers
purchase time in many of our markets. Corporate headquarters personnel also are
responsible for centralized reporting and financial functions, benefits
administration, engineering oversight and other support functions designed to
provide resources to local management.
We believe that the listening audiences for our radio stations
formatted with our primary format, which provide the financial support for
program producers purchasing time on these stations, are responsive to affinity
advertisers that promote products targeted to audiences interested in religious
and family issues and are receptive to direct response appeals such as those
offered through infomercials. All of
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such stations 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 nationally affiliated religious bookstores, publishers
specializing in inspirational and religious literature and other businesses that
desire to specifically target audiences interested in religious and family
issues. Our stations generate spot advertising revenue from general market
advertisers, including automobile dealers, Internet companies and grocery store
chains.
SALEM RADIO NETWORK(R)
In 1993, we established Salem Radio Network(R) in connection with our
acquisition of certain assets of the former CBN Radio Network. Establishment of
Salem Radio Network(R) 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. Salem Radio Network(R) which is headquartered
in Dallas, develops, produces and syndicates a broad range of programming
specifically targeted to religious and family issues talk and music stations as
well as general market news/talk stations. Currently, we have rights to eight
full-time satellite channels and all Salem Radio Network(R) product is delivered
to affiliates via satellite.
After completing our pending transactions, Salem Radio Network(R) will
have more than 1,300 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. Network operations also
include commission revenue of Salem Radio Representatives from unaffiliated
customers and an allocation of operating expenses estimated to relate to such
commissions. Salem Radio Representatives, a wholly owned subsidiary of Salem,
sells all national commercial advertising placed on Salem Radio Network's
commercial affiliate radio stations. Salem Radio Network's gross revenue for the
year ended December 31, 1999 was $2.4 million. Salem Radio Network(R) incurred a
net operating loss of $0.8 million for the year ended December 31, 1999.
SALEM RADIO REPRESENTATIVES. We established Salem Radio Representatives
in 1992 as a sales representation company specializing in placing national
advertising on religious format radio stations. Salem Radio Network(R) has an
exclusive relationship with Salem Radio Representatives for the sale of
available Salem Radio Network(R) spot advertising. Salem Radio Representatives
receives a commission on all Salem Radio Network(R) 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.
OTHER MEDIA
INTERNET. In January 1999, we purchased the assets of OnePlace, LLC for
$6.2 million. OnePlace provides Christian supply catalogs in print and online,
church management software and support, and Internet c-commerce and web site
development services.
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PUBLISHING. In January 1999, we purchased CCM Communications, Inc.
for $1.9 million. CCM, based in Nashville, Tennessee, has published
magazines since 1978 which follow the contemporary Christian music industry.
CCM's flagship publication, CCM Magazine(R), is a monthly music magazine
offering interviews with artists, issue-oriented features, album reviews and
concert schedules. Through CCM's trade publications, we are uniquely positioned
to track contemporary Christian music audience trends.
SATELLITE RADIO. In August 1998 we expanded our reach by entering into
an exclusive agreement with XM Satellite Radio, Inc. to develop, produce, supply
and market religious and family issues audio programming which will be
distributed by a subscriber-based satellite digital audio radio service. XM
Satellite Radio, Inc. is one of two FCC licensees for this service (which is
expected to commence in the year 2001) and it will have the capability of
providing up to 100 channels of audio programming. We have agreed to provide
religious and family issues talk programming on one channel and youth and adult
religious music programming on two additional channels.
COMPETITION
RADIO. The radio broadcasting industry, including the religious and
family issues format segment of this industry, is a highly competitive business.
The financial success of each of our radio stations that features the religious
and family issues format 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 the religious format
approaches Salem in size of potential listening audience and presence in major
markets, religious format 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 and
billboard advertising.
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, the
Internet, personal communications services and the authorization by the FCC of a
new service of low powered, limited coverage FM radio stations. Digital audio
broadcasting may 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, the anticipated commencement of
satellite delivered digital audio radio services, which are intended to deliver
multiple audio programming formats to local and national audiences, may create
additional competition. We have attempted to address these existing and
potential competitive threats through our Internet acquisition and through our
exclusive arrangement to provide religious and family issues talk and music
formats on one of the two FCC licensees of satellite digital audio radio
services.
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NETWORK. Salem Radio Network(R) competes with other commercial radio
networks that offer news and talk programming to religious and general format
stations and two noncommercial networks that offer religious music formats.
Salem Radio Network(R) 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 religious music industry and publications
that address issues of interest to church leadership. Our Internet business
competes with other companies that deliver on-line audio programming and with
web sites that offer content and e-commerce capabilities, such as Amazon.com,
whose product offerings include religious books and music.
EMPLOYEES
At March 1, 2000, Salem employed 665 full-time and 320 part-time
employees. None of Salem's employees are covered by collective bargaining
agreements, and we consider our relations with our employees to be good.
ITEM 2. PROPERTIES.
The types of properties required to support our radio stations include
offices, studios and tower and antenna sites. A station's studios are generally
housed with its 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, our network's operations, the
operations of our other media businesses and our corporate headquarters 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 do not anticipate difficulties in renewing those leases that
expire within the next several years or in obtaining other lease arrangements,
if necessary.
We lease certain property from the principal stockholders or trusts and
partnerships created for the benefit of the principal stockholders and their
families. See "Certain Relationships and Related Transactions." All such leases
have cost of living adjustments. Based upon our management's assessment and
analysis of local market conditions for comparable properties, we believe such
leases do not have terms that vary materially from those that would have been
available from unaffiliated parties.
No one 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. We own
substantially all of our equipment, consisting principally of transmitting
antennae, transmitters, studio equipment and general office equipment.
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ITEM 3. LEGAL PROCEEDINGS.
We are involved in various routine legal proceedings incident to the
ordinary course of our business. We believe that the outcome of all pending
legal proceedings in the aggregate will not have a material adverse effect on
our consolidated financial condition or our results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 25, 1999, at a special telephonic meeting, the security holders
of the company gave their unanimous consent to re-elect as directors of the
company Edward G. Atsinger III, Stuart W. Epperson, Eric H. Halvorson, Richard
A. Riddle, Roland S. Hinz, and to elect two new directors, Joseph S. Schuchert
and Donald P. Hodel, as well as to adopt and approve the company's 1999 stock
incentive plan.
On April 16, 1999, at a special telephonic meeting, the security
holders of the company gave their unanimous consent to the adoption of an
amended and restated certificate of incorporation as of March 31, 1999, its
further amendment by an amended and restated certificate of incorporation filed
with the Delaware Secretary of State on May 19, 1999 and the initial public
offering of Class A common stock.
No other matters have been submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the period covered by
this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A common stock is traded on the National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ-NMS") under the symbol SALM. At March 23, 2000, the
Company had approximately 25 shareholders of record (not including the number of
persons or entities holding stock in nominee or street name through various
brokerage firms) and 17,902,392 outstanding shares of Class A common stock and
5,553,696 outstanding shares of Class B common stock. The following table sets
forth for the fiscal quarters indicates the range of high and low bid
information per share of the Class A common stock of the Company as reported on
the NASDAQ-NMS since July 1, 1999, the date the Company's Class A common stock
first became publicly traded.
1999
-------------------------------
4TH QUARTER 3RD QUARTER
----------- -----------
High.................... 30 31 1/8
Low..................... 16 1/8 21 3/8
There is no established public trading market for the Company's Class B
common stock.
DIVIDEND POLICY
No cash dividends were declared for any class of common equity in the
last two fiscal years. The company intends to retain future earnings for use in
its business and does not anticipate declaring or paying any dividends on shares
of the company's Class A or Class B common stock in the foreseeable future.
Further, the company's board of directors will make any determinations to
declare and pay dividends in light of the company's earnings, financial
position, capital requirements, agreements for our outstanding debt and such
other factors as the board of directors deems relevant.
The company's sole source of cash from which to make dividend payments
will be dividends paid to the company or payments made to the company by its
subsidiaries. The ability of the subsidiaries to make such payments may be
restricted by applicable state laws or terms of agreements to which they are or
may become a party.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION.
Salem's selected historical statement of operations and balance sheet
data presented below as of and for the years ended December 31, 1995, 1996,
1997, 1998 and 1999 are derived from the audited consolidated financial
statements of Salem. The consolidated financial statements as of December 31,
1998 and 1999 and for each of the years in the three-year period ended December
31, 1999, and the independent auditors' report thereon, are included elsewhere
in this report. Salem's financial results are not comparable from period to
period because of our acquisition and disposition of radio stations and our
acquisition of other media businesses. The selected consolidated financial
information below should be read in conjunction with, and is qualified by
reference to, our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
(EXCEPT PER SHARE DATA AND RATIOS)
Statement of Operations Data:
Net broadcasting revenue ................ $ 48,168 $ 59,010 $ 67,912 $ 77,891 $ 87,122
Other media revenue ..................... -- -- -- -- 6,424
---------- ---------- ---------- ---------- ----------
Total revenue ........................... 48,168 59,010 67,912 77,891 93,546
Operating expenses:
Broadcasting operating expenses ....... 27,527 33,463 39,626 42,526 46,291
Other media operating expenses ........ -- -- -- -- 9,985
Corporate expenses .................... 3,799 4,663 6,210 7,395 8,507
Stock and related cash grant........... -- -- -- -- 2,550
Tax reimbursements to S corporation
shareholders(1) ...................... 2,057 2,038 1,780 -- --
Depreciation and amortization ......... 7,884 8,394 12,803 14,058 18,233
---------- ---------- ---------- ---------- ----------
Total operating expenses ................ 41,267 48,558 60,419 63,979 85,566
---------- ---------- ---------- ---------- ----------
Net operating income .................. 6,901 10,452 7,493 13,912 7,980
Other income (expense):
Interest income ....................... 319 523 230 291 1,005
Gain (loss) on disposal of assets ..... (7) 16,064 4,285 236 (219)
Interest expense ...................... (6,646) (7,361) (12,706) (15,941) (14,219)
Other expense ......................... (255) (270) (389) (422) (633)
---------- ---------- ---------- ---------- ----------
Total other income (expense) ............ (6,589) 8,956 (8,580) (15,836) (14,066)
Income (loss) before income taxes
and extraordinary item ................ 312 19,408 (1,087) (1,924) (6,086)
Provision (benefit) for income taxes .... (204) 6,655 106 (343) (1,611)
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item . 516 12,753 (1,193) (1,581) (4,475)
Extraordinary loss(2) ................... (394) -- (1,185) -- (3,570)
---------- ---------- ---------- ---------- ----------
Net income (loss) ....................... $ 122 $ 12,753 $ (2,378) $ (1,581) $ (8,045)
========== ========== ========== ========== ==========
Pro forma net income (loss)(1) .......... $ 1,024 $ 12,838 $ (770)
========== ========== ==========
Basic and diluted income (loss) per
share before extraordinary item ........ $ 0.03 $ 0.77 $ (0.07) $ (0.09) $ (0.22)
========== ========== ========== ========== ==========
Basic and diluted net income (loss)
per share(3) ........................... $ 0.01 $ 0.77 $ (0.14) $ (0.09) $ (0.40)
========== ========== ========== ========== ==========
Pro forma basic and diluted income
(loss) per share before extraordinary
item ................................... $ 0.09 $ 0.77 $ 0.02
========== ========== ==========
Pro forma basic and diluted net income
(loss) per share ....................... $ 0.06 $ 0.77 $ (0.05)
========== ========== ==========
Basic and diluted weighted average
shares outstanding(3) .................. 16,661,088 16,661,088 16,661,088 16,661,088 20,066,006
========== ========== ========== ========== ==========
Other Data:
Broadcast cash flow(4) .................. $ 20,641 $ 25,547 $ 28,286 $ 35,365 $ 40,831
Broadcast cash flow margin(5) ........... 42.9% 43.3% 41.7% 45.4% 46.9%
EBITDA(4) ............................... $ 16,842 $ 20,884 $ 22,076 $ 27,970 $ 28,763
After-tax cash flow(4) .................. 9,306 11,594 10,647 12,335 15,809
Cash flows related to:
Operating activities .................. $ 7,681 $ 10,495 $ 7,314 $ 11,015 $ 8,204
Investing activities .................. (27,681) (18,923) (26,326) (31,762) (35,159)
Financing activities .................. 19,227 9,383 18,695 21,019 59,162
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DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- --------
Balance Sheet Data:
Cash and cash equivalents .................. $ 1,007 $ 1,962 $ 1,645 $ 1,917 $ 34,124
Total assets ............................... 104,817 159,185 184,813 207,750 264,364
Long-term debt, less current portion ....... 81,020 121,790 154,500 178,610 100,087
Stockholders' equity ....................... 13,282 20,354 10,682 9,101 142,839
- --------------
(1) Tax reimbursements to S corporation shareholders represent the income tax
liabilities of our principal stockholders created by the income of New
Inspiration and Golden Gate, which were both S corporations prior to our
August 1997 reorganization. Pro forma net income (loss) excludes tax
reimbursements to S corporation shareholders and includes a pro forma tax
provision at an estimated combined federal and state income tax rate of 40%
as if the reorganization had occurred at the beginning of each period
presented. In August 1997, New Inspiration and Golden Gate became
wholly-owned subsidiaries of Salem. From this date, pretax income of New
Inspiration and Golden Gate is included in our computation of the income tax
provision included in our consolidated statements of operations. See notes 1
and 7 to our consolidated financial statements.
The following table reflects the pro forma adjustments to historical net
income for the periods prior to and including our August 1997
reorganization:
1995 1996 1997
------ ------- -------
Pro Forma Information:
Income (loss) before income taxes and extraordinary item
as reported above ........................................... $ 312 $19,408 $(1,087)
Add back tax reimbursements to S corporation shareholders .... 2,057 2,038 1,780
------ ------- -------
Pro forma income (loss) before income taxes and
extraordinary item .......................................... 2,369 21,446 693
Pro forma provision (benefit) for income taxes ............... 951 8,608 278
------ ------- -------
Pro forma income (loss) before extraordinary item ............ 1,418 12,838 415
Extraordinary loss ........................................... (394) -- (1,185)
------ ------- -------
Pro forma net income (loss) .................................. $1,024 $12,838 $ (770)
====== ======= =======
(2) The extraordinary loss in each of 1995, 1997 and 1999 relates to the
write-off of deferred financing costs and termination fees related to the
repayment of long-term debt. See note 5 to our consolidated financial
statements.
(3) See note 1 to our consolidated financial statements.
(4) We define broadcast cash flow as net operating income, excluding other media
revenue and other media operating expenses, before depreciation and
amortization and corporate expenses. We define EBITDA as net operating
income before depreciation and amortization. We define after-tax cash flow
as income (loss) before extraordinary item minus gain (loss) on disposal of
assets (net of income tax) plus depreciation and amortization. EBITDA and
after-tax cash flow for the year ended December 31, 1999 excludes a $2.6
million charge ($1.9 million, net of income tax) for a one-time stock grant
concurrent with our initial public offering. For periods prior to 1998,
broadcast cash flow and EBITDA are calculated using net operating income
before tax reimbursements to S corporation shareholders. For periods prior
to 1998, after-tax cash flow excludes reimbursements to S corporation
shareholders and includes a pro forma tax provision at an estimated combined
federal and state income tax rate of 40% as if the reorganization had
occurred at the beginning of each period presented.
Although broadcast cash flow, EBITDA and after-tax cash flow are not
measures of performance calculated in accordance with generally accepted
accounting principles, we believe that they are useful because they are
measures widely used in the radio broadcast industry to evaluate a radio
company's operating performance. However, you should not consider broadcast
cash flow, EBITDA and after-tax cash flow in isolation or as substitutes
for net income, cash flows from operating activities and other statement of
operations or cash flows data prepared in accordance with generally
accepted accounting principles as a measure of liquidity or profitability.
These measures are not necessarily comparable to similarly titled measures
employed by other companies.
(5) Broadcast cash flow margin is broadcast cash flow as a percentage of net
broadcasting revenue.
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15
ITEM 7. MANAGEMENT'S 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 our 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 radio stations and our
acquisition of other media businesses. See note 2 to our consolidated financial
statements.
Historically, the principal sources of our 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.
In 1999, we expanded our sources of revenue and product offerings with
the acquisition of other media businesses.
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,
---------------------------------------------------------
1997 1998 1999
---------------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
Block program time:
National.................. $27,664 37.0% $29,506 34.5% $31,317 32.9%
Local..................... 11,392 15.2 13,389 15.7 15,816 16.6
------- ----- ------- ----- ------- -----
39,056 52.2 42,895 50.2 47,133 49.5
Advertising:
National.................. 3,621 4.8 4,458 5.2 5,855 6.1
Local..................... 21,143 28.3 26,106 30.6 29,686 31.2
------- ----- ------- ----- ------- -----
24,764 33.1 30,564 35.8 35,541 37.3
Infomercials................ 3,819 5.1 4,121 4.8 3,764 4.0
Salem Radio Network......... 6,186 8.3 6,053 7.1 6,983 7.3
Other....................... 1,005 1.3 1,778 2.1 1,856 1.9
------- ----- ------- ----- ------- -----
Gross broadcasting revenue.. 74,830 100.0% 85,411 100.0% 95,277 100.0%
===== ===== =====
Less agency commissions..... 6,918 7,520 8,155
------- ------- -------
Net broadcasting revenue.... $67,912 $77,891 $87,122
======= ======= =======
Our broadcasting revenue is affected primarily by the program rates our
radio stations charge and by the advertising rates our radio stations and
network charge. The rates for block program 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
network's ability to produce results for its advertisers. Historically we have
not subscribed to traditional audience measuring services. Instead, we have
marketed ourselves to advertisers based upon the responsiveness of our audience.
See "Business - Radio Stations." Each of our radio stations and our network have
a general pre-determined level of time that they make available for block
programs and/or advertising, which may vary at different times of the day.
In recent years, we have begun to place greater emphasis on the
development of local advertising in all of our markets. We encourage general
managers and sales managers to increase advertising revenue. We can create
additional advertising revenue in a variety of ways, such as removing block
programming that generates marginal audience response, adjusting the start time
of programs to add advertising in more desirable time slots and increasing
advertising rates.
As is typical in the radio broadcasting industry, our second and fourth
quarter advertising revenue generally exceeds our first and third quarter
advertising revenue. Quarterly revenue from the sale of block program time does
not tend to vary, however, since program rates are generally set annually.
Our cash flow is affected by a transition period experienced by radio
stations we have acquired when, due to the nature of the radio station, our
plans for the market and other circumstances, we find it beneficial or advisable
to change its format.
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16
This transition period is when we develop a radio station's customer and
listener base. During this period, a station will typically 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 1999, we sold 92% 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 employee salaries and commissions, and facility
expenses (for example, rent and utilities). 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.
OnePlace earns its revenue from the (1) sales of and advertising in
print and online catalogs, (2) sales of software and software support
contracts, (3) sales of products, services and banner advertising on the
Internet, and (4) sales of web site development services. CCM 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.
Our consolidated statements of operations for periods prior to 1998
have included an operating expense called "tax reimbursements to S corporation
shareholders." These amounts represent the income tax liabilities of our
principal stockholders created by the income of New Inspiration and Golden Gate,
which were both S corporations prior to our August 1997 reorganization. We
consider the nature of this operating expense to be essentially equivalent to an
income tax provision. In August 1997, New Inspiration and Golden Gate became
wholly-owned subsidiaries of Salem. From this date, pretax income of New
Inspiration and Golden Gate is included in our consolidated income tax return
and in our computation of the income tax provision included in our consolidated
statements of operations.
The performance of a radio broadcasting company, such as Salem, is
customarily measured by the ability of its stations to generate broadcast cash
flow and EBITDA. We define broadcast cash flow as net operating income,
excluding other media revenue and other media operating expenses, before
depreciation and amortization and corporate expenses. We define EBITDA as net
operating income before depreciation and amortization. We define after-tax cash
flow as income (loss) before extraordinary item minus gain (loss) on disposal
of assets (net of income tax) plus depreciation and amortization. EBITDA and
after-tax cash flow for the year ended December 31, 1999 excludes a $2.6 million
charge ($1.9 million, net of income tax) for a one-time stock grant concurrent
with our initial public offering on June 30, 1999. For periods prior to 1998,
broadcast cash flow and EBITDA are calculated using net operating income before
tax reimbursements to S corporation shareholders. For periods prior to 1998,
after-tax cash flow is calculated as if New Inspiration and Golden Gate were C
corporations for each of these periods. This means that after-tax cash flow
excludes tax reimbursements to S corporation shareholders and includes a pro
forma tax provision at an estimated combined federal and state income tax rate
of 40% as if the reorganization had occurred at the beginning of each period
presented.
Although broadcast cash flow, EBITDA and after-tax cash flow are not
measures of performance calculated in accordance with generally accepted
accounting principles, and should be viewed as a supplement to and not a
substitute for our results of operations presented on the basis of generally
accepted accounting principles, we believe that broadcast cash flow, EBITDA and
after-tax cash flow are useful because they are generally recognized by the
radio broadcasting industry as measures of performance and are used by analysts
who report on the performance of broadcast companies. These measures are not
necessarily comparable to similarly titled measures employed by other companies.
16
17
In the following discussion of our results of operations, 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. We include in our same
station comparisons the results of operations of radio stations and network
formats that:
- we own or operate for all of both periods;
- we acquire or begin to operate at any time after the beginning of the
first relevant comparison period if the station or network format (i)
is in a market in which we already own or operate a radio station or
network format and (ii) is integrated with the existing station or
network format for our internal financial reporting purposes; or
- we sell or cease to operate at any time after the beginning of the
first relevant comparison period if the station or network format (i)
was integrated with another station or network format in a market for
our internal financial reporting purposes prior to the sale or
cessation of operations and (ii) we continue to own or operate the
other station or network format following the sale or cessation of
operations.
We include in our same station comparisons the results of operations of our
integrated stations and network formats from the date that we acquire or begin
to operate them or through the date that we sell or cease to operate them, as
the case may be.
RESULTS OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET BROADCASTING REVENUE. Net broadcasting revenue increased $9.2
million or 11.8% to $87.1 million in 1999 from $77.9 million in 1998. The
inclusion of revenue from the acquisitions of radio stations and revenue
generated from local marketing agreements entered into during 1999 and 1998,
partially offset by the loss of revenue from radio stations sold in 1998,
provided $1.9 million of the increase. On a same station basis, net revenue
improved $7.3 million or 9.6% to $83.1 million in 1999 from $75.8 million in
1998. Included in the same station comparison are the results of two stations
that we began to own or operate in 1999 for a total purchase price of $1.8
million, and three stations that we acquired in 1998 for a total purchase price
of $3.1 million. The improvement was primarily due to an increase in revenue at
the radio stations we acquired in 1997 that previously operated with formats
other than their current format, an increase in program rates and an increase in
advertising time and improved selling efforts at both the national and local
level. Revenue from advertising as a percentage of our gross revenue increased
to 37.3% in 1999 from 35.8% in 1998. Revenue from block program time as a
percentage of our gross revenue decreased to 49.5% in 1999 from 50.2% in 1998.
This change in our revenue mix is primarily due to our continued efforts to
develop more local advertising sales in all of our markets.
OTHER MEDIA REVENUE. Other media revenue was $6.4 million for the year
ended December 31, 1999 and was generated from businesses acquired in 1999.
BROADCASTING OPERATING EXPENSES. Broadcasting operating expenses
increased $3.8 million or 8.9% to $46.3 million in 1999 from $42.5 million in
1998. The inclusion of expenses from the acquisitions of radio stations and
expenses incurred for local marketing agreements entered into during 1999 and
1998, partially offset by the exclusion of operating expenses from radio
stations sold in 1998, accounted for $1.4 million of the increase. On a same
station basis, broadcasting operating expenses
17
18
increased $2.4 million or 5.8% to $43.9 million in 1999 from $41.5 million in
1998, primarily due to incremental selling and production expenses incurred to
produce the increased revenue in the period. The difference between 1999 and
1998 broadcasting operating expenses was increased by a one-time credit of
$453,000 that we recorded in 1998. The credit related to music licensing fees
and represented the proceeds of a settlement between us and the two largest
performance rights organizations.
OTHER MEDIA OPERATING EXPENSES. Other media operating expenses were
$10.0 million for the year ended December 31, 1999 and were incurred in the
businesses acquired in 1999.
BROADCAST CASH FLOW. Broadcast cash flow increased $5.4 million or
15.3% to $40.8 million in 1999 from $35.4 million in 1998. As a percentage of
net broadcasting revenue, broadcast cash flow increased to 46.8% in 1999 from
45.4% in 1998. The increase is primarily attributable to the improved
performance of radio stations acquired in 1997 and 1998 that previously operated
with formats other than their current format, offset by a one-time credit for
music licensing fees in 1998. Acquired and reformatted radio stations typically
produce low margins during the first few years following conversion. Broadcast
cash flow margins improve as we implement scheduled program rate increases and
increase advertising revenue on our stations. On a same station basis, broadcast
cash flow improved $4.9 million or 14.3% to $39.2 million in 1999 from $34.3
million in 1998.
CORPORATE EXPENSES. Corporate expenses increased $1.1 million or 14.9%
to $8.5 million in 1999 from $7.4 million in 1998, primarily due to an increase
in bonuses of $300,000 in 1999 as compared to 1998, an increase in executive
officer compensation of $340,000 as compared to 1998, public reporting costs of
$200,000 and additional personnel and overhead costs associated with radio
station and other media acquisitions in 1999.
EBITDA. EBITDA increased $800,000 or 2.9% to $28.8 million in 1999 from
$28.0 million in 1998. As a percentage of total revenue, EBITDA decreased to
30.8% in 1999 from 35.9% in 1998. EBITDA was negatively impacted by the results
of operations of our other media businesses acquired during 1999, which
generated a net loss before depreciation and amortization of $3.6 million during
the year. EBITDA excluding the other media businesses increased $4.3 million or
15.4% to $32.3 million in 1999 from $28.0 million in 1998. As a percentage of
net broadcasting revenue, EBITDA excluding the other media businesses increased
to 37.1% in 1999 from 35.9% in 1998. The increase is primarily attributable to
the improved performance of radio stations acquired in 1997 and 1998 that
previously operated with formats other than their current format.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased $2.3
million or 53.5% to $6.6 million in 1999 from $4.3 million in 1998. Amortization
expense increased $1.8 million or 18.4% to $11.6 million in 1999 from $9.8
million in 1998. The increases were primarily due to radio station and other
media acquisitions consummated during 1999 and 1998.
OTHER INCOME (EXPENSE). Interest income increased $700,000 to $1.0
million in 1999 from $300,000 in 1998. The increase is primarily due to the
interest earned on the investment of the net proceeds received on our initial
public offering in July 1999. Interest expense decreased $1.7 million or 10.7%
to $14.2 million in 1999 from $15.9 million in 1998. The decrease is primarily
due to interest expense associated with $50 million in principal amount of the
senior subordinated notes repurchased in July 1999 partially offset by interest
expense associated with additional borrowings to fund acquisitions consummated
during 1998 and the first and second quarters of 1999. Other expense increased
$211,000 to $633,000 in 1999 from $422,000 in 1998 primarily due to increased
bank commitment fees.
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19
PROVISION (BENEFIT) FOR INCOME TAXES. Provision (benefit) for income
taxes as a percentage of income (loss) before income taxes and extraordinary
item (that is, the effective tax rate) was (26.5)% for 1999 and (17.8%) for
1998. The effective tax rate in 1999 and 1998 differs from the federal statutory
income tax rate of 34.0% primarily due to the effect of state income taxes
and certain expenses that are not deductible for tax purposes.
NET INCOME (LOSS). We recognized a net loss of $8.0 million in 1999,
compared to a net loss of $1.6 million in 1998. Included in the net loss for
1999 is a $3.6 million extraordinary loss, net of income tax benefit, resulting
from the premium paid on the repurchase of $50 million principal amount of our
senior subordinated notes, the related write-off of a portion of the unamortized
bond issue costs, and the write-off of deferred financing costs related to our
credit facility. Additionally, we incurred a $1.9 million charge, net of income
tax, related to a one-time stock grant concurrent with our initial public
offering on June 30, 1999.
AFTER-TAX CASH FLOW. After-tax cash flow increased $3.5 million or
28.5% to $15.8 million in 1999 from $12.3 million in 1998. This increase was
offset by negative after-tax cash flow of our other media businesses in 1999.
After-tax cash flow excluding other media losses (net of income tax) increased
$5.6 million or 45.5% to $17.9 million from $12.3 million in 1998. The increase
is primarily due to an increase in broadcast cash flow and a decrease in
interest expense.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET BROADCASTING REVENUE. Net broadcasting revenue increased $10.0
million or 14.7% to $77.9 million in 1998 from $67.9 million in 1997. The
inclusion of revenue from the acquisitions of radio stations and revenue
generated from local marketing agreements entered into during 1998 and 1997
provided $1.5 million of the increase. On a same station basis, net broadcasting
revenue improved $8.5 million or 12.7% to $75.3 million in 1998 from $66.8
million in 1997. Included in this same station comparison are the results of
three stations that we acquired in 1998 for a total purchase price of $3.1
million, four stations that we acquired or began to operate in 1997 for a total
purchase price of $4.9 million and one station that we sold in 1997 for $5.0
million. The improvement was primarily due to an increase in revenue at the
radio stations we acquired in 1996 that previously operated with formats other
than their current format, an increase in program rates and an increase in
advertising time and improved selling efforts at both the national and local
level. Revenue from advertising as a percentage of our gross broadcasting
revenue increased from 33.1% in 1997 to 35.8% in 1998. Revenue from block
program time as a percentage of our gross revenue decreased from 52.2% in 1997
to 50.2% in 1998. This change in our revenue mix is primarily due to our efforts
to develop more local advertising sales in all of our markets.
BROADCASTING OPERATING EXPENSES. Broadcasting operating expenses
increased $2.9 million or 7.3% to $42.5 million in 1998 from $39.6 million in
1997. The inclusion of expenses from the acquisitions of radio stations and
expenses incurred for local marketing agreements entered into during 1998 and
1997 accounted for $400,000 of the increase. On a same station basis,
broadcasting operating expenses increased $2.5 million or 6.4% to $41.3 million
in 1998 from $38.8 million in 1997, primarily due to incremental selling and
production expenses incurred to produce the increased revenue in the period.
This increase was offset in part by a one-time credit of $453,000 that we
recorded in 1998. The credit related to music licensing fees and represented the
proceeds of a settlement between us and the two largest performance rights
organizations.
BROADCAST CASH FLOW. Broadcast cash flow increased $7.1 million or
25.1% to $35.4 million in 1998 from $28.3 million in 1997. As a percentage of
net broadcasting revenue, broadcast cash flow increased to 45.4% in 1998 from
41.7% in 1997. The increase is primarily attributable to the improved
performance of radio stations acquired in 1996 and 1997 that previously operated
with formats other than their current format and the one-time credit for music
licensing fees. Acquired and reformatted radio stations typically produce low
margins during the first few years following conversion. Broadcast cash flow
margins improve as we implement scheduled program rate increases and increase
advertising revenue on our stations. On a same station basis, broadcast cash
flow improved $6.0 million or 21.4% to $34.0 million in 1998 from $28.0 million
in 1997.
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CORPORATE EXPENSES. Corporate expenses increased $1.2 million or 19.4%
to $7.4 million in 1998 from $6.2 million in 1997, primarily due to bonuses
totaling $538,000 paid to our president and to our chairman of the board in 1998
and additional personnel and overhead costs associated with radio station
acquisitions in 1998.
EBITDA. EBITDA increased $5.9 million or 26.7% to $28.0 million in 1998
from $22.1 million in 1997. As a percentage of total revenue, EBITDA increased
to 35.9% in 1998 from 32.5% in 1997. The increase is primarily attributable to
the improved performance of radio stations acquired in 1996 and 1997 that
previously operated with formats other than a religious and family issues format
and the one-time credit for music licensing fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.3 million or 10.2% to $14.1 million in 1998 from $12.8 million in
1997, primarily due to radio station acquisitions consummated during 1998 and
1997.
OTHER INCOME (EXPENSE). Interest income was essentially unchanged for
1998 compared to 1997. Gain on disposal of assets decreased $4.1 million from
$4.3 million in 1997 to $236,000 in 1998. The gain in 1997 was primarily due to
the sale of WPZE-AM, Boston. Interest expense increased $3.2 million or 25.2% to
$15.9 million in 1998 from $12.7 million in 1997, primarily due to interest
expense associated with additional borrowings to fund acquisitions consummated
during 1998 and 1997. Other expense was essentially unchanged for 1998 compared
to 1997.
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PROVISION (BENEFIT) FOR INCOME TAXES. Provision (benefit) for income
taxes as a percentage of income (loss) before income taxes and extraordinary
item (that is, the effective tax rate) was (17.8)% for 1998 and 9.8% for 1997.
The effective tax rate in 1998 differs from the federal statutory income tax
rate of 34.0% primarily because of the effect of state income taxes and certain
expenses that are not deductible for tax purposes. The effective tax rate in
1997 differs from the federal statutory income tax rate of 34.0% primarily
because of the effect of state income taxes and the establishment of a deferred
tax liability of $609,000 resulting from our August 1997 reorganization. These
effects were offset by the inclusion of income from New Inspiration and Golden
Gate, which were S corporations (and therefore not subject to federal income
taxes) prior to the reorganization.
NET LOSS. We recognized a net loss of $1.6 million in 1998, compared to
a net loss of $2.4 million in 1997. Included in the net loss for 1997 is a $1.2
million extraordinary loss for the write-off of deferred financing costs and
termination fees related to the repayment of our prior credit facility which we
repaid in full upon issuance of our senior subordinated notes in September 1997.
AFTER-TAX CASH FLOW. After-tax cash flow increased $1.7 million or
16.0% to $12.3 million in 1998 from $10.6 million in 1997. The increase is
primarily attributable to improved net operating income.
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22
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed acquisitions of radio stations through
borrowings, including borrowings under bank credit facilities and, to a lesser
extent, from operating cash flow and selected asset dispositions. We received
net proceeds of $140.1 million from our initial public offering in July 1999,
which was used to pay a portion of our senior subordinated notes and amounts
outstanding under our credit facility. 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 senior
subordinated notes from operating cash flow. At December 31, 1999 we had $34.1
million of cash and cash equivalents and positive working capital of $42.0
million.
We will fund future acquisitions from cash on hand, borrowings under
our credit facility and operating cash flow; the aggregate purchase price for
all pending acquisitions exceeds the maximum amount that we may currently borrow
under our credit facility. We are evaluating alternatives to fund these
acquisitions including amending our credit facility to allow a greater debt to
cash flow ratio, selling some of our existing radio stations, and obtaining
bridge financing. We believe that cash on hand, cash flow from operations,
borrowings under our credit facility, proceeds from the sale of some of our
existing radio stations and anticipated bridge financing will be sufficient to
permit us to meet our financial obligations, fund our pending acquisitions and
fund operations for at least the next twelve months.
At December 31, 1999, we had no amounts outstanding under our credit
facility. In July 1999, we paid amounts outstanding of $39.8 million with a
portion of the net proceeds of the offering. We amended our credit facility
principally to increase our borrowing capacity from $75 million to $150 million,
to lower the borrowing rates and to modify current financial ratio tests to
provide us with additional borrowing flexibility. The amended credit facility
matures on June 30, 2006. Aggregate commitments under the amended credit
facility begin to decrease commencing March 31, 2001.
Amounts outstanding under our credit facility bear interest at a base
rate, at our option, of the bank's prime rate or LIBOR, plus a spread. For
purposes of determining the interest rate under our credit facility, the prime
rate spread ranges from 0% to 1%, and the LIBOR spread ranges from 0.875% to
2.25%.
The maximum amount that we may borrow under our credit facility is
limited by our debt to cash flow ratio, adjusted for recent radio station
acquisitions (the "Adjusted Debt to Cash Flow Ratio"). The maximum Adjusted Debt
to Cash Flow Ratio allowed under our credit facility is 6.00 to 1 through
December 31, 2000. Thereafter, the maximum ratio will decline periodically until
January 1, 2004, at which point it will remain at 4.00 to 1 through June 2006.
The Adjusted Debt to Cash Flow Ratio at December 31, 1999 was 2.48 to 1,
resulting in a borrowing availability of approximately $131.4 million.
Our credit facility contains additional restrictive covenants customary
for credit facilities of the size, type and purpose contemplated which, with
specified exceptions, limits our ability to 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. The
credit facility also requires us to satisfy specified financial covenants, which
covenants require the maintenance of specified financial ratios and compliance
with certain financial tests, including ratios for maximum leverage as
described, minimum interest coverage (not less than 1.75 to 1), minimum debt
service coverage (a static ratio of not less than 1.1 to 1) and minimum fixed
charge coverage (a static ratio of not less than 1.1 to 1). The credit facility
is guaranteed by all of our subsidiaries and is secured by pledges of all of
our and our subsidiaries' assets and all of the capital stock of our
subsidiaries.
22
23
In September 1997, we issued $150 million principal amount of 9 1/2%
senior subordinated notes due 2007. In July 1999, we repurchased $50 million in
principal amount of the senior subordinated notes with a portion of the net
proceeds of the offering. After giving effect to this repurchase, we are
required to pay $9.5 million per year in interest on the senior subordinated
notes. The indenture for the senior subordinated notes contains restrictive
covenants that, among others, limit the incurrence of debt by us and our
subsidiaries, the payment of dividends, the use of proceeds of specified asset
sales and transactions with affiliates. The senior subordinated notes are
guaranteed by all of our subsidiaries.
As a result of the repurchase of our senior subordinated notes in July
1999, we recorded a non-cash charge of $1.5 million for the write-off of
unamortized bond issue costs. This was in addition to the $3.9 million premium
paid in connection with this repurchase.
Net cash provided by operating activities decreased to $8.2 million
for the year ended December 31, 1999, compared to $11.0 million in 1998,
primarily due to a decrease in accounts payable and accrued interest and an
increase in prepaid expenses of other media businesses during the year ended
December 31, 1998.
Net cash used in investing activities increased to $35.2 million for
the year ended December 31, 1999, compared to $31.8 million in 1998 primarily
due to acquisitions (cash used of $23.9 million to purchase three radio
stations and other media businesses in 1999 compared to cash used of $33.7
million to purchase four radio stations in 1998). Net cash used in investing
activities increased to $31.8 million in 1998, compared to $26.3 million in
1997, primarily due to radio station acquisitions (cash used of $33.7 million
to purchase four stations in 1998 compared to cash used of $19.4 million to
purchase eight stations in 1997).
Net cash provided by financing activities increased to $59.2 million
for the year ended December 31, 1999 compared to net cash provided by financing
activities of $21.0 million in 1998. The increase was primarily due to the net
proceeds of our initial public offering offset by the application of the net
proceeds to pay off $39.8 million owing under our prior credit facility and the
repurchase of $50 million in principal amount of our senior subordinated notes
in July 1999.
In 1999, we purchased radio stations KKOL-AM, Seattle, Washington,
KCTK-AM, Phoenix, Arizona, WLSY-FM and WRVI-FM, Louisville, Kentucky, in
separate transactions for a total of $11.8 million. In 1999, we also purchased
OnePlace, CCM, Christian Research Report, AudioCentral, Gospel Media Network,
Inc. and Involved Christian Radio Network, in separate transactions for a total
of $12.8 million. We paid for these purchases primarily with a portion of the
net proceeds of the offering.
Subsequent to December 31, 1999, we used a portion of the net proceeds
of the offering to purchase the assets (principally intangibles) of the
following radio stations:
PURCHASE
ACQUISITION DATE STATION MARKET SERVED PRICE
- ---------------- ------- ------------- -----------
January 4, 2000....... WNIV-AM and
WLTA-AM Atlanta, GA $ 8,000,000
January 10, 2000...... WABS-AM Washington, D.C. 4,100,000
January 25, 2000...... KJQI-FM San Francisco, CA 8,000,000
February 15, 2000..... KAIM-AM/FM Honolulu, HI 1,800,000
February 17, 2000..... KHNR-AM and
KGU-AM Honolulu, HI 1,700,000
-----------
$23,600,000
===========
In November 1999, we agreed to purchase radio station WGKA-AM, Atlanta,
Georgia for $8.0 million. We anticipate this purchase will close in April 2000.
In December 1999, we agreed to purchase all of the outstanding shares
of stock of Reach Satellite Network, Inc. (RSN), for $3.1 million. RSN owns
and operates Solid Gospel, a radio broadcasting network that produces and
distributes music programming to its own radio stations WBOZ-FM and WVRY-FM,
Nashville, Tennessee, and to independent radio station affiliates. RSN also
owns and operates SolidGospel.com, a web site on the Internet. We anticipate
this purchase will close in April 2000.
On January 18, 2000, we purchased real property in Dallas, Texas, for
$885,000.
23
24
In January 2000, we agreed to exchange our radio station KPRZ-FM,
Colorado Springs, Colorado, plus $7.5 million for radio stations KSKY-AM,
Dallas, Texas. We anticipate this exchange will occur in May 2000.
On February 25, 2000, we purchased the KIEV-AM property in Los Angeles,
California, for $2.8 million. This amount was included in current portion of
long-term debt at December 31, 1999.
In March 2000, we agreed to purchase the following radio stations for
$185.6 million: KDGE-FM, Dallas, Texas, KALC-FM, Denver, Colorado, KXMX-FM and
KEZY-AM, Los Angeles, California, WYGY-FM and WBOB-AM, Cincinnati, Ohio, and
WRMR-AM and WKNR-AM, Cleveland, Ohio. We anticipate this purchase will close in
the third quarter of 2000. In connection with this agreement we deposited a $25
million irrevocable letter of credit with an escrow agent. Under the agreement
we are subject to a liquidated damages provision. If we fail to consummate the
purchase or otherwise terminate the agreement we are required to pay the seller
$21.4 million in addition to the $25 million letter of credit, which would be
disbursed to the seller.
IMPACT OF YEAR 2000
In prior years, the company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the Year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
24
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE INSTRUMENTS. The company does not invest, and during the
year ended December 31, 1999 did not invest, in market risk sensitive
instruments.
MARKET RISK. Our market risk exposure with respect to financial
instruments is to changes in LIBOR and in the "prime rate" in the United
States. As of December 31, 1999, we may borrow $131.4 million under our credit
facility. Amounts outstanding under the credit facility bear interest at a base
rate, at our option, of the bank's prime rate or LIBOR, plus a spread. For
purposes of determining the interest rate under our credit facility, the prime
rate spread ranges from 0% to 1%, and the LIBOR spread ranges from 0.875% to
2.25%. There were no amounts outstanding under our credit facility as of
December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item
are set forth at the end of this Annual Report on Form 10-K beginning on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by this reference is the information set forth in
the sections entitled "DIRECTORS AND EXECUTIVE OFFICERS - Directors" and
"--Executive Officers" and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE contained in the company's Proxy Statement for its 2000 Annual
Meeting of Stockholders (the "2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by this reference is the information set forth in
the sections entitled "COMPENSATION AND OTHER INFORMATION" and "COMPENSATION
COMMITTEE REPORT ON EXECUTIVE COMPENSATION" contained in the 2000 Proxy
Statement.
26
27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by this reference is the information set forth in
the sections entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and
"SECURITY OWNERSHIP OF MANAGEMENT" contained in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by this reference is the information set forth in
the section entitled "RELATED PARTY TRANSACTIONS" contained in the 2000 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements required to be filed hereunder are set forth
at the end of this Report beginning on page F-1.
2. Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
-------- -----------------------
3.01* Amended and Restated Certificate of Incorporation of Salem
Communications Corporation, a Delaware corporation.
3.02* Bylaws of Salem Communications Corporation, a Delaware
Corporation.
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 9 1/2% Series A and Series B Senior
Subordinated Notes due 2007.
4.02+ Form of 9 1/2% Senior Subordinated Note (filed as part of
Exhibit 4.01).
4.03+ Form of Note Guarantee (filed as part of Exhibit 4.01).
4.04+ Credit Agreement, dated as of September 25, 1997, among
Salem, the several Lenders from time to time parties
thereto, and The Bank of New York, as administrative agent
for the Lenders (incorporated by reference to Exhibit 4.07
of the previously filed Registration Statement on Form S-4).
4.05+ Borrower Security Agreement, dated as of September 25, 1997,
by and between Salem and The Bank of New York, as
Administrative Agent of the Lenders (incorporated by
reference to Exhibit 4.07 of the previously filed
Registration Statement on Form S-4).
4.06+ Subsidiary Guaranty and Security Agreement dated as of
September 25, 1997, by and between Salem, certain named
guarantors, and The Bank of New York, as Administrative
Agent (incorporated by reference to Exhibit 4.09 of the
previously filed Registration Statement on Form S-4).
4.07++ Amendment No. 1 and Consent No. 1, dated as of August 5,
1998, to the Credit Agreement, dated as of September 25,
1997, by and among Salem, The Bank of New York, as
Administrative Agent for the Lenders, Bank of America NT&SA,
as documentation agent, and the several Lenders
(incorporated by reference to Exhibit 10.02 of previously
filed Current Report on Form 8-K).
4.08* Amendment No. 2 and Consent No. 2, dated as of January 22,
1999, to the Credit Agreement, dated as of September 25,
1997, by and among Salem, The Bank of New York, as
Administrative Agent for the Lenders, Bank of America NT&SA,
as documentation agent, and the Lenders.
4.09* Specimen of Class A common stock certificate.
4.10* 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.
4.11* Consent No. 3, dated as of March 31, 1999, to the Credit
Agreement, dated as of September 25, 1997, by and among
Salem, The Bank of New York, as Administrative Agent for the
Lenders, Bank of America NT&SA, as Documentation Agent, and
the Lenders named therein.
27
28
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
----------- -----------------------
4.12* Assumption Agreement, dated as of March 31, 1999, by and
between Salem Communications Corporation, a Delaware
corporation, and The Bank of New York, as Administrative
Agent.
4.13* Amendment No. 1 to the Grant of Security Interest
(Servicemarks) by Salem to The Bank of New York, as
Administrative Agent, under the Borrower Security Agreement,
dated as of September 25, 1997, with the Administrative
Agent.
4.14* Amendment No. 3 and Consent No. 4, dated as of April 23,
1999, under the Credit Agreement, dated as of September 25,
1997, by and among Salem, The Bank of New York, as
Administrative Agent for the Lenders, Bank of America NT&SA,
as Documentation Agent, and the Lenders party thereto.
4.15* First Amended and Restated Credit Agreement by and among
Salem, The Bank of New York, as Administrative Agent for the
Lenders, Bank of America NT&SA, as Documentation Agent, and
the Lenders named therein.
4.16 Amendment No. 1 to First Amended and Restated Credit
Agreement, by and among Salem, The Bank of New York, as
Administrative Agent for the Lenders, Bank of America, N.A.,
as Documentation Agent and the Lenders party thereto.
4.17 Amendment No. 2 to First Amended and Restated Credit
Agreement, by and among Salem, The Bank of New York, as
Administrative Agent for the Lenders, Bank of America, N.A.,
as Documentation Agent and the Lenders party thereto.
10.01* Amended and Restated Employment Agreement, dated as of May
19, 1999, between Salem and Edward G. Atsinger III.
10.02* Amended and Restated Employment Agreement, dated as of May
19, 1999, between Salem and Stuart W. Epperson.
10.03.01+ Employment Contract, dated November 7, 1991, between Salem
and Eric H. Halvorson.
10.03.02+ First Amendment to Employment Contract, dated April 22,
1996, between Salem and Eric H. Halvorson.
10.03.03+ Second Amendment to Employment Contract, dated July 8, 1997,
between Salem and Eric H. Halvorson.
10.03.04+ Deferred Compensation Agreement, dated November 7, 1991,
between Salem and Eric H. Halvorson.
10.03.05* Third Amendment to Employment Agreement, entered into May
26, 1999, between Salem and Eric Halvorson.
10.05.01+ Antenna/tower lease between Caron Broadcasting, Inc.
(WHLO-AM/Akron, Ohio) and Messrs. Atsinger and Epperson
expiring 2007.
10.05.02+ Antenna/tower/studio lease between Caron Broadcasting, Inc.
(WTSJ-AM/ Cincinnati, Ohio) and Messrs. Atsinger and
Epperson expiring 2007.
10.05.03+ Antenna/tower lease between Caron Broadcasting, Inc.
(WHK-FM/Canton, Ohio) and Messrs. Atsinger and Epperson
expiring 2007.
10.05.04+ Antenna/tower/studio lease between Common Ground
Broadcasting, Inc. (KKMS-AM/Eagan, Minnesota) and Messrs.
Atsinger and Epperson expiring in 2006.
10.05.05+ Antenna/tower lease between Common Ground Broadcasting, Inc.
(WHK-AM/ Cleveland, Ohio) and Messrs. Atsinger and Epperson
expiring 2008.
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.
10.05.07+ Antenna/tower/studio lease between Inland Radio, Inc.
(KKLA-AM/San Bernardino, California) and Messrs. Atsinger
and Epperson expiring 2002.
28
29
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
----------- -----------------------
10.05.08+ Antenna/tower lease between Inspiration Media, Inc.
(KGNW-AM/Seattle, Washington) and Messrs. Atsinger and
Epperson expiring in 2002.
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.
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.
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.
10.05.12+ Antenna/tower lease between Radio 1210, Inc.
(KPRZ-AM/Olivenhain, California) and The Atsinger Family
Trust expiring in 2002.
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).
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.
10.05.15+ Antenna/tower lease between Salem Media of Colorado, Inc.
(KNUS-AM/Denver-Boulder, Colorado) and Messrs. Atsinger and
Epperson expiring 2006.
10.05.16 Atenna/tower lease between Salem Media of Colorado, Inc. and
Atsinger Family Trust/Epperson Family Limited Partnership
(KRKS-AM/KBJD-AM/Denver, Colorado).
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.
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.
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.
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.
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.
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.
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.
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.
10.06.05+ Asset Purchase Agreement dated as of September 30, 1996 by
and between Infinity Broadcasting Corporation of Dallas and
Inspiration Media of Texas, Inc. (KEWS, Arlington, Texas;
KDFX, Dallas, Texas).
29
30
10.06.07+ Asset Purchase Agreement dated June 2, 1997 by and between
New England Continental Media, Inc. and Hibernia
Communications, Inc. (WPZE-AM, Boston, Massachusetts).
10.06.08+ Option to Purchase dated as of August 18, 1997 by and
between Sonsinger, Inc. and Inspiration Media, Inc.
(KKOL-AM, Seattle, Washington).
10.06.09++ Asset Purchase Agreement dated as of April 13, 1998 by and
between New Inspiration Broadcasting Company and First
Scientific Equity Devices Trust (KIEV-AM, Glendale,
California) (incorporated by reference to Exhibit 2.01 of
the previously filed Current Report on Form 8-K).
10.06.10* Asset Purchase Agreement dated as of April 1, 1999 by and
between Inspiration Media, Inc. and Sonsinger, Inc.
(KKOL-AM, Seattle, Washington).
10.07.01+ Tower Purchase Agreement dated August 22, 1997 by and
between Salem and Sonsinger Broadcasting Company of Houston,
L.P.
10.07.02+ Amendment to the Tower Purchase Agreement dated November 10,
1997 by and between Salem and Sonsinger Broadcasting Company
of Houston, L.P.
10.07.03+ Promissory Note dated November 11, 1997 made by Sonsinger
Broadcasting Company of Houston, L.P. payable to Salem.
10.07.04+ Promissory Note dated December 24, 1997 made by Salem
payable to Edward G. Atsinger III.
10.07.05+ Promissory Note dated December 24, 1997 made by Salem
payable to Stuart W. Epperson.
10.08.01 Local Marketing Agreement dated August 13, 1999 between
Concord Media Group, Inc. and Radio 1210, Inc.
10.08.02 Asset Purchase Agreement dated as of August 18, 1999, by
and between Salem Media of Georgia, Inc. and Genesis
Communications, Inc. (WNIV-FM, Atlanta, Georgia and WLTA-FM,
Alpharetta, Georgia.
10.08.03 Asset Purchase Agreement dated as of November 29, 1999, by
and among JW Broadcasting, Inc., Salem Media of Georgia,
Inc. and Salem Communications Corporation (WGKA-AM, Atlanta,
Georgia.
10.09.01+ Evidence of Key man life insurance policy no. 2256440M
insuring Edward G. Atsinger III in the face amount of
$5,000,000.
10.09.02+ Evidence of Key man life insurance policy no. 2257474H
insuring Edward G. Atsinger III in the face amount of
$5,000,000.
10.09.03+ Evidence of Key man life insurance policy no. 2257476B
insuring Stuart W. Epperson in the face amount of
$5,000,000.
10.10* 1999 Stock Incentive Plan.
21.01 Subsidiaries of Salem.
27.01 Financial Data Schedule.
- ---------------
+ Incorporated by reference to the exhibit of the same number, unless otherwise
noted, of Salem's Registration Statement on Form S-4 (No. 333-41733), as
amended, as declared effective by the Securities and Exchange Commission on
February 9, 1998.
++ Incorporated by reference to the exhibit of the same number, unless otherwise
noted, of Salem's Current Report on Form 8-K, filed with the Securities and
Exchange Commission on September 4, 1998.
++ Incorporated by reference to the exhibit of the same number, unless otherwise
noted, of Salem's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1999.
** Incorporated by reference to the exhibit of the same number, unless otherwise
noted, of Salem's Current Report on Form 8-K, filed with the Securities and
Exchange Commission on April 14, 1999.
* Incorporated by reference to the exhibit of the same number to the Company's
Registration Statement on Form S-1 (No. 333-76649) as amended, as declared,
effective by the Securities and Exchange Commission on June 30, 1999.
30
31
(b) Reports on Form 8-K.
On April 14, 1999, the company filed a Current Report on Form 8-K,
reporting Item 5, in connection with the reincorporation of the company in
Delaware.
31
32
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.
SALEM COMMUNICATIONS CORPORATION
March 30, 2000 By: /s/ Edward G. Atsinger III
------------------------------------------
Edward G. Atsinger III
President and Chief Executive Officer
March 30, 2000 By: /s/ Dirk Gastaldo
------------------------------------------
Dirk Gastaldo
Vice President and Chief Financial Officer
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.
Signature Title Date
- --------- ----- ----
/s/ Edward G. Atsinger III President and Chief Executive Officer March 30, 2000
- ------------------------------- (Principal Executive Officer)
Edward G. Atsinger III
/s/ Dirk Gastaldo Vice President and Chief Financial Officer March 30, 2000
- ------------------------------- (Principal Financial Officer)
Dirk Gastaldo
/s/ Eileen E. Hill Vice President, Financial Planning March 30, 2000
- ------------------------------- and Analysis
Eileen E. Hill (Principal Accounting Officer)
/s/ Edward G. Atsinger III Director March 30, 2000
- -------------------------------
Edward G. Atsinger III
/s/ Stuart W. Epperson Director March 30, 2000
- -------------------------------
Stuart W. Epperson
/s/ Eric H. Halvorson Director March 30, 2000
- -------------------------------
Eric H. Halvorson
/s/ Richard A. Riddle Director March 30, 2000
- -------------------------------
Richard A. Riddle
/s/ Roland S. Hinz Director March 30, 2000
- -------------------------------
Roland S. Hinz
/s/ Donald P. Hodel Director March 30, 2000
- -------------------------------
Donald P. Hodel
/s/ Joseph S. Schuchert Director March 30, 2000
- -------------------------------
Joseph S. Schuchert
32
33
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 F-6
Notes to Consolidated Financial Statements F-7
F-1
34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of Salem Communications Corporation
We have audited the accompanying consolidated balance sheets of Salem
Communications Corporation as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
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 auditing standards generally
accepted in the 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, 1998 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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.
ERNST & YOUNG LLP
Woodland Hills, California
March 15, 2000
F-2
35
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
DECEMBER 31,
-------------------------
1998 1999
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 1,917 $ 34,124
Accounts receivable (less allowance for doubtful accounts
of $862 in 1998 and $1,753 in 1999) .......................... 14,289 17,481
Other receivables ............................................... 67 645
Prepaid expenses ................................................ 658 1,628
Due from stockholders ........................................... -- 905
Deferred income taxes ........................................... 2,443 732
-------- ---------
Total current assets .............................................. 19,374 55,515
Property, plant, equipment and software, net ...................... 40,749 50,665
Intangible assets:
Broadcast licenses .............................................. 167,870 177,487
Noncompetition agreements ....................................... 14,593 14,625
Customer lists and contracts .................................... 4,094 4,097
Favorable and assigned leases ................................... 1,800 1,800
Goodwill ........................................................ 6,689 15,177
Other intangible assets ......................................... 2,567 4,799
-------- ---------
197,613 217,985
Less accumulated amortization ................................... 55,837 67,465
-------- ---------
Intangible assets, net ............................................ 141,776 150,520
Bond issue costs .................................................. 4,657 2,750
Other assets ...................................................... 1,194 4,914
-------- ---------
Total assets ...................................................... $207,750 $ 264,364
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 1,676 $ 2,600
Accrued expenses ................................................ 489 1,256
Accrued compensation and related ................................ 1,613 2,047
Accrued interest ................................................ 3,968 2,546
Deferred subscription revenue ................................... -- 1,670
Income taxes .................................................... 89 148
Current portion of long-term debt and capital
lease obligations ............................................. -- 3,248
-------- ---------
Total current liabilities ......................................... 7,835 13,515
Long-term debt, less current portion .............................. 178,610 100,087
Deferred income taxes ............................................. 11,581 7,232
Other liabilities ................................................. 623 691
Stockholders' equity:
Class A common stock, $.01 par value; authorized 80,000,000
shares; issued and outstanding 11,107,392 shares and
17,902,392 shares at December 31, 1998 and 1999, respectively.. 111 179
Class B common stock, $.01 par value; authorized 20,000,000
shares; issued and outstanding 5,553,696 shares ............... 56 56
Additional paid-in capital ...................................... 5,665 147,380
Retained earnings (deficit) ..................................... 3,269 (4,776)
-------- ---------
Total stockholders' equity ........................................ 9,101 142,839
-------- ---------
Total liabilities and stockholders' equity ........................ $207,750 $ 264,364
======== =========
See accompanying notes.
F-3
36
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
Gross broadcasting revenue .......................... $ 74,830 $ 85,411 $ 95,277
Less agency commissions ............................. 6,918 7,520 8,155
------------ ------------ ------------
Net broadcasting revenue ............................ 67,912 77,891 87,122
Other media revenue ................................. -- -- 6,424
------------ ------------ ------------
Total revenue ....................................... 67,912 77,891 93,546
Operating expenses:
Broadcasting operating expenses ................... 39,626 42,526 46,291
Other media operating expenses .................... -- -- 9,985
Corporate expenses ................................ 6,210 7,395 8,507
Stock and related cash grant ...................... -- -- 2,550
Tax reimbursements to S corporation shareholders... 1,780 -- --
Depreciation (including $1,817 in 1999 for other
media businesses) ............................... 3,988 4,305 6,599
Amortization (including $420 in 1999 for other
media businesses) ............................... 8,815 9,753 11,634
------------ ------------ ------------
Total operating expenses .......................... 60,419 63,979 85,566
------------ ------------ ------------
Net operating income ................................ 7,493 13,912 7,980
Other income (expense):
Interest income ................................... 230 291 1,005
Gain (loss) on disposal of assets ................. 4,285 236 (219)
Interest expense .................................. (12,706) (15,941) (14,219)
Other expense ..................................... (389) (422) (633)
------------ ------------ ------------
Loss before income taxes and extraordinary item ..... (1,087) (1,924) (6,086)
Provision (benefit) for income taxes ................ 106 (343) (1,611)
------------ ------------ ------------
Loss before extraordinary item ...................... (1,193) (1,581) (4,475)
Extraordinary loss on early extinguishment of
debt (net of income tax benefit of $659 in 1997
and $1,986 in 1999)................................ (1,185) -- (3,570)
------------ ------------ ------------
Net loss ............................................ $ (2,378) $ (1,581) $ (8,045)
============ ============ ============
Basic and diluted loss per share before
extraordinary item ................................ $ (0.07) $ (0.09) $ (0.22)
Extraordinary loss per share ........................ (0.07) -- (0.18)
------------ ------------ ------------
Basic and diluted net loss per share ................ $ (0.14) $ (0.09) $ (0.40)
============ ============ ============
Basic and diluted weighted average shares outstanding 16,661,088 16,661,088 20,066,006
============ ============ ============
Pro forma information for 1997 (unaudited):
Loss before income taxes and extraordinary item as
reported above .................................... $ (1,087)
Add back tax reimbursements to S Corporation
shareholders ...................................... 1,780
------------
Pro forma income before income taxes and
extraordinary item ................................ 693
Pro forma provision for income taxes ................ 278
------------
Pro forma income before extraordinary Item .......... 415
Extraordinary loss .................................. (1,185)
------------
Pro forma net loss .................................. $ (770)
============
Proforma basic and diluted income per share before
extraordinary item ................................ $ 0.02
Extraordinary loss per share ........................ (0.07)
------------
Basic and diluted net loss per share ................ $ (0.05)
============
Basic and diluted weighted average shares outstanding 16,661,088
============
See accompanying notes.
F-4
37
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL RETAINED
-------------------- ------------------- PAID-IN EARNINGS/
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ------ --------- ------ -------- --------- ---------
Stockholders' equity, January 1, 1997 . 11,107,392 $111 5,553,696 $56 $ 5,665 $ 14,702 $ 20,534
Net loss .............................. -- -- -- -- -- (2,378) (2,378)
Stockholder distributions ............. -- -- -- -- -- (7,474) (7,474)
---------- ---- --------- --- -------- -------- ---------
Stockholders' equity, December 31, 1997 11,107,392 111 5,553,696 56 5,665 4,850 10,682
Net loss .............................. -- -- -- -- -- (1,581) (1,581)
---------- ---- --------- --- -------- -------- ---------
Stockholders' equity, December 31, 1998 11,107,392 111 5,553,696 56 5,665 3,269 9,101
Stock grant ........................... 75,000 1 -- -- 1,687 -- 1,688
Issuance of Class A common stock ...... 6,720,000 67 -- -- 140,028 -- 140,095
Net loss .............................. -- -- -- -- -- (8,045) (8,045)
---------- ---- --------- --- -------- -------- ---------
Stockholders' equity, December 31, 1999 17,902,392 $179 5,553,696 $56 $147,380 $ (4,776) $ 142,839
========== ==== ========= === ======== ======== =========
See accompanying notes.
F-5
38
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
--------- -------- ---------
OPERATING ACTIVITIES
Net loss ............................................. $ (2,378) $ (1,581) $ (8,045)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ...................... 12,803 14,058 18,233
Amortization of bank loan fees ..................... 175 42 87
Amortization of bond issue costs ................... 126 531 443
Deferred income taxes .............................. (1,022) (730) (4,106)
(Gain) loss on sale of assets ...................... (4,285) (236) 219
Loss on early extinguishment of debt, before taxes.. 1,844 -- 5,556
Noncash stock grant ................................ -- -- 1,688
Changes in operating assets and liabilities:
Accounts receivable .............................. (1,572) (2,048) (2,573)
Prepaid expenses and other current assets ........ (473) (18) (1,747)
Accounts payable and accrued expenses ............ 1,844 1,035 (1,555)
Deferred subscription revenue .................... -- -- 384
Other liabilities ................................ 78 166 (439)
Income taxes ..................................... 174 (204) 59
--------- -------- ---------
Net cash provided by operating activities ............ 7,314 11,015 8,204
INVESTING ACTIVITIES
Capital expenditures ................................. (7,512) (6,865) (9,142)
Deposits on radio station acquisitions ............. (4,907) 4,907 (1,325)
Purchases of radio stations ........................ (19,436) (33,682) (11,837)
Purchases of other media businesses ................ -- -- (12,049)
Proceeds from disposal of property, plant and
equipment and intangible assets .................. 5,120 4,226 73
Expenditures for tower construction project
held for sale .................................... (9) (495) (410)
Proceeds from sale of tower construction project ... -- -- 914
Other assets ....................................... 418 147 (1,383)
--------- -------- ---------
Net cash used in investing activities ................ (26,326) (31,762) (35,159)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and notes
payable to stockholders .......................... 222,810 40,500 18,750
Net proceeds from issuance of common stock ......... -- -- 140,095
Payments of long-term debt and notes payable to
stockholders ..................................... (190,166) (19,200) (94,860)
Payments on capital lease obligations .............. -- -- (239)
Payments of bank loan fees ......................... (1,025) -- --
Payment of premium on senior subordinated notes .... -- -- (3,875)
Payments of costs related to bank credit facility .. (417) -- (709)
Payments of bond issue costs ....................... (5,033) (281) --
Distributions to shareholders ...................... (7,474) -- --
--------- -------- ---------
Net cash provided by financing activities ............ 18,695 21,019 59,162
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents . (317) 272 32,207
Cash and cash equivalents at beginning of year ..... 1,962 1,645 1,917
--------- -------- ---------
Cash and cash equivalents at end of year ............. $ 1,645 $ 1,917 $ 34,124
========= ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ......................................... $ 9,523 $ 14,965 $ 15,048
Income taxes ..................................... 295 591 450
See accompanying notes.
F-6
39
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. Prior to the reorganization described below (the
Reorganization) the financial statements had been presented on a combined basis
and included Salem, New Inspiration Broadcasting Company, Inc. (New
Inspiration), Golden Gate Broadcasting Company, Inc. (Golden Gate) and Beltway
Media Partners (Beltway), and all of these entities were under common control.
New Inspiration and Golden Gate were S corporations for income tax purposes.
Salem, New Inspiration and Golden Gate were the partners of Beltway. The
combined financial statements were entitled Salem Broadcasting Entities.
Pursuant to the Reorganization the financial statements have been renamed and
the disclosure of common stock information has been retroactively restated for
all periods presented as if the Reorganization had been completed as of the
beginning of the earliest period presented. 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. All of the
Company's subsidiaries are Guarantors of the 9 1/2% Senior Subordinated Notes
due 2007 (the Notes) discussed in Note 5. The Guarantors (i) are wholly owned
subsidiaries of the Company, (ii) comprise all the Company's direct and indirect
subsidiaries and (iii) have fully and unconditionally guaranteed on a joint and
several basis, the Notes. The Company has not presented separate financial
statements and other disclosures concerning the Guarantors because management
has determined that such information is not material to investors.
In August 1997, the Company, New Inspiration and Golden Gate effected
the Reorganization pursuant to which New Inspiration and Golden Gate became
wholly-owned subsidiaries of the Company, with Beltway remaining a partnership.
The Company accounted for the Reorganization as a combination of entities under
common control, which is a method similar to a pooling of interests. In October
1998, the Company, New Inspiration and Golden Gate contributed their partnership
interests in Beltway to Salem Media of Virginia, Inc. (SMV), thereby dissolving
Beltway. SMV is an indirectly wholly-owned subsidiary of the Company.
The S Corporation status of New Inspiration and Golden Gate was
terminated in the Reorganization. Prior to the Reorganization, New Inspiration
and Golden Gate distributed cash and promissory notes to their respective
shareholders in the aggregate amount of $8.5 million. Of such amount, $1.8
million, equal to the estimated federal and state income tax liability of the S
corporation shareholders on the earnings of New Inspiration and Golden Gate, was
paid by New Inspiration and Golden Gate in cash. The balance, $6.7 million
representing the balance of the net income of New Inspiration and Golden Gate
that had previously been taxed, but not distributed to the shareholders, was
paid in the form of promissory notes. In September 1997, the Company financed
the repayment of these promissory notes by an additional borrowing.
F-7
40
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 religious and family issues. Salem operated 54 and 45 radio
stations across the United States at December 31, 1999 and 1998, respectively.
The Company also owns and operates Salem Radio Network (SRN), SRN News Network
(SNN), Salem Music Network (SMN) and Salem Radio Representatives (SRR). SRN, SNN
and SMN are radio networks which produce and distribute talk, news and music
programming to radio stations in the U.S., including some of Salem's stations.
SRR sells commercial air time to national advertisers for Salem's
radio stations and networks, and for independent radio station affiliates.
Salem also owns and operates OnePlace, LLC (OnePlace) and CCM
Communications, Inc. (CCM). OnePlace provides Christian supply catalogs in print
and online, church management software and support, and Internet e-commerce and
web site development services. CCM 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.
The significant accounting policies of Salem are summarized below and
conform with generally accepted accounting principles and reflect practices
appropriate to the radio broadcasting industry.
Segments
The Company has adopted the provisions of Financial Accounting
Standards Board Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company identifies its operating segments based on business activities. The
Company's chief operating decision maker reviews financial information to manage
the business consistent with the manner presented in the consolidated financial
statements. As the Company acquires and integrates new businesses it evaluates,
based on the nature, size and integration and management strategies, whether it
has separate reportable segments. During the three years ended December 31,
1999, the Company had one reportable segment.
Revenue Recognition
Revenue from radio programs and commercial advertising is recognized
when broadcast. Salem's broadcasting customers principally include
not-for-profit charitable organizations and commercial advertisers.
Revenue from the sale of products and services from the Company's other
media businesses is recognized when the products are shipped and the services
are rendered. Revenue from the sale of advertising in CCM's publications is
recognized upon publication. Revenue from the sale of subscriptions to CCM's
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.
The estimated fair value of the barter advertising provided for the years ended
December 31, 1997, 1998 and 1999, was approximately $1,743,000, $2,510,000 and
$2,936,000, respectively. Barter expenses were approximately the same. Barter
advertising provided and barter expenses are included net in broadcasting
operating expenses.
Cash Equivalents
Salem considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents. The recorded amount
for cash and cash equivalents approximates the fair market value.
F-8
41
Property, Plant, Equipment and Software
Property, plant, equipment and software 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
The carrying value of property, plant, equipment and software 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 (if
necessary) to the fair market value of the assets is recorded. No adjustments to
the carrying amounts of property, plant, equipment and software have been made
during the years ended December 31, 1997, 1998 and 1999.
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:
Broadcast licenses...................................... 10 - 25 years
Noncompetition agreements............................... 3 - 5 years
Customer lists and contracts............................ 10- 15 years
Favorable and assigned leases........................... Life of the lease
Goodwill................................................ 15 - 40 years
Other................................................... 5 - 10 years
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 (if necessary) to the fair market value
of these assets is recorded. No adjustments to the carrying amounts of
intangible assets have been made during the year ended December 31, 1997, 1998
and 1999.
Bond Issue Costs
Bond issue costs are being amortized over the term of the Notes as an
adjustment to interest expense.
Tax Reimbursements to S Corporation Shareholders
"Tax reimbursements to S Corporation shareholders" represents
additional salary payments made in the amount necessary to satisfy individual
federal and state income tax liabilities of the S Corporation shareholders on
the earnings of New Inspiration and Golden Gate prior to the Reorganization.
F-9
42
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 SFAS No. 123, "Accounting for
Stock-Based Compensation."
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.
Federal and state income taxes (except for 1.5% state franchise tax)
have not been provided through August 12, 1997 for New Inspiration and Golden
Gate because they were S Corporations and income tax attributes of S
Corporations are passed through to their shareholders.
Basic and Diluted Net Loss Per Share
Basic net loss per share has been computed using the weighted average
number of shares of common stock outstanding during the period. Diluted net loss
per share is computed using the weighted average number of shares of common
stock outstanding during the period plus the dilutive effects of stock options.
Options to purchase 304,500 shares of common stock with exercise prices
greater than the average market prices of common stock were outstanding at
December 31, 1999. These options were excluded from the respective computations
of diluted net loss per share because their effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
Numerator:
Net loss .................... $(2,378,000) $(1,581,000) $(8,045,000)
Denominator:
Weighted average shares ..... 16,661,088 16,661,088 20,066,066
----------- ----------- -----------
Basic and diluted net loss
per share ................... $ (0.14) $ (0.09) $ (0.40)
=========== =========== ===========
Concentrations of Business and Credit Risks
The majority of the Company's operations are conducted in several
locations across the country. The Company's credit risk is spread across a large
number of customers, none of which accounted 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 management's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made to the prior year financial
statements to conform to the current year presentation.
F-10
43
2. ACQUISITIONS AND DISPOSITIONS OF ASSETS
Pro forma information to present operating results as if the
acquisitions discussed below had occurred at the beginning of the year acquired
is not presented because the Company, generally, changes the programming format
of the radio stations such that the source and nature of revenue and operating
expenses are significantly different than they were prior to the acquisition
and, accordingly, historical and pro forma financial information has not been
considered meaningful by management. Pro forma and historical financial
information of radio stations acquired where the format was not changed and of
other media businesses acquired have not been significant to the consolidated
financial position or operating results of the Company.
The Company used the purchase method of accounting for all of the
acquisitions described below, and, accordingly, the operating results of the
acquired assets and businesses are included in the consolidated operating
results since the dates of acquisition.
During the year ended December 31, 1999, the Company purchased the assets
(principally intangibles) of the following radio stations:
PURCHASE
ACQUISITION DATE STATION MARKET SERVED PRICE
- ---------------- ------- ------------- --------------
(IN THOUSANDS)
April 30, 1999............ KKOL-AM Seattle, WA $ 1,750
July 23, 1999............. KCTK-AM Phoenix, AZ 5,000
September 13, 1999........ WLSY-FM Louisville, KY 2,500
September 13, 1999........ WRVI-FM Louisville, KY 2,500
-------
$11,750
=======
The purchase price has been allocated to the assets acquired as
follows:
AMOUNT
--------------
(IN THOUSANDS)
ASSET
-----
Property and equipment........................... $ 2,160
Broadcast licenses............................... 9,557
Goodwill and other intangibles................... 33
--------
$ 11,750
========
In addition to the stations above, in January 1999, the Company
purchased the assets of OnePlace for $6.2 million, and all the outstanding
shares of stock of CCM for $1.9 million. The purchases were financed primarily
by an additional borrowing.
On March 11, 1999, the Company acquired the assets of Christian
Research Report (CRR) for $300,000. The publications of CRR follow the
contemporary Christian music industry.
On August 25, 1999, the Company purchased the assets of the Internet
sites AudioCentral.com and ChristianBooks.com for $400,000 cash and $600,000
non-cash consideration.
F-11
44
On October 19, 1999, the Company acquired the assets of Gospel Media
Network, Inc., relating to the audio and video streaming of content on the
GospelMedia.com Internet site, for $475,000.
On November 30, 1999, the Company acquired the assets of the Involved
Christian Radio Network, which provides streaming media on its Internet site,
ICRN.com, for $3.0 million.
The revenue and operating expenses of these businesses are reported as
"other media" on our consolidated statements of operations.
The table below summarizes the other media acquisitions during 1999:
PURCHASE
ACQUISITION DATE ENTITY PRICE
- ---------------- ------ --------------
(IN THOUSANDS)
January 29, 1999............ OnePlace $ 6,150
January 29, 1999............ CCM 1,886
March 11, 1999.............. Christian Research Report 300
August 25, 1999............. AudioCentral 1,000
October 19, 1999............ Gospel Media Network, Inc. 475
November 30, 1999........... Involved Christian Radio Network 3,000
-------
$12,811
=======
The purchase price has been allocated to the assets acquired and
liabilities assumed as follows:
AMOUNT
--------------
(IN THOUSANDS)
Assets
Accounts receivable and other current assets.. $ 1,453
Property, plant, equipment and software....... 5,764
Subscriber base and domain names.............. 2,246
Goodwill and other intangible assets.......... 8,790
Other assets.................................. 607
-------
18,860
Liabilities
Accounts payable and other current liabilities (3,437)
Other long-term liabilities.................... (2,612)
-------
(6,049)
-------
Purchase price................................. $12,811
=======
During the year ended December 31, 1998, the Company purchased the
assets (principally intangibles) of the following radio stations:
PURCHASE
ACQUISITION DATE STATION MARKET SERVED PRICE
---------------- ------- ------------- --------
(IN THOUSANDS)
August 21, 1998....... KKMO-AM Tacoma, WA $ 500
August 26, 1998....... KIEV-AM Los Angeles, CA 33,210
October 30, 1998...... KYCR-AM Minneapolis, MN 500
October 30, 1998...... KTEK-AM Houston, TX 2,061
-------
$36,271
=======
The purchase price has been allocated to the assets acquired as
follows:
AMOUNT
ASSET --------------
----- (IN THOUSANDS)
Property and equipment.............. $ 4,507
Broadcast licenses.................. 29,627
Goodwill and other intangibles...... 2,137
-------
$36,271
=======
F-12
45
In 1998, the Company sold the assets (principally intangibles) of radio
stations KTSL-FM (Spokane, WA) for $1.3 million and KAVC-FM (Lancaster, CA) for
$1.6 million.
During the year ended December 31, 1997, the Company purchased the
assets (principally intangibles) of the following radio stations:
PURCHASE
ACQUISITION DATE STATION MARKET SERVED PRICE
---------------- ------- ------------- --------------
(IN THOUSANDS)
January 21, 1997...... WHK-AM Cleveland, OH $ 6,220
February 20, 1997..... WHK-FM Canton, OH 5,903
February 20, 1997..... WHLO-AM Akron, OH 1,995
February 28, 1997..... WEZE-AM Boston, MA 7,030
April 2, 1997......... KTKZ-AM Sacramento, CA 1,385
July 18, 1997......... WITH-AM Baltimore, MD 1,114
July 18, 1997......... WTSJ-AM Cincinnati, OH 1,114
October 24, 1997...... WCCD-AM Cleveland, OH 700
-------
$25,461
=======
The purchase price has been allocated to the assets acquired as
follows:
AMOUNT
--------------
(IN THOUSANDS)
ASSET
-----
Property and equipment....................... $ 3,634
Broadcast licenses and other intangibles..... 21,827
--------
$ 25,461
========
In November 1997, the Company sold the assets (principally intangibles)
of radio station WPZE-AM (Boston, MA) for $5 million. Proceeds from the sale
were initially being held by a qualified intermediary under a like-kind exchange
agreement to preserve the Company's ability to effect a tax-deferred exchange.
The Company did not effect a tax-deferred exchange and received the proceeds
from the sale in 1998.
3. DUE FROM STOCKHOLDERS
The amounts due from stockholders represent short-term advances made to
stockholders of the Company and repaid in January 2000.
4. PROPERTY, PLANT, EQUIPMENT AND SOFTWARE
Property, plant, equipment and software consisted of the following at
December 31:
DECEMBER 31,
-------------------
1998 1999
------- -------
(IN THOUSANDS)
Land........................................ $ 1,440 $ 1,974
Buildings................................... 1,417 1,742
Office furnishings and equipment............ 9,775 12,952
Antennae, towers and transmitting equipment. 25,665 32,672
Studio and production equipment............. 14,817 18,613
Computer software........................... -- 4,427
Record and tape libraries................... 511 527
Automobiles................................. 69 166
Leasehold improvements...................... 3,797 4,877
Construction-in-progress.................... 8,767 4,658
------- -------
66,258 82,608
Less accumulated depreciation............... 25,509 31,943
------- -------
$40,749 $50,665
======= =======
F-13
46
5. LONG-TERM DEBT
Long-term debt consisted of the following at:
DECEMBER 31,
---------------------
1998 1999
-------- --------
(IN THOUSANDS)
Revolving line of credit with banks.......... $ 24,000 $ --
9 1/2% Senior Subordinated Notes due 2007.... 150,000 100,000
Obligation to acquire KIEV-AM property....... 2,810 2,810
Unsecured note payable to stockholder with
interest at 8 1/4%......................... 1,800 --
Capital leases acquired through OnePlace..... -- 344
Seller financed note to acquire GospelMedia.. -- 181
-------- --------
178,610 103,335
Less current portion......................... -- 3,248
-------- --------
$178,610 $100,087
======== ========
Since the revolving line of credit with banks carries a floating
interest rate, the carrying amount approximates its fair market value. The Notes
were issued in September 1997 at par. At December 31, 1999, their fair market
value was approximately $100.1 million.
Revolving Line of Credit with Banks
Salem has a credit agreement with six banks (the Credit Agreement) to
provide for borrowing capacity of up to $150 million under a revolving line of
credit. The maximum amount that the Company may borrow under the Credit
Agreement is limited by the Company's debt to cash flow ratio, adjusted for
recent radio station acquisitions as defined in the Credit Agreement (the
Adjusted Debt to Cash Flow Ratio). At December 31, 1999, the maximum Adjusted
Debt to Cash Flow Ratio allowed under the Credit Agreement was 6.00 to 1.00. At
December 31, 1999, the Adjusted Debt to Cash Flow Ratio was 2.48 to 1.00,
resulting in total borrowing availability of approximately $131.4 million. The
maximum Adjusted Debt to Cash Flow Ratio allowed under the Credit Agreement is
6.00 to 1 through December 31, 2000. Thereafter, the maximum ratio will decline
periodically until January 1, 2004, at which point it will remain at 4.00 to 1
through June 2006.
The note underlying the revolving line of credit bears interest at a
fluctuating base rate plus a spread that is determined by Salem's Adjusted Debt
to Cash Flow Ratio. At Salem's option, the base rate is either a bank's prime
rate or LIBOR. For purposes of determining the interest rate the prime rate
spread ranges from 0% to 1%, and the LIBOR spread ranges from .875% to 2.25%.
Interest is payable quarterly. Commencing March 31, 2001, and every quarter
thereafter, the commitment under the Credit Agreement reduces by increasing
amounts through June 30, 2006, when it expires.
F-14
47
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 Salem to maintain certain
financial ratios and other covenants. Salem has pledged all of its assets as
collateral under the Credit Agreement. Additionally, all the Company's stock
holdings in its subsidiaries are pledged as collateral.
In July 1999, the Company used a portion of the net proceeds of the
Offering to repay all amounts due under a previous revolving line of credit with
the banks, and to repurchase $50 million principal amount of the Notes. The
Company wrote off certain deferred financing costs (including bond issue costs
of $1.5 million) and paid a premium of $3.9 million on the Notes. The write-off
and premium of $3,570,000, net of a $1,986,000 income tax benefit, was recorded
as an extraordinary item in the accompanying statement of operations for the
year ended December 31, 1999.
In September 1997, in connection with the issuance of the Notes and the
Credit Agreement the Company repaid all amounts due under a previous revolving
line of credit with the banks. The Company wrote off certain deferred financing
costs and terminated all of its
F-15
48
interest rate swap and cap agreements associated with the line of credit (see
Note 6). The write-off and termination fees of $1,185,000, net of a $659,000
income tax benefit, was recorded as an extraordinary item in the accompanying
statement of operations for the year ended December 31, 1997.
9 1/2% Senior Subordinated Notes due 2007
The Notes bear interest at 9 1/2% per annum, with interest payment
dates on April 1 and October 1, commencing April 1, 1998. Principal is due on
the maturity date, October 1, 2007. The Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after October 1, 2002, 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 (the Company's subsidiaries). The Notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior indebtedness, including the Company's 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 March 1998, the Company consummated an exchange offer for the
original notes (Original Notes) which were issued in September 1997. The
exchange offer commenced when the Company's registration statement under the
Securities Act of 1933 was declared effective. The Notes are identical in all
material respects to the Original Notes except that the Notes do not contain
terms with respect to transfer restrictions. The Notes are fully and
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis by the Guarantors. The Notes are in general freely transferable without
further registration under the Securities Act of 1933.
Other Debt
In August 1998, in connection with the Company's acquisition of
KIEV-AM, the Company agreed to lease the real property on which the station's
towers and transmitter are located for $10,000 per month. The Company also
agreed to purchase the property for $3 million in February 2000. The Company
recorded this transaction in a manner similar to a capital lease. The amount
recorded as a long-term obligation at December 31, 1998, represents the present
value of the future commitments under the lease and purchase contract,
discounted at 8.5%. The obligation is classified as current at December 31,
1999.
At December 31, 1998, the Company owed $1.8 million to one of its
stockholders. The entire amount was paid to the stockholder in April 1999.
F-16
49
In connection with the acquisition of OnePlace in January 1999, the
Company acquired several capital leases related to various data processing
equipment. The obligation recorded at December 31, 1999 represents the present
value of future commitments under the lease agreements.
In connection with the acquisition of Gospel Media Network, Inc., the
Company incurred an obligation to make future payments to the seller. These
payments have been discounted to reflect the present value of the future
commitments.
Maturities of Long-Term Debt
Principal repayment requirements under all long-term debt agreements
outstanding at December 31, 1999, for each of the next five years and thereafter
are as follows:
2000............................... $ 3,189
2001............................... 146
2002............................... --
2003............................... --
2004............................... --
Thereafter......................... 100,000
--------
$103,335
========
6. INTEREST RATE CAP AND SWAP AGREEMENTS
In 1996 and 1997 Salem had entered into interest rate swap and cap
agreements to reduce the impact of changes in interest rates on its
floating-rate long-term debt. In September 1997, in connection with the issuance
of the Notes and the Credit Agreement the Company terminated all of its interest
rate swap and cap agreements for aggregate fees of $417,000. The Company wrote
off these costs (unamortized swap fee of $201,000 and the swap termination fee
of $417,000) in September 1997. This write-off, net of income tax benefit, was
included in the extraordinary loss in the accompanying statement of operations
for the year ended December 31, 1997 (see Note 5).
7. INCOME TAXES
As discussed in Note 1, prior to the Reorganization, New Inspiration
and Golden Gate were S Corporations for income tax purposes. Accordingly, any
federal and state income tax liability on net income of the S Corporations has
been the liability of shareholders of the S Corporations. The S Corporation
status of New Inspiration and Golden Gate was terminated in the Reorganization,
which was effective August 13, 1997, and the income of New Inspiration and
Golden Gate will thereafter be subject to federal and state income taxes. The
accompanying consolidated statements of operations include an unaudited pro
forma income tax adjustment, using an estimated combined effective tax rate of
approximately 40%, to reflect the estimated income tax expense of the Company as
if New Inspiration and Golden Gate had been subject to federal and state income
taxes for the periods presented. In connection with the Reorganization, which
resulted in the termination of the S Corporation status of New Inspiration and
Golden Gate, the Company recorded a deferred tax liability and provision of
approximately $609,000 in December 1997.
In connection with the 1999 acquisition of CCM the Company recorded a
net deferred tax liability of $1,468,000, which was recorded as an increase to
the deferred tax liability and is not reflected in the income tax benefit in
1999.
F-17
50
The consolidated provision (benefit) for income taxes for Salem
consisted of the following at December 31:
1997 1998 1999
-------- ------ ------
(IN THOUSANDS)
Current:
Federal.............................. $ (149) $ -- $ --
State................................ 618 387 509
------- ----- ------
469 387 509
Deferred:
Federal.............................. (1,162) (467) (3,507)
State................................ 140 (263) (599)
-------- ----- -------
(1,022) (730) (4,106)
Current tax benefit reflected in net
extraordinary loss................... (659) -- (1,986)
------- ------ -------
Income tax provision (benefit)......... $ 106 $ (343) $(1,611)
======= ====== =======
The consolidated deferred tax asset and liability consisted of the
following at December 31:
1998 1999
------- ------
(IN THOUSANDS)
Deferred tax assets:
Financial statement accruals not currently
deductible ............................. $ 665 $ 1,140
Net operating loss, AMT credit and other
carryforwards .......................... 2,367 4,846
State taxes ............................... 122 176
Other ..................................... -- 537
------- -------
Total deferred tax assets ................... 3,154 6,699
Valuation allowance for deferred tax assets . (95) (95)
------- -------
Net deferred tax assets ..................... 3,059 6,604
Deferred tax liabilities:
Excess of net book value of property,
plant, equipment and software for
financial reporting purposes over tax
basis ................................... 4,263 4,291
Excess of net book value of intangible
assets for financial reporting purposes
over tax basis .......................... 7,305 7,842
Other ..................................... 629 971
------- -------
Total deferred tax liabilities .............. 12,197 13,104
------- -------
Net deferred tax liabilities ................ $ 9,138 $ 6,500
======= =======
A reconciliation of the statutory federal income tax rate to the
effective tax rate, as a percentage of income before income taxes, is as
follows:
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
---- ---- -----
Statutory federal income tax rate...................... (34)% (34)% (34)%
State income taxes, net................................ 49 4 1
Nondeductible expenses................................. 5 7 7
Exclusion of income taxes of S corporations and the
Partnership.......................................... (76) -- --
Change in taxable entity (S corporation to
C corporation)....................................... 56 -- --
Other, net............................................. 10 5 --
--- --- ---
10% (18)% (26)%
=== === ===
The S Corporations had book income before income taxes of $2,400,000 in
1997. This amount includes the S Corporations' 85% ownership interest in
Beltway.
F-18
51
At December 31, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $13,500,000 which expire in
years 2010 through 2019 and for state income tax purposes of approximately
$10,900,000 which expire in years 2000 through 2014. The Company has federal
alternative minimum tax credit carryforwards of approximately $147,000. For
financial reporting purposes, a valuation allowance of $95,000 has been provided
in 1999 and 1998 to offset a portion of the deferred tax assets related to the
state net operating loss carryforwards.
8. COMMITMENTS AND CONTINGENCIES
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 $4,800,000, $4,800,000 and
$6,000,000 in 1997, 1998, and 1999, respectively.
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, 1999, are as follows:
RELATED
PARTIES OTHER TOTAL
------- ------- -------
(IN THOUSANDS)
2000....................... $ 1,501 $ 4,827 $ 6,328
2001....................... 1,515 4,055 5,570
2002....................... 1,244 3,316 4,560
2003....................... 1,160 3,119 4,279
2004....................... 990 2,921 3,911
Thereafter................. 2,994 11,658 14,652
------- ------- -------
$ 9,404 $29,896 $39,300
======= ======= =======
The Company is involved in certain legal actions and claims arising in
the normal course of business. It is the opinion of management that such
litigation and claims will be resolved without material effect on the Company's
consolidated financial position, operations and cash flows.
The Company has a deferred compensation agreement with one of its
officers, which provides for retirement payments to the officer for a period of
ten consecutive years, if he remains employed by the Company until age 60. The
retirement payments are based on a formula defined in the agreement. The
estimated obligation under the deferred compensation agreement is being provided
for over the service period. At December 31, 1998 and 1999, a liability of
approximately $432,000 and $494,000 respectively, is included in other
liabilities in the accompanying balance sheet for the amounts earned under this
agreement.
9. STOCK OPTION PLAN
The 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 1,000,000 shares were authorized under the Plan. Options generally
vest over five years and have a maximum term of 10 years. 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, 1999, the Company had 695,500 shares
available for future grants under its Plan.
A summary of stock option activity is as follows:
WEIGHTED AVERAGE
OPTION PRICE WEIGHTED AVERAGE CONTRACTUAL LIFE
OPTIONS PER SHARE EXERCISE PRICE REMAINING IN YEARS
------- --------------- ---------------- ------------------
Outstanding at December 31, 1998 -- -- -- --
Grants 304,500 $22.50 - $27.06 $22.65 9.5
------- --------------- ------ ---
Outstanding at December 31, 1999 304,500 $22.50 - $27.06 $22.65 9.5
======= =============== ====== ===
F-19
52
No options were exercisable as of December 31, 1999.
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized in the results of operations for the stock option
grants. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date, amortized over the vesting
period, for awards in 1999 consistent with the provisions of SFAS No. 123, the
Company's net income and basic earnings per share would have been reduced to the
pro forma amounts as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
Net loss $(2,378) $(1,581) $(8,045)
Pro forma net loss (2,378) (1,581) (8,845)
Pro forma basic and diluted loss per share $ (0.14) $ (0.09) $ (0.44)
Using the Black-Scholes valuation model, the per share weighted-average fair
value of stock options granted during the year ended December 31, 1999 was
$11.36. The pro forma effect on the Company's net loss and basic and diluted
loss per share for 1999 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 weighted-average
assumptions used for grants made in 1999: dividend yield of 0%; expected
volatility of 58.0%; risk-free interest rate of 5.8%; expected life of 4 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options. The assumptions used in option valuation models
are highly subjective, particularly the expected stock price volatility of the
underlying stock. Because changes in these subjective input assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not provide a reliable single measure of the fair value of its
employee stock options.
10. RELATED PARTY TRANSACTIONS
In December 1998, the Company borrowed $1.8 million from a stockholder
pursuant to a promissory note with a revolving principal amount of up to $2.5
million. The outstanding balance on the note as of December 31, 1998 was $1.8
million (see Note 5). The note was repaid in full and cancelled in April 1999.
In January 1998, the Company borrowed $1.5 million from another
stockholder pursuant to another promissory note with a revolving principal
amount of up to $2.5 million. The Company repaid all amounts outstanding in May
1998 and the note was cancelled.
A stockholder's trust owns real estate on which certain assets of two
radio stations are located. One of the stations, KAVC-FM, was sold during 1998.
Salem, in the ordinary course of its business, entered into two separate lease
agreements with this trust. Rental expense included in operating expense for
1997, 1998 and 1999 amounted to $57,000, $60,000 and $48,000, respectively.
Land and buildings occupied by various Salem radio stations are leased
from the stockholders of Salem. Rental expense under these leases included in
operating expense for 1997, 1998 and 1999 amounted to $1.0 million, $1.0 million
and $1.4 million, respectively.
In October 1997, the Company assigned its contract with a tower
construction company to build a broadcast tower in Houston to the principal
shareholders subject to the principal shareholders obtaining financing. The
principal shareholders obtained such financing on December 31, 1997 and
reimbursed the Company for its costs and expenses under the contract, which
amounted to approximately $3.7 million.
In June 1997, the Company entered into a local marketing agreement
(LMA) with a corporation, Sonsinger, Inc. (Sonsinger), owned by two of Salem's
stockholders for radio station KKOL-AM. The stockholders and the Company are
parties to an Option to Purchase Agreement whereunder the Company had been
granted an option to purchase KKOL-AM from the stockholders at any time on or
before December 31, 1999 at a price equal to the lower of the cost of the
station to the stockholders, $1.4 million, and its fair market value as
determined by an independent appraisal. The Company acquired KKOL-AM from
Sonsinger on April 30, 1999 for $1.4 million and associated real estate for
$400,000. Under the LMA, Salem programs KKOL-AM and sells all the airtime.
Salem retains all of the revenue and incurs all of the expenses related to the
operation of KKOL-AM and incurred approximately $64,000, $164,000 and $43,000 in
1997, 1998 and 1999, respectively in LMA fees to Sonsinger.
F-20
53
From time to time, the Company rents an airplane and a helicopter from
a company which is owned by one of the principal stockholders. As approved by
the independent members of the Company's board of directors, the Company rents
these aircraft on an hourly basis at below-market rates and uses them for
general corporate needs. Total rental expense for these aircraft for 1997, 1998
and 1999 amounted to approximately $60,000, $69,000 and $156,000, respectively.
11. DEFINED CONTRIBUTION PLAN
In 1993, the Company established a 401(k) defined contribution plan
(the Plan), which covers all eligible employees (as defined in the Plan).
Participants are allowed to make nonforfeitable contributions up to 15% of their
annual salary, but may not exceed the annual maximum contribution limitations
established by the Internal Revenue Service. The Company currently matches 25%
of the amounts contributed by each participant but does not match participants'
contributions in excess of 6% of their compensation per pay period. Prior to
January 1, 1999, the Company matched 10% of the amounts contributed by each
participant but did not match participants' contributions in excess of 10% of
their compensation per pay period. The Company contributed and expensed $80,000,
$87,000 and $237,000 to the Plan in 1996, 1997 and 1999 respectively.
12. STOCKHOLDERS' EQUITY
On March 31, 1999, the Company changed its domicile from California to
Delaware (the Reincorporation). In conjunction with the Reincorporation, the
Company's capital structure was changed to authorize 80,000,000 shares of Class
A common stock, $0.01 par value, 20,000,000 shares of Class B common stock,
$0.01 par value, and 10,000,000 shares of preferred stock, $0.01 par value. In
the Reincorporation, the previously outstanding 5,553,696 shares of common stock
were converted into 11,107,392 shares of Class A common stock and 5,553,696
shares of Class B common stock.
In April 1999, the Company filed a registration statement for an
initial public offering (the Offering) of its Class A common stock with the
Securities and Exchange Commission. In connection with the Offering, the
Company's board of directors approved a 67-for-one stock dividend on the
Company's Class A and Class B common stock. All references in the accompanying
financial statements to Class A and Class B common stock and per share amounts
have been retroactively adjusted to give effect to the stock dividend.
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.
The Company established, in connection with the completion of the
Offering, the 1999 Stock Incentive Plan under which awards of stock options,
performance awards, restricted stock, stock appreciation rights, stock payments,
dividend equivalents, stock bonuses, stock sales, phantom stock and other
stock-based benefits may be granted (see Note 9).
On May 26, 1999, the Company awarded 75,000 shares of Class A common
stock to an officer of the Company. The Company also agreed to pay the
individual federal and state income tax liabilities associated with the stock
award. The Class A common stock award was valued based on the initial public
offering price and along with the compensation resulting from the payment of the
individual federal and state income taxes associated with the award was
recognized as compensation expense of $2.6 million during the year ended
December 31, 1999.
Upon the closing of the Company's initial public offering, the Company
issued 6,720,000 shares of the Company's Class A common stock at $22.50 per
share, generating gross offering proceeds of $151.2 million. After deducting a
$9.6 million underwriting discount and $1.5 million in other related expenses,
the net proceeds to Salem were $140.1 million.
In addition, two selling stockholders sold 2,940,000 shares of the
Company's Class A common stock (including 1,260,000 shares sold by the
stockholders as a result of the exercise by the managing underwriters of their
over-allotment option subsequent to the initial offering) to the underwriting
syndicate at the same price per share raising gross proceeds of $66.2 million.
After deducting a $4.2 million underwriting discount the net proceeds to the
selling stockholders were $62.0 million. Salem did not receive any monies from
the sale of shares of the Company's Class A common stock by these selling
stockholders.
F-21
54
13. SUBSEQUENT EVENTS (Unaudited)
Subsequent to December 31, 1999, the Company purchased the assets
(principally intangibles) of the following radio stations:
PURCHASE
ACQUISITION DATE STATION MARKET SERVED PRICE
- ---------------- ------- ------------- --------------
(IN THOUSANDS)
January 4, 2000....... WNIV-AM
and WLTA-AM Atlanta, GA $ 8,000
January 10, 2000...... WABS-AM Washington, D.C. 4,100
January 25, 2000...... KJQI-FM San Francisco, CA 8,000
February 15, 2000..... KAIM-AM/FM Honolulu, HI 1,800
February 16, 2000..... KHNR-AM
and KGU-AM Honolulu, HI 1,700
-------
$23,600
=======
In November 1999, the Company agreed to purchase radio station WGKA-AM,
Atlanta, Georgia, for $8 million. The Company anticipates this purchase will
close in April 2000.
In December 1999, the Company agreed to purchase all of the outstanding
shares of stock of Reach Satellite Network, Inc. (RSN), for $3.1 million. RSN
owns and operates Solid Gospel, a radio broadcasting network that produces and
distributes music programming to its own radio stations WBOZ-FM and WVRY-FM,
Nashville, Tennessee, and to independent radio station affiliates. RSN also owns
and operates SolidGospel.com, a web site on the Internet. The Company
anticipates this purchase will close in April 2000.
On January 18, 2000, the Company purchased real property in Dallas,
Texas, for $885,000.
In January 2000, the Company agreed to exchange its radio station
KPRZ-FM, Colorado Springs, Colorado, plus $7.5 million, for radio station
KSKY-AM, Dallas, Texas. The Company anticipates this exchange will occur in May
2000.
On February 25, 2000, the Company purchased the KIEV-AM transmitter
site in Los Angeles, California, for $2.8 million. This amount was included in
current portion of long-term debt at December 31, 1999.
In March 2000, the Company agreed to purchase the following radio
stations for $185.6 million: KDGE-FM, Dallas, Texas, KALC-FM, Denver, Colorado,
KXMX-FM and KEZY-AM, Los Angeles, California, WYGY-FM and WBOB-AM, Cincinnati,
Ohio, and WRMR-AM and WKNR-AM, Cleveland, Ohio. The Company anticipates this
purchase will close in the third quarter of 2000. In connection with this
agreement the Company deposited a $25 million irrevocable letter of credit with
an escrow agent. Under the agreement Salem is subject to a liquidated damages
provision. If the Company fails to consummate the purchase or otherwise
terminates the agreement it is required to pay the seller $21.4 million in
addition to the $25 million letter of credit, which would be disbursed to the
seller.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
March 31 June 30 September 30 December 31
-------------------- -------------------- -------------------- ----------------------
1998 1999 1998 1999(1) 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- -------- ----------
(in thousands, except per share data)
Total revenue $ 17,702 $ 21,520 $ 18,702 $ 22,718 $19,232 $ 23,100 $ 22,255 $ 26,208
Net operating income 2,932 2,936 3,399 (89) 4,067 2,345 3,514 2,788
Net income (loss) before
extraordinary item (574) (1,308) (785) (3,516) 184 (138) (406) 487
Extraordinary loss -- -- -- -- -- (3,570) -- --
Net income (loss) $ (574) $ (1,308) $ (785) $ (3,516) $ 184 $ (3,708) $ (406) $ 487
Basic and diluted earnings
(loss) per share before
extraordinary item $ (0.03) $ (0.08) $ (0.05) $ (0.21) $ 0.01 $ (0.01) $ (0.02) $ 0.02
Extraordinary loss per share -- -- -- -- -- (0.15) -- --
Basic and diluted earnings
(loss) per share $ (0.03) $ (0.08) $ (0.05) $ (0.21) $ 0.01 $ (0.16) $ (0.02) $ 0.02
- ----------------
(1) Includes a charge of $2.6 million ($1.9 million net of tax) related to stock
and related cash award made during the quarter.
F-22
55
SALEM COMMUNICATIONS CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS DEDUCTIONS
------------------------- ---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COST AND OTHER BAD DEBT END OF
Description PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
- ----------- ------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Year Ended December 31, 1997 .. $1,005 $1,283 $ -- $(1,039) $1,249
Allowance for doubtful accounts
Year Ended December 31, 1998 .. 1,249 2,087 -- (2,474) 862
Allowance for doubtful accounts
Year Ended December 31, 1999 .. 862 2,670 -- (1,779) 1,753
Allowance for doubtful accounts
F-23
56
SALEM COMMUNICATIONS CORPORATION
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
4.16 Amendment No. 1 to First Amended and Restated Credit Agreement, by
and among Salem, The Bank of New York, as Administrative Agent for
the Lenders, Bank of America, N.A., as Documentation Agent and the
Lenders party thereto.
4.17 Amendment No. 2 to First Amended and Restated Credit Agreement, by
and among Salem, The Bank of New York, as Administrative Agent for
the Lenders, Bank of America, N.A., as Documentation Agent and the
Lenders party thereto.
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).
10.05.16 Atenna/tower lease between Salem Media of Colorado, Inc. and
Atsinger Family Trust/Epperson Family Limited Partnership
(KRKS-AM/KBJD-AM/ Denver, Colorado).
10.08.01 Local Marketing Agreement dated August 13, 1999 between Concord
Group, Inc. and Radio 1210, Inc.
10.08.02 Asset Purchase Agreement dated as of August 18, 1999, by and
between Salem Media of Georgia, Inc. and Genesis Communications,
Inc. (WNIV-FM, Atlanta, Georgia and WLTA-FM, Alpharetta, Georgia.
10.08.03 Asset Purchase Agreement dated as of November 29, 1999, by and
among JW Broadcasting, Inc., Salem Media of Georgia, Inc. and
Salem Communications Corporation (WGKA-AM, Atlanta, Georgia).
21.01 Subsidiaries of Salem.
27.01 Financial Data Schedule.
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+ Incorporated by reference to the exhibit of the same number, unless otherwise
noted, of Salem's Registration Statement on Form S-4 (No. 333-41733), as
amended, as declared effective by the Securities and Exchange Commission on
February 9, 1998.
++ Incorporated by reference to the exhibit of the same number, unless otherwise
noted, of Salem's Current Report on Form 8-K, filed with the Securities and
Exchange Commission on September 4, 1998.
++ Incorporated by reference to the exhibit of the same number, unless otherwise
noted, of Salem's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1999.
** Incorporated by reference to the exhibit of the same number, unless otherwise
noted, of Salem's Current Report on Form 8-K, filed with the Securities and
Exchange Commission on April 14, 1999.
* Incorporated by reference to the exhibit of the same number to the Company's
Registration Statement on Form S-1 (No. 333-76649) as amended, as declared,
effective by the Securities and Exchange Commission on June 30, 1999.