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SALM > SEC Filings for SALM > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for SALEM COMMUNICATIONS CORP /DE/


9-Aug-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, 12 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 expenses 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.


Table of Contents

RESULTS OF OPERATIONS

Three months ended June 30, 2013 compared to the three months ended June 30, 2012

The following factors affected our results of operations and cash flows for the three months ended June 30, 2013 as compared to the same period of the prior year:

Financing

• On June 28, 2013, we repaid $4.0 million in principal on the Term Loan B. We recorded a $14,000 pre-tax loss on the early retirement of long-term debt related to the unamortized discount;

• On June 3, 2013, we redeemed the remaining $0.9 million aggregate principal outstanding on our 95/8% Notes; and

• On May 30, 2013, we announced a quarterly dividend in the amount of $0.05 per share on Class A and Class B common stock. The quarterly dividend of $1.2 million, or $0.05 per share, was paid on June 28, 2013 to all common stockholders of record as of June 14, 2013.

Net Broadcast Revenue



                                                                 Three Months Ended June 30,
                                       2012         2013       Change $      Change %          2012               2013
                                           (Dollars in thousands)                              % of Total Net Revenue
Net Broadcast Revenue                $ 46,372     $ 47,025     $     653           1.4 %          80.5 %             78.2 %
Same Station Net Broadcast Revenue   $ 46,428     $ 46,316     $     112           0.2 %

Net broadcast revenues increased as compared to the same period of the prior year due to a $0.9 million increase in other revenue that includes station events and listener purchase programs and a $0.4 million increase in programming revenue from our Christian Teaching and Talk format stations, primarily from an increase in the number of programmers and secondarily to rate increases. These increases were offset by a $0.4 million decline in advertising revenue, of which $0.2 million was attributable to prior period political advertisements, and a $0.2 million decline in infomercial revenue as a result of our station rebranding efforts. We continue to promote our stations through various local events and speaking engagements. Our rebranding efforts are focused on offering our listeners programming and content consistent with our company values.

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

                                            Three Months Ended June 30,
                                           2012                      2013
                                               (Dollars in thousands)
           Block program time:
           National                $ 10,731        23.1 %      11,111        23.6 %
           Local                      7,865        17.0 %       7,841        16.7 %

                                     18,596        40.1 %      18,952        40.3 %
           Advertising:
           National                   3,587         7.7 %       3,638         7.7 %
           Local                     16,655        35.9 %      16,230        34.6 %

                                     20,242        43.6 %      19,868        42.3 %
           Infomercials               1,620         3.5 %       1,430         3.0 %
           Network                    3,846         8.3 %       3,805         8.1 %
           Other                      2,068         4.5 %       2,970         6.3 %

           Net broadcast revenue   $ 46,372       100.0 %      47,025       100.0 %

Internet Revenue

Three Months Ended June 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Internet Revenue $ 8,035 $ 9,906 $ 1,871 23.3 % 13.9 % 16.5 %

Increases in Internet revenue reflect 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 $0.5 million over the same period of the prior year based on higher volumes.


Table of Contents

Publishing Revenue

Three Months Ended June 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Publishing Revenue $ 3,219 $ 3,205 $ (14 ) (0.4 )% 5.6 % 5.3 %

Publishing revenue declined due to a lower number of subscribers to our print magazines that was partially offset by a higher volume of book sales with Xulon Press.

Broadcast Operating Expenses



                                                                   Three Months Ended June 30,
                                       2012         2013        Change $        Change %           2012               2013
                                            (Dollars in thousands)                                 % of Total Net Revenue
Broadcast Operating Expenses         $ 30,519     $ 30,844     $      325             1.1 %           53.0 %             51.3 %
Same Station Net Broadcast
Operating Expenses                   $ 30,437     $ 30,253     $     (184 )          (0.6 )%

Higher broadcast operating expenses reflect a $0.3 million increase in bad debt expense as compared to the same period of the prior year, a $0.3 million increase in personnel related costs that include sales commissions, a $0.3 million increase in production and programming expenses, and a $0.3 million increase in facility related expenses due to the addition of the Greenville, South Carolina market and rent escalations that are based on the Consumer Price Index partially offset by a $0.4 million decline in advertising expenses, a $0.3 million decline in travel and entertainment related expenses and a $0.1 million decrease in music license fees.

Internet Operating Expenses

Three Months Ended June 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Internet Operating Expenses $ 6,109 $ 6,887 $ 778 12.7 % 10.6 % 11.5 %

Internet operating expenses reflect higher variable costs associated with higher revenues, including a $0.3 million increase in royalties, a $0.3 million increase in personnel related costs including sales commissions, and a $0.1 million increase in streaming and hosting expense associated with higher traffic volume.

Publishing Operating Expenses

Three Months Ended June 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses $ 3,000 $ 3,452 $ 452 15.1 % 5.2 % 5.7 %

Publishing operating expenses reflect higher personnel related costs and royalties consistent with higher sales from Xulon Press.

Corporate Expenses

Three Months Ended June 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Corporate Expenses $ 4,804 $ 5,092 $ 288 6.0 % 8.3 % 8.5 %

Corporate expenses include shared general and administrative services. The increase over the same period of the prior year includes a $0.2 million increase in personnel related costs and a $0.1 million increase in repair and maintenance expense.

Depreciation Expense

Three Months Ended June 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Depreciation Expense $ 3,037 $ 3,102 $ 65 2.1 % 5.3 % 5.2 %

Depreciation expense increased slightly due to recent acquisition activity.

Amortization Expense

Three Months Ended June 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Amortization Expense $ 542 $ 688 $ 146 26.9 % 0.9 % 1.1 %


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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.

Impairment of indefinite-lived long-term assets other than goodwill

Three Months Ended June 30, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Impairment of indefinite-lived long
term assets other than goodwill $ - $ 345 $ 345 100.0 % - % 0.6 %

Due to actual operating results that did not meet or exceed our expectations or the assumptions used in our prior valuations, we performed an interim valuation of our mastheads as of June 30, 2013. We determined that the carrying value of the mastheads was less than the estimated fair value. We recorded an impairment charge of $0.3 million associated with the mastheads in our publishing division.

Impairment of goodwill

Three Months Ended June 30, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Impairment of goodwill $ - $ 438 $ 438 100.0 % - % 0.7 %

Due to actual operating results that did not meet or exceed our expectations or the assumptions used in our prior valuations, we performed an interim valuation of our print magazines as of June 30, 2013. We determined that the carrying value of the goodwill was less than the estimated fair value. We recorded an impairment charge of $0.4 million associated with the goodwill previously recorded in our print magazine division.

Impairment of long-lived assets

Three Months Ended June 30, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Impairment of long-lived assets $ 5,608 $ - $ (5,608 ) (100.0 )% 9.7 % - %

During June 2012, based on changes in management's planned usage, the land in Covina, CA was classified as held for sale and evaluated for impairment as of that date. In accordance with the authoritative guidance for impairment of long-lived assets held for sale, we determined the carrying value of the land exceeded the estimated fair value less cost to sell. We recorded an impairment charge of $5.6 million associated with the land.

Loss on disposal of assets

Three Months Ended June 30, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Loss on disposal of assets $ 145 $ 1 $ (144 ) (99.3 )% 0.3 % - %

The net loss on disposal of assets for the three months ended June 30, 2013 and of the same period of the prior year represents 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)

                                                                  Three Months Ended June 30,
                                      2012          2013         Change $        Change %           2012               2013
                                            (Dollars in thousands)                                 % of Total Net Revenue
Interest Income                     $     28      $     15      $      (13 )         (46.4 )%             -  %            -  %
Interest Expense                      (6,264 )      (3,719 )         2,545           (40.6 )%          (10.9 )%         (6.2 )%
Change in fair value of interest
rate swaps                                -          4,007           4,007           100.0 %              -  %           6.7 %
Loss on early retirement of
long-term debt                          (893 )         (55 )           838           (93.8 )%           (1.5 )%         (0.1 )%
Other Income (Expense), net                4             5               1            25.0 %              -  %            -  %

Interest income represents earnings on excess cash. The decrease in interest expense is due to the lower cost of capital under our Term Loan B as compared to our 95/8% Notes which were redeemed in March 2013 in a tender offer. The change in the fair value of interest rate swaps relates to the mark-to-market adjustment on our interest rate swap entered on March 28, 2013. Other income and expense, net relates royalty income from real estate properties.


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The loss on early retirement of long-term debt of $0.1 million are fees associated with the final redemption of our outstanding 95/8% Notes. The $0.9 million from the same period of the prior year related to the redemption of $17.5 million of our outstanding 95/8% Notes for $18.0 million, or at a price equal to 103% of the face value.

Provision for (benefit from) income taxes

Three Months Ended June 30, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Provision for (benefit from)
income taxes $ (1,484 ) $ 4,335 $ 5,819 (392.1 )% (2.6 )% 7.2 %

In accordance with FASB ASC Topic 740 "Income Taxes," our provision for income taxes was $4.3 million for the three months ended June 30, 2013 compared to a tax benefit of $1.5 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 45.4% for the three months ended June 30, 2013 compared to 45.5% 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 June 30, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Loss from discontinued operations,
net of tax $ (13 ) $ (4 ) $ 9 (69.2 )% - % - %

The loss from discontinued operations for the three months ended June 30, 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 June 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Net Income (loss) $ (1,792 ) $ 5,201 $ 6,993 390.2 % (3.1 )% 8.6 %

The increase in net income is due to the $2.5 million increase in total revenue, a $3.0 million decrease in operating expenses, a $4.0 million change in fair value of interest rate swaps, a $0.8 million decrease in loss on early retirement of long-term debt and a $2.6 million decrease in interest expense offset by a $5.8 million increase in income tax expense.

Six months ended June 30, 2013 compared to the six months ended June 30, 2012

The following factors affected our results of operations and cash flows for the six months ended June 30, 2013 as compared to the same period of the prior year:

Financing

• On June 28, 2013, we repaid $4.0 million in principal on the Term Loan B. We recorded a $14,000 pre-tax loss on the early retirement of long-term debt related to the unamortized discount;

• On May 30, 2013, we announced a quarterly dividend in the amount of $0.05 per share on Class A and Class B common stock. The quarterly dividend of $1.2 million, or $0.05 per share, was paid on June 28, 2013 to all common stockholders of record as of June 14, 2013;

• 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;

• On March 14, 2013, we entered into a 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 for $212.6 million in aggregate principal amount of the 95/8% Notes for an aggregate purchase price of $240.3 million, or at a price equal to 110.65% of the face value of the 95/8% . . .

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