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SALM > SEC Filings for SALM > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for SALEM COMMUNICATIONS CORP /DE/


10-May-2013

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 4 of our condensed consolidated financial statements for additional information.

Salem is a diversified multi-media company with integrated business operations covering radio broadcasting, content programming, publishing, and the Internet. Salem is a radio broadcaster, Internet content provider, and magazine and book publisher targeting audiences interested in Christian and family-themed content and conservative values.

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 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. In markets where we subscribe to Arbitron under the PPM, our ratings have been less consistent. PPM data can fluctuate when changes are made to the "panel" (a group of individuals holding PPM devices). This makes all stations susceptible to some inconsistencies in ratings that may or may not accurately reflect the actual number of listeners at any given time.

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 27 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 2012, 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.


Table of Contents

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;

• the sale of advertising time on our national radio network; and

• revenue derived from radio station sponsored events.

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; 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 March 31, 2013 compared to the three months ended March 31, 2012

The following factors affected our results of operations and cash flows for the three months ended March 31, 2013 as compared to the same period of the prior year:

Financing

• On March 18, 2013, we announced a quarterly dividend in the amount of $0.05 per share on Class A and Class B common stock. The quarterly cash dividend of $1.2 million, or $0.05 per share, was paid on April 1, 2013 to all common stockholders of record as of March 25, 2013. Based on the number of shares currently outstanding, we expect to pay total annual dividends of $4.9 million;

• On March 14, 2013, we entered into a new senior secured credit facility, consisting of a Term Loan B of $300.0 million and a Revolver of $25.0 million. We used the proceeds of the new facility to tender for our 95/8% Notes, retire all other outstanding corporate debt, and to pay related fees. We tendered $212.6 million of the 95/8% Notes for $240.3 million, or at a price equal to 110.65% of the face value. We paid $22.7 million for this redemption resulting in a $26.9 million pre-tax loss on the early retirement of debt. We issued irrevocable instructions to the Trustee to redeem on June 3, 2013 the 95/8% Notes outstanding; and

• We entered into an interest rate swap agreement with Wells Fargo Bank on March 28, 2014 with a notional principal amount of $150.0 million to offset risks associated with the variable interest rate on our new senior secured credit facility.

Acquisitions

• On February 15, 2013, we completed the acquisition of WTOH-FM (formerly WJKR-FM), Columbus, Ohio, for $4.0 million cash; and

• On February 5, 2013, we completed the acquisition of WGTK-FM (formerly WMUU-FM), Greenville, South Carolina, for $5.4 million, consisting of $1.0 million in cash, a $2.0 million note payable in April 2014, and a $3.0 million advertising credit.

Net Broadcast Revenue



                                                                  Three Months Ended March 31,
                                       2012         2013          Change $              Change %            2012               2013
                                              (Dollars in thousands)                                        % of Total Net Revenue
Net Broadcast Revenue                $ 43,957     $ 43,247     $          (710 )              (1.6 )%          81.0 %             77.7 %
Same Station Net Broadcast Revenue   $ 43,951     $ 42,875     $        (1,076 )              (2.4 )%

Net broadcast revenues decreased as compared to the same period of the prior year due to a $0.4 million decline in political advertisements as 2013 in not an election year, a $0.4 million decline in network affiliation fees, and a $0.2 million decrease in infomercial revenue associated with station rebranding efforts, partially offset by a $0.2 million increase in local spot revenue primarily on our music format stations. The increase in local spot revenue is primarily due to higher ratings which favorably impact the ability of the sales team to sell spots at a higher rate.

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

                                            Three Months Ended March 31,
                                           2012                      2013
                                               (Dollars in thousands)
           Block program time:
           National                $ 10,708        24.4 %      10,657        24.6 %
           Local                      8,239        18.7 %       7,949        18.4 %

                                     18,947        43.1 %      18,606        43.0 %
           Advertising:
           National                   3,257         7.4 %       3,093         7.2 %
           Local                     14,554        33.1 %      14,756        34.1 %

                                     17,811        40.5 %      17,849        41.3 %
           Infomercials               1,630         3.7 %       1,444         3.3 %
           Network                    3,831         8.7 %       3,446         8.0 %
           Other                      1,738         4.0 %       1,902         4.4 %

           Net broadcast revenue   $ 43,957       100.0 %      43,247       100.0 %


Table of Contents

Internet Revenue

Three Months Ended March 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Internet Revenue $ 7,434 $ 9,716 $ 2,282 30.7 % 13.7 % 17.4 %

The increase in Internet revenue reflects growth from acquisitions, including GodVine.com and SermonSpice.com as well as higher demand for banner advertisements across all of our web-based platforms. The increases are driven primarily by a higher sales volume and secondarily to higher rates charged to our customers. Banner advertisements, including those on our station branded websites increased $1.3 million while video and graphic downloads increased $0.9 million over the same period of the prior year due to higher volumes.

Publishing Revenue

Three Months Ended March 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Publishing Revenue $ 2,893 $ 2,665 $ (228 ) (7.9 )% 5.3 % 4.8 %

Publishing revenue decreased from lower submission fees and book sales with Xulon Press and declines in subscription revenues from our print magazines due to alower number of subscribers as compared to the same period of the prior year.

Broadcast Operating Expenses



                                                                 Three Months Ended March 31,
                                    2012          2013          Change $              Change %             2012               2013
                                           (Dollars in thousands)                                          % of Total Net Revenue
Broadcast Operating Expenses      $ 29,142      $ 29,567      $         425                   1.5 %           53.7 %             53.2 %
Same Station Net Broadcast
Operating Expenses                $ 29,073      $ 29,101      $          28                   0.1 %

Higher broadcast operating expenses reflect a $0.4 million increase in bad debt expense as compared to the same period of the prior year when the favorable impact of collecting a large past due account was recognized and a $0.3 million increase in facility related expenses due to the addition of the Greenville, South Carolina market and rent escalations tied to the Consumer Price Index offset by a $0.3 million decrease in advertising expense.

Internet Operating Expenses

Three Months Ended March 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Internet Operating Expenses $ 5,924 $ 6,841 $ 917 15.5 % 10.9 % 12.2 %

Increase in Internet operating expenses reflect higher variable expenses associated with higher revenues, including a $0.5 million increase in royalties, $0.4 million increase in personnel-related costs that includes commissions, and a $0.1 million increase in streaming and hosting expense, partially offset by a $0.1 million decline in discretionary advertising expenses. The decline in discretionary advertising expenses is due to the nature and timing of various campaigns and events. We intend to continue investing in our brands through strategic advertising.

Publishing Operating Expenses

Three Months Ended March 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses $ 2,971 $ 3,023 $ 52 1.8 % 5.5 % 5.4 %

Decrease in publishing operating expenses is consistent with the declines in revenue and reflect lower variable costs such as commission and printing fees.

Corporate Expenses

Three Months Ended March 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Corporate Expenses $ 4,867 $ 5,796 $ 929 19.1 % 9.0 % 10.4 %


Table of Contents

Corporate expenses include shared general and administrative services. The increase over the same period of the prior year reflects a $0.4 million increase in stock-based compensation expense based on restricted share awards granted during the quarter that vested immediately, a $0.2 million increase in acquisition related costs and legal fees, a $0.1 million increase in personnel related costs and a $0.1 million increase in public reporting costs.

Depreciation Expense

Three Months Ended March 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Depreciation Expense $ 3,030 $ 3,122 $ 92 3.0 % 5.6 % 5.6 %

Depreciation expense increased slightly due to recent acquisition activity that was partially offset with lower capital expenditures incurred compared to the same period of the prior year.

Amortization Expense

Three Months Ended March 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Amortization Expense $ 589 $ 693 $ 104 17.7 % 1.1 % 1.2 %

Amortization expense increased due to the intangible assets recognized in the latter part of 2012 from our purchases of Godvine.com, Sermonspice.com and Churchangel.com. The intangible assets include advertising agreements, customer lists and domain names with useful lives that range between one and five years.

(Gain) loss on disposal of assets

Three Months Ended March 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue (Gain) loss on disposal of assets $ (169 ) $ 4 $ 173 (102.4 )% (0.3 )% - %

The net loss on disposal of assets for the three months ended March 31, 2013 represents various fixed asset and equipment disposals. The net gain on disposal of assets for the same period of the prior year includes a $0.2 million pre-tax gain on the sale of WBZS-AM in Pawtucket, Rhode Island partially offset with various fixed asset and equipment disposals.

Other income (expense), net

                                                                         Three Months Ended March 31,
                                        2012           2013             Change $               Change %             2012              2013
                                                  (Dollars in thousands)                                           % of Total Net Revenue
Interest Income                       $     31       $      21       $           (10 )              (32.3 )%            0.1 %             -  %
Interest Expense                        (6,396 )        (5,723 )                 673                (10.5 )%          (11.8 )%         (10.2 )%
Change in fair value of interest
rate swaps                                  -             (429 )                (429 )              100.0 %              -  %           (0.8 )%
Loss on early retirement of
long-term debt                              -          (27,721 )             (27,721 )              100.0 %              -  %          (49.5 )%
Other Income (Expense)                       7               6                    (1 )              (14.3 )%             -  %             -  %

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 and Term Loan. Other income and expense, net relates royalty income from real estate properties.

The loss on early retirement of debt of $27.7 million includes $26.9 million from the redemption of $212.6 million of the outstanding 95/8% Notes and $0.8 million associated with termination of our existing credit facilities in conjunction with the new Term Loan B and Revolver entered into on March 14, 2013.

Provision for (benefit from) income taxes

Three Months Ended March 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Provision for income taxes $ 687 $ (8,682 ) $ (9,369 ) (1,363.8 )% 1.3 % (15.5 )%


Table of Contents

In accordance with FASB ASC Topic 740 "Income Taxes," our benefit from income taxes was $8.7 million for the three months ended March 31, 2013 compared to a tax provision of $0.7 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 31.8% for the three months ended March 31, 2013 compared to 43.7% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 35.0% 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.

Loss from discontinued operations, net of tax

Three Months Ended March 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Loss from discontinued operations,
net of tax $ (42 ) $ (11 ) $ 31 (73.8 )% (0.1 )% - %

The income (loss) from discontinued operations for the three months ended March 31, 2012 and 2013 relate to expenses associated with facilities previously occupied by Samaritan Fundraising, which ceased operations in December 2011.

Net Income (loss)

Three Months Ended March 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Net Income (loss) $ 843 $ (18,593 ) $ (19,436 ) (2,305.6 )% 1.6 % (33.2 )%

The decrease in net income is due to the $27.7 million loss on early retirement of long-term debt, a $3.0 million increase in operating expenses and $0.4 million change in fair value of interest rate swaps offset by a $1.7 million increase in total revenue and $0.7 million decrease in interest expense and $9.4 million decrease in the income tax expense.

SAME STATION DEFINITION

In the discussion of our results of operations below, we compare our results between periods on an as reported basis (that is, the results of operations of all radio stations and network formats owned or operated at any time during either period) and on a "same station" basis. With regard to fiscal quarters, we include in our same station comparisons the results of operations of radio stations or radio station clusters and networks that we own or operate in the same format during the quarter, as well as the corresponding quarter of the prior year. Same station results for a full year are based on the sum of the same station results for the four quarters of that year.

NON-GAAP FINANCIAL MEASURES

The performance of a radio broadcasting company is customarily measured by the ability of its stations to generate station operating income. We define station operating income ("SOI") as net broadcast revenue less broadcast operating expenses. Accordingly, changes in net broadcast revenue and broadcast operating expenses, as explained above, have a direct impact on changes in SOI.

SOI is not a measure of performance calculated in accordance with GAAP. SOI should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of GAAP. Management believes that SOI is a useful non-GAAP financial measure to investors, when considered in conjunction with operating income, the most directly comparable GAAP financial measure, because it is generally recognized by the radio broadcasting industry as a tool in measuring performance and in applying valuation methodologies for companies in the media, entertainment and communications industries. This measure is used by investors and analysts who report on the industry to provide comparisons between broadcasting groups. Additionally, our management uses SOI as one of the key measures of operating efficiency, profitability and our internal review associated with our impairment analysis of indefinite-lived intangible assets. . . .

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