Salem Media Group, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

STOCK INCENTIVE PLAN

STOCK INCENTIVE PLAN

6 Months Ended

Jun. 30, 2016

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

NOTE 10. 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.”

The following table reflects the components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2016:

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2016		2015		2016
	(Dollars in thousands)
Stock option compensation expense included in corporate expenses	$	88	$	81	$	316	$	202
Restricted stock awards compensation expense included in corporate expenses		14				15		24
Stock option compensation expense included in broadcast operating expenses		25		20		77		48
Stock option compensation expense included in digital media operating expenses		19		14		55		39
Stock option compensation expense included in publishing operating expenses		10		10		24		11
Total stock-based compensation expense, pre-tax	$	156	$	125	$	487	$	324
Tax provision for stock-based compensation expense		(63)		(50)		(195)		(130)
Total stock-based compensation expense, net of tax	$	93	$	75	$	292	$	194

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 three and six months ended June 30, 2015 and 2016:

	Three Months Ended June 30,					Six Months Ended June 30,
	2015		2016			2015			2016
Expected volatility		n/a		46.77	%		52.37	%		47.03	%
Expected dividends		n/a		4.08	%		4.28	%		5.36	%
Expected term (in years)		n/a		6.0			3.0			7.5
Risk-free interest rate		n/a		1.38	%		0.85	%		1.66	%

Stock option information with respect to the company’s stock-based equity plans during the six months ended June 30, 2016 is as follows:

Options	Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(Dollars in thousands, except weighted average exercise price and weighted average grant date fair value)
Outstanding at January 1, 2016		1,581,123	$	4.87	$	3.39	4.3 years	$	1,738
Granted		549,500		4.85		1.33
Exercised		(117,443)		2.85		1.85
Forfeited or expired		(70,377)		8.01		5.91
Outstanding at June 30, 2016		1,942,803	$	4.88	$	2.81	4.9 years	$	4,585
Exercisable at June 30, 2016		1,062,178	$	5.03	$	3.56	3.4 years	$	2,342
Expected to Vest		836,164	$	4.69	$	1.89	6.6 years	$	2,130

Non-employee directors of the company have been awarded restricted stock awards 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 are 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 common stock on the grant dates. Information regarding the company’s restricted stock awards during the six months ended June 30, 2016 is as follows:

Restricted Stock Awards	Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(Dollars in thousands, except weighted average exercise price and weighted average grant date fair value)
Outstanding at January 1, 2016		8,000	$	5.83		0.2 years	$	40
Granted
Lapsed		(8,000)		5.83				52
Forfeited
Unvested outstanding at June 30, 2016			$				$

The aggregate intrinsic value represents the difference between the company’s closing stock price on June 30, 2016 of $7.22 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 six months ended June 30, 2015 and 2016 was $1.3 million and $1.1 million, respectively.

As of June 30, 2016, there was $0.7 million of total unrecognized compensation cost related to non-vested stock option awards. This cost is expected to be recognized over a weighted-average period of 2.07 years.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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