Salem Media Group, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

STOCK INCENTIVE PLAN

STOCK INCENTIVE PLAN

12 Months Ended

Dec. 31, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

NOTE 12. STOCK INCENTIVE PLAN

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 restricted stock to employees, directors, officers and advisors of the company. A maximum of 5,000,000 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 upon the occurrence of 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. We recognize non-cash stock-based compensation expense related to the estimated fair value of stock options granted in accordance with FASB ASC Topic 718 “CompensationStock Compensation.”

During the year ending December 31, 2014, the Board of Directors accelerated the vesting period for three outstanding stock awards issued to an employee. This accelerated vesting resulted in additional compensation expense of $30,000 recognized in the fourth quarter of 2014. The following table reflects the components of stock-based compensation expense recognized in the Consolidated Statements of Operations for the years ended December 31, 2013, 2014 and 2015:

	Year Ended December 31,
	2013		2014		2015
	(Dollars in thousands)
Stock option compensation expense included in corporate expenses	$	766	$	1,025	$	474
Restricted stock shares compensation expense included in corporate expenses		481				34
Stock option compensation expense included in broadcast operating expenses		302		325		130
Stock option compensation expense included in Internet operating expenses		253		165		92
Stock option compensation expense included in publishing operating expenses		47		61		41
Total stock-based compensation expense, pre-tax	$	1,849	$	1,576	$	771
Tax benefit (expense) from stock-based compensation expense		(740)		(630)		(308)
Total stock-based compensation expense, net of tax	$	1,109	$	946	$	463

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. For grants of stock options, the option exercise price is set at the closing price of the company’s common stock on the date of grant, and the related number of shares underlying the stock option is fixed at that point in time. The Plan also provides for grants of restricted stock. 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. The Plan does not allow key employees and directors (restricted persons) to exercise options during pre-defined blackout periods. Employees may participate in plans established pursuant to Rule 10b5-1 under the Exchange Act that allow them to exercise options according to pre-established criteria.

We use the Black-Scholes valuation model to estimate the grant date fair value of stock options and restricted stock. The expected volatility reflects the consideration of the historical volatility of our stock as determined by the closing price over a six to ten year term that is generally commensurate with the expected term of the award. Expected dividends reflect the quarterly distributions authorized and declared on our Class A and Class B common stock as of the grant date. The expected term of the awards are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rates for periods within the expected term of the award are based on the U.S. Treasury yield curve in effect during the period the options were granted. We use historical data to estimate future forfeiture rates to apply against the gross amount of compensation expense determined using the valuation model.

The weighted-average assumptions used to estimate the fair value of the stock options and restricted stock awards using the Black-Scholes valuation model were as follows for the years ended December 31, 2013, 2014 and 2015:

	Year Ended December 31,
	2013		2014		2015
Expected volatility		100.78%		74.98%		52.37%
Expected dividends		2.05%		2.70%		4.28%
Expected term (in years)		6.6		7.8		3.0
Risk-free interest rate		1.06%		2.27%		0.85%

Stock option information with respect to the company’s stock-based equity plans during the three years ended December 31, 2015 is as follows (Dollars in thousands, except weighted average exercise price and weighted average grant date fair value):

Options	Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2013		1,927,099	$	4.37	$	3.45	5.4 years	$	3,899
Granted		735,750		6.93		4.90			1,303
Exercised		(410,983)		3.46		2.47			1,883
Forfeited or expired		(89,799)		12.30		7.43			72
Outstanding at December 31, 2013		2,162,067	$	5.09	$	3.57	5.5 years	$	8,491
Exercisable at December 31, 2013		514,751		6.29		4.52	2.7 years		1,919
Expected to Vest		1,564,128	$	4.71	$	3.28	6.4 years	$	6,240

Outstanding at January 1, 2014		2,162,067	$	5.09	$	3.57	5.5 years	$	8,491
Granted		25,000		8.40		4.73
Exercised		(278,837)		4.38		3.43			1,260
Forfeited or expired		(92,026)		12.25		7.89			43
Outstanding at December 31, 2014		1,816,204	$	4.88	$	3.39	4.8 years	$	5,718
Exercisable at December 31, 2014		663,417		5.32		3.90	3.0 years		2,015
Expected to Vest		1,094,574	$	4.62	$	3.10	5.9 years	$	3,515

Outstanding at January 1, 2015		1,816,204	$	4.88	$	3.39	5.5 years	$	5,718
Granted		10,000		6.08		1.98
Exercised		(163,994)		2.35		1.53			589
Forfeited or expired		(81,087)		10.32		6.93			12
Outstanding at December 31, 2015		1,581,123	$	4.87	$	3.39	4.3 years	$	1,738
Exercisable at December 31, 2015		947,573		4.92		3.54	3.3 years		1,001
Expected to Vest		601,557	$	4.80	$	3.15	5.6 years	$	700

The aggregate intrinsic value represents the difference between the company’s closing stock price on December 31, 2015 of $4.98 and the option exercise price of the shares for stock options that were in the money, multiplied by the number of shares underlying such options. The total fair value of options vested during the years ended December 31, 2013, 2014 and 2015 was $0.8 million, $1.9 million and $1.5 million, respectively.

Non-employee directors of the company have been awarded restricted stock grants that vest one year from the date of issuance. During the twelve months ended December 31, 2013, the company granted restricted stock awards to certain members of management. These restricted stock awards vested immediately, but contained transfer restrictions under which they could not be sold, pledged, transferred or assigned until the three-month anniversary from the grant date. During the twelve months ended December 31, 2015, the company granted restricted stock awards to non-employee directors that vest one year from the date of issuance. These restricted stock awards contained transfer restrictions under which they could not be sold, pledged, transferred or assigned until the sooner of the fifth anniversary from the grant date or the day after the non-employee director is no longer a member of the company’s board. The restricted stock awards were independent of option grants and were granted at no cost to the recipient other than applicable taxes owed by the recipient. The awards were considered issued and outstanding from the date of grant.

The fair values of shares of restricted stock awards are determined based on the closing price of the company’s common stock on the grant dates. Information regarding the company’s restricted stock during the year ended December 31, 2013 and 2015 is as follows:

Restricted Stock Awards	Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Non-Vested at January 1, 2013			$		5.4 years	$	3,899
Granted		79,810		6.02			1,303
Lapsed		(79,810)		6.02			1,883
Forfeited		(89,799)					72
Outstanding at December 31, 2013			$		5.5 years	$	8,491

Non-Vested at January 1, 2015			$			$
Granted		10,000		5.83	1.0 years		61
Lapsed
Forfeited or expired		(2,000)		5.83			10
Outstanding at December 31, 2015		8,000	$	5.83	0.2 years	$	40

As of December 31, 2015, there was $0.3 million of total unrecognized compensation cost related to non-vested awards of stock options. This cost is expected to be recognized over a weighted-average period of 1.03 years.

Additional information regarding options outstanding as of December 31, 2015, is as follows:

			Weighted Average
			Contractual Life		Weighted				Weighted Average
Range of			Remaining		Average		Exercisable		Grant Date
Exercise Prices	Options		(Years)		Exercise Price		Options		Fair Value
$ 0.36 - $ 3.00		737,746		4.5	$	2.59		401,246	$	1.71
$ 3.01 - $ 6.00		146,214		2.0		5.13		145,414		4.20
$ 6.01 - $ 9.00		679,938		4.6		6.97		375,688		4.86
$ 9.01 - $ 12.00		22,350		0.2		11.80		22,350		8.80
$ 12.01 - $ 15.00		2,875		0.3		13.20		2,875		9.78
$ 0.36 - $ 15.00		1,589,123		4.2	$	4.84		947,573	$	3.40