<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K*
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------ -------
COMMISSION FILE NUMBER 333-41733
SALEM COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0121400
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4880 SANTA ROSA ROAD, SUITE 300 93012
CAMARILLO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-0400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting and non-voting common stock held by non-
affiliates of the registrant as of May 1, 1998: $0.00
As of May 1, 1998 there were 81,672 shares of common stock of Salem
Communications Corporation outstanding.
* THIS SPECIAL FINANCIAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997 IS FILED PURSUANT TO RULE 15d-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND CONTAINS ONLY CERTIFIED FINANCIAL STATEMENTS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1997, AS REQUIRED BY RULE 15d-2.
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<PAGE>
On March 19, 1998, Salem Communications Corporation (the "Company")
consummated its offer for all outstanding 9 1/2% series A senior subordinated
notes due 2007 (the "Old Notes") in exchange for 9 1/2% series B senior
subordinated notes due 2007 (the "Notes") (the "Exchange Offer"). The Notes
are guaranteed by the Company's wholly-owned subsidiaries (the "Guarantors").
A detailed description of the Exchange Offer is included within the
registration statement on Form S-4 (Registration Statement No. 333-41733)
filed with the Securities and Exchange Commission (the "Commission"). The
registration statement, as amended by amendment no. 1. (the "Registration
Statement"), was declared effective by order of the Commission on February 9,
1998.
Rule 15d-2 ("Rule 15d-2") promulgated by the Commission pursuant to the
Securities Exchange Act of 1934, as amended, provides generally that if a
registrant files a registration statement under the Securities Act of 1933, as
amended, which does not contain certified financial statements for the
registrant's last full fiscal year, then the registrant shall, within 90 days
after the effective date of the registration statement, file a special report
furnishing certified financial statements for such last full fiscal year. Rule
15d-2 further provides that such special financial report is to be filed under
cover of the facing sheet appropriate for annual reports of the registrant.
The Registration Statement referenced above contained certified consolidated
financial statements of the Company for the period ended September 30, 1997.
Separate financial statements of the wholly-owned subsidiary Guarantors were
not included because management determined that such information was not
material to investors. As the Registration Statement did not contain the
certified consolidated financial statements for the Company for the last full
fiscal year as required by Rule 15d-2, certified financial statements for the
Company's fiscal year ended December 31, 1997 are herewith being filed with
the Commission under cover of the facing page of an annual report on Form 10-K
for the Company.
2
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO 15(d)
OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
The Company has no obligation to deliver, and has not delivered, to its
security holders any annual reports covering the last fiscal year or proxy
soliciting material to its security holders with respect to any annual or
other meeting of security holders.
3
<PAGE>
PART IV
INDEX TO FINANCIAL STATEMENTS
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a)(1) List of Financial Statements filed as part of the Form 10-K:
Report of Independent Auditors........................................ F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997.......... F-2
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997................................................. F-3
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997.................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997................................................. F-5
Notes to Consolidated Financial Statements............................ F-6
(a)(2) List of Financial Statement Schedules filed as part of this Form 10 K:
Financial Data Schedule, Exhibit 27.01.
(b) Reports on Form 8-K:
Not applicable to this filing.
(c) Exhibits
Financial Data Schedule, Exhibit 27.01.
</TABLE>
4
<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, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1996 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
April 10, 1998, except for
Note 10 as to which
the date is April 13, 1998
F-1
<PAGE>
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 1,962 $ 1,645
Accounts receivable (less allowance for doubtful accounts
of
$1,005 in 1996 and $1,249 in 1997)........................ 10,542 12,227
Other receivables.......................................... 194 81
Prepaid expenses........................................... 308 640
Prepaid income taxes....................................... 70 48
Deferred income taxes...................................... 537 2,254
-------- --------
Total current assets......................................... 13,613 16,895
Property, plant and equipment, net........................... 30,307 36,638
Intangible assets:
Broadcast licenses......................................... 117,081 138,837
Noncompetition agreements.................................. 14,893 14,593
Customer lists and contracts............................... 4,094 4,094
Favorable and assigned leases.............................. 1,800 1,800
Goodwill................................................... 5,795 5,999
Organizational costs and other intangible assets........... 972 972
-------- --------
144,635 166,295
Less accumulated amortization.............................. 37,854 46,212
-------- --------
Intangible assets, net..................................... 106,781 120,083
Notes receivable from shareholders and accrued interest...... 28 94
Bond issue costs............................................. -- 4,907
Other assets................................................. 8,456 6,196
-------- --------
Total assets................................................. $159,185 $184,813
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 1,935 $ 1,050
Accrued expenses........................................... 485 476
Accrued compensation and related........................... 1,289 1,381
Accrued interest........................................... 1,157 3,804
Income taxes............................................... 189 341
-------- --------
Total current liabilities.................................... 5,055 7,052
Long-term debt............................................... 121,790 154,500
Deferred income taxes........................................ 11,427 12,122
Other liabilities............................................ 379 457
Shareholders' equity:
Common stock, no par value; authorized 100,000 shares;
issued and outstanding 81,672 shares...................... 5,832 5,832
Retained earnings.......................................... 14,702 4,850
-------- --------
Total shareholders' equity................................... 20,534 10,682
-------- --------
Total liabilities and shareholders' equity................... $159,185 $184,813
======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE>
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Gross broadcasting revenue......................... $53,303 $65,141 $ 74,830
Less agency commissions............................ 5,135 6,131 6,918
------- ------- --------
Net broadcasting revenue........................... 48,168 59,010 67,912
Operating expenses:
Station operating expenses....................... 27,527 33,463 39,626
Corporate expenses (including $800 in shareholder
salaries in 1995, 1996 and 1997)................ 3,799 4,663 6,210
Tax reimbursements to S corporation
shareholders.................................... 2,057 2,038 1,780
Depreciation and amortization.................... 7,884 8,394 12,803
------- ------- --------
Operating expenses............................... 41,267 48,558 60,419
------- ------- --------
Net operating income............................... 6,901 10,452 7,493
Other income (expense):
Interest income.................................. 319 523 230
Gain (loss) on disposal of assets................ (7) 16,064 4,285
Interest expense................................. (6,646) (7,361) (12,706)
Other expense.................................... (255) (270) (389)
------- ------- --------
Income (loss) before income taxes and extraordinary
item.............................................. 312 19,408 (1,087)
Provision (benefit) for income taxes............... (204) 6,655 106
------- ------- --------
Income (loss) before extraordinary item............ 516 12,753 (1,193)
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $263 in 1995 and
$659 in 1997)..................................... (394) -- (1,185)
------- ------- --------
Net income (loss).................................. $ 122 $12,753 $ (2,378)
======= ======= ========
Pro forma information (unaudited):
Income (loss) before income taxes and
extraordinary item as reported above............ $ 312 $19,408 $ (1,087)
Add back tax reimbursements to S Corporation
shareholders.................................... 2,057 2,038 1,780
------- ------- --------
Pro forma income (loss) before income taxes and
extraordinary item.............................. 2,369 21,446 693
Pro forma provision (benefit) for income taxes... 951 8,608 278
------- ------- --------
Pro forma income (loss) before extraordinary
item............................................ 1,418 12,838 415
Extraordinary loss............................... (394) -- (1,185)
------- ------- --------
Pro forma net income (loss)...................... $ 1,024 $12,838 $ (770)
======= ======= ========
</TABLE>
See accompanying notes.
F-3
<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, 1995................. $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.............................................. -- (2,378) (2,378)
Shareholder distributions............................. -- (7,474) (7,474)
------ ------- -------
Shareholders' equity, December 31, 1997............... $5,832 $ 4,850 $10,682
====== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
SALEM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................. $ 122 $ 12,753 $ (2,378)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 7,884 8,394 12,803
Amortization of bank loan fees................ 104 109 175
Amortization of bond issue costs.............. -- -- 126
Deferred income taxes......................... (341) 6,133 (1,022)
(Gain) loss on sale of assets................. 7 (16,064) (4,285)
Accrued interest from shareholders............ (213) -- --
Loss on early extinguishment of debt.......... 657 -- 1,844
Changes in operating assets and liabilities:
Accounts receivable......................... (2,539) (1,370) (1,572)
Prepaid expenses and other current assets... 9 (111) (473)
Accounts payable and accrued expenses....... 1,950 258 1,844
Other liabilities........................... (30) 270 78
Income taxes................................ 71 123 174
-------- -------- ---------
Net cash provided by operating activities...... 7,681 10,495 7,314
INVESTING ACTIVITIES
Capital expenditures.......................... (3,040) (6,982) (7,521)
Purchases of radio stations................... (24,454) (21,160) (19,436)
Deposits on radio station acquisitions........ (125) (6,314) (4,907)
Proceeds from disposal of property, plant and
equipment and intangible assets.............. 38 15,867 5,120
Other assets.................................. (100) (334) 418
-------- -------- ---------
Net cash used in investing activities.......... (27,681) (18,923) (26,326)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and
notes payable to shareholders................ 42,840 23,800 222,710
Payments of long-term debt and notes payable
to shareholders.............................. (22,220) (15,430) (190,100)
Payments of bank loan fees.................... (856) -- (1,025)
Payments of costs related to debt
refinancing.................................. (228) -- (417)
Payments of bond issue costs.................. -- -- (5,033)
Repayments (additions) of shareholder notes
and
repayment of accrued interest receivable--
net.......................................... (309) 4,614 (66)
Proceeds from shareholder notes payable....... -- 1,900 100
Distributions to shareholders................. -- (5,501) (7,474)
-------- -------- ---------
Net cash provided by financing activities..... 19,227 9,383 18,695
-------- -------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (773) 955 (317)
Cash and cash equivalents at beginning of
year......................................... 1,780 1,007 1,962
-------- -------- ---------
Cash and cash equivalents at end of year....... $ 1,007 $ 1,962 $ 1,645
======== ======== =========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.................................... $ 6,816 $ 6,158 $ 9,523
Income taxes................................ 288 400 295
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-5
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION, EXCHANGE OFFER 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.
In September 1997, the Company issued 9 1/2% Senior Subordinated Notes due
2007 (the Notes) discussed in Note 4. In March 1998, the Company consummated
an offer for all outstanding restricted Notes (the Old Notes) in exchange for
unrestricted notes (the New Notes) (the Exchange Offer). Pursuant to the
Exchange Offer the New Notes were issued and all outstanding Old Notes were
canceled. The New Notes are identical in all material respects to the Old
Notes except that the New Notes do not contain terms with respect to transfer
restrictions and are generally freely transferrable without further
registration under the Securities Act of 1933. Reference to the Notes includes
both the Old Notes and the New Notes.
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 Notes. 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. 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 43 and 39 radio stations across the United States at December
31, 1997 and 1996, 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 independent
F-6
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
radio station affiliates. SRR sells commercial air time to national
advertisers for Salem's radio stations and networks, and for independent radio
station affiliates.
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.
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, 1995, 1996 and 1997, was
approximately $1,467,000, $1,498,000 and $1,743,000, 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, 1995, 1996 and 1997.
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>
F-7
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
1995, 1996 and 1997.
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.
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
F-8
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 year ended December 31, 1997, the Company purchased the assets
(principally intangibles) of the following radio stations:
<TABLE>
<CAPTION>
MARKET PURCHASE
ACQUISITION 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 1,385
July 18, 1997.......................... WITH-AM Baltimore, MD 1,114
July 18, 1997.......................... WTSJ-AM Cincinnati, OH 1,114
October 24, 1997....................... WCCD-AM Parma, OH 700
-------
$25,461
=======
</TABLE>
F-9
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The purchase price has been allocated to the assets acquired as follows:
<TABLE>
<CAPTION>
ASSET AMOUNT
----- --------------
(IN THOUSANDS)
<S> <C>
Property and equipment...................................... $ 3,634
Broadcast licenses and other intangibles.................... 21,827
-------
$25,461
=======
</TABLE>
In November 1997, the Company sold the assets (principally intangibles) of
radio station WPZE-AM (Boston, MA) for $5 million. Proceeds from the sale
(included in other assets as a deposit at December 31, 1997) 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.
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 DATE STATION MARKET SERVED PURCHASE 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.
F-10
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 DATE STATION MARKET SERVED PURCHASE 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>
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>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land...................................................... $ 356 $ 325
Buildings................................................. 2,084 1,477
Office furnishings and equipment.......................... 7,057 8,902
Antennae, towers and transmitting equipment............... 23,210 25,652
Studio and production equipment........................... 11,545 14,033
Record and tape libraries................................. 442 442
Automobiles............................................... 81 68
Leasehold improvements.................................... 2,997 3,684
Construction-in-progress.................................. 1,633 4,054
------- -------
49,405 58,637
Less accumulated depreciation............................. 19,098 21,999
------- -------
$30,307 $36,638
======= =======
</TABLE>
4. LONG-TERM DEBT
Long-term debt consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Note payable to banks and revolving line of credit........ $ 89,390 $ 2,500
9 1/2% Senior Subordinated Notes due 2007................. -- 150,000
Note payable to seller of KWRD-FM......................... 30,500 --
Unsecured note payable to shareholder with interest at 9
1/4% in 1996
and 9% in 1997........................................... 1,900 2,000
-------- --------
$121,790 $154,500
======== ========
</TABLE>
F-11
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 same
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 December
31, 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 December 31,
1997, the Adjusted Debt to Cash Flow Ratio was 5.74 to 1.00, resulting in
total borrowing availability of approximately $27.0 million, approximately
$11.0 million 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%. At December 31, 1997, the
interest rate on amounts outstanding under the Credit Agreement was 8.5%.
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 December 31,
1997 is based on the terms of the Credit Agreement.
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 $1,185,000, net of a $659,000 income tax benefit, was recorded as an
extraordinary item in the accompanying statement of operations for the year
ended December 31, 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
F-12
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
OTHER DEBT
In December 1997, the Company borrowed $2 million from one of its
shareholders. The note bears interest at 1% less than the prime rate-based
interest rate available to the Company under the Credit Agreement, and is
payable upon demand by the shareholder. The Company intends to refinance the
borrowing if demanded by the shareholder with the proceeds from a borrowing
under the Credit Agreement. Accordingly, the amount is reflected as long-term
debt in the accompanying balance sheet at December 31, 1997, consistent with
the terms of the Credit Agreement.
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.
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
No principal payments on the Company's long-term debt are required in each
of the five years following December 31, 1997.
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
F-13
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 year
ended December 31, 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 $609,000 in December
1997.
F-14
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The consolidated provision (benefit) for income taxes for Salem consisted of
the following at December 31:
<TABLE>
<CAPTION>
1995 1996 1997
----- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $ 45 $ 189 $ (149)
State.......................................... 314 333 618
----- ------ -------
359 522 469
Deferred:
Federal........................................ (775) 5,737 (1,162)
State.......................................... (51) 396 140
----- ------ -------
(826) 6,133 (1,022)
Current tax benefit reflected in net
extraordinary loss.............................. (263) -- (659)
----- ------ -------
Income tax provision (benefit)................... $(204) $6,655 $ 106
===== ====== =======
</TABLE>
The consolidated deferred tax asset and liability consisted of the following
at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Financial statement accruals not currently deductible.. $ 447 $ 610
Net operating loss, AMT credit and other
carryforwards......................................... 280 2,224
State taxes............................................ 102 197
------- -------
Total deferred tax assets................................ 829 3,031
Valuation allowance for deferred tax assets.............. (95) (95)
------- -------
Net deferred tax assets.................................. 734 2,936
Deferred tax liabilities:
Excess of net book value of property, plant and
equipment for financial reporting purposes over income
tax purposes.......................................... 2,700 3,806
Excess of net book value of intangible assets for
financial reporting purposes over income tax
purposes.............................................. 8,668 8,118
Other.................................................. 256 881
------- -------
Total deferred tax liabilities........................... 11,624 12,805
------- -------
Net deferred tax liabilities............................. $10,890 $ 9,869
======= =======
</TABLE>
F-15
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
-----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate..................... 34% 34% (34)%
State income taxes, net............................... 53 3 49
Exclusion of income taxes of S corporations and the
Partnership.......................................... (177) (7) (76)
Change in valuation allowance......................... -- -- --
Change in taxable entity (S corp. to C corp.)......... -- -- 56
Other, net............................................ 25 4 15
---- --- ---
(65)% 34% 10%
==== === ===
</TABLE>
The S Corporations had book income before income taxes of $1,791,580,
$3,814,431 and $2,419,895 in 1995, 1996, and 1997 respectively. These amounts
include the S Corporations' 85% ownership interest in Beltway.
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $5,300,000 which expire in years
2008 through 2012 and for state income tax purposes of approximately
$4,700,000 which expire in years 1998 through 2012. The Company has federal
alternative minimum tax credit carryforwards of approximately $147,000. For
financial reporting purposes, a valuation allowance of $95,000 has been
provided in 1997 and 1996 to offset a portion of the deferred tax assets
related to the state net operating loss carryforwards.
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 are subject to escalation clauses and may be renewed for successive
periods ranging from one to five years on terms similar to current agreements
and except for specified increases in lease payments. Rental expense included
in operating expense under all lease agreements was $3,123,049, $3,821,254 and
$4,803,482 in 1995, 1996, and 1997 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, 1997, are as follows:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1998............................................... $1,026 $ 3,671 $ 4,697
1999............................................... 1,026 3,725 4,751
2000............................................... 1,010 3,206 4,216
2001............................................... 1,001 2,412 3,413
2002............................................... 593 1,857 2,450
Thereafter......................................... 1,290 16,172 17,462
------ ------- -------
$5,946 $31,043 $36,989
====== ======= =======
</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.
F-16
<PAGE>
SALEM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1996 and 1997, a
liability of approximately $300,000 and $370,000, respectively, is included in
other liabilities 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 1995, 1996 and 1997 amounted to $55,915, $57,003 and
$57,299 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 1995, 1996 and 1997 amounted to $690,380, $827,378 and
$1,028,275 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.
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 $44,000, $48,000 and $80,000 to the Plan in
1995, 1996 and 1997 respectively.
10. SUBSEQUENT EVENTS
In April 1998 the Company agreed to purchase the assets of radio station
KIEV-AM, Glendale, California for $30.5 million. The Federal Communications
Commission must approve the assignment of the license to the Company before
the purchase can be consummated. The Company anticipates that the purchase
will close in August 1998. The purchase will be financed primarily by
additional borrowings. The Company intends to amend its Credit Agreement with
the bank to allow for such a borrowing.
F-17
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, SALEM COMMUNICATIONS CORPORATION HAS DULY CAUSED THIS
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
Salem Communications Corporation
By: /s/ EDWARD G. ATSINGER III
---------------------------------
EDWARD G. ATSINGER III
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
May 8, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF SALEM
COMMUNICATIONS CORPORATION AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ EDWARD G. ATSINGER III President and Chief May 8, 1998
- ------------------------------------- Executive Officer
EDWARD G. ATSINGER III (Principal Executive
Officer)
/s/ DIRK GASTALDO Vice President and May 8, 1998
- ------------------------------------- Chief Financial
DIRK GASTALDO Officer (Principal
Financial Officer)
/s/ EILEEN E. HILL Vice President-- May 8, 1998
- ------------------------------------- Accounting & Taxation
EILEEN E. HILL (Principal Accounting
Officer)
/s/ EDWARD G. ATSINGER III Director May 8, 1998
- -------------------------------------
EDWARD G. ATSINGER III
/s/ STUART W. EPPERSON Director May 8, 1998
- -------------------------------------
STUART W. EPPERSON
/s/ ERIC H. HALVORSON Director May 8, 1998
- -------------------------------------
ERIC H. HALVORSON
- ------------------------------------- Director May , 1998
RICHARD A. RIDDLE
- ------------------------------------- Director May , 1998
ROLAND S. HINZ
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEUDLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMETS FOR THE YEAR ENDED 12/31/97 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,645
<SECURITIES> 0
<RECEIVABLES> 13,557
<ALLOWANCES> 1,249
<INVENTORY> 0
<CURRENT-ASSETS> 16,895
<PP&E> 58,637
<DEPRECIATION> 21,999
<TOTAL-ASSETS> 184,813
<CURRENT-LIABILITIES> 7,052
<BONDS> 154,500
0
0
<COMMON> 5,832
<OTHER-SE> 4,850
<TOTAL-LIABILITY-AND-EQUITY> 184,813
<SALES> 0
<TOTAL-REVENUES> 74,830
<CGS> 0
<TOTAL-COSTS> 66,054
<OTHER-EXPENSES> 389
<LOSS-PROVISION> 1,283
<INTEREST-EXPENSE> 12,706
<INCOME-PRETAX> (1,087)
<INCOME-TAX> 106
<INCOME-CONTINUING> (1,193)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,185)
<CHANGES> 0
<NET-INCOME> (2,378)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
