q32007salemcommunications.htm

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

[ ]	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

—

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

—

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

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.

	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

	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

	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

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

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

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

	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