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 THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
 
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 000-26497
 
SALEM COMMUNICATIONS CORPORATION
 
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 
 

DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
 
77-0121400
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
 
 
 
4880 SANTA ROSA ROAD CAMARILLO, CALIFORNIA
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
 
93012
( ZIP CODE)
 
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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                       
 Yes [X ]  
   No  [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
                                                                                                   
 Large accelerated filer [   ]      
 Accelerated filer  [X ]   
 Non-accelerated filer  [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes [   ]    No  [ X ]
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A
 
Outstanding at November 5, 2007
Common Stock, $0.01 par value per share
 
18,115,092 shares
 
Class B
 
Outstanding at November 5, 2007
Common Stock, $0.01 par value per share
 
5,553,696 shares
 

 
SALEM COMMUNICATIONS CORPORATION
 
 
INDEX
 
   
PAGE NO.
 
       
COVER PAGE
     
INDEX
     
PART I - FINANCIAL INFORMATION
     
Item 1.   Financial Statements
   
2
 
Item 2.   Management’s Discussion and Analysis of Financial Condition
               and Results of Operations
   
19
 
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
   
30
 
Item 4.   Controls and Procedures
   
32
 
PART II - OTHER INFORMATION
   
32
 
Item 1.    Legal Proceedings
   
32
 
Item 1A. Risk Factors
   
32
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
   
33
 
Item 3.   Defaults Upon Senior Securities
   
33
 
Item 4.   Submission of Matters to a Vote of Security Holders
   
33
 
Item 5.   Other Information
   
33
 
Item 6.   Exhibits
   
33
 
SIGNATURES
   
44
 
EXHIBIT INDEX
   
45
 

 

 
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,” “intends,” “will,” “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 the statements are made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in Salem’s reports on Forms 10-K, 10-Q and 8-K filed with or furnished to the Securities and Exchange Commission. Forward-looking statements made in this report speak as of the date hereof. Except as required by law, 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 
PART I - FINANCIAL INFORMATION
 
 
SALEM COMMUNICATIONS CORPORATION
 
 
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

SALEM COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
 
December 31, 2006
 
September 30, 2007
 
 
(Note 1)
(Unaudited)
ASSETS
Current assets:
                 
Cash and cash equivalents
      $
710
      $
673
 
Trade accounts receivable (net of allowance for doubtful accounts of $7,606 in 2006 and $7,617 in 2007)
       
31,984
       
31,359
 
Other receivables
       
551
       
380
 
Prepaid expenses
       
2,330
       
2,584
 
Income tax receivable
       
       
38
 
Deferred income taxes
       
5,020
       
5,125
 
Total current assets
       
40,595
       
40,159
 
Property, plant and equipment (net of accumulated depreciation of $74,766 in 2006 and $81,112 in 2007)
       
128,713
       
130,894
 
Broadcast licenses
       
476,544
       
472,463
 
Goodwill
       
20,606
       
20,498
 
Other indefinite-lived intangible assets
       
2,892
       
2,892
 
Amortizable intangible assets (net of accumulated amortization of $10,846 in 2006 and $13,181 in 2007)
       
8,368
       
6,771
 
Bond issue costs
       
593
       
481
 
Bank loan fees
       
2,996
       
2,237
 
Fair value of interest rate swap agreements
       
1,290
       
451
 
Other assets
       
3,667
       
4,545
 
Total assets
      $
686,264
      $
681,391
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
      $
3,421
      $
1,546
 
Accrued expenses
       
6,446
       
5,636
 
Accrued compensation and related expenses
       
7,033
       
7,506
 
Accrued interest
       
4,275
       
3,829
 
Deferred revenue
       
4,050
       
4,732
 
Current portion of long-term debt and capital lease obligations
       
2,048
       
3,696
 
Income taxes payable
       
22
       
 
Total current liabilities
       
27,295
       
26,945
 
Long-term debt and capital lease obligations, less current portion
       
358,978
       
350,457
 
Deferred income taxes
       
53,935
       
61,611
 
Deferred revenue
       
7,063
       
7,358
 
Other liabilities
       
1,277
       
1,302
 
Total liabilities
       
448,548
       
447,673
 
Commitments and contingencies
Stockholders’ equity:
Class A common stock, $0.01 par value; authorized 80,000,000 shares; 20,424,242 issued and 18,293,824 outstanding at December 31, 2006 and 20,432,742 issued and 18,115,092 outstanding at September 30, 2007
       
204
       
204
 
Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding shares at December 31, 2006 and September 30, 2007
       
56
       
56
 
Additional paid-in capital
       
221,466
       
224,013
 
Retained earnings
       
47,433
       
43,350
 
Treasury stock, at cost (2,130,418 shares at December 31, 2006 and 2,317,650 at September 30, 2007)
        (32,218 )       (34,006 )
Accumulated other comprehensive income
       
775
       
101
 
Total stockholders’ equity
       
237,716
       
233,718
 
Total liabilities and stockholders’ equity
      $
686,264
      $
681,391
 
See accompanying notes
 

SALEM COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2006
   
2007
   
2006
   
2007
 
Net broadcasting revenue
  $
52,509
    $
51,888
    $
154,664
    $
155,978
 
Non-broadcast revenue
   
5,402
     
6,208
     
13,338
     
18,250
 
Total revenue
   
57,911
     
58,096
     
168,002
     
174,228
 
Operating expenses:
                               
Broadcasting operating expenses, exclusive of depreciation and amortization shown below (including $202 and $311 for the quarter ended September 30, 2006 and 2007, respectively, and $816 and $927 for the nine months ended September 30, 2006 and 2007, respectively, paid to related parties)
   
31,821
     
32,719
     
97,013
     
98,831
 
Non-broadcast operating expenses, exclusive of depreciation and amortization shown below
   
5,311
     
5,820
     
12,570
     
16,743
 
Corporate expenses, exclusive of depreciation and amortization shown below (including $47 and $192 for the quarter ended September 30, 2006 and 2007, respectively, and $197 and $337 for the nine months ended September 30, 2006 and 2007, respectively, paid to related parties)
   
5,637
     
5,425
     
18,333
     
16,735
 
Depreciation (including $261 and $181 for the quarter ended September 30 2006 and 2007, respectively, and $486 and $470 for the nine months ended September 30, 2006 and 2007, respectively for non-broadcast businesses)
   
3,198
     
2,973
     
9,056
     
8,987
 
Amortization (including $632 and $721 for the quarter ended September 30 2006 and 2007, respectively, and $1,474 and $2,207 for the nine months ended September 30, 2006 and 2007, respectively for non-broadcast businesses)
   
759
     
748
     
2,062
     
2,334
 
(Gain) loss on disposal of assets
   
167
     
309
      (18,872 )     (2,326 )
Total operating expenses
   
46,893
     
47,994
     
120,162
     
141,304
 
Operating income from continuing operations
   
11,018
     
10,102
     
47,840
     
32,924
 
Other income (expense):
                 
Interest income
   
68
     
52
     
114
     
160
 
Interest expense
    (6,490 )     (6,375 )     (19,857 )     (19,137 )
Loss on early redemption of long-term debt
    (3,625 )    
      (3,625 )    
 
Other income (expense), net
    (120 )    
83
      (466 )    
230
 
Income from continuing operations before income taxes
   
851
     
3,862
     
24,006
     
14,177
 
Provision for income taxes
   
200
     
1,764
     
9,378
     
6,190
 
Income from continuing operations
   
651
     
2,098
     
14,628
     
7,987
 
Income from discontinued operations, net of tax
   
802
     
     
1,106
     
 
Net income
  $
1,453
    $
2,098
    $
15,734
    $
7,987
 
Other comprehensive income (loss), net of tax
    (1,468 )     (1,498 )    
462
      (674 )
Comprehensive income (loss)
  $ (15 )   $
600
    $
16,196
    $
7,313
 
Basic earnings per share from continuing operations
  $
0.03
    $
0.09
    $
0.60
    $
0.34
 
Income per share from discontinued operations
   
0.03
     
     
0.05
     
 
Basic earnings per share
  $
0.06
    $
0.09
    $
0.65
    $
0.34
 
                                 
Diluted earnings per share from continuing operations
  $
0.03
    $
0.09
    $
0.60
    $
0.34
 
Income per share from discontinued operations
   
0.03
     
     
0.05
     
 
Diluted earnings per share
  $
0.06
    $
0.09
    $
0.65
    $
0.34
 
                                 
Basic weighted average shares outstanding
   
23,983,085
     
23,772,647
     
24,338,649
     
23,823,757
 
Diluted weighted average shares outstanding
   
23,990,729
     
23,776,449
     
24,347,388
     
23,828,495
 
See accompanying notes
 
 

SALEM COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
       
Nine Months Ended September 30,
 
       
2006
   
2007
 
OPERATING ACTIVITIES
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
14,628
   
$
7,987
 
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Non-cash stock-based compensation
   
3,546
     
2,515
 
 
Loss on early redemption of debt
   
3,625
     
 
 
Depreciation and amortization
 
 
11,118
 
 
 
11,321
 
 
Amortization of bond issue costs and bank loan fees
   
1,069
     
871
 
 
Amortization and accretion of financing items
   
(214)
     
82
 
 
Provision for bad debts
 
 
2,572
 
 
 
1,875
 
 
Deferred income taxes
   
9,816
     
5,960
 
 
(Gain) loss on disposal of assets
 
 
(18,872)
 
 
 
(2,326)
 
 
Changes in operating assets and liabilities:
 
 
Accounts receivable
 
 
(2,557)
 
 
 
(1,117)
 
   
Prepaid expenses and other current assets
   
(251)
     
(254)
 
 
 
Accounts payable and accrued expenses
 
 
4,323
 
 
 
(1,829)
 
   
Deferred revenue
   
378
     
977
 
 
 
Other liabilities
 
 
(174)
 
 
 
127
 
   
Income taxes payable
 
 
   
 
(22)
 
Net cash provided by continuing operating activities
 
 
29,007
 
 
 
26,167
 
INVESTING ACTIVITIES
Capital expenditures
 
 
(16,129)
 
 
 
(11,959)
 
Purchases of broadcast assets
 
 
(19,229)
 
 
 
 
Purchase of non-broadcast businesses
   
(11,246)
     
(962)
 
Proceeds from the disposal of property, plant and equipment
   
2,208
     
7,963
 
Other
 
 
(1,519)
 
 
 
(747)
 
Net cash used in investing activities of continuing operations
   
(45,915)
     
(5,705)
 
FINANCING ACTIVITIES
Proceeds from borrowings under credit facilities
   
153,000
     
20,500
 
Payments of long-term debt and notes payable
 
 
(15,878)
 
 
 
(29,624)
 
Net borrowings and repayment on Swingline credit facility
   
599
     
1,145
 
Repurchase of Class A common stock
   
(20,679)
     
(1,788)
 
Payment of bond premium
   
(4,231)
     
 
Payments to redeem 9% notes
   
(94,031)
     
 
Payment of dividend on common stock
   
(14,609)
     
(10,010)
 
Proceeds from exercise of stock options
   
95
     
30
 
Tax benefit related to stock options exercised
   
1
     
1
 
Payments on capital lease obligations
 
 
(17)
 
 
 
(24)
 
Payments of costs related to bank credit facility and debt financing
   
(273)
     
 
Book overdraft
   
     
(729)
 
Net cash provided by (used in) financing activities
 
 
3,977
   
 
(20,499)
 
CASH FLOWS OF DISCONTINUED OPERATIONS
               
  Operating cash flows
   
(2,336)
     
 
  Investing cash flows
   
11,778
     
 
          Total cash inflow from discontinued operations
   
9,442
     
 
Net increase (decrease) in cash and cash equivalents
 
 
(3,489)
 
 
 
(37)
 
Cash and cash equivalents at beginning of year
 
 
3,979
   
 
710
 
Cash and cash equivalents at end of period
 
$
490
 
 
$
673
 
Supplemental disclosures of cash flow information:
               
 
Cash paid during the period for
 
 
 
 
 
   
Interest
 
$
19,012
   
$
18,691
 
 
 
Income taxes
 
$
199
 
 
$
293
 
Non-cash investing and financing activities:
               
   Assets acquired through capital lease obligations
 
$
   
$
800
 
See accompanying notes

SALEM COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1. BASIS OF PRESENTATION
 
 The accompanying condensed consolidated financial statements of Salem Communications Corporation (“Salem” or the “Company”) include the Company and its wholly-owned subsidiaries.  The Company, excluding its subsidiaries, is herein referred to as Parent.  All significant intercompany balances and transactions have been eliminated.
 
Information with respect to the three and nine months ended September 30, 2007 and 2006 is unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 GAAP 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 the Company. 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, 2006.
 
      The balance sheet at December 31, 2006 included in this report has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP.     
 
NOTE 2. RECLASSIFICATIONS
 
Certain reclassifications were made to the prior period financial statements to conform to the current period presentation.
 
NOTE 3. ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS
 
On February 2, 2007, the Company purchased ChristianMusicPlanet.com, a leading Christian music Internet portal, for $0.3 million.
 
On September 12, 2007, the Company purchased CMCentral.com, a Christian music Internet site and online community, for $0.4 million.
 
The purchase price was allocated to the total assets acquired as follows:
 
   
Amount
 
   
(Dollars in thousands)
 
Asset
     
Property and equipment
  $
130
 
Domain and brand names
   
337
 
Subscriber list
   
151
 
Customer lists and contracts
   
32
 
Goodwill
   
21
 
    $
671
 
 
 
 
On February 7, 2007, the Company sold radio station WKNR-AM in Cleveland, Ohio, to Good Karma Broadcasting for $7.0 million resulting in a pre-tax gain of $3.4 million.  The operating results of WKNR-AM were excluded from our Condensed Consolidated Statement of Operations beginning on December 1, 2006, the date the Company stopped operating the station pursuant to a local marketing agreement (“LMA”) with Good Karma Broadcasting.
 
   On May 29, 2007, the Company sold radio station WVRY-FM, Nashville, Tennessee to Grace Broadcasting Services, Inc. for $0.9 million resulting in a pre-tax loss of $0.5 million.  The operating results of WVRY-FM were excluded from our Condensed Consolidated Statement of Operations beginning on March 9, 2007, the date the Company stopped operating the station pursuant to an LMA with Grace Broadcasting Services.
 
Other Pending Transactions:
 
On February 1, 2007, the Company entered into an agreement to purchase selected assets of radio station KKSN-AM, in Portland, Oregon subject to certain conditions, for $4.5 million.   The company began operating the station under an LMA effective the same date.   The accompanying Condensed Consolidated Statement of Operations includes the operating results of this radio station as of the LMA date.  The Company does not expect this transaction to close during 2007.

   Discontinued Operations:
 
The following table sets forth the components of income from discontinued operations, net of tax, for the three and nine months ended September 30, 2006 (dollars in thousands).
   
 
 
 
   
Three Months Ended
 September 30, 2006
 
Nine Months Ended
September 30, 2006 
   
(Dollars in thousands)
Operating loss
  $ (114)     $ (274)
Gain on sale or exchange of radio stations
   
1,387
     
2,043
Gain from discontinued operations before income taxes
   
1,273
     
1,769
Provision for income taxes
   
471
     
663
Income from discontinued operations, net of tax
  $
802
    $
1,106
               
 
Details of these transactions are as follows:
 
  On February 10, 2006, the Company exchanged radio stations WTSJ-AM, Cincinnati, Ohio, and WBOB-AM, Cincinnati, Ohio and $6.7 million in cash for selected assets of radio station WLQV-AM, Detroit, Michigan.  The accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 reflect the results of WTSJ-AM and WBOB-AM as discontinued operations.  The exchange was accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 153, “Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29,” and resulted in a pre-tax gain on the exchange of $0.7 million.
 
   On July 17, 2006, the Company completed the sale of radio station WBTK-AM, Richmond, Virginia, for $1.5 million resulting in a pre-tax gain of $0.6 million.  The accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 reflect the results of WBTK-AM as a discontinued operation.
 
On September 18, 2006, the Company completed the sale of radio station WBGB-FM, Jacksonville, Florida for $7.6 million resulting in a pre-tax gain of $0.8 million.  The accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 reflect the results of WBGB-FM as a discontinued operation.  
 
On December 1, 2006, the Company completed the sale of radio stations WJGR-AM, Jacksonville, Florida, WZNZ-AM, Jacksonville, Florida and WZAZ-AM, Jacksonville, Florida for $2.8 million resulting in a pre-tax gain of $0.1 million.  The assets were sold to Chesapeake-Portsmouth Broadcasting Corporation (“Chesapeake-Portsmouth”).  Chesapeake-Portsmouth is a company controlled by Nancy Epperson, wife of Salem's Chairman of the Board Stuart W. Epperson and sister of Salem’s CEO Edward G. Atsinger III.  The accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 reflect the results of WJGR-AM, Jacksonville, Florida, WZNZ-AM, Jacksonville, Florida and WZAZ-AM, Jacksonville, Florida as discontinued operations.
 
On December 22, 2006, the Company completed the sale of radio station WITH-AM, Baltimore, Maryland for $3.0 million resulting in a pre-tax gain of $2.2 million.  The accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 reflect the results of WITH-AM as a discontinued operation.
 
NOTE 4. STOCK-BASED COMPENSATION
 
  The Company has one stock incentive plan.  The Amended and Restated 1999 Stock Incentive Plan (the “Plan”) allows the Company to grant stock options and shares of restricted stock to employees, directors, officers and advisors of the Company. A maximum of 3,100,000 shares are authorized under the Plan. Options generally vest over a four year period and have a maximum term of five years from the vesting date. The Plan provides that vesting may be accelerated in certain corporate transactions of the Company. The Plan provides that the Board of Directors, or a committee appointed by the Board, has discretion, subject to certain limits, to modify the terms of outstanding options.   In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), the Company recognizes compensation expense related to the estimated fair value of stock options granted.

   The Company adopted SFAS No. 123(R) on January 1, 2006, using the modified-prospective-transition method. Under this transition method, compensation expense recognized subsequent to adoption includes: (a) compensation expense for all share-based awards granted prior to, but not yet vested, as of December 31, 2005 based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (b) compensation expense for all share-based awards granted subsequent to December 31, 2005, based on the grant-date fair values estimated in accordance with the provisions of SFAS No. 123(R). In accordance with the modified-prospective-transition method, the Company’s results of operations for prior periods have not been adjusted to reflect the impact of SFAS 123(R).
 
 
   The following table reflects the components of stock-based compensation expense recognized in our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2006
   
2007
   
2006
   
2007
 
   
(Dollars in thousands)
 
Stock option compensation expense included in corporate expenses
  $
671
    $
643
    $
2,845
    $
1,741
 
Restricted stock units compensation expense included in corporate expenses
   
22
     
15
     
66
     
47
 
Stock option compensation expense included in broadcast operating expenses
   
211
     
180
     
584
     
617
 
Stock option compensation expense included in non-broadcast operating expenses
   
22
     
43
     
51
     
110
 
 Total stock-based compensation expense
  $
926
    $
881
    $
3,546
    $
2,515
 
Tax benefit from stock-based compensation expense
    (361 )     (385 )     (1,406 )     (1,108 )
Total stock-based compensation expense net of tax benefit
  $
565
    $
496
    $
2,140
    $
1,407
 
 
 
Stock option and restricted stock grants
 
The Plan allows the Company to grant stock options and shares of restricted stock to employees, directors, officers and advisors of the Company. The option exercise price is set at the closing price of our common stock on the date of grant, and the related number of shares granted is fixed at that point in time.  The Plan also provides for grants of restricted units. Eligible employees may receive stock options annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. In addition, certain management and professional level employees typically receive a stock option grant upon commencement of employment.  Non-employee directors of the Company have received restricted stock grants that vest one year from the date of issuance as well as stock options that vest immediately.
 
The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of stock options. The expected volatility calculation reflects the historical volatility of the Company’s stock as determined by the closing price over a six to nine year term that is generally commensurate with the contractual term of the option.  The expected term of the option is based on evaluations of historical and expected future employee exercise behavior.   The risk-free interest rates for periods within the expected life of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted. The weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model were as follows for the three and nine months ended September 30, 2007 and 2006:
 
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2006
   
2007
   
2006
   
2007
 
Expected volatility
    53.90 %     46.44 %     52.55 %     44.76 %
Expected dividends
    0.0 %     0.0 %     0.0 %     0.0 %
Expected term (in years)
   
6 - 9
     
6 - 9
     
6 – 9
     
6 - 9
 
Risk-free interest rate
    4.80 %     4.16 %     4.93 %     4.48 %
 
 

 
Stock option information with respect to our stock-based compensation plan during the nine months ended September 30, 2007 and 2006 is as follows:

Options
 
Shares
   
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Weighted Average Grant Date Fair Value
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2006
   
1,924,269
    $
23.82
            $
 
Granted
   
361,950
     
13.39
      $
7.47
     
 
Exercised
    (8,250 )    
11.58
               
8,605
 
Forfeited or expired
    (118,905 )    
22.20
               
 
Outstanding at September 30, 2006
   
2,159,064
     
22.19
 
4.8 years
           
 
Exercisable at September 30, 2006
   
1,309,337
     
25.25
 
3.3 years
           
 
                                   
Outstanding at January 1, 2007
   
2,146,564
    $
22.30
              $
 
Granted
   
393,900
     
11.79
      $
8.10
     
 
Exercised
    (2,500 )    
11.81
               
4,219
 
Forfeited or expired
    (106,790 )    
19.59
               
 
Outstanding at September 30, 2007
   
2,431,174
    $
20.73
 
4.5 years
           
 
Exercisable at September 30, 2007
   
1,436,762
    $
24.32
 
2.8 years
           
 
 
The fair values of shares of restricted stock are determined based on the closing price of the Company common stock on the grant dates. Information regarding our restricted stock unit grants for the nine months ended September 30, 2007 and 2006 is as follows:
Restricted Stock Units
 
Shares
   
Weighted Average Grant Date Fair Value
 
Non-Vested at January 1, 2006
   
5,000
    $
17.90
 
Granted
   
6,000
     
11.15
 
Vested
    (5,000 )    
17.90
 
Forfeited
   
     
 
Non-Vested at September 30, 2006
   
6,000
    $
11.15
 
                 
Non-Vested at January 1, 2007
   
6,000
    $
11.15
 
Granted
   
5,000
     
10.15
 
Vested
    (6,000 )    
11.15
 
Forfeited
   
     
 
Non-Vested at September 30, 2007
   
5,000
    $
10.15
 
 
As of September 30, 2007, there was $5.1 million of total unrecognized compensation expense related to non-vested awards of stock options and restricted shares.  This cost is to be recognized over a weighted average period of 1.3 years.
 
NOTE 5. OTHER COMPREHENSIVE INCOME (LOSS)
 
       Other comprehensive income (loss) reflects changes in the fair value of each of the Company’s three cash flow hedges as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2006
   
2007
   
2006
   
2007
 
   
(Dollars in thousands)
 
Mark-to-market gain (loss)
  $ (2,551 )   $ (2,496 )   $
770
    $ (1,123 )
Less tax provision (benefit)
    (1,083 )     (998 )    
308
      (449 )
Other comprehensive income (loss)
  $ (1,468 )   $ (1,498 )   $
462
    $ (674 )
 

 
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
 
Statement of Financial Accounting Standards No. 157
 
On September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.”  This statement defines fair value, specifies the acceptable methods for determining fair value, and expands disclosure requirements regarding fair value measurements.  SFAS No. 157 is effective beginning January 1, 2008.  The Company believes that the adoption of SFAS No. 157 will not have a material impact on the Company’s results of operations, cash flows or financial position.
 
Statement of Financial Accounting Standards No. 159
 
On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statements No. 115.” SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period.  SFAS No. 159 is effective beginning January 1, 2008.  The Company believes that the adoption of SFAS No. 159 will not have a material impact on the Company’s results of operations, cash flows or financial position.
 
NOTE 7. EQUITY TRANSACTIONS
 
The Company’s Board of Directors authorized a $25.0 million share repurchase program in May 2005.   In February 2006, the Board of Directors increased Salem’s existing share repurchase program to permit the repurchase of up to an additional $25.0 million of shares of Salem’s Class A common stock.   This repurchase program will continue until the earlier of (a) December 31, 2007, (b) all desired shares are repurchased, or (c) the Repurchase Plan is terminated earlier by the Repurchase Plan Committee on behalf of the Company’s Board of Directors.  The amount the Company may repurchase may be limited by certain restrictions under our credit facilities.
 
During the three month period ended September 30, 2007, the Company repurchased 187,232 shares of its Class A common stock for $1.8 million at an average price of $9.55 per share.  As of September 30, 2007, the Company repurchased 2,317,650 shares of stock for $34.0 million at an average price of $14.67 per share.  During the three month period ended September 30, 2006, the Company repurchased 511,250 shares of its Class A common stock for $5.5 million at an average price of $10.82 per share.  For the nine month period ended September 30, 2006, the Company made repurchases of 1,490,625 shares of its Class A common stock for $20.7 million at an average price of $13.87 per share.
 
On August 23, 2007, the Company paid a special cash dividend of $0.42 per share on its Class A and Class B common stock to shareholders of record as of the close of business on August 20, 2007.  The cash payment amounted to approximately $10.0 million.   On July 28, 2006, the Company paid a special cash dividend of $0.60 per share on its Class A and Class B common stock to shareholders of record as of the close of business on July 17, 2006.  The cash payment amounted to approximately $14.6 million.
 
The Company accounts for stock-based compensation expense in accordance with SFAS No. 123(R).  As a result, $0.9 million and $2.5 million of stock-based compensation expense has been recorded to additional paid-in capital for the three and nine months ended September 30, 2007, respectively, in comparison to $0.9 million and $3.5 million for the three and nine months ended September 30, 2006, respectively.
 
NOTE 8. NOTES PAYABLE AND LONG-TERM DEBT
 
Long-term debt consisted of the following:
 
   
December 31, 2006
   
September 30, 2007
 
   
(Dollars in thousands)
 
Term loans under credit facility
  $
238,125
    $
236,100
 
Revolving line of credit under credit facility
   
19,100
     
12,000
 
Swingline credit facility
   
1,241
     
2,387
 
7¾% Senior Subordinated Notes due 2010
   
100,000
     
100,000
 
Fair market value of interest rate swap agreement
   
     
284
 
Seller financed note to acquire Townhall.com
   
2,444
     
2,526
 
Capital leases and other loans
   
116
     
856
 
     
361,026
     
354,153
 
Less current portion
   
2,048
     
3,696
 
    $
358,978
    $
350,457
 
 

Maturities of Long-Term Debt
 
      Principal repayment requirements under all long-term debt agreements outstanding at September 30, 2007 for each of the next five years and thereafter are as follows:
 
Twelve Months Ended September 30,
 
Amount
 
   
(Dollars in thousands)
 
2008
  $
3,696
 
2009
   
18,088
 
2010
   
231,335
 
2011
   
100,024
 
2012
   
30
 
Thereafter
   
696
 
     
353,869
 
Fair value of interest rate swap
   
284
 
 
  $
354,153
 
 
 NOTE 9. AMORTIZABLE INTANGIBLE ASSETS
 
      The following tables provide details, by major category, of the significant classes of amortizable intangible assets:
 
   
As of September 30, 2007
 
   
 
   
Accumulated
   
 
 
   
Cost
   
Amortization
   
Net
 
   
(Dollars in thousands)
 
       
Customer lists and contracts
  $
10,588
    $ (7,292 )   $
3,296
 
Domain and brand names
   
4,906
      (2,262 )    
2,644
 
Favorable and assigned leases
   
1,581
      (1,209 )    
372
 
Other amortizable intangible assets
   
2,877
      (2,418 )    
459
 
    $
19,952
    $ (13,181 )   $
6,771
 
 
   
As of December 31, 2006
 
   
 
   
Accumulated
   
 
 
   
Cost
   
Amortization
   
Net
 
   
(Dollars in thousands)
 
       
Customer lists and contracts
  $
10,404
    $ (6,030 )   $
4,374
 
Domain and brand names
   
4,487
      (1,533 )    
2,954
 
Favorable and assigned leases
   
1,581
      (1,144 )    
437
 
Other amortizable intangible assets
   
2,742
      (2,139 )    
603
 
    $
19,214
    $ (10,846 )   $
8,368
 
 
      Based on the amortizable intangible assets as of September 30, 2007, we estimate amortization expense for the next five years to be as follows:
 
Year Ending
   
Amortization Expense
 
     
(Dollars in thousands)
 
2007 (October 1 – December 31)
 
 
$
700
 
2008
     
2,667
 
2009
 
 
 
1,417
 
2010
     
933
 
2011
 
 
 
369
 
Thereafter
     
685
 
Total
   
$
6,771
 

 

 
NOTE 10. BASIC AND DILUTED EARNINGS PER SHARE
 
      Basic earnings per share has been computed using the weighted average number of Class A and Class B shares of common stock outstanding during the period. Diluted earnings per share is computed using the weighted average number of shares of Class A and Class B common stock outstanding during the period plus the dilutive effects of stock options.
 
      Options to purchase 2,159,064 and 2,436,174 shares of Class A common stock were outstanding at September 30, 2006 and 2007, respectively. Diluted weighted average shares outstanding exclude outstanding stock options whose exercise price is in excess of the average price of the Company’s stock price. Those options are excluded due to their antidilutive effect.
 
NOTE 11. DERIVATIVE INSTRUMENTS
 
Salem is exposed to fluctuations in interest rates.  The Company actively monitors these fluctuations and uses derivative instruments from time to time to manage the related risk. In accordance with our risk management strategy, Salem uses derivative instruments only for the purpose of managing risk associated with an asset, liability, committed transaction, or probable forecasted transaction that is identified by management. The Company’s use of derivative instruments may result in short-term gains or losses that may increase the volatility of Salem’s earnings.
 
Under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended, the accounting for changes in the fair value of a derivative instrument at each new measurement date is dependent upon its intended use. The change in the fair value of a derivative instrument designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability or a firm commitment, referred to as a fair value hedge, is recognized as gain or loss in earnings in the period of the change together with an offsetting gain or loss for the change in fair value of the hedged item attributable to the risk being hedged. The change in the fair value of a derivative instrument designated as a hedge of the exposure of the variability in expected cash flows of recognized assets, liabilities or of unrecognized forecasted transactions, referred to as a cash flow hedge, is recognized as other comprehensive income.  The differential paid or received on the interest rate swaps is recognized in earnings as an adjustment to interest expense.
 
During 2004 and through February 18, 2005, the Company had an interest rate swap agreement with a notional principal amount of $66.0 million.  This agreement related to its $94.4 million 9% senior subordinated notes due 2011 (the “9% Notes.”)  This agreement was scheduled to expire in 2011 when the 9% Notes were to mature, and effectively swapped the 9.0% fixed interest rate on $66.0 million of the 9% Notes for a floating rate equal to the LIBOR rate plus 3.09%. On February 18, 2005, the Company sold its entire interest in this swap and received a payment of approximately $3.7 million, which was amortized as a reduction of interest expense over the remaining life of the 9% Notes.  On July 6, 2006, the Company completed the redemption of the remainder of its outstanding 9% Notes.  As a result of the redemption, the Company wrote off the remaining balance of the buyout premium of approximately $2.7 million as a reduction of the loss on the early redemption of long term debt.  Interest expense for the nine months ended September 30, 2006, was reduced by approximately $0.3 million related to the amortization of the buyout premium received.
 
During 2004, the Company also had a second interest rate swap agreement with a notional principal amount of $24.0 million. This agreement also related to its 9% Notes. This agreement was to expire in 2011 when the 9% Notes were to mature, and effectively swapped the 9.0% fixed interest rate on $24.0 million of the 9% Notes for a floating rate equal to the LIBOR rate plus 4.86%. On August 20, 2004, the Company sold its interest in $14.0 million of this swap. As a result of this transaction, the Company paid and capitalized $0.3 million in buyout premium, which was to be amortized into interest expense over the remaining life of the 9% Notes. On October 22, 2004, the Company sold its remaining $10.0 million interest in this swap. As a result of this second transaction, the Company paid and capitalized approximately $110,000 in buyout premium, which was to be amortized into interest expense over the remaining life of the 9% Notes.  On July 6, 2006, the Company completed the redemption of the remainder of its outstanding 9% Notes.  As a result of this redemption, the Company recorded a loss on the swap of approximately $0.3 million, which is included in the loss on early redemption of long-term debt.  The Company recognized approximately $32,000 in interest expense for the nine months ended September 30, 2006 related to the amortization of capitalized buyout premium. 
 
On April 8, 2005, the Company entered into an interest rate swap arrangement for the notional principal amount of $30.0 million whereby it will pay a fixed interest rate of 4.99% as compared to LIBOR on a bank credit facility borrowing.  Interest expense for the nine months ended September 30, 2007, was reduced by approximately $82,000 as a result of the difference between the interest rates.  As of September 30, 2007, the Company recorded a liability for the fair value of the interest rate swap of approximately $0.3 million. This amount, net of income taxes of approximately $0.1 million, is reflected in other comprehensive income, as the Company has designated the interest rate swap as a cash flow hedge.  The effective date of this interest rate swap was July 1, 2006 and the expiration date is July 1, 2012.
 

 
On April 26, 2005, the Company entered into a second interest rate swap arrangement for the notional principal amount of $30.0 million whereby it will pay a fixed interest rate of 4.70% as compared to LIBOR on a bank credit facility borrowing.  Interest expense for the nine months ended September 30, 2007, was reduced by approximately $148,000 as a result of the difference between the interest rates.  As of September 30, 2007, the Company recorded an asset for the fair value of the interest rate swap of approximately $0.1 million.  This amount, net of income taxes of approximately $43,000, is reflected in other comprehensive income, as the Company has designated the interest rate swap as a cash flow hedge. The effective date of this interest rate swap was July 1, 2006 and the expiration date is July 1, 2012.
 
On May 5, 2005, the Company entered into a third interest rate swap arrangement for the notional principal amount of $30.0 million whereby it will pay a fixed interest rate of 4.53% as compared to LIBOR on a bank credit facility borrowing.  Interest expense for the nine months ended September 30, 2007, was reduced by approximately $188,000 as a result of the difference between the interest rates. As of September 30, 2007, the Company recorded an asset for the fair value of the interest rate swap of approximately $0.3 million.  This amount, net of income taxes of approximately $0.1 million, is reflected in other comprehensive income, as the Company has designated the interest rate swap as a cash flow hedge. The effective date of this interest rate swap was July 1, 2006 and the expiration date is July 1, 2012.
 
Interest Rate Caps
 
On October 18, 2006, the Company purchased two interest rate caps for $0.1 million to mitigate exposure to rising interest rates.  The first interest rate cap covers $50.0 million of borrowings under the credit facilities for a three year period.  The second interest rate cap covers $50.0 million of borrowings under the credit facilities for a four year period.  Both interest rate caps are at 7.25%. The caps do not qualify for hedge accounting and accordingly, all changes in fair value have been included as a component of interest expense.  Interest expense of approximately $15,000 was recognized during the nine months ended September 30, 2007 related to our interest rate caps.
 
NOTE 12. INCOME TAXES
 
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”  This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN No. 48 effective January 1, 2007. In accordance with FIN No. 48, paragraph 19, the Company has decided to classify interest and penalties as a component of tax expense.  As a result of the implementation of FIN No. 48, the Company recognized an additional $2.0 million liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.
 
The Company files numerous consolidated and separate income tax returns in the United States Federal jurisdiction and in many state jurisdictions. The Company is no longer subject to US Federal income tax examinations for years before 2003 and is no longer subject to state and local, or income tax examinations by tax authorities for years before 2002.
 
The Company has unrecognized tax benefits of approximately $4.0 million as of January 1, 2007 and, if recognized, would result in a reduction of the Company's effective tax rate. Interest and penalties are immaterial at the date of adoption and are included in the unrecognized tax benefits.  The Company recorded an increase of its unrecognized tax benefits of approximately $0.5 million as of September 30, 2007.
 
NOTE 13. COMMITMENTS AND CONTINGENCIES
 
The Company and its subsidiaries, incident to its business activities, are parties to a number of legal proceedings, lawsuits, arbitration and other claims.  Such matters are subject to many uncertainties and outcomes that are not predictable with assurance. Also, the Company maintains insurance which may provide coverage for such matters. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. The Company believes, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the Company’s annual consolidated financial position, results of operations or cash flows.
 

 
NOTE 14. SEGMENT DATA
 
            SFAS No. 131, “Disclosures About Segments of An Enterprise and Related Information” requires companies to provide certain information about their operating segments. The Company has one reportable operating segment - radio broadcasting.  The remaining non-reportable segments consist of Salem Web Network™ and Salem Publishing, which do not meet the reportable segment quantitative thresholds and accordingly are aggregated below as non-broadcast.  The radio broadcasting segment also operates various radio networks.
 
            Management uses operating income before depreciation, amortization and (gain) loss on disposal of assets as its measure of profitability for purposes of assessing performance and allocating resources.

   
Radio Broadcasting
   
Non-broadcast
   
Corporate
   
Consolidated
 
                         
   
(Dollars in thousands)
 
Three Months Ended September 30, 2006
                       
Net revenue
  $
52,509
    $
5,402
    $
    $
57,911
 
Operating expenses
   
31,821
     
5,311
     
5,637
     
42,769
 
Operating income (loss before depreciation, amortization and (gain) loss on disposal of assets
   
20,688
     
91
      (5,637 )    
15,142
 
Depreciation
   
2,640
     
261
     
297
     
3,198
 
Amortization
   
122
     
632
     
5
     
759
 
Operating income (loss) before income taxes
   $
17,926
     $ (802 )    $ (5,939 )    $
11,185
 

Three Months Ended September 30, 2007
                       
Net revenue
  $
51,888
    $
6,208
    $
    $
58,096
 
Operating expenses
   
32,719
     
5,820
     
5,425
     
43,964
 
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets
   
19,169
     
388
      (5,425 )    
14,132
 
Depreciation
   
2,511
     
181
     
281
     
2,973
 
Amortization
   
23
     
721
     
4
     
748
 
Operating income (loss) before income taxes
   $
16,635
     $ (514 )    $ (5,710 )    $
10,411
 


   
Radio Broadcasting
   
Non-broadcast
   
Corporate
   
Consolidated
 
                         
   
(Dollars in thousands)
 
Nine Months Ended September 30, 2006
                       
Net revenue
  $
154,664
    $
13,338
    $
    $
168,002
 
Operating expenses
   
97,013
     
12,570
     
18,333
     
127,916
 
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets
   
57,651
     
768
      (18,333 )    
40,086
 
Depreciation
   
7,690
     
486
     
880
     
9,056
 
Amortization
   
574
     
1,474
     
14
     
2,062
 
Operating income (loss) before income taxes
   $
49,387
     $ (1,192 )    $ (19,227 )    $
28,968
 

Nine Months Ended September 30, 2007
                       
Net revenue
  $
155,978
    $
18,250
    $
    $
174,228
 
Operating expenses
   
98,831
     
16,743
     
16,735
     
132,309
 
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets
   
57,147
     
1,507
      (16,735 )    
41,919
 
Depreciation
   
7,673
     
470
     
844
     
8,987
 
Amortization
   
113
     
2,207
     
14
     
2,334
 
Operating income (loss) before income taxes
   $
49,361
     $ (1,170 )    $ (17,593 )    $
30,598
 
 
 

 
NOTE 14. SEGMENT DATA (CONTINUED)
   
Radio Broadcasting
   
Non-broadcast
   
Corporate
   
Consolidated
 
                         
   
(Dollars in thousands)
 
December 31, 2006
                       
Total property, plant and equipment, net
  $
115,604
    $
2,830
    $
10,279
    $
128,713
 
Goodwill
   
5,011
     
15,587
     
8
     
20,606
 
September 30, 2007
                               
Total property, plant and equipment, net
  $
115,875
    $
4,897
    $
10,122
    $
130,894
 
Goodwill
   
4,857
     
15,633
     
8
     
20,498
 

Reconciliation of operating income from continuing operations before depreciation, amortization, and (gain) loss on disposal of assets to income from continuing operations before income taxes:
 
   
Three Months Ended
   
Nine months Ended
 
   
September 30,
   
September 30,
 
   
2006
   
2007
   
2006
   
2007
 
   
(Dollars in thousands)
 
Operating income before depreciation, amortization, and gain (loss) on disposal of assets
  $
15,142
    $
14,132
    $
40,086
    $
41,919
 
Depreciation expense
    (3,198 )     (2,973 )     (9,056 )     (8,987 )
Amortization expense
    (759 )     (748 )     (2,062 )     (2,334 )
Interest income
   
68
     
52
     
114
     
160
 
Gain (loss) on disposal of assets
    (167 )     (309 )    
18,872
     
2,326
 
Interest expense
    (6,490 )     (6,375 )     (19,857 )     (19,137 )
Loss on early redemption of long-term debt
    (3,625 )    
      (3,625 )    
 
Other income (expense), net
    (120 )    
83
      (466 )    
230
 
Income from continuing operations before income taxes
  $
851
    $
3,862
    $
24,006
    $
14,177
 
 
NOTE 15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
 
            The following is the consolidating information of Salem Communications Corporation for purposes of presenting the financial position and operating results of Salem Communications Holding Corporation (“Salem Holding”) as the issuer of the 7¾% senior subordinated notes due 2010 (the “7 ¾ Notes”) and its guarantor subsidiaries on a consolidated basis and the financial position and operating results of the other guarantors, which are consolidated within the Company. Separate financial information of Salem Holding on an unconsolidated basis is not presented because Salem Holding has substantially no assets, operations or cash other than its investments in its subsidiaries. Each guarantor has given its full and unconditional guarantee, on a joint and several basis, of indebtedness under the 7¾% Notes. Salem Holding and Salem Communications Acquisition Corporation (“AcquisitionCo”) are 100% owned by Salem and Salem Holding owns 100% of all of its subsidiaries. All subsidiaries of Salem Holding are guarantors. OnePlace, LLC and CCM Communications, Inc., are aggregated and collectively referred to as “Non-broadcast.”  The net assets of Salem Holding are subject to certain restrictions which, among other things, require Salem Holding to maintain certain financial covenant ratios, and restrict Salem Holding and its subsidiaries from transferring funds in the form of dividends, loans or advances without the consent of the holders of the 7¾% Notes. The restricted net assets of Salem Holding as of September 30, 2007, amounted to $220.3 million. Included in intercompany receivables of Salem Holding presented in the consolidating balance sheet below is $80.7 million of amounts due from Salem and AcquisitionCo as of September 30, 2007.
 

 
NOTE 15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
 
 
SALEM COMMUNICATIONS CORPORATION
 
CONDENSED CONSOLIDATING BALANCE SHEET
 
(Unaudited)
(Dollars in thousands)
 
   
As of September 30, 2007
                     
Issuer and
                     
Guarantor
   
Guarantors
   
Subsidiaries
   
Parent
   
AcquisitionCo
   
Other Media
   
Salem Holding
   
Adjustments
   
Salem
Consolidated
Current assets:
                                 
Cash and cash equivalents 
  $
    $
95
    $
255
    $
323
    $
    $
673
Trade accounts receivable, net 
   
     
3,002
     
772
     
27,682
      (97 )    
31,359
Other receivables
   
     
8
     
5
     
367
     
     
380
Prepaid expenses 
   
     
83
     
260
     
2,241
     
     
2,584
Income tax receivable
   
     
7
      (3 )    
34
     
     
38
Deferred income taxes 
   
     
362
     
142
     
4,621
     
     
5,125
Total current assets 
   
     
3,557
     
1,431
     
35,268
      (97 )    
40,159
Investment in subsidiaries
   
226,266
     
     
     
      (226,266 )    
Property, plant and equipment, net 
   
     
8,232
     
576
     
122,086
     
     
130,894
Broadcast licenses 
   
     
94,473
     
     
377,990
     
     
472,463
Goodwill 
   
     
10,281
     
2,575
     
7,642
     
     
20,498
Other indefinite-lived intangible assets
   
     
     
2,892
     
     
     
2,892
Amortizable intangible assets, net 
   
     
4,276
     
1,106
     
1,389
     
     
6,771
Bond issue costs 
   
     
     
     
481
     
     
481
Bank loan fees 
   
     
     
     
2,237
     
     
2,237
FV of interest rate swap
   
     
     
     
451
     
     
451
Intercompany receivables 
   
99,944
     
10,845
     
     
114,768
      (225,557 )    
Other assets 
   
     
60
     
30
     
4,455
     
     
4,545
Total assets 
  $
326,210
    $
131,724
    $
8,610
    $
666,767
    $ (451,920 )   $
681,391
 

 
NOTE 15. CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
 
 
SALEM COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(Unaudited)
(Dollars in thousands)
 
   
As of September 30, 2007
 
                     
Issuer and
 
                     
Guarantor
 
   
Guarantors
   
Subsidiaries
 
               
Other
               
Salem
 
   
Parent
   
AcquisitionCo
   
Media
   
Salem Holding
   
Adjustments
   
Consolidated
 
Current liabilities: 
                                   
Accounts payable 
  $
    $ (48 )   $
46
    $
1,548
    $
    $
1,546
 
Accrued expenses 
   
     
476
     
410
     
4,914
      (164 )    
5,636
 
Accrued compensation and related expenses 
   
     
895
     
186
     
6,425
     
     
7,506
 
Accrued interest
   
     
     
     
3,829
     
     
3,829
 
Deferred revenue 
   
     
     
4,171
     
561
     
     
4,732
 
Current maturities of long-term debt
   
     
1,242
     
     
2,454
     
     
3,696
 
Total current liabilities