ATEP RADIO INC
424B3, 1998-02-13
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<PAGE>
 
                                               FILED PURSUANT TO RULE 424(b)(3)
                                                     REGISTRATION NO. 333-41733
PROSPECTUS
 
[LOGO OF SALEM COMMUNICATIONS CORPORATION]

                           OFFER FOR ALL OUTSTANDING
              9 1/2% SERIES A SENIOR SUBORDINATED NOTES DUE 2007
                                  IN EXCHANGE FOR
              9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
              
                       SALEM COMMUNICATIONS CORPORATION
 
              THIS EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT,
             NEW YORK CITY TIME ON MARCH 11, 1998, UNLESS EXTENDED
 
                             --------------------
 
  Salem Communications Corporation, a California corporation (the "Company")
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth herein and in the related Letter of Transmittal, to
exchange up to $150,000,000 aggregate principal amount of its 9 1/2% Series B
Senior Subordinated Notes due 2007 (the "Notes") of the Company for a like
amount of the privately placed 9 1/2% Series A Senior Subordinated Notes Due
2007 (the "Old Notes") of the Company issued on September 25, 1997, from the
holders thereof.
 
  The Notes are being offered hereunder in order to satisfy the obligations of
the Company under a Registration Rights Agreement dated September 17, 1997
(the "Registration Rights Agreement") by and among the Company, the Guarantors
(as defined herein), and Furman Selz LLC, Smith Barney Inc., BancBoston
Securities, Inc., and BNY Capital Markets, Inc. (the "Initial Purchasers").
The Exchange Offer is designed to provide to holders an opportunity to acquire
the Notes which, unlike the Old Notes, are expected to be freely transferable
at all times, subject to state "blue sky" law restrictions, provided that the
holder is not an "affiliate" of the Company within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and represents that
the Notes are being acquired in the ordinary course of such holder's business
and the holder, if not a broker-dealer, is not engaged in, and does not intend
to engage in, a distribution of the Notes. With the exception of the freely
transferable nature of the Notes, the Notes are substantially identical to the
Old Notes. See "The Exchange Offer--Purpose of the Exchange Offer."
 
  The Company will accept for exchange any and all validly tendered Old Notes
on or prior to 12:00 Midnight, New York City time, on March 11, 1998, unless
extended (the "Expiration Date"). Tenders of Old Notes made pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date. In
the event the Company terminates the Exchange Offer and does not accept any
Old Notes with respect to the Exchange Offer, the Company will promptly return
such Old Notes to the holders thereof. The Company will not receive any
proceeds from the Exchange Offer.
 
  Interest on the Notes will accrue from the date of issuance and will be
payable semi-annually on each April 1 and October 1, commencing April 1, 1998.
The Notes will mature on October 1, 2007. The Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after October 1,
2002, at the redemption prices set forth herein, plus accrued and unpaid
interest to the redemption date. In addition, the Company, at its option, may
redeem up to $50.0 million in aggregate principal amount of the Notes at any
time on or prior to October 1, 2000 at 109.50% of the aggregate principal
amount so redeemed, plus accrued and unpaid interest thereon to the redemption
date, with the proceeds of one or more Public Equity Offerings (as defined
herein), provided that at least $100.0 million in aggregate principal amount
of the Notes remain outstanding immediately after the occurrence of any such
redemption. See "Description of the Notes--Optional Redemption." Upon a Change
of Control (as defined herein), each holder of the Notes will be entitled to
require the Company to purchase such holder's Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest to the purchase date. There
can be no assurance that the Company will have sufficient funds to repurchase
the Notes upon a Change of Control. See "Description of the Notes--Certain
Covenants--Purchase of Notes Upon a Change of Control."
 
  The Notes will be general unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness (as defined
herein), including the Company's obligations under the Credit Agreement (as
defined herein), and senior in right of payment to all existing and future
Subordinated Indebtedness (as defined herein) of the Company. See "Description
of Certain Indebtedness" and "Description of the Notes--Subordination." The
Notes will be guaranteed, jointly and severally (the "Guarantees"), on a
senior subordinated basis by all of the Company's current subsidiaries (the
"Guarantors"). See "Description of the Notes--Guarantees." The Guarantees will
be general unsecured obligations of the Guarantors, subordinated in right of
payment to all Guarantor Senior Indebtedness (as defined herein), including
any guarantees by Guarantors of the Company's obligations under the Credit
Agreement and senior in right of payment to any Subordinated Indebtedness of
the Guarantors. As of September 30, 1997, the Company and the Guarantors had
an aggregate of approximately $10.1 million of Senior Indebtedness outstanding
under the Credit Agreement and no other Indebtedness (as defined herein)
outstanding other than the Notes.
 
                                                  (Continued on following page)
 
                             --------------------
 
  SEE "RISK FACTORS" BEGINNING ON PAGE 14 HEREIN FOR A DISCUSSION OF CERTAIN
RISKS THAT HOLDERS OF OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE
EXCHANGE OFFER.
 
                             --------------------
 
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
  EXCHANGE  COMMISSION  OR  ANY  STATE SECURITIES  COMMISSION  NOR  HAS  THE
   SECURITIES AND  EXCHANGE COMMISSION  OR ANY STATE  SECURITIES COMMISSION
    PASSED  UPON  THE  ACCURACY  OR   ADEQUACY  OF  THIS  PROSPECTUS.  ANY
     REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
               The date of this Prospectus is February 9, 1998.
<PAGE>
 
  The Old Notes were sold by the Company on September 25, 1997 to the Initial
Purchasers in a transaction not registered under the Securities Act in
reliance upon an exemption under the Securities Act. The Initial Purchasers
subsequently placed the Old Notes with qualified institutional buyers in
reliance upon Rule 144A under the Securities Act. The Old Notes may not be
reoffered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available.
 
  Based on the interpretive letters Exxon Capital Holdings Corporation (May
13, 1998), Morgan Stanley & Co., Incorporated (June 5, 1991) and Shearman &
Sterling (July 2, 1993) issued by the staff of the Securities and Exchange
Commission (the "Commission"), the Company believes that a holder of Notes
(other than (i) a broker-dealer who purchases such Notes directly from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person who is an affiliate of the Company within
the meaning of Rule 405 under the Securities Act) who exchanges Old Notes for
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of the Notes, will be allowed to
resell the Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Notes a
prospectus that satisfies the requirements of the Securities Act. See "The
Exchange Offer--Purpose of the Exchange Offer" and "Resales of Notes."
However, a broker-dealer that acquires Notes for its own account in the
Exchange Offer in exchange for Old Notes that were acquired for its own
account as a result of market-making or other trading activities may be deemed
to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver in any resale of the Notes a prospectus meeting the
requirements of the Securities Act. For a period of 180 days from the
Expiration Date, the Company will make copies of this Prospectus, as amended
or supplemented, available to any broker-dealer that receives Notes for its
own account in the Exchange Offer in exchange for Old Notes that were acquired
by the broker-dealer as a result of the market-making or other trading
activities for use in connection with any such resale. See "Plan of
Distribution." If any other holder is deemed to be an "underwriter" within the
meaning of the Securities Act or acquires Notes in the Exchange Offer for the
purpose of distributing or participating in a distribution of the Notes, such
holder may not rely on the positions of the Commission's staff enunciated in
Exxon Capital, Morgan Stanley and Shearman & Sterling and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available.
 
  If a holder of Old Notes does not exchange such Old Notes for Notes pursuant
to the Exchange Offer, such Old Notes will continue to be subject to the
restrictions on transfer contained in the legend thereon. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws.
 
  The Old Notes are currently eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. Following
commencement of the Exchange Offer but prior to its consummation, the Old
Notes may continue to be traded in the PORTAL market. Following consummation
of the Exchange Offer, the Notes will not be eligible for PORTAL trading.
 
  It is not currently anticipated that an active public market for the Notes
will develop. The Company currently does not intend to apply for the listing
of the Notes on any securities exchange or to seek approval for quotation
through any automated quotation system. No assurance can be given as to the
liquidity of the trading market for the Notes.
 
  The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject
to certain customary conditions. See "The Exchange Offer--Conditions to the
Exchange Offer." Old Notes may be tendered only in integral multiples of
$1,000.
<PAGE>
 
                    NOTICE TO NEW HAMPSHIRE RESIDENTS ONLY
 
  NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED
STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE ATTORNEY GENERAL OR THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE
FOR A SECURITY OR A TRANSACTION MEANS THAT THE ATTORNEY GENERAL OR THE
SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF,
OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT
IS UNLAWFUL TO MAKE OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER,
CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS
PARAGRAPH.
 
        SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
 
  This Prospectus contains forward-looking statements, including statements
regarding, among other items, (i) the realization of the Company's business
strategy, (ii) the sufficiency of cash flow to fund the Company's debt service
requirements and working capital needs and (iii) the anticipated trends in the
radio broadcasting industry. Forward-looking statements are typically
identified by the words "believe," "expect," "anticipate," "intend,"
"estimate" and similar expressions. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from those
contemplated by these forward-looking statements. There can be no assurance
that the results and events contemplated by the forward-looking information
contained in this Prospectus will in fact transpire. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of their dates. The Company does not undertake any obligation to update or
revise any forward-looking statements.
 
  The safeharbor under the Securities Act and the Securities Exchange Act of
1934, as amended (the "Exchange Act") for certain "forward-looking statements"
within the meaning of such Acts does not apply to initial public offerings.
 
                                       1
<PAGE>
 
             AVAILABLE INFORMATION AND INCORPORATION BY REFERENCE
 
  The Company and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a registration statement relating to the Notes
offered hereby (herein, together with all amendments and exhibits, referred to
as the "Registration Statement") under the Securities Act. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description thereof, and each such statement shall
be deemed qualified by such reference.
 
  Upon effectiveness of the Registration Statement, the Company and the
Guarantors will be subject to the reporting requirements of the Exchange Act,
and in accordance therewith must file periodic reports and other information
with the Commission, unless granted relief from such requirements.
 
  The Registration Statement and the exhibits and schedules thereto and any
periodic reports or other information filed pursuant to the Exchange Act may
be inspected without charge and copies at prescribed rates at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a website that contains reports, proxy and information
statements and other information filed electronically with the Commission at
http://www.sec.gov.
 
  The Company and the Guarantors have agreed to furnish to holders of the
Notes and Old Notes and prospective purchasers and securities analysts, upon
their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
 
                              MARKET DATA SOURCES
 
  All metropolitan statistical area ("MSA") rank information set forth in this
Prospectus has been obtained from the Spring 1997 Radio Market Survey Schedule
& Population Ranking published by The Arbitron Company. According to the
Survey, the population estimates used were based upon 1990 U.S. Bureau Census
estimates updated and projected to January 1, 1997 by Market Statistics, based
on the data from Sales & Marketing Management's 1996 Survey of Buying Power.
Information regarding the number of radio stations in the United States
featuring religious talk and music formats, including formats identified as
Religious, Gospel, Christian, Inspirational or Sacred, the growth in the
number of stations featuring religious formats from 1989 to 1997, the
religious format as the third largest radio format in the United States, the
size of the listening audience for religious programming and the number of
stations owned and/or operated in the top 25 radio markets by competitors of
the Company have been obtained from the 1997 Broadcasting & Cable Yearbook,
The M Street Journal (November 26, 1997), Religion & Media Quarterly (July
1997) and the 1998 Directory of Religious Media.
 
                                       2
<PAGE>
 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified by, and should be read in conjunction
with, the more detailed information and financial statements and notes thereto
appearing elsewhere in this Prospectus. As used in this Prospectus, the term
the "Company" refers to Salem Communications Corporation and its subsidiaries,
unless the context otherwise requires. Edward G. Atsinger III and Stuart W
Epperson are referred to herein as the "Principal Shareholders" and together
with Nancy A. Epperson, the wife of Mr. Epperson and the sister of
Mr. Atsinger, as the "Shareholders." The Shareholders reorganized the Company
in August 1997 such that certain entities owned by the Shareholders became
wholly owned by the Company. In addition to the historical information
contained herein, this Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from those discussed herein. Factors that might cause such a
difference include, but are not limited to, those discussed under the captions
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as well as those discussed elsewhere in this
Prospectus. See "Special Cautionary Notice Regarding Forward-Looking
Statements."
 
                                  THE COMPANY
 
  Salem Communications Corporation is the leading radio broadcast company in
the United States, measured by number of stations owned and audience coverage,
that focuses on serving the religious/conservative listening audience. The
Company's two primary businesses include the ownership and operation of
religious format radio stations and the development and expansion of a national
radio network (the "Network") offering talk programming, news and music to
affiliated stations. The Company owns and/or operates 43 radio stations
concentrated in 28 geographically diverse markets across the United States.
 
  The Company offers a variety of specialized talk programming emphasizing
Bible study and Judeo-Christian values applied to family and community issues
as well as contemporary and traditional religious music. The 1997 Broadcasting
& Cable Yearbook identifies over 1,800 radio stations throughout the United
States that feature religious talk and music formats, including formats
identified as Religious, Gospel, Christian, Inspirational or Sacred. According
to statistics appearing in The M Street Journal, a broadcast industry
newsletter, the number of radio stations featuring religious formats has grown
approximately 69% between 1989 and 1997 and the religious format is the third
largest radio format in the United States after country and
news/talk/business/sports formats. According to Religion & Media Quarterly,
religious format radio stations have an audience of approximately 20.6 million
listeners.
 
  The Company focuses on serving the top 25 markets in terms of audience size
in the United States and has radio stations in nine of the top ten and 19 of
the top 25 of those markets. The Company is also interested in serving certain
mid-sized markets, which the Company considers to be markets that are among the
26th through 50th largest radio markets in the United States in terms of
audience size. Since January 1, 1992, the Company has grown significantly by
acquiring ownership of, or operating rights to, 29 radio stations in 20
markets, including 17 stations in 14 markets since January 1, 1996. Many of
these recently acquired radio stations were previously broadcasting in non-
religious formats and have been re-formatted by the Company. The Company's
experience has been that changing the format of an acquired station typically
requires a transition period during which the Company develops its program
customer and listener base. During such transition period, these stations
typically do not generate significant cash flow from operations. The Company's
total gross revenue, broadcast cash flow and EBITDA (as defined herein) were
$65.1 million, $25.5 million and $20.9 million, respectively, for the year
ended December 31, 1996 and were $54.5 million, $20.7 million and $15 million,
respectively, for the nine months ended September 30, 1997. The Company's
results of operations for the year ended December 31, 1996 and the nine months
ended September 30, 1997 include the results of many stations in transition
periods, which have not generated significant cash flow from operations in the
aggregate.
 
                                       3
<PAGE>

  Owned and/or Operated Stations. The following table sets forth information
about the number of radio stations owned and/or operated by the Company and the
markets served in order of market size:
 
<TABLE>
<CAPTION>
                                      NUMBER OF                                           NUMBER OF
                                      STATIONS                                            STATIONS
                                      ---------                                           ------------
        MARKET(1):        MSA RANK(2)  FM   AM            MARKET(1):          MSA RANK(2)  FM      AM
        ----------        ----------- ---- ----           ----------          ----------- ----    ----
 <C>                      <C>         <C>  <C>     <S>                        <C>         <C>     <C>
 New York, NY............       1        0    2    Pittsburgh, PA..........        20        1       1
 Los Angeles, CA.........       2        2    1    Cleveland, OH...........        22        0       2
 Chicago, IL.............       3        1    0    Denver-Boulder, CO......        23        1       2
 San Francisco, CA.......       4        0    1    Portland, OR............        24        1       1
 Philadelphia, PA........       5        0    2    Cincinnati, OH..........        25        0       1
                                                   Riverside-San
 Dallas-Ft. Worth, TX....       7        1    0    Bernardino, CA..........        26        0       1(5)
 Washington, D.C. .......       8        1    0    Sacramento, CA..........        28        0       2
 Houston-Galveston, TX...       9        1    1    Columbus, OH............        32        0       1
 Boston, MA..............      10        0    1    San Antonio, TX.........        34        0       1
 Seattle-Tacoma, WA......      13        0    3(3) Akron, OH...............        67        0       1
 San Diego, CA...........      14        0    1    Spokane, WA.............        87        1       0
 Minneapolis-St. Paul, MN
 ........................      16        0    1    Colorado Springs, CO....        95        3       0
 Phoenix, AZ.............      18        0    1    Oxnard, CA..............       109        1       0
 Baltimore, MD...........      19        0    1(4) Canton, OH..............       120        1(6)    0
                                                                                          ----    ----
                                                     TOTAL..............................    15      28
                                                                                          ====    ====
</TABLE>
- --------------------
(1) Actual city of license may differ from metropolitan market served.
 
(2) "MSA" means metropolitan statistical area.
 
(3) The Company operates one of the stations, which is licensed to a
    corporation owned by the Principal Shareholders of the Company, under the
    terms of a local marketing agreement. See "Federal Regulation of Radio
    Broadcasting--Local Marketing Agreements" and "Certain Transactions."
 
(4) The station is simulcast with WAVA-FM, Washington, D.C.
 
(5) The station is simulcast with KKLA-FM, Los Angeles.
 
(6) The station is simulcast with WHK-AM, Cleveland.
 
  For the year ended December 31, 1996 and the nine months ended September 30,
1997, the Company derived 57.5% and 53.4% of its gross revenue, or $37.5
million and $29.1 million, respectively, from the sale of nationally syndicated
and local block program time. The Company believes that sales of block program
time lessen its exposure to swings in general economic activity and thus make
its revenue stream less volatile. The Company derives its nationally syndicated
program revenue from a programming customer base consisting primarily of
geographically diverse, well-established non-profit religious and educational
organizations that purchase time on stations in a large number of markets in
the United States. These nationally syndicated program producers typically
purchase 13, 26 or 52 minute blocks on a Monday through Friday basis and may
offer supplemental programming for weekend release. The recognized leading
daily radio program featured on religious talk format stations is Focus on the
Family, which according to the 1997 Directory of Religious Media is syndicated
on 943 radio stations in the United States, including 35 Company stations as of
November 1997. Other leading radio programs currently include Insight for
Living (590 stations, including 26 Company stations), In Touch (490 stations,
including 27 Company stations) and Grace to You (294 stations, including 22
Company stations).
 
  For the year ended December 31, 1996 and the nine months ended September 30,
1997, the Company derived 26.7% and 27.6% of its gross revenue, or $17.4
million and $15.0 million, respectively, from the sale of local spot
advertising and 6.3% and 9.4% of its gross revenue, or $4.1 million and $5.1
million (including $2.7 million of reclassified infomercial advertising
revenue), respectively, from the sale of national spot advertising. The Company
in recent years has begun to place greater emphasis on the development of local
spot sales in all of its markets. The Company believes that the listening
audience for its radio stations is responsive to
 
                                       4
<PAGE>
 
affinity advertisers that promote products targeted to the
religious/conservative audience and is receptive to direct response appeals
such as those offered through infomercials. The Company's stations all have
affinity advertising customers in their respective markets. The Company also
generates spot advertising revenue from general market retailers, including
automobile dealers and grocery store chains, in many of its markets. Because
the Company does not sell advertising based on market share, it does not
subscribe to traditional audience measuring services, but instead sells
advertising based upon the proven success of its other advertising customers.
The Company's radio stations also receive revenue from national advertisers
desiring to include selected Company stations in national buys covering
multiple markets. These national advertising buys are placed through Salem
Radio Representatives ("SRR"), a wholly owned subsidiary of the Company, which
sells all national commercial advertising placed on the Network's commercial
affiliate radio stations.
 
  The Network. In 1993, the Company established the Network in connection with
its acquisition of certain assets of the former CBN Radio Network.
Establishment of the Network was a part of the Company's overall business
strategy to develop a national network of affiliated radio stations anchored by
the Company's owned and operated radio stations in major markets. The Network,
which is headquartered in Dallas, is focused on the development, production and
syndication of a broad range of programming specifically targeted to religious
talk and music stations as well as general market news/talk stations.
Currently, the Company has rights to six full-time satellite channels and all
Network product is delivered to affiliates via satellite.
 
  As of November 30, 1997, the Network had approximately 750 affiliate
stations, including the Company's owned and operated stations, that broadcast
one or more of the offered programming options. These programming options
feature talk shows, such as The Oliver North Show and The Alan Keyes Show, news
and music. Network operations also include commission revenue of SRR from
unaffiliated customers and an allocation of operating expenses estimated to
relate to such commission revenue. The Network's gross revenue for the year
ended December 31, 1996 and the nine months ended September 30, 1997 were $5.3
million and $4.5 million, respectively. While the Network earned net operating
income of $274,000 for the year ended December 31, 1996, it incurred a net
operating loss of $542,000 for the nine months ended September 30, 1997, due
primarily to continued costs associated with the development of a news
programming production and distribution capability and reduced advertising
revenue associated with syndicated talk programming.
 
  The Company is a California corporation. Its principal offices are located at
4880 Santa Rosa Road, Suite 300, Camarillo, California 93012 and its telephone
number is (805) 987-0400.
 
                               OPERATING STRATEGY
 
  Maintain and Enhance Leadership Position in Religious Talk Format. The
Company believes that an important factor in its ability to attract and retain
quality programming customers is its demonstrated long-term commitment to the
religious talk format. Program customers tend to be sophisticated purchasers of
air time that recognize that building a listener base capable of generating
revenue sufficient to cover programming costs may take several years. The
Company's experience has been that such programmers are accordingly reluctant
to make the commitment to building a new listener base unless they have a
reasonable expectation that the format will remain in place. Management of the
Company therefore intends to continue its long-term commitment to the religious
talk format. Management believes its commitment to growing the religious talk
format, increasing the number of owned and operated stations and developing
network operations and national sales activities allows for future growth
opportunities for the Company.
 
  Identify and Develop New Program Producers. The Company recognizes that the
ongoing success of its religious talk format is largely dependent on the
continued availability of quality programs. Management of the Company is
committed to assisting promising new program producers with advice on content
and structuring of programs in addition to advice on levels of support
staffing, engineering and programming delivery options. Station managers are
encouraged to evaluate local talk programs with a view toward expansion of
promising
 
                                       5
<PAGE>
 
programs into national syndication. The Company continues to emphasize this
important development area with the goal of maintaining a backlog of quality
programs available for placement in new markets and existing markets where the
Company may add additional stations.
 
  Emphasize Signal Quality and Market Coverage. The Company is committed to the
ongoing evaluation and improvement of its technical facilities, including power
increases, tower/antenna relocations and investment in state of the art
equipment. The Company believes that its success is attributable in part to its
ownership of broadcast facilities that provide broad signal coverage in its
markets.
 
  Build Station Identity Through Development of Strong Production Values. The
Company believes that an important element in retaining and increasing the
listening audience and expanding the base of potential advertisers for its
stations is the development of local station identity. The Company believes
that its emphasis on development of a station's identity during those times
when the Company is not broadcasting its customers' block programming will
allow it to compete with general format stations for listening audience and
advertising customers. Station employees with responsibility for programming
are encouraged to build identity through continual improvement of production
values and to share their ideas with other Company stations. The Company
assists local personnel and coordinates development of increased production
values through its director of programming located at the corporate
headquarters. Certain of the Company's stations have successfully adopted
techniques that have built identity through the development of local on-air
personalities associated with segments of the broadcast day, and these
techniques are being implemented at other Company stations.
 
  Expand and Diversify National Network. The Company is committed to expanding
the Network by adding to its menu of Network product offerings and by actively
promoting these products to Network affiliates. The Company believes that by
continually increasing the quality of its Network product it will add to its
affiliate base, thereby providing more audience reach that will attract more
national advertising customers and potentially generate business from national
advertising agencies. The Company competes aggressively for talk show talent it
believes will be attractive to existing and potential affiliates, refines
existing music formats and develops political commentary and public affairs
programming that are complementary to the product offerings of the Network. The
Company will continue to explore ways to better serve its customers and the
religious/conservative listening audience by using the combined resources of
its owned and operated stations and the Network. For example, unused Network
inventory can be used as an incentive to potential or existing program
producers to purchase block program time on the Company's radio stations. The
Company has successfully implemented this strategy in the past and will
continue to devote significant time and resources to find additional
synergistic uses of its radio stations and the Network.
 
                              ACQUISITION STRATEGY
 
  Expand Into New Markets.  The Company continues to pursue an acquisition
strategy of acquiring radio stations in the top 25 markets in which it
currently does not have a presence and acquiring selected stations in mid-sized
markets. The Company considers mid-sized markets to be the 26th through 50th
largest radio markets in the United States in terms of audience size. In the
early years of the Company's operations, and from time to time more recently,
it has acquired radio stations in markets smaller than mid-sized markets.
Generally, any recent acquisition of a station in a smaller market was
undertaken (i) to access an audience that the Company believed would be
particularly receptive to its format, such as the market in Colorado Springs,
Colorado, where the headquarters of a number of religious organizations are
located, or (ii) as part of an acquisition in which the Company was pursuing
its strategy of acquiring a station in a major or mid-sized market but was
required to acquire the smaller market station as part of a multiple station
transaction.
 
  The Company believes that its presence in large markets makes it attractive
to national program syndicators and national advertisers. In addition, the
geographic diversity of the Company's markets reduces its dependence on any
single local economy. Over the past 20 years, the Company has developed and
implemented a model for evaluating the desirability of entering a new market.
Management considers the number of stations already serving the target market
with religious formats, the programming within that format (music or talk), the
quality
 
                                       6
<PAGE>
 
of talk programs offered and the signal strength of the competing stations. The
signal strength of any station that becomes available for purchase is a
critical factor in the evaluation process.
 
  Expand in Existing Markets. The Company pursues the acquisition of additional
stations in markets in which it already has a presence. The experience of the
Company with existing duopolies and triopolies has been positive. Multiple
stations making use of one general manager and sales staff and one broadcast
facility have resulted in operational efficiencies in certain markets. In
addition, the Company intends to develop more talk and music product at the
Network level that will be available for use on additional stations in a
market. The Company believes new religious music formats are gaining increased
popularity and are complementary to the Company's religious talk format. Three
separate music formats are produced by the Network and are available for use by
Company stations. This strategy has been implemented successfully in Colorado
Springs, where the Company owns three FM stations, two of which offer religious
music formats and one of which features a religious talk format.
 
  Upgrades in Existing Markets. The Company is continually looking for upgrade
opportunities in existing markets to expand its audience reach. This strategy
of acquiring upgraded facilities in existing markets has been an area of
emphasis for senior management for many years and has been successfully
demonstrated in such markets as Seattle and New York in prior years. More
recently, the Company has significantly improved its position in Boston and
Dallas through the acquisition of more powerful stations that have allowed the
Company to continue its business strategy of operating stations that provide
broad signal coverage in its markets.
 
  Acquisition Financing. In the past, the Company has principally financed
acquisitions of radio stations through borrowings, including borrowings under
credit agreements with banks and, to a lesser extent, from cash flow from
operations and selected asset dispositions. Taking into account certain
restrictions under the Credit Agreement, however, the Company is not currently
able to borrow for acquisitions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
                              RECENT DEVELOPMENTS
 
  The Company has completed the purchase of the following radio stations in
1997:
 
<TABLE>
<CAPTION>
   DATE                             MARKET     STATION MSA RANK PURCHASE PRICE
   ----                             ------     ------- -------- --------------
   <S>                          <C>            <C>     <C>      <C>
   January 1997................ Dallas, TX     KWRD-FM     7     $40,100,000(1)
   January 1997................ Cleveland, OH  WHK-AM     22       6,220,000
   February 1997............... Canton, OH     WHK-FM    120       5,903,000
   February 1997............... Akron, OH      WHLO-AM    67       1,995,000
   February 1997............... Boston, MA     WEZE-AM    10       7,030,000
   April 1997.................. Sacramento, CA KTKZ-AM    28       1,485,000
   July 1997................... Baltimore, MD  WITH-AM    19       1,114,000
   July 1997................... Cincinnati, OH WTSJ-AM    25       1,114,000
   October 1997................ Cleveland, OH  WCCD-AM    22         700,000
</TABLE>
- --------------------
(1) This acquisition was consummated on December 30, 1996, but operational
    control was not transferred until January 1997.
 
  In November 1997, the Company sold substantially all of the assets of radio
station WPZE-AM, Boston, Massachusetts, for $5 million. Proceeds from the sale
are being held by a qualified intermediary under a like-kind exchange agreement
to preserve the Company's ability to effect a tax-deferred exchange. If the
Company does not identify replacement property it will use the proceeds to
reduce outstanding borrowings under the Credit Agreement.
 
 
                                       7
<PAGE>
 
                               THE EXCHANGE OFFER
 
<TABLE>
 <C>                                         <S>
 Securities Offered......................... Up to $150,000,000 aggregate
                                             principal amount of 9 1/2% Series
                                             B Senior Subordinated Notes due
                                             2007.

 The Exchange Offer......................... The Notes are being offered in
                                             exchange for a like principal
                                             amount of the Company's Old
                                             Notes. Old Notes may be exchanged
                                             only in integral multiples of
                                             $1,000. The issuance of the Notes
                                             is intended to satisfy the
                                             obligations of the Company under
                                             the terms of the Registration
                                             Rights Agreement.

 Tenders; Expiration Date; Withdrawal....... The Exchange Offer will expire at
                                             12:00 Midnight, New York City
                                             time on March 11, 1998, or such
                                             later date and time to which it
                                             is extended by the Company (the
                                             "Expiration Date"). Tenders of
                                             Old Notes pursuant to the
                                             Exchange Offer may be withdrawn
                                             at any time prior to the
                                             Expiration Date. In the event the
                                             Company terminates the Exchange
                                             Offer and does not accept for
                                             exchange any Old Notes pursuant
                                             to the Exchange Offer, the
                                             Company will promptly return such
                                             Old Notes to the Holders thereof.

 Accrued Interest on the Notes.............. The Notes will bear interest from
                                             and including the date of
                                             issuance of the Old Notes.
                                             Accordingly, Holders who receive
                                             Notes in exchange for Old Notes
                                             will forego accrued but unpaid
                                             interest on their exchanged Old
                                             Notes for the period from and
                                             including the date of issuance of
                                             the Old Notes to the date of
                                             exchange, but will be entitled to
                                             such interest under the Notes.

 Conditions of the Exchange Offer........... The Exchange Offer is subject to
                                             certain customary conditions, any
                                             or all of which may be waived by
                                             the Company. The Company
                                             currently expects that each of
                                             the conditions will be satisfied
                                             and that no waivers will be
                                             necessary. See "The Exchange
                                             Offer--Conditions to the Exchange
                                             Offer."

 Procedures for Tendering Old Notes......... Each Holder wishing to accept the
                                             Exchange Offer must complete and
                                             sign the Letter of Transmittal,
                                             in accordance with the
                                             instructions contained therein,
                                             and submit the Letter of
                                             Transmittal to the Exchange Agent
                                             identified below. In addition,
                                             either (i) certificates for such
                                             Old Notes must be received by the
                                             Exchange Agent along with the
                                             Letter of Transmittal, (ii) a
                                             timely confirmation of a book-
                                             entry transfer (by generating an
                                             "agent message" via the Automated
                                             Tender Offer Program System of
                                             The Depository Trust Company (the
                                             "DTC")) of such Old Notes, if
                                             such procedure is available, into
                                             the Exchange Agent's account at
                                             the DTC pursuant to the procedure
                                             of book-entry transfer described
                                             herein, must be received by the
                                             Exchange Agent on or prior to the
                                             Expiration Date or (iii) the
                                             holder must comply with the
                                             guaranteed delivery procedures
                                             described herein. See "The
                                             Exchange Offer--Procedures for
                                             Tendering."
</TABLE>
 
 
                                       8
<PAGE>
 
<TABLE>
 <C>                                         <S>
 Guaranteed Delivery Procedures............. Holders of Old Notes who wish to
                                             tender their Old Notes and whose
                                             Old Notes are not immediately
                                             available or who cannot deliver
                                             their Old Notes and the Letter of
                                             Transmittal and any other
                                             documents required by the Letter
                                             of Transmittal to the Exchange
                                             Agent prior to the Expiration
                                             Date, must tender their Old Notes
                                             according to the guaranteed
                                             delivery procedures set forth in
                                             "The Exchange Offer--Guaranteed
                                             Delivery Procedures."

 Acceptance of Old Notes and Delivery of     
  Notes..................................... The Company will accept for       
                                             exchange any and all Old Notes    
                                             which are properly tendered in    
                                             the Exchange Offer prior to 12:00 
                                             Midnight, New York City time, on  
                                             the Expiration Date. See "The     
                                             Exchange Offer--Acceptance of Old 
                                             Notes for Exchange; Delivery of   
                                             Notes."                            

 Rights of Dissenting Holders............... Holders of Old Notes do not have
                                             any appraisal or dissenters'
                                             rights under the California
                                             General Corporation Law in
                                             connection with the Exchange
                                             Offer.

 Exchange Agent............................. The Bank of New York; telephone
                                             (212) 815-3687. See "The Exchange
                                             Offer--Exchange Agent."
</TABLE>
 
                                       9
<PAGE>
 
 
                               TERMS OF THE NOTES
 
  The terms of the Notes are identical in all material respects to the terms of
the Old Notes, except that the Notes are generally expected to be freely
transferable as described under "The Exchange Offer--Resales of Notes."
 
<TABLE>
 <C>                                         <S>
 Maturity Date.............................. October 1, 2007.

 Interest Payment Dates..................... April 1 and October 1 of each
                                             year, commencing April 1, 1998.

 Optional Redemption........................ The Notes are redeemable at the
                                             option of the Company, in whole
                                             or in part, at any time on or
                                             after October 1, 2002, at the
                                             redemption prices set forth
                                             herein, plus accrued and unpaid
                                             interest to the redemption date.
                                             In addition, the Company, at its
                                             option, may redeem up to $50.0
                                             million in aggregate principal
                                             amount of the Notes at any time
                                             on or prior to October 1, 2000 at
                                             109.50% of the aggregate
                                             principal amount so redeemed,
                                             plus accrued and unpaid interest
                                             thereon to the redemption date,
                                             with the proceeds of one or more
                                             Public Equity Offerings, provided
                                             that at least $100.0 million in
                                             aggregate principal amount of the
                                             Notes remain outstanding
                                             immediately after the occurrence
                                             of any such redemption. See
                                             "Description of the Notes--
                                             Optional Redemption."

 Change of Control.......................... Upon a Change of Control, each
                                             holder of the Notes will be
                                             entitled to require the Company
                                             to purchase such holder's Notes
                                             at 101% of the principal amount
                                             thereof, plus accrued and unpaid
                                             interest to the purchase date.
                                             See "Description of the Notes--
                                             Certain Covenants--Purchase of
                                             Notes Upon a Change of Control."

 Guarantees................................. The Notes will be guaranteed,
                                             jointly and severally, on a
                                             senior subordinated basis by the
                                             Guarantors. The Guarantees will
                                             be general unsecured obligations
                                             of the Guarantors, subordinated
                                             in right of payment to all
                                             Guarantor Senior Indebtedness,
                                             including any guarantees by
                                             Guarantors of the Company's
                                             obligations under the Credit
                                             Agreement, and senior in right of
                                             payment to any Subordinated
                                             Indebtedness of the Guarantors.
                                             See "Description of Notes--
                                             Guarantees."

 Subordination.............................. The Notes will be general
                                             unsecured obligations of the
                                             Company, subordinated in right of
                                             payment to all existing and
                                             future Senior Indebtedness,
                                             including the Company's
                                             obligations under the Credit
                                             Agreement, and senior in right of
                                             payment to any Subordinated
                                             Indebtedness of the Company. See
                                             "Description of Notes--
                                             Subordination."

 Certain Covenants.......................... The Indenture under which the Old
                                             Notes were and the Notes will be
                                             issued contains certain covenants
                                             that, among other things, limits
                                             the incurrence of additional
                                             indebtedness by the Company and
                                             Restricted Subsidiaries
</TABLE>
 
                                       10
<PAGE>
 
<TABLE>
 <C>                                         <S>
                                             (as defined herein), the payment
                                             of dividends, the use of proceeds
                                             of certain asset sales and
                                             certain transactions with
                                             affiliates and contains certain
                                             other restrictive covenants
                                             affecting the Company and
                                             Restricted Subsidiaries. See
                                             "Description of Notes--Certain
                                             Covenants."

 Absence of a Public Market for the Notes... There has been no public market
                                             for the Old Notes and it is not
                                             currently anticipated that an
                                             active public market for the
                                             Notes will develop. No assurance
                                             can be given as to the liquidity
                                             of the trading market for the
                                             Notes following the Exchange
                                             Offer.
</TABLE>
 
                                       11
<PAGE>
 
           SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
 
  The summary consolidated financial information below should be read in
conjunction with, and is qualified by reference to, the Company's consolidated
financial statements and related notes, "Selected Consolidated Financial
Information of the Company" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus. The financial results of the Company are not comparable from year
to year because of the acquisition and disposition of various radio stations
and radio networks by the Company.
<TABLE>
<CAPTION>
                                                                            NINE MONTHS ENDED
                                     YEAR ENDED DECEMBER 31                   SEPTEMBER 30
                          ------------------------------------------------  ------------------
                            1992      1993      1994      1995      1996      1996      1997
                          --------  --------  --------  --------  --------  --------  --------
                                              (DOLLARS IN THOUSANDS)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS
 DATA:
Net revenue.............  $ 28,532  $ 32,423  $ 38,575  $ 48,168  $ 59,010  $ 42,465  $ 49,449
Operating expenses:
 Station operating
  expenses..............    14,922    17,011    22,179    27,527    33,463    23,907    28,793
 Corporate expenses.....     2,647     3,193     3,292     3,799     4,663     3,413     4,998
 Tax reimbursements to
  S corporation
  shareholders..........     1,029     1,311       977     2,057     2,038     1,529     1,780
 Depreciation and
  amortization..........     6,441     6,601     7,633     7,884     8,394     6,148     9,382
                          --------  --------  --------  --------  --------  --------  --------
Operating expenses......    25,039    28,116    34,081    41,267    48,558    34,997    44,953
                          --------  --------  --------  --------  --------  --------  --------
 Net operating income...     3,493     4,307     4,494     6,901    10,452     7,468     4,496
Other income (expense):
 Interest
  income/expense, net...    (2,516)   (2,349)   (3,438)   (6,327)   (6,838)   (5,198)   (8,392)
 Gain (loss) on disposal
  of assets.............    (1,044)    1,603      (482)       (7)   16,064    12,659      (190)
 Other income (expense).      (393)        2      (135)     (255)     (270)     (209)     (288)
                          --------  --------  --------  --------  --------  --------  --------
Total other income
 (expense)..............    (3,953)     (744)   (4,055)   (6,589)    8,956     7,252    (8,870)
Income (loss) before
 income taxes and
 extraordinary item.....      (460)    3,563       439       312    19,408    14,720    (4,374)
Provision (benefit) for
 income taxes...........      (415)    1,437      (247)     (204)    6,655     5,046    (1,790)
                          --------  --------  --------  --------  --------  --------  --------
Income (loss) before
 extraordinary item.....       (45)    2,126       686       516    12,753     9,674    (2,584)
Extraordinary gain
 (loss)(1)..............       921       --        --       (394)      --        --     (1,090)
                          --------  --------  --------  --------  --------  --------  --------
Net income (loss).......  $    876  $  2,126  $    686  $    122  $ 12,753  $  9,674  $ (3,674)
                          ========  ========  ========  ========  ========  ========  ========
Pro forma net income
 (loss)(2)..............  $  1,262  $  2,917  $    848  $  1,024  $ 12,838  $  9,727  $ (2,651)
                          ========  ========  ========  ========  ========  ========  ========
OTHER DATA:
Cash flows provided by
 operating activities...  $  6,030  $  6,879  $  7,482  $  7,681  $ 10,495  $  9,261  $  1,928
Cash flows used in
 investing activities...  $(19,301) $(11,693) $(18,806) $(27,681) $(18,923) $(13,250) $(26,592)
Cash flows provided by
 financing activities...  $ 15,453  $  3,612  $ 11,827  $ 19,227  $  9,383  $  3,332  $ 24,805
Broadcast cash flow(3)..  $ 13,610  $ 15,412  $ 16,396  $ 20,641  $ 25,547  $ 18,558  $ 20,656
Broadcast cash flow
 margin(4)..............      47.7%     47.5%     42.5%     42.9%     43.3%     43.7%     41.8%
EBITDA (excludes all
 other income items)(3).  $ 10,963  $ 12,219  $ 13,104  $ 16,842  $ 20,884  $ 15,145  $ 15,658
Capital expenditures....  $  1,691  $    912  $  2,441  $  3,040  $  6,982  $  4,119  $  5,502
Purchase price of radio
 stations...............  $ 20,000  $ 15,500  $ 14,935  $ 24,550  $ 59,621  $  8,302  $ 24,861
Earnings to fixed
 charges ratio(5).......       0.9x      2.1x      1.1x      1.0x      3.2x                 .5x
PRO FORMA RATIO:
Pro forma earnings to
 fixed charges ratio(5).                                               1.7x                 .4x
</TABLE>
 
<TABLE>
<CAPTION>
                                        DECEMBER 31
                         ----------------------------------------- SEPTEMBER 30
                          1992    1993    1994     1995     1996       1997
                         ------- ------- ------- -------- -------- ------------
<S>                      <C>     <C>     <C>     <C>      <C>      <C>
BALANCE SHEET DATA:
Cash and cash
 equivalents............ $ 2,479 $ 1,277 $ 1,780 $  1,007 $  1,962   $  2,103
Working capital.........     322   5,836   1,852    1,088    8,258     17,573
Intangible assets, net..  32,146  39,296  46,748   61,923  106,781    121,833
Total assets............  62,106  69,656  82,041  104,817  159,185    184,133
Long-term debt
 (including current
 portion)...............  44,915  48,656  60,656   81,020  121,790    160,100
Shareholders' equity....  10,348  12,474  13,160   13,282   20,354      9,386
</TABLE>
 
                                       12
<PAGE>
 
- --------------------
(1) The extraordinary gain in 1992 represents a gain on early extinguishment of
    a private annuity agreement. The extraordinary loss in 1995 and 1997
    relates to the write-off of loan and related fees related to the repayment
    of long-term debt. See "Management's Discussion and Analysis of Financial
    Condition and Results of Operations" and Note 4 of the Notes to
    Consolidated Financial Statements.
 
(2) The Company's consolidated financial data for the periods presented include
    the results of operations, assets and liabilities of New Inspiration
    Broadcasting Company, Inc. ("New Inspiration") and Golden Gate Broadcasting
    Company, Inc. ("Golden Gate"), which were both S corporations under common
    ownership and control with the Company prior to the Reorganization (as
    defined herein). Federal and state income taxes (except for a 1.5% state
    franchise tax) are not provided for New Inspiration and Golden Gate in the
    consolidated statements of operations of the Company for the periods
    presented because the tax attributes of S corporations are passed through
    to their shareholders. Prior to the Reorganization, New Inspiration and
    Golden Gate reimbursed the S corporation shareholders for their individual
    income tax liabilities on the earnings of the S corporations. These tax
    reimbursements to S corporation shareholders are reflected as an operating
    expense in the Company's consolidated financial statements.
 
  In August 1997, the Company, New Inspiration and Golden Gate effected the
  Reorganization pursuant to which the S corporations became wholly owned by
  the Company. The S corporation status of New Inspiration and Golden Gate was
  terminated in the Reorganization. To give effect to the Reorganization,
  including the termination of the S corporation status of New Inspiration and
  Golden Gate, pro forma net income excludes the tax reimbursements to S
  corporation shareholders (because such amounts would not have been paid had
  New Inspiration and Golden Gate been subject to income taxes) and includes a
  pro forma tax provision at an estimated combined federal and state income tax
  rate of approximately 40% (to reflect an estimated income tax provision
  (benefit) of the Company) as if the Reorganization had occurred at the
  beginning of each period presented in the Company's consolidated financial
  data. See "Business--Corporate Structure and Reorganization."
 
  The following table reflects the pro forma adjustments to historical net
  income:
<TABLE>
<CAPTION>
                                                                 NINE MONTHS
                                                                    ENDED
                               YEAR ENDED DECEMBER 31           SEPTEMBER 30
                         ------------------------------------- ---------------
                          1992    1993   1994   1995    1996    1996    1997
                         ------  ------ ------ ------  ------- ------- -------
<S>                      <C>     <C>    <C>    <C>     <C>     <C>     <C>
 Pro Forma Information:
   Income (loss) before
    income taxes and
    extraordinary
    item as reported
    above............... $ (460) $3,563 $  439 $  312  $19,408 $14,720 $(4,374)
   Add back tax
    reimbursements to
    S corporation
    shareholders........  1,029   1,311    977  2,057    2,038   1,529   1,780
                         ------  ------ ------ ------  ------- ------- -------
   Pro forma income
    (loss) before income
    taxes and
    extraordinary item .    569   4,874  1,416  2,369   21,446  16,249  (2,594)
   Pro forma income tax
    provision (benefit).    228   1,957    568    951    8,608   6,522  (1,033)
                         ------  ------ ------ ------  ------- ------- -------
   Pro forma income
    (loss) before
    extraordinary item..    341   2,917    848  1,418   12,838   9,727  (1,561)
   Extraordinary gain
    (loss)..............    921     --     --    (394)     --      --   (1,090)
                         ------  ------ ------ ------  ------- ------- -------
   Pro forma net income
    (loss).............. $1,262  $2,917 $  848 $1,024  $12,838 $ 9,727 $(2,651)
                         ======  ====== ====== ======  ======= ======= =======
</TABLE>
 
(3) "Broadcast cash flow" consists of net operating income before tax
    reimbursements to S corporation shareholders, depreciation and amortization
    and corporate expenses. "EBITDA" consists of net operating income before
    tax reimbursements to S corporation shareholders and depreciation and
    amortization. Although broadcast cash flow and EBITDA are not measures of
    performance calculated in accordance with GAAP, management believes that
    they are useful to an investor in evaluating the Company because they are
    measures widely used in the broadcast industry to evaluate a radio
    company's operating performance. However, broadcast cash flow and EBITDA
    should not be considered in isolation or as substitutes for net income,
    cash flows from operating activities and other income or cash flow
    statement data prepared in accordance with GAAP as a measure of liquidity
    or profitability.
 
(4) Broadcast cash flow margin is broadcast cash flow as a percentage of net
    revenue.
 
(5) For purposes of computing the ratio of earnings to fixed charges,
    "earnings" consist of income from operations before income taxes plus fixed
    charges, and "fixed charges" consist of interest expense plus an allocation
    of a portion of rent expense representing interest. The pro forma earnings
    to fixed charges ratio assumes the issuance of the Notes and the repayment
    in full of the Company's outstanding indebtedness under the Company's prior
    credit agreement which was repaid in full upon issuance of the Old Notes on
    September 25, 1997 as if each occurred at the beginning of each period
    presented. For the years ended December 31, 1992 and 1995, and for the nine
    months ended September 30, 1997, the Company's earnings were inadequate to
    cover fixed charges; the coverage deficiency for the years ended
    December 31, 1992 and 1995 was $460,000 and $313,000, respectively, and for
    the nine months ended September 30, 1997 was $4.4 million (actual) and $7.2
    million (pro forma).
 
                                       13
<PAGE>
 
                                 RISK FACTORS
 
  In addition to the other information set forth elsewhere in this Prospectus,
the following risk factors should be carefully considered before making an
investment in the Notes offered hereby.
 
SUBSTANTIAL LEVERAGE; SUBORDINATION; RESTRICTIONS IMPOSED BY CREDIT AGREEMENT;
ASSET ENCUMBRANCE
 
  The Company is highly leveraged with approximately $160.1 million of total
Indebtedness outstanding and approximately $9.4 million of shareholders'
equity. The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii)
the Company must pay interest on the Notes and interest and principal on its
other indebtedness, leaving less funds for other purposes, (iii) the Company
may be at a competitive disadvantage to its less leveraged competitors; and
(iv) the Company could be more vulnerable to a downturn in general economic
conditions.
 
  The Notes are unsecured and thus, in effect, will rank junior to any secured
indebtedness of the Company and the Guarantors. The payment of any amount
owing in respect of the Notes will be subordinated to the prior payment in
full of all existing and future Senior Indebtedness of the Company, including
all amounts owing under the Credit Agreement. In addition, the Guarantees of
the Notes will be subordinated to the prior payment in full of all existing
and future Guarantor Senior Indebtedness of the Guarantors. Consequently, in
the event of the liquidation, dissolution, reorganization or similar
proceeding with respect to the Company or the Guarantors, assets of the
Company and the Guarantors will be available to pay obligations on the Notes
only after all Senior Indebtedness or Guarantor Senior Indebtedness, as
applicable, has been paid in full, and there can be no assurance that
sufficient assets to pay amounts due on all or any of the Notes will remain.
See "Description of the Notes--Subordination." As of September 30, 1997, the
Company and the Guarantors had an aggregate of $10.1 million of Senior
Indebtedness outstanding under the Company's $75.0 million senior secured
reducing revolving credit facility (the "Credit Agreement") and no other
Indebtedness outstanding other than the Notes. Subject to restrictions in the
Indenture and the Credit Agreement, the Company will be able to incur
additional Senior Indebtedness, including indebtedness under the Credit
Agreement.
 
  The indebtedness outstanding under the Credit Agreement is secured by liens
on substantially all of the assets of the Company and the Guarantors,
constitutes Senior Indebtedness and will come due prior to the maturity of the
Notes. Indebtedness under the Credit Agreement is at variable rates of
interest, which will cause the Company to be vulnerable to increases in
interest rates (except to the extent the Company has entered into certain
Interest Rate Agreements (as defined herein) with respect thereto). The Credit
Agreement includes certain restrictive covenants that, among other things and
with certain exceptions, limit the Company's ability to incur additional
indebtedness, enter into affiliate transactions, pay dividends, consolidate,
merge or effect certain asset sales, make certain investments or loans and
change the nature of its business. The Credit Agreement also requires
satisfaction by the Company of certain financial covenants, which will require
maintenance of specified financial ratios and compliance with certain
financial tests, including ratios for maximum leverage, minimum interest
coverage, minimum debt service coverage and minimum fixed charge coverage. The
ability of the Company to comply with these and other provisions of the Credit
Agreement may be affected by events beyond the Company's control. The breach
of any of these covenants could result in a default under the Credit
Agreement, in which case, depending on the actions taken by the lenders
thereunder or their successors in interest, such lenders would be entitled to
declare all amounts borrowed under the Credit Agreement, together with accrued
interest, to be due and payable. If the Company were unable to repay such
borrowings, such lenders could proceed against their collateral. See
"Description of Certain Indebtedness--Credit Agreement." If the indebtedness
under the Credit Agreement were accelerated, there can be no assurance that
the assets of the Company would be sufficient to repay in full such
indebtedness and the other indebtedness of the Company, including the Notes.
See "Description of the Notes."
 
OPERATING AND GROWTH STRATEGY
 
  Because the Company maintains a religious format at nearly all its owned and
operated radio stations and offers religious programming options through the
Network, the success of the Company is dependent upon the
 
                                      14
<PAGE>
 
popularity of religious formats, the financial success of the organizations
purchasing block program time and spot advertising on the Company's stations
and the financial success of religious format radio stations that purchase
programming through the Network. The Company recognizes that this commitment
may result in the foregoing of certain opportunities, such as switching to
non-religious formats in certain markets that appear, or may appear in the
future, to offer better profit opportunities. The Company believes, however,
that this commitment is necessary in order to continue to obtain commitments
from those quality program producers whose presence on the Company's stations
will attract and retain the religious/conservative listening audience. While
the Company has been successful in the past with the religious formats of its
stations and Network programming, no assurance can be given that this format
will be successful in the future.
 
  Since January 1, 1992, the Company has grown significantly by acquiring
ownership of, or operating rights to, 29 radio stations in 20 markets, nine of
which were acquired after January 1, 1997. Typically the Company has acquired
radio stations that operate under a different format than the religious/talk
format the Company employs. The Company is committed to the religious/talk
format and considers its commitment to have brought it success by allowing
quality programmers to commit their resources to development of their
programming based on the comfort that the format will exist long enough for
such programmers to succeed in building an audience on the Company's stations.
The Company intends to continue its growth and operating strategies through
continued acquisitions of radio station groups and individual radio stations
in selected markets and expects that, consistent with past practices, it will
reformat most of these radio stations. See "Business--Acquisition Strategy."
The Company's growth and operating strategy has a number of inherent risks
including: (i) the Company may be unable to generate cash flow in reformatted
stations as effectively as it has in the past, (ii) the Company's management
team may be unable to manage a larger organization or may be unable to
integrate newly acquired stations into its management structure as effectively
as when it had fewer stations to manage, (iii) the acquisitions that the
Company makes may not benefit the Company as expected, (iv) the Company may be
unable to locate attractive acquisition opportunities or may be forced to pay
higher prices due to increased competition for such radio stations and (v) to
continue its acquisition strategy, the Company may need and be unable to
obtain additional financing on terms acceptable to its management and in
compliance with the Indenture and the Credit Agreement or at all. Taking into
account certain restrictions under the Credit Agreement, the Company is not
currently able to borrow for acquisitions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." The Company currently is evaluating certain acquisitions
but has no binding acquisition commitments other than as described in
"Summary--Recent Developments."
 
DEPENDENCE ON KEY CUSTOMERS AND KEY MARKETS; MARKET GROWTH CONSTRAINTS
 
  A substantial portion of the Company's historical revenue has been realized
from the sale of block program time to independent producers of religious
programming. While no single programming customer represented more than 7.5%
of total program revenue for the year ended December 31, 1996 or the six
months ended June 30, 1997, the top five revenue-producing program customers
accounted for 20.7% and 22.2%, respectively, of gross program revenue and
11.9% of gross revenue for such periods. These top programmers purchase block
program time on many of the Company's stations. The Company's contracts with
program providers are not exclusive and, with limited exceptions, may be
terminated by either party on 30 days' notice. The Company's operating results
and business could be materially and adversely affected should any of its
significant programmers experience financial difficulties or determine to move
their programs to other radio broadcasters or media.
 
  A substantial portion of the Company's historical revenue has been realized
from the results of operations of several of its radio stations in certain key
markets. The Company's top four revenue-producing stations accounted for 38.3%
and 36.1%, respectively, of the Company's net revenue for the year ended
December 31, 1996 and the nine months ended September 30, 1997 and 59.5% and
59.7%, respectively, of the Company's EBITDA for the same periods. A
significant decline in net revenue from the Company's stations in these
markets could have a material adverse effect on the Company's financial
position and results of operations.
 
                                      15
<PAGE>
 
  In addition, the Company's ability to enter new markets has been dependent
to a significant degree upon the willingness of its core group of national
programming customers to purchase air time in these new markets and thus
expand the distribution of their programs. There can be no assurance that such
core group will continue to support the Company's further expansion into new
markets. Because of the substantial investment required to purchase block
program time in new markets and the significant time lag involved in creating
a listener base capable of generating revenue sufficient to cover these
programming costs, these programming customers may not be willing to make the
financial commitment associated with expanding into new markets, which may in
turn affect the Company's ability to expand into new markets. In addition, the
Company's ability to expand into new markets could be limited by programming
customers having pre-existing relationships with other stations in such
markets.
 
HOLDING COMPANY STRUCTURE; POSSIBLE UNENFORCEABILITY OF GUARANTEES; FRAUDULENT
CONVEYANCES AND PREFERENTIAL TRANSFERS
 
  The Company is a holding company that derives substantially all of its
operating income from the Guarantors, including income used for the payment of
principal of and interest on the Notes. The ability of the Guarantors to make
such payments is restricted by, among other things, applicable state corporate
laws, other laws and regulations or terms of agreements to which they may
become party.
 
  The Guarantees provided by the Guarantors may be subject to legal challenge
in the event of the bankruptcy of a Guarantor. To the extent that the
Guarantees are not enforceable, the rights of holders of the Notes to
participate in any distribution of assets of any Guarantor upon liquidation,
bankruptcy, reorganization or otherwise may, as is the case with other
unsecured creditors of the Company, be subject to prior claims of creditors of
the Guarantor.
 
  Enforcement of the Guarantees may be limited by certain fraudulent
conveyance laws. Various fraudulent conveyance and similar laws have been
enacted for the protection of creditors and may be utilized by a court of
competent jurisdiction to avoid the Guarantees. The requirements for
establishing a fraudulent conveyance vary depending on the law of the
jurisdiction that is being applied. Generally, if in a bankruptcy,
reorganization, rehabilitation or similar proceeding in respect to the Company
or a Guarantor, or in a lawsuit by or on behalf of creditors against the
Company or a Guarantor, a court were to find that (i) the Company or a
Guarantor, as the case may be, incurred indebtedness in connection with the
Notes (including the Guarantees) with the intent of hindering, delaying or
defrauding current or future creditors of the Company or the Guarantor, as the
case may be, or (ii) the Company or a Guarantor, as the case may be, received
less than reasonably equivalent value or fair consideration for incurring such
indebtedness (including the Guarantees), as the case may be, and either
(a) was insolvent at the time of the incurrence of such indebtedness
(including the Guarantees), (b) was rendered insolvent by reason of incurring
such indebtedness (including the Guarantees), (c) was at such time engaged or
about to engage in a business or transaction for which its assets constituted
unreasonably small capital or (d) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, such court
could, with respect to the Company or the Guarantor, as the case may be,
declare void in whole or in part the obligations of the Company or such
Guarantor in connection with the Notes (including the Guarantees). Generally,
an entity will be considered insolvent if the sum of its respective debts was
greater than the fair saleable value of all of its property at a fair
valuation or if the present fair saleable value of its assets is less than the
amount that will be required to pay its probable liability on its existing
debts, as they become absolute and mature.
 
  Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against
the Company or any Guarantor within 90 days after any payment by the Company
or such Guarantor with respect to the Notes or a Guarantee, respectively, or
if the Company or such Guarantor anticipated becoming insolvent, all or a
portion of such payment could be avoided as a preferential transfer and the
recipient of such payment could be required to return such payment.
 
                                      16
<PAGE>
 
DEPENDENCE ON KEY PERSONNEL; CONTROL OF COMPANY
 
  The Company's business is dependent upon the performance of certain key
individuals, particularly Edward G. Atsinger III, the President, Chief
Executive Officer and a director, and Stuart W. Epperson, the Chairman of the
Board. The loss of the services of either Mr. Atsinger or Mr. Epperson, each
of whom has been involved in the radio broadcasting industry for more than 25
years, could have a material adverse effect upon the Company. The Company has
entered into Employment Agreements with Mr. Atsinger and Mr. Epperson which
expire July 31, 2000. See "Management--Employment Agreements." In addition,
the Company has purchased key-man life insurance covering Mr. Atsinger and Mr.
Epperson in the amount of $5.0 million each.
 
  The Principal Shareholders hold 86.8% of the outstanding common stock of the
Company. See "Securities Ownership of Certain Beneficial Owners." As a result,
the Principal Shareholders are effectively able to elect all of the members of
the Board of Directors of the Company and therefore direct the management and
policies of the Company. The Principal Shareholders may have interests
different from those of holders of the Notes.
 
COMPETITION
 
  The radio broadcasting industry, including the religious format segment of
this industry, is a highly competitive business. The financial success of each
of the Company's radio stations that features talk programming is dependent,
to a significant degree, upon its ability to generate revenue from the sale of
block program time to national and local religious and educational
organizations. The Company competes for this program revenue with a number of
different commercial and noncommercial radio station licensees. While no group
owner specializing in the religious format approaches the Company in size of
potential listening audience and presence in major markets, religious format
stations exist and enjoy varying degrees of prominence and success in all
markets. The Company owns and/or operates 30 radio stations in 19 of the top
25 radio markets in terms of audience size. Two competitors of the Company
with the next highest presence in the top 25 markets own and/or operate only
15 stations in 7 of such major markets and 10 stations in 10 of such markets,
respectively. While management believes that its commitment to acquiring full
market coverage facilities, its reputation for quality programming and its
relationships with key customers position it well for continued growth and
stability of program revenue, there can be no assurance that the Company will
be able to maintain or increase its current program revenue.
 
  The Company also competes for revenue in the spot advertising market with
other commercial religious format and general format radio station licensees.
There can be no assurance that the Company will be able to maintain or
increase its current advertising revenue. The Company competes in the spot
advertising market with other media as well, including broadcast television,
cable television, newspapers, magazines, direct mail coupons and billboard
advertising. Competition may also come from new media technologies currently
being developed or introduced, such as the delivery of audio programming by
cable television systems, by satellite and by digital audio broadcasting
("DAB"). DAB may deliver by satellite to national and regional audiences,
multi-channel, multiformat digital radio services with quality equivalent to
compact discs. The delivery of information through the Internet also could
create new competition. The Federal Communications Commission (the "FCC") has
recently authorized spectrum for the use of a new technology, satellite
digital audio radio services ("DARS"), to deliver audio programming. DARS may
provide a medium for the delivery by satellite or terrestrial means of
multiple new audio programming formats to local and national audiences. The
Company cannot predict at this time the effect, if any, that any such new
technologies may have on the radio broadcasting industry.
 
  The Network also faces competition. The Network competes with other
commercial radio networks that offer news and talk programming to religious
format stations and two noncommercial networks that offer religious music
formats. The Network also competes with other radio networks for the services
of talk show personalities. While management believes that the variety of
products offered by the Network and its presence in major markets through
affiliation with Company owned and operated stations gives the Network a
strong competitive position, there can be no assurance that existing and new
competitors will not adversely affect the Network's growth potential and
profitability.
 
                                      17
<PAGE>
 
REGULATORY MATTERS
 
  Each of the Company's radio stations operates pursuant to one or more
licenses issued by the FCC that expire at different times. Although the
Company can and intends to apply to renew these licenses, third parties may
challenge the Company's renewal applications. There can be no assurance that
the Company's licenses to operate its radio stations will be renewed.
 
  The radio broadcasting industry is subject to extensive and changing
regulation. Among other things, the Communications Act of 1934 (the
"Communications Act") and FCC rules and policies require FCC approval for
transfers of control of FCC licenses and assignments of FCC licenses. The
filing of complaints against the Company or other FCC licensees could result
in the FCC's delaying the grant of, or refusing to grant, its consent to the
assignment of licenses to or from an FCC licensee against whom a complaint is
pending. See "Business--Federal Regulation of Radio Broadcasting."
 
  Further, in addition to the other risks associated with the acquisition of
radio stations, the Company also is aware that the FCC and the Department of
Justice (the "DOJ"), which evaluate transactions to determine whether those
transactions should be challenged under the federal antitrust laws, have
recently been increasingly active in their review of radio station
acquisitions, particularly where an operator proposes to acquire additional
stations in its existing markets. There can be no assurance that the DOJ or
the Federal Trade Commission ("FTC") will not require the restructuring of
future acquisitions. See "Business--Federal Regulation of Radio Broadcasting."
 
POTENTIAL INABILITY TO PURCHASE TENDERED NOTES UPON A CHANGE OF CONTROL
 
  Each holder has the option to cause the Company to purchase its Notes, in
whole or in part, at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon through the date of
repurchase, following a Change of Control (as defined herein). In addition, a
Change of Control would be an event of default under the Credit Agreement. The
Company currently does not have sufficient funds available to it to purchase
all of the outstanding Notes were they to be tendered in the event of a Change
of Control. There can be no assurance that the Company will be able to repay
all outstanding Senior Indebtedness and repurchase the Notes in the future
upon a Change of Control. See "Description of the Notes--Certain Covenants--
Purchase of Notes Upon a Change of Control."
 
LACK OF PUBLIC MARKET; RESTRICTIONS ON RESALE
 
  The Notes are new securities for which there is currently no market. The Old
Notes are currently eligible for trading by qualified buyers in the PORTAL
market. Following commencement of the Exchange Offer but prior to its
consummation, the Old Notes may continue to be traded in the PORTAL market.
Following consummation of the Exchange Offer, the Notes will not be eligible
for PORTAL trading. Although the Initial Purchasers have informed the Company
that they currently intend to make a market for the Notes, they are not
obligated to do so and any such market may be discontinued at any time without
notice. There can be no assurance that an active public market for the Notes
will develop or, if developed, will continue to exist. If a public trading
market for the Notes develops, future trading prices will depend on many
factors, including, among other things, general market conditions, prevailing
interest rates, the Company's results of operations and the market for similar
securities. Depending upon such factors, the Notes may trade at a discount
from their original issue price. Further, in the case of non-tendering holders
of Old Notes, no assurance can be given as to the liquidity of the trading
market for the Old Notes following the Exchange Offer.
 
                                      18
<PAGE>
 
                                USE OF PROCEEDS
 
  The Company will receive no proceeds from the exchange of the Notes for the
Old Notes pursuant to the Exchange Offer. The net proceeds to the Company from
the private placement of the Old Notes were approximately $145.4 million
(after deduction of the Initial Purchasers' discount and expenses of the
Offering). The Company used the net proceeds from the sale of the Old Notes to
repay substantially all of its outstanding indebtedness under the Old Credit
Agreement (as defined herein). During the one-year period ended just prior to
the Offering the Company had borrowed approximately $60.7 million under the
Old Credit Agreement. The Company used the proceeds from borrowings under the
Old Credit Agreement of approximately $60.7 million to purchase radio stations
(approximately $49.3 million), to pay bank loan fees (approximately $0.7
million), and for general corporate purposes (approximately $10.7 million),
including capital expenditures and payment of interest expenses.
 
                              THE EXCHANGE OFFER
 
PURPOSE OF THE EXCHANGE OFFER
 
  The Exchange Offer is designed to provide holders of the Old Notes with an
opportunity to acquire Notes which, unlike the Old Notes, will be freely
tradable at all times, subject to any restrictions on transfer imposed by
state "blue sky" laws and provided that the holder is not an affiliate of the
Company within the meaning of the Securities Act and represents that the Notes
are being acquired in the ordinary course of such holder's business and the
holder is not engaged in, and does not intend to engage in a distribution of
the Notes. The outstanding Old Notes in the aggregate principal amount at
maturity of $150.0 million were originally issued and sold on September 25,
1997 (the "Original Issue Date") in order to repay outstanding indebtedness.
The original sale to the Initial Purchasers was not registered under the
Securities Act in reliance upon the exemption provided by Section 4(2) of the
Securities Act and the concurrent resale of the Old Notes to investors was not
registered under the Securities Act in reliance upon the exemption provided by
Rule 144A promulgated under the Securities Act. The Old Notes may not be
reoffered, resold or transferred other than pursuant to a registration
statement filed pursuant to the Securities Act or unless an exemption from the
registration requirements of the Securities Act is available. Pursuant to Rule
144, Old Notes may generally be resold (a) commencing one year after the
Original Issue Date, in an amount up to, for any three-month period, the
greater of 1% of the Old Notes then outstanding or the average weekly trading
volume of the Old Notes during the four calendar weeks immediately preceding
the filing of the required notice of sale with the Commission and (b)
commencing two years after the Original Issue Date, in any amount and
otherwise without restriction by a holder who is not, and has not been for the
preceding 90 days, an affiliate of the Company. The Old Notes are eligible for
trading in the PORTAL Market, and may be resold to certain qualified
institutional buyers pursuant to Rule 144A. Certain other exemptions may also
be available under other provisions of the federal securities laws for the
resale of the Old Notes.
 
  In connection with the original issue and sale of the Old Notes, the Company
and the Guarantors entered into a Registration Rights Agreement, pursuant to
which they agreed to use their best efforts to file with the Commission and
cause to become effective a registration statement covering the exchange of
the Notes for the Old Notes (the "Exchange Offer Registration Statement").
 
  In the event that (i) due to a change in applicable law or current
interpretations by the Commission, the Company and the Guarantors are not
permitted to effect the Exchange Offer for all of the Old Notes, (ii) the
Exchange Offer is not for any other reason consummated within 180 days after
the Original Issuance Date of the Old Notes, (iii) any holder of the Old Notes
shall, within 30 days after commencement of the Exchange Offer, notify the
Company that such holder (x) is prohibited by applicable law or Commission
policy from participating in the Exchange Offer, (y) may not resell Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and that the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by
such holder or (z) is a broker-dealer and holds Old Notes acquired directly
from the Company or any Guarantor or an "affiliate" of the Company or any
Guarantor, then in addition
 
                                      19
<PAGE>
 
to or in lieu of conducting the Exchange Offer, or (iv) at the request of any
of the Initial Purchasers, the Company and the Guarantors will be required to
file a registration statement (a "Shelf Registration Statement") covering
resales (a) by the holders of the Old Notes in the event the Company and the
Guarantors are not permitted to effect the Exchange Offer pursuant to the
foregoing clause (i) or the Exchange Offer is not consummated within 180 days
after the Original Issuance Date of the Old Notes, pursuant to the foregoing
clause (i) or (ii) or (b) by the holders of Old Notes with respect to which
the Company receives notice pursuant to the foregoing clauses (iii) or (iv),
and will use its best efforts to cause any such Shelf Registration Statement
to become effective and to keep such Shelf Registration Statement continuously
effective for two years from the effective date thereof or such shorter period
that will terminate when all of the Notes covered by the Shelf Registration
Statement have been sold pursuant to the Shelf Registration Statement. The
Company and the Guarantors shall, if they file a Shelf Registration Statement,
provide to each holder of the Old Notes copies of the related prospectus and
notify each such holder when the Shelf Registration Statement has become
effective. A holder that sells Old Notes pursuant to a Shelf Registration
Statement generally will be required to be named as a selling securityholder
in the related prospectus and to deliver a current prospectus to purchasers,
and will be subject to certain of the civil liability provisions under the
Securities Act in connection with such sales.
 
  Under the Registration Rights Agreement, the Company and the Guarantors have
agreed to use their best efforts to: (i) file the Exchange Offer Registration
Statement or a Shelf Registration Statement with the Commission as soon as
practicable after the Original Issuance Date of the Old Notes or notice from
holders in the event of clauses (iii) or (iv) of the prior paragraph, (ii)
have such Exchange Offer Registration Statement or Shelf Registration
Statement declared effective by the Commission as soon as practicable after
the filing thereof, and (iii) commence the Exchange Offer and issue the
Exchange Notes in exchange for all Old Notes validly tendered in accordance
with the terms of the Exchange Offer prior to the close of the Exchange Offer,
or, in addition or in the alternative, cause such Shelf Registration Statement
to remain continuously effective for two years from the effective date thereof
or such shorter period that will terminate when all of the Old Notes covered
by the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement. Each holder of the Old Notes is bound by the
provisions of the Registration Rights Agreement which may require the holder
to furnish notice or other information to the Company as a condition to
certain obligations of the Company and the Guarantors to file a Shelf
Registration Statement by a particular date or to maintain its effectiveness
for the prescribed two-year period.
 
  If the Company or the Guarantors fail to comply with the above provisions,
the Company and the Guarantors agree to pay liquidated damages to each holder
of Old Notes or Notes as follows:
 
    (i) (A) if an Exchange Offer Registration Statement (or, in the event of
  a change in applicable law or due to current interpretations by the
  Commission, the Company and the Guarantors are not permitted to effect the
  Exchange Offer, a Shelf Registration Statement) is not filed within 75 days
  following the Original Issuance Date of the Old Notes, (B) in the event
  that within the 30 days after commencement of the Exchange Offer, any
  holder of Old Notes shall notify the Company that such holder (x) is
  prohibited by applicable law or Commission policy from participating in the
  Exchange Offer, (y) may not resell Exchange Notes acquired by it in the
  Exchange Offer to the public without delivering a prospectus and that the
  prospectus contained in the Exchange Offer Registration Statement is not
  appropriate or available for such resales by such holder or (z) is a
  broker-dealer and holds Old Notes acquired directly from the Company or any
  Guarantor or an "affiliate" of the Company or any Guarantor and a Shelf
  Registration Statement is not filed within 75 days after such notice, or
  (C) upon the request of an Initial Purchaser, a Shelf Registration
  Statement is not filed within 75 days after such request, then commencing
  on either the 76th day after the Original Issuance Date of the Old Notes or
  the expiration of the 75-day time periods set forth in clauses (B) and (C)
  above (either a "Prescribed Time Period"), as the case may be, penalty
  amounts shall be accrued on the Old Notes over and above the stated payment
  rates thereon at a rate of 0.25% per annum for the first 90 days
  immediately following the 76th day after either the Closing Date or the
  expiration of the Prescribed Time Period, as the case may be (the "Penalty
  Amounts"), such Penalty Amount rate increasing by an additional 0.25% per
  annum at the beginning of each subsequent 90-day period;
 
                                      20
<PAGE>
 
    (ii) if an Exchange Offer Registration Statement or a Shelf Registration
  Statement is filed pursuant to clause (i) above and is not declared
  effective within either 150 days following the Original Issuance Date of
  the Old Notes or 75 days following the expiration of the Prescribed Time
  Period, as the case may be, then commencing on the 151st day after the
  Original Issuance Date or the 76th day following the expiration of the
  Prescribed Time Period, as the case may be, Penalty Amounts shall be
  accrued on the Old Notes over and above the accrued stated payment rates
  thereon at a rate of 0.25% per annum for the first 90 days immediately
  following the 151st day after the Closing Date or the 76th day after the
  expiration of the Prescribed Time Period, as the case may be, such Penalty
  Amounts rate increasing by an additional 0.25% per annum at the beginning
  of each subsequent 90-day period; and
 
    (iii) if either (A) the Company and the Guarantors have not exchanged
  Exchange Notes for all Old Notes validly tendered in accordance with the
  terms of the Exchange Offer on or prior to 180 days after the Original
  Issuance Date or (B) if applicable, a Shelf Registration Statement has been
  declared effective and such Shelf Registration Statement ceases to be
  effective prior to two years from its original effective date or such
  shorter period that will terminate when all of the Old Notes covered by the
  Shelf Registration Statement have been sold pursuant to the Shelf
  Registration Statement, then, subject to certain exceptions, Penalty
  Amounts shall be accrued on the Old Notes over and above the stated payment
  rates at a rate of 0.25% per annum for the first 90 days immediately
  following (x) the 181st day after the Original Issuance Date in the case of
  (A) above, or (y) the day such Shelf Registration Statement ceases to be
  effective in the case of (B) above, such Penalty Amounts rate increasing by
  an additional 0.25% per annum at the beginning of each subsequent 90-day
  period; provided, however, that the Penalty Amounts rate on the applicable
  Old Notes may not exceed 1.0% per annum; and provided further that (1) upon
  the filing of the Exchange Offer Registration Statement or a Shelf
  Registration Statement (in the case of (i) above), (2) upon the
  effectiveness of the Exchange Offer Registration Statement or a Shelf
  Registration Statement (in the case of (ii) above), or (3) upon the
  exchange of Notes for all Old Notes tendered in the Exchange Offer or upon
  the effectiveness of the Shelf Registration Statement which had ceased to
  remain effective prior to two years from its original effective date (in
  the case of (iii) above), Penalty Amounts as a result of such
  clause (i), (ii) or (iii) shall cease to accrue.
 
  Any Penalty Amounts due pursuant to clause (i), (ii) or (iii) above will be
payable in cash on the various payment dates related to the Old Notes. The
Penalty Amounts will be determined by multiplying the applicable Penalty
Amounts rate by the principal amount of the Old Notes, multiplied by a
fraction, the numerator of which is the number of days such Penalty Amount
rate was applicable during such period, and the denominator of which is 360.
 
  The foregoing summary of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
by reference to, the provisions of the Registration Rights Agreement filed as
an exhibit to the Registration Rights Agreement. Copies of the Registration
Rights Agreement are available from the Company or the Initial Purchasers upon
request.
 
TERMS OF THE EXCHANGE OFFER
 
  Upon the terms and subject to the conditions set forth herein and in the
accompanying Letter of Transmittal, the Company will exchange $1,000 principal
amount of Notes for each $1,000 principal amount of its outstanding Old Notes.
Notes will be issued only in integral multiplies of $1,000 to each tendering
holder of Old Notes whose Old Notes are accepted in the Exchange Offer.
 
  The Notes will bear interest from and including the Original Issue Date.
Accordingly, holders who receive Notes in exchange for Old Notes will forego
accrued but unpaid interest on their exchanged Old Notes for the period from
and including the Original Issue Date to the date of exchange, but will be
entitled to such interest under the Notes.
 
  As of February 9, 1998, $150.0 million aggregate principal amount at
maturity of Old Notes were outstanding. This Prospectus, the Letter of
Transmittal and Notice of Guaranteed Delivery are being sent to all registered
holders
 
                                      21
<PAGE>
 
of Old Notes as of that date. Tendering holders will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant
to the Exchange Offer. The Company will pay all charges and expenses, other
than certain transfer taxes which may be imposed, in connection with the
Exchange Offer. See "--Payment of Expenses."
 
  Holders of Old Notes do not have any appraisal or dissenters' rights under
the California General Corporation Law in connection with the Exchange Offer.
 
EXPIRATION DATE; EXTENSIONS; TERMINATION
 
  The Exchange Offer will expire at 12:00 Midnight, New York City time, on
March 11, 1998, subject to extension by the Company by notice to the Exchange
Agent as herein provided. The Company reserves the right to extend the
Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the time and date on which the Exchange Offer as so extended shall
expire. The Company shall notify the Exchange Agent of any extension by oral
or written notice and shall mail to the registered holders of Old Notes an
announcement thereof, each prior to 9:00 A.M., New York City time, on the next
business day after the previously scheduled Expiration Date.
 
  The Company reserves the right to extend or terminate the Exchange Offer and
not accept for exchange any Old Notes if any of the events set forth below
under "--Conditions to the Exchange Offer" occur and are not waived by the
Company, by giving oral or written notice of such delay or termination to the
Exchange Agent. See "--Conditions to the Exchange Offer." The rights reserved
by the Company in this paragraph are in addition to the Company's rights set
forth below under the caption "--Conditions to the Exchange Offer."
 
PROCEDURES FOR TENDERING
 
  The tender to the Company of Old Notes by a holder thereof pursuant to one
of the procedures set forth below and the acceptance thereof by the Company
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
 
  Except as set forth below, a holder who wishes to tender Old Notes for
exchange pursuant to the Exchange Offer must transmit a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth
below under "Exchange Agent" on or prior to the Expiration Date. In addition,
either (i) certificates for such Old Notes must be received by the Exchange
Agent along with the Letter of Transmittal, (ii) a timely confirmation of a
book-entry transfer by generating an "agent message" via the Automated Tender
Offer Program ("ATOP") System of the DTC (a "Book-Entry Confirmation") of such
Old Notes, if such procedure is available, into the Exchange Agent's account
at the DTC pursuant to the procedure of book-entry transfer described below,
must be received by the Exchange Agent on or prior to the Expiration Date, or
(iii) the holder must comply with the guaranteed delivery procedures described
below. LETTERS OF TRANSMITTAL AND OLD NOTES SHOULD NOT BE SENT TO THE COMPANY.
 
  Signatures on a Letter of Transmittal must be guaranteed unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered holder of Old
Notes who has not completed the box entitled "Special Issuance and Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of any firm
that is a member of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc. (the "NASD") or a
commercial bank or trust company having an office in the United States (an
"Eligible Institution"). In the event that signatures on a Letter of
Transmittal are required to be guaranteed, such guarantee must be by an
Eligible Institution.
 
  The method of delivery of Old Notes and other documents to the Exchange
Agent is at the election and risk of the holder, but if delivery is by mail it
is suggested that the mailing be made sufficiently in advance of the
Expiration Date to permit delivery to the Exchange Agent before the Expiration
Date.
 
                                      22
<PAGE>
 
  If the Letter of Transmittal is signed by a person other than a registered
holder of any Old Note tendered therewith, such Old Note must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name of the registered holder appears on the Old Note.
 
  If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must
be submitted.
 
  All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes will be resolved by the Company,
whose determination will be final and binding. The Company reserves the
absolute right to reject any or all tenders that are not in proper form or the
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Old Notes. The Company's interpretation
of the terms and conditions of the Exchange Offer (including the instructions
in the Letter of Transmittal) will be final and binding. Unless waived, any
irregularities in connection with tenders must be cured within such time as
the Company shall determine. Neither the Company nor the Exchange Agent shall
be under any duty to give notification of defects in such tenders or shall
incur liabilities for failure to give such notification. Tenders of Old Notes
will not be deemed to have been made until such irregularities have been cured
or waived. Any Old Notes received by the Exchange Agent that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned by the Exchange Agent to the tendering holder, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
 
  The Company's acceptance for exchange of Old Notes tendered pursuant to the
Exchange Offer will constitute a binding agreement between the tendering
person and the Company upon the terms and subject to the conditions of the
Exchange Offer.
 
BOOK-ENTRY TRANSFER
 
  The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the DTC for purposes of the Exchange Offer within two
business days after the date of this Prospectus, and any financial institution
that is a participant in the DTC's systems may make book-entry delivery of Old
Notes by causing the DTC to transfer such Old Notes into the Exchange Agent's
account at the DTC in accordance with such DTC's procedures for transfer.
However, although delivery of Old Notes may be effected through book-entry
transfer at the DTC, the Letter of Transmittal or facsimile thereof with any
required signature guarantees and any other required documents must, in any
case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under the caption "--Exchange Agent" on or prior to
the Expiration Date or the guaranteed delivery procedures described below must
be complied with.
 
GUARANTEED DELIVERY PROCEDURES
 
  Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, or (iii) who cannot complete the procedures for delivery
by book entry transfer on a timely basis, may effect a tender if:
 
    (a) The tender is made through an Eligible Institution;
 
    (b) On or prior to the Expiration Date, the Exchange Agent receives from
  such Eligible Institution a properly completed and duly executed Notice of
  Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
  substantially in the form made available by the Company; and
 
    (c) Such properly completed and executed Letter of Transmittal (or
  facsimile thereof), as well as the certificate(s) representing all tendered
  Old Notes in proper form for transfer, or a Book-Entry Confirmation, as the
  case may be, and all other documents required by the Letter of Transmittal
  are received by the Exchange Agent within three New York Stock Exchange
  trading days after the Expiration Date.
 
                                      23
<PAGE>
 
  Upon request of the Exchange Agent, a Notice of Guaranteed Delivery (as well
as a copy of this Prospectus and the Letter of Transmittal) will be sent to
holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
 
CONDITIONS TO THE EXCHANGE OFFER
 
  Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer if at any time before
the acceptance of such Old Notes for exchange or the exchange of the Notes for
such Old Notes, the Company determines that the Exchange Offer violates
applicable law, and applicable interpretation of the staff of the Commission
or any order of any governmental agency or court of competent jurisdiction.
 
  The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its reasonable discretion. The failure by the Company
at any time to exercise any of the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
 
  In addition, the Company will not accept for exchange any Old Notes
tendered, and no Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to
the Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939. In any
such event, the Company is required to use its reasonable best efforts to
obtain the withdrawal of any stop order at the earliest possible time.
 
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NOTES
 
  Upon the terms and subject to the conditions of the Exchange Offer, the
Company will accept all Old Notes validly tendered prior to 12:00 Midnight,
New York City time, on the Expiration Date. The Company will deliver Notes in
exchange for Old Notes promptly following the Expiration Date.
 
  For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
or written notice thereof to the Exchange Agent. The Exchange Agent will act
as agent for the tendering holders for the purpose of receiving the Notes.
Under no circumstances will interest be paid by the Company or the Exchange
Agent by reason of any delay in making such payment or delivery.
 
  If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Old Notes will be returned, at the Company's
expense, to the tendering holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
 
WITHDRAWAL RIGHTS
 
  Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
 
  For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "--
Exchange Agent." Any such notice of withdrawal must specify the name of the
person or, if submitted via ATOP, the entity name and DTC participant number,
having tendered the Old Notes to be withdrawn, identify the Old Notes to be
withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If
 
                                      24
<PAGE>
 
Old Notes have been tendered to the procedure for book-entry transfer
described above, any notice of withdrawal must specify the name and number of
the account at the DTC to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for
any reason will be returned to the holder thereof without cost to such holder
(or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the DTC pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with the DTC for the Old Notes) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under "--Procedures for Tendering" above at any time on or prior to
the Expiration Date.
 
EXCHANGE AGENT
 
  The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. All correspondence in connection with the Exchange Offer and the Letter
of Transmittal should be addressed to the Exchange Agent as follows:
 
   BY REGISTERED OR CERTIFIED MAIL:    BY HAND DELIVERY OR OVERNIGHT COURIER:
         The Bank of New York                   The Bank of New York
     101 Barclay Street - Floor 7E        101 Barclay Street - Ground Level
          New York, NY 10286               Corporate Trust Services Window
          Attn: Kwei Aryeetey                    New York, NY 10286
         Reorganization Section                   Attn: Kwei Aryeetey 
                                                 Reorganization Section         
                                  
                                                       
 
                            FACSIMILE TRANSMISSION:
                                (212) 815-6339
 
                             CONFIRM BY TELEPHONE:
                                (212) 815-3687
 
  Requests for additional copies of the Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
 
PAYMENT OF EXPENSES
 
  The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The
Company, however, will pay reasonable and customary fees and reasonable out-
of-pocket expenses to the Exchange Agent in connection therewith. The Company
will also pay the cash expenses to be incurred in connection with the Exchange
Offer, including accounting, legal, printing, and related fees and expenses.
 
ACCOUNTING TREATMENT
 
  The Notes will be recorded at the same carrying value as the Old Notes, as
reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized.
 
RESALES OF NOTES
 
  The staff of the Commission has issued the interpretive letters Exxon
Capital Holdings Corporation (May 13, 1988), Morgan Stanley & Co.,
Incorporated (June 5, 1991) and Shearman & Sterling (July 2, 1993)
 
                                      25
<PAGE>
 
that conclude, in circumstances similar to those contemplated by the Exchange
Offer, that new debt securities issued in a registered exchange for
outstanding debt securities, which new securities are intended to be
substantially identical to the securities for which they are exchanged, may be
offered for resale, resold and otherwise transferred by a holder thereof
(other than (i) a broker-dealer who purchases such securities from the issuer
to resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person who is an affiliate of the issuer within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provision of the Securities Act, provided
that the new securities are acquired in the ordinary course of such holder's
business and such holder, if not a broker-dealer, has no arrangement with any
person to participate in the distribution of the new securities. A broker-
dealer who holds outstanding debt securities that were acquired for its own
account as a result of market-making or other trading activities may, however,
be deemed to be an "underwriter" within the meaning of the Securities Act and
must, therefore, deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of the new securities received
by the broker-dealer in any such exchange. For a period of 180 days from the
Expiration Date, the Company will make a reasonable number of additional
copies of this Prospectus, as amended or supplemented, available to any such
broker-dealer for use in connection with any such resale.
 
  The Company has not requested or obtained an interpretive letter from the
Commission staff with respect to this Exchange Offer, and the Company and the
holders are not entitled to rely on interpretive advice provided by the staff
to other persons, which advice was based on the facts and conditions
represented in such letters. However, the Exchange Offer is being conducted in
a manner intended to be consistent with the facts and conditions represented
in the Exxon Capital, Morgan Stanley and Shearman & Sterling letters. If any
holder has any arrangement or understanding with respect to the distribution
of the Notes to be acquired pursuant to the Exchange Offer, such holder (i)
could not rely on the applicable interpretations of the staff of the
Commission the Exxon Capital, Morgan Stanley and Shearman & Sterling letters
and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
In addition, based upon the Shearman & Sterling letter each broker-dealer that
receives Notes for its own account in exchange for the Old Notes, where such
Old Notes were acquired by such broker-dealers as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Notes. See "Plan of
Distribution." By delivering the Letter of Transmittal, a holder tendering Old
Notes for exchange will be required to make certain representations, including
among others, (i) that such holder is not an "affiliate" of the Company or any
Guarantor within the meaning of Rule 405 under the Securities Act, (ii) that
the Notes being acquired pursuant to the Exchange Offer are being obtained in
the ordinary course of business of the person receiving such Notes and (iii)
that the holder, if not a broker-dealer, has no arrangement or understanding
with any Person to participate in the distribution of the Notes. Holders who
do not exchange their Old Notes pursuant to the Exchange Offer will continue
to hold Old Notes that are subject to restrictions on transfer.
 
  In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and the conditions thereto have
been met. The Company has agreed, pursuant to the Registration Rights
Agreement and subject to certain specified limitations therein, to register or
qualify the Notes for offer or sale under the securities or blue sky laws of
such jurisdictions as any holder of the Notes or the Old Notes reasonably
requests in writing.
 
 
                                      26
<PAGE>
 
          SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
 
  The selected consolidated financial information of the Company presented
below as of and for the years ended December 31, 1992, 1993, 1994, 1995, and
1996 is derived from the consolidated financial statements of the Company,
which consolidated financial statements have been audited by Ernst & Young
LLP, independent certified public accountants. The selected consolidated
financial information of the Company presented below as of September 30, 1997,
and for the nine months ended September 30, 1996 and 1997, is derived from
unaudited consolidated financial statements of the Company which, in the
opinion of management, contain all necessary adjustments of a normal recurring
nature to present the financial statements in conformity with generally
accepted accounting principles ("GAAP"). The consolidated financial statements
of the Company as of December 31, 1995 and 1996 and for each of the years in
the three-year period ended December 31, 1996, and the independent auditors'
report thereon, as well as the unaudited consolidated financial statements of
the Company as of September 30, 1997, and for the nine months ended September
30, 1996 and 1997, are included elsewhere in this Prospectus. The financial
results of the Company are not comparable from year to year because of the
acquisition and disposition of various radio stations and radio networks by
the Company. The selected consolidated financial information below should be
read in conjunction with, and is qualified by reference to, the Company's
consolidated financial statements and related notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                        NINE MONTHS
                                                                      ENDED SEPTEMBER
                                 YEAR ENDED DECEMBER 31                     30
                         -------------------------------------------  ----------------
                          1992     1993     1994     1995     1996     1996     1997
                         -------  -------  -------  -------  -------  -------  -------
                                         (DOLLARS IN THOUSANDS)
<S>                      <C>      <C>      <C>      <C>      <C>      <C>      <C>
STATEMENT OF OPERATIONS
 DATA:
Net revenue............. $28,532  $32,423  $38,575  $48,168  $59,010  $42,465  $49,449
Operating expenses:
 Station operating
  expenses..............  14,922   17,011   22,179   27,527   33,463   23,907   28,793
 Corporate expenses.....   2,647    3,193    3,292    3,799    4,663    3,413    4,998
 Tax reimbursements to
  S corporation
  shareholders..........   1,029    1,311      977    2,057    2,038    1,529    1,780
 Depreciation and
  amortization..........   6,441    6,601    7,633    7,884    8,394    6,148    9,382
                         -------  -------  -------  -------  -------  -------  -------
Operating expenses......  25,039   28,116   34,081   41,267   48,558   34,997   44,953
                         -------  -------  -------  -------  -------  -------  -------
 Net operating income...   3,493    4,307    4,494    6,901   10,452    7,468    4,496
Other income (expense):
 Interest
  income/expense, net...  (2,516)  (2,349)  (3,438)  (6,327)  (6,838)  (5,198)  (8,392)
 Gain (loss) on disposal
  of assets.............  (1,044)   1,603     (482)      (7)  16,064   12,659     (190)
 Other income (expense).    (393)       2     (135)    (255)    (270)    (209)    (288)
                         -------  -------  -------  -------  -------  -------  -------
Total other income
 (expense)..............  (3,953)    (744)  (4,055)  (6,589)   8,956    7,252   (8,870)
Income (loss) before
 income taxes and
 extraordinary item.....    (460)   3,563      439      312   19,408   14,720   (4,374)
Provision (benefit) for
 income taxes...........    (415)   1,437     (247)    (204)   6,655    5,046   (1,790)
                         -------  -------  -------  -------  -------  -------  -------
Income (loss) before
 extraordinary item.....     (45)   2,126      686      516   12,753    9,674   (2,584)
Extraordinary gain
 (loss)(1)..............     921      --       --      (394)     --       --    (1,090)
                         -------  -------  -------  -------  -------  -------  -------
Net income (loss)....... $   876  $ 2,126  $   686  $   122  $12,753  $ 9,674  $(3,674)
                         =======  =======  =======  =======  =======  =======  =======
Pro forma net income
 (loss)(2).............. $ 1,262  $ 2,917  $   848  $ 1,024  $12,838  $ 9,727  $(2,651)
                         =======  =======  =======  =======  =======  =======  =======
</TABLE>
 
                                      27
<PAGE>
 
<TABLE>
<CAPTION>
                                                                            NINE MONTHS ENDED
                                     YEAR ENDED DECEMBER 31                   SEPTEMBER 30
                          ------------------------------------------------  ------------------
                            1992      1993      1994      1995      1996      1996      1997
                          --------  --------  --------  --------  --------  --------  --------
                                              (DOLLARS IN THOUSANDS)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>
OTHER DATA:
Cash flows provided by
 operating activities...  $  6,030  $  6,879  $  7,482  $  7,681  $ 10,495  $  9,261  $  1,928
Cash flows used in
 investing activities...  $(19,301) $(11,693) $(18,806) $(27,681) $(18,923) $(13,250) $(26,592)
Cash flows provided by
 financing activities...  $ 15,453  $  3,612  $ 11,827  $ 19,227  $  9,383  $  3,332  $ 24,805
Broadcast cash flow(3)..  $ 13,610  $ 15,412  $ 16,396  $ 20,641  $ 25,547  $ 18,558  $ 20,656
Broadcast cash flow
 margin(4)..............      47.7%     47.5%     42.5%     42.9%     43.3%     43.7%     41.8%
EBITDA (excludes all
 other income items)(3).  $ 10,963  $ 12,219  $ 13,104  $ 16,842  $ 20,884  $ 15,145  $ 15,658
Capital expenditures....  $  1,691  $    912  $  2,441  $  3,040  $  6,982  $  4,119  $  5,502
Purchase price of radio
 stations...............  $ 20,000  $ 15,500  $ 14,935  $ 24,550  $ 59,621  $  8,302  $ 24,861
Earnings to fixed
 charges ratio(5).......       0.9x      2.1x      1.1x      1.0x      3.2x                0.5x
PRO FORMA RATIO:
Pro forma earnings to
 fixed charges ratio(5).                                               1.7x                0.4x
</TABLE>
 
<TABLE>
<CAPTION>
                                        DECEMBER 31
                         -----------------------------------------
                                                                   SEPTEMBER 30
                          1992    1993    1994     1995     1996       1997
                         ------- ------- ------- -------- -------- ------------
<S>                      <C>     <C>     <C>     <C>      <C>      <C>
BALANCE SHEET DATA:
Cash and cash
 equivalents............ $ 2,479 $ 1,277 $ 1,780 $  1,007 $  1,962   $  2,103
Working capital.........     322   5,836   1,852    1,088    8,258     17,573
Intangible assets, net..  32,146  39,296  46,748   61,923  106,781    121,833
Total assets............  62,106  69,656  82,041  104,817  159,185    184,133
Long-term debt
 (including current
 portion)...............  44,915  48,656  60,656   81,020  121,790    160,100
Shareholders' equity....  10,348  12,474  13,160   13,282   20,534      9,386
</TABLE>
- ---------------------
(1) The extraordinary gain in 1992 represents a gain on early extinguishment
    of a private annuity agreement. The extraordinary loss in 1995 and 1997
    relates to the write-off of loan and related fees related to the repayment
    of long-term debt. See "Management's Discussion and Analysis of Financial
    Condition and Results of Operations" and Note 4 of the Notes to
    Consolidated Financial Statements.
 
(2) The Company's consolidated financial data for the periods presented
    include the results of operations, assets and liabilities of New
    Inspiration and Golden Gate, which were both S corporations under common
    ownership and control with the Company prior to the Reorganization. The S
    corporation status of New Inspiration and Golden Gate was terminated in
    the Reorganization. Federal and state income taxes (except for a 1.5%
    state franchise tax) are not provided for New Inspiration and Golden Gate
    in the consolidated statements of operations of the Company for the
    periods presented because the tax attributes of S corporations are passed
    through to their shareholders. Prior to the Reorganization, New
    Inspiration and Golden Gate reimbursed the S corporation shareholders for
    their individual income tax liabilities on the earnings of the S
    corporations. These tax reimbursements to S corporation shareholders are
    reflected as an operating expense in the Company's consolidated financial
    statements.
 
  In August 1997, the Company, New Inspiration and Golden Gate effected the
  Reorganization pursuant to which the S corporations became wholly owned by
  the Company. To give effect to the Reorganization, including the
  termination of the S corporation status of New Inspiration and Golden Gate,
  pro forma net income excludes the tax reimbursements to S corporation
  shareholders (because such amounts would not have been paid had New
  Inspiration and Golden Gate been subject to income taxes) and includes a
  pro forma tax provision at an estimated combined federal and state income
  tax rate of approximately 40% (to reflect an estimated income tax provision
  (benefit) of the Company) as if the Reorganization had occurred at the
  beginning of each period presented in the Company's consolidated financial
  data. See "Business--Corporate Structure and Reorganization."
 
                                      28
<PAGE>
 
  The following table reflects the pro forma adjustments to historical net
  income:
 
<TABLE>
<CAPTION>
                                                                 NINE MONTHS
                                                               ENDED SEPTEMBER
                               YEAR ENDED DECEMBER 31                30,
                         ------------------------------------- ---------------
                          1992    1993   1994   1995    1996    1996    1997
                         ------  ------ ------ ------  ------- ------- -------
<S>                      <C>     <C>    <C>    <C>     <C>     <C>     <C>
  Pro Forma Information:
   Income (loss) before
    income taxes and
    extraordinary
    item as reported
    above............... $ (460) $3,563 $  439 $  312  $19,408 $14,720 $(4,374)
   Add back tax
    reimbursements to S
    corporation
    shareholders........  1,029   1,311    977  2,057    2,038   1,529   1,780
                         ------  ------ ------ ------  ------- ------- -------
   Pro forma income
    (loss) before income
    taxes and
    extraordinary item..    569   4,874  1,416  2,369   21,446  16,249  (2,594)
   Pro forma income tax
    provision
    (benefit)...........    228   1,957    568    951    8,608   6,522  (1,033)
                         ------  ------ ------ ------  ------- ------- -------
   Pro forma income
    (loss) before
    extraordinary item..    341   2,917    848  1,418   12,838   9,727  (1,561)
   Extraordinary gain
    (loss)..............    921     --     --    (394)     --      --   (1,090)
                         ------  ------ ------ ------  ------- ------- -------
   Pro forma net income
    (loss).............. $1,262  $2,917 $  848 $1,024  $12,838 $ 9,727 $(2,651)
                         ======  ====== ====== ======  ======= ======= =======
</TABLE>
 
(3) "Broadcast cash flow" consists of net operating income before tax
    reimbursements to S corporation shareholders, depreciation and
    amortization and corporate expenses. "EBITDA" consists of net operating
    income before tax reimbursements to S corporation shareholders and
    depreciation and amortization. Although broadcast cash flow and EBITDA are
    not measures of performance calculated in accordance with GAAP, management
    believes that they are useful to an investor in evaluating the Company
    because they are measures widely used in the broadcast industry to
    evaluate a radio company's operating performance. However, broadcast cash
    flow and EBITDA should not be considered in isolation or as substitutes
    for net income, cash flows from operating activities and other income or
    cash flow statement data prepared in accordance with GAAP as a measure of
    liquidity or profitability.
 
(4) Broadcast cash flow margin is broadcast cash flow as a percentage of net
    revenue.
 
(5) For purposes of computing the ratio of earnings to fixed charges,
    "earnings" consist of income from operations before income taxes plus
    fixed charges, and "fixed charges" consist of interest expense plus an
    allocation of a portion of rent expense representing interest. The pro
    forma earnings to fixed charges ratio assumes the issuance of the Notes
    and the repayment in full of the Company's outstanding indebtedness under
    the Company's prior credit agreement which was repaid in full upon
    issuance of the Old Notes on September 25, 1997 as if each occurred at the
    beginning of each period presented. For the years ended December 31, 1992
    and 1995, and for the nine months ended September 30, 1997, the Company's
    earnings were inadequate to cover fixed charges; the coverage deficiency
    for the years ended December 31, 1992 and 1995 was $460,000 and $313,000,
    respectively, and for the nine months ended September 30, 1997 was $4.4
    million (actual) and $7.2 million (pro forma).
 
 
                                      29
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
 
GENERAL
 
  The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
 
  The principal sources of the Company's revenue are (i) the sale of block
program time, both to national and local program producers, (ii) the sale of
broadcast time on its radio stations for advertising, both to national and
local advertisers, and (iii) the sale of broadcast time on the Network for
advertising. The following table shows gross revenue and the percentage of
gross revenue for each revenue source.
 
<TABLE>
<CAPTION>
                                                                        NINE MONTHS
                                   YEAR ENDED DECEMBER 31                  ENDED
                          -------------------------------------------  SEPTEMBER 30,
                              1994           1995           1996           1997
                          -------------  -------------  -------------  -------------
                                          (DOLLARS IN THOUSANDS)
<S>                       <C>     <C>    <C>     <C>    <C>     <C>    <C>     <C>
Block program time:
  National..............  $19,182  45.0% $23,390  43.9% $26,610  40.8% $20,557  37.8%
  Local.................    5,409  12.7    8,219  15.4   10,869  16.7    8,516  15.6
                          ------- -----  ------- -----  ------- -----  ------- -----
                           24,591  57.7   31,609  59.3   37,479  57.5   29,073  53.4
Advertising:
  National..............    2,460   5.8    3,165   5.9    4,088   6.3    5,128   9.4
  Local.................   12,154  28.5   14,072  26.4   17,416  26.7   15,014  27.6
                          ------- -----  ------- -----  ------- -----  ------- -----
                           14,614  34.3   17,237  32.3   21,504  33.0   20,142  37.0
Network.................    2,619   6.1    3,423   6.4    5,270   8.1    4,486   8.2
Other...................      767   1.9    1,034   2.0      888   1.4      770   1.4
                          ------- -----  ------- -----  ------- -----  ------- -----
Gross revenue...........   42,591 100.0%  53,303 100.0%  65,141 100.0%  54,471 100.0%
                                  =====          =====          =====          =====
Less agency commissions.    4,016          5,135          6,131          5,022
                          -------        -------        -------        -------
Net revenue.............  $38,575        $48,168        $59,010        $49,449
                          =======        =======        =======        =======
</TABLE>
 
  The Company's revenue is affected primarily by the program and advertising
rates its radio stations and the Network charge. Correspondingly, the rates
for block program time are based upon the 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
on-air inventory, which in turn is based on the stations' and the Network's
ability to produce results for its advertisers. Each of the Company's stations
and the Network have a general pre-determined level of on-air inventory that
it makes available for block programs and advertising, which may vary at
different times of the day and tends to remain stable over time. Much of the
Company's selling activity is based on demand for its radio stations' and the
Network's on-air inventory.
 
  The Company's revenue and cash flow are also affected by the transition
period experienced by stations acquired by the Company that previously
operated with formats other than religious formats. During the transition
period when the Company develops its program customer and listener base, such
stations typically do not generate significant cash flow from operations. The
Company's quarterly revenue varies throughout the year, as is typical in the
radio broadcasting industry. Quarterly revenue from the sale of block program
time does not tend to vary, however, since program rates are generally set
annually.
 
  In the broadcasting industry, radio stations often utilize trade (or barter)
agreements to exchange advertising time for goods or services (such as other
media advertising, travel or lodging), in lieu of cash. In order to preserve
most of its on-air inventory for cash advertising, the Company generally
enters into trade agreements only if the goods or services bartered to the
Company will be used in the Company's business. The Company has minimized its
use of trade agreements and has generally sold over 90% of its advertising
time for cash. In addition, it is the Company's general policy not to preempt
advertising spots paid for in cash with advertising spots paid for in trade.
 
                                      30
<PAGE>
 
  The primary operating expenses incurred in the ownership and operation of
the Company's radio stations include employee salaries and commissions, and
facility expenses (e.g., rent and utilities). The Company also incurs and will
continue to incur significant depreciation, amortization and interest expense
as a result of completed and future acquisitions of stations, and due to
existing borrowings and future borrowings, including the Offering and
borrowings under the Credit Agreement. The Company's consolidated financial
statements tend not to be directly comparable from period to period due to the
Company's acquisition activity.
 
  The consolidated statements of operations of the Company include an
operating expense called "tax reimbursements to S corporation shareholders."
These amounts represent the income tax liability of the Shareholders created
by the income of New Inspiration and Golden Gate, which prior to the recent
Reorganization were each S corporations. See "Business--Corporate Structure
and Reorganization." Management considers the nature of this operating expense
to be essentially equivalent to an income tax provision and has excluded this
expense from the calculation of broadcast cash flow and EBITDA. Commencing
1997, pretax income of New Inspiration and Golden Gate will be included in the
Company's consolidated income tax return and in the Company's computation of
the income tax provision included in its consolidated statement of operations.
 
  The Company anticipates a net loss for the fourth quarter of 1997 in an
amount substantially similar to the amount of net loss experienced in the
third quarter of 1997 of $1.2 million.
 
PRO FORMA INFORMATION
 
  To give effect to the private placement of the Old Notes, pro forma interest
expense assumes issuance of the Old Notes on January 1, 1996, that amounts
owing to the banks under the Credit Agreement as of September 30, 1997 had
been outstanding since September 25, 1997, an interest rate on both the Old
Notes and borrowings under the Credit Agreement of 9 1/2%, and the
amortization over 10 years of costs incurred to issue the Old Notes. Pro forma
net income (loss) gives effect to pro forma interest expense, net of income
taxes at a combined federal and state tax rate of 40%. Pro forma interest
expense for the year ended December 31, 1996 and for the nine months ended
September 30, 1997 are approximately $14.7 million and $11.1 million,
respectively. Pro forma net income (loss) for the year ended December 31, 1996
and for the nine months ended September 30, 1997 are approximately $8,341,000
and $(5,176,000), respectively.
 
RESULTS OF OPERATIONS
 
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
 
  Net Revenue. Net revenue increased approximately $6.9 million or 16.2% to
$49.4 million for the nine months ended September 30, 1997 from $42.5 million
for the nine months ended September 30, 1996. The inclusion of revenue from
the acquisitions of radio stations and networks and revenue generated from the
local marketing agreements ("LMAs"), see "Business--Federal Regulation of
Radio Broadcasting--Local Marketing Agreements," entered into during 1996 and
1997 provided approximately $4.3 million of the increase. For stations and
networks owned and operated over the comparable period in 1996 and 1997, net
revenue improved approximately $2.6 million or 6.3% to $43.9 million in 1997
from $41.3 million in 1996 due primarily to program rate increases and to a
lesser extent to increases in on-air inventory and improved selling efforts.
 
  Station Operating Expenses. Station operating expenses increased
approximately $4.9 million or 20.5% to $28.8 million for the nine months ended
September 30, 1997 from $23.9 million for the nine months ended September 30,
1996. Approximately $4.1 million of such increase was due to the inclusion of
expenses from the acquisitions of radio stations and networks and expenses
incurred for LMAs entered into during 1996 and 1997. For stations and networks
owned and/or operated over the comparable periods in 1996 and 1997, station
operating expenses increased approximately $0.8 million or 3.6% to $23.1
million in 1997 from $22.3 million in 1996 primarily due to expenses incurred
to produce the increased revenue in the periods, as described above.
 
  Broadcast Cash Flow. Broadcast cash flow increased approximately $2.1
million or 11.3% to $20.7 million for the nine months ended September 30, 1997
from $18.6 million for the nine months ended
 
                                      31
<PAGE>
 
September 30, 1996. As a percentage of net revenue, broadcast cash flow
decreased to 41.8% for the nine months ended September 30, 1997 from 43.7% for
the nine months ended September 30, 1996. The decrease is primarily
attributable to lower margins achieved during the transition period of the
stations and networks acquired in 1996 and 1997 that previously operated with
formats other than religious formats.
 
  Corporate Expenses. Corporate expenses increased approximately $1.6 million
or 47.1% to $5.0 million for the nine months ended September 30, 1997 from
$3.4 million for the nine months ended September 30, 1996, primarily due to
additional personnel and overhead costs associated with station and network
acquisitions in 1996 and 1997 (approximately $611,000 of the increase),
bonuses paid to corporate officers in 1997 (approximately $155,000 of the
increase), the write-off of costs incurred for potential station acquisitions
which were abandoned (approximately $292,000 of the increase), and expenses
incurred for officers' life insurance (approximately $277,000 of the
increase), in 1997.
 
  EBITDA. EBITDA increased approximately $0.5 million or 3.3% to $15.7 million
for the nine months ended September 30, 1997 from $15.2 million for the nine
months ended September 30, 1996.
 
  Tax Reimbursements to S Corporation Shareholders. Tax reimbursements to S
corporation shareholders increased approximately $0.3 million or 20.0% to $1.8
million for the nine months ended September 30, 1997 from $1.5 million for the
nine months ended September 30, 1996, primarily due to increased taxable
income of the S corporations.
 
  Depreciation and Amortization. Depreciation and amortization expense
increased approximately $3.3 million or 54.1% to $9.4 million for the nine
months ended September 30, 1997 from $6.1 million for the nine months ended
September 30, 1996, primarily due to radio station and network acquisitions
consummated during 1996 and 1997.
 
  Other Income (Expense). Interest income decreased $156,000 to $156,000 for
the nine months ended September 30, 1997 from $312,000 for the nine months
ended September 30, 1996, primarily due to interest income earned in 1996 on a
$14.0 million deposit from the sale of KDBX-FM, Portland. Gain (loss) on
disposal of assets decreased $12.8 million from $12.7 million for the nine
months ended September 30, 1996 to ($190,000) for the nine months ended
September 30, 1997. The gain in 1996 was primarily due to the sale of KDBX-FM,
Portland and WTJY-FM, Columbus. Interest expense increased approximately $3.0
million or 54.5% to $8.5 million for the nine months ended September 30, 1997
from $5.5 million for the nine months ended September 30, 1996, primarily due
to interest expense associated with additional borrowings to fund acquisitions
consummated during 1996 and 1997. Other expense was essentially unchanged for
the 1997 period compared to the 1996 period.
 
  Provision (Benefit) for Income Taxes. Income tax provision (benefit) as a
percentage of income before income taxes (i.e., effective tax rate) was
(40.9)% for the nine months ended September 30, 1997 and 34.3% for the nine
months ended September 30, 1996. The effective tax rates may differ from the
federal statutory income tax rate of 34.0% because of the effect of state
income taxes and the exclusion of federal income taxes relating to the
S corporations. The decrease in the effective tax rate for the nine months
ended September 30, 1997 as compared to the nine months ended September 30,
1996 is due to losses generated by the non-S corporation entities.
 
  Net Income (Loss). The Company recognized a net loss of approximately ($3.7)
million for the nine months ended September 30, 1997, compared to net income
of $9.7 million for the nine months ended September 30, 1996. Included in net
loss for 1997 is a $1.1 million extraordinary loss for the write off of
deferred financing costs and termination fees related to the repayment of the
Company's prior credit agreement (the "Old Credit Agreement") which was repaid
in full upon issuance of the Old Notes on September 25, 1997.
 
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
  Net Revenue. Net revenue increased approximately $10.8 million or 22.4% to
$59.0 million in 1996 from $48.2 million in 1995. The inclusion of revenue
from the acquisitions of radio stations and networks and revenue
 
                                      32
<PAGE>
 
generated from LMAs entered into during 1996 and 1995 provided approximately
$5.2 million of the increase. For stations and networks owned and operated
over the comparable period in 1995 and 1996, net revenue improved
approximately $5.6 million or 12.3% to $51.1 million in 1996 from $45.5
million in 1995 due primarily to program rate increases and to a lesser extent
to increases in on-air inventory and improved selling efforts at both the
national and local level.
 
  Station Operating Expenses. Station operating expenses increased
approximately $6.0 million or 21.8% to $33.5 million in 1996 from $27.5
million in 1995. Approximately $4.6 million of such increase was due to the
inclusion of expenses from the acquisitions of radio stations and networks and
expenses incurred for LMAs entered into during 1996 and 1995. For stations and
networks owned and/or operated over the comparable periods in 1996 and 1995,
station operating expenses increased approximately $1.4 million or 5.7% to
$26.1 million in 1996 from $24.7 million in 1995 primarily due to expenses
incurred to produce the increased revenue in the periods, as described above.
 
  Broadcast Cash Flow. Broadcast cash flow increased approximately $4.9
million or 23.8% to $25.5 million in 1996 from $20.6 million in 1995. As a
percentage of net revenue, broadcast cash flow increased to 43.3% in 1996 from
42.9% in 1995.
 
  Corporate Expenses. Corporate expenses increased approximately $0.9 million
or 23.7% to $4.7 million in 1996 from $3.8 million in 1995, primarily due to
additional personnel and overhead costs associated with station and network
acquisitions in 1996.
 
  EBITDA. EBITDA increased approximately $4.1 million or 24.4% to $20.9
million in 1996 from $16.8 million in 1995.
 
  Tax Reimbursements to S Corporation Shareholders. Tax reimbursements to S
corporation shareholders was essentially unchanged for the year ended December
31, 1996 compared to 1995.
 
  Depreciation and Amortization. Depreciation and amortization expense
increased approximately $0.5 million or 6.3% to $8.4 million in 1996 from $7.9
million in 1995, primarily due to radio station and network acquisitions
consummated during 1996 and 1995.
 
  Other Income (Expense). Interest income increased $204,000 to $523,000 in
1996 from $319,000 in 1995, primarily due to interest income earned on a $14.0
million deposit from the sale of KDBX-FM, Portland. Gain (loss) on disposal of
assets increased $16.1 million from ($7,000) in 1995 to $16.1 million in 1996.
The gain in 1996 was primarily due to the sales of KDBX-FM, Portland, KDFX-AM,
Dallas and WTJY-FM, Columbus. Interest expense increased approximately $0.8
million or 12.1% to $7.4 million in 1996 from $6.6 million in 1995, primarily
due to interest expense associated with additional borrowings to fund
acquisitions consummated during 1996 and 1995. Other expense was essentially
unchanged for the year ended December 31, 1996 compared to 1995.
 
  Provision (Benefit) for Income Taxes. Income tax provision (benefit) as a
percentage of income before income taxes (i.e., effective tax rate) was 34.3%
for 1996 and (65.4%) for 1995. The effective tax rates may differ from the
federal statutory income tax rate of 34.0% because of the effect of state
income taxes and the exclusion of federal income taxes relating to the S
corporations. The increase in the effective tax rate for 1996 as compared to
1995 is primarily due to the increase in income of the non-S corporation
entities, including gains recognized on the sale of radio stations during
1996. In connection with the Reorganization of the Company, which resulted in
the termination of the S corporation status of New Inspiration and Golden
Gate, the Company will record a deferred tax liability and provision of
approximately $600,000.
 
  Net Income. The Company recognized net income of approximately $12.8 million
in 1996, compared to net income of $122,000 in 1995. Included in net income
for 1995 is a $394,000 extraordinary loss for the write off of deferred
financing costs related to the repayment in March 1995 of outstanding
indebtedness under certain credit agreements with banks, including the Old
Credit Agreement, and a make-whole premium in connection with the repayment of
certain senior subordinated notes to insurance companies.
 
                                      33
<PAGE>
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
 
  Net Revenue. Net revenue increased approximately $9.6 million or 24.9% to
$48.2 million in 1995 from $38.6 million in 1994 primarily due to the
inclusion of revenue from the acquisitions of radio stations during 1995 and
1994 (approximately $6.2 million of the increase), and to a lesser extent, to
program rate increases, and improved selling efforts at both the national and
local level (approximately $3.4 million of the increase).
 
  Station Operating Expenses. Station operating expenses increased
approximately $5.3 million or 23.9% to $27.5 million in 1995 from $22.2
million in 1994, primarily due to the inclusion of operating expenses of the
station acquisitions during 1995 and 1994 (approximately $4.3 million of the
increase), and to a lesser extent, to expenses incurred to produce the
increased revenue described above (approximately $1.0 million of the
increase).
 
  Broadcast Cash Flow. Broadcast cash flow increased approximately $4.2
million or 25.6% to $20.6 million in 1995 from $16.4 million in 1994. As a
percentage of net revenue, broadcast cash flow increased to 42.9% in 1995 from
42.5% in 1994.
 
  Corporate Expenses. Corporate expenses increased approximately $0.5 million
or 15.2% to $3.8 million in 1995 from $3.3 million in 1994, primarily due to
additional personnel and overhead costs associated with station acquisitions
in 1995.
 
  EBITDA. EBITDA increased approximately $3.7 million or 28.2% to $16.8
million in 1995 from $13.1 million in 1994.
 
  Tax Reimbursements to S Corporation Shareholders. Tax reimbursements to S
corporation shareholders increased approximately $1.1 million or 110.0% to
$2.1 million in 1995 from $1.0 million in 1994, primarily due to increased
taxable income of the S corporations.
 
  Depreciation and Amortization. Depreciation and amortization expense
increased approximately $0.3 million or 3.9% to $7.9 million in 1995 from $7.6
million in 1994, primarily due to radio station acquisitions consummated
during 1995 and 1994.
 
  Other Income (Expense). Interest income increased $89,000 to $319,000 in
1995 from $230,000 in 1994. Loss on disposal of assets decreased $475,000 from
$482,000 in 1994 to $7,000 in 1995, primarily due to the write-off of
leasehold improvements at abandoned office/studio locations in 1994. Interest
expense increased approximately $2.9 million or 78.4% to $6.6 million in 1995
from $3.7 million in 1994, primarily due to interest expense associated with
additional borrowings to fund acquisitions consummated during 1995 and 1994,
and increases in interest rates. Other expense increased $120,000 to $255,000
in 1995 from $135,000 in 1994, primarily due to increased expenses related to
bank loan fees in 1995.
 
  Provision (Benefit) for Income Taxes. Income tax provision (benefit) as a
percentage of income before income taxes (i.e., effective tax rate) was
(135.4%) for 1995 and (56.3%) for 1994. The effective tax rates may differ
from the federal statutory income tax rate of 34.0% because of the effect of
state income taxes and the exclusion of federal income taxes relating to the S
corporations. The decrease in the effective tax rate for 1995 as compared to
1994 is primarily due to losses of the non-S corporation entities, including
an increase in interest expense in 1995.
 
  Net Income. The Company recognized net income of approximately $122,000 in
1995, compared to net income of $686,000 in 1994. Included in net income for
1995 is a $394,000 extraordinary loss for the write off of deferred financing
costs related to the repayment in March 1995 of outstanding indebtedness under
certain credit agreements with banks, including the Old Credit Agreement, and
a make-whole premium in connection with the repayment of certain senior
subordinated notes to insurance companies.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  In the past, the Company principally financed acquisitions of radio stations
through borrowings, including borrowings under credit agreements with banks,
and, to a lesser extent, from cash flow from operations and
 
                                      34
<PAGE>
 
selected asset dispositions. The Company used the net proceeds from the sale
of the Notes to repay substantially all of its outstanding indebtedness under
a line of credit agreement, at which time such facility was canceled and the
Company entered into the current Credit Agreement.
 
  The Company anticipates funding future acquisitions from operating cash flow
and borrowings, including borrowings under the Credit Agreement. At September
30, 1997, $10.1 million was outstanding under the Company's Credit Agreement.
The maximum amount that the Company may borrow under the Credit Agreement is
limited by the Company's debt to cash flow ratio, adjusted for recent radio
station acquisitions as defined in the Credit Agreement (the "Adjusted Debt to
Cash Flow Ratio"). At September 30, 1997, the maximum Adjusted Debt to Cash
Flow Ratio allowed under the Credit Agreement was 7.0 to 1. The Company's
ability to borrow for the purpose of acquiring a radio station is further
limited by the Credit Agreement in that the Company may not borrow for an
acquisition if the Adjusted Debt to Cash Flow Ratio is greater than 6.0 to 1.
At September 30, 1997, the Adjusted Debt to Cash Flow Ratio was 6.07 to 1,
resulting in total borrowing availability of approximately $19.9 million, none
of which can currently be used for radio station acquisitions. In addition to
debt service requirements under the Credit Agreement, the Company will be
required to pay $14.3 million per annum in interest on the Notes. Management
believes that cash flow from operations and borrowings under the Credit
Agreement should be sufficient to permit the Company to meet its financial
obligations and to fund its operations for at least the next twelve months.
 
  The Credit Agreement contains certain additional restrictive covenants
customary for credit facilities of the size, type and purpose contemplated
which, among other things, and with certain exceptions, limits the Company's
ability to enter into affiliate transactions, pay dividends, consolidate,
merge or effect certain asset sales, make certain investments or loans and
change the nature of its business. The Credit Agreement also requires the
satisfaction by the Company of certain financial covenants, which will require
the maintenance of specified financial ratios and compliance with certain
financial tests, including ratios for maximum leverage as described above (not
greater than 7.0 to 1 at September 30, 1997), minimum interest coverage (not
less than 1.25 to 1 at September 30, 1997), minimum debt service coverage (a
static ratio of not less than 1.1 to 1) and minimum fixed charge coverage (a
static ratio of not less than 1.1 to 1). See "Description of Other
Indebtedness."
 
  For the nine months ended September 30, 1997, net cash provided by
operations decreased to $1.9 million, compared to $9.3 million for the 1996
period due to the Company recording a net loss in the 1997 period primarily as
a result of higher interest expense and changes in working capital items in
1997. Net cash provided by operations increased to $10.5 million for the year
ended December 31, 1996, compared to $7.7 million in 1995 due primarily to
increased net operating income in 1996. Net cash provided by operations was
essentially unchanged for the year ended December 31, 1995 compared to 1994.
 
  For the nine months ended September 30, 1997, net cash used in investing
activities increased $13.3 million to $26.6 million from $13.3 million for the
1996 period due to radio station acquisitions (seven stations purchased for
$18.8 million in the first nine months of 1997 compared to seven stations
purchased for $8.3 million in the first nine months of 1996), and expenditures
for a tower construction project held for sale, in 1997. Net cash used in
investing activities decreased to $18.9 million for the year ended December
31, 1996, compared to $27.7 million for 1995 primarily due to the sale of
KDBX-FM, Portland and KDFX-AM, Dallas in 1996. The sale of these two radio
stations provided $15.9 million of cash, which offset the cash used by the
Company to purchase radio stations in 1996. Net cash used in investing
activities increased to $27.7 million for the year ended December 31, 1995,
compared to $18.8 million for 1994 primarily due to the acquisition of higher
priced radio stations in 1995 compared to 1994.
 
  For the nine months ended September 30, 1997, net cash provided by financing
activities increased $21.5 million to $24.8 million from $3.3 million for the
1996 period primarily from proceeds from long-term debt incurred in 1997,
offset by the $30.5 million payment of the note payable associated with the
acquisition of KWRD-FM, Dallas. Net cash provided by financing activities was
$9.4 million for the year ended December 31, 1996, $19.2 million for 1995, and
$11.8 million for 1994, primarily due to increased long-term debt borrowings
for the higher priced radio stations acquired in 1995.
 
                                      35
<PAGE>
 
                                   BUSINESS
 
GENERAL
 
  Salem Communications Corporation is the leading radio broadcast company in
the United States, measured by number of stations owned and audience coverage,
that focuses on serving the religious/conservative listening audience. The
Company's two primary businesses include the ownership and operation of
religious format radio stations and the development and expansion of its
national Network offering talk programming, news and music to affiliated
stations. The Company owns and/or operates 43 radio stations concentrated in
28 geographically diverse markets across the United States. The Company offers
a variety of specialized talk programming emphasizing Bible study and Judeo-
Christian values applied to family and community issues as well as
contemporary and traditional religious music.
 
  The Company focuses on serving the top 25 markets in terms of audience size
in the United States and has stations in nine of the top ten and 19 of the top
25 of those markets. The Company is also interested in serving certain mid-
sized markets, which the Company considers to be markets that are among the
26th through 50th largest radio markets in the United States in terms of
audience size. Since January 1, 1992, the Company has grown significantly by
acquiring ownership of, or operating rights to, 29 radio stations in 20
markets, including 17 stations in 14 markets since January 1, 1996. Most of
these recently acquired radio stations were previously broadcasting in non-
religious formats and have been re-formatted by the Company. The Company's
experience has been that changing the format of an acquired station typically
requires a transition period during which the Company develops its program
customer and listener base. During such transition period, these stations
typically do not generate significant cash flow from operations. The Company's
total gross revenue, broadcast cash flow and EBITDA were $65.1 million,
$25.5 million and $20.9 million, respectively, for the year ended December 31,
1996 and were $54.5 million, $20.7 million and $15.7 million, respectively,
for the nine months ended September 30, 1997.
 
  The following table sets forth information about each radio station owned
and/or operated by the Company in order of market size:
 
<TABLE>
<CAPTION>
              MARKET(1)            MSA RANK   STATION CALL LETTERS     YEAR ACQUIRED
              ---------            --------   --------------------     -------------
   <S>                             <C>      <C>                       <C>
   New York, NY...................     1    WMCA-AM; WWDJ-AM          1989; 1994
   Los Angeles, CA................     2    KKLA-FM; KLTX-AM; KAVC-FM 1985; 1986; 1983
   Chicago, IL....................     3    WYLL-FM                   1990
   San Francisco, CA..............     4    KFAX-AM                   1984
   Philadelphia, PA...............     5    WFIL-AM; WZZD-AM          1993; 1994
   Dallas-Ft. Worth, TX...........     7    KWRD-FM                   1996
   Washington, D.C. ..............     8    WAVA-FM                   1992
   Houston-Galveston, TX..........     9    KKHT-FM; KENR-AM          1995; 1995
   Boston, MA.....................    10    WEZE-AM                   1997
   Seattle-Tacoma, WA.............    13    KGNW-AM; KLFE-AM; KKOL-AM 1985; 1994; (2)
   San Diego, CA..................    14    KPRZ-AM                   1986
   Minneapolis-St. Paul, MN.......    16    KKMS-AM                   1996
   Phoenix, AZ....................    18    KPXQ-AM                   1996
   Baltimore, MD..................    19    WITH-AM(3)                1997
   Pittsburgh, PA.................    20    WORD-FM; WPIT-AM          1989; 1993
   Cleveland, OH..................    22    WHK-AM; WCCD-AM           1997
   Denver-Boulder, CO.............    23    KRKS-FM; KRKS-AM; KNUS-AM 1993; 1994; 1996
   Portland, OR...................    24    KPDQ-FM; KPDQ-AM          1986; 1986
   Cincinnati, OH.................    25    WTSJ-AM                   1997
   Riverside-San Bernardino, CA...    26    KKLA-AM(4)                1986
   Sacramento, CA.................    28    KFIA-AM; KTKZ-AM          1995; 1997
   Columbus, OH...................    32    WRFD-AM                   1982
   San Antonio, TX................    34    KSLR-AM                   1994
   Akron, OH......................    67    WHLO-AM                   1997
   Spokane, WA....................    87    KTSL-FM                   1996
   Colorado Springs, CO...........    95    KGFT-FM; KBIQ-FM; KPRZ-FM 1996; 1996; 1996
   Oxnard, CA.....................   109    KDAR-FM                   1974
   Canton, OH.....................   120    WHK-FM(5)                 1997
</TABLE>
 
                                      36
<PAGE>
 
- ---------------------
(1) Actual city of license may differ from metropolitan market served.
 
(2) The Company operates the station, which is licensed to a corporation owned
    by the Principal Shareholders of the Company, under the terms of a local
    marketing agreement. The Principal Shareholders and the Company are
    parties to an Option to Purchase Agreement whereunder the Company has been
    granted an option to purchase KKOL-AM from the Principal Shareholders at
    any time on or before December 31, 1999. See "Federal Regulation of Radio
    Broadcasting--Local Marketing Agreements" and "Certain Transactions."
 
(3) The station is simulcast with WAVA-FM, Washington, D.C.
 
(4) The station is simulcast with KKLA-FM, Los Angeles.
 
(5) The station is simulcast with WHK-AM, Cleveland.
 
CORPORATE STRUCTURE AND REORGANIZATION
 
  The Company was incorporated in California in 1986 in connection with a
combination of most of the radio station holdings of the Principal
Shareholders. Each of the Principal Shareholders owned 50% of the Company's
outstanding common stock. New Inspiration, the licensee of KKLA-FM, Los
Angeles, and Golden Gate, the licensee of KFAX-AM, San Francisco, were owned
by the Shareholders. New Inspiration and Golden Gate were both "S
corporations," as that term is defined in the Internal Revenue Code. The
Company, New Inspiration and Golden Gate are the general partners of Beltway
Media Partners ("Beltway"), the licensee of WAVA-FM, Washington, D.C.
 
  On August 13, 1997, the Company, New Inspiration and Golden Gate effected a
reorganization (including the Shareholder Notes as defined below, the
"Reorganization") pursuant to which New Inspiration and Golden Gate became
wholly owned subsidiaries of the Company, with Beltway remaining a partnership
owned by the Company, New Inspiration and Golden Gate. The S corporation
status of New Inspiration and Golden Gate was terminated in the
Reorganization. Prior to the Reorganization, New Inspiration and Golden Gate
made distributions of cash and promissory notes to their respective
shareholders in the aggregate amount of $8.5 million. Of such amount, $1.8
million, equal to the estimated federal and state income tax liability of the
shareholders on the earnings of New Inspiration and Golden Gate, was paid by
New Inspiration and Golden Gate in cash. The remainder, $6.7 million, the
balance of the net income of New Inspiration and Golden Gate that had
previously been taxed but not distributed to the shareholders, was distributed
in the form of promissory notes to be paid to the shareholders immediately
following the closing of the offering (the "Shareholder Notes"). The Company
borrowed $6.7 million under the Credit Agreement and applied this amount to
the payment of certain indebtedness owed to New Inspiration and Golden Gate by
the Company. The cash made available to New Inspiration and Golden Gate from
the repayment of such loans was then used by New Inspiration and Golden Gate
to pay the Shareholder Notes. See "Certain Transactions" and "Description of
Certain Indebtedness--Shareholder Notes."
 
  To effect the Reorganization, the Shareholders contributed their shares of
stock in New Inspiration and Golden Gate to the Company (which in turn
effected the contribution to the Company of the Shareholders' interests in
Beltway) in exchange for the new shares in the Company. The share conversion
factors were based on the ratio of asset values of the Company, New
Inspiration and Golden Gate to the combined asset value of such entities. The
asset values were determined by an independent radio station broker. Following
the Reorganization, Mrs. Epperson, who had been a 50% owner of New
Inspiration, became a shareholder of the Company. All of the outstanding stock
of the Company is currently owned by Mr. Atsinger (50%), Mr. Epperson (36.8%)
and Mrs. Epperson (13.2%). See "Securities Ownership of Certain Beneficial
Owners."
 
RELIGIOUS FORMAT OVERVIEW
 
  The 1997 Broadcasting & Cable Yearbook identifies over 1,800 radio stations
throughout the United States that feature religious talk and music formats,
including formats identified as Religious, Gospel, Christian, Inspirational or
Sacred. Approximately two-thirds of these stations are for-profit businesses.
The balance of these stations broadcast from the noncommercial educational
band (88.1MHz-91.9MHz) and are licensed to non-profit organizations.
 
 
                                      37
<PAGE>
 
  Contrary to many mainstream formats which have experienced a decline in
popularity in recent years, religious formats have experienced significant
growth. According to statistics appearing in The M Street Journal, a broadcast
industry newsletter, the number of radio stations featuring religious formats
has grown approximately 69% between 1989 and 1997 and the religious format is
the third largest radio format in the United States after country and
news/talk. According to Religion & Media Quarterly, religious format radio
stations have an audience of approximately 20.6 million listeners.
 
  While a variety of music formats, including Southern Gospel, Black Gospel,
Praise and Worship, and Contemporary Christian, are offered on religious
format stations, the largest single category of religious format is talk
programming emphasizing Bible preaching and teaching and other programming
addressing family and community issues. Music and talk formats can be found on
both commercial and noncommercial stations. Commercial stations that feature
religious music formats generate nearly all of their revenue from the sale of
advertising time to local and national spot advertisers and national network
advertisers. Commercial stations that specialize in talk programming,
including substantially all of the Company's stations, generate the majority
of their revenue from the sale of block program time to national and local
program producers. Noncommercial stations typically obtain revenue through
tax-deductible contributions from listeners, the sale of block program time to
national and local program producers and grants or sponsorships of specific
programming that allow the sponsor's name to be featured. Sale of spot
advertising is prohibited on noncommercial stations.
 
OPERATING STRATEGY
 
  Maintain and Enhance Leadership Position in Religious Talk Format. The
Company believes that an important factor in its ability to attract and retain
quality programming customers is its demonstrated long-term commitment to
religious talk formats. Program customers tend to be sophisticated purchasers
of air time that recognize that building a listener base capable of generating
revenue sufficient to cover programming costs may take several years. The
Company's experience has been that such programmers are accordingly reluctant
to make the commitment to building a new listener base unless they have a
reasonable expectation that the format will remain in place. Management of the
Company therefore intends to continue its long-term commitment to the
religious talk format. Management believes its commitment to growing the
religious talk format, increasing the number of owned and operated stations
and developing network operations and national sales activities allows for
future growth opportunities for the Company.
 
  Identify and Develop New Program Producers. The Company recognizes that the
ongoing success of its religious talk format is largely dependent on the
continued availability of quality programs. Management of the Company is
committed to assisting promising new program producers with advice on content
and structuring of programs in addition to advice on levels of support
staffing, engineering and programming delivery options. Station managers are
encouraged to evaluate local talk programs with a view toward expansion of
promising programs into national syndication. The Company continues to
emphasize this important development area with the goal of maintaining a
backlog of quality programs available for placement in new markets and
existing markets where the Company may add additional stations.
 
  Emphasize Signal Quality and Market Coverage. The Company is committed to
the ongoing evaluation and improvement of its technical facilities, including
power increases, tower/antenna relocations and investment in state of the art
equipment. The Company believes that its success is attributable in part to
its ownership of broadcast facilities that provide broad signal coverage in
its markets.
 
  Build Station Identity Through Development of Strong Production Values. The
Company believes that an important element in retaining and increasing the
listening audience and expanding the base of potential advertisers for its
stations is the development of local station identity. The Company believes
that its emphasis on development of a station's identity during those times
when the Company is not broadcasting its customers' block programming will
allow it to compete with general format stations for listening audience and
advertising customers. Station employees with responsibility for programming
are encouraged to build identity through continual improvement of production
values and to share their ideas with other Company stations. The Company
 
                                      38
<PAGE>
 
assists local personnel and coordinates development of increased production
values through its director of programming located at the corporate
headquarters. Certain of the Company's stations have successfully adopted
techniques that have built identity through the development of local on-air
personalities associated with segments of the broadcast day, and these
techniques are being implemented at other Company stations.
 
  Expand and Diversify National Network. The Company is committed to expanding
the Network by adding to its menu of Network product offerings and by actively
promoting these products to Network affiliates. The Company believes that by
continually increasing the quality of its Network product it will add to its
affiliate base, thereby providing more audience reach that will attract more
national advertising customers and potentially generate business from national
advertising agencies. The Company competes aggressively for talk show talent
it believes will be attractive to existing and potential affiliates, refines
existing music formats and develops political commentary and public affairs
programming that are complementary to the product offerings of the Network.
The Company will continue to explore ways to better serve its customers and
the religious/conservative listening audience by using the combined resources
of its owned and operated stations and the Network. For example, unused
Network inventory can be used as an incentive to potential or existing program
producers to purchase block program time on the Company's radio stations. The
Company has successfully implemented this strategy in the past and will
continue to devote significant time and resources to find additional
synergistic uses of its radio stations and the Network.
 
ACQUISITION STRATEGY
 
  Expand Into New Markets. The Company continues to pursue an acquisition
strategy of acquiring radio stations in the top 25 markets in which it
currently does not have a presence and acquiring selected stations in mid-
sized markets. The Company considers mid-sized markets to be the 26th through
50th largest radio markets in the United States in terms of audience size. In
the early years of the Company's operations, and from time to time more
recently, it has acquired radio stations in markets smaller than mid-sized
markets. Generally, any recent acquisition of a station in a smaller market
was undertaken (i) to access an audience that the Company believed would be
particularly receptive to its format, such as the market in Colorado Springs,
Colorado, where the headquarters of a number of religious organizations are
located, or (ii) as part of an acquisition in which the Company was pursuing
its strategy of acquiring a station in a major or mid-sized market but was
required to acquire the smaller market station as part of a multiple station
transaction.
 
  The Company believes that its presence in large markets makes it attractive
to national program syndicators and national advertisers. In addition, the
geographic diversity of the Company's markets reduces its dependence on any
single local economy. Over the past 20 years, the Company has developed and
implemented a model for evaluating the desirability of entering a new market.
Management considers the number of stations already serving the target market
with religious formats, the programming within that format (music or talk),
the quality of talk programs offered and the signal strength of the competing
stations. The signal strength of any station that becomes available for
purchase is a critical factor in the evaluation process.
 
  Expand in Existing Markets. The Company pursues the acquisition of
additional stations in markets in which it already has a presence. The
experience of the Company with existing duopolies and triopolies has been
positive. Multiple stations making use of one general manager and sales staff
and one broadcast facility have resulted in operational efficiencies in
certain markets. In addition, the Company intends to develop more talk and
music product at the Network level that will be available for use on
additional stations in a market. The Company believes new religious music
formats are gaining increased popularity and are complementary to the
Company's religious talk format. Three separate music formats are produced by
the Network and are available for use by Company stations. This strategy has
been implemented successfully in Colorado Springs, where the Company owns
three FM stations, two of which offer religious music formats and one of which
features a religious talk format.
 
  Upgrades in Existing Markets. The Company is continually looking for upgrade
opportunities in existing markets to expand its audience reach. This strategy
of acquiring upgraded facilities in existing markets has been an area of
emphasis for senior management for many years and has been successfully
demonstrated in such markets as Seattle and New York in prior years. More
recently, the Company has significantly improved its
 
                                      39
<PAGE>
 
position in Boston and Dallas through the acquisition of more powerful
stations that have allowed the Company to continue its business strategy of
operating stations that provide broad signal coverage in its markets.
 
  Acquisition Financing. In the past, the Company has principally financed
acquisitions of radio stations through borrowings, including borrowings under
credit agreements with banks and, to a lesser extent, from cash flow from
operations and selected asset dispositions. Taking into account certain
restrictions under the Credit Agreement, however, the Company is not currently
able to borrow for acquisitions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
OWNED AND/OR OPERATED RADIO STATIONS
 
  Program Revenue. For the year ended December 31, 1996 and the nine months
ended September 30, 1997, the Company derived 57.5% and 53.4% of its gross
revenue, or $37.5 million and $29.1 million, respectively, from the sale of
nationally syndicated and local block program time. The Company derives its
nationally syndicated program revenue from a programming customer base
consisting primarily of geographically diverse, well-established non-profit
religious and educational organizations that purchase time on stations in a
large number of markets in the United States. These nationally syndicated
program producers typically purchase 13, 26 or 52 minute blocks on a Monday
through Friday basis and may offer supplemental programming for weekend
release. The recognized leading daily radio program featured on religious talk
format stations is Focus on the Family, which according to the 1997 Directory
of Religious Media is syndicated on 943 radio stations in the United States,
including 35 Company stations as of November 1997. Other leading radio
programs currently include Insight for Living (590 stations, including 26
Company stations), In Touch (490 stations, including 27 Company stations), and
Grace to You (294 stations, including 22 Company stations). Local program
revenue is obtained from community organizations and churches that typically
purchase time primarily for weekend release and from local speakers who
purchase daily releases. The Company has been successful in assisting quality
local programs to expand into national syndication.
 
  Purchasers of block program time derive their income from two primary
sources: (i) listener contributions, and (ii) product sales, including sales
of inspirational material such as printed literature and periodicals, audio
and video tapes and other miscellaneous items. Revenue from these sources is
used in part to pay for the air time purchased from the Company. The
nationally syndicated program producers carefully track the source of their
donations and product sales and use this information to measure the return on
their air time investment at each station. The Company's top five revenue-
producing program customers accounted for $7.8 million of gross revenue for
the year ended December 31, 1996 and $4.3 million of gross revenue for the six
months ended June 30, 1997. These amounts represented 20.7% and 22.2%,
respectively, of the Company's gross program revenue and 11.9% of the
Company's gross revenue for such periods.
 
  The Company's stations have enjoyed long-standing relationships with key
customers. Focus on the Family and Insight for Living have been ongoing
customers of the Company since 1977. Management attributes this continuity to
the recognized commitment of the Company to concentrate its efforts in
religious talk format stations and not to change formats or exit markets where
it has acquired stations. Management believes that its key customers are
willing to make the long-term commitment to build a base of support in Company
markets largely because of the Company's commitment to build a religious talk
format for its radio stations. As is typical in the radio industry, contracts
may generally be canceled by either the station or the program producer on one
month's notice. New program producers, however, are occasionally required to
sign one-year contracts to demonstrate a commitment of resources to the
program. Rate increases are typically negotiated on an annual basis.
 
  The Company believes that sales of block program time lessen its exposure to
swings in general economic activity and thus make its revenue stream less
volatile. Because program customers derive their income primarily from various
forms of listener support, and given the time period usually required for a
program to obtain and develop an audience, management believes that program
customers have generally found it to be in their best interest to retain a
specific time slot on a long-term basis notwithstanding short-term financial
results or economic conditions.
 
                                      40
<PAGE>
 
  Advertising Revenue. For the year ended December 31, 1996, and the nine
months ended September 30, 1997, the Company derived 26.7% and 27.5% of its
gross revenue, or $17.4 million and $15.0 million, respectively, from the sale
of local spot advertising and 6.3% and 9.4% of its gross revenue, or $4.1
million and $5.1 million (including $2.7 million of reclassified infomercial
advertising revenue), respectively, from the sale of national spot
advertising. Prior to 1997, classification of revenue (i.e. national program,
national advertising, local program or local advertising) from infomercials
was determined at the discretion of local station general managers. In 1997,
the Company began including revenue from infomercials in the national
advertising category in order to establish uniformity of classification of
revenue. The Company in recent years has begun to place greater emphasis on
the development of local spot sales in all of its markets. General managers
and sales managers are encouraged to create more spot inventory for sale.
Additional spot inventory can be created in a variety of ways, such as
removing programming which generates marginal audience response and adjusting
the start time of programs to add inventory in more desirable dayparts.
 
  The Company believes that the listening audience for its radio stations,
which provides the financial support for program producers purchasing time on
these stations, is responsive to affinity advertisers that promote products
targeted to the religious/conservative audience and is receptive to direct
response appeals such as those offered through infomercials. The Company's
stations all have affinity advertising customers in their respective markets.
Local church groups and many community organizations such as rescue missions
and family crisis support services can often effectively reach their natural
constituencies by advertising on religious format stations. Significant
advertising is also purchased by local and nationally affiliated religious
bookstores, publishers specializing in inspirational and religious literature
and other businesses that desire to specifically target the conservative adult
religious community. The Company also generates spot advertising revenue from
general market retailers, including automobile dealers and grocery store
chains, in many of its markets. Management believes these results are
consistent with an increased openness to the use of niche radio formats by
general market retailers.
 
  Because the Company does not sell advertising based on market share, it does
not subscribe to traditional audience measuring services, but instead sells
advertising based upon the proven success of its other advertising customers.
A majority of advertisers on Company radio stations are "direct-response"
advertisers (i.e., advertisers that solicit some type of response, typically
the calling of a toll-free telephone number to purchase a product or service
advertised). The typical advertiser on a Company radio station measures the
effectiveness of its advertising on Company stations in terms of (a) the
number of inquiries to the advertiser in which the caller reports having heard
the advertiser's commercial on a Company radio station, (b) whether a
sufficient volume of new customers for the advertiser is generated given a
designated inquiry level (e.g., the advertiser may require that it experience
a conversion rate of four new customers for every 10 inquiries), or (c)
revenues attributable to sales by the advertiser that are identified as
generated by the advertiser's commercial aired on Company stations. The sales
staffs of the Company's radio stations obtain information from existing
advertisers regarding the advertisers' level of satisfaction with the results
generated by the advertisers' commercials aired on Company radio stations. The
Company's sales staffs communicate such information, as well as information
regarding the volume of existing advertisers' repeat advertising on Company
stations, to prospective advertisers in marketing the Company's radio
stations.
 
  The Company's radio stations also receive revenue from national advertisers
desiring to include selected Company stations in national buys covering
multiple markets. These national advertising buys are placed through SRR,
which receives a commission based on the gross dollar amount of all orders
generated. Infomercials run regularly on Company stations, generally on
weekends. In reviewing proposed purchases of air time by advertisers and
infomercial producers, the Company considers the suitability of the content of
the advertising and infomercials for its audience.
 
  Operations. Each of the radio markets in which the Company has a presence
has a general manager who is responsible for day-to-day operations, local spot
advertising sales and, where applicable, local program sales for all Company
stations in the market. General managers earn a base salary plus a percentage
of the respective
 
                                      41
<PAGE>
 
station's net operating income. Each station also has a staff of full and
part-time engineering, programming and sales personnel. Sales staffs are paid
on a commission basis.
 
  The Company has decentralized its operations in response to the rapid growth
it has experienced in recent years. Operations vice presidents of the Company,
some of whom are also station general managers, oversee several markets on a
regional basis. The operations vice presidents are experienced radio
broadcasters with expertise in sales, programming and production. The Company
will continue to rely on this strategy of decentralization and encourage
operations vice presidents to apply innovative techniques to the operations
they oversee which, if successful, can be implemented in other Company
stations.
 
  Corporate headquarters personnel oversee the placement and rate negotiation
for all nationally syndicated programs. Centralized oversight of this most
critical component of Company revenue is necessary because the Company's key
program customers purchase time on many of the Company's markets. Corporate
headquarters personnel also are responsible for centralized reporting and
financial functions, benefits administration, engineering oversight and other
support functions designed to provide resources to local management.
 
NATIONAL NETWORK OPERATIONS
 
  In 1993, the Company established the Network in connection with its
acquisition of certain assets of the former CBN Radio Network. Establishment
of the Network was a part of the Company's overall business strategy to
develop a national network of affiliated radio stations anchored by the
Company's owned and operated radio stations in major markets. The Network,
which is headquartered in Dallas, is focused on the development, production
and syndication of a broad range of programming specifically targeted to
religious talk and music stations as well as general market news/talk
stations. Currently, the Company has rights to six full-time satellite
channels and all Network product is delivered to affiliates via satellite.
 
  As of November 30, 1997, the Network had approximately 750 affiliate
stations, including the Company's owned and operated stations, that broadcast
one or more of the offered programming options. These programming options
feature talk shows, news and music. Network operations also include commission
revenue of SRR from unaffiliated customers and an allocation of operating
expenses estimated to relate to such commissions. SRR is a wholly owned
subsidiary of the Company, which sells all national commercial advertising
placed on the Network's commercial affiliate radio stations. The Network's
gross revenue for the year ended December 31, 1996 and the nine months ended
September 30, 1997 was $5.3 million and $4.5 million, respectively. While the
Network earned net operating income of $274,000 for the year ended December
31, 1996, it incurred a net operating loss of $542,000 for the nine months
ended September 30, 1997, due primarily to continued costs associated with the
development of a news programming production and distribution capability, and
reduced advertising revenue associated with syndicated talk programming.
 
  Talk Programming. The Network offers talk programming designed to attract
listeners to affiliate stations by addressing current national issues from a
religious/conservative perspective. The Network currently produces 20 daily
and weekly long-form and short-form programs including The Oliver North Show,
The Alan Keyes Show, The Dick Staub Show, Janet Parshall's America and a
sports talk program titled Sharing the Victory. As of November 30, 1997,
approximately 260 affiliate radio stations carried some form of Network talk
programming.
 
  Station affiliations for talk programming are non-exclusive, allowing a
station to select specific Network programs it wishes to carry. Commercial
affiliates are required to air five Network spots during each hour of Network
programming carried. The Network affiliation contract generally provides a 90-
day termination option for both parties.
 
  News. The Network began the production and distribution of news in 1996 with
the purchase of StandardNews. The name was subsequently changed to SRN News
and the news product was repositioned to offer affiliates a family-focused
news service, delivered three times each hour, providing coverage of national
 
                                      42
<PAGE>
 
and international news. SRN News began operating from a new, fully-digital
headquarters located in the Washington, D.C. area in early 1997. SRN News has
fully-equipped broadcast facilities at the White House, United States House of
Representatives and United States Senate that are staffed by full-time
correspondents. As of November 30, 1997, the Network provided SRN News to
approximately 295 affiliate radio stations, compared with the 167 affiliates
existing at the time the news service was acquired in 1996.
 
  Commercial radio stations that affiliate with SRN News are required to air
12 Network spots between the hours of 6 AM and 11 PM daily. Because they are
unable to clear commercial advertisements, noncommercial radio stations that
affiliate with SRN News pay a monthly access fee. Affiliation agreements for
the news service are two years in length.
 
  Music. The Network offers three syndicated religious music formats. The
Morningstar format, which originates from studios in Nashville, features adult
contemporary Christian music targeted to the mainstream 25-to-54 year old
audience. The Network also offers a contemporary Christian music format, The
Word in Music, targeted to a younger audience, and a more traditional praise
and worship format, The Word in Praise. Both of these formats originate from
two of the Company's owned and operated stations in Colorado Springs. All
music formats are available to affiliate stations on a 24-hour basis or in
selected dayparts. As of November 30, 1997, the Morningstar format and The
Word in Music format had 127 and 22 affiliates, respectively. As of the same
date, The Word in Praise, established in the first quarter of 1997, had eight
affiliates.
 
  Each music network requires affiliates to air a minimum number of minutes
per hour for network spots. In addition, fixed monthly affiliation fees are
charged to both commercial and non-commercial stations which affiliate with
the Morningstar format and non-commercial stations which affiliate with The
Word in Music and The Word in Praise. In addition to these three 24-hour music
formats, the Network provides weekly music programs, including CCM Countdown
with Gary Chapman, CCM Radio Magazine and Rock Alive, to approximately 310
affiliate stations.
 
  Salem Radio Representatives. The Company established SRR in 1992 as a sales
representation company specializing in placing national advertising on
religious format radio stations. The Network has an exclusive relationship
with SRR, a wholly owned subsidiary of the Company, for the sale of available
Network spot advertising. SRR receives a commission on all Network sales. SRR
also contracts with individual radio stations to sell air time to national
advertisers desiring to include selected Company stations in national buys
covering multiple markets. See "--Owned and/or Operated Radio Stations--
Advertising Revenue." SRR administrative offices are located in Dallas, and
its 12 commissioned sales personnel are located in field offices in
Washington, D.C., Chicago, Nashville, Dallas, Seattle and Los Angeles.
 
COMPETITION
 
  The radio broadcasting industry, including the religious format segment of
this industry, is a highly competitive business. The financial success of each
of the Company's radio stations that features talk programming is dependent,
to a significant degree, upon its ability to generate revenue from the sale of
block program time to national and local religious and educational
organizations. The Company competes for this program revenue with a number of
different commercial and noncommercial radio station licensees. While no group
owner in the United States specializing in the religious format approaches the
Company in size of potential listening audience and presence in major markets,
religious format stations exist and enjoy varying degrees of prominence and
success in all markets. The Company owns and/or operates 30 radio stations in
19 of the top 25 radio markets in terms of audience size. Two competitors of
the Company with the next highest presence in the top 25 markets own and/or
operate only 15 stations in 7 of such major markets and 10 stations in 10 of
such markets, respectively.
 
  The Company also competes for revenue in the spot advertising market with
other commercial religious format and general format radio station licensees.
The Company competes in the spot advertising market with
 
                                      43
<PAGE>
 
other media as well, including broadcast television, cable television,
newspapers, magazines, direct mail coupons and billboard advertising.
 
  Competition may also come from new media technologies currently being
developed or introduced, such as the delivery of audio programming by cable
television systems, by satellite and by DAB. DAB may deliver by satellite to
national and regional audiences, multi-channel, multiformat digital radio
services with quality equivalent to compact discs. The delivery of information
through the Internet also could create new competition. The FCC has recently
authorized spectrum for the use of a new technology, satellite DARS, to
deliver audio programming. DARS may provide a medium for the delivery by
satellite or terrestrial means of multiple new audio programming formats to
local and national audiences.
 
  The Network competes with other commercial radio networks that offer news
and talk programming to religious format stations and two noncommercial
networks that offer religious music formats. The Network also competes with
other radio networks for the services of talk show personalities.
 
SERVICEMARKS
 
  The Company owns the federally registered service marks "Salem
Communications Corporation" and "Salem Radio Network" and the related Salem
Communications Corporation and Salem Radio Network logos. The Company
considers these service marks to be important to its business.
 
EMPLOYEES
 
  At November 30, 1997, the Company employed 513 full-time and 309 part-time
employees. None of the Company's employees are covered by collective
bargaining agreements, and the Company considers its relations with its
employees to be good.
 
  In certain of its larger markets, the Company employs on-air personalities
with loyal audiences in their respective markets. The loss of one of these
personalities could result in a short-term loss of audience share, but the
Company does not believe that any such loss would have a material adverse
effect on the Company's financial condition or results of operations.
 
FEDERAL REGULATION OF RADIO BROADCASTING
 
  Introduction. The ownership, operation and sale of broadcast stations,
including those licensed to the Company, are subject to the jurisdiction of
the FCC, which acts under authority derived from the Communications Act. The
Communications Act was amended by the Telecommunications Act of 1996 (the
"Telecommunications Act") to make changes in several broadcast laws. Among
other things, the FCC assigns frequency bands for broadcasting; determines
whether to approve changes in ownership or control of station licenses;
regulates equipment used by stations; adopts and implements regulations and
policies that directly or indirectly affect the ownership, operation and
employment practices of stations; and has the power to impose penalties for
violations of its rules under the Communications Act.
 
  The following is a brief summary of certain provisions of the Communications
Act and of specific FCC regulations and policies. Failure to observe these or
other rules and policies can result in the imposition of various sanctions,
including monetary forfeitures, the grant of "short" (less than the maximum)
license renewal terms or, for particularly egregious violations, the denial of
a license renewal application, the revocation of a license or the denial of
FCC consent to acquire additional broadcast properties. Reference should be
made to the Communications Act, FCC rules and the public notices and rulings
of the FCC for further information concerning the nature and extent of federal
regulation of broadcast stations.
 
  License Grant and Renewal. Radio broadcast licenses are granted for maximum
terms of eight years. Licenses may be renewed through an application to the
FCC. Prior to the Telecommunications Act, during certain periods when a
renewal application was pending, competing applicants could file for the radio
frequency
 
                                      44
<PAGE>
 
being used by the renewal applicant. The Telecommunications Act prohibits the
FCC from considering such competing applications if the FCC finds that the
station has served the public interest, convenience and necessity, that there
have been no serious violations by the licensee of the Communications Act or
the rules and regulations of the FCC, and that there have been no other
violations by the licensee of the Communications Act or the rules and
regulations of the FCC that, when taken together, would constitute a pattern
of abuse.
 
  Petitions to deny license renewals can be filed by interested parties,
including members of the public. Such petitions may raise various issues
before the FCC. The FCC is required to hold hearings on renewal applications
if the FCC is unable to determine that renewal of a license would serve the
public interest, convenience and necessity, or if a petition to deny raises a
"substantial and material question of fact" as to whether the grant of the
renewal application would be prima facie inconsistent with the public
interest, convenience and necessity. Also, during certain periods when a
renewal application is pending, the transferability of the applicant's license
is restricted. The Company is not currently aware of any facts that would
prevent the timely renewal of its licenses to operate its radio stations,
although there can be no assurance that the Company's licenses will be
renewed.
 
  The FCC classifies each AM and FM station. An AM station operates on either
a clear channel, regional channel or local channel. A clear channel is one on
which AM stations are assigned to serve wide areas. Clear channel AM stations
are classified as either: Class A stations, which operate on an unlimited time
basis and are designated to render primary and secondary service over an
extended area; Class B stations, which operate on an unlimited time basis and
are designed to render service only over a primary service area; and Class D
stations, which operate either during daytime hours only, during limited times
only or on an unlimited time basis with low nighttime power. A regional
channel is one on which Class B and Class D AM stations may operate and serve
primarily a principal center of population and the rural areas contiguous to
it. A local channel is one on which AM stations operate on an unlimited time
basis and serve primarily a community and the suburban and rural areas
immediately contiguous thereto. Class C AM stations operate on a local channel
and are designed to render service only over a primary service area that may
be reduced as a consequence of interference.
 
  The minimum and maximum facilities requirements for an FM station are
determined by its class. FM class designations depend upon the geographic zone
in which the transmitter of the FM station is located. In general, commercial
FM stations are classified as follows, in order of increasing power and
antenna height: Class A, B1, C3, B, C2, C1 and C.
 
 
                                      45
<PAGE>
 
  The following table sets forth in order of market size the market, call
letters, FCC license classification, antenna height above average terrain
(HAAT), power and frequency of each of the stations owned or operated by the
Company and the date on which each station's FCC license expires.
 
<TABLE>
<CAPTION>
                         STATION                                             EXPIRATION
                          CALL       FCC    HAAT      POWER IN                DATE OF
     MARKET(1)           LETTERS    CLASS IN METERS KILOWATTS(2)   FREQUENCY  LICENSE
     ---------           -------    ----- --------- ------------   --------- ----------
<S>                      <C>        <C>   <C>       <C>            <C>       <C>
New York, NY............ WMCA-AM       B      NA        5.0/5.0      570 kHz  6/1/1998
                         WWDJ-AM       B      NA        5.0/5.0      970 kHz  6/1/1998
Los Angeles, CA......... KKLA-FM       B     878           10.5     99.5 MHz 12/1/2005
                         KAVC-FM       A      94            2.9    105.5 MHz 12/1/2005
                         KLTX-AM       B      NA        5.0/3.6     1390 kHz 12/1/2005
Chicago, IL............. WYLL-FM       B      91             50    106.7 MHz 12/1/2004
San Francisco, CA....... KFAX-AM       B      NA          50/50     1100 kHz 12/1/2005
Philadelphia, PA........ WFIL-AM       B      NA        5.0/5.0      560 kHz  8/1/1998
                         WZZD-AM       B      NA      50.0/10.0      990 kHz  8/1/1998
Dallas-Ft. Worth, TX.... KWRD-FM       C     460            100     94.9 MHz  8/1/2005
Washington, D.C. ....... WAVA-FM       B     131             50    105.1 MHz 10/1/2003
Houston-Galveston, TX... KENR-AM       B      NA       10.0/5.0     1070 kHz  8/1/2005
                         KKHT-FM       C     344            100    106.9 MHz  8/1/2005
Boston, MA.............. WEZE-AM       B      NA        5.0/5.0      590 kHz       (3)
Seattle-Tacoma, WA...... KGNW-AM       B      NA       50.0/5.0      820 kHz       (3)
                         KLFE-AM       B      NA        5.0/5.0     1590 kHz       (3)
                         KKOL-AM(4)    B      NA        5.0/5.0     1300 kHz       (3)
San Diego, CA........... KPRZ-AM       B      NA       20.0/5.0     1210 kHz 12/1/2005
Minneapolis-St. Paul,
 MN..................... KKMS-AM       B      NA        5.0/5.0      980 kHz  4/1/2004
Phoenix, AZ............. KPXQ-AM       B      NA        5.0/5.0      960 kHz 10/1/2005
Baltimore, MD........... WITH-AM       C      NA        1.0/1.0     1230 kHz 10/1/2003
Pittsburgh, PA.......... WORD-FM       B     154             48    101.5 Mhz  8/1/1998
                         WPIT-AM       D      NA      5.0/0.024      730 kHz  8/1/1998
Cleveland, OH........... WCCD-AM       D      NA          0.5/0     1000 kHz 10/1/2004
                          WHK-AM       B      NA        5.0/5.0     1420 kHz 10/1/2004
Denver-Boulder, CO...... KNUS-AM       B      NA        5.0/5.0      710 kHz  4/1/2005
                         KRKS-AM       B      NA       5.0/0.39      990 kHz  4/1/2005
                         KRKS-FM       C     387            100     94.7 MHz  4/1/2005
Portland, OR............ KPDQ-AM       B      NA       1.0/0.51      800 kHz       (3)
                         KPDQ-FM       C     387            100     93.7 MHz       (3)
Cincinnati, OH.......... WTSJ-AM       B      NA       1.0/0.28     1050 kHz 10/1/2004
Riverside-San
 Bernardino, CA......... KKLA-AM       C      NA        1.0/1.0     1240 kHz 12/1/2005
Sacramento, CA.......... KFIA-AM       B      NA       25.0/1.0      710 kHz 12/1/2005
                         KTKZ-AM       B      NA        5.0/5.0     1380 kHz 12/1/2005
Columbus, OH............ WRFD-AM       D      NA     23.0/6.1/0(5)   880 kHz 10/1/2004
San Antonio, TX......... KSLR-AM       B      NA        5.0/4.3      630 kHz  8/1/2005
Akron/Canton, OH........ WHLO-AM       B      NA       5.4/0.54      640 kHz 10/1/2004
Spokane, WA............. KTSL-FM      C3     198           28.5    101.9 MHz       (3)
Colorado Springs, CO.... KBIQ-FM       C     695           57.0    102.7 MHz  4/1/2005
                         KGFT-FM      C1     647             13    100.7 MHz  4/1/2005
                         KPRZ-FM      C3     614           0.51     96.1 MHz  4/1/2005
Oxnard, CA.............. KDAR-FM      B1     393            1.5     98.3 MHz 12/1/2005
Canton, OH..............  WHK-FM       B     175             36     98.1 MHz 10/1/2004
</TABLE>
- ---------------------
(1) Actual city of license may be different form the metropolitan market
    served.
(2) Pursuant to FCC rules and regulations, many AM radio stations are licensed
    to operate at a reduced power during nighttime broadcasting hours, which
    results in reducing the radio station's coverage during those hours of
    operation. Both power ratings are shown, where applicable.
(3) Indicates pending renewal application.
(4) The Company operates this station, which is licensed to a corporation
    owned by the Principal Shareholders, under the terms of a local marketing
    agreement. See "--Local Marketing Agreements" and "Certain Transactions."
(5) Pursuant to FCC rules and regulations, many AM radio stations are licensed
    to operate at a reduced power during critical hours, the two-hour periods
    immediately following sunrise and preceding sunset. Both daytime power
    ratings are shown. WRFD-AM does not operate during nightime hours.
 
                                      46
<PAGE>
 
  Ownership Matters. The Communications Act prohibits the assignment of a
broadcast license or the transfer of control of a broadcast license without
the prior approval of the FCC. In determining whether to assign, transfer,
grant or renew a broadcast license, the FCC considers a number of factors
pertaining to the licensee, including compliance with various rules limiting
common ownership of media properties, the "character" of the licensee and
those persons holding "attributable" interests therein, and compliance with
the Communications Act's limitation on alien ownership, as well as compliance
with other FCC policies, including equal employment opportunity requirements.
 
  Once a station purchase agreement has been signed, an application for FCC
consent to assignment of license or transfer of control (depending upon
whether the underlying transaction is an asset purchase or stock acquisition)
is filed with the FCC. Approximately 10 to 15 days after this filing, the FCC
publishes a notice assigning a file number to the application and advising
that the application has been "accepted for filing." This begins a 30-day
statutory public notice period during which third parties have the opportunity
to file formal petitions to deny the proposed transaction. Informal objections
to the transaction may be filed at any time prior to the grant of an
application. During this 30-day period, the FCC staff generally begins its
review of the application and may request additional information from the
applicants in response to any questions the staff may have.
 
  Assuming that no petitions are filed during the public notice period and
that the proposed transaction poses no issues requiring higher level consent,
the FCC staff often grants the application by delegated authority
approximately 10 days after the end of the public notice period. If there is a
back log of applications or the transaction proposes an issue requiring higher
level consent, the 10-day period can extend to 30 days or more. The parties to
the application are legally authorized to close on the transaction at any time
after the application is granted. At this point, however, the grant is not a
"final order."
 
  Public notice of the FCC staff grant of an application is usually issued
within seven days of the date on which the application is granted. For a
period of 30 days following the date of this public notice interested parties
may file petitions seeking staff reconsideration or full FCC review of the
staff action. In addition, for a period of 40 days following the date of the
public notice, the FCC, on its own, can review and reconsider the grant. In
the event that review by the FCC is made, judicial review of the FCC action
may be sought in the United States Court of Appeals for the District of
Columbia within 30 days of the public notice of the FCC's action. In the event
the court affirms the FCC's action, further judicial review may be sought by
seeking rehearing en banc from the Court of Appeals or by certiorari from the
United States Supreme Court.
 
  Assuming that no petitions are filed by third parties and no action staying
or reversing the grant is made by the FCC, then the grant will become a final
order by operation of law at the close of business on the 40th day following
the public notice of the grant. Upon a grant becoming a final order, counsel
is able to deliver an opinion that the grant is no longer subject to
administrative or judicial review, although such actions can nevertheless be
set aside in rare circumstances (e.g., fraud on the agency by a party to the
application).
 
  The FCC will not issue an unconditional assignment or transfer grant if an
application for renewal of license for the station is pending. Thus, the
foregoing timetables will be altered in the event an application for
assignment or transfer is filed while a license renewal application is
pending.
 
  Under the Communications Act, a broadcast license may not be granted to or
held by a corporation that has more than one-fifth of its capital stock owned
or voted by aliens or their representatives, by foreign governments or their
representatives, or by non-U.S. corporations. Under the Communications Act, a
broadcast license also may not be granted to or held by any corporation that
is controlled, directly or indirectly, by any other corporation more than one-
fourth of whose capital stock is owned or voted by aliens or their
representatives, by foreign governments or their representatives, or by non-
U.S. corporations. These restrictions apply in modified form to other forms of
business organizations, including partnerships. The Company therefore may be
restricted from having more than one-fourth of its stock owned or voted by
aliens, foreign governments or non-U.S. corporations.
 
                                      47
<PAGE>
 
  The Communications Act and FCC rules also generally restrict the common
ownership, operation or control of radio broadcast stations serving the same
local market, of a radio broadcast station and a television broadcast station
serving the same local market, and of a radio broadcast station and a daily
newspaper serving the same local market. Under these "cross-ownership" rules,
absent waivers, the Company would not be permitted to acquire any daily
newspaper or television broadcast station (other than low power television) in
a local market where it then owned any radio broadcast station. The FCC's
rules provide for the liberal grant of a waiver of the rule prohibiting common
ownership of radio and television stations in the same geographic market in
the top 25 television markets if certain conditions are satisfied. The
Telecommunications Act extends this waiver policy to stations in the top 50
television markets, although the FCC has not yet implemented this change.
 
  In response to the Telecommunications Act, the FCC amended its multiple
ownership rules to eliminate the national limits on ownership of AM and FM
stations. The FCC's broadcast multiple ownership rules restrict the number of
radio stations one person or entity may own, operate or control on a local
level. These limits are:
 
    (i) in a market with 45 or more commercial radio stations, an entity may
  own up to eight commercial radio stations, not more than five of which are
  in the same service (FM or AM);
 
    (ii) in a market with between 30 and 44 (inclusive) commercial radio
  stations, an entity may own up to seven commercial radio stations, not more
  than four of which are in the same service;
 
    (iii) in a market with between 15 and 29 (inclusive) commercial radio
  stations, an entity may own up to six commercial radio stations, not more
  than four of which are in the same service;
 
    (iv) in a market with 14 or fewer commercial radio stations, an entity
  may own up to five commercial radio stations, not more than three of which
  are in the same service, except that an entity may not own more than 50% of
  the stations in such market.
 
None of these multiple ownership rules requires any change in the Company's
current ownership of radio broadcast stations; however, these rules will limit
the number of additional stations that the Company may acquire in the future
in certain of its markets.
 
  Because of these multiple and cross-ownership rules, a purchaser of voting
stock of the Company that acquires an "attributable" interest in the Company
may violate the FCC's rule if it also has an attributable interest in other
television or radio stations, or in daily newspapers, depending on the number
and location of those radio or television stations or daily newspapers. Such a
purchaser also may be restricted in the companies in which it may invest, to
the extent that these investments give rise to an attributable interest. If an
attributable shareholder of the Company violates any of these ownership rules,
the Company may be unable to obtain from the FCC one or more authorizations
needed to conduct its radio station business and may be unable to obtain FCC
consents for certain future acquisitions.
 
  The FCC generally applies its television/radio/newspaper cross-ownership
rules and its broadcast multiple ownership rules by considering the
"attributable," or cognizable interests held by a person or entity. A person
or entity can have an interest in a radio station, television station or daily
newspaper by being an officer, director, partner or shareholder of a company
that owns that station or newspaper. Whether that interest is cognizable under
the FCC's ownership rules is determined by the FCC's attribution rules. If an
interest is attributable, the FCC treats the person or entity who holds that
interest as an "owner" of the radio station, television station or daily
newspaper in question, and therefore subject to the FCC's ownership rules.
 
  With respect to a corporation, officers and directors and persons or
entities that directly or indirectly can vote 5% or more of the corporation's
stock (10% or more of such stock in the case of insurance companies,
investment companies, bank trust departments and certain other "passive
investors" that hold such stock for investment purposes only) generally are
attributed with an ownership interest in whatever radio stations, television
stations and daily newspapers the corporation owns.
 
 
                                      48
<PAGE>
 
  With respect to a partnership, the interest of a general partner is
attributable, as is the interest of any limited partner who is "materially
involved" in the media-related activities of the partnership. Debt
instruments, nonvoting stock, options and warrants for voting stock that have
not yet been exercised, limited partnership interests where the limited
partner is not "materially involved" in the media-related activities of the
partnership, and minority (under 5%) voting stock, generally do not subject
their holders to attribution.
 
  The FCC has issued a Notice of Proposed Rulemaking (the "NPRM") that
contemplates tightening attribution standards where parties have multiple
nonattributable interests in and relationships with stations that would be
prohibited by the FCC's cross-interest rules, if the interest/relationships
were attributable. The NPRM contemplates that this change in attribution will
apply only to persons holding debt or equity interests that exceed certain
benchmarks. For further information, see "--Proposed Changes" below.
 
  In addition, the FCC has a "cross-interest" policy that under certain
circumstances could prohibit a person or entity with an attributable interest
in a broadcast station or daily newspaper from having a "meaningful"
nonattributable interest in another broadcast station or daily newspaper in
the same local market. Among other things, "meaningful" interests could
include significant equity interests (including nonvoting stock, voting stock
and limited partnership interests) and significant employment positions. This
policy may limit the permissible investments a purchaser of the Company's
voting stock may make or hold.
 
  Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." The FCC has gradually relaxed or eliminated many
of the more formalized procedures it had developed in the past to promote the
broadcast of certain types of programming responsive to the needs of a
station's community of license. Licensees continue to be required, however, to
present programming that is responsive to community problems, needs and
interests and to maintain certain records demonstrating such responsiveness.
Complaints from listeners concerning a station's programming will be
considered by the FCC when it evaluates the licensee's renewal application,
but such complaints may be filed and considered at any time.
 
  Stations also must pay regulatory and application fees and follow various
FCC rules that regulate, among other things, political advertising, the
broadcast of obscene or indecent programming, sponsorship identification and
technical operations (including limits on radio frequency radiation). In
addition, licensees must develop and implement programs designed to promote
equal employment opportunities and must submit reports to the FCC on these
matters annually and in connection with a renewal application. The broadcast
of contests and lotteries is regulated by FCC rules.
 
  Failure to observe these or other rules and policies can result in the
imposition of various sanctions, including monetary forfeitures, the grant of
"short" (less than the maximum) renewal terms or, for particularly egregious
violations, the denial of a license renewal application or the revocation of a
license.
 
  In 1985, the FCC adopted rules regarding human exposures to levels of radio
frequency ("RF") radiation. These rules require applicants for new broadcast
stations, renewals of broadcast licenses or modifications of existing licenses
to inform the FCC at the time of filing such applications whether a new or
existing broadcast facility would expose people to RF radiation in excess of
certain guidelines. In August 1996, the FCC adopted more restrictive radiation
limits. These limits will become effective on September 1, 1997 and will
govern applications filed after that date. The Company anticipates that such
regulations will not have a material effect on its business.
 
  Local Marketing Agreements. Over the past five years, a number of radio
stations, including certain of the Company's stations, have entered into what
commonly are referred to as "local marketing agreements" ("LMAs") or "time
brokerage agreements." These agreements take various forms. Separately-owned
and licensed stations may agree to function cooperatively in terms of
programming, advertising sales and other matters, subject to compliance with
the antitrust laws and the FCC's rules and policies, including the requirement
that the licensee of each station maintains independent control over the
programming and other operations of its own station. The FCC has held that
such agreements do not violate the Communications Act as long as the
 
                                      49
<PAGE>
 
licensee of the station that is being substantially programmed by another
entity maintains complete responsibility for, and control over, operations of
its broadcast stations and otherwise ensures compliance with applicable FCC
rules and policies.
 
  A station that brokers substantial time on another station in its market or
engages in an LMA with a station in the same market will be considered to have
an attributable ownership interest in the brokered station for purposes of the
FCC's ownership rules. As a result, a broadcast station may not enter into an
LMA that allows it to program more than 15% of the broadcast time, on a weekly
basis, of another local station that it could not own under the FCC's local
multiple ownership rules. FCC rules also prohibit the broadcast licensee from
simulcasting more than 25% of its programming on another station in the same
broadcast service (i.e., AM-AM or FM-FM) where the two stations serve
substantially the same geographic area, whether the licensee owns the stations
or owns one and programs the other through an LMA arrangement.
 
  Proposed Changes. In December, 1994, the FCC initiated a proceeding to
solicit comment on whether it should revise its radio and television ownership
"attribution" rules by among other proposals (i) raising the basic benchmark
for attributing ownership in a corporate licensee from 5% to 10% of the
licensee's voting stock, (ii) increasing from 10% to 20% of the licensee's
voting stock the attribution benchmark for "passive investors" in corporate
licensees, (iii) restricting the availability of the attribution exemption
when a single party controls more than 50% of the voting stock; and (iv)
considering LMAs, joint sales agreements, debt and non-voting stock interests
to be attributable under certain circumstances. No decision has been made by
the FCC in these matters. At this time, no determination can be made as to
what effect, if any, this proposed rulemaking will have on the Company.
 
  The Congress and the FCC from time to time have under consideration, and may
in the future consider and adopt, new laws, regulations and policies regarding
a wide variety of matters that could, directly or indirectly, affect the
operation, ownership and profitability of the Company's radio stations, result
in the loss of audience share and revenue for the Company's radio stations,
and affect the ability of the Company to acquire additional radio stations or
finance such acquisitions. Such matters include: (i) proposals to impose
spectrum use or other fees on FCC licensees; (ii) the FCC's equal employment
opportunity rules and matters relating to political broadcasting; (iii)
technical and frequency allocation matters; (iv) changes in the FCC's cross
interest, multiple ownership and cross-ownership policies; (v) changes to
broadcast technical requirements; (vi) proposals to allow telephone or cable
television companies to deliver audio and video programming to the home
through existing phone lines; (vii) proposals to limit the tax deductibility
of advertising expenses by advertisers; and (viii) proposals to auction the
right to use the radio broadcast spectrum to the highest bidder, instead of
granting FCC licenses and subsequent license renewals without such bidding.
 
  The Balanced Budget Act of 1997, enacted August 5, 1997, requires the FCC to
resolve mutually-exclusive requests for use of the commercial radio broadcast
spectrum by auction under most circumstances. On November 25, 1997, the FCC
adopted a Notice of Proposed Rulemaking (the "November 25, 1997 NPRM") seeking
to implement its statutory auction authority. The Balanced Budget Act of 1997
requires the use of auctions to resolve mutually-exclusive requests for new
stations or major changes in the facilities of existing stations filed after
June 30, 1997, where the stations propose to use the commercial radio
broadcast spectrum. The FCC may use auctions to resolve such mutually-
exclusive requests filed before July 1, 1997, which remain pending after a
mandated period ending February 1, 1998, in which the applicants may enter
into settlement agreements to resolve the mutual exclusivity of their
applications. In connection with the November 25, 1997 NPRM, the FCC has
imposed a temporary freeze on the filing of most requests for new commercial
broadcast stations or for major changes of existing commercial broadcast
facilities until it adopts auction rules.
 
  The Company cannot predict whether any proposed changes will be adopted or
what other matters might be considered in the future, nor can it judge in
advance what impact, if any, the implementation of any of these proposals or
changes might have on its business.
 
 
                                      50
<PAGE>
 
  The FCC, on April 2, 1997, awarded two licenses for the provision of
satellite DARS. Under rules adopted for this service, licensees must begin
construction of their space stations within one year, begin operating within
four years, and be operating their entire system within six years. The Company
cannot predict whether the service will be subscription or advertiser
supported. Digital technology also may be used in the future by terrestrial
radio broadcast stations either on existing or alternate broadcasting
frequencies, and the FCC has stated that it will consider making changes to
its rules to permit AM and FM radio stations to offer digital sound following
industry analysis of technical standards. In addition, the FCC has authorized
an additional 100 kHz of bandwidth for the AM band and on March 17, 1997,
adopted an allotment plan for the expanded band that identified the 88 AM
radio stations selected to move into the band. At the end of a five-year
transition period, those licensees will be required to return to the FCC
either the license for their existing AM band station or the license for the
expanded AM band station.
 
  The foregoing summary of certain provisions of the Communications Act and of
specific FCC rules and policies does not purport to be comprehensive.
Reference should be made to the Communications Act, the FCC's rules and the
public notices and rulings of the FCC for further information concerning the
nature and extent of federal regulation of radio broadcast stations.
 
  Federal Antitrust Considerations. The FTC and the DOJ, which evaluate
transactions to determine whether those transactions should be challenged
under the federal antitrust laws, have been increasingly active recently in
their review of radio station acquisitions, particularly where an operator
proposes to acquire additional stations in its existing markets.
 
  For an acquisition meeting certain size thresholds, the Hart-Scott-Rodino
Improvements Act ("HSR Act") and the rules promulgated thereunder require the
parties to file Notification and Report Forms with the FTC and the DOJ and to
observe specified waiting period requirements before consummating the
acquisition. At any time before or after the consummation of a proposed
acquisition, the FTC or the DOJ could take such action under the antitrust
laws as it deems necessary or desirable in the public interest, including
seeking to enjoin the acquisition or seeking divestiture of the business
acquired or other assets of the Company. Acquisitions that are not required to
be reported under the HSR Act may be investigated by the FTC or the DOJ under
the antitrust laws before or after consummation. In addition, private parties
may under certain circumstances bring legal action to challenge an acquisition
under the antitrust laws.
 
  As part of its increased scrutiny of radio station acquisitions, the DOJ has
stated publicly that it believes that LMAs and other similar agreements
customarily entered into in connection with radio station transfers prior to
the expiration of the waiting period under the HSR Act could violate the HSR
Act.
 
  Although the Company does not believe that its acquisition strategy as a
whole will be adversely affected in any material respect by antitrust review,
there can be no assurance that this will be the case.
 
PROPERTIES AND FACILITIES
 
  The types of properties required to support the Company's radio stations
include offices, studios and tower and antenna sites. A station's studios are
generally housed with its office in a downtown or business district. The
Company's tower and antenna sites are generally selected to provide maximum
market coverage. The Network operations are supported by offices and studios
from which Network programming is originated or relayed from a remote point of
origination.
 
  The studios and offices of the Company's stations, its Network operations
and its corporate headquarters are located in leased facilities. The Network
leases satellite transponders used for delivery of its programming. The
Company either owns or leases its radio station tower and antenna sites. The
Company does not anticipate difficulties in renewing those leases that expire
within the next several years or in obtaining other lease arrangements, if
necessary.
 
 
                                      51
<PAGE>
 
  The Company leases certain property from the Principal Shareholders or
trusts and partnerships created for the benefit of the Principal Shareholders
and their families. See "Certain Transactions." All such leases have cost of
living adjustments. Based upon management's assessment and analysis of local
market conditions for comparable properties, the Company believes such leases
do not have terms that vary materially from those that would have been
available from unaffiliated parties.
 
  No one property is material to the Company's overall operations. The Company
believes that its properties are in good condition and suitable for its
operations; however, the Company continually evaluates opportunities to
upgrade its properties. The Company owns substantially all of its equipment,
consisting principally of transmitting antennae, transmitters, studio
equipment and general office equipment.
 
LITIGATION
 
  Neither the Company nor any of its subsidiaries are parties to any material
pending legal proceedings, other than ordinary routine litigation incidental
to their consolidated business operations.
 
                                      52
<PAGE>
 
                                  MANAGEMENT
 
EXECUTIVE AND OTHER KEY OFFICERS AND DIRECTORS
 
  The executive and other key officers and directors of the Company are as
follows:
 
<TABLE>
<CAPTION>
             NAME              AGE                  POSITION
             ----              ---                  --------
 <C>                           <C> <S>
 Edward G. Atsinger III......   58 President, Chief Executive Officer and
                                    Director
 Stuart W. Epperson..........   61 Chairman of the Board
 Eric H. Halvorson...........   48 Executive Vice President, Chief Operating
                                    Officer, General Counsel and Director
 Greg R. Anderson............   50 President, Salem Radio Network
 Dirk Gastaldo...............   42 Vice President and Chief Financial Officer
 Kenneth L. Gaines...........   59 Vice President-Operations
 Dave Armstrong..............   52 Vice President-Operations and General
                                    Manager/KKLA-FM/AM
 Joe D. Davis................   53 Vice President-Operations and General
                                    Manager/WMCA-AM and WWDJ-AM
 Kenneth W. Sasso............   51 Vice President-Operations
 Donald V. Cartmell..........   67 Vice President-National Programming and
                                    Ministry Relations
 Richard A. Riddle...........   53 Director
 Roland S. Hinz..............   58 Director
</TABLE>
 
  All directors hold office until the next annual meeting of shareholders
following their election, or until their successors are elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
 
  Mr. Atsinger has been President, Chief Executive Officer and a Director of
the Company since its inception. He has been engaged in the ownership and
operation of radio stations since 1969 and is a member of the Board of
Directors of the National Religious Broadcasters.
 
  Mr. Epperson has been Chairman of the Company since its inception. Mr.
Epperson has been engaged in the ownership and operation of radio stations
since 1961. In addition, he is a member of the Board of Directors of the
National Religious Broadcasters. Mr. Epperson is married to Nancy A. Epperson
who is Mr. Atsinger's sister.
 
  Mr. Halvorson has been Chief Operating Officer of the Company since 1995,
Executive Vice President of the Company since 1991 and a Director of the
Company since 1988. From 1991 to the present, Mr. Halvorson has also served as
the General Counsel of the Company. Mr. Halvorson was the managing partner of
the law firm of Godfrey & Kahn, S.C.-Green Bay from 1988 until 1991. From 1985
to 1988, he was Vice President and General Counsel of the Company. From 1976
until 1985, he was an associate and then a partner of Godfrey & Kahn, S.C.-
Milwaukee. Mr. Halvorson was a Certified Public Accountant with Arthur
Andersen & Co. from 1971 to 1973.
 
  Mr. Anderson has been President of the Network since 1994. From 1993 to
1994, Mr. Anderson was the Vice President-General Manager of the Network. Mr.
Anderson was employed by Multimedia, Inc. from 1980 to 1993. After serving as
program director and general manager at Multimedia stations in Greenville,
Shreveport and Milwaukee, he was named Vice President, Operations, of the
Multimedia radio division in 1987 and was subsequently appointed as Executive
Vice President and group head of Multimedia's radio division.
 
  Mr. Gastaldo has been Chief Financial Officer of the Company since 1993, and
a Vice President of the Company since 1992. From 1992 to 1993, Mr. Gastaldo
was Vice President-Administration of the Company, and from 1989 to 1991 he was
Manager-Internal Audit of the Company. He was a Certified Public Accountant
with Ernst & Young from 1978 to 1989.
 
                                      53
<PAGE>
 
  Mr. Gaines has been Vice President-Operations of the Company since 1994.
Prior to that time, he served as General Manager of KKLA-FM from 1992 to 1994
and General Manager of WYLL-FM from 1990 to 1992. Mr. Gaines has been involved
in the management of radio stations since 1964. He served as Executive Vice
President of Commonwealth Communications from 1988 to 1990, Vice President of
Penn Communications from 1985 to 1988, Executive Vice President of Broadstreet
Communications from 1974 to 1985 and Vice President and General Manager of
Metromedia from 1964 to 1974.
 
  Mr. Armstrong has been Vice President-Operations of the Company since 1996
and General Manager of KKLA-FM/AM since 1994. He has also supervised
operations of KLTX-AM since January 1997. Mr. Armstrong has 28 years of radio
broadcast experience and has been general manager of stations in Santa Ana and
Orange, California.
 
  Mr. Davis has been Vice President-Operations of the Company since 1996 and
General Manager of WMCA-AM since 1989. He has also been the General Manager of
WWDJ-AM since 1994. He has previously served as Vice President and Executive
Director of Christian Fund for the Disabled as well as President of Practice
Resources, Inc., Davis Eaton Corporation and Vintage Specialty Advertising
Company.
 
  Mr. Sasso has been Vice President-Operations of the Company since 1996.
Prior to that time, he served as General Manager of the Company's Colorado
Springs stations from 1994 to present and General Manager of the Company's
Denver stations from 1995 to 1996. Mr. Sasso is the former owner of eight
radio stations in Florida, Mississippi and Louisiana which were sold in 1989.
From 1969 to 1979 he served in various radio management capacities for King
Broadcasting and The American Broadcasting Companies.
 
  Mr. Cartmell has been Vice President-National Programming and Ministry
Relations of the Company since 1996. He served as Vice President-Operations of
the Company from 1988 to 1996 and as General Manager of KLTX-AM from 1987 to
1988. Prior to joining the Company, Mr. Cartmell was Vice President and
Director of Marketing of Interstate Broadcasting Company.
 
  Mr. Riddle has been a Director of the Company since September, 1997. Mr.
Riddle is an independent businessman specializing in providing financial
assistance and consulting to manufacturing companies. He was President and
majority shareholder of I. L. Walker Company from 1988 to 1997 when the
company was sold. He also was Chief Operating Officer and majority shareholder
of Richter Manufacturing from 1970 to 1987.
 
  Mr. Hinz has been a Director of the Company since September, 1997. Mr. Hinz
has been the owner and President of Hi-Torque Publishing Company, a publisher
of magazines covering the motorcycling and biking industries, since 1981. He
is active in a number of non-profit organizations and serves as Chairman of
the Fund Development Committee of English Language Institute China. Mr. Hinz
also serves on the Board of Directors of Gordon Conwell Seminary.
 
                                      54
<PAGE>
 
EXECUTIVE COMPENSATION
 
  The following table sets forth all compensation paid by the Company for the
fiscal year ended December 31, 1997 to the Company's Chief Executive Officer
and the four highest paid executive officers of the Company.
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                    ANNUAL COMPENSATION
                            --------------------------------------
    NAME AND PRINCIPAL                                OTHER ANNUAL    ALL OTHER
        POSITIONS           YEAR  SALARY   BONUS      COMPENSATION   COMPENSATION
    ------------------      ---- -------- --------    ------------   ------------
<S>                         <C>  <C>      <C>         <C>            <C>
Edward G. Atsinger III....  1997 $400,000 $    --      $  890,192(2)     $ --
 President, Chief           1996  400,000  350,000(1)     996,372(2)       --
 Executive Officer and
 Director
Stuart W. Epperson........  1997  400,000      --         890,192(2)       --
 Chairman of the Board      1996  400,000  350,000(1)   1,012,319(2)       --
Eric H. Halvorson,
 Executive Vice President.  1997  270,000   12,500            --          950(3)
 Chief Operating Officer    1996  255,000   85,000            --          909(3)
 and Director
Dave Armstrong............  1997  163,683      --             --           19(3)
 Vice President-Operations  1996  149,019   15,000            --          585(3)
Greg R. Anderson..........  1997  162,300      --             --          950(3)
 Vice President;            1996  157,871   10,000            --          950(3)
 President, the Network
</TABLE>
- ---------------------
(1) Distributions of net income from New Inspiration and Golden Gate (in an
    amount equal to the excess over the amount necessary to satisfy individual
    tax liabilities, see Footnote 2 below) that had previously been taxed, but
    not distributed, to the S corporation shareholders. See the Company's
    Consolidated Statements of Shareholders' Equity included elsewhere in this
    Prospectus.
 
(2) Tax reimbursement payments made to satisfy individual federal and state
    income tax liabilities generated by New Inspiration and Golden Gate as a
    result of their S corporation status. See "Business--Corporate Structure
    and Reorganization."
 
(3) Represents employer matching contributions to individuals' 401(k)
    accounts.
 
EMPLOYMENT AGREEMENTS
 
  Edward G. Atsinger III entered into an employment agreement with the Company
effective as of August 1, 1997, pursuant to which he will serve as President
and Chief Executive Officer of the Company for an annual salary of $400,000
and an annual bonus determined at the discretion of the Board of Directors,
for an initial period of three years. The employment agreement with Mr.
Atsinger provides the Company with a right of first refusal on corporate
opportunities, which might include acquisitions of radio stations in any
market in which the Company is interested, and includes a noncompete provision
for a period of two years from the cessation of Mr. Atsinger's employment with
the Company and a nondisclosure provision which is effective for the term of
the employment agreement and indefinitely thereafter. In addition to the
requirements of his employment agreement, since the inception of the Company
Mr. Atsinger has been obligated under applicable state law to first present
corporate opportunities to the Company before pursuing any such opportunity
himself. Under the terms of his employment agreement, Mr. Atsinger is also
entitled to participate in any benefit plans provided by the Company to its
employees.
 
  Stuart W. Epperson entered into an employment agreement with the Company
effective as of August 1, 1997, pursuant to which he will serve as Chairman of
the Company for an annual salary of $400,000 and an annual bonus determined at
the discretion of the Board of Directors, for an initial period of three
years. The employment agreement with Mr. Epperson provides the Company with a
right of first refusal on corporate opportunities, which might include
acquisitions of radio stations in any market in which the Company is
interested, and includes a noncompete provision for a period of two years from
the cessation of Mr. Epperson's employment with the Company and a
nondisclosure provision which is effective for the term of the employment
agreement and indefinitely thereafter. In addition to the requirements of his
employment agreement, since the inception of the Company Mr. Epperson has been
obligated under applicable state law to first present corporate opportunities
to the Company before pursuing any such opportunity himself. Under the terms
of his employment agreement, Mr. Epperson is also entitled to participate in
any benefit plans provided by the Company to its employees.
 
  Eric H. Halvorson entered into an employment agreement with the Company
effective as of November 1991, pursuant to which he serves as Executive Vice
President of the Company at an annual salary starting at
 
                                      55
<PAGE>
 
$175,000, with annual increases of $11,000 to $14,000, for a period of seven
years. The agreement was subsequently amended in April 1996 to extend the term
for one additional year and increase the base salary to $255,000, $270,000 and
$285,000 for 1996, 1997 and 1998, respectively, and was again amended in July
1997 to extend the term through December 2003 at a base salary of $300,000 for
each year after 1998. The employment agreement provides that Mr. Halvorson may
participate in any benefit plans provided by the Company to its employees. Mr.
Halvorson also entered into a deferred compensation agreement with the Company
effective as of November 1991, pursuant to which Mr. Halvorson will receive
(i) 50% of the average of his three highest years of compensation, payable for
a period of ten consecutive years, if he remains employed by the Company until
age 60, or (ii) a discounted amount, based upon the compensation he would have
received if he had remained employed until age 60, if his employment
terminates before he reaches age 60 by reason of death, disability or
termination by the Company without cause.
 
  Greg R. Anderson entered into an employment agreement with SRN effective as
of October 1994, pursuant to which he serves as President of SRN for a period
of three years at an annual salary of $120,000, $126,000 and $132,300 for each
year during the term of the agreement, respectively. The agreement was
subsequently amended in December 1995 to increase Mr. Anderson's base salary
to $162,300 and was amended again in August 1997 to extend the term for three
additional years. Mr. Anderson is also entitled to participate in any benefit
plans provided by SRN to its employees.
 
401(K) PLAN
 
  The Company adopted a 401(k) Savings Plan ("Retirement Plan") in 1993 for
the purpose of providing, at the option of the employee, retirement benefits
to full-time employees of the Company and its subsidiaries. Contributions to
the Retirement Plan are made by the employee and, on a voluntary basis, by the
Company. The Company currently matches 10% of the employee's contributions to
the Retirement Plan which do not exceed 10% of the employee's annual
compensation. The Company made a contribution of $80,357 to the Retirement
Plan during the year ended December 31, 1997.
 
                             CERTAIN TRANSACTIONS
 
REORGANIZATION
 
  To effect the Reorganization, the Shareholders contributed their shares of
stock in New Inspiration and Golden Gate to the Company (which in turn
effected the contribution to the Company of the Shareholders' interests in
Beltway) in exchange for new shares in the Company. The share conversion
factors were based on the ratio of asset values of the Company, New
Inspiration and Golden Gate to the combined asset value of such entities. The
asset values were determined by an independent radio station broker. Following
the Reorganization, Mrs. Epperson, who had been a 50% owner of New
Inspiration, became a shareholder of the Company. All of the outstanding stock
of the Company is currently owned by Mr. Atsinger (50%), Mr. Epperson (36.8%)
and Mrs. Epperson (13.2%). See "Securities Ownership of Certain Beneficial
Owners." See "Business--Corporate Structure and Reorganization."
 
DISTRIBUTIONS TO SHAREHOLDERS
 
  In connection with the recent Reorganization, New Inspiration and Golden
Gate, which were each S corporations prior to the Reorganization, distributed
cash and promissory notes to their respective shareholders in the aggregate
amount of $8.5 million. Of such amount, $1.8 million, equal to the estimated
federal and state income tax liability of the shareholders on the earnings of
New Inspiration and Golden Gate, was paid by New Inspiration and Golden Gate
in cash. The remainder, $6.7 million, was paid in the form of promissory notes
payable to the shareholders (the "Shareholder Notes") immediately following
the closing of the Offering. After the closing of the Offering, the Company
borrowed $6.7 million under the Credit Agreement and applied this amount to
the payment of certain indebtedness owed to New Inspiration and Golden Gate by
the Company. The cash made available from the repayment of such loans was then
used by New Inspiration and Golden Gate to pay the Shareholder Notes. See
"Business--Corporate Structure and Reorganization."
 
                                      56
<PAGE>
 
CERTAIN LOAN TRANSACTIONS
 
  In December 1996, the Principal Shareholders repaid certain promissory notes
and accrued interest owed to the Company in the approximate amount of $4.8
million (approximately $3.4 million principal and $1.4 million accrued
interest). The Company had made these loans (approximately $1.7 million each
to Messrs. Atsinger and Epperson) to the Principal Shareholders in 1991 to
facilitate the repayment of personal indebtedness they had incurred in
connection with prior radio station acquisitions. The notes bore interest at
the Applicable Federal Rate. The repayments were made with the proceeds of a
distribution to the Principal Shareholders from Golden Gate and New
Inspiration of previously taxed S corporation income. Principal and accrued
interest, divided equally between Messrs. Atsinger and Epperson, amounted to
approximately $4.6 million at December 31, 1995. Interest earned on these
notes in 1996, 1995 and 1994 was approximately $189,000, $213,000 and
$174,000, respectively.
 
  In December 1996, the Company borrowed $1.9 million from Mr. Atsinger, who
owns 50% of the outstanding stock of the Company. The note was repaid,
including interest at 9 1/4%, in January 1997, with proceeds from a borrowing
under the Credit Agreement.
 
  In July 1997, the Company canceled certain indebtedness owed to the Company
by Eric H. Halvorson, an executive officer and director of the Company, in the
amount of $25,000 plus accrued interest calculated at the Applicable Federal
Rate. The Company also made a distribution to Mr. Halvorson in an amount equal
to the tax liability he incurred as a result of the cancellation of this debt.
 
  In December 1997, the Company borrowed $2.0 million from Mr. Atsinger
pursuant to a promissory note with a revolving principal amount of up to $2.5
million. The note is a demand note which bears interest at a floating rate
that is currently 9%. During the term of the note, the interest rate will at
all times be 1% lower than the rate for base rate borrowings under the
Company's Credit Agreement. The Company will borrow under the Credit Agreement
when Mr. Atsinger demands repayment. The note is outstanding as of the date
hereof.
 
  In January 1998, the Company borrowed $1.5 million from Mr. Epperson
pursuant to a promissory note with a revolving principal amount of up to $2.5
million. The note is a demand note which bears interest at floating rate that
is currently 9%. During the term of the note, the interest rate will at all
times be 1% lower than the rate for base rate borrowings under the Company's
Credit Agreement. The Company will borrow under the Credit Agreement when Mr.
Epperson demands repayment. The note is outstanding as of the date hereof.
 
                                      57
<PAGE>
 
LEASES WITH PRINCIPAL SHAREHOLDERS
 
  The Company leases the studios and tower and antenna sites described in the
table below from the Principal Shareholders or trusts and partnerships created
for the benefit of the Principal Shareholders and their families. All such
leases have cost of living adjustments. Based upon management's assessment and
analysis of local market conditions for comparable properties, the Company
believes that such leases do not have terms that vary materially from those
that would have been available from unaffiliated parties.
 
<TABLE>
<CAPTION>
                           STATION
                             CALL                          CURRENT ANNUAL EXPIRATION
         MARKET            LETTERS     FACILITIES LEASED       RENTAL      DATE(1)
         ------            -------     -----------------   -------------- ----------
<S>                       <C>        <C>                   <C>            <C>
Leases with both
 Principal Shareholders:
  Philadelphia, PA......  WFIL-AM/   Antenna/Tower/Studios   $  110,520      2004
                          WZZD-AM
  Pittsburgh, PA........  WORD-FM/       Antenna/Tower           26,772      2003
                          WPIT-AM
  Columbus, OH..........  WRFD-AM        Antenna/Tower           44,220      2002
  Chicago, IL...........  WYLL-FM        Antenna/Tower           41,460      2002
  Denver-Boulder, CO....  KNUS-AM        Antenna/Tower           18,480      2006
  Houston-Galveston, TX.  KKHT-FM/       Antenna/Tower           50,772      2005
                          KENR-AM
  San Antonio, TX.......  KSLR-AM        Antenna/Tower           30,705      2007
  Seattle-Tacoma, WA....  KGNW-AM        Antenna/Tower           35,928      2002
                          KLFE-AM        Antenna/Tower           26,112      2004
  Portland, OR..........  KPDQ-AM/FM         Studios             60,804      2002
                                         Antenna/Tower           13,824      2002
  Sacramento, CA........  KFIA-AM        Antenna/Tower           79,764      2006
  Los Angeles, CA.......  KKLA-AM            Studios             22,800      2002
                                         Antenna/Tower           22,800      2002
                          KLTX-AM        Antenna/Tower          138,180      2002
  San Francisco, CA.....  KFAX-AM        Antenna/Tower          143,604      2003
  Minneapolis, MN.......  KKMS-AM            Studios             66,000      2006
                                         Tower/Antenna           66,000      2006
  Cleveland, OH.........  WHK-AM         Antenna/Tower           33,600      2008
  Akron, OH.............  WHLO-AM        Antenna/Tower           12,000      2007
  Cincinnati, OH........  WTSJ-AM    Antenna/Tower/Studios       24,000      2007
  Canton, OH............  WHK-FM         Antenna/Tower           12,000      2007
                                                             ----------
                                                              1,080,345
                                                             ----------
Leases with Mr.
 Atsinger:
  Los Angeles, CA.......  KAVC-FM        Antenna/Tower           12,348      2002
  San Diego, CA.........  KPRZ-FM        Antenna/Tower           45,576      2002
                                                             ----------
                                                                 57,924
                                                             ----------
                                                             $1,138,269
                                                             ==========
</TABLE>
- ---------------------
(1) The expiration date reported for certain facilities represents the
    expiration date assuming exercise of lease term extensions at the
    Company's option.
 
  Rental expense paid by the Company to the Principal Shareholders or trusts
or partnerships created for the benefit of their families for 1996, 1995 and
1994 amounted to approximately $827,000, $690,000 and $574,000, respectively.
Rental expense paid by the Company to Mr. Atsinger or trusts created for the
benefit of his family for 1996, 1995 and 1994 amounted to approximately
$57,000, $56,000 and $67,000, respectively.
 
                                      58
<PAGE>
 
MANAGEMENT SERVICES CONTRACT
 
  The Company provides management services for Sonsinger, Inc. ("Sonsinger")
which is the licensee of KKOL-AM, Seattle. The Principal Shareholders are the
owners of 100% of the outstanding shares of Sonsinger. The Principal
Shareholders and the Company are parties to an Option to Purchase Agreement
whereunder the Company has been granted an option to purchase KKOL-AM from the
Principal Shareholders at any time on or before December 31, 1999 at a price
equal to the lower of the cost of the station to the Principal Shareholders,
$1.4 million, or its fair market value as determined by an independent
appraisal. Pursuant to an LMA with Sonsinger, entered into June 13, 1997, the
Company programs KKOL-AM and sells all the airtime. The Company retains all of
the revenue (approximately $20,400 from June 13, 1997 through December 31,
1997) and incurs all of the expenses (approximately $56,500 for the same
period) related to the operation of KKOL-AM and pays no fees or rent under the
LMA.
 
TOWER CONSTRUCTION CONTRACT
 
  In October 1997, in order to reduce the indebtedness under the Credit
Agreement, the Company assigned its contract with a tower construction company
to build a broadcast tower in Houston to the Principal Shareholders, subject
to the Principal Shareholders obtaining financing. The Principal Shareholders
will reimburse the Company for its costs and expenses, which amounted to
approximately $2.9 million as of September 30, 1997. The antenna for the
Company's station in Houston, KKHT-FM, will be located on the tower and the
Company will pay rent to the Principal Shareholders. The Company and the
Principal Shareholders have not agreed upon the rental rate. The Company
intends to agree upon a rate based on management's assessment and analysis of
local market conditions for comparable properties, such rate to be no less
favorable to the Company than would be available in a comparable transaction
with an unaffiliated party. Such agreement is subject to approval of a
majority of the disinterested members of the Board of Directors.
 
RADIO STATIONS OWNED BY THE EPPERSONS
 
  Mrs. Epperson has personally acquired a radio station in a small market in
Virginia and has applied to the FCC for authorization to acquire a second
station in that market. Additionally, Mr. Epperson has personally acquired
certain radio stations in small markets in North Carolina. These Virginia and
North Carolina markets are not currently served by stations owned and operated
by the Company. Acquisitions in such markets are not part of the Company's
current business and acquisition strategies.
 
 
                                      59
<PAGE>
 
               SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
  The following table sets forth certain information regarding the ownership
of the Company's common stock by each of the Shareholders, who currently own
all the outstanding common stock of the Company.
 
<TABLE>
<CAPTION>
                                         NUMBER OF SHARES  PERCENTAGE OF SHARES
   NAME OF INDIVIDUAL OR ENTITY(1)      BENEFICIALLY OWNED     OUTSTANDING
   -------------------------------      ------------------ --------------------
   <S>                                  <C>                <C>
   Edward G. Atsinger III..............       40,836               50.00%
   Stuart W. Epperson(2)...............       30,092               36.80%
   Nancy A. Epperson(2)................       10,744               13.20%
                                              ------              ------
                                              81,672              100.00%
                                              ======              ======
</TABLE>
- ---------------------
(1) The address of each of Mr. Atsinger and Mr. and Mrs. Epperson is 4880
    Santa Rosa Road, Suite 300, Camarillo, California 93012.
(2) Stuart and Nancy Epperson are husband and wife.
 
                      DESCRIPTION OF CERTAIN INDEBTEDNESS
 
  As of September 25, 1997, the Company entered into a credit agreement with
The Bank of New York (the "Bank") as the administrative agent for the $75.0
million senior secured reducing revolving credit facility (the "Credit
Agreement"). At September 30, 1997, taking into account the leverage ratio
requirement in the Credit Agreement, the Company had approximately $19.9
million available to it under the Credit Agreement. Taking into account
certain restrictions under the Credit Agreement, the Company is not currently
able to borrow for acquisitions.
 
  Revolving Credit Commitment. The Company is, subject to certain conditions,
able to draw upon the revolving credit available under the Credit Agreement
for Permitted Acquisitions (as defined in the Credit Agreement), working
capital and other permitted uses. The commitments under the Credit Agreement
are to be reduced by $10.0 million in each of the years 1999 through 2003 and
by $25.0 million in 2004. Any remaining principal balance will be due in
August, 2004. At the Company's election, any portion of revolving loans which
have been prepaid or repaid may be reborrowed up to the current commitment
amount, and the commitment may be permanently reduced in whole or in part.
 
  Prepayments. Mandatory reductions in the credit facility established by the
Credit Agreement are required under certain circumstances. Commitments will be
permanently reduced by the following amounts: (i) 100% of the net cash
proceeds in excess of $1.0 million received from station sales or exchanges
which are not reinvested within 360 days, (ii) to the extent that commitments
under the Credit Agreement are at least $50.0 million, 100% of the net cash
proceeds received from the issuance of equity when the Company's Total
Leverage Ratio (as defined in the Credit Agreement) is greater than 6.0 to 1,
and 50% of the net cash proceeds received from the issuance of equity when the
Company's Total Leverage Ratio is greater than 4.5 to 1 but less than 6.0 to
1, (iii) 50% of Excess Cash Flow (as defined in the Credit Agreement)
calculated for each fiscal year of the Company when the Total Leverage Ratio
is greater than or equal to 3.5 to 1, (iv) 100% of all insurance or
condemnation recoveries in excess of amounts used to replace or restore any
properties or which are not used to replace or restore properties within one
year after any casualty, and (v) in the event a radio station ceases operation
for a period of more than 30 days by reason of FCC action, an amount equal to
the Total Leverage Ratio (up to a ratio of 6.0 to 1) multiplied by the
Operating Cash Flow (as defined in the Credit Agreement) of the station in
question, unless such station was acquired within the preceding 18-month
period in which case such amount will equal the purchase price of such
station. Mandatory reductions will be applied among the remaining scheduled
commitment reductions in inverse order. Loans shall be prepaid to the extent
necessary to assure outstanding loans do not exceed the reduced commitment.
 
                                      60
<PAGE>
 
  Interest Rates. The Credit Agreement gives the Company the option to borrow
at either the Alternate Base Rate, defined as the higher of the Bank's Prime
Rate and the Federal Funds Rate plus 0.5%, or the LIBOR Rate, in each case
plus the Applicable Margin. The Applicable Margins for the Credit Agreement
will range between 0% and 1.75% for the Alternate Base Rate and 1.00% and
3.00% for the LIBOR Rate, depending on the Total Leverage Ratio from time to
time.
 
  Fees. The Company is required to pay an annual fee, payable quarterly, on
the unused portion of the facility at the annual rate of 0.50% (if the Total
Leverage Ratio is greater than or equal to 4.5 to 1) or 0.375% (if the Total
Leverage Ratio is less than 4.5 to 1).
 
  Guaranty and Security. The Credit Agreement is guaranteed by each of the
Company's present and future direct and indirect subsidiaries. Subject only to
certain permitted liens incurred in the ordinary course of business, the
Credit Agreement is secured by (i) a pledge of all of the capital stock of the
Company's present and future direct and indirect subsidiaries, (ii) a pledge
of all of the assets of the Company and its present and future direct and
indirect subsidiaries and (iii) all proceeds of the foregoing.
 
  Change of Control. A change in control or ownership is an event of default
under the Credit Agreement. Under the Credit Agreement, a change in control or
ownership occurs if (i) Mr. Epperson and/or Mr. Atsinger do not control in the
aggregate at least 75% of the total voting power of all classes of capital
stock of the Company, (ii) neither Mr. Epperson nor Mr. Atsinger is Chief
Executive Officer of the Company or (iii) a Change of Control (as defined in
the Indenture for the Notes) occurs.
 
  Covenants. The Credit Agreement contains certain restrictive covenants
customary for credit facilities of the size, type and purpose contemplated
which, among other things, and with certain exceptions, limits the Company's
ability to incur additional indebtedness, enter into affiliate transactions,
pay dividends, consolidate, merge or effect certain asset sales, make certain
investments or loans and change the nature of its business. The Credit
Agreement also requires the satisfaction by the Company of certain financial
covenants, which will require the maintenance of specified financial ratios
and compliance with certain financial tests, including ratios for maximum
leverage, minimum interest coverage, minimum debt service coverage and minimum
fixed charge coverage.
 
  Events of Default. The Credit Agreement contains certain events of default
customary for credit facilities of the size, type and purpose contemplated,
including without limitation: (i) failure to pay, when and as required to be
paid, principal, interest or any other amount payable; (ii) failure to perform
or observe any covenant; (iii) material inaccuracy with respect to certain
representations made in or in connection with the Credit Agreement; (iv)
insolvency or bankruptcy proceedings; (v) change of control; (vi) revocation
or failure to renew any license material to the Company's business; and (vii)
defaults under other outstanding indebtedness of the Company. Upon the
occurrence of an event of default, subject to certain limitations, the
Company's obligations under the Credit Agreement which are at that time
outstanding may be automatically accelerated.
 
                                      61
<PAGE>
 
                           DESCRIPTION OF THE NOTES
 
  The terms of the Notes are identical in all material respects to the Old
Notes, except for certain transfer restrictions and registration rights
relating to the Old Notes. The description of the Notes contained herein
assumes that all Old Notes are exchanged for Notes in the Exchange Offer. To
the extent that Old Notes remain outstanding after the consummation of the
Exchange Offer, Old Notes and Notes will be redeemed or repurchased pro rata
pursuant to the provisions contained herein. In addition, as the Old Notes
were, and the Notes will be, issued under the Indenture, to the extent that
Old Notes remain outstanding after consummation of the Exchange Offer, any
action described herein as permitted or required to be taken thereunder by a
specified portion of the holders of the Notes may only be taken by such
portion of the holders of the Old Notes and the Notes, counted as a single
series.
 
  The definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions." For purposes of this summary, the term
"Company" refers only to Salem Communications Corporation and not to any of
its Subsidiaries.
 
  The Notes offered hereby will be issued under an Indenture dated as of
September 25, 1997 among the Company, the Guarantors and The Bank, as trustee
(the "Trustee"). The following summary of the material provisions of the
Indenture does not purport to be complete, and where reference is made to
particular provisions of the Indenture, such provisions, including the
definitions of certain terms, are qualified by reference to all of the
provisions of the Indenture filed as an exhibit to the Registration Statement
and those terms made a part of the Indenture by reference to the Trust
Indenture Act. For definitions of certain capitalized terms used in the
following summary, see "--Certain Definitions." A copy of the Indenture may be
obtained from the Company or the Initial Purchasers.
 
GENERAL
 
  The Notes will mature on October 1, 2007, will be limited to $150.0 million
aggregate principal amount, and will be unsecured senior subordinated
obligations of the Company. Each Note will bear interest at the rate set forth
on the cover page hereof from the issue date or from the most recent interest
payment date to which interest has been paid, payable semiannually on April 1
and October 1 each year, commencing April 1, 1998, to the Person in whose name
the Note (or any predecessor Note) is registered at the close of business on
the March 15 or September 15 next preceding such interest payment date.
 
  Payment of the Notes is guaranteed by the Guarantors, jointly and severally,
on a senior subordinated basis. The Guarantors are comprised of all of the
Subsidiaries of the Company. See "--Guarantees."
 
  Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable (subject to compliance
with transfer restrictions imposed by applicable securities laws for so long
as the Notes are not registered for resale under the Securities Act), at the
office or agency of the Company maintained for such purposes (which initially
will be the Trustee); provided, however, that payment of interest may be made
at the option of the Company by check mailed to the Person entitled thereto as
shown on the security register. The Notes will be issued only in fully
registered form without coupons, in denominations of $1,000 and any integral
multiple thereof. No service charge will be made for any registration of
transfer, exchange or redemption of Notes, except in certain circumstances for
any tax or other governmental charge that may be imposed in connection
therewith.
 
OPTIONAL REDEMPTION
 
  The Notes will be subject to redemption at any time on or after October 1,
2002, at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice by first-class mail in amounts of $1,000
or an integral multiple thereof at the following redemption prices (expressed
as percentages
 
                                      62
<PAGE>
 
of the principal amount), if redeemed during the 12-month period beginning
October 1 of the years indicated below:
 
<TABLE>
<CAPTION>
                                                                      REDEMPTION
          YEAR                                                          PRICE
          ----                                                        ----------
       <S>                                                            <C>
       2002..........................................................   104.75%
       2003..........................................................   103.17%
       2004..........................................................   101.59%
       2005 and thereafter...........................................   100.00%
</TABLE>
 
in each case together with accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on relevant record
dates to receive interest due on an interest payment date).
 
  In addition, at any time on or prior to October 1, 2000, the Company may
redeem up to $50.0 million aggregate principal amount of Notes with the net
proceeds of a Public Equity Offering of the Company at a redemption price
equal to 109.50% of the aggregate principal amount thereof, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
right of holders of record on relevant record dates to receive interest due on
an interest payment date); provided that not less than $100.0 million
aggregate principal amount of Notes remains outstanding immediately after the
occurrence of such redemption.
 
  If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable.
 
SINKING FUND
 
  There will be no sinking fund.
 
SUBORDINATION
 
  The payment of the principal of, premium, if any, and interest on, the Notes
will be subordinated, as set forth in the Indenture, in right of payment to
the prior payment in full of all Senior Indebtedness in cash or cash
equivalents or in any other form as acceptable to the holders of Senior
Indebtedness. The Notes will be senior subordinated indebtedness of the
Company ranking pari passu with all other existing and future senior
subordinated indebtedness of the Company and senior to all existing and future
Subordinated Indebtedness of the Company.
 
  During the continuance of any default in the payment of any Designated
Senior Indebtedness, no payment (other than payments previously made pursuant
to the provisions described under "--Defeasance or Covenant Defeasance of
Indenture") or distribution of any assets of the Company of any kind or
character (excluding certain permitted equity interests or subordinated
securities) shall be made on account of the principal of, premium, if any, or
interest on, the Notes or any other indenture obligation or on account of the
purchase, redemption, defeasance or other acquisition of, the Notes unless and
until such default has been cured, waived or has ceased to exist or such
Designated Senior Indebtedness shall have been discharged or paid in full in
cash or cash equivalents or in any other form as acceptable to the holders of
such Designated Senior Indebtedness.
 
  During the continuance of any non-payment default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated (a "Non-payment Default") and after the receipt by the Trustee
from a representative of the holder of any Designated Senior Indebtedness of a
written notice of such default, no payment (other than payments previously
made pursuant to the provisions described under "--Defeasance or Covenant
Defeasance of Indenture") or distribution of any assets of the Company of any
kind or character (excluding certain permitted equity or subordinated
securities) may be made by the Company on account of the principal of,
premium, if any, or interest on, the Notes or any other indenture obligation
or on account of the purchase, redemption, defeasance or other acquisition of,
the Notes for the period specified below (the "Payment Blockage Period").
 
                                      63
<PAGE>
 
  The Payment Blockage Period shall commence upon the receipt of notice of the
Non-payment Default by the Trustee from a representative of the holder of any
Designated Senior Indebtedness and shall end on the earliest of (i) the first
date on which more than 179 days shall have elapsed since the receipt of such
written notice (provided such Designated Senior Indebtedness as to which
notice was given shall not theretofore have been accelerated), (ii) the date
on which such Non-payment Default (and all Non-payment Defaults as to which
notice is given after such Payment Blockage Period is initiated) are cured,
waived or ceased to exist or on which such Designated Senior Indebtedness is
discharged or paid in full in cash or cash equivalents or in any other form as
acceptable to the holders of Designated Senior Indebtedness or (iii) the date
on which such Payment Blockage Period (and all Non-payment Defaults as to
which notice is given after such Payment Blockage Period is initiated) shall
have been terminated by written notice to the Trustee from the representatives
of holders of Designated Senior Indebtedness initiating such Payment Blockage
Period, after which, in the case of clauses (i), (ii) and (iii), the Company
shall promptly resume making any and all required payments in respect of the
Notes, including any missed payments. In no event will a Payment Blockage
Period extend beyond 179 days from the date of the receipt by the Trustee of
the notice initiating such Payment Blockage Period (such 179-day period
referred to as the "Initial Period"). Any number of notices of Non-payment
Defaults may be given during the Initial Period; provided that during any 365-
day consecutive period only one Payment Blockage Period during which payment
of principal of, or interest on, the Notes may not be made may commence and
the duration of the Payment Blockage Period may not exceed 179 days. No Non-
payment Default with respect to Designated Senior Indebtedness which existed
or was continuing on the date of the commencement of any Payment Blockage
Period will be, or can be, made the basis for the commencement of a second
Payment Blockage Period, whether or not within a period of 365 consecutive
days, unless such default has been cured or waived for a period of not less
than 90 consecutive days.
 
  If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the holders of the Notes to
accelerate the maturity thereof. See "--Events of Default."
 
  The Indenture provides that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relative to the Company or
to its creditors, as such, or its assets, or any liquidation, dissolution or
other winding up of the Company, whether voluntary or involuntary and whether
or not involving insolvency or bankruptcy, or any assignment for the benefit
of creditors or any other marshalling of assets or liabilities of the Company,
all Senior Indebtedness must be paid in full in cash or cash equivalents or in
any other manner acceptable to the holders of Senior Indebtedness, or
provision made for such payment, before any payment or distribution (excluding
distributions of certain permitted equity or subordinated securities) is made
on account of the principal of, premium, if any, or interest on the Notes.
 
  By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes, and funds which would be
otherwise payable to the holders of the Notes will be paid to the holders of
the Senior Indebtedness to the extent necessary to pay the Senior Indebtedness
in full in cash or cash equivalents or in any other manner acceptable to the
holders of Senior Indebtedness, and the Company may be unable to meet its
obligations fully with respect to the Notes.
 
  Each Guarantee of a Guarantor will be an unsecured senior subordinated
obligation of such Guarantor, ranking pari passu with, or senior in right of
payment to, all other existing and future Indebtedness of such Guarantor that
is expressly subordinated to Guarantor Senior Indebtedness. The Indebtedness
evidenced by the Guarantees will be subordinated to Guarantor Senior
Indebtedness to the same extent as the Notes are subordinated to Senior
Indebtedness and during any period when payment on the Notes is blocked by
Designated Senior Indebtedness, payment on the Guarantees is similarly
blocked.
 
 
                                      64
<PAGE>
 
  "Senior Indebtedness" is defined as the principal of, premium, if any, and
interest (including interest accruing after the filing of a petition
initiating any proceeding under any state, federal or foreign bankruptcy law
whether or not allowable as a claim in such proceeding) on any Indebtedness of
the Company (other than as otherwise provided in this definition), whether
outstanding on the date of the Indenture or thereafter created, incurred or
assumed, and whether at any time owing, actually or on a contingent basis,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Notes. Without limiting the generality of the foregoing, "Senior Indebtedness"
shall include (i) the principal of, premium, if any, and interest (including
interest accruing after the filing of a petition initiating any proceeding
under any state, federal or foreign bankruptcy law whether or not allowable as
a claim in such proceeding) and all other obligations of every nature of the
Company from time to time owed to the lenders (or their agent) under the Bank
Credit Agreement (provided, however, that any Indebtedness under any
refinancing, refunding or replacement of the Bank Credit Agreement shall not
constitute Senior Indebtedness to the extent that the Indebtedness thereunder
is by its express terms subordinate to any other Indebtedness of the Company)
and (ii) Indebtedness under Interest Rate Agreements. Notwithstanding the
foregoing, "Senior Indebtedness" shall not include (i) Indebtedness evidenced
by the Notes, (ii) Indebtedness that is subordinate or junior in right of
payment, by contract or otherwise, to any Indebtedness of the Company (iii)
Indebtedness which when incurred and without respect to any election under
Section 1111(b) of Title 11 United States Code, is without recourse to the
Company, (iv) Indebtedness which is represented by Disqualified Equity
Interests, (v) any liability for foreign, federal, state, local or other taxes
owed or owing by the Company, (vi) Indebtedness of the Company to a Subsidiary
or any other Affiliate of the Company or any of such Affiliate's subsidiaries,
(vii) that portion of any Indebtedness which at the time of issuance is issued
in violation of the Indenture, (viii) Indebtedness evidenced by a guarantee of
any Subordinated Indebtedness or Pari Passu Indebtedness and (ix) Indebtedness
owed by the Company for compensation to employees or for services rendered by
employees.
 
  "Guarantor Senior Indebtedness" is defined as the principal of, premium, if
any, and interest (including interest accruing after the filing of a petition
initiating any proceeding under any state, federal or foreign bankruptcy laws
whether or not allowable as a claim in such proceeding) on any Indebtedness of
any Guarantor (other than as otherwise provided in this definition), whether
outstanding on the date of the Indenture or thereafter created, incurred or
assumed, and whether at any time owing, actually or contingent, unless, in the
case of any particular Indebtedness, the instrument creating or evidencing the
same or pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to any Guarantor. Without
limiting the generality of the foregoing, "Guarantor Senior Indebtedness"
shall include (i) the principal of, premium, if any, and interest (including
interest accruing after the filing of a petition initiating any proceeding
under any state, federal or foreign bankruptcy law whether or not allowable as
a claim in such proceeding) and all other obligations of every nature of any
Guarantor from time to time owed to the lenders (or their agent) under the
Bank Credit Agreement; provided, however, that any Indebtedness under any
refinancing, refunding, or replacement of the Bank Credit Agreement shall not
constitute Guarantor Senior Indebtedness to the extent that the Indebtedness
thereunder is by its express terms subordinate to any other Indebtedness of
any Guarantor and (ii) Indebtedness under Interest Rate Agreements.
Notwithstanding the foregoing, "Guarantor Senior Indebtedness" shall not
include (i) Indebtedness evidenced by the Guarantees, (ii) Indebtedness that
is subordinate or junior in right of payment, by contract or otherwise, to any
Indebtedness of any Guarantor, (iii) Indebtedness which when incurred and
without respect to any election under Section 1111(b) of Title 11 United
States Code, is without recourse to any Guarantor, (iv) Indebtedness which is
represented by Disqualified Equity Interests, (v) any liability for foreign,
federal, state, local or other taxes owed or owing by any Guarantor to the
extent such liability constitutes Indebtedness, (vi) Indebtedness of any
Guarantor to a Subsidiary or any other Affiliate of the Company or any of such
Affiliate's subsidiaries, (vii) Indebtedness evidenced by any guarantee of any
Subordinated Indebtedness or Pari Passu Indebtedness, (viii) that portion of
any Indebtedness which at the time of issuance is issued in violation of the
Indenture and (ix) Indebtedness owed by any Guarantor for compensation to
employees or for services rendered by employees.
 
 
                                      65
<PAGE>
 
  "Designated Senior Indebtedness" is defined as (i) all Senior Indebtedness
outstanding under the Bank Credit Agreement and (ii) any other Senior
Indebtedness which is incurred pursuant to an agreement (or series of related
agreements) simultaneously entered into providing for indebtedness, or
commitments to lend, of at least $25.0 million at the time of determination
and is specifically designated in the instrument evidencing such Senior
Indebtedness or the agreement under which such Senior Indebtedness arises as
"Designated Senior Indebtedness" by the Company.
 
  As of September 30, 1997, the aggregate amount of Senior Indebtedness that
ranked senior in right of payment to the Notes was $10.1 million. The
Company's and its Subsidiaries' ability to incur additional Indebtedness is
restricted as set forth under "--Certain Covenants--Limitation on
Indebtedness." Any Indebtedness which can be incurred may constitute
additional Senior Indebtedness or Guarantor Senior Indebtedness. See "Risk
Factors--Substantial Leverage; Subordination; Restrictions Imposed by Credit
Agreement; Asset Encumbrance."
 
GUARANTEES
 
  The Guarantors will, jointly and severally, fully and unconditionally
guarantee the due and punctual payment of principal of, premium, if any, and
interest on, the Notes. Such guarantees will be subordinated to the Guarantor
Senior Indebtedness. See "--Subordination." As of September 30, 1997, the
aggregate amount of Guarantor Senior Indebtedness that ranked senior in right
of payment to the Guarantees was $10.1 million, all of which constitutes
outstanding indebtedness representing guarantees of Senior Indebtedness. In
addition, under certain circumstances described under "--Certain Covenants--
Limitations on Issuances of Guarantees of and Pledges for Indebtedness," the
Company is required to cause the execution and delivery of additional
Guarantees by Restricted Subsidiaries.
 
  In addition, upon any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's Equity Interest in, or all
or substantially all of the assets of, any Guarantor, which is in compliance
with the Indenture, such Guarantor shall be released from all its obligations
under its Guarantee.
 
  The Guarantors consist of all of the Company's existing Subsidiaries.
 
CERTAIN COVENANTS
 
  The Indenture contains, among others, the following covenants:
 
  Limitation on Indebtedness. The Company will not, and will not permit any
Restricted Subsidiary to, create, incur, assume or directly or indirectly
guarantee or in any other manner become directly or indirectly liable for
("incur") any Indebtedness (including Acquired Indebtedness), except that the
Company may incur Indebtedness and a Guarantor may incur Permitted Subsidiary
Indebtedness if, in each case, the Debt to Operating Cash Flow Ratio of the
Company and its Restricted Subsidiaries at the time of the incurrence of such
Indebtedness, after giving pro forma effect thereto, is 7.0 to 1 or less.
 
  The foregoing limitation will not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"):
 
    (i) Indebtedness of the Company under the Bank Credit Agreement in an
  aggregate principal amount at any one time outstanding not to exceed $75.0
  million;
 
    (ii) Indebtedness of the Company pursuant to the Notes and Indebtedness
  of any Guarantor pursuant to a Guarantee;
 
    (iii) Indebtedness of any Guarantor consisting of a guarantee of the
  Company's Indebtedness under the Bank Credit Agreement;
 
    (iv) Indebtedness of the Company or any Restricted Subsidiary outstanding
  on the date of the Indenture and listed on Schedule I thereto;
 
                                      66
<PAGE>
 
    (v) Indebtedness of the Company owing to a Restricted Subsidiary,
  provided that any Indebtedness of the Company owing to a Restricted
  Subsidiary that is not a Guarantor is made pursuant to an intercompany note
  in the form attached to the Indenture and is subordinated in right of
  payment from and after such time as the Notes shall become due and payable
  (whether at Stated Maturity, by acceleration or otherwise) to the payment
  and performance of the Company's obligations under the Notes; provided
  further, that any disposition, pledge or transfer of any such Indebtedness
  to a Person (other than a disposition, pledge or transfer to a Wholly Owned
  Restricted Subsidiary or a pledge to or for the benefit of the lenders
  under the Bank Credit Agreement) shall be deemed to be an incurrence of
  such Indebtedness by the obligor not permitted by this clause (v);
 
    (vi) Indebtedness of a Wholly Owned Restricted Subsidiary owing to the
  Company or another Wholly Owned Restricted Subsidiary; provided that, with
  respect to Indebtedness owing to a Wholly Owned Restricted Subsidiary that
  is not a Guarantor, (x) any such Indebtedness is made pursuant to an
  intercompany note in the form attached to the Indenture and (y) any such
  Indebtedness shall be subordinated in right of payment from and after such
  time as the obligations under the Guarantee, if any, by such Wholly Owned
  Restricted Subsidiary shall become due and payable to the payment and
  performance of such Wholly Owned Restricted Subsidiary's obligations under
  its Guarantee; provided, further, that (a) any disposition, pledge or
  transfer of any such Indebtedness to a Person (other than a disposition,
  pledge or transfer to the Company or a Wholly Owned Restricted Subsidiary
  or pledge to or for the benefit of the lenders under the Bank Credit
  Agreement) shall be deemed to be an incurrence of such Indebtedness by the
  obligor not permitted by this clause (vi) and (b) any transaction pursuant
  to which any Wholly Owned Restricted Subsidiary, which has Indebtedness
  owing to the Company or any other Wholly Owned Restricted Subsidiary,
  ceases to be a Wholly Owned Restricted Subsidiary shall be deemed to be the
  incurrence of Indebtedness by such Wholly Owned Restricted Subsidiary that
  is not permitted by this clause (vi);
 
    (vii) guarantees of any Restricted Subsidiary made in accordance with the
  provisions of "--Limitation on Issuances of Guarantees of and Pledges for
  Indebtedness;"
 
    (viii) obligations of the Company entered into in the ordinary course of
  business pursuant to Interest Rate Agreements designed to protect the
  Company against fluctuations in interest rates in respect of Indebtedness
  of the Company as long as such obligations at the time incurred do not
  exceed the aggregate principal amount of such Indebtedness then outstanding
  or in good faith anticipated to be outstanding within 90 days of such
  occurrence;
 
    (ix) any renewals, extensions, substitutions, refundings, refinancings or
  replacements (collectively, a "refinancing") of any Indebtedness described
  in clauses (ii), (iii), (iv) and (v) above, including any successive
  refinancings so long as the aggregate principal amount of Indebtedness
  represented thereby is not increased by such refinancing (except, in the
  case of Guarantees under clause (iii), which Guarantees do not exceed the
  aggregate principal amount of the Bank Credit Agreement) plus the lesser of
  (I) the stated amount of any premium or other payment required to be paid
  in connection with such a refinancing pursuant to the terms of the
  Indebtedness being refinanced or (II) the amount of premium or other
  payment actually paid at such time to refinance the Indebtedness, plus, in
  either case, the amount of expenses of the Company incurred in connection
  with such refinancing and, in the case of Pari Passu Indebtedness or
  Subordinated Indebtedness, such refinancing does not reduce the Average
  Life to Stated Maturity or the Stated Maturity of such Indebtedness; and
 
    (x) Indebtedness of the Company in addition to that described in clauses
  (i) through (ix) above, and any renewals, extensions, substitutions,
  refinancings, or replacements of such Indebtedness, so long as the
  aggregate principal amount of all such Indebtedness shall not exceed $5.0
  million.
 
  Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly:
 
    (i) declare or pay any dividend on, or make any distribution to holders
  of, any of the Company's Equity Interests (other than dividends or
  distributions payable solely in its Qualified Equity Interests);
 
                                      67
<PAGE>
 
    (ii) purchase, redeem or otherwise acquire or retire for value, directly
  or indirectly, any Equity Interest of the Company or any Affiliate thereof
  (except Equity Interests held by the Company or a Wholly Owned Restricted
  Subsidiary);
 
    (iii) make any principal payment on, or repurchase, redeem, defease,
  retire or otherwise acquire for value, prior to any scheduled principal
  payment, sinking fund or maturity, any Subordinated Indebtedness;
 
    (iv) declare or pay any dividend or distribution on any Equity Interests
  of any Subsidiary to any Person (other than the Company or any of its
  Wholly Owned Restricted Subsidiaries);
 
    (v) incur, create or assume any guarantee of Indebtedness of any
  Affiliate (other than a Wholly Owned Restricted Subsidiary of the Company);
  or
 
    (vi) make any Investment in any Person (other than any Permitted
  Investments) (any of the foregoing payments described in clauses (i)
  through (vi), other than any such action that is a Permitted Payment,
  collectively, "Restricted Payments") unless after giving effect to the
  proposed Restricted Payment (the amount of any such Restricted Payment, if
  other than cash, as determined by the Board of Directors of the Company,
  whose determination shall be conclusive and evidenced by a board
  resolution), (1) no Default or Event of Default shall have occurred and be
  continuing and such Restricted Payment shall not be an event which is, or
  after notice or lapse of time or both, would be, an "event of default"
  under the terms of any Indebtedness of the Company or its Restricted
  Subsidiaries; and (2) the aggregate amount of all such Restricted Payments
  declared or made after the date of the Indenture does not exceed the sum
  of:
 
      (A) an amount equal to the Company's Cumulative Operating Cash Flow
    less 1.4 times the Company's Cumulative Consolidated Interest Expense;
    and
 
      (B) the aggregate Net Cash Proceeds received after the date of the
    Indenture by the Company from capital contributions (other than from a
    Subsidiary) or from the issuance or sale (other than to any of its
    Subsidiaries) of its Qualified Equity Interests (except, in each case,
    to the extent such proceeds are used to purchase, redeem or otherwise
    retire Equity Interests or Subordinated Indebtedness as set forth
    below).
 
  (b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(vi) below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions (clauses (i)
through (vi) being referred to as "Permitted Payments"):
 
    (i) the payment of any dividend within 60 days after the date of
  declaration thereof, if at such date of declaration such payment would be
  permitted by the provisions of paragraph (a) of this Section and such
  payment shall be deemed to have been paid on such date of declaration for
  purposes of the calculation required by paragraph (a) of this Section;
 
    (ii) any transaction with an officer or director of the Company entered
  into in the ordinary course of business (including compensation or employee
  benefit arrangements with any officer or director of the Company);
 
    (iii) the repurchase, redemption, or other acquisition or retirement of
  any Equity Interests of the Company in exchange for (including any such
  exchange pursuant to the exercise of a conversion right or privilege
  pursuant to which cash is paid in lieu of the issuance of fractional shares
  or scrip), or out of the Net Cash Proceeds of, a substantially concurrent
  issuance and sale for cash (other than to a Subsidiary) of other Qualified
  Equity Interests of the Company; provided that the Net Cash Proceeds from
  the issuance of such Qualified Equity Interests are excluded from clause
  (2)(B) of paragraph (a) of this Section;
 
    (iv) any repurchase, redemption, defeasance, retirement, refinancing or
  acquisition for value or payment of principal of any Subordinated
  Indebtedness in exchange for, or out of the Net Cash Proceeds of, a
  substantially concurrent issuance and sale for cash (other than to any
  Subsidiary of the Company) of any Qualified Equity Interests of the
  Company; provided that the Net Cash Proceeds from the issuance of such
  shares of Qualified Equity Interests are excluded from clause (2)(B) of
  paragraph (a) of this Section;
 
                                      68
<PAGE>
 
    (v) the repurchase, redemption, defeasance, retirement, refinancing or
  acquisition for value or payment of principal of any Subordinated
  Indebtedness (other than Disqualified Equity Interests) (a "refinancing")
  through the issuance of new Subordinated Indebtedness of the Company, as
  the case may be; provided that any such new Indebtedness (1) shall be in a
  principal amount that does not exceed the principal amount so refinanced
  or, if such Subordinated Indebtedness provides for an amount less than the
  principal amount thereof to be due and payable upon a declaration or
  acceleration thereof, then such lesser amount as of the date of
  determination), plus the lesser of (I) the stated amount of any premium,
  interest or other payment required to be paid in connection with such a
  refinancing pursuant to the terms of the Indebtedness being refinanced or
  (II) the amount of premium, interest or other payment actually paid at such
  time to refinance the Indebtedness, plus, in either case, the amount of
  expenses of the Company incurred in connection with such refinancing; (2)
  has an Average Life to Stated Maturity greater than the remaining Average
  Life to Stated Maturity of the Notes; (3) has a Stated Maturity for its
  final scheduled principal payment later than the Stated Maturity for the
  final scheduled principal payment of the Notes; and (4) is expressly
  subordinated in right of payment to the Notes at least to the same extent
  as the Indebtedness to be refinanced; and
 
    (vi) the payment prior to maturity of Indebtedness outstanding on the
  date of the Indenture evidenced by those certain Promissory Notes dated
  March 1, 1994 by the Company to New Inspiration and by the Company to
  Golden Gate, in each case, in connection with the payment prior to maturity
  (which payment shall also be permitted under this clause (vi)) of
  Indebtedness outstanding on the date of the Indenture evidenced by those
  certain Promissory Notes dated August 12, 1997 by Golden Gate to Mr.
  Atsinger and Mr. Epperson in the principal amount, in each case, of $1.23
  million and by New Inspiration to Mr. Atsinger and Mrs. Epperson in the
  principal amount, in each case, of $2.12 million.
 
  Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or suffer to exist any transaction or series of related
transactions (including, without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate of the Company
(other than the Company or a Wholly Owned Restricted Subsidiary) unless (a)
such transaction or series of transactions is in writing on terms that are no
less favorable to the Company or such Restricted Subsidiary, as the case may
be, than would be available in a comparable transaction in arm's-length
dealings with an unrelated third party and (b)(i) with respect to any
transaction or series of transactions involving aggregate payments in excess
of $1.0 million the Company delivers an officers' certificate to the Trustee
certifying that such transaction or series of related transactions complies
with clause (a) above and such transaction or series of related transactions
has been approved by a majority of the members of the Board of Directors of
the Company (and approved by a majority of Independent Directors or, in the
event there is only one Independent Director, by such Independent Director)
and (ii) with respect to any transaction or series of transactions involving
aggregate payments in excess of $5.0 million, an opinion as to the fairness to
the Company or such Restricted Subsidiary from a financial point of view
issued by an investment banking firm of national standing. Notwithstanding the
foregoing, this provision will not apply to (A) any transaction with an
officer or director of the Company entered into in the ordinary course of
business (including compensation or employee benefit arrangements with any
officer or director of the Company), (B) any transaction entered into by the
Company or one of its Wholly Owned Restricted Subsidiaries with a Wholly Owned
Restricted Subsidiary of the Company, and (C) transactions in existence on the
date of the Indenture and any renewal, replacement or extension thereof on
substantially similar terms.
 
  Limitation on Senior Subordinated Indebtedness. The Company will not, and
will not permit any Guarantor to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise in any manner become directly or
indirectly liable for or with respect to or otherwise permit to exist any
Indebtedness that is subordinate in right of payment, by contract or
otherwise, to any Indebtedness of the Company or such Guarantor, as the case
may be, unless such Indebtedness is also pari passu with the Notes or the
Guarantee of such Guarantor, or subordinate in right of payment to the Notes
or such Guarantee to at least the same extent as the Notes or such Guarantee
are subordinate in right of payment to Senior Indebtedness or Guarantor Senior
Indebtedness, as the case may be, as set forth in the Indenture.
 
                                      69
<PAGE>
 
  Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, affirm or
suffer to exist any Lien of any kind upon any of its property or assets
(including any intercompany notes), now owned or acquired after the date of
the Indenture, or any income or profits therefrom, except if the Notes are
directly secured equally and ratably with (or prior to in the case of Liens
with respect to Subordinated Indebtedness) the obligation or liability secured
by such Lien, excluding, however, from the operation of the foregoing any of
the following:
 
    (a) any Lien existing as of the date of the Indenture and listed on a
  schedule thereto;
 
    (b) any Lien arising by reason of (1) any judgment, decree or order of
  any court, so long as such Lien is adequately bonded and any appropriate
  legal proceedings which may have been duly initiated for the review of such
  judgment, decree or order shall not have been finally terminated or the
  period within which such proceedings may be initiated shall not have
  expired; (2) taxes not yet delinquent or which are being contested in good
  faith; (3) security for payment of workers' compensation or other
  insurance; (4) good faith deposits in connection with tenders, leases,
  contracts (other than contracts for the payment of money); (5) zoning
  restrictions, easements, licenses, reservations, provisions, covenants,
  conditions, waivers, restrictions on the use of property or minor
  irregularities of title (and with respect to leasehold interests,
  mortgages, obligations, liens and other encumbrances incurred, created,
  assumed or permitted to exist and arising by, through or under a landlord
  or owner of the leased property, with or without consent of the lessee),
  none of which materially impairs the use of any parcel of property material
  to the operation of the business of the Company or any Subsidiary or the
  value of such property for the purpose of such business; (6) deposits to
  secure public or statutory obligations, or in lieu of surety or appeal
  bonds; (7) certain surveys, exceptions, title defects, encumbrances,
  easements, reservations of, or rights of others for, rights of way, sewers,
  electric lines, telegraph or telephone lines and other similar purposes or
  zoning or other restrictions as to the use of real property not interfering
  with the ordinary conduct of the business of the Company or any of its
  Subsidiaries; or (8) operation of law in favor of mechanics, materialmen,
  laborers, employees or suppliers, incurred in the ordinary course of
  business for sums which are not yet delinquent or are being contested in
  good faith by negotiations or by appropriate proceedings which suspend the
  collection thereof;
 
    (c) any Lien now or hereafter existing on property of the Company or any
  of its Restricted Subsidiaries securing Senior Indebtedness or Guarantor
  Senior Indebtedness, in each case which Indebtedness is permitted under the
  provisions of "Limitation on Indebtedness" and provided that the provisions
  described under "Limitation on Issuances of Guarantees of and Pledges for
  Indebtedness" are complied with;
 
    (d) any Lien securing Acquired Indebtedness created prior to (and not
  created in connection with, or in contemplation of) the incurrence of such
  Indebtedness by the Company or any Subsidiary, in each case which
  Indebtedness is permitted under the provisions of "Limitation on
  Indebtedness"; provided that any such Lien only extends to the assets that
  were subject to such Lien securing such Acquired Indebtedness prior to the
  related transaction by the Company or its Subsidiaries;
 
    (e) any Lien securing Permitted Subsidiary Indebtedness; and
 
    (f) any extension, renewal, refinancing or replacement, in whole or in
  part, of any Lien described in the foregoing clauses (a) through (e) so
  long as the amount of security is not increased thereby.
 
  Limitation on Sale of Assets. (a) The Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, consummate an
Asset Sale unless (i) at least 80% of the consideration from such Asset Sale
is received in cash and (ii) the Company or such Restricted Subsidiary
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the shares or assets sold (other than in the case of an
involuntary Asset Sale, as determined by the Board of Directors of the Company
and evidenced in a board resolution).
 
                                      70
<PAGE>
 
  (b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness then
outstanding as required by the terms thereof, or the Company determines not to
apply such Net Cash Proceeds to the permanent prepayment of such Senior
Indebtedness or if no such Senior Indebtedness is then outstanding, then the
Company may within 12 months of the Asset Sale, invest the Net Cash Proceeds
in properties and assets that (as determined by the Board of Directors)
replace the properties and assets that were the subject of the Asset Sale or
in properties and assets that will be used in the businesses of the Company or
its Restricted Subsidiaries existing on the date of the Indenture or
reasonably related thereto. The amount of such Net Cash Proceeds neither used
to permanently repay or prepay Senior Indebtedness nor used or invested as set
forth in this paragraph constitutes "Excess Proceeds."
 
  (c) When the aggregate amount of Excess Proceeds equals $5.0 million or
more, the Company shall apply the Excess Proceeds to the repayment of the
Notes and any Pari Passu Indebtedness required to be repurchased under the
instrument governing such Pari Passu Indebtedness as follows: (a) the Company
shall make an offer to purchase (an "Offer") from all holders of the Notes in
accordance with the procedures set forth in the Indenture in the maximum
principal amount (expressed as a multiple of $1,000) of Notes that may be
purchased out of an amount (the "Note Amount") equal to the product of such
Excess Proceeds multiplied by a fraction, the numerator of which is the
outstanding principal amount of the Notes, and the denominator of which is the
sum of the outstanding principal amount of the Notes and such Pari Passu
Indebtedness (subject to proration in the event such amount is less than the
aggregate Offered Price of all Notes tendered) and (b) to the extent required
by such Pari Passu Indebtedness to permanently reduce the principal amount of
such Pari Passu Indebtedness, the Company shall make an offer to purchase or
otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari Passu Offer")
in an amount (the "Pari Passu Debt Amount") equal to the excess of the Excess
Proceeds over the Note Amount, provided that in no event shall the Pari Passu
Debt Amount exceed the principal amount of such Pari Passu Indebtedness plus
the amount of any premium required to be paid to repurchase such Pari Passu
Indebtedness. The offer price shall be payable in cash in an amount equal to
100% of the principal amount of the Notes plus accrued and unpaid interest, if
any, to the date (the "Offer Date") such Offer is consummated (the "Offered
Price"), in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate Offered Price of the Notes tendered pursuant to the
Offer is less than the Note Amount relating thereto or the aggregate amount of
Pari Passu Indebtedness that is purchased is less than the Pari Passu Debt
Amount (the amount of such shortfall, if any, constituting a "Deficiency"),
the Company shall use such Deficiency in the business of the Company and its
Restricted Subsidiaries. Upon completion of the purchase of all the Notes
tendered pursuant to an Offer and repurchase of the Pari Passu Indebtedness
pursuant to a Pari Passu Offer, the amount of Excess Proceeds, if any, shall
be reset at zero.
 
  (d) Whenever the Excess Proceeds received by the Company exceed $5.0 million
such Excess Proceeds shall be set aside by the Company in a separate account
pending (i) deposit with the depositary or a paying agent of the amount
required to purchase the Notes or Pari Passu Indebtedness tendered in an Offer
or a Pari Passu Offer, (ii) delivery by the Company of the Offered Price to
the holders of the Notes or Pari Passu Indebtedness tendered in an Offer or a
Pari Passu Offer and (iii) application, as set forth above, of Excess Proceeds
in the business of the Company and its Restricted Subsidiaries. Such Excess
Proceeds may be invested in Temporary Cash Investments; provided that the
maturity date of any such investment made after the amount of Excess Proceeds
exceeds $5.0 million shall not be later than the Offer Date. The Company shall
be entitled to any interest or dividends accrued, earned or paid on such
Temporary Cash Investments; provided that the Company shall not withdraw such
interest from the separate account if an Event of Default has occurred and is
continuing.
 
  (e) If the Company becomes obligated to make an Offer pursuant to clause (c)
above, the Notes shall be purchased by the Company, at the option of the
holder thereof, in whole or in part, in integral multiples of $1,000, on a
date that is not earlier than 45 days and not later than 60 days from the date
the notice is given to holders, or such later date as may be necessary for the
Company to comply with the requirements under the Exchange Act, subject to
proration in the event the Note Amount is less than the aggregate Offered
Price of all Notes tendered.
 
 
                                      71
<PAGE>
 
  (f) The Company shall comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable
securities laws or regulations in connection with an Offer.
 
  (g) The Company will not, and will not permit any Restricted Subsidiary to,
create or permit to exist or become effective any restriction (other than
restrictions existing under (i) Indebtedness as in effect on the date of the
Indenture listed on a schedule thereto as such Indebtedness may be refinanced
from time to time, provided that such restrictions are no less favorable to
the holders of the Notes than those existing on the date of the Indenture or
(ii) any Senior Indebtedness and any Guarantor Senior Indebtedness) that would
materially impair the ability of the Company to make an Offer to purchase the
Notes or, if such Offer is made, to pay for the Notes tendered for purchase.
 
  Limitation on Asset Swaps. The Company will not, and will not permit any
Restricted Subsidiary to, engage in Asset Swaps, unless: (i) at the time of
entering into such Asset Swap, and immediately after giving effect to such
Asset Swap, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and (ii) the Company or
such Restricted Subsidiary receives consideration at the time of such Asset
Swap at least equal to the Fair Market Value of the properties or assets
exchanged as determined in writing by a nationally recognized investment
banking or appraisal firm.
 
  Limitation on Issuances of Guarantees of and Pledges for
Indebtedness. (a) The Company will not permit any Restricted Subsidiary, other
than the Guarantors, directly or indirectly, to secure the payment of any
Senior Indebtedness of the Company and the Company will not, and will not
permit any Restricted Subsidiary to, pledge any intercompany notes
representing obligations of any Restricted Subsidiary (other than the
Guarantors) to secure the payment of any Senior Indebtedness unless in each
case such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a guarantee of payment
of the Notes by such Restricted Subsidiary, which guarantee shall be on the
same terms as the guarantee of the Senior Indebtedness (if a guarantee of
Senior Indebtedness is granted by any such Restricted Subsidiary) except that
the guarantee of the Notes need not be secured and shall be subordinated to
the claims against such Restricted Subsidiary in respect of Senior
Indebtedness to the same extent as the Notes are subordinated to Senior
Indebtedness of the Company under the Indenture.
 
  (b) The Company will not permit any Restricted Subsidiary, other than the
Guarantors, directly or indirectly, to guarantee, assume or in any other
manner become liable with respect to any Indebtedness of the Company (other
than guarantees in existence on the date of the Indenture) unless such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a guarantee of the Notes on the same
terms as the guarantee of such Indebtedness except that if the Notes are
subordinated in right of payment to such Indebtedness, the guarantee under the
supplemental indenture shall be subordinated to the guarantee of such
Indebtedness to the same extent as the Notes are subordinated to such
Indebtedness under the Indenture.
 
  (c) Each guarantee created pursuant to the provisions described in the
foregoing paragraph is referred to as a "Guarantee" and the issuer of each
such Guarantee is referred to as a "Guarantor." Notwithstanding the foregoing,
any Guarantee by a Restricted Subsidiary of the Notes shall provide by its
terms that it shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's Equity Interest in, or all
or substantially all the assets of, such Restricted Subsidiary, which is in
compliance with the Indenture or (ii) (with respect to any Guarantees created
after the date of the Indenture) the release by the holders of the
Indebtedness of the Company described in clauses (a) and (b) above of their
security interest or their guarantee by such Restricted Subsidiary (including
any deemed release upon payment in full of all obligations under such
Indebtedness), at a time when (A) no other Indebtedness of the Company has
been secured or guaranteed by such Restricted Subsidiary, as the case may be,
or (B) the holders of all such other Indebtedness which is secured or
guaranteed by such Restricted Subsidiary also release their security interest
in, or guarantee by, such Restricted Subsidiary (including any deemed release
upon payment in full of all obligations under such Indebtedness).
 
 
                                      72
<PAGE>
 
  Restriction on Transfer of Assets. The Company and the Guarantors will not
sell, convey, transfer or otherwise dispose of their respective assets or
property to any of the Company's Restricted Subsidiaries (other than any
Guarantor), except for sales, conveyances, transfers or other dispositions
made in the ordinary course of business. For purposes of this provision, any
sale, conveyance, transfer, lease or other disposition of property or assets,
having a Fair Market Value in excess of (a) $1.0 million for any sale,
conveyance, transfer, leases or dispositions or series of related sales,
conveyances, transfers, leases and dispositions and (b) $5.0 million in the
aggregate for all such sales, conveyances, transfers, leases or dispositions
in any fiscal year of the Company shall not be considered "in the ordinary
course of business"; provided that sales by the Company of block program time
and spot advertising time shall not be deemed not to be "in the ordinary
course of business" solely because of the dollar volume of such sales.
 
  Purchase of Notes Upon a Change of Control. If a Change of Control shall
occur at any time, then each holder of Notes shall have the right to require
that the Company purchase such holder's Notes in whole or in part in integral
multiples of $1,000, at a purchase price (the "Change of Control Purchase
Price") in cash in an amount equal to 101% of the principal amount of such
Notes, plus accrued and unpaid interest, if any, to the date of purchase (the
"Change of Control Purchase Date"), pursuant to the offer described below (the
"Change of Control Offer") and the other procedures set forth in the
Indenture.
 
  Within 30 days following any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes, by first-class mail, postage prepaid, at his address
appearing in the security register, stating, among other things, the purchase
price and that the purchase date shall be a business day no earlier than 30
days nor later than 60 days from the date such notice is mailed, or such later
date as is necessary to comply with requirements under the Exchange Act; that
any Note not tendered will continue to accrue interest; that, unless the
Company defaults in the payment of the purchase price, any Notes accepted for
payment pursuant to the Change of Control Offer shall cease to accrue interest
after the Change of Control Purchase Date; and certain other procedures that a
holder of Notes must follow to accept a Change of Control Offer or to withdraw
such acceptance.
 
  If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. A Change of Control will
also result in an event of default under the Bank Credit Agreement and could
result in the acceleration of all indebtedness under the Bank Credit
Agreement. See "Description of Certain Indebtedness--Credit Agreement--Change
of Control." The failure of the Company to make or consummate the Change of
Control Offer or pay the Change of Control Purchase Price when due will result
in an Event of Default under the Indenture.
 
  The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing
law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event the holders of the Notes elected to exercise their
rights under the Indenture and the Company elected to contest such election,
there could be no assurance as to how a court interpreting New York law would
interpret the phrase.
 
  The existence of a holder's right to require the Company to repurchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
 
  "Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a Person shall be deemed to have beneficial ownership of all shares that
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 40% of the total outstanding Voting Stock of the Company, provided
that the Permitted Holders "beneficially own" (as so defined) a lesser
percentage of such Voting Stock than such other Person and do not
 
                                      73
<PAGE>
 
have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors of the Company,
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election to such Board or whose
nomination for election by the shareholders of the Company, was approved by a
vote of 66% of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of such
Board of Directors then in office; (iii) the Company consolidates with or
merges with or into any Person or conveys, transfers or leases all or
substantially all of its assets to any Person, or any corporation consolidates
with or merges into or with the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is changed
into or exchanged for cash, securities or other property, other than any such
transaction in which the outstanding Voting Stock of the Company is not
changed or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of the Company) or in which (A)
the outstanding Voting Stock of the Company is changed into or exchanged for
(x) Voting Stock of the surviving corporation which is not Disqualified Equity
Interests or (y) cash, securities and other property (other than Equity
Interests of the surviving corporation) in an amount which could be paid by
the Company as a Restricted Payment as described under "--Limitation on
Restricted Payments" (and such amount shall be treated as a Restricted Payment
subject to the provisions in the Indenture described under "--Limitation on
Restricted Payments") and (B) no "person" or "group" other than Permitted
Holders owns immediately after such transaction, directly or indirectly, more
than the greater of (1) 40% of the total outstanding Voting Stock of the
surviving corporation and (2) the percentage of the outstanding Voting Stock
of the surviving corporation owned, directly or indirectly, by Permitted
Holders immediately after such transaction; or (iv) the Company is liquidated
or dissolved or adopts a plan of liquidation or dissolution other than in a
transaction which complies with the provisions described under "--
Consolidation, Merger, Sale of Assets."
 
  "Permitted Holders" means as of the date of determination (i) any of Stuart
W. Epperson and Edward G. Atsinger III; (ii) family members or the relatives
of the Persons described in clause (i); (iii) any trusts created for the
benefit of the Persons described in clauses (i), (ii) or (iv) or any trust for
the benefit of any such trust; or (iv) in the event of the incompetence or
death of any of the Persons described in clauses (i) and (ii), such Person's
estate, executor, administrator, committee or other personal representative or
beneficiaries, in each case who at any particular date shall beneficially own
or have the right to acquire, directly or indirectly, Equity Interests of the
Company.
 
  The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
 
  The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
existing under Indebtedness as in effect on the date of the Indenture) that
would materially impair the ability of the Company to make a Change of Control
Offer to purchase the Notes or, if such Change of Control Offer is made, to
pay for the Notes tendered for purchase.
 
  Limitation on Subsidiary Equity Interests. The Company will not permit any
Restricted Subsidiary of the Company to issue any Equity Interests, except for
(i) Equity Interests issued to and held by the Company or a Wholly Owned
Restricted Subsidiary, and (ii) Equity Interests issued by a Person prior to
the time (A) such Person becomes a Restricted Subsidiary, (B) such Person
merges with or into a Restricted Subsidiary or (C) a Restricted Subsidiary
merges with or into such Person; provided that such Equity Interests were not
issued or incurred by such Person in anticipation of the type of transaction
contemplated by subclause (A), (B) or (C).
 
  Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer
to exist or become effective any encumbrance or restriction on the ability of
any Restricted Subsidiary of the Company to (i) pay dividends or make any
other distribution on its Equity Interests, (ii) pay any Indebtedness owed to
the Company or a Restricted Subsidiary of the Company, (iii) make any
Investment in the Company or a Restricted Subsidiary of the Company or (iv)
transfer any of its properties or assets to the Company or any
 
                                      74
<PAGE>
 
Restricted Subsidiary, except (a) any encumbrance or restriction pursuant to
an agreement in effect on the date of the Indenture and listed as a schedule
thereto, (b) any encumbrance or restriction, with respect to a Restricted
Subsidiary that is not a Subsidiary of the Company on the date of the
Indenture, in existence at the time such Person becomes a Restricted
Subsidiary of the Company and not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary; (c) any
encumbrance or restriction existing under any agreement that extends, renews,
refinances or replaces the agreements containing the encumbrances or
restrictions in the foregoing clauses (a) and (b), or in this clause (c),
provided that the terms and conditions of any such encumbrances or
restrictions are not materially less favorable to the holders of the Notes
than those under or pursuant to the agreement evidencing the Indebtedness so
extended, renewed, refinanced or replaced or are not more restrictive than
those set forth in the Indenture; and (d) any encumbrance or restriction
created pursuant to an asset sale agreement, stock sale agreement or similar
instrument pursuant to which an Asset Sale permitted under "--Limitations on
Sale of Assets" is to be consummated, so long as such restriction or
encumbrance shall be effective only for a period from the execution and
delivery of such agreement or instrument through a termination date not later
than 270 days after such execution and delivery.
 
  Limitation on Unrestricted Subsidiaries. The Company will not make, and will
not permit any of its Restricted Subsidiaries to make, any Investments in
Unrestricted Subsidiaries if, at the time thereof, the aggregate amount of
such Investments would exceed the amount of Restricted Payments then permitted
to be made pursuant to the "Limitation on Restricted Payments" covenant. Any
Investments in Unrestricted Subsidiaries permitted to be made pursuant to this
covenant (i) will be treated as the payment of a Restricted Payment in
calculating the amount of Restricted Payments made by the Company and (ii) may
be made in cash or property.
 
  Provision of Financial Statements. The Indenture provides that, whether or
not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the
Company will, to the extent permitted under the Exchange Act, file with the
Commission the annual reports, quarterly reports and other documents which the
Company would have been required to file with the Commission pursuant to such
Section 13(a) or 15(d) if the Company were so subject, such documents to be
filed with the Commission on or prior to the respective dates (the "Required
Filing Dates") by which the Company would have been required so to file such
documents if the Company were so subject. The Company will also in any event
(x) within 15 days of each Required Filing Date (i) transmit by mail to all
holders, as their names and addresses appear in the Note register, without
cost to such holders and (ii) file with the Trustee copies of the annual
reports, quarterly reports and other documents which the Company would have
been required to file with the Commission pursuant to Section 13(a) or 15(d)
of the Exchange Act if the Company were subject to such Sections and (y) if
filing such documents by the Company with the Commission is not permitted
under the Exchange Act, promptly upon written request and payment of the
reasonable cost of duplication and delivery, supply copies of such documents
to any prospective holder at the Company's cost.
 
  Additional Covenants. The Indenture also contains covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency; (iii) arrangements regarding the handling
of money held in trust; (iv) maintenance of corporate existence; (v) payment
of taxes and other claims; (vi) maintenance of properties; and (vii)
maintenance of insurance.
 
CONSOLIDATION, MERGER, SALE OF ASSETS
 
  The Company shall not, in a single transaction or a series of related
transactions, consolidate with or merge with or into any other Person or sell
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Subsidiaries to enter into any such transaction or
transactions if such transaction or transactions, in the aggregate, would
result in a sale, assignment, conveyance, transfer, lease or disposition of
all or substantially all of the properties and assets of the Company and its
Subsidiaries on a Consolidated basis to any other Person or group of
affiliated Persons, unless at the time and after giving effect thereto: (i)
either (1) the Company shall be the continuing corporation or (2) the Person
(if other than the Company) formed by such consolidation or into which the
Company is merged or the Person which acquires by sale, assignment,
conveyance, transfer, lease or disposition of all or substantially
 
                                      75
<PAGE>
 
all of the properties and assets of the Company and its Subsidiaries on a
Consolidated basis (the "Surviving Entity") shall be a corporation duly
organized and validly existing under the laws of the United States of America,
any state thereof or the District of Columbia and such Person assumes, by a
supplemental indenture in a form reasonably satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture, and the
Indenture shall remain in full force and effect; (ii) immediately before and
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, the Consolidated Net Worth of
the Company (or the Surviving Entity if the Company is not the continuing
obligor under the Indenture) is equal to or greater than the Consolidated Net
Worth of the Company immediately prior to such transaction; (iv) immediately
before and immediately after giving effect to such transaction on a pro forma
basis (on the assumption that the transaction occurred on the first day of the
four-quarter period immediately prior to the consummation of such transaction
with the appropriate adjustments with respect to the transaction being
included in such pro forma calculation), the Company (or the Surviving Entity
if the Company is not the continuing obligor under the Indenture) could incur
$1.00 of additional Indebtedness under the provisions of "--Certain
Covenants--Limitation on Indebtedness" (other than Permitted Indebtedness);
(v) each Guarantor, if any, unless it is the other party to the transactions
described above, shall have by supplemental indenture confirmed that its
Guarantee shall apply to such Person's obligations under the Indenture and the
Notes; (vi) if any of the property or assets of the Company or any of its
Subsidiaries would thereupon become subject to any Lien, the provisions of "--
Certain Covenants--Limitation on Liens" are complied with; and (vii) the
Company or the Surviving Entity shall have delivered, or caused to be
delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an officers' certificate and an opinion of counsel, each to the
effect that such consolidation, merger, transfer, sale, assignment, lease or
other transaction and the supplemental indenture in respect thereto comply
with the provisions of the Indenture and that all conditions precedent
provided for in the Indenture relating to such transaction have been complied
with.
 
  Each Guarantor will not, and the Company will not permit a Guarantor to, in
a single transaction or series of related transactions merge or consolidate
with or into any other corporation (other than the Company or any other
Guarantor) or other entity, or sell, assign, convey, transfer, lease or
otherwise dispose of all or substantially all of its properties and assets on
a Consolidated basis to any entity (other than the Company or any other
Guarantor) unless at the time and after giving effect thereto: (i) either (1)
such Guarantor shall be the continuing corporation or (2) the entity (if other
than such Guarantor) formed by such consolidation or into which such Guarantor
is merged or the entity which acquires by sale, assignment, conveyance,
transfer, lease or disposition the properties and assets of such Guarantor
shall be a corporation duly organized and validly existing under the laws of
the United States, any state thereof or the District of Columbia and shall
expressly assume by a supplemental indenture, executed and delivered to the
Trustee, in a form reasonably satisfactory to the Trustee, all the obligations
of such Guarantor under its Guarantee and the Indenture; (ii) immediately
before and immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing, and (iii) such
Guarantor shall have delivered to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an officers' certificate and an
opinion of counsel, each stating that such consolidation, merger, sale,
assignment, conveyance, transfer, lease or disposition and such supplemental
indenture comply with the Indenture, and thereafter all obligations of the
predecessor shall terminate. The provisions of this paragraph shall not apply
to any transaction (including an Asset Sale made in accordance with "--Certain
Covenants--Limitations on Sale of Assets" ) with respect to any Guarantor if
the Guarantee of such Guarantor is released in connection with such
transaction in accordance with paragraph (c) of "--Certain Covenants--
Limitations on Issuances of Guarantees of and Pledges for Indebtedness."
 
  In the event of any transaction described in and complying with the
conditions listed in the immediately preceding paragraphs in which the Company
or any Guarantor is not the continuing corporation, the successor Person
formed or remaining shall succeed to, and be substituted for, and may exercise
every right and power of, the Company or such Guarantor, as the case may be,
and the Company or such Guarantor, as the case may be, would be discharged
from its obligations under the Indenture, the Notes or its Guarantee, as the
case may be.
 
                                      76
<PAGE>
 
EVENTS OF DEFAULT
 
  An Event of Default will occur under the Indenture if:
 
    (i) there shall be a default in the payment of any interest on any Note
  (including any Penalty Amounts) when it becomes due and payable, and such
  default shall continue for a period of 30 days;
 
    (ii) there shall be a default in the payment of the principal of (or
  premium, if any, on) any Note at its Maturity (upon acceleration, optional
  or mandatory redemption, required repurchase or otherwise);
 
    (iii) (a) there shall be a default in the performance, or breach, of any
  covenant or agreement of the Company or any Guarantor under the Indenture
  (other than a default in the performance, or breach, of a covenant or
  agreement which is specifically dealt with in clause (i) or (ii) or in
  clause (b), (c) or (d) of this clause (iii)) and such default or breach
  shall continue for a period of 30 days after written notice has been given,
  by certified mail, (x) to the Company by the Trustee or (y) to the Company
  and the Trustee by the holders of at least 25% in aggregate principal
  amount of the outstanding Notes; (b) there shall be a default in the
  performance or breach of the provisions described in "--Consolidation,
  Merger, Sale of Assets;" (c) the Company shall have failed to make or
  consummate an Offer in accordance with the provisions of "--Certain
  Covenants--Limitation on Sale of Assets;" or (d) the Company shall have
  failed to make or consummate a Change of Control Offer in accordance with
  the provisions of "--Certain Covenants--Purchase of Notes Upon a Change of
  Control;"
 
    (iv) one or more defaults shall have occurred under any agreements,
  indentures or instruments under which the Company, any Guarantor or any
  Restricted Subsidiary then has outstanding Indebtedness in excess of $5.0
  million in the aggregate and, if not already matured at its final maturity
  in accordance with its terms, such Indebtedness shall have been
  accelerated;
 
    (v) any Guarantee shall for any reason cease to be, or be asserted in
  writing by any Guarantor or the Company not to be, in full force and
  effect, enforceable in accordance with its terms, except to the extent
  contemplated by the Indenture and any such Guarantee;
 
    (vi) one or more judgments, orders or decrees for the payment of money in
  excess of $5.0 million, either individually or in the aggregate (net of
  amounts covered by insurance, bond, surety or similar instrument) shall be
  entered against the Company, any Guarantor or any Restricted Subsidiary or
  any of their respective properties and shall not be discharged and either
  (a) any creditor shall have commenced an enforcement proceeding upon such
  judgment, order or decree or (b) there shall have been a period of 60
  consecutive days during which a stay of enforcement of such judgment or
  order, by reason of an appeal or otherwise, shall not be in effect;
 
    (vii) any holder or holders of at least $5.0 million in aggregate
  principal amount of Indebtedness of the Company, any Guarantor or any
  Restricted Subsidiary after a default under such Indebtedness shall notify
  the Trustee of the intended sale or disposition of any assets of the
  Company, any Guarantor or any Restricted Subsidiary that have been pledged
  to or for the benefit of such holder or holders to secure such Indebtedness
  or shall commence proceedings, or take any action (including by way of set-
  off), to retain in satisfaction of such Indebtedness or to collect on,
  seize, dispose of or apply in satisfaction of Indebtedness, assets of the
  Company or any Restricted Subsidiary (including funds on deposit or held
  pursuant to lock-box and other similar arrangements);
 
    (viii) there shall have been the entry by a court of competent
  jurisdiction of (a) a decree or order for relief in respect of the Company,
  any Guarantor or any Restricted Subsidiary in an involuntary case or
  proceeding under any applicable Bankruptcy Law or (b) a decree or order
  adjudging the Company, any Guarantor or any Restricted Subsidiary bankrupt
  or insolvent, or seeking reorganization, arrangement, adjustment or
  composition of or in respect of the Company, any Guarantor or any
  Restricted Subsidiary under any applicable federal or state law, or
  appointing a custodian, receiver, liquidator, assignee, trustee,
  sequestrator (or other similar official) of the Company, any Guarantor or
  any Restricted Subsidiary or of any substantial part of their respective
  properties, or ordering the winding up or liquidation of their affairs,
 
                                      77
<PAGE>
 
  and any such decree or order for relief shall continue to be in effect, or
  any such other decree or order shall be unstayed and in effect, for a
  period of 60 consecutive days; or
 
    (ix) (a) the Company, any Guarantor or any Restricted Subsidiary
  commences a voluntary case or proceeding under any applicable Bankruptcy
  Law or any other case or proceeding to be adjudicated bankrupt or
  insolvent, (b) the Company, any Guarantor or any Restricted Subsidiary
  consents to the entry of a decree or order for relief in respect of the
  Company, any Guarantor or such Restricted Subsidiary in an involuntary case
  or proceeding under any applicable Bankruptcy Law or to the commencement of
  any bankruptcy or insolvency case or proceeding against it, (c) the
  Company, any Guarantor or any Restricted Subsidiary files a petition or
  answer or consent seeking reorganization or relief under any applicable
  federal or state law, (d) the Company, any Guarantor or any Restricted
  Subsidiary (x) consents to the filing of such petition or the appointment
  of, or taking possession by, a custodian, receiver, liquidator, assignee,
  trustee, sequestrator or other similar official, of the Company, any
  Guarantor or such Restricted Subsidiary or of any substantial part of their
  respective property, (y) makes an assignment for the benefit of creditors
  or (z) admits in writing its inability to pay its debts generally as they
  become due or (e) the Company, any Guarantor or any Restricted Subsidiary
  takes any corporate action in furtherance of any such actions in this
  paragraph (ix).
 
  If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing, the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes
outstanding may, and the Trustee at the request of such holders shall, declare
all unpaid principal of, premium, if any, and accrued interest on, all the
Notes to be due and payable immediately by a notice in writing to the Company
(and to the Trustee if given by the holders of the Notes), provided that so
long as the Bank Credit Agreement is in effect, such declaration shall not
become effective until the earlier of (a) five business days after receipt of
such notice of acceleration from the holders or the Trustee by the agent under
the Bank Credit Agreement or (b) acceleration of the Indebtedness under the
Bank Credit Agreement. Thereupon the Trustee may, at its discretion, proceed
to protect and enforce the rights of the holders of Notes by appropriate
judicial proceedings. If an Event of Default specified in clause (viii) or
(ix) of the prior paragraph occurs and is continuing, then all the Notes shall
ipso facto become and be immediately due and payable, in an amount equal to
the principal amount of the Notes, together with accrued and unpaid interest,
if any, to the date the Notes become due and payable, without any declaration
or other act on the part of the Trustee or any holder. The Trustee or, if
notice of acceleration is given by the holders of the Notes, the holders of
the Notes shall give notice to the agent under the Bank Credit Agreement of
such acceleration.
 
  After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding, by written notice
to the Company and the Trustee, may rescind and annul such declaration if (a)
the Company has paid or deposited with the Trustee a sum sufficient to pay (i)
all sums paid or advanced by the Trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, (ii) all overdue interest on all Notes, (iii) the
principal of and premium, if any, on any Notes which have become due otherwise
than by such declaration of acceleration and interest thereon at a rate borne
by the Notes and (iv) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Notes; and (b) all
Events of Default, other than the non-payment of principal of the Notes which
have become due solely by such declaration of acceleration, have been cured or
waived.
 
  The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may on behalf of the holders of all the Notes waive any past
default under the Indenture and its consequences, except a default in the
payment of the principal of, premium, if any, or interest on any Note, or in
respect of a covenant or provision which under the Indenture cannot be
modified or amended without the consent of the holder of each Note
outstanding.
 
  The Company is also required to notify the Trustee within five business days
of the occurrence of any Default. The Company is required to deliver to the
Trustee, on or before a date not more than 60 days after the
 
                                      78
<PAGE>
 
end of each quarter and not more than 120 days after the end of each fiscal
year, a written statement as to compliance with the Indenture, including
whether or not any default has occurred. The Trustee is under no obligation to
exercise any of the rights or powers vested in it by the Indenture at the
request or direction of any of the holders of the Notes unless such holders
offer to the Trustee security or indemnity satisfactory to the Trustee against
the costs, expenses and liabilities which might be incurred thereby.
 
  The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions, provided that if it acquires any conflicting
interest it must eliminate such conflict upon the occurrence of an Event of
Default or else resign.
 
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
 
  The Company may, at its option, at any time, elect to have the obligations
of the Company, each of the Guarantors and any other obligor upon the Notes
discharged with respect to the outstanding Notes ("defeasance"). Such
defeasance means that the Company, each of the Guarantors and any other
obligor under the Indenture shall be deemed to have paid and discharged the
entire Indebtedness represented by the outstanding Notes, except for (i) the
rights of holders of outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes, and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to have the obligations of the Company and any Guarantor released with respect
to certain covenants that are described in the Indenture ("covenant
defeasance") and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes. In the
event covenant defeasance occurs, certain events (not including non-payment,
enforceability of any Guarantee, bankruptcy and insolvency events) described
under "--Events of Default" will no longer constitute an Event of Default with
respect to the Notes.
 
  In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants or a nationally recognized investment
banking firm expressed in a written certification thereof delivered to the
Trustee, to pay and discharge the principal of, premium, if any, and interest
on the outstanding Notes on the Stated Maturity of such principal or
installment of principal or interest (or on any date after October 1, 2002
(such date being referred to as the "Defeasance Redemption Date"), if when
exercising either defeasance or covenant defeasance, the Company has delivered
to the Trustee an irrevocable notice to redeem all of the outstanding Notes on
the Defeasance Redemption Date); (ii) in the case of defeasance, the Company
shall have delivered to the Trustee an opinion of independent counsel in the
United States stating that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the date
of the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
independent counsel in the United States shall confirm that, the holders of
the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; (iii)
in the case of covenant defeasance, the Company shall have delivered to the
Trustee an opinion of independent counsel in the United States to the effect
that the holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such covenant defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or insofar as clause
(viii) or
 
                                      79
<PAGE>
 
(ix) under the first paragraph under "--Events of Default" are concerned, at
any time during the period ending on the 91st day after the date of deposit;
(v) such defeasance or covenant defeasance shall not cause the Trustee for the
Notes to have a conflicting interest with respect to any securities of the
Company or any Guarantor; (vi) such defeasance or covenant defeasance shall
not result in a breach or violation of, or constitute a Default under, the
Indenture or any other material agreement or instrument to which the Company
or any Guarantor is a party or by which it is bound, (vii) the Company shall
have delivered to the Trustee an opinion of independent counsel to the effect
that (A) the trust funds will not be subject to any rights of holders of
Senior Indebtedness or Guarantor Senior Indebtedness, including, without
limitation, those arising under the Indenture and (B) after the 91st day
following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (viii) the Company shall have delivered
to the Trustee an officers' certificate stating that the deposit was not made
by the Company with the intent of preferring the holders of the Notes or any
Guarantee over the other creditors of the Company or any Guarantor with the
intent of defeating, hindering, delaying or defrauding creditors of the
Company, any Guarantor or others; (ix) no event or condition shall exist that
would prevent the Company from making payments of the principal of, premium,
if any, and interest on the Notes on the date of such deposit or at any time
ending on the 91st day after the date of such deposit; and (x) the Company
shall have delivered to the Trustee an officers' certificate and an opinion of
independent counsel, each stating that all conditions precedent provided for
relating to either the defeasance or the covenant defeasance, as the case may
be, have been complied with.
 
SATISFACTION AND DISCHARGE
 
  The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of Notes, and certain other
rights as expressly provided for in the Indenture) as to all outstanding Notes
when (a) either (i) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid) have
been delivered to the Trustee for cancellation or (ii) all Notes not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, or (y) will become due and payable at their Stated Maturity within
one year, or (z) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company and
the Company or any Guarantor has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire indebtedness on the Notes not theretofore delivered to the Trustee
for cancellation, including principal of, premium, if any, and accrued
interest at such Stated Maturity or redemption date, (b) the Company or any
Guarantor has paid or caused to be paid all other sums payable under the
Indenture by the Company or any Guarantor, and (c) the Company has delivered
to the Trustee an officers' certificate and an opinion of counsel stating that
(i) all conditions precedent under the Indenture relating to the satisfaction
and discharge of the Indenture have been complied with and (B) such
satisfaction and discharge will not result in a breach or violation of, or
constitute a default under, the Indenture or any other material agreement or
instrument to which the Company or any Guarantor is a party or by which the
Company or any Guarantor is bound.
 
MODIFICATIONS AND AMENDMENTS
 
  Modifications and amendments of the Indenture may be made by the Company,
any Guarantor and the Trustee with the consent of the holders of not less than
a majority in aggregate principal amount of the outstanding Notes; provided,
however, that no such modification or amendment may, without the consent of
the holder of each outstanding Note affected thereby: (i) change the Stated
Maturity of the principal of, or any installment of interest on, any Note or
reduce the principal amount thereof or the rate of interest thereon or any
premium payable upon the redemption thereof, or change the coin or currency in
which the principal of any Note or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment after the Stated Maturity thereof (or in the case of redemption, on or
after the redemption date); (ii) amend, change or modify the obligation of the
Company to make and consummate an Offer with respect to any Asset Sale or
Asset Sales in accordance with "--Certain Covenants--Limitation on Sale of
Assets" or the
 
                                      80
<PAGE>
 
obligation of the Company to make and consummate a Change of Control Offer in
the event of a Change of Control in accordance with "--Certain Covenants--
Purchase of Notes Upon a Change of Control," including amending, changing or
modifying any deletions with respect thereto; (iii) reduce the percentage in
principal amount of outstanding Notes, the consent of whose holders is
required for any such supplemental indenture, or the consent of whose holders
is required for any waiver or compliance with certain provisions of the
Indenture or certain defaults or with respect to any Guarantee; (iv) modify
any of the provisions relating to supplemental indentures requiring the
consent of holders or relating to the waiver of past defaults or relating to
the waiver of certain covenants, except to increase the percentage of
outstanding Notes required for such actions or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent
of the holder of each Note affected thereby; (v) except as otherwise permitted
under "--Consolidation, Merger, Sale of Assets," consent to the assignment or
transfer by the Company or any Guarantor of any of its rights and obligations
under the Indenture; or (vi) amend or modify any of the provisions of the
Indenture relating to the subordination of the Notes or any Guarantee in any
manner adverse to the holders of the Notes or any Guarantee.
 
  The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
 
GOVERNING LAW
 
  The Indenture, the Notes and the Guarantees will be governed by, and
construed in accordance with the laws of the State of New York, without giving
effect to the conflicts of law principles thereof.
 
CERTAIN DEFINITIONS
 
  "Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or
the date the acquired Person becomes a Subsidiary.
 
  "Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person, (ii) any other Person that
owns, directly or indirectly, 5% or more of such Person's Equity Interests or
any officer or director of any such Person or other Person or, with respect to
any natural Person, any person having a relationship with such Person or other
Person by blood, marriage or adoption not more remote than first cousin or
(iii) any other Person 10% or more of the voting Equity Interests of which are
beneficially owned or held directly or indirectly by such specified person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person directly or indirectly, whether through ownership of voting securities,
by contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
 
  "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
Sale and Leaseback Transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Equity
Interest of any Restricted Subsidiary; (ii) all or substantially all of the
properties and assets of any division or line of business of the Company or
its Restricted Subsidiaries; or (iii) any other properties or assets of the
Company or any Restricted Subsidiary, other than in the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall not
include any transfer of properties and assets (A) that is governed by the
provisions described under " --Consolidation, Merger, Sale of Assets" or
"Limitations on Asset Swaps," (B) that is by the Company to any Wholly Owned
Restricted Subsidiary, or by any Restricted Subsidiary to the Company or any
Wholly Owned Restricted Subsidiary in accordance with the terms of the
Indenture or (C) that aggregates not more than $1.0 million in gross proceeds.
 
 
                                      81
<PAGE>
 
  "Asset Swap" means an Asset Sale by the Company or any Restricted Subsidiary
in exchange for properties or assets that will be used in the business of the
Company and its Restricted Subsidiaries existing on the date of the Indenture
or reasonably related thereto.
 
  "Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments.
 
  "Bank Credit Agreement" means the Credit Agreement dated as of September 25,
1997 among the Company, the lenders named therein and The Bank of New York as
agent, as such agreement may be amended, renewed, extended, substituted,
refinanced, restructured, replaced, supplemented or otherwise modified from
time to time (including, without limitation, any successive renewals,
extensions substitutions, refinancings, restructurings, replacements,
supplementations or other modifications of the foregoing). For all purposes
under the Indenture, "Bank Credit Agreement" shall include any amendments,
renewals, extensions, substitutions, refinancings, restructurings,
replacements, supplements or any other modifications that increase the
principal amount of the Indebtedness or the commitments to lend thereunder and
have been made in compliance with "--Certain Covenants--Limitation on
Indebtedness;" provided that, for purposes of the definition of "Permitted
Indebtedness," no such increase may result in the principal amount of
Indebtedness of the Company under the Bank Credit Agreement exceeding the
amount permitted by clause (i) of the definition of "Permitted Indebtedness."
 
  "Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
 
  "Capital Lease Obligation" means any obligation of the Company and its
Restricted Subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as
a capitalized lease obligation.
 
  "Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
 
  "Company" means Salem Communications Corporation, a corporation incorporated
under the laws of California, until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter
"Company" shall mean such successor Person.
 
  "Consolidated Interest Expense" means, without duplication, for any period,
the sum of (a) the interest expense of the Company and its Consolidated
Restricted Subsidiaries for such period, on a Consolidated basis, including,
without limitation, (i) amortization of debt discount, (ii) the net cost under
Interest Rate Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation and (iv) accrued interest,
plus (b) the interest component of the Capital Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Company during such period, and
all capitalized interest of the Company and its Consolidated Restricted
Subsidiaries, in each case as determined in accordance with GAAP consistently
applied.
 
  "Consolidated Net Income" means, for any period, the Consolidated net income
(or loss) of the Company and its Consolidated Restricted Subsidiaries for such
period as determined in accordance with GAAP consistently applied, adjusted,
to the extent included in calculating such net income (or loss), by excluding,
without duplication, (i) all extraordinary gains but not losses (less all fees
and expenses relating thereto), (ii) the portion of net income (or loss) of
the Company and its Consolidated Restricted Subsidiaries allocable to
interests in
 
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<PAGE>
 
unconsolidated Persons or Unrestricted Subsidiaries, except to the extent of
the amount of dividends or distributions actually paid to the Company or its
Consolidated Restricted Subsidiaries by such other Person during such period,
(iii) net income (or loss) of any Person combined with the Company or any of
its Restricted Subsidiaries on a "pooling of interests" basis attributable to
any period prior to the date of combination, (iv) any gain or loss, net of
taxes, realized upon the termination of any employee pension benefit plan, (v)
net gains but not losses (less all fees and expenses relating thereto) in
respect of dispositions of assets other than in the ordinary course of
business, or (vi) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its shareholders.
 
  "Consolidated Net Worth" means the Consolidated equity of the holders of
Equity Interests (excluding Disqualified Equity Interests) of the Company and
its Restricted Subsidiaries, as determined in accordance with GAAP
consistently applied.
 
  "Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries (other than any
Unrestricted Subsidiaries) if and to the extent the accounts of such Person
and each of its subsidiaries (other than any Unrestricted Subsidiaries) would
normally be consolidated with those of such Person, all in accordance with
GAAP consistently applied. The term "Consolidated" shall have a similar
meaning.
 
  "Cumulative Consolidated Interest Expense" means, as of any date of
determination, Consolidated Interest Expense from the date of the Indenture to
the end of the Company's most recently ended full fiscal quarter prior to such
date, taken as a single accounting period.
 
  "Cumulative Operating Cash Flow" means, as of any date of determination,
Operating Cash Flow from the date of the Indenture to the end of the Company's
most recently ended full fiscal quarter prior to such date, taken as a single
accounting period.
 
  "Debt to Operating Cash Flow Ratio" means, as of any date of determination,
the ratio of (a) the aggregate principal amount of all outstanding
Indebtedness of the Company and its Restricted Subsidiaries as of such date on
a Consolidated basis plus the aggregate liquidation preference or redemption
amount of all Disqualified Equity Interests of the Company (excluding any such
Disqualified Equity Interests held by the Company or a Wholly Owned Restricted
Subsidiary of the Company), to (b) Operating Cash Flow of the Company and its
Restricted Subsidiaries on a Consolidated basis for the four most recent full
quarters ending immediately prior to such date, determined on a pro forma
basis (and after giving pro forma effect to (i) the incurrence of such
Indebtedness and (if applicable) the application of the net proceeds
therefrom, including to refinance other Indebtedness, as if such Indebtedness
was incurred, and the application of such proceeds occurred, at the beginning
of such four-quarter period; (ii) the incurrence, repayment or retirement of
any other Indebtedness by the Company and its Restricted Subsidiaries since
the first day of such four-quarter period as if such Indebtedness was
incurred, repaid or retired at the beginning of such four-quarter period
(except that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average balance of
such Indebtedness at the end of each month during such four-quarter period);
(iii) in the case of Acquired Indebtedness, the related acquisition, as if
such acquisition had occurred at the beginning of such four-quarter period;
and (iv) any acquisition or disposition by the Company and its Restricted
Subsidiaries of any company or any business or any assets out of the ordinary
course of business, or any related repayment of Indebtedness, in each case
since the first day of such four-quarter period, assuming such acquisition or
disposition had been consummated on the first day of such four-quarter
period).
 
  "Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
 
 
                                      83
<PAGE>
 
  "Disqualified Equity Interests" means any Equity Interests that, either by
their terms or by the terms of any security into which they are convertible or
exchangeable or otherwise, are or upon the happening of an event or passage of
time would be required to be redeemed prior to any Stated Maturity of the
principal of the Notes or are redeemable at the option of the holder thereof
at any time prior to any such Stated Maturity, or are convertible into or
exchangeable for debt securities at any time prior to any such Stated Maturity
at the option of the holder thereof.
 
  "Equity Interest" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited,
and limited liability company interests of such Person, including any
Preferred Equity Interests.
 
  "Exchange Act" means the Securities Exchange Act of 1934, as amended.
 
  "Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
 
  "Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the date of the Indenture.
 
  "Guarantee" means the guarantee by any Guarantor of the Company's Indenture
Obligations pursuant to a guarantee given in accordance with the Indenture.
 
  "Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person referred to in the definition of Indebtedness guaranteed
directly or indirectly in any manner by such Person, or in effect guaranteed
directly or indirectly by such Person through an agreement (i) to pay or
purchase such Indebtedness or to advance or supply funds for the payment or
purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or
lessor) property, or to purchase or sell services, primarily for the purpose
of enabling the debtor to make payment of such Indebtedness or to assure the
holder of such Indebtedness against loss, (iii) to supply funds to, or in any
other manner invest in, the debtor (including any agreement to pay for
property or services without requiring that such property be received or such
services be rendered), (iv) to maintain working capital or equity capital of
the debtor, or otherwise to maintain the net worth, solvency or other
financial condition of the debtor or (v) otherwise to assure a creditor
against loss; provided that the term "guarantee" shall not include
endorsements for collection or deposit, in either case in the ordinary course
of business.
 
  "Guarantor" means the Subsidiaries listed as guarantors in the Indenture or
any other guarantor of the Indenture Obligations. The Guarantors currently
consist of all the Company's Subsidiaries.
 
  "Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit issued under letter of
credit facilities, acceptance facilities or other similar facilities and in
connection with any agreement to purchase, redeem, exchange, convert or
otherwise acquire for value any Equity Interests of such Person, or any
warrants, rights or options to acquire such Equity Interests, now or hereafter
outstanding, (ii) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments, (iii) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even if the rights and remedies
of the seller or lender under such agreement in the event of default are
limited to repossession or sale of such property), but excluding trade
payables arising in the ordinary course of business, (iv) all obligations
under Interest Rate Agreements of such Person, (v) all Capital Lease
Obligations of such Person, (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holder of such Indebtedness
has an existing
 
                                      84
<PAGE>
 
right, contingent or otherwise, to be secured by) any Lien, upon or with
respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness, (vii) all Guaranteed Debt
of such Person, (viii) all Disqualified Equity Interests valued at the greater
of their voluntary or involuntary maximum fixed repurchase price plus accrued
and unpaid dividends, and (ix) any amendment, supplement, modification,
deferral, renewal, extension, refunding or refinancing of any liability of the
types referred to in clauses (i) through (viii) above. The amount of
Indebtedness of any Person at any date shall be, without duplication, the
principal amount that would be shown on a balance sheet of such Person
prepared as of such date in accordance with GAAP and the maximum determinable
liability of any Guaranteed Debt referred to in clause (vii) above at such
date. The Indebtedness of the Company and its Restricted Subsidiaries shall
not include any Indebtedness of Unrestricted Subsidiaries so long as such
Indebtedness is non-recourse to the Company and the Restricted Subsidiaries.
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Equity Interests which do not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Equity Interests
as if such Disqualified Equity Interests were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the Fair Market Value of such
Disqualified Equity Interests, such Fair Market Value to be determined in good
faith by the Board of Directors of the issuer of such Disqualified Equity
Interests.
 
  "Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Notes, including any Guarantor, to
pay principal, premium, if any, and interest when due and payable, and all
other amounts due or to become due under or in connection with the Indenture,
the Notes and the performance of all other obligations to the Trustee and the
holders under the Indenture and the Notes, according to the terms thereof.
 
  "Independent Director" means a director of the Company other than a director
(i) who (apart from being a director of the Company or any Subsidiary) is an
employee, insider, associate or Affiliate of the Company or a Subsidiary or
has held any such position during the previous five years or (ii) who is a
director, an employee, insider, associate or Affiliate of another party to the
transaction in question.
 
  "Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate
swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
 
  "Investments" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase, acquisition or ownership by such Person of any Equity Interests,
bonds, notes, debentures or other securities or assets issued or owned by any
other Person and all other items that would be classified as investments on a
balance sheet prepared in accordance with GAAP.
 
  "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind (including any conditional sale or other
title retention agreement, any leases in the nature thereof, and any agreement
to give any security interest), real or personal, movable or immovable, now
owned or hereafter acquired.
 
  "Maturity," when used with respect to any Note, means the date on which the
principal of such Note becomes due and payable as provided in the Note or as
provided in the Indenture, whether at Stated Maturity, the offer date, or the
redemption date and whether by declaration of acceleration, Offer in respect
of Excess Proceeds, Change of Control, call for redemption or otherwise.
 
  "Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof in the form of cash or Temporary Cash Investments
including payments in respect of deferred payment obligations
 
                                      85
<PAGE>
 
when received in the form of, or stock or other assets when disposed of for,
cash or Temporary Cash Investments (except to the extent that such obligations
are financed or sold with recourse to the Company or any Restricted
Subsidiary) net of (i) brokerage commissions and other reasonable fees and
expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes payable as a result
of such Asset Sale, (iii) payments made to retire Indebtedness where payment
of such Indebtedness is secured by the assets or properties the subject of
such Asset Sale or would cause a required repayment under the Bank Credit
Agreement, (iv) amounts required to be paid to any Person (other than the
Company or any Restricted Subsidiary) owning a beneficial interest in the
assets subject to the Asset Sale and (v) appropriate amounts to be provided by
the Company or any Restricted Subsidiary, as the case may be, as a reserve, in
accordance with GAAP, against any liabilities associated with such Asset Sale
and retained by the Company or any Restricted Subsidiary, as the case may be,
after such Asset Sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters
and liabilities under any indemnification obligations associated with such
Asset Sale, all as reflected in an officers' certificate delivered to the
Trustee and (b) with respect to any issuance or sale of Equity Interests, or
debt securities or Equity Interests that have been converted into or exchanged
for Equity Interests, as referred to under "--Certain Covenants--Limitation on
Restricted Payments," the proceeds of such issuance or sale in the form of
cash or Temporary Cash Investments, including payments in respect of deferred
payment obligations when received in the form of, or stock or other assets
when disposed for, cash or Temporary Cash Investments (except to the extent
that such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
 
  "Operating Cash Flow" means, for any period, the Consolidated Net Income of
the Company and its Restricted Subsidiaries for such period, plus (a)
extraordinary net losses and net losses on sales of assets outside the
ordinary course of business during such period, to the extent such losses were
deducted in computing Consolidated Net Income, plus (b) provision for taxes
based on income or profits, to the extent such provision for taxes was
included in computing such Consolidated Net Income, and any provision for
taxes utilized in computing the net losses under clause (a) hereof, plus (c)
Consolidated Interest Expense of the Company and its Restricted Subsidiaries
for such period, plus (d) depreciation, amortization and all other non-cash
charges, to the extent such depreciation, amortization and other non-cash
charges were deducted in computing such Consolidated Net Income (including
amortization of goodwill and other intangibles).
 
  "Pari Passu Indebtedness" means any Indebtedness of the Company or any
Guarantor that is pari passu in right of payment to the Notes or any
Guarantee, as the case may be.
 
  "Permitted Investments" means any of the following:
 
    (i) Temporary Cash Investments;
 
    (ii) Investments by the Company or any of its Restricted Subsidiaries in
  a Guarantor and Investments by any Restricted Subsidiary in the Company;
 
    (iii) Investments by the Company or any of its Restricted Subsidiaries in
  another Person, if as a result of such Investment (a) such other Person
  becomes a Restricted Subsidiary that is or would be a Guarantor or (b) such
  other Person is merged or consolidated with or into, or transfers or
  conveys all or substantially all of its assets to, the Company or a
  Restricted Subsidiary that is or would be a Guarantor;
 
    (iv) Promissory notes received as a result of Asset Sales permitted under
  the provisions of "Limitation on Sales of Assets."
 
    (v) Investments in assets owned or used in the ordinary course of
  business;
 
    (vi) Investments in existence on the date of the Indenture;
 
 
                                      86
<PAGE>
 
    (vii) Direct or indirect loans to employees, or to a trustee for the
  benefit of such employees, of the Company or any of its Restricted
  Subsidiaries in an aggregate amount outstanding at any time not exceeding
  $1.0 million;
 
    (viii) Permitted Non-Commercial Educational Station Investments; provided
  that immediately after giving effect to any such Investment, the Company
  could incur $1.00 of additional Indebtedness (other than Permitted
  Indebtedness) pursuant to the restrictions under the "--Certain Covenants--
  Limitation on Indebtedness" covenant; and
 
    (ix) Other Investments that do not exceed $5.0 million at any one time
  outstanding.
 
  "Permitted Non-Commercial Educational Station Investment" means a loan made
by the Company or a Restricted Subsidiary to a non-profit entity, the proceeds
of which are used to acquire assets used in the operation of a radio station;
provided that so long as any such Investment remains outstanding (i) such loan
shall be evidenced by a promissory note and shall not be subordinated to any
other Indebtedness of such non-profit entity; (ii) at least 40% of the board
seats (or other comparable governing body) of such non-profit entity shall be
held by executive officers of the Company, and (iii) a technical and
professional services agreement shall be in full force and effect between such
non-profit entity and the Company pursuant to which the Company shall be
compensated for providing engineering, accounting, legal and other assistance
in connection with the operation of the station licensed to such non-profit
entity (which agreement shall contain customary terms and conditions for
technical and professional services agreements in the radio broadcasting
industry generally).
 
  "Permitted Subsidiary Indebtedness" means:
 
    (i) Indebtedness of any Guarantor under Capital Lease Obligations
  incurred in the ordinary course of business; and
 
    (ii) Indebtedness of any Guarantor (a) issued to finance or refinance the
  purchase or construction of any assets of such Guarantor or (b) secured by
  a Lien on any assets of such Guarantor where the lender's sole recourse is
  to the assets so encumbered, in either case (x) to the extent the purchase
  or construction prices for such assets are or should be included in
  "property and equipment" in accordance with GAAP and (y) if the purchase or
  construction of such assets is not part of any acquisition of a Person or
  business unit.
 
  "Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
 
  "Preferred Equity Interest," as applied to the Equity Interest of any
Person, means an Equity Interest of any class or classes (however designated)
which is preferred as to the payment of dividends or distributions, or as to
the distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over Equity Interests of any other class of such
Person.
 
  "Public Equity Offering" means, with respect to any Person, an underwritten
public offering by such Person of some or all of its Equity Interests (other
than Disqualified Equity Interests), the net proceeds of which (after
deducting any underwriting discounts and commissions) exceed $10.0 million.
 
  "Qualified Equity Interests" of any Person means any and all Equity
Interests of such Person other than Disqualified Equity Interests.
 
  "Restricted Subsidiary" means a Subsidiary of the Company other than an
Unrestricted Subsidiary.
 
  "Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which the Company or a Restricted Subsidiary sells or
transfers any property or asset in connection with the leasing, or the resale
against installment payments, of such property or asset to the seller or
transferor.
 
  "Securities Act" means the Securities Act of 1933, as amended.
 
                                      87
<PAGE>
 
  "Stated Maturity," when used with respect to any Indebtedness or any
installment of interest thereon, means the date specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest is due and payable.
 
  "Subordinated Indebtedness" means Indebtedness of the Company or any
Guarantor subordinated in right of payment to the Notes or any Guarantee, as
the case may be.
 
  "Subsidiary" means any Person a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or
more other Subsidiaries.
 
  "Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof and
guaranteed fully as to principal, premium, if any, and interest by the United
States of America, (ii) any certificate of deposit, maturing not more than one
year after the date of acquisition, issued by, or time deposit of, a
commercial banking institution (including the Trustee) that is a member of the
Federal Reserve System and that has combined capital and surplus and undivided
profits of not less than $500.0 million, whose debt has a rating, at the time
as of which any investment therein is made, of "P-1" (or higher) according to
Moody's Investors Service, Inc. ("Moody's") or any successor rating agency or
"A-1" (or higher) according to Standard & Poor's Corporation ("S&P") or any
successor rating agency, (iii) commercial paper, maturing not more than one
year after the date of acquisition, issued by a corporation (other than an
Affiliate or Subsidiary of the Company, but including the Trustee) organized
and existing under the laws of the United States of America with a rating, at
the time as of which any investment therein is made, of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P and (iv) any money
market deposit accounts issued or offered by a domestic commercial bank having
capital and surplus in excess of $500.0 million.
 
  "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
 
  "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all
of the following conditions apply: (a) such Subsidiary is not liable, directly
or indirectly, with respect to any Indebtedness other than Unrestricted
Subsidiary Indebtedness and (b) any Investment in such Subsidiary made as a
result of designating such Subsidiary an Unrestricted Subsidiary shall not
violate the provisions of the "--Certain Covenants--Limitation on Unrestricted
Subsidiaries" covenant. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustee by filing with the Trustee a board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complies with the foregoing conditions. The
Board of Directors of the Company may designate any Unrestricted Subsidiary as
a Restricted Subsidiary; provided that immediately after giving effect to such
designation, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to the restrictions under the "--Certain
Covenants--Limitation on Indebtedness" covenant.
 
  "Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Restricted Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Restricted Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), except Guaranteed Debt of the Company or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of such
Guaranteed Debt resulted in a Restricted Payment at the time of incurrence)
the Company shall be deemed to have made a Restricted Payment equal to the
principal amount of any such Indebtedness to the extent guaranteed at the time
such Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon
the occurrence of a default with respect thereto, does not result in, or
permit any holder of any Indebtedness of the Company or any Restricted
 
                                      88
<PAGE>
 
Subsidiary to declare, a default on such Indebtedness of the Company or any
Restricted Subsidiary or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity.
 
  "Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency).
 
  "Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the
Equity Interests of which are owned by the Company or another Wholly Owned
Restricted Subsidiary. The Wholly Owned Restricted Subsidiaries of the Company
currently consist of all the Company's Subsidiaries.
 
 
                   CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
 
  The following discussion of the material United States federal income tax
consequences of the Exchange Offer is for general information only. It is
based on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), existing and proposed Treasury regulations, and judicial and
administrative determinations, all of which are subject to change at any time,
possibly on a retroactive basis. The following relates only to Old Notes, and
Notes received therefor, that are held as "capital assets" within the meaning
of Section 1221 of the Code by persons who are citizens or residents of the
United States. It does not discuss state, local, or foreign tax consequences,
nor does it discuss tax consequences to categories of holders that are subject
to special rules, such as foreign persons, tax-exempt organizations, insurance
companies, banks, and dealers in stocks and securities. Tax consequences may
vary depending on the particular status of an investor. No rulings will be
sought from the Internal Revenue Service ("IRS") with respect to the federal
income tax consequences of the Exchange Offer.
 
  THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A HOLDER'S DECISION TO PARTICIPATE IN THE
EXCHANGE OFFER. EACH HOLDER SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING
THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS
PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO PARTICIPATE IN THE EXCHANGE
OFFER.
 
THE EXCHANGE OFFER
 
  The exchange of the Old Notes for the Notes pursuant to the Exchange Offer
will not constitute a material modification of the terms of the Old Notes or
the Notes and, thus, such exchange will not constitute an exchange for federal
income tax purposes. Accordingly, such exchange will have no federal income
tax consequences to the holders of the Old Notes or the Notes, regardless of
whether such holders participate in the Exchange Offer, and each holder will
continue to be required to include interest on the Notes or the Old Notes, if
not exchanged, in its gross income in accordance with its method of accounting
for federal income tax purposes. The Company intends, to the extent required,
to treat the Exchange Offer for federal income tax purposes in accordance with
the position described in this paragraph.
 
BACKUP WITHHOLDING
 
  Under the Code, a holder of a Note may be subject, under certain
circumstances, to "backup withholding" at a 31% rate with respect to payments
in respect of interest thereon or the gross proceeds from the disposition
thereof. This withholding generally applies only if the holder (i) fails to
furnish his or her social security or other taxpayer identification number
("TIN") within a reasonable time after request therefor, (ii) furnishes an
incorrect TIN, (iii) is notified by the IRS that he or she has failed to
report properly payments of interest and dividends and the IRS has notified
the Company that he or she is subject to backup withholding, or (iv) fails,
under certain circumstances, to provide a certified statement, signed under
penalty of perjury, that the TIN provided is his or
 
                                      89
<PAGE>
 
her correct number and that he or she is not subject to backup withholding.
Any amount withheld from a payment to a holder under the backup withholding
rules is allowable as a credit against such holder's federal income tax
liability, provide that the required information is furnished to the IRS.
Corporations and certain other entities described in the Code and Treasury
regulations are exempt from such withholding if their exempt status is
properly established.
 
                             PLAN OF DISTRIBUTION
 
  Each broker-dealer that receives Notes for its own account pursuant to the
Exchange Offer in exchange for Old Notes that were acquired by such broker-
dealer for its own account as a result of market-making activities or other
trading activities (a "Participating Broker") must acknowledge that it will
deliver a prospectus in connection with any resale of such Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker in connection with any resale of Notes. For a
period of 180 days after the Expiration Date, the Company will make a
reasonable number of additional copies of this Prospectus, as amended or
supplemented, available to any Participating Broker requesting the same
through the Exchange Agent for use in connection with any such resale. In
addition, until      , 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the Notes may be required to deliver a
prospectus.
 
  The Company will not receive any proceeds from any sale of Notes by broker-
dealers. Notes received by any Participating Broker may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Notes or a combination of
such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such Notes. Any
Participating Broker that resells Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus as required, a Participating Broker
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
 
  The Company has agreed to pay all expenses incident to the Exchange Offer
(which shall not include the expenses of any holder in connection with resales
of the Notes). The Company has agreed to indemnify the holders of the Notes,
including any Participating Broker, against certain liabilities, including
liabilities under the Securities Act.
 
                                 LEGAL MATTERS
 
  The validity of the Notes and Guarantees offered hereby will be passed upon
for the Company by Gibson, Dunn & Crutcher LLP, Orange County, California.
 
                                    EXPERTS
 
  The consolidated financial statements of Salem Communications Corporation at
December 31, 1995 and 1996, and for each of the three years in the period
ended December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
 
                                      90
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors............................................  F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September
 30, 1997 (unaudited).....................................................  F-3
Consolidated Statements of Operations for the years ended December 31,
 1994, 1995 and 1996 and the nine months ended September 30, 1996 and 1997
 (unaudited)..............................................................  F-4
Consolidated Statements of Shareholders' Equity for the years ended
 December 31, 1994, 1995 and 1996 and the nine months ended September 30,
 1996 and 1997 (unaudited)................................................  F-5
Consolidated Statements of Cash Flows for the years ended December 31,
 1994, 1995 and 1996 and the nine months ended September 30, 1996 and 1997
 (unaudited)..............................................................  F-6
Notes to Consolidated Financial Statements................................  F-7
</TABLE>
 
                                      F-1
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders
Salem Communications Corporation
 
  We have audited the accompanying consolidated balance sheets of Salem
Communications Corporation as of December 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Salem
Communications Corporation at December 31, 1995 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
 
                                          Ernst & Young LLP
May 9, 1997, except for basis of presentation and reorganization under Note 1
as to which the date is August 13, 1997
 
Woodland Hills, California
 
                                      F-2
<PAGE>
 
                        SALEM COMMUNICATIONS CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31
                                                 ----------------- SEPTEMBER 30
                                                   1995     1996       1997
                                                 -------- -------- ------------
                                                                   (UNAUDITED)
                     ASSETS
                     ------
<S>                                              <C>      <C>      <C>
Current assets:
  Cash and cash equivalents..................... $  1,007 $  1,962   $  2,103
  Accounts receivable (less allowance for
   doubtful accounts of $704 in 1995, $1,005 in
   1996 and $1,249 in 1997).....................    9,215   10,542     10,991
  Other receivables.............................      151      194        110
  Prepaid expenses..............................      197      308        964
  Prepaid income taxes..........................       24       70         39
  Tower construction project held for sale......      --       --       2,943
  Deferred income taxes.........................    1,071      537      3,170
                                                 -------- --------   --------
Total current assets............................   11,665   13,613     20,320
Property, plant and equipment, net..............   24,595   30,307     36,172
Intangible assets:
  Broadcast licenses............................   69,169  117,081    138,460
  Noncompetition agreements.....................   14,887   14,893     14,893
  Customer lists and contracts..................    3,144    4,094      4,094
  Favorable and assigned leases.................    1,798    1,800      1,800
  Goodwill......................................    5,152    5,795      6,002
  Organizational costs and other intangible
   assets.......................................      974      972        972
                                                 -------- --------   --------
                                                   95,124  144,635    166,221
  Less accumulated amortization.................   33,201   37,854     44,388
                                                 -------- --------   --------
  Intangible assets, net........................   61,923  106,781    121,833
Notes receivable from shareholders and accrued
 interest.......................................    4,642       28        --
Bond issue costs................................      --       --       4,638
Other assets....................................    1,992    8,456      1,170
                                                 -------- --------   --------
Total assets.................................... $104,817 $159,185   $184,133
                                                 ======== ========   ========
<CAPTION>
      LIABILITIES AND SHAREHOLDERS' EQUITY
      ------------------------------------
<S>                                              <C>      <C>      <C>
Current liabilities:
  Accounts payable.............................. $  2,786 $  1,935   $    884
  Accrued expenses..............................      295      485        592
  Accrued compensation and related..............    1,224    1,589      1,615
  Accrued interest..............................      252    1,157         11
  Income taxes..................................       20      189        --
  Current portion of long-term debt.............    6,000      --         --
                                                 -------- --------   --------
Total current liabilities.......................   10,577    5,355      3,102
Long-term debt, less current portion ...........   75,020  121,790    160,100
Deferred income taxes...........................    5,829   11,427     11,490
Other liabilities...............................      109       79         55
Shareholders' equity:
  Common stock, no par value; authorized 100,000
   shares; issued and outstanding 81,672 shares.    5,832    5,832      5,832
  Retained earnings.............................    7,450   14,702      3,554
                                                 -------- --------   --------
Total shareholders' equity......................   13,282   20,534      9,386
                                                 -------- --------   --------
Total liabilities and shareholders' equity...... $104,817 $159,185   $184,133
                                                 ======== ========   ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
 
                        SALEM COMMUNICATIONS CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 NINE MONTHS
                                                               ENDED SEPTEMBER
                                    YEAR ENDED DECEMBER 31           30
                                    -------------------------  ----------------
                                     1994     1995     1996     1996     1997
                                    -------  -------  -------  -------  -------
                                                                 (UNAUDITED)
<S>                                 <C>      <C>      <C>      <C>      <C>
Gross broadcasting revenue........  $42,591  $53,303  $65,141  $46,974  $54,471
Less agency commissions...........    4,016    5,135    6,131    4,509    5,022
                                    -------  -------  -------  -------  -------
Net broadcasting revenue..........   38,575   48,168   59,010   42,465   49,449
Operating expenses:
  Station operating expenses......   22,179   27,527   33,463   23,907   28,793
  Corporate expenses (including
   $800 in shareholder salaries in
   1994, 1995 and 1996)...........    3,292    3,799    4,663    3,413    4,998
  Tax reimbursements to S
   corporation shareholders.......      977    2,057    2,038    1,529    1,780
  Depreciation and amortization...    7,633    7,884    8,394    6,148    9,382
                                    -------  -------  -------  -------  -------
  Operating expenses..............   34,081   41,267   48,558   34,997   44,953
                                    -------  -------  -------  -------  -------
Net operating income..............    4,494    6,901   10,452    7,468    4,496
Other income (expense):
  Interest income.................      230      319      523      312      156
  Gain (loss) on disposal of
   assets.........................     (482)      (7)  16,064   12,659     (190)
  Interest expense................   (3,668)  (6,646)  (7,361)  (5,510)  (8,548)
  Other expense...................     (135)    (255)    (270)    (209)    (288)
                                    -------  -------  -------  -------  -------
Income (loss) before income taxes
 and extraordinary item...........      439      312   19,408   14,720   (4,374)
Provision (benefit) for income
 taxes............................     (247)    (204)   6,655    5,046   (1,790)
                                    -------  -------  -------  -------  -------
Income (loss) before extraordinary
 item.............................      686      516   12,753    9,674   (2,584)
Extraordinary loss on early
 extinguishment of debt (net of
 income tax benefit of $263 in
 1995 and $755 in 1997)...........      --      (394)     --       --    (1,090)
                                    -------  -------  -------  -------  -------
Net income (loss).................  $   686  $   122  $12,753  $ 9,674  $(3,674)
                                    =======  =======  =======  =======  =======
Pro forma information (unaudited):
Income (loss) before income taxes
 and extraordinary item as
 reported above...................  $   439  $   312  $19,408  $14,720  $(4,374)
Add back tax reimbursements to S
 Corporation shareholders.........      977    2,057    2,038    1,529    1,780
                                    -------  -------  -------  -------  -------
Pro forma income (loss) before
 income taxes and extraordinary
 item ............................    1,416    2,369   21,446   16,249   (2,594)
Pro forma provision (benefit) for
 income taxes.....................      568      951    8,608    6,522   (1,033)
                                    -------  -------  -------  -------  -------
Pro forma income (loss) before
 extraordinary item...............      848    1,418   12,838    9,727   (1,561)
Extraordinary loss................      --      (394)     --       --    (1,090)
                                    -------  -------  -------  -------  -------
Pro forma net income (loss).......  $   848  $ 1,024  $12,838  $ 9,727  $(2,651)
                                    =======  =======  =======  =======  =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-4
<PAGE>
 
                        SALEM COMMUNICATIONS CORPORATION
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                       COMMON RETAINED
                                                       STOCK  EARNINGS   TOTAL
                                                       ------ --------  -------
   <S>                                                 <C>    <C>       <C>
   Shareholders' equity, January 1, 1994.............. $5,832 $ 6,642   $12,474
   Net income.........................................    --      686       686
                                                       ------ -------   -------
   Shareholders' equity, December 31, 1994............  5,832   7,328    13,160
   Net income.........................................    --      122       122
                                                       ------ -------   -------
   Shareholders' equity, December 31, 1995............  5,832   7,450    13,282
   Net income.........................................    --   12,753    12,753
   Shareholder distributions..........................    --   (5,501)   (5,501)
                                                       ------ -------   -------
   Shareholders' equity, December 31, 1996............  5,832  14,702    20,534
   Net loss (unaudited)...............................    --   (3,674)   (3,674)
   Shareholder distributions (unaudited)..............    --   (7,474)   (7,474)
                                                       ------ -------   -------
   Shareholders' equity, September 30, 1997
    (unaudited)....................................... $5,832 $ 3,554   $ 9,386
                                                       ====== =======   =======
</TABLE>
 
 
                            See accompanying notes.
 
 
                                      F-5
<PAGE>
 
                        SALEM COMMUNICATIONS CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                            NINE MONTHS ENDED
                                YEAR ENDED DECEMBER 31         SEPTEMBER 30
                              ----------------------------  -------------------
                                1994      1995      1996      1996      1997
                              --------  --------  --------  --------  ---------
                                                               (UNAUDITED)
<S>                           <C>       <C>       <C>       <C>       <C>
OPERATING ACTIVITIES
Net income (loss)...........  $    686  $    122  $ 12,753  $  9,674  $  (3,674)
Adjustments to reconcile net
 income (loss) to net cash
 provided by operating
 activities:
 Depreciation and
  amortization..............     7,633     7,884     8,394     6,148      9,382
 Amortization of bank loan
  fees......................        85       104       109        82        165
 Deferred income taxes......      (214)     (341)    6,133     4,335     (2,570)
 (Gain) loss on sale of
  assets....................       482         7   (16,064)  (12,659)       190
 Accrued interest from
  shareholders..............      (174)     (213)      --       (172)       --
 Income recognition on
  noncompetition
  agreements................       (80)      --        --        --         --
 Loss on early
  extinguishment of debt....       --        657       --        --       1,845
 Changes in operating
  assets and liabilities:
   Accounts receivable......      (931)   (2,539)   (1,370)      511       (365)
   Prepaid expenses and
    other current assets....       (81)        9      (111)     (275)      (798)
   Accounts payable and
    accrued expenses........       401     1,950       558     1,639     (2,065)
   Other liabilities........        (5)      (30)      (30)      (22)       (25)
   Income taxes.............      (320)       71       123       --        (157)
                              --------  --------  --------  --------  ---------
Net cash provided by
 operating activities.......     7,482     7,681    10,495     9,261      1,928
INVESTING ACTIVITIES
 Capital expenditures.......    (2,441)   (3,040)   (6,982)   (4,119)    (5,502)
 Purchases of radio
  stations..................   (14,935)  (24,454)  (21,160)   (8,329)   (18,806)
 Deposits on radio station
  acquisitions..............    (1,050)     (125)   (6,314)  (16,288)       --
 Proceeds from disposal of
  property, plant and
  equipment and intangible
  assets....................        47        38    15,867    15,831        133
 Expenditures for tower
  construction project held
  for sale..................       --        --        --        --      (2,943)
 Other assets...............      (427)     (100)     (334)     (345)       526
                              --------  --------  --------  --------  ---------
Net cash used in investing
 activities.................   (18,806)  (27,681)  (18,923)  (13,250)   (26,592)
FINANCING ACTIVITIES
 Proceeds from issuance of
  long-term debt and notes
  payable to shareholders...    17,300    42,840    23,800    17,500    222,710
 Payments of long-term
  debt......................    (5,300)  (22,220)  (15,430)  (10,630)  (182,500)
 Payments of bank loan
  fees......................      (175)     (856)      --        --      (1,003)
 Payments of costs related
  to debt refinancing.......       --       (228)      --        --        (418)
 Payments of bond issue
  costs.....................       --        --        --        --      (4,638)
 Repayments (additions) of
  shareholder notes and
  repayment of accrued
  interest receivable--net..         2     (309)     4,614   (2,838)     (1,872)
 Proceeds from shareholder
  notes payable.............       --        --      1,900       --         --
 Distributions to
  shareholders..............       --        --     (5,501)     (700)    (7,474)
                              --------  --------  --------  --------  ---------
 Net cash provided by
  financing activities......    11,827    19,227     9,383     3,332     24,805
                              --------  --------  --------  --------  ---------
 Net (decrease) increase in
  cash and cash
  equivalents...............       503      (773)      955      (657)       141
 Cash and cash equivalents
  at beginning of year......     1,277     1,780     1,007     1,007      1,962
                              --------  --------  --------  --------  ---------
Cash and cash equivalents at
 end of year................  $  1,780  $  1,007  $  1,962  $    350  $   2,103
                              ========  ========  ========  ========  =========
Supplemental disclosures of
 cash flow information:
 Cash paid during the year
  for:
   Interest.................  $  3,425  $  6,816  $  6,158  $  4,475  $   9,288
   Income taxes.............       287       288       400       227        221
Noncash transactions:
 Acquisition of radio
  station (KWRD-FM)
   Fair market value of
    assets acquired.........  $    --   $    --   $ 40,100  $    --   $     --
   Debt to seller...........       --        --    (30,500)      --         --
   Fair market value of
    assets exchanged........       --        --     (8,000)      --         --
                              --------  --------  --------  --------  ---------
Cash paid (reflected in
 Deposits on radio station
 acquisitions)..............  $    --   $    --   $  1,600  $    --   $     --
                              ========  ========  ========  ========  =========
</TABLE>
 
                            See accompanying notes.
 
                                      F-6
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION AND REORGANIZATION
 
  The accompanying consolidated financial statements of Salem Communications
Corporation (Salem or the Company) include the Company and its wholly-owned
subsidiaries. Prior to the reorganization described below (the Reorganization)
the financial statements had been presented on a combined basis and included
Salem, New Inspiration Broadcasting Company, Inc. (New Inspiration), Golden
Gate Broadcasting Company, Inc. (Golden Gate) and Beltway Media Partners
(Beltway), all of these entities were under common control. New Inspiration
and Golden Gate were S corporations for income tax purposes. Salem, New
Inspiration and Golden Gate are the partners of Beltway. The combined
financial statements were entitled Salem Broadcasting Entities. Pursuant to
the Reorganization the financial statements have been renamed and the
disclosure of common stock information has been retroactively restated for all
periods presented as if the Reorganization had been completed as of the
beginning of the earliest period presented. All significant intercompany
balances and transactions have been eliminated.
 
  The Company is a holding company with substantially no assets, operations or
cash flows other than its investment in subsidiaries. All of the Company's
subsidiaries are Guarantors of the 9 1/2% Senior Subordinated Notes due 2007
(the Notes) and the exchange notes (the Exchange Notes) discussed in Note 4.
The Guarantors (i) are wholly owned subsidiaries of the Company, (ii) comprise
all the Company's direct and indirect subsidiaries and (iii) have and will
fully and unconditionally guarantee, on a joint and several basis, the Notes
and the Exchange Notes, respectively. The Company has not presented separate
financial statements and other disclosures concerning the Guarantors because
management has determined that such information is not material to investors.
 
  In August 1997, the Company, New Inspiration and Golden Gate effected the
Reorganization pursuant to which New Inspiration and Golden Gate became
wholly-owned subsidiaries of the Company, with Beltway remaining a
partnership. The Company accounted for the Reorganization as a combination of
entities under common control, which is a method similar to a pooling of
interests.
 
  The S corporation status of New Inspiration and Golden Gate was terminated
in the Reorganization. Prior to the Reorganization, New Inspiration and Golden
Gate distributed cash and promissory notes to their respective shareholders in
the aggregate amount of $8.5 million. Of such amount, $1.8 million, equal to
the estimated federal and state income tax liability of the S corporation
shareholders on the earnings of New Inspiration and Golden Gate, was paid by
New Inspiration and Golden Gate in cash. The balance, $6.7 million
representing the balance of the net income of New Inspiration and Golden Gate
that had previously been taxed, but not distributed to the shareholders, was
paid in the form of promissory notes. In September 1997, the Company financed
the repayment of these promissory notes by an additional borrowing.
 
DESCRIPTION OF BUSINESS
 
  Salem operated 39 and 31 radio stations across the United States at December
31, 1996 and 1995, respectively. The Company also owns and operates Salem
Radio Network (SRN), SRN News Network (SNN), Salem Music Network (SMN) and
Salem Radio Representatives (SRR). SRN, SNN and SMN are radio networks which
produce and distribute talk, news and music programming to Salem's radio
stations and other affiliated independent radio stations. SRR sells commercial
air time to national advertisers for Salem's radio stations and networks, and
for affiliated independent radio stations.
 
  The significant accounting policies of Salem are summarized below and
conform with generally accepted accounting principles and reflect practices
appropriate to the radio broadcasting industry.
 
                                      F-7
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
 
INTERIM FINANCIAL DATA
 
  The unaudited financial statements of the Company for the nine months ended
September 30, 1996 and 1997 have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
state fairly the financial information set forth therein, in accordance with
generally accepted accounting principles.
 
  The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of the results to be expected for the full fiscal
year.
 
REVENUE RECOGNITION
 
  Revenue from radio programs and commercial advertising is recognized when
broadcast. Salem's customers principally include not-for-profit charitable
organizations and commercial advertisers.
 
  Advertising by the radio stations exchanged for goods and services is
recorded as the advertising is broadcast and is valued at the fair market
value of goods or services received or to be received. The value of the goods
and services received in such barter transactions is charged to expense when
used. Barter revenue for the years ended December 31, 1994, 1995 and 1996, was
approximately $1,431,000, $1,467,000 and $1,498,000, respectively. Barter
expenses were approximately the same.
 
CASH EQUIVALENTS
 
  Salem considers all highly liquid debt instruments with a maturity of three
months or less when purchased to be cash equivalents. The recorded amount for
cash and cash equivalents approximates the fair market value.
 
PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over
estimated useful lives as follows:
 
<TABLE>
         <S>                                            <C>
         Buildings.....................................   40 years
         Office furnishings and equipment.............. 5-10 years
         Antennae, towers and transmitting equipment...   20 years
         Studio and production equipment...............   10 years
         Record and tape libraries.....................   20 years
         Automobiles...................................    5 years
         Leasehold improvements........................   15 years
</TABLE>
 
  The carrying value of property, plant and equipment is evaluated
periodically in relation to the operating performance and anticipated future
cash flows of the underlying radio stations and businesses for indicators of
impairment. When indicators of impairment are present and the undiscounted
cash flows estimated to be generated from these assets are less than the
carrying value of these assets an adjustment to reduce the carrying value (if
necessary) to the fair market value of the assets is recorded. No adjustments
to the carrying amounts of property, plant and equipment have been made during
the years ended December 31, 1994, 1995 and 1996.
 
                                      F-8
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
 
INTANGIBLE ASSETS
 
   Intangible assets acquired in conjunction with the acquisition of various
radio stations are being amortized over the following estimated useful lives
using the straight-line method:
 
<TABLE>
         <S>                                     <C>
         Broadcast licenses.....................       10-25 years
         Noncompetition agreements..............         3-5 years
         Customer lists and contracts...........          10 years
         Favorable and assigned leases.......... Life of the lease
         Goodwill...............................       15-40 years
         Organizational costs and other.........        5-10 years
</TABLE>
 
  The carrying value of intangibles is evaluated periodically in relation to
the operating performance and anticipated future cash flows of the underlying
radio stations and businesses for indicators of impairment. When indicators of
impairment are present and the undiscounted cash flows estimated to be
generated from these assets are less than the carrying amounts of these
assets, an adjustment to reduce the carrying value (if necessary) to the fair
market value of these assets is recorded. No adjustments to the carrying
amounts of intangible assets have been made during the year ended December 31,
1994, 1995 and 1996.
 
BOND ISSUE COSTS
 
  Bond issue costs are being amortized over the term of the Notes as an
adjustment to interest expense.
 
TAX REIMBURSEMENTS TO S CORPORATION SHAREHOLDERS
 
  "Tax reimbursements to S Corporation shareholders" represents additional
salary payments made in the amount necessary to satisfy individual federal and
state income tax liabilities of the S Corporation shareholders on the earnings
of New Inspiration and Golden Gate.
 
INCOME TAXES
 
  The Company accounts for income taxes in accordance with the Financial
Accounting Standards Board Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes." SFAS No. 109 prescribes the liability
method of providing for deferred income taxes. Deferred income taxes arise
from temporary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements.
 
  Federal and state income taxes (except for 1.5% state franchise tax) have
not been provided through August 12, 1997 for New Inspiration and Golden Gate
because they were S Corporations and income tax attributes of S Corporations
are passed through to their shareholders.
 
  Income taxes for the nine months ended September 30, 1996 and 1997 were
provided for using the estimated annual effective tax rate. The income tax
provision for the nine months ended September 30, 1997 includes a charge of
$612,000 for the reinstatement of deferred taxes upon the reorganization and
conversion of New Inspiration and Golden Gate from S Corporation to C
Corporation status effective August 13, 1997.
 
 
                                     F-9
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
 
CONCENTRATIONS OF BUSINESS AND CREDIT RISKS
 
  The majority of the Company's operations are conducted in several locations
across the country. The Company's credit risk is spread across a large number
of customers, none of which accounted for a significant volume of revenue or
outstanding receivables. The Company does not normally require collateral on
credit sales; however, credit histories are reviewed before extending
substantial credit to any customer. The Company
establishes an allowance for doubtful accounts based on customers' payment
history and perceived credit risks. Bad debts have been within management's
expectations.
 
INTEREST RATE SWAP AGREEMENTS
 
  The Company enters into interest-rate swap agreements to modify the interest
characteristics of its outstanding debt. Each interest-rate swap agreement is
designated with all or a portion of the principal balance and term of a
specific debt obligation. These agreements involve the exchange of amounts
based on a fixed interest rate for amounts based on variable interest rates
over the life of the agreement without an exchange of the notional amount upon
which the payments are based. The differential to be paid or received as
interest rates change is accrued and recognized as an adjustment of interest
expense related to the debt. The related amount payable to or receivable from
counterparties is included in other liabilities or assets. The fair value of
the swap agreements and changes in the fair value as a result of changes in
market interest rates are not recognized in the financial statements.
 
  Gains and losses on terminations of interest-rate swap agreements are
deferred as an adjustment to the carrying amount of the outstanding debt and
amortized as an adjustment to interest expense related to the debt over the
remaining term of the original contract life of the terminated swap agreement.
In the event of the early extinguishment of a designated debt obligation, any
realized or unrealized gain or loss from the swap would be recognized in
income coincident with the extinguishment gain or loss.
 
INTEREST RATE CAP AGREEMENTS
 
  The Company purchases interest-rate cap agreements that are designed to
limit its exposure to increasing interest rates. An interest rate cap entitles
the Company to receive a payment from the counter-party equal to the excess,
if any, of the hypothetical interest expense (strike price) on a specified
notional amount at a current market interest rate over an amount specified in
the agreement. The only amount the Company is obligated to pay to the
counterparty is an initial premium. The strike price of these agreements
exceeds the current market levels at the time they are entered into. The cost
of these agreements is included in other assets and amortized to interest
expense ratably during the life of the agreement.
 
USE OF ESTIMATES
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
RECLASSIFICATIONS
 
  Certain reclassifications were made to the prior year financial statements
to conform to the current year presentation.
 
                                     F-10
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
 
2. ACQUISITIONS AND DISPOSITIONS OF ASSETS
 
  Pro forma information to present operating results as if the acquisitions
discussed below had occurred at the beginning of the year acquired is not
presented because the Company, generally, changes the programming format of
the radio stations such that the source and nature of revenue and operating
expenses are significantly different than they were prior to the acquisition
and, accordingly, historical and pro forma financial information is not
considered meaningful by management. Pro forma and historical financial
information of radio stations acquired where the format was not changed is not
significant to the consolidated financial position or operating results of the
Company.
 
  During the nine months ended September 30, 1997, the Company purchased the
assets (principally intangibles) of the following radio stations:
 
<TABLE>
<CAPTION>
              ACQUISITION                             MARKET         PURCHASE
                 DATE                 STATION         SERVED          PRICE
              -----------             -------         ------      --------------
                                                                  (IN THOUSANDS)
     <S>                           <C>           <C>              <C>
     January 21, 1997............. WHK-AM        Cleveland, OH       $ 6,220
     February 20, 1997............ WHK-FM        Canton, OH            5,903
     February 20, 1997............ WHLO-AM       Akron, OH             1,995
     February 28, 1997............ WEZE-AM       Boston, MA            7,030
     April 2, 1997................ KTKZ-AM       Sacramento, CA        1,485
     July 18, 1997................ WITH-AM       Baltimore, MD         1,114
     July 18, 1997................ WTSJ-AM       Cincinnati, OH        1,114
                                                                     -------
                                                                     $24,861
                                                                     =======
</TABLE>
 
  The purchase price has been allocated to the assets acquired as follows:
 
<TABLE>
<CAPTION>
     ASSET                                                            AMOUNT
     -----                                                            ------
                                                                  (IN THOUSANDS)
     <S>                                                          <C>
     Property and equipment......................................    $ 3,534
     Broadcast licenses and other intangibles....................     21,327
                                                                     -------
                                                                     $24,861
                                                                     =======
</TABLE>
 
                                     F-11
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
2. ACQUISITIONS AND DISPOSITIONS OF ASSETS, CONTINUED
 
  During the year ended December 31, 1996, the Company purchased the assets
(principally intangibles) (and in the case of KBIQ-FM, all of the outstanding
shares of common stock) of the following radio stations:
 
<TABLE>
<CAPTION>
           ACQUISITION                                         MARKET           PURCHASE
               DATE                    STATION                 SERVED            PRICE
           -----------                 -------                 ------        --------------
                                                                             (IN THOUSANDS)
     <S>                      <C>                       <C>                  <C>
     February 1, 1996........ KTSL-FM                   Seattle, WA             $   900
     February 1, 1996........ KLTE-FM                   Kirksville, MO              550
     February 1, 1996........ KPRZ-FM                   Colorado Springs, CO      1,400
     March 1, 1996........... KGFT-FM                   Colorado Springs, CO      3,000
     March 15, 1996.......... KNUS-AM                   Denver, CO                1,100
     October 5, 1996......... KPXQ-AM                   Phoenix, AZ               6,500
     October 25, 1996........ KBIQ-FM                   Colorado Springs, CO      2,825
     December 6, 1996........ KKMS-AM                   Minneapolis, MN           1,894
     December 30, 1996....... KWRD-FM                   Dallas, TX               40,100
     April 3, 1996........... Standard News Network     Washington, D.C.            --
     August 1, 1996.......... The Word in Music         Colorado Springs, CO        120
     August 23, 1996......... Morningstar Radio Network Nashville, TN             1,232
                                                                                -------
                                                                                $59,621
                                                                                =======
</TABLE>
 
  The purchase price has been allocated to the assets acquired as follows:
 
<TABLE>
<CAPTION>
     ASSET                                                            AMOUNT
     -----                                                            ------
                                                                  (IN THOUSANDS)
     <S>                                                          <C>
     Property and equipment......................................    $ 3,767
     Broadcast licenses..........................................     53,116
     Goodwill and other intangibles..............................      2,738
                                                                     -------
                                                                     $59,621
                                                                     =======
</TABLE>
 
  In 1996, the Company sold the assets (principally intangibles) of radio
stations WTJY-FM (Johnstown, Ohio), for $1.5 million, KLTE-FM (Kirksville,
Missouri), for $550,000 and KDBX-FM (Banks, Oregon), for $14 million. In
addition, KDFX-AM (Dallas, Texas), was exchanged as part of the purchase price
of KWRD-FM. The Company received approximately $8 million of value of KDFX-AM
towards the total purchase price of KWRD-FM of $40.1 million, resulting in a
gain recognized of approximately $4.0 million.
 
  In 1995, the Company purchased the assets (principally intangibles) (and in
the case of KDBX-FM, all of the outstanding shares of common stock) of the
following radio stations:
 
<TABLE>
<CAPTION>
                ACQUISITION                           MARKET         PURCHASE
                   DATE                 STATION       SERVED          PRICE
                -----------             -------       ------      --------------
                                                                  (IN THOUSANDS)
     <S>                               <C>        <C>             <C>
     August 1, 1995................... KDBX-FM    Portland, OR       $ 1,850
     August 9, 1995................... KDFX-AM    Dallas, TX           4,500
     April 14, 1995................... KFIA-AM    Sacramento, CA       3,850
     March 4, 1995.................... KKHT-FM    Houston, TX         11,850
     March 4, 1995.................... KENR-AM    Houston, TX          2,500
                                                                     -------
                                                                     $24,550
                                                                     =======
</TABLE>
 
                                     F-12
<PAGE>
 
                        SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
                                   UNAUDITED)
 
2. ACQUISITIONS AND DISPOSITIONS OF ASSETS, CONTINUED
 
  The purchase price has been allocated to the assets acquired as follows:
 
<TABLE>
<CAPTION>
     ASSET                                                            AMOUNT
     -----                                                            ------
                                                                  (IN THOUSANDS)
     <S>                                                          <C>
     Property and equipment......................................    $ 5,125
     Broadcast licenses..........................................     17,572
     Goodwill and other intangibles..............................      1,853
                                                                     -------
                                                                     $24,550
                                                                     =======
</TABLE>
 
  In 1994, the Company purchased the assets (principally intangibles) of the
following radio stations:
 
<TABLE>
<CAPTION>
               ACQUISITION                            MARKET         PURCHASE
                   DATE                STATION        SERVED          PRICE
               -----------             -------        ------      --------------
                                                                  (IN THOUSANDS)
     <S>                              <C>        <C>              <C>
     January 3, 1994................. KRKS-AM    Denver, CO          $   400
     August 5, 1994.................. WWDJ-AM    New York, NY          7,985
     August 5, 1994.................. WZZD-AM    Philadelphia, PA      4,600
     August 5, 1994.................. KSLR-AM    San Antonio, TX       1,000
     April 24, 1994.................. WTJY-FM    Columbus, OH            650
     August 23, 1994................. KLFE-AM    Seattle, WA             300
                                                                     -------
                                                                     $14,935
                                                                     =======
</TABLE>
 
3. PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment consisted of the following at December 31:
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31   SEPTEMBER 30
                                                    ---------------     1997
                                                     1995    1996   (UNAUDITED)
                                                    ------- ------- ------------
                                                           (IN THOUSANDS)
   <S>                                              <C>     <C>     <C>
   Land............................................ $   352 $   356   $   391
   Buildings.......................................   1,744   2,084     1,783
   Office furnishings and equipment................   5,336   7,057     7,676
   Antennae, towers and transmitting equipment.....  20,068  23,210    25,582
   Studio and production equipment.................   9,127  11,545    12,694
   Record and tape libraries.......................     442     442       442
   Automobiles.....................................      82      81        62
   Leasehold improvements..........................   1,892   2,997     3,141
   Construction-in-progress........................   1,679   1,633     6,202
                                                    ------- -------   -------
                                                     40,722  49,405    57,973
   Less accumulated depreciation...................  16,127  19,098    21,801
                                                    ------- -------   -------
                                                    $24,595 $30,307   $36,172
                                                    ======= =======   =======
</TABLE>
 
                                      F-13
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
 
4. LONG-TERM DEBT
 
  Long-term debt consisted of the following at:
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31    SEPTEMBER 30
                                                  ----------------     1997
                                                   1995     1996   (UNAUDITED)
                                                  ------- -------- ------------
                                                         (IN THOUSANDS)
   <S>                                            <C>     <C>      <C>
   Note payable to banks and revolving line of
    credit....................................... $81,020 $ 89,390   $ 10,100
   9 1/2% Senior Subordinated Notes due 2007.....     --       --     150,000
   Note payable to seller of KWRD-FM.............     --    30,500        --
   Unsecured notes payable to shareholder with
    interest at a bank's prime rate plus 1 1/4%..     --     1,900        --
                                                  ------- --------   --------
                                                   81,020  121,790    160,100
   Less current portion..........................   6,000      --         --
                                                  ------- --------   --------
                                                  $75,020 $121,790   $160,100
                                                  ======= ========   ========
</TABLE>
 
  Since the note payable to banks and revolving line of credit carry floating
interest rates, the carrying amount approximates their fair market value. The
Notes were issued in September 1997 at par; the carrying amount approximates
their fair market value.
 
CREDIT AGREEMENTS WITH BANKS
 
  In January 1997, Salem amended and restated its credit agreement with five
banks to provide for a $150 million revolving line of credit. Interest was
payable quarterly. Commencing June 30, 1999, the commitment under the credit
agreement reduced by $12.5 million semiannually through December 31, 2002, and
by $25 million semiannually through December 31, 2003, when the credit
agreement was to expire. The classification of the notes payable to banks and
revolving line of credit in the accompanying balance sheet at December 31,
1996 is based on the terms of this credit agreement. The interest rate on
amounts outstanding at December 31, 1996 under this credit agreement was
7.83%.
 
  In September 1997, Salem entered into a new credit agreement with the five
banks (the Credit Agreement) to provide for borrowing capacity of up to $75
million under a revolving line of credit. The maximum amount that the Company
may borrow under the Credit Agreement is limited by the Company's debt to cash
flow ratio, adjusted for recent radio station acquisitions as defined in the
Credit Agreement (the Adjusted Debt to Cash Flow Ratio). At September 30,
1997, the maximum Adjusted Debt to Cash Flow Ratio allowed under the Credit
Agreement was 7.00 to 1.00. The Company's ability to borrow for the purpose of
acquiring a radio station is further limited by the Credit Agreement in that
the Company may not borrow for an acquisition if the Adjusted Debt to Cash
Flow Ratio is greater than 6.00 to 1.00. At September 30, 1997, the Adjusted
Debt to Cash Flow Ratio was 6.07 to 1.00, resulting in total borrowing
availability of approximately $19.9 million, none of which can currently be
used for radio station acquisitions. The note evidencing the indebtedness
bears interest at a fluctuating base rate plus a spread that was determined by
Salem's Adjusted Debt to Cash Flow Ratio. At Salem's option, the base rate is
either a bank's prime rate or LIBOR. For purposes of determining the interest
rate the prime rate spread ranges from 0% to 1.75%, and the LIBOR spread
ranges from 1% to 3%. Interest is payable quarterly. Commencing March 31,
1999, the commitment under the Credit Agreement reduces by $2.5 million
quarterly through December 31, 2003, and by $6.25 million quarterly through
June 30, 2004. The Credit Agreement expires August 31, 2004. The
classification of the amounts due under the revolving line of credit in the
accompanying balance sheet at September 30, 1997 is based on the terms of the
Credit Agreement.
 
                                     F-14
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
4. LONG-TERM DEBT, CONTINUED
 
  The Credit Agreement with the banks (a) provides for restrictions on
additional borrowings and leases; (b) prohibits Salem, without prior approval
from the banks, from paying dividends, liquidating, merging, consolidating or
selling its assets or business, and (c) requires Salem to maintain certain
financial ratios and other covenants. Salem has pledged all of its assets as
collateral under the Credit Agreement. Additionally, all the Company's stock
holdings in its subsidiaries are pledged as collateral.
 
  In September 1997, in connection with the issuance of the Notes and the
Credit Agreement the Company repaid all amounts due under the revolving line
of credit with the banks. The Company wrote off certain deferred financing
costs and terminated all of its interest rate swap and cap agreements
associated with the line of credit (see Note 5). The write-off and termination
fees of $1,090,000, net of a $755,000 income tax benefit, was recorded as an
extraordinary item in the accompanying statement of operations for the nine
months ended September 30, 1997.
 
  In March 1995, Salem amended and restated its then existing credit agreement
with two banks. The number of banks which were parties to the credit agreement
was increased to five, and the credit facility was structured to provide for a
$50 million term loan and a $50 million revolving line of credit. In
connection with the refinancing the Company repaid all amounts due under the
then existing credit agreement with the two banks and senior subordinated
notes payable to insurance companies and wrote off certain deferred financing
costs as well as a make-whole premium to the insurance companies. The write-
off of $394,000, net of a $263,000 income tax benefit, was recorded as an
extraordinary item in the accompanying statement of operations for 1995.
 
SENIOR SUBORDINATED NOTES
 
  The Notes bear interest at 9 1/2% per annum, with interest payment dates on
April 1 and October 1, commencing April 1, 1998. Principal is due on the
maturity date, October 1, 2007. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after October 1, 2002, at the
redemption prices specified in the indenture. The Notes are fully and
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis by the Guarantors (the Company's subsidiaries). The Notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior indebtedness, including the Company's obligations
under the Credit Agreement. The indenture limits the incurrence of additional
indebtedness by the Company, the payment of dividends, the use of proceeds of
certain asset sales, and contains certain other restrictive covenants
affecting the Company. The Company has filed a registration statement under
the Securities Act of 1933, relating to an exchange offer for the Notes (the
Exchange Offer). If such registration statement has not become effective or
the Exchange Offer is not consummated within the time periods set forth in the
registration rights agreement, the interest rate on the Notes will be
increased. The exchange notes (the Exchange Notes) will be identical in all
material respects to the Notes except that the Exchange Notes will not contain
terms with respect to transfer restrictions or provide for penalty amounts for
future periods. The Exchange Notes are fully and unconditionally guaranteed,
jointly and severally, on a senior subordinated basis by the Guarantors. The
Exchange Notes would in general be freely transferable after the Exchange
Offer without further registration under the Securities Act of 1933.
 
OTHER DEBT
 
  The $30,500,000 note payable to the seller of KWRD-FM represents amounts
payable at December 31, 1996, under a purchase agreement. The amount was paid
in January 1997 with the proceeds from a borrowing under the revolving line of
credit with the banks; accordingly, the amount is reflected as long-term debt
in the accompanying balance sheet at December 31, 1996, consistent with the
terms of the January 1997 credit agreement.
 
                                     F-15
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
 
4. LONG-TERM DEBT, CONTINUED
 
  In December 1996, the Company borrowed $1.9 million from one of its
shareholders. The note was repaid, including interest at 9 1/4%, on January
10, 1997, with proceeds from a borrowing under the revolving line of credit
with the banks; accordingly, the amount is reflected as long-term debt in the
accompanying balance sheet at December 31, 1996, consistent with the terms of
the January 1997 credit agreement.
 
MATURITIES OF LONG-TERM DEBT
 
  Principal repayment requirements under all long-term debt agreements
outstanding at December 31, 1996 and September 30, 1997, for each of the next
five years and thereafter are as follows:
 
<TABLE>
<CAPTION>
                                            SEPTEMBER 30
                                DECEMBER 31     1997
                                   1996     (UNAUDITED)
                                ----------- ------------
                                     (IN THOUSANDS)
            <S>                 <C>         <C>
            1997...............  $    --      $    --
            1998...............       --           --
            1999...............       --           --
            2000...............    21,790          --
            2001...............    25,000          --
            Thereafter.........    75,000      160,100
                                 --------     --------
                                 $121,790     $160,100
                                 ========     ========
</TABLE>
 
The repayment requirements as of December 31, 1996 are per the revolving line
of credit agreement with the banks that the Company entered into in January
1997. The repayment requirements as of September 30, 1997 are per the Credit
Agreement and the Notes.
 
5. INTEREST RATE CAP AND SWAP AGREEMENTS
 
  Salem had entered into interest rate swap and cap agreements to reduce the
impact of changes in interest rates on its floating-rate long-term debt. At
December 31, 1996, Salem had two outstanding interest rate cap agreements with
commercial banks, having a notional principal amount of $35 million. The
agreements effectively changed Salem's interest rate exposure on $35 million
of its senior secured notes to a fixed rate of 11.75% (including the interest
rate spread of 2.25%). In addition, Salem had two interest rate swap
agreements with two other commercial banks, having an aggregate notional
principal amount of $10 million. These agreements effectively changed Salem's
interest rate exposure on $5 million of its senior secured notes to a fixed
rate of 11.36% (including the interest rate spread of 2.25%) and on $5 million
of its senior secured notes to a fixed rate of 9.035% (including the interest
rate spread of 2.25%). The interest rate cap agreements were to mature in
March 1998, and the interest rate swap agreements were to mature in March
1999. Salem is exposed to credit loss in the event of nonperformance by the
other parties to the interest rate swap and cap agreements. However, Salem
does not anticipate nonperformance by the counterparties.
 
  The fair value of the above interest rate swap agreements which are not
recognized in the financial statements reflected a negative value of the swaps
of $400,955 at December 31, 1996. The fair market value of the interest rate
cap agreements was $2,000 at December 31, 1996.
 
  In March 1997, Salem amended its swap agreements to an aggregate notional
amount of $21.5 million, expiring in March 2001. These agreements effectively
changed Salem's interest rate exposure on $11.5 million
 
                                     F-16
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
5. INTEREST RATE CAP AND SWAP AGREEMENTS, CONTINUED
 
of its senior secured notes to a fixed 9.405% (including the interest rate
spread of 2.25%), and on $10 million of its senior secured notes to a fixed
8.885% (including the interest rate spread of 2.25%). Also in March 1997,
Salem entered into two cap agreements having an aggregate notional amount of
$38.5 million, expiring in March 2000. The agreements effectively changed
Salem's interest rate exposure on $38.5 million of its senior secured notes to
a fixed rate of 11.75% (including the interest rate spread of 2.25%).
 
  Salem assigned its obligation under a $5 million swap agreement to another
bank on January 8, 1996, for a fee of $426,000. This fee was being amortized
to interest expense over the term of the original agreement of three years. In
September 1997, in connection with the issuance of the Notes and the Credit
Agreement the Company terminated all of its interest rate swap and cap
agreements for aggregate fees of $417,000. The Company wrote off these costs
(unamortized swap fee of $201,000 and the swap termination fee of $417,000) in
September 1997. This write-off, net of income tax benefit, was included in the
extraordinary loss in the accompanying statement of operations for the nine
months ended September 30, 1997 (see Note 4).
 
6. INCOME TAXES
 
  As discussed in Note 1, prior to the Reorganization, New Inspiration and
Golden Gate were S corporations for income tax purposes. Accordingly, any
federal and state income tax liability on net income of the S corporations has
been the liability of shareholders of the S corporations. The S corporation
status of New Inspiration and Golden Gate was terminated in the
Reorganization, which was effective August 13, 1997, and the income of New
Inspiration and Golden Gate will thereafter be subject to federal and state
income taxes. The accompanying consolidated statements of operations include
an unaudited pro forma income tax adjustment, using an estimated combined
effective tax rate of approximately 40%, to reflect the estimated income tax
expense of the Company as if New Inspiration and Golden Gate had been subject
to federal and state income taxes for the periods presented. In connection
with the Reorganization, which resulted in the termination of the
S corporation status of New Inspiration and Golden Gate, the Company recorded
a deferred tax liability and provision of approximately $612,000 in September
1997.
 
  The consolidated provision (benefit) for income taxes for Salem consisted of
the following at December 31:
 
<TABLE>
<CAPTION>
                                           1994   1995    1996
                                           -----  -----  ------
                                             (IN THOUSANDS)
         <S>                               <C>    <C>    <C>
         Current:
           Federal........................ $  14  $  45  $  189
           State..........................   (47)   314     333
                                           -----  -----  ------
                                             (33)   359     522
         Deferred:
           Federal........................  (321)  (775)  5,737
           State..........................   107    (51)    396
                                           -----  -----  ------
                                            (214)  (826)  6,133
         Current tax benefit reflected in
          net extraordinary loss..........   --    (263)    --
                                           -----  -----  ------
         Income tax provision (benefit)... $(247) $(204) $6,655
                                           =====  =====  ======
</TABLE>
 
                                     F-17
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
 
6. INCOME TAXES, CONTINUED
 
  The consolidated deferred tax asset and liability consisted of the following
at December 31:
 
<TABLE>
<CAPTION>
                                                                 1995    1996
                                                                ------  -------
                                                                (IN THOUSANDS)
   <S>                                                          <C>     <C>
   Deferred tax assets:
     Financial statement accruals not currently deductible....  $  359  $   447
     Net operating loss, AMT credit and other carryforwards...     910      280
     State taxes..............................................      95      102
                                                                ------  -------
   Total deferred tax assets..................................   1,364      829
   Valuation allowance for deferred tax assets................     (95)     (95)
                                                                ------  -------
   Net deferred tax assets....................................   1,269      734
   Deferred tax liabilities:
     Excess of net book value of property, plant and equipment
      for financial reporting purposes over income tax
      purposes................................................   2,498    2,700
     Excess of net book value of intangible assets for
      financial reporting purposes over income tax purposes...   3,272    8,668
     Other....................................................     257      256
                                                                ------  -------
   Total deferred tax liabilities.............................   6,027   11,624
                                                                ------  -------
   Net deferred tax liabilities...............................  $4,758  $10,890
                                                                ======  =======
</TABLE>
 
  A reconciliation of the statutory federal income tax rate to the effective
tax rate, as a percentage of income before income taxes, is as follows:
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31
                                                             ------------------
                                                             1994   1995   1996
                                                             ----   ----   ----
   <S>                                                       <C>    <C>    <C>
   Statutory federal income tax rate........................  34 %    34 %  34 %
   State income taxes, net.................................. (13)     53     3
   Exclusive of income taxes of S corporations and the
    Partnership............................................. (82)   (177)   (7)
   Change in valuation allowance............................  21      --    --
   Other, net............................................... (16)     25     4
                                                             ---    ----   ---
                                                             (56)%   (65)%  34 %
                                                             ===    ====   ===
</TABLE>
 
  The S corporations had book income before income taxes of $1,062,191,
$1,791,580 and $3,814,431 in 1994, 1995 and 1996, respectively. These amounts
include the S corporations' 85% ownership interest in Beltway.
 
  In 1996 the increase in the deferred tax liabilities related to intangible
assets is primarily due to gains on the disposal of assets of approximately
$14.6 million that are deferred for tax purposes under (S)1031 of the Internal
Revenue Code.
 
  At December 31, 1996, the Company has net operating loss carryforwards for
state income tax purposes of approximately $1,200,000 which expire in years
1997 through 2008. The Company has federal alternative minimum tax credit
carryforwards of approximately $109,000. For financial reporting purposes, a
valuation allowance of $95,000 has been provided in 1996 and 1995 to offset a
portion of the deferred tax assets related to the state net operating loss
carryforwards.
 
                                     F-18
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
 
7. COMMITMENTS AND CONTINGENCIES
 
  Salem leases various land, offices, studios and other equipment under
operating leases that expire over the next 10 years. The majority of these
leases may be renewed for successive periods ranging from one to five years on
terms similar to current agreements except for specified increases in lease
payments. Rental expense included in operating expense under all lease
agreements was $2,485,661, $3,123,049 and $3,821,254 in 1994, 1995 and 1996,
respectively.
 
  Future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1996, are as follows:
 
<TABLE>
<CAPTION>
                                         RELATED
                                         PARTIES  OTHER   TOTAL
                                         ------- ------- -------
                                             (IN THOUSANDS)
         <S>                             <C>     <C>     <C>
         1997........................... $1,046  $ 3,255 $ 4,301
         1998...........................  1,045    3,259   4,304
         1999...........................  1,045    3,208   4,253
         2000...........................  1,045    2,724   3,769
         2001...........................  1,045    2,149   3,194
         Thereafter.....................  1,539    8,068   9,607
                                         ------  ------- -------
                                         $6,765  $22,663 $29,428
                                         ======  ======= =======
</TABLE>
 
  The Company is involved in certain legal actions and claims arising in the
normal course of business. It is the opinion of management that such
litigation and claims will be resolved without material effect on the
Company's consolidated financial position, operations and cash flows.
 
  The Company has a deferred compensation agreement with one of its officers,
which provides for retirement payments to the officer for a period of ten
consecutive years, if he remains employed by the Company until age 60. The
retirement payments are based on a formula defined in the agreement. The
estimated obligation under the deferred compensation agreement is being
provided for over the service period. At September 30, 1997, a liability of
approximately $355,000 is included in accrued compensation in the accompanying
balance sheet for the amounts earned under this agreement.
 
8. RELATED PARTY TRANSACTIONS
 
  A shareholder's trust owns real estate on which certain assets of two radio
stations are located. Salem, in the ordinary course of its business, entered
into two separate lease agreements with this trust. Rental expense included in
operating expense for 1994, 1995 and 1996 amounted to $66,501, $55,915, and
$57,003, respectively.
 
  Land and buildings occupied by various Salem radio stations are leased from
the shareholders of Salem. Rental expense under these leases included in
operating expense for 1994, 1995 and 1996 amounted to $574,410, $690,380 and
$827,378, respectively.
 
  At December 31, 1995, notes receivable from shareholders totaled $3,387,080.
The notes bore interest at the Applicable Federal Rate and were payable upon
demand. In December 1996, New Inspiration and Golden Gate distributed $5.5
million to the shareholders, of which $4.8 million was used by the
shareholders to repay the notes receivable and accrued interest.
 
  In June 1997, the Company entered into a local marketing agreement (LMA)
with a corporation, Sonsinger, Inc. ("Sonsinger"), owned by two of Salem's
shareholders for radio station KKOL-AM. Under the LMA, Salem
programs KKOL-AM and sells all the airtime. Salem retains all of the revenue
and incurs all of the expenses related to the operation of KKOL-AM and pay no
fees or rent under the LMA.
 
                                     F-19
<PAGE>
 
                       SALEM COMMUNICATIONS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
                                 IS UNAUDITED)
 
 
9. DEFINED CONTRIBUTION PLAN
 
  In 1993, the Company established a 401(k) defined contribution plan (the
Plan), which covers all eligible employees (as defined in the Plan).
Participants are allowed to make nonforfeitable contributions up to 15% of
their annual salary, but may not exceed the annual maximum contribution
limitations established by the Internal Revenue Service. The Company currently
matches 10% of the amounts contributed by each participant but does not match
participants' contributions in excess of 10% of their compensation per pay
period. The Company contributed $36,000, $44,000 and $48,000 to the Plan in
1994, 1995 and 1996, respectively.
 
10. SUBSEQUENT EVENTS (UNAUDITED)
 
  In October 1997, the Company assigned its contract with a tower construction
company to build a broadcast tower in Houston to two of the Company's
shareholders (the Principal Shareholders), subject to the Principal
Shareholders obtaining financing. The Principal Shareholders will reimburse
the Company for its costs and expenses, which amounted to approximately
$2.9 million as of September 30, 1997. The antenna for the Company's station
in Houston, KKHT-FM, will be located on the tower and the Company will pay
rent to the Principal Shareholders. Proceeds from the sale will be used to
reduce borrowings.
 
  In October 1997, the Company purchased the assets of radio station WCCD-AM,
Cleveland, Ohio, for $700,000 from available cash. The Company had operated
WCCD-AM under an LMA since April 1997.
 
  In November 1997, the Company sold substantially all of the assets of radio
station WPZE-AM, Boston, Massachusetts, for $5 million. Proceeds from the sale
are being held by a qualified intermediary under a like-kind exchange
agreement to preserve the Company's ability to effect a tax-deferred exchange.
If the Company does not identify replacement property it will use the proceeds
to reduce borrowings.
 
 
                                     F-20
<PAGE>
 
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  NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURIS-
DICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
 
                             ---------------------
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Available Information and Incorporation by Reference......................    2
Prospectus Summary........................................................    3
Risk Factors .............................................................   14
Use of Proceeds ..........................................................   19
The Exchange Offer........................................................   19
Selected Consolidated Financial Information of the Company ...............   27
Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   30
Business..................................................................   36
Management................................................................   53
Certain Transactions .....................................................   56
Securities Ownership of Certain Beneficial Owners.........................   60
Description of Certain Indebtedness ......................................   60
Description of the Notes .................................................   62
Certain Federal Income Tax Considerations.................................   89
Plan of Distribution......................................................   90
Legal Matters.............................................................   90
Experts...................................................................   90
Index to Financial Statements.............................................  F-1
</TABLE>
 
  UNTIL MAY 11, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
 
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                   [LOGO OF SALEM COMMUNICATIONS CORPORATION]
 
 
                           OFFER FOR ALL OUTSTANDING
                             9 1/2% SERIES A SENIOR
                                  SUBORDINATED
                                 NOTES DUE 2007
                             IN EXCHANGE FOR 9 1/2%
                       SERIES B SENIOR SUBORDINATED NOTES
                                    DUE 2007
 
                                --------------
 
                                   PROSPECTUS
 
                                --------------
 
                                FEBRUARY 9, 1998
 
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