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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR QUARTERLY PERIOD ENDED MARCH 31, 2001

OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________________ TO __________________

COMMISSION FILE NUMBER 333-76649

SALEM COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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 May 14, 2001 there were 17,902,392 shares of Class A common stock and 5,553,696 shares of Class B common stock of Salem Communications Corporation outstanding.

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SALEM COMMUNICATIONS CORPORATION
INDEX

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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

      From time to time, in both written reports (such as this report) and oral statements, Salem Communications Corporation (“Salem” or the “company”, including references to Salem by “we,” “us” and “our”) makes “forward-looking statements” within the meaning of Federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “expects,” “may” or “plans” and similar expressions are intended to identify forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company’s current expectations and are based upon data available to the company at the time of the statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations including, but not limited to, Salem’s ability to close and integrate announced transactions, competition in the radio broadcast, publishing and Internet industries and from new technologies, market acceptance of recently launched music formats and adverse economic conditions. These risks as well as other risks and uncertainties are detailed from time to time in Salem’s periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission. Forward-looking statements made in this report speak as of the date hereof. The company undertakes no obligation to update or revise any forward-looking statements made in this report. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by Salem about its business. These projections or forward-looking statements fall under the safe harbors of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”).

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PART I — FINANCIAL INFORMATION

SALEM COMMUNICATIONS CORPORATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

SALEM COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

See accompanying notes

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SALEM COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

See accompanying notes

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SALEM COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes

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SALEM COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

      Information with respect to the three months ended March 31, 2001 and 2000 is unaudited. The accompanying unaudited condensed 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 (“Salem”, or “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 our annual report on Form 10-K for the year ended December 31, 2000.

NOTE 2. ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS

      We purchased the assets (principally intangibles) of the following radio stations during the quarter ended March 31, 2001:

      On January 22, 2001, the company sold the assets of radio station KALC-FM, Denver, CO for approximately $100 million. The net proceeds have been placed in an account with a qualified intermediary under a like-kind exchange agreement in order to preserve our ability to effect a tax-deferred exchange. As of March 31, 2001, we have invested $38.2 million of the proceeds. The balance of $61.1 million is reflected in cash and cash equivalents at March 31, 2001.

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

      In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 establishes accounting and reporting standards requiring that all derivatives be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. Certain provisions of SFAS No. 133, including its required implementation date, were subsequently amended. We adopted SFAS No. 133, as amended, in the first quarter of 2001 and its adoption did not have a material effect on our results of operations or our financial position.

NOTE 4. BASIC AND DILUTED NET LOSS PER SHARE

      Basic net loss per share is computed by dividing net loss by the weighted average number of common stock shares outstanding. Diluted net loss per share is computed by dividing net loss by the weighted average number of common stock shares and when dilutive, common stock share equivalents outstanding. Options to purchase 342,500 and 473,200 shares of common stock were outstanding as of March 31, 2000 and 2001, respectively. These options were excluded from the respective computations of diluted net loss per share because their effect would be anti-dilutive and, as such, basic and diluted net loss per share are the same.

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      The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

NOTE 5. CONTINGENCIES

      The company and our subsidiaries, incident to our business activities, are parties to a number of legal proceedings, lawsuits, arbitration and other claims, including the Gospel Communications International, Inc. (“GCI”) matter described in more detail below. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Also, we maintain insurance which may provide coverage for such matters. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters as of March 31, 2001. However, we believe, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the our financial position, results of operations or cash flows.

      On December 6, 2000, GCI made a demand for arbitration upon Salem. The demand, pending before an arbitration panel of the American Arbitration Association, alleges Salem and its subsidiary OnePlace, failed to provide certain e-commerce software to GCI pursuant to a written contract between GCI and OnePlace, for which GCI seeks $5.0 million in damages. We have filed an answer to the demand, denying the factual basis for certain elements of GCI’s claims and has asserted counterclaims against GCI for breach of contract. Although there can be no assurance that the GCI matter will be resolved in favor of the Company, we will vigorously defend the action and pursue its counterclaims against GCI.

NOTE 6. SUBSEQUENT EVENTS

      On April 1, 2001, we purchased the assets of radio station WROL-AM, Boston, MA, for $11.0 million.

ITEM 2. 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 condensed consolidated financial statements and related notes included elsewhere in this report. Our condensed consolidated financial statements are not directly comparable from period to period because of our acquisition and disposition of radio stations and our acquisitions of other media businesses. See Note 2 to our condensed consolidated financial statements.

      We are the largest U.S. radio broadcasting company, measured by number of stations and audience coverage, providing programming targeted at audiences interested in religious and family issues. Our core business, developed over the last 25 years, is the ownership and operation of radio stations in large metropolitan markets. After completing our pending transactions, we will own or operate 79 radio stations, including 54 stations which broadcast to 22 of the top 25 U.S. markets. We also operate Salem Radio Network®, a national radio network offering syndicated talk, news and music programming to over 1,600 affiliated radio stations, after giving effect to a pending transaction.

      Historically, 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

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•

the sale of advertising time on our national radio network.

      Our broadcasting 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. Historically we have not subscribed to traditional audience measuring services. Instead, we have marketed ourselves to advertisers based upon the responsiveness of our audience. With the launch of the contemporary Christian music format, called “The Fish™”, in several markets, we have started to subscribe to Arbitron Inc., which develops quarterly reports to measure a radio station’s audience share in the demographic groups targeted by advertisers. Each of our radio stations and our 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.

      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 when, due to the nature of the radio station, our plans for the market and other circumstances, we find it beneficial or advisable to change its format. This transition period is when we develop the radio station’s program customer and listener base. During this period, a station will 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 2000, we sold 94% 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). Beginning in 2000, in connection with the launch of our contemporary Christian music format in several markets, we incurred increased amounts for promotional expenses and music license fees. 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.

      OnePlace earns its revenue from the (1) sales of banner advertising and sponsorships on the Internet, (2) sales of streaming services, and (2) sales of software and software support contracts. CCM Communications, Inc. earns its revenue by selling advertising in and subscriptions to its publications. The revenue and related operating expenses of these businesses are reported as “other media” on our condensed 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, EBITDA and after-tax cash flow. We define broadcast cash flow as net operating income, excluding other media revenue and other media operating expenses, before depreciation and amortization and corporate expenses. We define EBITDA as net operating income before depreciation and amortization. We define after-tax cash flow as income (loss) before extraordinary items minus gain (loss) on disposal of assets (net of income tax) plus depreciation and amortization.

      Although broadcast cash flow, EBITDA and after-tax cash flow 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, EBITDA and after-tax cash flow 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 networks that we own or operate

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in the same format during the current period compared with the results of the same stations and networks for the corresponding period of the prior year. We do not include a station or network in this comparison unless it has been owned or operated for at least an entire quarter included in each of the current and corresponding prior year periods.

RESULTS OF OPERATIONS

      NET BROADCASTING REVENUE. Net broadcasting revenue increased $7.5 million or 33.2% to $30.1 million for the quarter ended March 31, 2001 from $22.6 million for the same quarter of the prior year. The growth is attributable to the increase in same station revenue and the acquisitions of radio stations and a network during 2000 and 2001, partially offset by the sales of radio stations during 2000. On a same station basis, net broadcasting revenue improved $1.9 million or 12.2% to $17.5 million for the quarter ended March 31, 2001 from $15.6 million for the same quarter of the prior year. The improvement was primarily due to an increase in network revenue due to increased network affiliations and quality programming, an increase in net revenue at radio stations we acquired in 1998 and 1999 that previously operated with formats other than their current format, an increase in program rates and increases in advertising time and improved selling efforts at both the national and local level. Revenue from advertising as a percentage of our gross broadcasting revenue increased to 41.0% for the quarter ended March 31, 2001 from 35.2% for the same quarter of the prior year. Revenue from block program time as a percentage of our gross broadcasting revenue decreased to 43.5% for the quarter ended March 31, 2001 from 51.8% for the same quarter of the prior year. This change in our revenue mix is primarily due to our continued efforts to develop more advertising revenue in all of our markets as well as the launch of our contemporary Christian music format in several markets.

      OTHER MEDIA REVENUE. Other media revenue increased $0.2 million or 11.1% to $2.0 million for the quarter ended March 31, 2001 from $1.8 million for the same quarter in the prior year. The increase is due primarily to our increased revenue from banner advertising and streaming services, offset by the loss of revenues from the sale of certain assets which generated revenue from the sale of advertising in print and online catalogs and product sales.

      BROADCASTING OPERATING EXPENSES. Broadcasting operating expenses increased $7.2 million or 56.7% to $19.9 million for the quarter ended March 31, 2001 from $12.7 million for the same quarter of the prior year. The increase is attributable to operating expenses associated with the acquisitions of radio stations and a network during 2000 and 2001, promotional expenses associated with the launch of the contemporary Christian music format in several markets, and an increase in music license fees, partially offset by the operating expenses associated with three radio stations sold during 2000. On a same station basis, broadcasting operating expenses increased $1.1 million or 12.8% to $9.7 million for the quarter ended March 31, 2001 from $8.6 million for the same quarter of the prior year. The increase is primarily due to incremental selling and production expenses incurred to produce the increased revenue in the period.

      OTHER MEDIA OPERATING EXPENSES. Other media operating expenses decreased $1.6 million or 39.0% to $2.5 million for the quarter ended March 31, 2001 from $4.1 million for the same quarter in the prior year. The decrease is attributable primarily to the reduction of operating expenses incurred due to the sale of certain software products, assets and contracts.

      BROADCAST CASH FLOW. Broadcast cash flow increased $0.3 million or 3.0% to $10.2 million for the quarter ended March 31, 2001 from $9.9 million for the same quarter of the prior year. As a percentage of net broadcasting revenue, broadcast cash flow decreased to 33.9% for the quarter ended March 31, 2001 from 43.8% for the same quarter of the prior year. The decrease is primarily attributable to the effect of stations acquired during 2000 and 2001 that previously operated with formats other than their current format and the effect of the launch of the contemporary Christian music format in several markets. Acquired and reformatted radio stations typically produce low margins during the first few years following conversion. 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 $0.8 million or 11.4% to $7.8 million for the quarter ended March 31, 2001 from $7.0 million for the same quarter of the prior year.

      CORPORATE EXPENSES. Corporate expenses increased $1.4 million or 56.0% to $3.9 million in the quarter ended March 31, 2001 from $2.5 million in the same quarter of the prior year, primarily due to additional overhead costs associated with the acquisitions of radio stations and a network during 2000 and 2001.

      EBITDA. EBITDA increased $0.7 million or 13.7% to $5.8 million for the quarter ended March 31, 2001 from $5.1 million for the same quarter of the prior year. As a percentage of total revenue, EBITDA decreased to 18.1% for the quarter ended March 31, 2001 from 20.9% for the same quarter of the prior year. EBITDA was negatively impacted by the results of operations of our other media businesses acquired in 1999, which generated a net loss before depreciation and amortization of $0.6 million for the quarter ended March 31, 2001 as compared to $2.4 million for the same quarter of the prior year. Broadcast EBITDA excluding the other media businesses decreased $1.1 million or 14.7% to $6.4 million for the quarter ended March 31, 2001 from $7.5 million for the same quarter in the prior year. As a percentage of net broadcasting revenue, broadcast EBITDA excluding the other media business decreased to 21.3% for the quarter ended March 31, 2001 from 33.2% for the same quarter of the prior year. The decrease is primarily attributable to the effect of

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stations acquired during 2000 and 2001 that previously operated with formats other than their current format, the effect of the launch of the Contemporary Christian music format in several markets and increased corporate expenses.

      DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $2.4 million or 49.0% to $7.3 million for the quarter ended March 31, 2001 from $4.9 million for the same quarter of the prior year. The increase is primarily due to the acquisitions of radio stations and a network in 2000 and 2001.

      OTHER INCOME (EXPENSE). Interest income increased $0.5 million to $0.8 million for the quarter ended March 31, 2001 from $0.3 million for the same quarter of the prior year, primarily due to interest earned on the investment of the proceeds from the sale of radio station KALC-FM, Denver, Colorado for $100 million in January 2001. Interest expense increased $4.0 million or 160.0% to $6.5 million for the quarter ended March 31, 2001 from $2.5 million for the same quarter of the prior year. The increase is due to interest expense associated with borrowings on our credit facility to fund acquisitions in 2000. Other expense, net decreased $0.2 million to $0.1 million for the quarter ended March 31, 2001 from $0.3 million for the same quarter in the prior year primarily due to decreased bank commitment fees.

      BENEFIT FOR INCOME TAXES. Benefit for income taxes as a percentage of loss before income taxes and extraordinary item (that is, the effective tax rate) was 34.7% for the quarter ended March 31, 2001 and 29.8% for the same quarter of the prior year. For the quarter ended March 31, 2001 and 2000 the effective tax rate differs from the federal statutory income rate of 34.0% primarily due to the effect of state income taxes and certain expenses that are not deductible for tax purposes.

      NET LOSS. We recognized a net loss of $4.7 million for the quarter ended March 31, 2001 as compared to a net loss of $1.7 million for the same quarter of the prior year.

      AFTER-TAX CASH FLOW. After-tax cash flow decreased $0.7 million or 21.2% to $2.6 million for the quarter ended March 31, 2001 from $3.3 million for the same quarter of the prior year. After-tax cash flow was negatively impacted by the after-tax cash flow of our other media businesses. After-tax cash flow excluding our other media losses (net of income tax) decreased $1.7 million or 36.2% to $3.0 million for the quarter ended March 31, 2001 from $4.7 million for the same quarter of the prior year. The decrease is primarily due to an increase in interest expense and corporate expenses.

LIQUIDITY AND CAPITAL RESOURCES

      Cash and cash equivalents was $65.1 million at March 31, 2001 including $61.1 million held by a qualified intermediary under a like-kind exchange agreement to preserve our ability to effect a tax-deferred exchange. Working capital was $71.5 million at March 31, 2001. Cash and cash equivalents was $3.9 million at December 31, 2000. The increase in cash and cash equivalents is due to cash provided by operating activities and cash provided by investing activities primarily related to the net proceeds received from the sale of KALC-FM, Denver, CO for approximately $100 million, offset by $38.2 million of the proceeds used to acquire five radio stations in the first quarter of 2001 (see Note 2).

      Net cash provided by operating activities increased to $7.7 million for the quarter ended March 31, 2001 compared to $2.0 million in the same period of the prior year. The increase is primarily due to a decrease in accounts receivable and an increase in accounts payable.

      Net cash provided by investing activities was $52.8 million for the quarter ended March 31, 2001 compared to net cash used in investing activities of $30.2 million for the same period of the prior year. The increase is due to cash received for the sale of KALC-FM, Denver, CO, partially offset by cash used for acquisitions (cash used of $38.2 million to purchase five radio stations during the quarter ended March 31, 2001 as compared to cash used of $26.5 million to purchase ten radio stations and a network for the same period of the prior year) and offset by an increase in capital expenditures.

      Net cash provided by financing activities was $0.7 million for the quarter ended March 31, 2001. Net cash used in investing activities was $1.9 million for the same period of the prior year due to a payment of long-term debt associated with the purchase of the KRLA-AM transmitter site in February 2000.

      We have historically funded, and will continue to fund, acquisitions of radio stations through borrowings, including borrowings under bank credit facilities and, to a lesser extent, from operating cash flow and selected asset dispositions. We have historically funded, and will continue to fund, expenditures for operations, administrative expenses, capital expenditures and debt service required by our credit facility and senior subordinated notes from operating cash flow. We believe that cash on hand, cash flow from operations, borrowings under our credit facility and proceeds from the sale of some of our existing radio stations will be sufficient to permit us to meet our financial obligations, fund our pending acquisitions and fund operations for at least the next twelve months.

      At March 31, 2001 we have $100.0 million principal amount of 9 1/2% senior subordinated notes due 2007. In August 2000, we supplemented the indenture for our senior subordinated notes in connection with the assignment of substantially all of the assets and liabilities to our wholly-owned subsidiary Salem Communications Holding Corporation (“HoldCo”), including the obligations as successor issuer under the indenture. The indenture for the senior subordinated notes contains restrictive covenants that, among others, limit the incurrence of debt by us and our subsidiaries, the payment of dividends, the use of proceeds of specified asset sales and transactions with affiliates. The senior subordinated notes are guaranteed by all of HoldCo’s subsidiaries.

      At March 31, 2001, we had $187.1 million outstanding under our credit facility. Since August 2000, we amended our credit facility to increase our borrowing capacity from $150 million to $225 million, lower the borrowing rates and modify current financial ratio tests to provide us with additional borrowing flexibility. The credit facility matures on June 30, 2007. Aggregate commitments under the credit facility begin to decrease commencing March 31, 2002.

      Amounts outstanding under our credit facility bear interest at a base rate, at our option, of the bank’s prime rate or LIBOR, plus a spread. For purposes of determining the interest rate under our credit facility, the prime rate spread ranges from 0% to 1.5%, and the LIBOR spread ranges from 0.875% to 2.75%.

      The maximum amount that we may borrow under our credit facility is limited by a ratio of our existing adjusted debt to pro forma twelve-month cash flow (the “Adjusted Debt to Cash Flow Ratio”). Our credit facility will allow us to adjust our total debt as used in such calculation by the lesser of 50% of the aggregate purchase price of acquisitions of newly acquired non-religious formatted radio stations that we reformat to a religious talk, conservative talk or religious music format or $30.0 million and the cash flow from such stations will not be considered in the calculation of the ratio. The maximum Adjusted Debt to Cash Flow Ratio allowed under our credit facility is 6.50 to 1 through December 30, 2001. Thereafter, the maximum ratio will decline periodically until December 31, 2005, at which point it will remain at 4.00 to 1 through June 2007. The Adjusted Debt to Cash Flow Ratio at March 31, 2001 was 4.74 to 1, resulting in a borrowing availability of approximately $12.4 million.

      Our credit facility contains additional restrictive covenants customary for credit facilities of the size, type and purpose contemplated which, with specified exceptions, limits our ability to enter into affiliate transactions, pay dividends, consolidate, merge or effect certain asset sales, make specified investments, acquisitions and loans and change the nature of our business. The credit facility also requires us to satisfy specified financial covenants, which covenants require the maintenance of specified financial ratios and compliance with certain financial tests, including ratios for maximum leverage as described, minimum interest coverage, minimum debt service and minimum fixed charge coverage. The credit facility is guaranteed by the company and all of its subsidiaries other than HoldCo, which is the borrower, and is secured by pledges of all of the capital stock of the company’s subsidiaries.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Derivative Instruments. We do not invest, and during the quarter ended March 31, 2001 did not invest, in market risk sensitive instruments.

      Market Risk. Our credit facility is subject to market risk exposure, specifically to changes in LIBOR and in the “prime rate” in the United States. As of March 31, 2001, we may borrow an additional $12.4 million under our credit facility. At March 31, 2001, we had borrowed $187.1 million under our credit facility. Amounts outstanding under the credit facility bear interest at a base rate, at our option, of the bank’s prime rate or LIBOR, plus a spread. For purposes of determining the interest rate under our credit facility, the prime rate spread ranges from 0% to 1.5%, and the LIBOR spread ranges from 0.875% to 2.75%. At March 31, 2001, the blended interest rate on amounts outstanding under the credit facility was 8.16%. At March 31, 2001, a hypothetical 100 basis point increase in the prime rate would result in additional interest expense of $1.9 million on an annualized basis.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      The company and our subsidiaries, incident to our business activities, are parties to a number of legal proceedings, lawsuits, arbitration and other claims, including the Gospel Communications International, Inc. (“GCI”) matter described in more detail below. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Also, we maintain insurance which may provide coverage for such matters. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters as of March 31, 2001. However, we believe, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the our financial position, results of operations or cash flows.

      On December 6, 2000, GCI made a demand for arbitration upon Salem. The demand, pending before an arbitration panel of the American Arbitration Association, alleges Salem and its subsidiary OnePlace failed to provide certain e-commerce software to GCI pursuant to a written contract between GCI and OnePlace, for which GCI seeks $5.0 million in damages. We have filed an answer to the demand, denying the factual basis for certain elements of GCI’s claims and has asserted counterclaims against GCI for breach of contract. Although there can be no assurance that the GCI matter will be resolved in favor of the Company, we will vigorously defend the action and pursue its counterclaims against GCI.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

      Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

      Not applicable.

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:

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(b) REPORTS ON FORM 8-K

      No reports on Form 8-K were filed during the quarter ended March 31, 2001.

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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.

 

		SALEM COMMUNICATIONS CORPORATION
	May 15, 2001
		By: /s/ EDWARD G. ATSINGER III
		Edward G. Atsinger III
		President and Chief Executive Officer
	May 15, 2001
		By: /s/ DAVID A. R. EVANS
		David A. R. Evans
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

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EXHIBIT INDEX