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, 2016

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

NOTE 15. STOCK INCENTIVE PLAN

Our Amended and Restated 1999 Stock Incentive Plan (the “Plan”) provides for grants of equity-based awards to employees, non-employee directors and officers, and advisors of the company (“Eligible Persons”). The Plan is designed to promote the interests of the company using equity investment interests to attract, motivate, and retain individuals.

A maximum of 5,000,000 shares of common stock are authorized under the Plan. All awards have restriction periods tied primarily to employment and/or service. The Plan allows for accelerated or continued vesting in certain circumstances as defined in the Plan including death, disability, a change in control, and termination or retirement. The company Board of Directors, or a committee appointed by the Board, has discretion subject to limits defined in the Plan, to modify the terms of any outstanding award.

The Plan does not allow insiders, or key employees and directors to exercise awards during pre-defined blackout periods. Insiders may participate in plans established pursuant to Rule 10b5-1 under the Exchange Act that allow them to exercise awards subject to pre-established criteria.

We recognize non-cash stock-based compensation expense based on the estimated fair value of awards in accordance with FASB ASC Topic 718 “CompensationStock Compensation.” Stock-based compensation expense fluctuates over time as a result of the vesting periods for outstanding awards and the number of awards that actually vest.

The following table reflects the components of stock-based compensation expense recognized in the Consolidated Statements of Operations for the years ended December 31, 2014, 2015 and 2016:

	Year Ended December 31,
	2014		2015		2016
	(Dollars in thousands)
Stock option compensation expense included in corporate expenses	$	1,025	$	474	$	378
Restricted stock shares compensation expense included in corporate expenses				34		24
Stock option compensation expense included in broadcast operating expenses		325		130		85
Stock option compensation expense included in Internet operating expenses		165		92		60
Stock option compensation expense included in publishing operating expenses		61		41		35
Total stock-based compensation expense, pre-tax	$	1,576	$	771	$	582
Tax benefit (expense) from stock-based compensation expense		(630)		(308)		(233)
Total stock-based compensation expense, net of tax	$	946	$	463	$	349

Stock option and restricted stock grants

Eligible employees may receive stock option awards annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. Incentive and non-qualified stock option awards allow the recipient to purchase shares of the company common stock at a set price, not to be less than the closing market price on the date of award, for no consideration payable by the recipient. The related number of shares underlying the stock option is fixed at the time of the grant. Options generally vest over a four-year period with a maximum term of five years from the vesting date. In addition, certain management and professional level employees may receive stock option awards upon the commencement of employment.

The Plan also allows for awards of restricted shares, which are typically granted annually to non-employee directors of the company. Awards granted to non-employee directors are made in exchange for their services to the company as directors and therefore, the guidance in FASB ASC Topic 505-50 “Equity Based Payments to Non Employees” is not applicable. Restricted stock awards contain transfer restrictions under which they cannot be sold, pledged, transferred or assigned until the period specified in the award, generally one to five years. Restricted stock awards are independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The awards are considered issued and outstanding from the date of grant.

The fair value of each award is estimated as of the date of the grant using the Black-Scholes valuation model. 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 commensurate with the expected term of the award. Expected dividends reflect the amount of 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, 2014, 2015 and 2016:

	Year Ended December 31,
	2014			2015			2016
Expected volatility		74.98	%		52.37	%		47.03	%
Expected dividends		2.70	%		4.28	%		5.36	%
Expected term (in years)		7.8			3.0			7.4
Risk-free interest rate		2.27	%		0.85	%		1.64	%

Activity with respect to the company’s option awards 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):

			Weighted Average		Weighted Average		Weighted Average	Aggregate
Options	Shares		Exercise Price		Grant Date Fair Value		Remaining Contractual Term	Intrinsic Value
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

Outstanding at January 1, 2016		1,581,123	$	4.87	$	3.39	4.3years	$	1,738
Granted		549,500		4.85		1.33
Exercised		(336,996)		2.95		2.02			1,418
Forfeited or expired		(73,627)		8.06		3.07			3
Outstanding at December 31, 2016		1,720,000	$	5.12	$	2.89	4.5 years	$	2,428
Exercisable at December 31, 2016		841,625		5.56		3.94	2.9 years		948
Expected to Vest		834,017	$	5.11	$	2.91	4.5 years	$	1,442

The aggregate intrinsic value represents the difference between the company’s closing stock price on December 31, 2016 of $6.25 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, 2016, 2015 and 2014 was $1.1 million, $1.5 million and $1.9 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, 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. Activity with respect to the company’s restricted stock awards during the year ended December 31, 2016 is as follows:

			Weighted Average Grant Date		Weighted Average Remaining		Aggregate Intrinsic
Restricted Stock Awards	Shares		Fair Value		Contractual Term		Value
Non-Vested at January 1, 2016		10,000	$	5.83		0.2 years	$	40
Granted
Lapsed		(10,000)		(5.83)				52
Forfeited or expired
Outstanding at December 31, 2016			$				$

As of December 31, 2016, there was $0.4 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 2.0 years.

Additional information regarding options outstanding as of December 31, 2016, 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
$2.38 - $2.56		147,375		2.4	$	2.38		147,375	$	2.38
$2.57 - $4.42		290,500		4.6		2.76		86,500		2.80
$4.43 - $4.85		541,000		6.7		4.85
$4.86 - $6.65		91,250		1.7		5.30		86,250		5.33
$6.66 - $7.54		619,875		3.6		6.92		506,750		6.92
$7.55 - $8.76		30,000		4.8		8.37		14,750		8.37
		1,720,000		4.5	$	5.12		841,625	$	5.56

- 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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