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SALM > SEC Filings for SALM > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for SALEM COMMUNICATIONS CORP /DE/

Form 10-Q for SALEM COMMUNICATIONS CORP /DE/


9-Nov-2012

Quarterly Report


ITEM 2. 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 the condensed consolidated financial statements and related notes included elsewhere in this report. Our condensed consolidated financial statements are not directly comparable from period to period due to acquisitions and dispositions of selected assets of radio stations and acquisitions of various Internet and publishing businesses. See Note 5 of our condensed consolidated financial statements for additional information.

Salem is a domestic multi-media company with integrated business operations covering radio broadcasting, publishing and the Internet. Our programming is intended for audiences interested in Christian and conservative opinion content.

Broadcast Segment

Broadcast revenues are impacted by the program rates our radio stations charge, the level of broadcast airtime sold and by the advertising rates our radio stations and networks charge. The rates for block programming time are based upon our stations' ability to attract audiences that will support the program producers through contributions and purchases of their products. Advertising rates are based upon the demand for advertising time, which in turn is based on our stations and networks' ability to produce results for their advertisers. We do not subscribe to traditional audience measuring services for most of our radio stations. Instead, we have marketed ourselves to advertisers based upon the responsiveness of our audiences. In selected markets, we do subscribe to Arbitron, which develops quarterly reports to measure a radio station's audience share in the demographic groups targeted by advertisers. Each of our radio stations and our networks has a pre-determined level of time that they make available for block programming and/or advertising, which may vary at different times of the day.

Arbitron has developed technology to collect data for its ratings service. The PPM is a small device that does not require active manipulation by the end user and is capable of automatically measuring radio, television, Internet, satellite radio and satellite television signals that are encoded for the service by the broadcaster. The PPM offers a number of advantages over the traditional diary ratings collection system including ease of use, more reliable ratings data and shorter time periods between when advertising runs and when audience listening or viewing habits can be reported. This service is already in a number of our markets and is scheduled to be introduced in more markets in the future. It is not clear what long-term impact, if any, the introduction of the PPM will have on our revenues for stations that subscribe to Arbitron.

As is typical in the radio broadcasting industry, our second and fourth quarter advertising revenue generally exceeds our first and third quarter advertising revenue. This seasonal fluctuation in advertising revenue corresponds with quarterly fluctuations in the retail advertising industry. Additionally, we experience increased demand for advertising during election years by way of political advertisements. Quarterly revenue from the sale of block programming time does not tend to vary significantly because program rates are generally set annually and are recognized on a per program basis. We currently program 39 of our stations with our Christian Teaching and Talk format, which is talk programming with Christian and family themes. We also program 25 News Talk stations, 11 Contemporary Christian Music stations, 10 Business format stations, and 7 Spanish-language Christian Teaching and Talk stations. The business format features financial experts, business talk, and nationally recognized Bloomberg programming. The business format operates similar to our Christian Teaching and Talk format as it features long-form block programming.

Our cash flow is historically affected by a transitional period experienced by radio stations when, due to the nature of the radio station, our plans for the market and other circumstances, we find it beneficial to change its format. This transitional period is when we develop a radio station's listener and customer base. During this period, a station may generate negative or insignificant cash flow.

In the broadcasting industry, radio stations often utilize trade or barter agreements to exchange advertising time for goods or services 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 2011, we sold 97% of our broadcast revenue for cash. In addition, it is our general policy not to preempt advertising paid for in cash with advertising paid for in trade.

The primary operating expenses incurred in the ownership and operation of our radio stations include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities,
(iii) marketing and promotional expenses and (iv) music license fees. In addition to these expenses, our network incurs programming costs and lease expenses for satellite communication facilities. We also incur and expect to continue to incur significant depreciation, amortization and interest expense as a result of completed and future acquisitions and existing and future borrowings.


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Internet Segment

Salem Web Network™ and our Internet business earns revenues from the sales of streaming services, sales of advertising and, to a lesser extent, sales of software, software support contracts and consumer products such as DVD's and editorial products. The revenues of these businesses are reported as Internet revenue on our Condensed Consolidated Statements of Operations.

The primary operating expense incurred in the ownership and operation of our Internet businesses include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities,
(iii) marketing and promotional expenses and (iv) streaming costs.

Publishing Segment

Our publishing business, Salem Publishing™, earns revenues from advertising in and subscriptions to our magazine publications and from book sales. Xulon Press™ generally earns its revenue from fees paid by authors in association with the publishing of their books. The revenues of these businesses are reported as publishing on our Condensed Consolidated Statements of Operations.

The primary operating expenses incurred by Salem Publishing™ include:
(i) employee salaries, commissions and related employee benefits and taxes,
(ii) facility expenses such as rent and utilities, (iii) marketing and promotional expenses and (iv) printing and production costs, including paper costs.

We maintain a website at www.salem.cc. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are available free of charge through our website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). Any information found on our website is not a part of, or incorporated by reference into, this or any other report of the company filed with, or furnished to, the SEC.

OVERVIEW

Our radio-broadcasting segment derives revenue primarily from the sale of broadcast time and radio advertising on a national and local basis.

Our principal sources of broadcast revenue include:

• the sale of block program time, both to national and local program producers;

• the sale of advertising time on our radio stations, both to national and local advertisers; and

• the sale of advertising time on our national radio network.

The rates we are able to charge for broadcast time and advertising time are dependent upon several factors, including:

• audience share;

• how well our stations perform for our clients;

• the size of the market;

• the general economic conditions in each market; and

• supply and demand on both a local and national level.

Our principal sources of Internet revenue include:

• the sale of Internet advertising;

• the support and promotion to stream third-party content on our websites;

• sales of software and support services; and

• product sales and royalties for on-air host materials.

Our principal sources of publishing revenue include:

• subscription fees for our magazines;

• the sale of print magazine advertising;

• fees from authors for book publishing; and

• the sale of books.


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RESULTS OF OPERATIONS

Three months ended September 30, 2012 compared to the three months ended September 30, 2011

The following factors affected our results of operations and cash flows for the three months ended September 30, 2012 as compared to the same period of the prior year:

Financing

• On September 28, 2012, we paid a quarterly common stock dividend of $0.9 million, or $0.035 per share.

• On September 12, 2012, we amended and restated the original affiliate line of credit with Roland S. Hinz, a Salem board member, to increase the unsecured revolving line of credit by $6.0 million for a total line of credit of up to $12.0 million, the full amount of which was outstanding at September 30, 2012.

Acquisitions

• On August 31, 2012, we completed the acquisition of radio station WLCC-AM, Tampa, Florida, for $1.2 million.

• On August 30, 2012, we purchased SermonSpice.com for $3.0 million.

Net Broadcasting Revenue



                                                               Three Months Ended September 30,
                                       2011         2012        Change $      Change %          2011               2012
                                                   (Dollars in thousands)                       % of Total Net Revenue
Net Broadcast Revenue                $ 44,793     $ 45,895     $    1,102           2.5 %          82.2 %             80.9 %
Same Station Net Broadcast Revenue   $ 44,763     $ 45,721     $      958           2.1 %

Net broadcast revenues increased over the same period of the prior year due to a $1.1 million increase in political advertisements as well as a $0.3 million increase in block programming revenue primarily on our Christian Teaching and Talk format stations partially offset by a reduction in the number of infomercials. Increases in block programming revenues reflect annual rate increases and additional time sold. Increases in advertising revenues reflect higher volume due to advertisers purchasing more air-time or participation in listener purchasing programs.

The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source:

                                          Three Months Ended September 30,
                                           2011                      2012
                                               (Dollars in thousands)
           Block program time:
           National                $ 10,913        24.3 %    $ 10,992        24.0 %
           Local                      7,673        17.1 %       7,972        17.4 %

                                     18,586        41.4 %      18,964        41.3 %
           Advertising:
           National                   3,424         7.6 %       3,570         7.8 %
           Local                     15,750        35.2 %      15,730        34.2 %

                                     19,174        42.8 %      19,300        42.0 %
           Infomercials               1,603         3.6 %       1,487         3.2 %
           Network                    3,521         7.9 %       4,173         9.1 %
           Other                      1,909         4.3 %       1,971         4.3 %

           Net broadcast revenue   $ 44,793       100.0 %    $ 45,895       100.0 %

Internet Revenue

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Internet Revenue $ 6,686 $ 7,800 $ 1,114 16.7 % 12.3 % 13.8 %

The increases in Internet revenue reflect improving overall economic conditions, a higher demand for Internet advertisements, and growth from our Internet acquisitions that typically generate revenues across all of our web-based platforms. Banner advertisements, including those on our station websites, increased $1.1 million, including $0.3 million of political revenue, primarily due to higher demand for placement from our advertisers and secondarily to rate increases.


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Publishing Revenue

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Publishing Revenue $ 3,024 $ 3,024 $ - - % 5.5 % 5.3 %

Publishing revenue increased from higher submission fees and book sales with Xulon Press that were offset by declines in subscription revenues from our print magazines as a result of a lower number of subscribers.

Broadcast Operating Expenses



                                                               Three Months Ended September 30,
                                       2011         2012        Change $      Change %          2011               2012
                                            (Dollars in thousands)                              % of Total Net Revenue
Broadcast Operating Expenses         $ 29,198     $ 30,628     $    1,430           4.9 %          53.6 %             54.0 %
Same Station Net Broadcast
Operating Expenses                   $ 29,117     $ 30,452     $    1,335           4.6 %

Increases in broadcast operating expenses include higher variable costs associated with revenue growth. These costs include a $0.7 million increase in personnel-related costs including commissions, a $0.5 million increase in bad debt expense, a $0.2 million increase in facility related costs, and a $0.1 million increase in music license fees. These increases were partially offset by a reduction in advertising expense of $0.1 million.

Internet Operating Expenses

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Internet Operating Expenses $ 5,080 $ 5,825 $ 745 14.7 % 9.3 % 10.3 %

Internet operating expenses increased due to higher variable costs associated with revenue growth, including a $0.4 million increase in personnel-related costs including commissions and a $0.3 million increase in advertising expense.

Publishing Operating Expenses

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses $ 2,890 $ 2,980 $ 90 3.1 % 5.3 % 5.3 %

Operating expenses for Xulon Press increased due to higher variable costs associated with revenue growth. These costs include an increase of $0.2 million in personnel related costs including commissions. This was partially offset by a decrease in our publishing printing costs associated with reduced distribution levels of our print magazines.

Corporate Expenses

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Corporate Expenses $ 4,285 $ 4,643 $ 358 8.4 % 7.9 % 8.2 %

Corporate expenses include shared general and administrative services. Higher costs include a $0.2 million increase in personnel-related costs primarily due to strategic new-hires, a $0.1 million increase in non-cash stock-based compensation expense and a $0.1 million increase in accounting and public reporting costs.

Depreciation Expense

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Depreciation Expense $ 3,099 $ 3,083 $ (16 ) (0.5 )% 5.7 % 5.4 %

Depreciation expense decreased due to lower levels of capital expenditures and lower levels of acquisitions, primarily in our broadcast operating segment as compared to prior years.


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Amortization Expense

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Amortization Expense $ 633 $ 494 $ (139 ) (22.0 )% 1.2 % 0.9 %

The decrease in amortization expense reflects the impact of higher amortization recognized during 2011 for intangibles, such as advertising agreements, customer lists and domain names, which were acquired during that year and prior years with useful lives ranging from one to five years.

(Gain)/Loss on Disposal of Assets

Three Months Ended September 30, 2011 2012 Change $ Change % 2011 2012 (Dollars in thousands) % of Total Net Revenue (Gain)/Loss on Disposal of Assets $ 32 $ 587 $ 555 1,734.4 % 0.1 % 1.0 %

The net loss on disposal of assets for the three months ended September 30, 2012 and 2011 represents gains and losses from various fixed asset and equipment disposals including an additional loss associated with the write-off of a receivable from a prior station sale.

Other Income (Expense), Net



                                                             Three Months Ended September 30,
                                    2011          2012         Change $        Change %         2011              2012
                                          (Dollars in thousands)                               % of Total Net Revenue
Interest Income                   $     57      $     24      $      (33 )       (57.9)%            0.1 %             -  %
Interest Expense                    (6,826 )      (6,127 )           699         (10.2)%          (12.5 )%         (10.8 )%
Loss on Early Redemption of
Long-Term Debt                        (305 )          -             (305 )      (100.0)%           (0.6 )%            -  %
Other Income (Expense)                   3            60              57        1,900.0%             -  %            0.1 %

Interest income represents earnings on excess cash. The decrease in interest expense is due to the lower principal balance outstanding on our 95/8% Notes, partially offset by higher interest on the outstanding balances on our Revolver, line of credit with First California Bank and subordinated debt due to related parties. Other income and expense, net relates to royalty income from real estate properties.

Loss on early retirement of debt of $0.3 million for the three months ended September 30, 2011 represents the redemption in each period of $5.0 million of the 95/8% Notes for $5.1 million, or at a price equal to 1027/8% of the face value.

Provision for (Benefit from) Income Taxes

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Provision for (Benefit from) Income Taxes $ 526 $ (971 ) $ (1,497 ) (284.5 )% 1.0 % (1.7 )%

In accordance with FASB ASC Topic 740 "Income Taxes," our benefit from income taxes was $1.0 million for the three months ended September 30, 2012 compared to a provision of $0.5 million for the same period of the prior year. Provision for income taxes as a percentage of income before income taxes (that is, the effective tax rate) was 39.9% for the three months ended September 30, 2012 compared to 40.0% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 23.8% due to the effect of state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance from the utilization of certain state net operating loss carryforwards. During the three months ending September 30, 2012, we released a portion of the reserve related to state income taxes for which the statute of limitations has expired. In addition, we have re-evaluated our position related to the reasoning for establishing the reserve and determined that additions to the reserve are no longer applicable. Accordingly, as the statute of limitations expires for each tax year, an additional portion of the reserve will be released.

Loss from Discontinued Operations, Net of Tax

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Loss from Discontinued Operations,
Net of Tax $ (204 ) $ (39 ) $ 165 (80.8 )% (0.4 ) % (0.1 )%


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The loss from discontinued operations for the three months ended September 30, 2012 and 2011 relate to the operating results of Samaritan Fundraising that ceased operations in December 2011.

Net Income (Loss)

Three Months Ended September 30,
2011 2012 Change $ Change % 2011 2012
(Dollars in thousands) % of Total Net Revenue
Net Income (Loss) $ 1,485 $ 3,368 $ 1,883 126.8 % 2.7 % 5.9 %

Net income increased due primarily to higher revenue from political advertisements and our Internet business partially offset by higher operating costs. Additionally, there was a $0.7 million decrease in interest expense and a $1.5 million decrease in our tax provision as discussed above.

Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

The following factors affected our results of operations and cash flows for the nine months ended September 30, 2012 as compared to the same period of the prior year:

Financing

• On May 21, 2012, we entered into a new Business Loan Agreement, Promissory Note and related loan documents with First California Bank (the "FCB Loan"). The FCB Loan is an unsecured, $10.0 million fixed-term loan with a maturity date of June 15, 2014. At September 30, 2012, our leverage ratio was 4.97 to 1 and our interest coverage ratio was 2.18 to 1. We were in compliance with our debt covenants under the FCB Loan at September 30, 2012, and we remain in compliance.

• On May 21, 2012, we entered into an affiliate line of credit with Roland S. Hinz, a Salem board member. Mr. Hinz committed to provide an unsecured revolving line of credit in a principal amount of up to $6.0 million. On September 12, 2012, we amended and restated the original affiliate line of credit with Mr. Hinz to increase the unsecured revolving line of credit by $6.0 million for a total line of credit of up to $12.0 million. At December 31, 2011 and September 30, 2012, $9.0 million and $15.0 million, respectively, was outstanding under all Affiliate Lines of Credit.

• On March 8, 2012, our Board of Directors authorized and declared a quarterly dividend in the amount of $0.035 per share on Class A and Class B common stock. Common stock dividends of $0.9 million, or $0.035 per share, were paid on March 31, 2012, June 29, 2012 and September 28, 2012, respectively to all common stockholders of record. We anticipate paying quarterly common stock dividends in March, June, September and December of each year. Based on the number of shares currently outstanding, we expect to pay total annual common stock dividends of approximately $3.4 million.

Acquisitions

• On August 31, 2012, we completed the acquisition of radio station WLCC-AM, Tampa, Florida, for $1.2 million.

• On August 30, 2012, we purchased the Internet site SermonSpice.com for $3.0 million.

• On May 15, 2012, we purchased the Internet sites Churchangel.com and rchurch.com for $0.2 million.

• On April 10, 2012, we completed the acquisition of radio station WKDL-AM in Warrenton, Virginia for $30,000. We began programming the station upon the close of the transaction.

• On January 13, 2012, we completed the acquisition of radio station KTNO-AM, Dallas, Texas for $2.2 million. We began programming the station pursuant to a Time Brokerage Agreement with the current owner on November 1, 2011.

Dispositions

• On March 16, 2012, we completed the sale of radio station WBZS-AM in Pawtucket, Rhode Island for $0.8 million in cash. The sale resulted in a pre-tax gain of $0.2 million.


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Net Broadcasting Revenue



                                                                 Nine Months Ended September 30,
                                       2011          2012         Change $      Change %          2011               2012
                                             (Dollars in thousands)                               % of Total Net Revenue
Net Broadcast Revenue                $ 132,929     $ 136,224     $    3,295           2.5 %          82.5 %             80.8 %
Same Station Net Broadcast Revenue   $ 132,359     $ 135,456     $    3,097           2.3 %

Net broadcast revenues increased due to overall improving economic conditions and a greater demand for radio air time as compared to the same period of the prior year. Included in these results are a $1.7 million increase in political advertisements and a $1.7 million increase in block programming revenue . . .

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