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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(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, 1998
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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4880 SANTA ROSA ROAD, SUITE 300
CAMARILLO, CALIFORNIA 93012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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 March 31, 1999: $0.00
As of March 31, 1999 there were 81,627 shares of common stock of Salem
Communications Corporation outstanding.
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The undersigned registrant hereby amends the following item of its Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 as set forth
below.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this report. Our
consolidated financial statements are not directly comparable from period to
period because of our acquisition and disposition of radio stations. See note 2
to our consolidated financial statements.
The principal sources of our revenue are:
- the sale of block program time, both to national and local program
producers,
- the sale of advertising time on our radio stations, both to national
and local advertisers, and
- the sale of advertising time on our national radio network.
The following table shows gross revenue, the percentage of gross revenue
for each revenue source and net revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Block program time:
National................... $26,610 40.8% $27,664 37.0% $30,337 35.5
Local...................... 10,869 16.7 11,392 15.2 12,558 14.7
------- ----- ------- ----- ------- -----
37,479 57.5 39,056 52.2 42,895 50.2
Advertising:
National................... 4,088 6.3 3,621 4.8 4,458 5.2
Local...................... 17,416 26.7 21,143 28.3 26,106 30.6
------- ----- ------- ----- ------- -----
21,504 33.0 24,764 33.1 30,564 35.8
Infomercials(1).............. -- -- 3,819 5.1 4,121 4.8
Salem Radio Network.......... 5,270 8.1 6,186 8.3 6,053 7.1
Other........................ 888 1.4 1,005 1.3 1,778 2.1
------- ----- ------- ----- ------- -----
Gross revenue................ 65,141 100.0% 74,830 100.0% 85,411 100.0
===== ===== =====
Less agency commissions...... 6,131 6,918 7,520
------- ------- -------
Net revenue.................. $59,010 $67,912 $77,891
======= ======= =======
</TABLE>
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(1) Prior to 1997, classification of revenue (as national program, national
advertising, local program or local advertising) from infomercials was
determined at the discretion of local station general managers. In 1997,
we began including revenue from infomercials in a separate category in order
to establish uniformity of classification of revenue.
Our revenue is affected primarily by the program rates our radio stations
charge and by the advertising rates our radio stations and network charge. The
rates for block program time are based upon our stations' ability to attract
audiences that will support the program producers through contributions and
purchases of their products. Advertising rates are based upon the demand for
advertising time, which in turn is based on our stations' and network's ability
to produce results for its advertisers. Each of our radio stations and our
network have a general pre-determined level of time that they make available for
block programs and/or advertising, which may vary at different times of the day.
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In recent years, we have begun to place greater emphasis on the development
of local advertising in all of our markets. We encourage general managers and
sales managers to increase advertising revenue. We can create additional
advertising revenue in a variety of ways, such as removing block programming
that generates marginal audience response, adjusting the start time of programs
to add advertising in more desirable time slots and increasing advertising
rates.
As is typical in the radio broadcasting industry, our second and fourth
quarter advertising revenue generally exceeds our first and third quarter
advertising revenue. Quarterly revenue from the sale of block program time does
not tend to vary, however, since program rates are generally set annually.
Our cash flow is affected by a transition period experienced by radio
stations we have acquired that previously operated with formats other than a
religious and family issues format. This transition period, which usually lasts
less than a year, is when we develop the radio station's program customer and
listener base. During this period, these stations typically generate negative or
insignificant cash flow.
In the broadcasting industry, radio stations often utilize trade or barter
agreements to exchange advertising time for goods or services (such as other
media advertising, travel or lodging), in lieu of cash. In order to preserve the
sale of our advertising time for cash, we generally enter into trade agreements
only if the goods or services bartered to us will be used in our business. We
have minimized our use of trade agreements and have generally sold most of our
advertising time for cash. In 1998, we sold 92% of our advertising time for
cash. In addition, it is our general policy not to preempt advertising paid for
in cash with advertising paid for in trade.
The primary operating expenses incurred in the ownership and operation of
our radio stations include employee salaries and commissions, and facility
expenses (for example, rent and utilities). In addition to these expenses, our
network incurs programming costs and lease expenses for satellite communication
facilities. We also incur and will continue to incur significant depreciation,
amortization and interest expense as a result of completed and future
acquisitions of radio stations and existing and future borrowings.
Our consolidated statements of operations for periods prior to 1998 have
included an operating expense called "tax reimbursements to S corporation
shareholders." These amounts represent the income tax liabilities of our
principal stockholders created by the income of New Inspiration and Golden Gate,
which were both S corporations prior to our August 1997 reorganization. We
consider the nature of this operating expense to be essentially equivalent to an
income tax provision. In August 1997, New Inspiration and Golden Gate became
wholly-owned subsidiaries of Salem. From this date, pretax income of New
Inspiration and Golden Gate is included in our consolidated income tax return
and in our computation of the income tax provision included in our consolidated
statements of operations.
The performance of a radio broadcasting company, such as Salem, is
customarily measured by the ability of its stations to generate broadcast cash
flow and EBITDA. We define broadcast cash flow as net operating income before
depreciation and amortization
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and corporate expenses. We define EBITDA as net operating income before
depreciation and amortization. For periods prior to 1998, broadcast cash flow
and EBITDA are calculated using net operating income before tax reimbursements
to S corporation shareholders.
Although broadcast cash flow and EBITDA are not measures of performance
calculated in accordance with generally accepted accounting principles, and
should be viewed as a supplement to and not a substitute for our results of
operations presented on the basis of generally accepted accounting principles,
we believe that broadcast cash flow and EBITDA are useful because they are
generally recognized by the radio broadcasting industry as measures of
performance and are used by analysts who report on the performance of broadcast
companies. These measures are not necessarily comparable to similarly titled
measures employed by other companies.
In the following discussion of our results of operations, we compare our
results between periods on an as reported basis (that is, the results of
operations of all radio stations and network formats owned or operated at any
time during either period) and on a "same station" basis. We include in our same
station comparisons the results of operations of radio stations and network
formats that:
- we own or operate for all of both periods;
- we acquire or begin to operate at any time after the beginning of the
first relevant comparison period if the station or network format (i) is
in a market in which we already own or operate a radio station or network
format and (ii) is integrated with the existing station or network format
for our internal financial reporting purposes; or
- we sell or cease to operate at any time after the beginning of the first
relevant comparison period if the station or network format (i) was
integrated with another station or network format in a market for our
internal financial reporting purposes prior to the sale or cessation of
operations and (ii) we continue to own or operate the other station or
network format following the sale or cessation of operations.
We include in our same station comparisons the results of operations of our
integrated stations and network formats from the date that we acquire or begin
to operate them or through the date that we sell or cease to operate them, as
the case may be.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenue. Net revenue increased $10.0 million or 14.7% to $77.9 million
in 1998 from $67.9 million in 1997. The inclusion of revenue from the
acquisitions of radio stations and revenue generated from local marketing
agreements entered into during 1998 and 1997 provided $1.5 million of the
increase. On a same station basis, net revenue improved $8.5 million or 12.7% to
$75.3 million in 1998 from $66.8 million in 1997. Included in this same station
comparison are the results of three stations that we acquired in 1998 for a
total purchase price of $3.1 million, four stations that we acquired or began to
operate in 1997 for a total purchase price of $4.9 million and one station that
we sold in 1997 for $5.0 million. The improvement was primarily due to an
increase in revenue at the radio stations we acquired in 1996 that previously
operated with formats other than a religious and family issues format, an
increase in program rates and, to a lesser extent, an increase in advertising
time and improved selling efforts at both the national and local level. Revenue
from advertising as a percentage of our gross revenue increased from 33.1% in
1997 to 35.8% in 1998. Revenue from block program time as a percentage of our
gross revenue decreased from 52.2% in 1997 to 50.2% in 1998. This change in our
revenue mix is primarily due to our efforts to develop more local advertising
sales in all of our markets.
Station Operating Expenses. Station operating expenses increased $2.9
million or 7.3% to $42.5 million in 1998 from $39.6 million in 1997. The
inclusion of expenses from the acquisitions of radio stations and expenses
incurred for local marketing agreements entered into during 1998 and 1997
accounted for $400,000 of the increase. On a same station basis, station
operating expenses increased $2.5 million or 6.4% to $41.3 million in 1998 from
$38.8 million in 1997, primarily due to incremental selling and production
expenses incurred to produce the increased revenue in the period. This increase
was offset in part by a one-time credit of $453,000 that we recorded in 1998.
The credit related to music licensing fees and represented the proceeds of a
settlement between us and the two largest performance rights organizations.
Broadcast Cash Flow. Broadcast cash flow increased $7.1 million or 25.1% to
$35.4 million in 1998 from $28.3 million in 1997. As a percentage of net
revenue, broadcast cash flow increased to 45.4% in 1998 from 41.7% in 1997. The
increase is primarily attributable to the improved performance of radio stations
acquired in 1996 and 1997 that previously operated with formats other than a
religious and family issues format and the one-time credit for music licensing
fees. Acquired and reformatted radio stations typically produce low margins
during the first few years following conversion from a non-religious format to a
religious and family issues format. Broadcast cash flow margins improve as we
implement scheduled program rate increases and increase advertising revenue on
our stations. On a same station basis, broadcast cash flow improved $6.0 million
or 21.4% to $34.0 million in 1998 from $28.0 million in 1997.
Corporate Expenses. Corporate expenses increased $1.2 million or 19.4% to
$7.4 million in 1998 from $6.2 million in 1997, primarily due to bonuses
totaling $538,000 paid to our president and to our chairman of the board in 1998
and additional personnel and overhead costs associated with radio station
acquisitions in 1998.
EBITDA. EBITDA increased $5.9 million or 26.7% to $28.0 million in 1998
from $22.1 million in 1997. As a percentage of total revenue, EBITDA increased
to 35.9% in 1998 from 32.5% in 1997. The increase is primarily attributable to
the improved performance of radio stations acquired in 1996 and 1997 that
previously operated with formats other than a religious and family issues format
and the one-time credit for music licensing fees.
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Depreciation and Amortization. Depreciation and amortization expense
increased $1.3 million or 10.2% to $14.1 million in 1998 from $12.8 million in
1997, primarily due to radio station acquisitions consummated during 1998 and
1997.
Other Income (Expense). Interest income was essentially unchanged for 1998
compared to 1997. Gain on disposal of assets decreased $4.1 million from $4.3
million in 1997 to $236,000 in 1998. The gain in 1997 was primarily due to the
sale of WPZE-AM, Boston. Interest expense increased $3.2 million or 25.2% to
$15.9 million in 1998 from $12.7 million in 1997, primarily due to interest
expense associated with additional borrowings to fund acquisitions consummated
during 1998 and 1997. Other expense was essentially unchanged for 1998 compared
to 1997.
Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes
as a percentage of income (loss) before income taxes and extraordinary item
(that is, the effective tax rate) was (17.8)% for 1998 and 9.8% for 1997. The
effective tax rate in 1998 differs from the federal statutory income tax rate of
34.0% primarily because of the effect of state income taxes and certain expenses
that are not deductible for tax purposes. The effective tax rate in 1997 differs
from the federal statutory income tax rate of 34.0% primarily because of the
effect of state income taxes and the establishment of a deferred tax liability
of $609,000 resulting from our August 1997 reorganization. These effects were
offset by the inclusion of income from New Inspiration and Golden Gate, which
were S corporations (and therefore not subject to federal income taxes) prior to
the reorganization.
Net Loss. We recognized a net loss of $1.6 million in 1998, compared to a
net loss of $2.4 million in 1997. Included in the net loss for 1997 is a $1.2
million extraordinary loss for the write-off of deferred financing costs and
termination fees related to the repayment of our prior credit facility which we
repaid in full upon issuance of our senior subordinated notes in September 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Revenue. Net revenue increased $8.9 million or 15.1% to $67.9 million
in 1997 from $59.0 million in 1996. The inclusion of revenue from the
acquisitions of radio stations and revenue generated from local marketing
agreements entered into during 1997 and 1996 provided $5.5 million of the
increase. On a same station basis, net revenue improved $3.4 million or 6.2% to
$58.4 million in 1997 from $55.0 million in 1996 due primarily to an increase in
program rates and, to a lesser extent, an increase in advertising time and
improved selling efforts at both the national and local level. Included in this
same station comparison are the results of five stations that we acquired or
began to operate in 1997 for a total purchase price of $11.9 million, one
station that we sold in 1997 for $5.0 million and one station that we sold in
1996 for $1.5 million. While revenue from advertising as a percentage of our
gross revenue was essentially unchanged from 1996 to 1997, revenue from local
advertising as a percentage of our gross revenue increased from 26.7% in 1996 to
28.3% in 1997. Revenue from block program time as a percentage of our gross
revenue decreased from 57.5% in 1996 to 52.2% in 1997. Revenue from
informercials was 5.1% of gross revenue in 1997. Prior to 1997, classification
of revenue (as national program, national advertising, local program or local
advertising) from infomercials was determined at the discretion of local station
general managers. The change in our revenue mix is primarily due to our efforts
to develop more local advertising sales in all of our markets and to the effects
of separate reporting of revenue from infomercials beginning in 1997.
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Station Operating Expenses. Station operating expenses increased $6.1
million or 18.2% to $39.6 million in 1997 from $33.5 million in 1996. The
inclusion of expenses from the acquisitions of radio stations and expenses
incurred for local marketing agreements entered into during 1997 and 1996
accounted for $4.4 million of the increase. On a same station basis, station
operating expenses increased $1.7 million or 5.9% to $30.6 million in 1997 from
$28.9 million in 1996, primarily due to incremental selling and production
expenses incurred to produce the increased revenue in the period.
Broadcast Cash Flow. Broadcast cash flow increased $2.8 million or 11.0% to
$28.3 million in 1997 from $25.5 million in 1996. As a percentage of net
revenue, broadcast cash flow decreased to 41.7% in 1997 from 43.3% in 1996. The
decrease is primarily attributable to lower margins achieved by recently
acquired and reformatted radio stations. On a same station basis, broadcast cash
flow improved $1.7 million or 6.5% to $27.8 million in 1997 from $26.1 million
in 1996.
Corporate Expenses. Corporate expenses increased $1.5 million or 31.9% to
$6.2 million in 1997 from $4.7 million in 1996, primarily due to additional
personnel and overhead costs associated with radio station acquisitions in 1997
($1.0 million), bonuses paid to corporate officers in 1997 ($85,000), the
write-off of costs incurred for potential station acquisitions which were
abandoned ($172,000), and expenses incurred for officers' life insurance
($277,000), in 1997.
EBITDA. EBITDA increased $1.2 million or 5.7% to $22.1 million in 1997 from
$20.9 million in 1996. As a percentage of total revenue, EBITDA decreased to
32.5% in 1997 from 35.4% in 1996. The decrease was primarily attributable to
lower margins achieved by recently acquired and reformatted stations and to
increased corporate expenses in 1997 as compared to 1996.
Tax Reimbursements to S Corporation Shareholders. Tax reimbursements to S
corporation shareholders decreased $200,000 or 10.0% to $1.8 million in 1997
from $2.0 million in 1996, primarily due to decreased taxable income of the S
corporations as a result of the termination of the S corporation status of New
Inspiration and Golden Gate in August 1997.
Depreciation and Amortization. Depreciation and amortization expense
increased $4.4 million or 52.4% to $12.8 million in 1997 from $8.4 million in
1996, primarily due to radio station and network acquisitions consummated during
1997 and 1996.
Other Income (Expense). Interest income decreased $293,000 to $230,000 in
1997 from $523,000 in 1996, primarily due to interest income earned in 1996 on a
$14.0 million deposit from the sale of KDBX-FM, Portland. Gain on disposal of
assets decreased $11.8 million from $16.1 million in 1996 to $4.3 million in
1997. The gain in 1997 was primarily due to the sale of WPZE-AM, Boston. The
gain in 1996 was primarily due to the sale of KDBX-FM, Portland and KDFX-AM,
Dallas. Interest expense increased $5.3 million or 71.6% to $12.7 million in
1997 from $7.4 million in 1996, primarily due to interest expense associated
with additional borrowings to fund acquisitions consummated during 1997 and
1996. Other expense was essentially unchanged for 1997 compared to 1996.
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Provision (Benefit) for Income Taxes. Income tax provision (benefit) as a
percentage of income (loss) before income taxes and extraordinary item (that is,
the effective tax rate) was 9.8% for 1997 and 34.3% for 1996. The effective tax
rate in 1997 differs from the federal statutory income tax rate of 34.0%
primarily because of the effect of state income taxes and the establishment of a
deferred tax liability of $609,000 resulting from our August 1997
reorganization. These effects were offset by the inclusion of income from New
Inspiration and Golden Gate, which were S corporations (and, therefore, not
subject to federal income taxes) prior to the reorganization. The effective tax
rate in 1996 differs from the federal statutory income tax rate of 34.0%
primarily because of the effect of state income taxes and the effect of gains
realized on the sale of radio stations in 1997. These effects were offset by the
inclusion of income from New Inspiration and Golden Gate, which were S
corporations (and, therefore, not subject to federal income taxes) prior to the
reorganization.
Net Income (Loss). We recognized a net loss of $2.4 million in 1997,
compared to net income of $12.8 million in 1996. Included in the net loss for
1997 is a $1.2 million extraordinary loss for the write-off of deferred
financing costs and termination fees related to the repayment of our prior
credit facility which we repaid in full in September 1997.
LIQUIDITY AND CAPITAL RESOURCES
In the past, we 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.
In September 1997, we issued and privately placed $150 million principal amount
of 9 1/2% Senior Subordinated Notes due 2007. In March 1998, we consummated an
offer for all outstanding notes, which were subject to certain restrictions on
transfer, in exchange for notes registered pursuant to the Securities Act of
1933, as amended and thus not subject to such transfer restrictions. Pursuant to
the exchange offer, the $150 million in principal amount of new notes were
issued and a like amount of the old notes were canceled. Reference in this
report to the notes includes both the new notes and the old notes. In September
1997, we used the net proceeds from the sale of the notes to repay substantially
all of our outstanding indebtedness under a line of credit agreement, at which
time such facility was canceled and we entered into the current credit
agreement.
We anticipate funding future acquisitions from operating cash flow and
borrowings, including borrowings under the credit agreement. At December 31,
1998, $24.0 million was outstanding under our credit agreement. The maximum
amount that we may borrow under our credit agreement is limited by our 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,
1998, the maximum Adjusted Debt to Cash Flow Ratio allowed under the credit
agreement was 6.75 to 1. Our ability to borrow for the purpose of acquiring a
radio station is further limited by the credit agreement in that we may not
borrow for an acquisition if the Adjusted Debt to Cash Flow Ratio is greater
than 6.00 to 1. At December 31, 1998, the Adjusted Debt to Cash Flow Ratio was
5.99 to 1, resulting in total borrowing availability (i.e., in addition to
amounts already outstanding) of approximately $22.6 million, $483,000 of which
can currently be used for radio station acquisitions. In addition to debt
service requirements under the credit agreement, we are required to pay $14.3
million per annum in interest on the Notes.
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We fund expenditures for operations, administrative expenses and debt
service from operating cash flow.
We believe that cash flow from operations and borrowings under the credit
agreement should be sufficient to permit us to meet our financial obligations
and to fund our 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 our 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
our business. The credit agreement also requires us to satisfy certain financial
covenants, which covenants 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 6.75 to 1 at December 31, 1998),
minimum interest coverage (not less than 1.25 to 1 at December 31, 1998),
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).
Previously we had revolving credit facilities with Messrs. Atsinger and
Epperson, totaling $5 million. At December 31, 1998, $1.8 million was
outstanding under the agreement with Mr. Atsinger. The outstanding balance under
these credit facilities was paid in full and the notes cancelled in April 1999.
The notes bore interest at a floating rate that was last set at 8%.
In January 1999, we purchased the assets of OnePlace, LLC, for $6.2
million, and all the outstanding shares of stock of CCM Communications, Inc.,
for $1.9 million. OnePlace is engaged in the business of applying Internet
e-commerce, consumer profiling and other information technologies in the
Christian products industry. CCM Communications publishes magazines which follow
the contemporary Christian music industry. The purchases were financed primarily
by an additional borrowing. We amended our credit agreement to allow for such a
borrowing, increasing the maximum permitted leverage ratio to not greater than
7.00 to 1 through June 29, 1999. After the borrowing for these acquisitions the
Adjusted Debt to Cash Flow Ratio was 6.22 to 1, resulting in total borrowing
availability of approximately $23.3 million, none of which can currently be used
for radio station acquisitions.
Net cash provided by operations increased to $11.0 million for the year
ended December 31, 1998, compared to $7.3 million in 1997 due primarily to
increased net operating income in 1998. Net cash provided by operations
decreased to $7.3 million for the year ended December 31, 1997, compared to
$10.5 million in 1996 due primarily to decreased net operating income in 1997.
Net cash used in investing activities increased to $31.8 million for the
year ended December 31, 1998, compared to $26.3 million for 1997 primarily due
primarily to radio station acquisitions (four stations purchased for $33.7
million in 1998 compared to eight stations purchased for $19.4 million in 1997).
Net cash used in investing activities increased to $26.3 million for the year
ended December 31, 1997, compared to $18.9 million for 1996 primarily due to the
proceeds of the sales of KDBX-FM, Portland and KDFX-AM, Dallas offsetting the
cash used in investing activities in 1996.
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Net cash provided by financing activities was $21.0 million for the year
ended December 31, 1998, and $18.7 million for 1997, and $9.4 million for 1996,
primarily due to increased long-term debt borrowings in 1997 and 1998.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
The term "year 2000 issue" (the year 2000 referred to as "Y2K") is a
general term used to describe the various problems that may result from the
improper processing of dates and date-sensitive calculations by computers and
other machinery as the year 2000 is approached and reached. These problems
generally arise from the fact that most of the world's computer hardware and
software have historically used only two digits (instead of four) to identify
the year in a date, often meaning that the computer will fail to distinguish
dates in the "2000's" from dates in the "1900's." These problems may also arise
from other sources as well, such as the use of special codes and conventions in
software that make use of the date field.
In early 1998, we began implementing the assessment phase of our plan to
address the Y2K issue in each broadcast area and have substantially completed a
Y2K assessment phase of our computer, broadcast and environmental systems,
redundant power systems and other critical systems including: (i) digital audio
systems, (ii) traffic scheduling and billing systems, (iii) accounting and
financial reporting systems and (iv) local area networking infrastructure. As
part of the assessment phase, we initiated formal communication with all of our
key business partners to identify their exposure to the Y2K issue. This
assessment is targeting potential external risks related to the Y2K issue and is
still in progress, but is expected to be completed by the end of the second
quarter of 1999. Key business partners include local and national programmers
and advertisers, suppliers of communication services, financial institutions and
suppliers of utilities. Amounts related to the assessment phase are primarily
internal costs, are expensed as incurred, have not been material to date and are
not expected to be material through completion of the phase.
The remediation phase is the next step in our plan to address the Y2K
issue. Activities during this phase are in progress and include, if necessary,
the actual repair, replacement or upgrade of our systems based on the findings
of the assessment phase. Systems which are Y2K ready include local area
networks, digital audio systems and traffic scheduling and billing systems. We
have implemented a new accounting and financial reporting system which is Y2K
ready. Costs related to this new system of approximately $200,000 will be
included in capital expenditures.
The final plan phase, the testing phase, will include the actual testing of
the enhanced and upgraded systems. This process will include internal and
external user review confirmation, as well as unit testing and integration
testing with other system interfaces. The testing schedule is being developed
and will begin during the second quarter of 1999 and is expected to be completed
by the end of the third quarter. Based on test results and assessment of outside
risks, contingency plans will be developed as determined necessary. We would
expect to complete such plans in the fourth quarter of 1999.
We anticipate minimal business disruption from both external and internal
factors. However, possible risks include, but are not limited to, loss of power
and communication links which are not subject to our control. We believe that
our Y2K compliance issues from all phases of our plan will be resolved on a
timely basis and that any related costs will not have a material impact on our
operations, cash flows or financial condition of future periods.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 on
Form 10-K/A to its Form 10-K for the fiscal year ended December 31, 1998 to be
signed on its behalf by the undersigned, thereunto duly authorized.
SALEM COMMUNICATIONS CORPORATION
June 4, 1999 By: /s/ Edward G. Atsinger III
-------------------------------------
Edward G. Atsinger III
President and Chief Executive Officer
June 4, 1999 By: /s/ Dirk Gastaldo
-------------------------------------
Dirk Gastaldo
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 on Form 10-K/A to Form 10-K for the fiscal year ended December
31, 1998 has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Edward G. Atsinger III President and Chief Executive Officer
- --------------------------------------- (Principal Executive Officer) June 4, 1999
Edward G. Atsinger III
/s/ Dirk Gastaldo Vice President and Chief Financial
- --------------------------------------- Officer June 4, 1999
Dirk Gastaldo (Principal Financial Officer)
/s/ Eileen E. Hill Vice President--Accounting & Taxation
- --------------------------------------- (Principal Accounting Officer) June 4, 1999
Eileen E. Hill
/s/ Edward G. Atsinger III Director
- --------------------------------------- June 4, 1999
Edward G. Atsinger III
/s/ Stuart W. Epperson Director
- --------------------------------------- June 4, 1999
Stuart W. Epperson
/s/ Eric H. Halvorson Director
- --------------------------------------- June 4, 1999
Eric H. Halvorson
/s/ Richard A. Riddle Director
- --------------------------------------- June 4, 1999
Richard A. Riddle
Director
- --------------------------------------- , 1999
Roland S. Hinz
Director
- --------------------------------------- , 1999
Donald P. Hodel
Director
- --------------------------------------- , 1999
Joseph S. Schuchert
</TABLE>
11
