- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (I.R.S. EMPLOYER IDENTIFICATION (STATE OR OTHER JURISDICTION OF NUMBER) INCORPORATION OR ORGANIZATION) 93012 4880 SANTA ROSA ROAD, SUITE 300 (ZIP CODE) CAMARILLO, CALIFORNIA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-0400 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 [_] As of August 1, 1998 there were 81,672 shares of common stock of Salem Communications Corporation outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SALEM COMMUNICATIONS CORPORATION INDEX Page No. ------- COVER PAGE................................................................................................. 1 INDEX...................................................................................................... 2 PART I-FINANCIAL INFORMATION............................................................................... 3 Item 1. Financial Statements (Unaudited).......................................................... 3 Condensed Consolidated Balance Sheets as of December 31, 1997 and September 30, 1998...... 3 Consolidated Statements of Operations for the three months and nine months ended September 30, 1997 and 1998............................................................. 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1998................................................................................ 5 Notes to Condensed Consolidated Financial Statements....................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 7 PART II--OTHER INFORMATION................................................................................. 12 Item 1. Legal Proceedings........................................................................... 12 Item 2. Changes in Securities....................................................................... 12 Item 3. Defaults upon Senior Securities............................................................. 12 Item 4. Submission of Matters to a Vote of Security Holders......................................... 12 Item 5. Other Information........................................................................... 12 Item 6. Exhibits and Reports on Form 8-K............................................................ 12 SIGNATURES................................................................................................. 16 EXHIBIT INDEX 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) SALEM COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) DECEMBER 31 SEPTEMBER 30 -------------- --------------- 1997 1998 -------------- --------------- (UNAUDITED) ASSETS - ------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents........................................................... $ 1,645 $ 1,343 Accounts receivable (less allowance for doubtful accounts of $1,249 in 1997 and $955 in 1998)...................................................................... 12,227 13,134 Other receivables................................................................... 81 51 Prepaid expenses.................................................................... 640 894 Prepaid income taxes................................................................ 48 30 Deferred income taxes............................................................... 2,254 2,592 -------- -------- Total current assets................................................................. 16,895 18,044 Property, plant and equipment, net................................................... 36,638 42,323 Intangible assets, net............................................................... 120,083 142,163 Notes receivable from shareholders and accrued interest.............................. 94 94 Bond issue costs, net................................................................ 4,907 4,790 Other assets......................................................................... 6,196 1,544 -------- -------- Total assets......................................................................... $184,813 $208,958 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------- Current liabilities: Accounts payable.................................................................... $ 1,050 $ 727 Accrued expenses.................................................................... 476 547 Accrued compensation and related.................................................... 1,381 1,520 Accrued interest.................................................................... 3,804 49 Income taxes........................................................................ 341 118 -------- -------- Total current liabilities............................................................ 7,052 2,961 Long-term debt....................................................................... 154,500 183,810 Deferred income taxes................................................................ 12,122 11,801 Other liabilities.................................................................... 457 879 Shareholders' equity: Common stock, no par value; authorized 100,000 shares; issued and Outstanding 81,672 shares.......................................................... 5,832 5,832 Retained earnings................................................................... 4,850 3,675 -------- -------- Total shareholders' equity........................................................... 10,682 9,507 -------- -------- Total liabilities and shareholders' equity........................................... $184,813 $208,958 ======== ======== See accompanying notes. 3 SALEM COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30 ------------------------------- ----------------------------- 1997 1998 1997 1998 ------------- ------------ ------------ ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Gross broadcasting revenue.................................. $18,584 $21,076 $54,471 $61,037 Less agency commissions..................................... 1,696 1,844 5,022 5,401 ------- ------- ------- ------- Net broadcasting revenue.................................... 16,888 19,232 49,449 55,636 Operating expenses: Station operating expenses................................ 9,834 10,171 29,091 30,150 Corporate expenses........................................ 1,879 1,497 4,700 4,925 Tax reimbursements to S corporation shareholders.......... 294 - 1,780 - Depreciation and amortization............................. 3,224 3,497 9,382 10,163 ------- ------- ------- ------- Operating expenses........................................ 15,231 15,165 44,953 45,238 ------- ------- ------- ------- Net operating income........................................ 1,657 4,067 4,496 10,398 Other income (expense): Interest income........................................... 51 68 156 258 Gain (loss) on disposal of assets......................... 2 270 (190) (365) Interest expense.......................................... (3,113) (3,953) (8,548) (11,544) Other expense............................................. (85) (101) (288) (306) ------- ------- ------- ------- Income (loss) before income taxes and extraordinary item.... (1,488) 351 (4,374) (1,559) Provision (benefit) for income taxes........................ (322) 167 (1,790) (384) ------- ------- ------- ------- Income (loss) before extraordinary item..................... (1,166) 184 (2,584) (1,175) Extraordinary loss on early extinguishment of debt.......... (1,090) - (1,090) - ------- ------- ------- ------- Net income (loss)........................................... $(2,256) $ 184 $(3,674) $(1,175) ======= ======= ======= ======= Pro forma information (unaudited): Income (loss) before income taxes as reported above......... $(1,488) $ 351 $(4,374) $(1,559) Add back tax reimbursements to S Corporation shareholders... 294 - 1,780 - ------- ------- ------- ------- Pro forma income (loss) before income taxes and extraordinary item.................................... (1,194) 351 (2,594) (1,559) Pro forma provision (benefit) for income taxes.............. (475) 167 (1,033) (384) ------- ------- ------- ------- Pro forma income (loss) before extraordinary item........... (719) 184 (1,561) (1,175) Extraordinary loss on early extinguishment of debt.......... (1,090) - (1,090) - ------- ------- ------- ------- Pro forma net income (loss)................................. $(1,809) $ 184 $(2,651) $(1,175) ======= ======= ======= ======= See accompanying notes. 4 SALEM COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) NINE MONTHS ENDED ------------------------- SEPTEMBER 30 ------------------------- 1997 1998 ----------- ----------- (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Net loss......................................................................................... $ (3,674) $(1,175) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.................................................................. 9,382 10,163 Amortization of bank loan fees................................................................. 165 32 Amortization of bond issue costs............................................................... -- 398 Deferred income taxes.......................................................................... (2,570) (659) Loss on sale of assets......................................................................... 190 365 Loss on early extinguishment of debt........................................................... 1,845 -- Changes in operating assets and liabilities: Accounts receivable.......................................................................... (365) (877) Prepaid expenses and other current assets.................................................... (798) (236) Accounts payable and accrued expenses........................................................ (2,065) (3,868) Other liabilities............................................................................ (25) 422 Income taxes................................................................................. (157) (223) -------- ------- Net cash provided by operating activities........................................................ 1,928 4,342 INVESTING ACTIVITIES Capital expenditures........................................................................... (5,502) (5,739) Purchases of radio stations.................................................................... (18,806) (33,887) Deposits on radio station acquisitions......................................................... -- (135) Proceeds from disposal of property, plant and equipment and intangible assets.................. 133 1,333 Expenditures for tower construction project held for sale...................................... (2,943) -- Other assets................................................................................... 526 4,755 -------- ------- Net cash used in investing activities............................................................ (26,592) (33,673) FINANCING ACTIVITIES Proceeds from issuance of long-term debt and notes payable to shareholders..................... 222,710 42,310 Payments of long-term debt and notes payable to shareholders................................... (182,500) (11,000) Payments of bank loan fees..................................................................... (1,003) -- Payments of costs related to debt refinancing.................................................. (418) -- Payments of bond issue costs................................................................... (4,638) (281) Repayments (additions) of shareholder notes and repayment of accrued interest receivable--net................................................. (1,872) (2,000) Distributions to shareholders.................................................................. (7,474) -- -------- ------- Net cash provided by financing activities...................................................... 24,805 29,029 -------- ------- Net (decrease) increase in cash and cash equivalents........................................... 141 (302) Cash and cash equivalents at beginning of year................................................. 1,962 1,645 -------- ------- Cash and cash equivalents at end of period....................................................... $ 2,103 $ 1,343 ======== ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest..................................................................................... $ 9,288 $14,817 Income taxes................................................................................. 221 499 See accompanying notes. 5 SALEM COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION Information with respect to the three and nine months ended September 30, 1998 and 1997 is unaudited. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of Salem Communications Corporation and Subsidiaries (the "Company"), for the periods presented. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Salem Communications Corporation and Subsidiaries' Special Financial Report filed pursuant to Rule 15d-2 promulgated under the Securities Exchange Act of 1934, as amended, under cover of Form 10-K for the year ended December 31, 1997. NOTE 2. MUSIC LICENSING FEE CREDIT The Company recorded a one-time credit of approximately $453,000 during the quarter ended September 30, 1998 related to music licensing fees (the Music Licensing Fee Credit). The amount represents the proceeds of a settlement between the Company and the two largest performance rights organizations. NOTE 3. RADIO STATION ACQUISITIONS AND DISPOSITIONS In August 1998, the Company purchased the assets of radio station KIEV-AM, Glendale, California, for $33.4 million, $30.4 million of which was paid to the seller at closing. The remaining $3 million is for real estate and is not payable until 18 months after the date of closing. The Company entered into a lease for the real estate. The Company recorded the $3 million purchase price plus the lease payments less imputed interest as a $2.8 million capital lease obligation. The Company borrowed $26 million under its Credit Agreement (and paid the balance of the purchase price from available cash) to close the purchase. In August 1998, the Company purchased the assets of radio station KKMO-AM, Tacoma, Washington, for $500,000. The Company paid for the station from available cash. In August 1998, the Company sold the assets of radio station KTSL-FM, Spokane, Washington, for $1.3 million. NOTE 4. SUBSEQUENT EVENTS In August 1998, the Company agreed to sell the assets of radio station KAVC-FM, Lancaster, California, for $1.6 million. The Company anticipates that the sale will close in November 1998. In October 1998, the Company purchased the assets of radio stations KTEK-AM, Houston, Texas and KYCR-AM, Minneapolis, Minnesota, for $2.7 million. The Company borrowed $1 million under its Credit Agreement (and paid the balance of the purchase price from available cash) to close the purchase. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion of the financial condition and results of operations of the Salem Communications Corporation, a California corporation (the "Company"), should be read in conjunction with the consolidated financial statements and related notes thereto. The Company is a radio broadcast company that focuses on serving the religious/conservative listening audience. The Company's two primary businesses include the ownership and operation of religious format radio stations and the development and expansion of a national radio network (the "Network") offering talk programming, news and music to affiliated stations. At September 30, 1998, the Company owned and/or operated 44 stations concentrated in 27 geographically diverse markets across the United States. The Company was incorporated in California in 1986 in connection with a combination of most of the radio station holdings of the principal shareholders of the Company, Edward G. Atsinger III and Stuart W. Epperson (the "Principal Shareholders"). Each of the Principal Shareholders owned 50% of the Company's outstanding common stock. New Inspiration Broadcasting Company, Inc. ("New Inspiration"), the licensee of KKLA-FM, Los Angeles, and Golden Gate Broadcasting Company, Inc. ("Golden Gate"), the licensee of KFAX- AM, San Francisco, were owned by the Principal Shareholders and Mr. Epperson's wife, Nancy A. Epperson. New Inspiration and Golden Gate were both "S corporations," as that term in defined in the Internal Revenue Code of 1986, as amended. In August 1997, the Company, New Inspiration and Golden Gate effected a reorganization (the "Reorganization") pursuant to which New Inspiration and Golden Gate became wholly owned subsidiaries of the Company. The S corporation status of New Inspiration and Golden Gate was terminated in the Reorganization. As a result of the Reorganization the outstanding common stock of the Company is owned by Mr. Atsinger (50%), Mr. Epperson (36.8%) and Mrs. Epperson (13.2%). In September 1997, the Company issued and privately placed $150 million principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Notes"). In March 1998, the Company consummated an offer for all outstanding Notes (the "Old Notes"), which were subject to certain restrictions on transfer, in exchange for Notes registered pursuant to the Securities Act of 1933, as amended (the "New Notes") and thus not subject to such transfer restrictions (the "Exchange Offer"). Pursuant to the Exchange Offer, the $150 million in principal amount of New Notes were issued and like amount of the Old Notes were canceled. Reference in this report to the Notes includes both the New Notes and the Old Notes. The performance of a radio group, such as the Company, is customarily measured by the ability of its stations to generate Broadcast Cash Flow and EBITDA. Broadcast Cash Flow is defined as net broadcasting revenue less station operating expenses (excluding depreciation and amortization). EBITDA is defined as Broadcast Cash Flow less corporate expenses. 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 the Company's results of operations presented on the basis of generally accepted accounting principles, the Company believes that Broadcast Cash Flow and EBITDA are useful because they are generally recognized by the radio broadcasting industry as a measure of performance and are used by analysts who report on the performance of broadcast companies. The principal sources of the Company's revenue are (i) the sale of block program time, both to national and local program producers, (ii) the sale of broadcast time on its radio stations for advertising, both to national and local advertisers, and (iii) the sale of broadcast time for advertising on the Network. The Company's revenue is affected primarily by the program and advertising rates its radio stations and the Network charge. Correspondingly, the rates for block program time are based upon the stations' ability to attract audiences that will support the program producers through contributions and purchases of their products. Advertising rates are based upon the demand for on-air inventory, which in turn is based on the stations' and the Network's ability to produce results for its advertisers. Each of the Company's stations and the Network have a 7 general pre-determined level of on-air inventory that it makes available for block programs and advertising, which may vary at different times of the day and tends to remain stable over time. Much of the Company's selling activity is based on demand for its radio stations' and the Network's on-air inventory. The Company's revenue and cash flow are also affected by the transition period experienced by stations acquired by the Company that previously operated with formats other than religious formats. During the transition period when the Company develops its program customer and listener base, such stations typically do not generate significant cash flow from operations. The Company's quarterly revenue varies throughout the year, as is typical in the radio broadcasting industry. Quarterly revenue from the sale of block program time does not tend to vary, however, since program rates are generally set annually. In the broadcasting industry, radio stations often utilize trade (or barter) agreements to exchange advertising time for goods or services (such as other media advertising, travel or lodging), in lieu of cash. In order to preserve most of its on-air inventory for cash advertising, the Company generally enters into trade agreements only if the goods or services bartered to the Company will be used in the Company's business. The Company has minimized its use of trade agreements and has generally sold over 90% of its advertising time for cash. In addition, it is the Company's general policy not to preempt advertising spots paid for in cash with advertising spots paid for in trade. The primary operating expenses incurred in the ownership and operation of the Company's radio stations include employee salaries and commissions, and facility expenses (e.g., rent and utilities). The Company also incurs and will continue to incur significant depreciation, amortization and interest expense as a result of completed and future acquisitions of stations, and due to existing borrowings and future borrowings. The Company's consolidated financial statements tend not to be directly comparable from period to period due to the Company's acquisition activity. The consolidated statements of operations of the Company for periods prior to August 13, 1997 include an operating expense called "tax reimbursements to S corporation shareholders." These amounts represent the income tax liability of the shareholders created by the income of New Inspiration and Golden Gate, which prior to the recent Reorganization were each S corporations. Management considers the nature of this operating expense to be essentially equivalent to an income tax provision and has excluded this expense from the calculation of Broadcast Cash Flow and EBITDA for periods prior to August 13, 1997. Commencing August 13, 1997, pretax income of New Inspiration and Golden Gate is included in the Company's consolidated income tax return and in the Company's computation of the income tax provision included in its consolidated statement of operations. RESULTS OF OPERATIONS Net Revenue. Net revenue increased approximately $2.3 million or 13.6% to $19.2 million for the quarter ended September 30, 1998 from $16.9 million for the same quarter of the prior year. Net revenue increased approximately $6.2 million or 12.6% to $55.6 million for the nine month period ended September 30, 1998 from $49.4 million for the same period of the prior year. The inclusion of revenue from the acquisitions of radio stations and revenue generated from local marketing agreements ("LMAs") entered into during 1998 and 1997 provided approximately $300,000 of the increase for the quarter ended September 30, 1998 over the same quarter of the prior year, and approximately $600,000 for the nine month period ended September 30, 1998 over the same period of the prior year. For stations and networks owned and operated over the comparable period in 1997 and 1998, net revenue improved approximately $2.0 million or 11.9% to $18.8 million for the quarter ended September 30, 1998 from $16.8 million for the same quarter of the prior year, and approximately $5.6 million or 11.3% to $55.0 million for the nine month period ended September 30, 1998 from $49.4 million for the same period of the prior year due primarily to increases in on-air inventory and improved selling efforts and to a lesser extent to program rate increases. Station Operating Expenses. Station operating expenses increased approximately $400,000 or 4.1% to $10.2 million for the quarter ended September 30, 1998 from $9.8 million for the same quarter of the prior year. Station operating expenses increased approximately $1.1 million or 3.8% to $30.2 million for the nine month period ended September 30, 1998 from $29.1 million for the same period of the prior year. The Company recorded the Music Licensing Fee Credit of $453,000 during the quarter ended September 30, 1998. The inclusion of expenses from the acquisitions of radio stations and expenses incurred for LMAs entered into during 1998 and 1997 provided approximately $253,000 of the increase for the quarter ended September 30, 1998 over the same quarter of the prior year, and approximately $400,000 for the nine month period ended September 30, 1998 over the same period of the prior year. For stations and networks owned and operated over the comparable period in 1997 and 1998, and excluding the Music Licensing Fee Credit, station operating expenses increased approximately $600,000 or 6.1% to $10.4 million for the quarter ended September 30, 1998 from $9.8 million for the same quarter of the prior year, and approximately $1.2 million or 4.1% to $30.2 million for the nine month period ended September 30, 1998 from $29.0 million for the same period of the prior year due primarily to expenses incurred to produce the increased revenue in the nine month period, as described above. 8 Broadcast Cash Flow. Broadcast Cash Flow increased approximately $2.0 million or 28.2% to $9.1 million for the quarter ended September 30, 1998 from $7.1 million for the same quarter of the prior year. Broadcast Cash Flow increased approximately $5.1 million or 25.0% to $25.5 million for the nine month period ended September 30, 1998 from $20.4 million for the same period of the prior year. As a percentage of net revenue, Broadcast Cash Flow increased to 47.1% for the quarter ended September 30, 1998 from 41.2% for the same quarter of the prior year. As a percentage of net revenue, Broadcast Cash Flow increased to 45.8% for the nine month period ended September 30, 1998 from 41.2% for the same period of the prior year. The increases are primarily attributable to the Music Licensing Fee Credit and the improved performance of stations acquired in 1996 and 1997 that previously operated with formats other than religious formats. These acquired and reformatted stations typically produce lower margins during the early phase of the transition period from a non-religious format to a religious format. Broadcast Cash Flow margins improve as the Company implements scheduled program rate increases and increases spot advertising revenue on the stations. Corporate Expenses. Corporate expenses decreased approximately $400,000 or 26.7% to $1.5 million for the quarter ended September 30, 1998 from $1.9 million for the same quarter of the prior year. The decrease is primarily attributable to costs incurred for potential acquisitions which were abandoned and expensed in the quarter ended September 30, 1997. Corporate expenses increased approximately $200,000 or 4.3% to $4.9 million for the nine month period ended September 30, 1998 from $4.7 million for the same period of the prior year. The increase is primarily attributable to additional personnel and overhead costs associated with station acquisitions in 1997 and 1998. EBITDA. EBITDA increased approximately $2.4 million or 46.2% to $7.6 million for the quarter ended September 30, 1998 from $5.2 million for the same quarter of the prior year. EBITDA increased approximately $4.9 million or 31.2% to $20.6 million for the nine month period ended September 30, 1998 from $15.7 million for the same period of the prior year. As a percentage of net revenue, EBITDA increased to 39.6% for the quarter ended September 30, 1998 from 30.8% for the same quarter of the prior year. As a percentage of net revenue, EBITDA increased to 37.1% for the nine month period ended September 30, 1998 from 31.8% for the same period of the prior year. Tax Reimbursements to S Corporation Shareholders. There were no tax reimbursements to S corporation shareholders for the nine month period ended September 30, 1998 because of the Reorganization which took place in August 1997. New Inspiration and Golden Gate became wholly-owned subsidiaries of the Company in August 1997 pursuant to the Reorganization. The S corporation status of New Inspiration and Golden Gate was terminated in the Reorganization. Depreciation and Amortization. Depreciation and amortization expense increased approximately $300,000 or 9.4% to $3.5 million for the quarter ended September 30, 1998 from $3.2 million for the same quarter of the prior year, primarily due to radio station and network acquisitions consummated during 1997 and 1998. Depreciation and amortization expense increased approximately $800,000 or 8.5% to $10.2 million for the nine month period ended September 30, 1998 from $9.4 million for the same period of the prior year, primarily due to radio station and network acquisitions consummated during 1997 and 1998. Other Income (Expense). Interest income was essentially unchanged for the third quarter of 1998 and 1997, and for the nine month periods ended September 30, 1998 and 1997. Gain (loss) on disposal of assets increased approximately $268,000 to $270,000 for the quarter ended September 30, 1998 compared to the same quarter of the prior year, primarily due to the gain on sale of radio station KTSL-FM in the third quarter of 1998. Gain (loss) on disposal of assets increased approximately $(175,000) to $(365,000) for the nine month period ended September 30, 1998 compared to the same period of the prior year, primarily due to the write off of abandoned assets at one of the Company's radio stations in the second quarter of 1998 offset in part by the gain on the sale of KTSL-FM in the third quarter of 1998. Interest expense increased approximately $900,000 or 29.0% to $4.0 million for the quarter ended September 30, 1998 from $3.1 million for the same quarter of the prior year. Interest expense increased approximately $3.0 million or 35.3% to $11.5 million for the nine month period ended September 30, 1998 from $8.5 million for the same period of the prior year. The increases in interest expense are primarily due to interest expense associated with additional borrowings to fund acquisitions consummated during 1997 and 1998. Other expense was essentially unchanged for the third quarter of 1998 and 1997, and for the nine month periods ended September 30, 1998 and 1997. Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes as a percentage of income (loss) before income taxes and extraordinary item (i.e., effective tax rate) was 47.6% for the quarter ended September 30, 1998 and (21.6)% for the same quarter of the prior year, and (24.6)% for the nine month period ended September 30, 1998 and (40.9)% for the same period of the prior year. For the quarter and nine month period ended September 30, 1997, the effective tax rate may differ from the federal statutory income tax rate of 34.0% because of the effect of state income taxes and the exclusion of federal income taxes relating to the S corporations. The increases in the effective tax rate are primarily due to an increase in state income taxes and the inclusion of income from New Inspiration and Golden Gate, which were S corporations prior to the Reorganization in August 1997. Net Income (Loss). The Company recognized net income of approximately $184,000 for the quarter ended September 30, 1998, compared to a net loss of approximately ($2.3) million for the same quarter of the prior year. The Company recognized a net loss of approximately ($1.2) million for the nine month period ended September 30, 1998, compared to a net loss of approximately ($3.7) million for the same period of the prior year. Included in the net loss for 1997 is a $1.1 million extraordinary loss for the write off of deferred financing costs and termination fees related to the repayment of the Company's prior credit agreement which was repaid in full upon issuance of the Old Notes on September 25, 1997. 9 LIQUIDITY AND CAPITAL RESOURCES In the past, the Company principally financed acquisitions of radio stations through borrowings, including borrowings under credit agreements with banks, and, to a lesser extent, from cash flow from operations and selected asset dispositions. In September 1997, the Company used the net proceeds from the sale of the Notes to repay substantially all of its outstanding indebtedness under a line of credit agreement, at which time such facility was canceled and the Company entered into the current Credit Agreement. The Company anticipates funding future acquisitions from operating cash flow and borrowings, including borrowings under the Credit Agreement. At September 30, 1998, $31.0 million was outstanding under the Company's Credit Agreement. The maximum amount that the Company may borrow under the Credit Agreement is limited by the Company's debt to cash flow ratio, adjusted for recent radio station acquisitions as defined in the Credit Agreement (the "Adjusted Debt to Cash Flow Ratio"). At September 30, 1998, the maximum Adjusted Debt to Cash Flow Ratio allowed under the Credit Agreement was 6.75 to 1. The Company's ability to borrow for the purpose of acquiring a radio station is further limited by the Credit Agreement in that the Company may not borrow for an acquisition if the Adjusted Debt to Cash Flow Ratio is greater than 6.0 to 1. At September 30, 1998, the Adjusted Debt to Cash Flow Ratio was 6.22 to 1, resulting in total borrowing availability of approximately $15.4 million, none of which can currently be used for radio station acquisitions. In addition to debt service requirements under the Credit Agreement, the Company is required to pay approximately $14.3 million per annum in interest on the Notes. The Credit Agreement contains certain additional restrictive covenants customary for credit facilities of the size, type and purpose contemplated which, among other things, and with certain exceptions, limits the Company's ability to enter into affiliate transactions, pay dividends, consolidate, merge or effect certain asset sales, make certain investments or loans and change the nature of its business. The Credit Agreement also requires the satisfaction by the Company of certain financial covenants, which will require the maintenance of specified financial ratios and compliance with certain financial tests, including ratios for maximum leverage as described above (not greater than 6.75 to 1 at September 30, 1998), minimum interest coverage (not less than 1.25 to 1 at September 30, 1998), minimum debt service coverage (a static ratio of not less than 1.10 to 1) and minimum fixed charge coverage (a static ratio of not less than 1.10 to 1). Management believes that cash flow from operations and borrowings under the Credit Agreement (as the Company anticipates the Credit Agreement will be amended) should be sufficient to permit the Company to meet its financial obligations and to fund its operations for at least the next twelve months. 10 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 the Company began implementing the assessment phase of its plan to address the Y2K issue in each broadcast area and has substantially completed a Y2K assessment phase of its 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, the Company initiated formal communication with all of its key business partners to identify their exposure to the Y2K issue. This assessment will target potential external risks related to the Y2K issue and is still in progress, but is expected to be completed by the end of the first 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, and 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 the Company's plan to address the Y2K issue. Activities during this phase are in progress and include, if necessary, the actual repair, replacement, or upgrade of the Company's 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. The Company currently is implementing a new accounting and financial reporting system which is Y2K ready and should be completed by the end of 1998. Costs related to this new system, expected to be 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 first quarter of 1999 and is expected to be completed by the end of the second quarter. Based on test results and assessment of outside risks, contingency plans will be developed as determined necessary. The Company would expect to complete such plans by the end of the third quarter of 1999. The Company anticipates 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 the Company's control. The Company believes that its Y2K compliance issues from all phases of its plan will be resolved on a timely basis and that any related costs will not have a material impact on the Company's operations, cash flows, or financial condition of future periods. SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS This report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. All statements, other than statements of historical facts, included in this report that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of the Company's business and operations, plans, references to future success and other such matters are forward-looking statements. When used in this report, the words "anticipates," "believes," "expects," "intends," "forecasts," "plans," "future," "strategy," or words of similar import are intended to identify forward-looking statements. The forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform to the Company's expectations and predictions is subject to a number of risks: general economic, market or business conditions; the opportunities (or lack thereof) that may be presented to and pursued by the Company; competitive actions by other companies; changes in laws or regulations; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward- looking statements made in this report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged to carefully review and consider the various disclosures made by the Company to advise interested parties of certain risks and other factors that may affect the Company's business and operating results, including the disclosures made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. 11 PART II--OTHER INFORMATION SALEM COMMUNICATIONS CORPORATION ITEM 1. LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries is a party to any material legal proceeding, other than ordinary routine litigation incidental to their consolidated business operations. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company has not had a material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within 30 days, with respect to any indebtedness of the Company or any of its significant subsidiaries exceeding 5 percent of the total assets of the Company and its consolidated subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters have been submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the period covered by this report. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Set forth below is a list of exhibits included as part of this Quarterly Report: EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- *3.01 Articles of Incorporation of the Company. *3.02 Bylaws of the Company. *4.01 Indenture between the Company, the Guarantors and The Bank of New York, as Trustee, dated as of September 25, 1997, relating to the Old Notes and the Notes, including form of Note. *4.02 Form of Note (filed as part of Exhibit 4.01). *4.03 Form of Note Guarantee (filed as part of Exhibit 4.01). *10.01 Employment Agreement, dated as of August 1, 1997, between the Company and Edward G. Atsinger III. *10.02 Employment Agreement, dated as of August 1, 1997, between the Company and Stuart W. Epperson. 12 EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- *10.03.01 Employment Contract, dated November 7, 1991, between the Company and Eric H. Halvorson. *10.03.02 First Amendment to Employment Contract, dated April 22, 1996, between the Company and Eric H. Halvorson. *10.03.03 Second Amendment to Employment Contract, dated July 8, 1997, between the Company and Eric H. Halvorson. *10.03.04 Deferred Compensation Agreement, dated November 7, 1991, between the Company and Eric H. Halvorson. *10.04.01 Employment Agreement, dated February 9, 1995, between Salem Radio Network Incorporated and Greg L Anderson. *10.04.02 Letter Agreement dated December 22, 1995, by Inspiration Media of Texas, Inc. re compensation of Greg L. Anderson under Employment Agreement with Salem Radio Network Incorporated. *10.04.03 First Amendment to Employment Agreement, dated August 1, 1997 between Salem Radio Network Incorporated and Greg R. Anderson. *10.05.01 Antenna/tower lease between Caron Broadcasting, Inc. (WHLO- AM/Akron, Ohio) and Messrs. Atsinger and Epperson expiring 2007. *10.05.02 Antenna/tower/studio lease between Caron Broadcasting, Inc. (WTSJ-AM/Cincinnati, Ohio) and Messrs. Atsinger and Epperson expiring 2007. *10.05.03 Antenna/tower lease between Caron Broadcasting, Inc. WHK- FM/Canton, Ohio) and Messrs. Atsinger and Epperson expiring 2007. *10.05.04 Antenna/tower studio lease between Common Ground Broadcasting, Inc. (KKMS-AM/Eagan, Minnesota) and Messrs. Atsinger and Epperson expiring in 2006. **10.05.05 Antenna/tower lease between Common Ground Broadcasting, Inc. (WHK-AM/Cleveland, Ohio) and Messrs. Atsinger and Epperson expiring 2008. **10.05.06 Antenna/tower lease (KFAX-FM/Hayward, California) and Salem Broadcasting Company, a partnership consisting of Messrs. Atsinger and Epperson, expiring in 2003. **10.05.07 Antenna/tower/studio lease between Inland Radio, Inc. (KKLA- AM/San Bernardino, California) and Messrs. Atsinger and Epperson expiring 2002. **10.05.08 Antenna/tower lease between Inspiration Media, Inc. (KGNW- AM/Seattle, Washington) and Messrs. Atsinger and Epperson expiring in 2002. **10.05.09 Antenna/tower lease between Inspiration Media, Inc. (KLFE- AM/Seattle, Washington) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring in 2004. **10.05.10 Antenna/tower lease between Oasis Radio, Inc. (KAVC-FM/Rosamond, California) and The Atsinger Family Trust under a lease expiring in 2002. **10.05.11.01 Antenna/tower/lease between Pennsylvania Media Associates, Inc. (WZZD-AM/WFIL-AM/ Philadelphia, Pennsylvania) and Messrs. Atsinger and Epperson, as assigned from WEAZ-FM Radio, Inc., expiring 2004. **10.05.11.02 Antenna/tower/studio lease between Pennsylvania Media Associates, Inc. (WZZD-AM/ WFIL-AM/Philadelphia, Pennsylvania) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2004. **10.05.12 Antenna/tower lease between Radio 1210, Inc. (KPRZ- AM/Olivenhain, California) and The Atsinger Family Trust expiring in 2002. **10.05.13 Antenna/tower lease between Salem Media Corporation (WYLL- FM/Arlington Heights, Illinois) and Messrs. Atsinger and Epperson expiring in 2002. 13 EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- **10.05.14 Antenna/tower/studio leases between Salem Media Corporation (KLTX-AM/Long Beach and Paramount, California) and Messrs. Atsinger and Epperson expiring in 2002 **10.05.15 Antenna/tower lease between Salem Media of Colorado, Inc. (KNUS- AM/Denver-Boulder, Colorado) and Messrs. Atsinger and Epperson expiring 2006. **10.05.16 Antenna/tower lease between Salem Media of Ohio, Inc. (WRFD- AM/Columbus, Ohio) and Messrs. Atsinger and Epperson expiring 2002. **10.05.17.01 Studio Lease between Salem Media of Oregon. Inc. (KPDQ- AM/FM/Portland, Oregon) and Edward G. Atsinger III, Mona J. Atsinger, Stuart W. Epperson and Nancy K. Epperson expiring 2002. **10.05.17.02 Antenna/tower lease between Salem Media of Oregon, Inc. (KPDQ- AM/Raleigh Hills, Oregon and Messrs. Atsinger and Epperson expiring 2002. **10.05.18 Antenna/tower lease between Salem Media of Pennsylvania, Inc. (WORD-FM/WPIT-AM/ Pittsburgh, Pennsylvania) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2003. **10.05.19 Antenna/tower lease between Salem Media of Texas, Inc. (KSLR- AM/San Antonio, Texas) and Epperson-Atsinger 1983 Family Trust expiring 2007. **10.05.20 Antenna/tower lease between South Texas Broadcasting, Inc. (KENR-AM/KKHT-FM/ Houston-Galveston, Texas) and Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2005. **10.05.21 Antenna/tower lease between Vista Broadcasting, Inc. (KFIA- AM/Sacramento, California) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2005. **10.06.01 Asset Purchase Agreement dated as of June 5, 1996 by and between Radio 94 of Phoenix Limited Partnership and Salem Media of Arizona, Inc. (KOOL-AM, Phoenix, Arizona). **10.06.02 Asset Purchase Agreement dated as of September 3, 1996 by and between Caron Broadcasting, Inc. and Mortenson Broadcasting Company of Canton, LLC and Mortenson Broadcasting Company of Akron, LLC (WTOF-FM, Canton, Ohio and WHLO-AM, Akron, Ohio). **10.06.03.01 Asset Purchase Agreement dated March 28, 1996 by and between American Radio Assistance Corporation and Common Ground Broadcasting, Inc. (KDBX-FM, Banks, Oregon). **10.06.03.02 First Amendment to Asset Purchase Agreement dated as of July 22, 1996 by and between American Radio Systems Corporation and Common Ground Broadcasting, Inc. (KDBX-FM, Banks, Oregon). **10.06.04.01 Asset Purchase Agreement dated as of April 23, 1996 by and between OmniAmerica Group and WHK License Partnership and Inspiration Media of Ohio, Inc. (WHK-AM, Cleveland, Ohio). **10.06.04.02 First Amendment to the Asset Purchase Agreement dated as of July 23, 1996 by and between OmniAmerica Group and WHK License Partnership and Inspiration Media of Ohio, Inc. (WHK-AM, Cleveland, Ohio). **10.06.04.03 Second Amendment to Asset Purchase Agreement dated as of August 12, 1996 by and between OmniAmerica Group and WHK License Partnership and Inspiration Media of Ohio, Inc. WHK-AM, Cleveland, Ohio). **10.06.05 Asset Purchase Agreement dated as of September 30, 1996 by and between Infinity Broadcasting Corporation of Dallas and Inspiration Media of Texas. Inc. (KEWS, Arlington, Texas; KDFX, Dallas, Texas). **10.06.06.01 Asset Purchase Agreement dated as of December 4, 1996 by and between Backbay Broadcasters, Inc. and New England Continental Media, Inc. (WBNW-AM, Boston, Massachusetts). 14 EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- **10.06.06.02 First Amendment to the Asset Purchase Agreement dated as of February, 1997 by and between Backbay Broadcasters, Inc. and New England Continental Media, Inc. (WBNW-AM, Boston, Massachusetts). **10.06.07 Asset Purchase Agreement dated June 2, 1997 by and between New England Continental Media, Inc. and Hibernia Communications, Inc. (WPZE-AM, Boston, Massachusetts). **10.06.08 Option to Purchase dated as of August 18, 1997 by and between Sonsinger, Inc. and Inspiration Media, Inc. (KKOL-AM, Seattle, Washington). **10.07.01 Tower Purchase Agreement dated August 22, 1997 by and between the Company and Sonsinger Broadcasting Company of Houston, L.P. *10.07.02 Amendment to the Tower Purchase Agreement dated November 10, 1997 by and between the Company and Sonsinger Broadcasting Company of Houston, L.P. **10.07.03 Promissory Note dated November 11, 1997 made by Sonsinger Broadcasting Company of Houston, L.P. payable to the Company. **10.07.04 Promissory Note dated December 24, 1997 made by the Company payable to Edward G. Atsinger III. **10.07.05 Promissory Note dated December 24, 1997 made by the Company payable to Stuart W. Epperson. *10.08.01 Local Programming and Marketing Agreement dated June 13, 1997 between Sonsinger, Inc. and Inspiration Media, Inc. *10.08.02 Local Programming and Marketing Agreement and Put/Call Agreement dated October 23, 1997 by and between Cherokee Broadcasting Co., Inc. and Salem Media of Georgia, Inc. *10.09.01 Evidence of Key man life insurance policy no. 2256440M insuring Edward G. Atsinger III in the face amount of $5,000,000. *10.09.02 Evidence of Key man life insurance policy no. 2257474H insuring Edward G. Atsinger III in the face amount of $5,000,000. *10.09.03 Evidence of Key man life insurance policy no. 2257476B insuring Stuart W. Epperson in the face amount of $5,000,000. +10.10.01 Credit Agreement, dated as of September 25, 1997, among the Company, the several Lenders from time to time parties thereto, and The Bank of New York, as administrative agent for the Lenders (previously filed as Exhibit 4.07). +10.10.02 Borrower Security Agreement, dated as of September 25, 1997, by and between the Company and The Bank of New York, as Administrative Agent of the Lenders (previously filed as Exhibit 4.08). +10.10.03 Subsidiary Guaranty and Security Agreement dated as of September 25, 1997, by and between the Company, the Guarantors, and The Bank of New York, as Administrative Agent (previously filed as Exhibit 4.09). 27.01 Financial Data Schedule. - -------- * Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Registration Statement on Form S-4 filed on December 8, 1997 (File No. 333-41733). + Incorporated by reference herein to the exhibit, numbered as noted in parentheses, filed as an exhibit to the Company's Registration Statement on Form S-4 filed on December 8, 1997 (File No. 333-41733). ** Incorporated by reference herein to the exhibit of the same number filed as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-4 filed on January 29, 1998 (File No. 333-41733). (b) REPORTS ON FORM 8-K The Company filed a report on Form 8-K dated September 3, 1998, relating to the acquisition of the assets of radio station KIEV-AM, Glendale, California. 15 SIGNATURES PURSUANT TO THE REQUIREMENTS 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. Date: Noverber 16, 1998 Salem Communications Corporation /s/ Edward G. Atsinger III By: _________________________________ Edward G. Atsinger III President and Chief Executive Officer /s/ Dirk Gastaldo Date: November 16, 1998 ___________________________________ Dirk Gastaldo Vice President and Chief Financial Officer (Principal Financial Officer) 16 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- *3.01 Articles of Incorporation of the Company. *3.02 Bylaws of the Company. *4.01 Indenture between the Company, the Guarantors and The Bank of New York, as Trustee, dated as of September 25, 1997, relating to the Old Notes and the Notes, including form of Note. *4.02 Form of Note (filed as part of Exhibit 4.01). *4.03 Form of Note Guarantee (filed as part of Exhibit 4.01). *10.01 Employment Agreement, dated as of August 1, 1997, between the Company and Edward G. Atsinger III. *10.02 Employment Agreement, dated as of August 1, 1997, between the Company and Stuart W. Epperson. *10.03.01 Employment Contract, dated November 7, 1991, between the Company and Eric H. Halvorson. *10.03.02 First Amendment to Employment Contract, dated April 22, 1996, between the Company and Eric H. Halvorson. *10.03.03 Second Amendment to Employment Contract, dated July 8, 1997, between the Company and Eric H. Halvorson. *10.03.04 Deferred Compensation Agreement, dated November 7, 1991, between the Company and Eric H. Halvorson. *10.04.01 Employment Agreement, dated February 9, 1995, between Salem Radio Network Incorporated and Greg L Anderson. *10.04.02 Letter Agreement dated December 22, 1995, by Inspiration Media of Texas, Inc. re compensation of Greg L. Anderson under Employment Agreement with Salem Radio Network Incorporated. *10.04.03 First Amendment to Employment Agreement, dated August 1, 1997 between Salem Radio Network Incorporated and Greg R. Anderson. *10.05.01 Antenna/tower lease between Caron Broadcasting, Inc. (WHLO- AM/Akron, Ohio) and Messrs. Atsinger and Epperson expiring 2007. *10.05.02 Antenna/tower/studio lease between Caron Broadcasting, Inc. (WTSJ- AM/Cincinnati, Ohio) and Messrs. Atsinger and Epperson expiring 2007. *10.05.03 Antenna/tower lease between Caron Broadcasting, Inc. WHK-FM/Canton, Ohio) and Messrs. Atsinger and Epperson expiring 2007. *10.05.04 Antenna/tower studio lease between Common Ground Broadcasting, Inc. (KKMS-AM/Eagan, Minnesota) and Messrs. Atsinger and Epperson expiring in 2006. **10.05.05 Antenna/tower lease between Common Ground Broadcasting, Inc. (WHK- AM/Cleveland, Ohio) and Messrs. Atsinger and Epperson expiring 2008. **10.05.06 Antenna/tower lease (KFAX-FM/Hayward, California) and Salem Broadcasting Company, a partnership consisting of Messrs. Atsinger and Epperson, expiring in 2003. EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- **10.05.07 Antenna/tower/studio lease between Inland Radio, Inc. (KKLA- AM/San Bernardino, California) and Messrs. Atsinger and Epperson expiring 2002. **10.05.08 Antenna/tower lease between Inspiration Media, Inc. (KGNW- AM/Seattle, Washington) and Messrs. Atsinger and Epperson expiring in 2002. **10.05.09 Antenna/tower lease between Inspiration Media, Inc. (KLFE- AM/Seattle, Washington) and The Atsinger Family Trust and Stuart W. Epperson Revocable living Trust expiring in 2004. **10.05.10 Antenna/tower lease between Oasis Radio, Inc. (KAVC-FM/Rosamond, California) and The Atsinger Family Trust under a lease expiring in 2002. **10.05.11.01 Antenna/tower/lease between Pennsylvania Media Associates, Inc. (WZZD-AM/ WFIL-AM/Philadelphia, Pennsylvania) and Messrs. Atsinger and Epperson, as assigned from WEAZ-FM Radio, Inc., expiring 2004. **10.05.11.02 Antenna/tower/studio lease between Pennsylvania Media Associates, Inc. (WZZD-AM/ WFIL-AM/Philadelphia, Pennsylvania) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2004. **10.05.12 Antenna/tower lease between Radio 1210, Inc. (KPRZ AM/Olivenhain, California) and The Atsinger Family Trust expiring in 2002. **10.05.13 Antenna/tower lease between Salem Media Corporation (WYLL- FM/Arlington Heights, Illinois) and Messrs. Atsinger and Epperson expiring in 2002. **10.05.14 Antenna/tower/studio leases between Salem Media Corporation (KLTX AM/Long Beach and Paramount, California) and Messrs. Atsinger and Epperson expiring in 2002 **10.05.15 Antenna/tower lease between Salem Media of Colorado, Inc. (KNUS- AM/Denver-Boulder, Colorado) and Messrs. Atsinger and Epperson expiring 2006. **10.05.16 Antenna/tower lease between Salem Media of Ohio, Inc. (WRFDAM/Columbus, Ohio) and Messrs. Atsinger and Epperson expiring 2002. **10.05.17.01 Studio Lease between Salem Media of Oregon. Inc. (KPDQ- AM/FM/Portland, Oregon) and Edward G. Atsinger III, Mona J. Atsinger, Stuart W. Epperson. and Nancy K. Epperson expiring 2002. **10.05.17.02 Antenna/tower lease between Salem Media of Oregon, Inc. (KPDQ- AM/Raleigh Hills, Oregon and Messrs. Atsinger and Epperson expiring 2002. **10.05.18 Antenna/tower lease between Salem Media of Pennsylvania, Inc. (WORD-FM/WPIT-AM/ Pittsburgh, Pennsylvania) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2003. **10.05.19 Antenna/tower lease between Salem Media of Texas, Inc. (KSLRAM/San Antonio, Texas) and Epperson-Atsinger 1983 Family Trust expiring 2007. **10.05.20 Antenna/tower lease between South Texas Broadcasting, Inc. (KENR-AM/KKHT-FM/Houston-Galveston, Texas) and Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2005. **10.05.21 Antenna/tower lease between Vista Broadcasting, Inc. (KFIA- AM/Sacramento, California) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2005. **10.06.01 Asset Purchase Agreement dated as of June 5, 1996 by and between Radio 94 of Phoenix Limited Partnership and Salem Media of Arizona, Inc. (KOOL-AM, Phoenix, Arizona). **10.06.02 Asset Purchase Agreement dated as of September 3, 1996 by and between Caron Broadcasting, Inc. and Mortenson Broadcasting Company of Canton, LLC and Mortenson Broadcasting Company of Akron, LLC (WTOF-FM, Canton, Ohio and WHLO-AM, Akron, Ohio). EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- **10.06.03.01 Asset Purchase Agreement dated March 28, 1996 by and between American Radio Assistance Corporation and Common Ground Broadcasting, Inc. (KDBX-FM, Banks, Oregon). **10.06.03.02 First Amendment to Asset Purchase Agreement dated as of July 22, 1996 by and between American Radio Systems Corporation and Common Ground Broadcasting, Inc. (KDBX-FM, Banks, Oregon). **10.06.04.01 Asset Purchase Agreement dated as of April 23, 1996 by and between OmniAmerica Group and WHK License Partnership and Inspiration Media of Ohio, Inc. (WHK-AM, Cleveland, Ohio). **10.06.04.02 First Amendment to the Asset Purchase Agreement dated as of July 23, 1996 by and between OmniAmerica Group and WHK License Partnership and Inspiration Media of Ohio, Inc. (WHK-AM, Cleveland, Ohio). **10.06.04.03 Second Amendment to Asset Purchase Agreement dated as of August 12, 1996 by and between OmniAmerica Group and WHK License Partnership and Inspiration Media of Ohio, Inc. WHK-AM, Cleveland, Ohio). **10.06.05 Asset Purchase Agreement dated as of September 30, 1996 by and between Infinity Broadcasting Corporation of Dallas and Inspiration Media of Texas. Inc. (KEWS, Arlington, Texas; KDFX, Dallas, Texas). **10.06.06.01 Asset Purchase Agreement dated as of December 4, 1996 by and between Backbay Broadcasters, Inc. and New England Continental Media, Inc. (WBNW-AM, Boston, Massachusetts). **10.06.06.02 First Amendment to the Asset Purchase Agreement dated as of February, 1997 by and between Backbay Broadcasters, Inc. and New England Continental Media, Inc. (WBNW-AM, Boston, Massachusetts). **10.06.07 Asset Purchase Agreement dated June 2, 1997 by and between New England Continental Media, Inc. and Hibernia Communications, Inc. (WPZE-AM, Boston, Massachusetts). **10.06.08 Option to Purchase dated as of August 18, 1997 by and between Sonsinger, Inc. and Inspiration Media, Inc. (KKOL-AM, Seattle, Washington). **10.07.01 Tower Purchase Agreement dated August 22, 1997 by and between the Company and Sonsinger Broadcasting Company of Houston, L.P. *10.07.02 Amendment to the Tower Purchase Agreement dated November 10, 1997 by and between the Company and Sonsinger Broadcasting Company of Houston, L.P. **10.07.03 Promissory Note dated November 11, 1997 made by Sonsinger Broadcasting Company of Houston, L.P. payable to the Company. **10.07.04 Promissory Note dated December 24, 1997 made by the Company payable to Edward G. Atsinger III. **10.07.05 Promissory Note dated December 24, 1997 made by the Company payable to Stuart W. Epperson. *10.08.01 Local Programming and Marketing Agreement dated June 13, 1997 between Sonsinger, Inc. and Inspiration Media, Inc. *10.08.02 Local Programming and Marketing Agreement and Put/Call Agreement dated October 23, 1997 by and between Cherokee Broadcasting Co., Inc. and Salem Media of Georgia, Inc. *10.09.01 Evidence of Key man life insurance policy no. 2256440M insuring Edward G. Atsinger III in the face amount of $5,000,000. *10.09.02 Evidence of Key man life insurance policy no. 2257474H insuring Edward G. Atsinger III in the face amount of $5,000,000. +10.10.01 Credit Agreement, dated as of September 25, 1997, among the Company, the several Lenders from time to time parties thereto, and The Bank of New York, as administrative agent for the Lenders (previously filed as Exhibit 4.07). +10.10.02 Borrower Security Agreement, dated as of September 25, 1997, by and between the Company and The Bank of New York, as Administrative Agent of the Lenders (previously filed as Exhibit 4.08). +10.10.03 Subsidiary Guaranty and Security Agreement dated as of September 25, 1997, by and between the Company, the Guarantors, and The Bank of New York, as Administrative Agent (previously filed as Exhibit 4.09). EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- *10.09.03 Evidence of Key man life insurance policy no. 2257476B insuring Stuart W. Epperson in the face amount of $5,000,000. 27.01 Financial Data Schedule. - -------- * Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Registration Statement on Form S-4 filed on December 8, 1997 (File No. 333-41733). + Incorporated by reference herein to the exhibit, numbered as noted in parentheses, filed as an exhibit to the Company's Registration Statement on Form S-4 filed on December 8, 1997 (File No. 333-41733). ** Incorporated by reference herein to the exhibit of the same number filed as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-4 filed on January 29, 1998 (File No. 333-41733).