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SALM > SEC Filings for SALM > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for SALEM COMMUNICATIONS CORP /DE/

Form 10-Q for SALEM COMMUNICATIONS CORP /DE/


8-Nov-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. Our programming is intended for audiences interested in Christian and family-themed content and conservative news talk.

Broadcast Segment

Our foundational business is the ownership and operation of radio stations in large metropolitan markets. Our broadcasting business also includes Salem Radio Network® ("SRN"), SRN News Network ("SNN"), Salem Music Network ("SMN"), Solid Gospel Network ("SGN"), Salem Media Representatives ("SMR") and Vista Media Representatives ("VMR"). SRN, SNN, SMN and SGN are networks that produce and distribute programming, such as talk, news and music segments to radio stations throughout the United States, including Salem owned and operated stations. SMR and VMR sell commercial airtime to national advertisers on radio stations and networks that we own, as well as on independent radio station affiliates.

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 Nielsen Audio (formerly 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.

Nielsen Audio 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 Nielsen Audio 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 40 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 8 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. During each of the nine months ending September 30, 2012 and 2013, we sold 97% of our broadcast revenue for cash. Our general policy is 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, (iv) production and programming expenses, and (v) 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.

Internet Segment

Salem Web Network™ ("SWN"), our Internet businesses, provides Christian and conservative-themed content, audio and video streaming, and other resources on the web. SWN's Internet portals include OnePlace.com, Christianity.com, Crosswalk.com, BibleStudyTools.com, GodTube.com, Townhall.com™, HotAir.com, WorshipHouseMedia.com, SermonSpice.com, GodVine.com and Jesus.org. SWN's content is accessible through our radio station websites that feature content of interest to local listeners throughout the United States. In addition to operating our radio station websites, SWN operates Salem Consumer Products, a website offering books, DVD's and editorial content developed by many of our on-air personalities that are available for purchase. The revenues generated from this segment are reported as Internet revenue on our Condensed Consolidated Statements of Operations.

SWN earns revenues from the sales of streaming services, sales of advertising, sales of videos 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, (iv) royalties, and (v) streaming costs.

Publishing Segment

Salem Publishing™, our publishing business, produces and distributes Christian and conservative opinion print magazines. Salem Publishing also includes Xulon Press™, a print-on-demand self-publishing service for Christian authors. The revenues generated from this segment are reported as publishing revenue on our Condensed Consolidated Statements of Operations.

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, editing and marketing 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;

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

• video and graphic downloads.

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.

RESULTS OF OPERATIONS

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

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

Financing

• On September 30, 2013, we repaid $4.0 million in principal on our current senior secured credit facility, consisting of a term loan of $300.0 million ("Term Loan B"). We recorded a $16,000 pre-tax loss on the early retirement of long-term debt related to the unamortized discount; and

• On September 30, 2013, we repaid $2.0 million in principal on the seller-financed note due April 2014 related to our acquisition of WGTK-FM, in Greenville, South Carolina, on February 5, 2013.

Acquisitions

• On September 23, 2013, we entered into an asset purchase agreement ("APA") to acquire radio stations KDIS-FM, Little Rock, Arkansas and KRDY-AM, San Antonio, Texas for $2.5 million in cash. We expect the transaction to close in the first quarter of 2014;

• On September 11, 2013, we acquired the GodUpdates domain for $0.3 million in cash; and

• On August 10, 2013, we acquired Christnotes.org for $0.5 million in cash.

Net Broadcast Revenue



                                                                Three Months Ended September 30,
                                        2012             2013              Change $              Change %              2012              2013
                                                   (Dollars in thousands)                                              % of Total Net Revenue
Net Broadcast Revenue                 $  45,895      $     46,015       $          120                   0.3 %             80.9 %           78.7 %
Same Station Net Broadcast Revenue    $  45,878      $     45,571       $         (307 )                (0.7 )%

Net broadcast revenues increased slightly as compared to the same period of the prior year. Excluding the impact of political revenue of $0.3 million during the three months ending September 30, 2013 compared to $1.2 million during the same period of the prior year, net broadcast revenue increased by $1.1 million. This increase includes a $0.5 million increase in block programming revenues, primarily from our Christian Teaching and Talk format stations, due to an increase in the number of programmers and secondarily to rate increases, a $0.5 million increase in listener purchase programs that offer our listeners access to special discounts and incentives, and $0.1 million increase in event revenue due to higher attendance at our music festivals and an increase in the number of local events held in all of our markets, partially offset by a $0.4 million decline in infomercial revenues as a result of station rebranding efforts. We continue to promote our stations through various local events and speaking engagements. Our rebranding efforts away from infomercials are focused on offering our listeners programming and content consistent with our company values.

On a same-station basis, excluding the impact of political revenue on the prior year of $0.9 million, revenue increased $0.7 million, consistent with the variables above.


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

                                          Three Months Ended September 30,
                                           2012                      2013
                                               (Dollars in thousands)
           Block program time:
           National                $ 10,992        24.0 %    $ 11,367        24.7 %
           Local                      7,972        17.4 %       8,099        17.6 %

                                     18,964        41.3 %      19,466        42.3 %
           Advertising:
           National                   3,570         7.8 %       3,203         7.0 %
           Local                     15,730        34.2 %      15,752        34.2 %

                                     19,300        42.0 %      18,955        41.2 %
           Infomercials               1,487         3.2 %       1,069         2.3 %
           Network                    4,173         9.1 %       3,835         8.3 %
           Other                      1,971         4.3 %       2,690         5.8 %

           Net broadcast revenue   $ 45,895       100.0 %    $ 46,015       100.0 %

Internet Revenue

Three Months Ended September 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Internet Revenue $ 7,800 $ 9,390 $ 1,590 20.4 % 13.8 % 16.1 %

Excluding the impact of political revenue of $0.3 million reflected in the three months ending September 30, 2012, Internet revenue increased by $1.9 million. 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 $0.3 million over the same period of the prior year based on higher volumes.

Publishing Revenue

Three Months Ended September 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Publishing Revenue $ 3,024 $ 3,071 $ 47 1.6 % 5.3 % 5.3 %

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

Broadcast Operating Expenses



                                                           Three Months Ended September 30,
                                   2012             2013              Change $              Change %              2012              2013
                                              (Dollars in thousands)                                              % of Total Net Revenue
Broadcast Operating Expenses     $  30,628      $     30,847       $          219                   0.7 %             54.0 %           52.8 %
Same Station Net Broadcast
Operating Expenses               $  30,602      $     30,362       $         (240 )                (0.8 )%

Higher broadcast operating expenses include a $0.4 million increase in personnel related costs that includes sales commissions, a $0.2 million increase in promotional and event expenses, a $0.1 million increase in production and programming expenses, and a $0.1 million increase in facility related expenses due to the addition of the Greenville, South Carolina market and rent escalations based on the Consumer Price Index, partially offset by a $0.1 million decline in advertising expenses, a $0.1 decline in travel and entertainment expenses, and a $0.4 million decline in bad debt expenses. The decline in broadcast operating revenues on a same-station basis reflect the impact of start-up costs associated with format changes and station launches.

Internet Operating Expenses

Three Months Ended September 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Internet Operating Expenses $ 5,825 $ 6,644 $ 819 14.1 % 10.3 % 11.4 %

Internet operating expenses reflect higher variable costs associated with the higher revenue generated. The increase of $0.8 million includes a $0.4 million increase in personnel related costs including sales commissions, a $0.2 million increase in streaming and hosting expenses associated with a higher volume of website traffic, a $0.2 million increase in royalties and a $0.2 million increase in bad debt expenses partially offset by a $0.2 million decrease in advertising expenses.


Publishing Operating Expenses

Three Months Ended September 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses $ 2,980 $ 3,301 $ 321 10.8 % 5.3 % 5.6 %

Publishing operating expenses reflect a $0.2 million increase in personnel related costs and a $0.1 increase in bad debt expenses.

Corporate Expenses

Three Months Ended September 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Corporate Expenses $ 4,643 $ 4,951 $ 308 6.6 % 8.2 % 8.5 %

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

Depreciation Expense

Three Months Ended September 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Depreciation Expense $ 3,083 $ 3,089 $ 6 0.2 % 5.4 % 5.3 %

Depreciation expense has remained consistent relative to that of the same period of the prior year.

Amortization Expense

Three Months Ended September 30,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Amortization Expense $ 494 $ 695 $ 201 40.7 % 0.9 % 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 the sale or disposal of assets

Three Months Ended September 30, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue (Gain) loss on the sale or
disposal of assets $ 587 $ (25 ) $ (612 ) (104.3 )% 1.0 % - %

The net gain on the sale or disposal of assets for the three months ended September 30, 2013 includes $0.1 million of insurance proceeds for damages at one of our stations offset by various fixed asset and equipment disposals. The net loss on the sale or disposal of assets for the same period of the prior year includes an additional loss associated with the write-off of a receivable from a prior station sale and various routine property and equipment disposals.

Other income (expense)

                                                                 Three Months Ended September 30,
                                      2012              2013                Change $              Change %               2012               2013
                                                  (Dollars in thousands)                                                 % of Total Net Revenue
Interest Income                     $      24        $        16         $           (8 )               (33.3 )%               - %                - %
Interest Expense                       (6,127 )           (3,770 )                2,357                 (38.5 )%           (10.8 )%            (6.4 )%
Change in the fair value of
interest rate swaps                         -             (1,033 )               (1,033 )              (100.0 )%               - %             (1.8 )%
Loss on early retirement of
long-term debt                              -                (16 )                  (16 )              (100.0 )%               - %                - %
Net miscellaneous income and
(expenses)                                 60                  4                    (56 )               (93.3 )%             0.1 %                - %


Interest income represents earnings on excess cash. Interest expense reflects a decrease of $2.3 million due to the lower cost of capital under our Term Loan B as compared to our Terminated 9 5/8% Notes which were repurchased in March 2013 in a cash tender offer launched on February 25, 2013 ("Tender Offer"). The change in the fair value of interest rate swaps reflect the mark-to-market fair value adjustment of the interest rate swap agreement that we entered into on March 28, 2013. The loss on early retirement of long-term debt is the unamortized discount associated with the $4.0 million repayment on our Term Loan B on September 30, 2013. Net miscellaneous income and expenses includes royalty income from our real estate properties.

Benefit from income taxes

Three Months Ended September 30, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Benefit from income taxes $ (971 ) $ (1,159 ) $ (188 ) 19.4 % (1.7 )% (2.0 )%

In accordance with FASB ASC Topic 740 "Income Taxes," our tax benefit for income taxes was $1.2 million for the three months ended September 30, 2013 compared to $1.0 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 (27.8%) for the three months ended September 30, 2013 compared to (39.9%) 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 September 30,
                                    2012            2013              Change $             Change %              2012              2013
                                              (Dollars in thousands)                                             % of Total Net Revenue
Loss from discontinued
operations, net of tax            $     (39 )     $     (11 )       $          28                (71.8 )%            (0.1 )%             - %

The loss from discontinued operations for the three months ended September 30, 2012 and 2013 relates to expenses associated with facilities previously occupied by Samaritan Fundraising, which ceased operations in December 2011.

Net Income (loss)

. . .

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