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.
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 ===========
- ------------ (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.
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)
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.
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
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.
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.
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.
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.
ITEM 3.
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.
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.
PART II
ITEM 5.
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.
------------------------------- 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.
ITEM 6.
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.
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(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:
(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.
ITEM 7.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
ITEM 7A.
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.
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.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
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.
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.
ITEM 12.
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.
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.
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.
2. Exhibits.
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.
(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.
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.
PAGE ---- Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1999
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
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
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
See accompanying notes.
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data)
See accompanying notes.
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data)
See accompanying notes.
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes.
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.
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.
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.
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:
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.
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.
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 =======
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 ======= =======
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.
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
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.
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.
The consolidated provision (benefit) for income taxes for Salem consisted of the following at December 31:
The consolidated deferred tax asset and liability consisted of the following at December 31:
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:
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.
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:
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:
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.
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.
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):
- ---------------- (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.
SALEM COMMUNICATIONS CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
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.
- --------------- + 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.