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SALM > SEC Filings for SALM > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for SALEM COMMUNICATIONS CORP /DE/

Form 10-K for SALEM COMMUNICATIONS CORP /DE/


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

GENERAL

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Our consolidated financial statements are not directly comparable from period to period due to acquisitions and dispositions of selected radio station assets and Internet and publishing businesses. Refer to Note 3 of our consolidated financial statements under Item 8 of this annual report for details of each of these transactions.

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. 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 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 and e-commerce 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.

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.


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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, 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 eight 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 2013 and 2012, we sold 97 %, respectively, 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 & e-commerce Segment

Internet and e-commerce have been significant growth areas for Salem and continue to be a focus for future development. 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 Christian content websites: OnePlace.com, Christianity.com, Crosswalk.com, GodVine.com, Jesus.org and Bible Study Tools.com. Our conservative opinion websites include Townhall.com™ and HotAir.com. We also offer church product websites including WorshipHouseMedia.com, SermonSpice.com, and ChurchStaffing.com. SWN's content is accessible through all of our radio station websites that feature content of interest to local listeners throughout the United States. In addition to operating our


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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 and e-commerce revenue on our 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 and e-commerce revenue on our Consolidated Statements of Operations.

On January 10, 2014, we acquired the assets of Eagle Publishing, including HumanEvents.com, Redstate.com and Eagle Wellness. We began operating these entities as of the closing date. Human Events and RedState are conservative opinion websites that provide news and commentary on issues of interest to the conservative community. Eagle Wellness provides practical complementary health advice and is a trusted source for nutritional supplements from one of the country's leading complementary health physicians. Supplements are available for consumer purchase online through our website.

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. Beginning in 2014, our operating costs will also include cost of goods sold associated with Eagle Wellness products.

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 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 Consolidated Statements of Operations.

On January 10, 2014, we acquired the assets of Eagle Publishing, including Regnery Publishing and Eagle Financial Publications. Regnery Publishing is a publisher of conservative books that was founded in 1947. Regnery has published dozens of bestselling books by leading conservative authors and personalities, including Ann Coulter, Newt Gingrich, Michelle Malkin, David Limbaugh, Laura Ingraham, Mark Steyn and Dinesh D'Souza. Book publishing revenue and cash flows are typically higher in the second and fourth quarter of each year when big titles are released.

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. Beginning in 2014, our operating costs will also include cost of goods sold and inventory reserves associated with Regnery Publishing.

KNOWN TRENDS AND UNCERTAINTIES

Although radio advertising revenues have stabilized following declines that began in 2008, revenue growth remains challenged. Revenues associated with our print magazines are also challenged, not only for adverstising, but for subscriber revenues. Because Internet and e-commerce are concentrated growth areas for us, decreases in revenues in these areas could affect our operating results, financial condition and results of operations. We continue to explore opportunities in which digital media, including our Internet sites and mobile applications, and our print media, for books and magazines are used to simultaneously cross-promote our content and brand.

KEY FINANCIAL PERFORMANCE INDICATORS - 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 calculated as the sum of the same station-results for each of the four quarters of that year.

RESULTS OF OPERATIONS

Year Ended December 31, 2013 compared to the year ended December 31, 2012

The following factors affected our results of operations and our cash flows for the year ended December 31, 2013 as compared to the prior year:

Financing

• On March 14, 2013, we entered into a new senior secured credit facility, consisting of the Term Loan B ("Term Loan B") of $300.0 million and the Revolver ("Revolver") of $25.0 million. We used the proceeds of the new facility to tender for and redeem our Terminated 95/8% Notes, retire all other outstanding corporate debt, and pay related fees.


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• On March 14, 2013, we tendered for $212.6 million in aggregate principal amount of the Terminated 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 Terminated 95/8% Notes in the Tender Offer. We paid $22.7 million for this repurchase resulting in a $26.9 million pre-tax loss on the early retirement of long-term debt.

• On June 3, 2013, we redeemed the remaining $0.9 million of the Terminated 95/8% Notes that were outstanding after the Tender Offer.

• During the year ended December 31, 2013, we repaid $8.8 million in principal on our Term Loan B. Our repayments consisted of $0.8 million on December 30, 2013, $4.0 million on September 30, 1013 and $4.0 million on June 28, 2013. We recorded a $33,000 pre-tax loss on the early retirement of long-term debt related to the unamortized discount associated with these repayments.

• 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.

• On March 27, 2013, we entered into an interest rate swap agreement with Wells Fargo Bank that will begin on March 28, 2014, with a notional principal amount of $150.0 million to offset risks associated with the variable interest rate on our current senior secured credit facility.

• During the year ended December 31, 2013, we paid quarterly distributions of $5.2 million in total compared to $3.4 million in total in the prior year.

Acquisitions

• On December 10, 2013, we acquired the Twitchy.com website for $0.9 million paid in cash upon close of the transaction and up to $1.2 million in contingent earn-out consideration payable based on the achievement of future page view targets. The fair value of the earn-out consideration based on a weighted average probability of payment was $0.6 million.

• On December 9, 2013, we acquired the EverythingInspirational.com domain name along with fourteen Facebook pages and various other Christian-themed social media intangible assets for $0.4 million in cash. We paid $0.1 million in cash upon closing and will pay the remaining $0.3 million in cash over three installments within 180 days from the closing date.

• On September 23, 2013, we entered into an APA to acquire radio stations KDIS-FM, Little Rock, Arkansas and KRDY-AM, San Antonio, Texas for $2.5 million in cash, including $0.5 million related to the KRDY-AM tower site land in San Antonio, Texas. On December 20, 2013, we closed on the land purchase for $0.5 million in cash. The radio station acquisitions closed on February 7, 2014.

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

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

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

• 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. We paid the $2.0 million note, including accrued interest of $8,500 in September 2013.

Net Broadcast Revenue



                                                                    Year Ended December 31,
                                                                                Change
                                       2012          2013        Change $          %             2012              2013
                                            (Dollars in thousands)                               % of Total Net Revenue
Net Broadcast Revenue                $ 183,180     $ 183,697     $     517          0.3 %            79.9 %            77.5 %
Same Station Net Broadcast Revenue   $ 183,050     $ 181,867     $  (1,183 )       (0.6 )%


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

                                              Year Ended December 31,
                                          2012                       2013
                                               (Dollars in thousands)
          Block program time:
          National                $  43,468        23.7 %    $  44,486        24.2 %
          Local                      32,321        17.7         32,608        17.8

                                     75,789        41.4         77,094        42.0
          Advertising:
          National                   14,200         7.8         13,840         7.5
          Local                      63,233        34.5         63,007        34.3

                                     77,433        42.3         76,847        41.8
          Infomercials                6,112         3.3          4,970         2.7
          Network                    16,083         8.8         15,364         8.4
          Other                       7,763         4.2          9,422         5.1

          Net broadcast revenue   $ 183,180       100.0 %    $ 183,697       100.0 %

Block programming revenue increased $1.3 million, of which $1.2 million was generated from national programming revenue on our Christian, Teaching and Talk format radio stations. The increase is primarily due to an increase in the number of programmers featured on-air and secondarily due to rate increases for premium time slots.

Advertising revenues for 2013 were impacted by political revenues, which were $0.4 million in 2013 compared to $2.3 million in 2012. Excluding the impact of political, advertising revenues increased by $1.3 million, primarily from national spot sales on our Contemporary Christian Music format radio stations. Rates charged in these formats are ratings-sensitive.

The decline in infomercial revenues of $1.1 million reflects our ongoing effort to rebrand our stations. We continue to promote our stations through various local events and speaking engagements. Our rebranding efforts away from infomercials are to focus on offering our listeners programming and content that is consistent with our company values.

The decline in network revenue reflects the impact of political revenues, of which $0.6 million was recognized in 2013 compared to $2.0 million in 2012. Excluding political revenues, the $0.7 million increase in network revenue reflects the increase in compensation received for network programs in select markets and increased distribution of SRN programming.

Other revenue includes a $1.3 million increase in listener purchase program revenue, a popular on-air promotion that offers our listeners access to special discounts and incentives from local advertisers, and a $0.2 million increase in rental revenue generated from radio tower subleases.

On a same-station basis, net broadcast revenue was impacted by the decline in political advertising with $1.0 million recognized in 2013 in local & national advertising and network revenue compared to $4.3 million in 2012.

Internet and e-commerce Revenue

Year Ended December31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Internet and e-commerce Revenue $ 33,474 $ 40,906 $ 7,432 22.2 % 14.6 % 17.3 %

Internet and E-Commerce revenue increased by $8.7 million as of 2013 when excluding political revenue of $1.2 million recognized in 2012. We continue to acquire or build websites that drive viewers to our content. During 2013, we acquired Christnotes.org and GodUpdates.org, as well as recognized a full year of revenue from 2012 acquisitions of Godvine.com and SermonSpice.com. Internet revenue growth reflects a higher demand for digital advertisements, including web banners and e-mail sponsorships. Advertising revenue, including those on our station branded websites, increased $5.7 million based on higher sales volume while video and graphic downloads increased $1.7 million based on an increase in the number of downloads.

Publishing Revenue

Year Ended December 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Publishing Revenue $ 12,525 $ 12,331 $ (194 ) (1.5 )% 5.5 % 5.2 %


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Publishing revenues include a $0.4 million reduction in subscription revenue with our print magazines as a result of a lower number of subscribers partially offset by higher book sales volume on Xulon Press.

Broadcast Operating Expenses



                                                                    Year Ended December 31,
                                      2012          2013         Change $      Change %          2012               2013
                                            (Dollars in thousands)                               % of Total Net Revenue
Broadcast Operating Expenses        $ 120,772     $ 122,862     $    2,090           1.7 %          52.7 %             51.9 %
Same Station Broadcast Operating
Expenses                            $ 120,524     $ 120,970     $      446           0.4 %

Higher broadcast operating expenses reflect a $1.8 million increase in personnel related costs including commissions, a $0.5 million increase in promotional and event expenses, a $0.3 million increase in facility related expenses due to the addition of the Greenville, South Carolina market and rent escalations based on changes in the Consumer Price Index, a $0.3 million increase in bad debt expense associated with higher revenues, and a $0.1 million increase in production and programming expenses, offset by a $0.8 million decrease in advertising expenses and a $0.1 million decrease in travel and entertainment expenses. The increase in broadcast operating expenses on a same-station basis reflects these items net of the impact of start-up costs associated with format changes and station launches.

Internet Operating Expenses

Year Ended December 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Internet Operating Expenses $ 25,145 $ 28,378 $ 3,233 12.9 % 11.0 % 12.0 %

Internet operating expenses reflect higher variable expenses associated with higher revenues, including a $1.4 million increase in personnel related costs that includes commissions, a $0.9 million increase in royalties, a $0.6 million increase in streaming and hosting expense, a $0.1 million increase in bad debt expense associated with higher revenues and a $0.1 million increase in professional services, partially offset by a $0.3 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

Year Ended December 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses $ 12,288 $ 13,289 $ 1,001 8.1 % 5.4 % 5.6 %

Publishing operating expenses reflect a $0.5 million increase in personnel related costs including commissions associated with higher revenues from Xulon Press and a $0.5 million increase in bad debt expense, also associated with higher revenues from Xulon Press.

Corporate Expenses

Year Ended December 31,
2012 2013 Change $ Change % 2012 2013
(Dollars in thousands) % of Total Net Revenue
Corporate Expenses $ 18,892 $ 21,430 $ 2,538 13.4 % 8.2 % 9.0 %

Corporate expenses include shared general and administrative services. The increase over the same period of the prior year reflects a $0.3 million increase in stock-based compensation expense based on restricted share awards granted in . . .

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