-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qtw7xMQdV/CHLFdqiYmiZOidOyTgWFV3BXMo6TgJxR7QLZE7Eb8g776R5VT/IRR8 04Kmb2uDEeM++H0oY2VSFw== 0000892569-99-000872.txt : 19990402 0000892569-99-000872.hdr.sgml : 19990402 ACCESSION NUMBER: 0000892569-99-000872 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALEM COMMUNICATIONS CORP /CA/ CENTRAL INDEX KEY: 0001049664 STANDARD INDUSTRIAL CLASSIFICATION: RADIO BROADCASTING STATIONS [4832] IRS NUMBER: 770121400 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-41733 FILM NUMBER: 99581730 BUSINESS ADDRESS: STREET 1: C/O SALEM COMMUNICATIONS CORP STREET 2: 4880 SANTA ROSA RD STE 300 CITY: CAMARILLO STATE: CA ZIP: 93012 BUSINESS PHONE: 8059870400 MAIL ADDRESS: STREET 1: C/O SALEM COMMUNICATIONS CORP STREET 2: 4880 SANTA ROSA RD STE 300 CITY: CAMARILLO STATE: CA ZIP: 93012 10-K405 1 FORM 10-K405 FOR THE FISCAL YEAR ENDED 12/31/1998 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 333-41733 SALEM COMMUNICATIONS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 77-0121400 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 4880 SANTA ROSA ROAD, SUITE 300 CAMARILLO, CALIFORNIA 93012 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-0400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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 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 if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of March 31, 1999: $0.00 As of March 31, 1999 there were 81,627 shares of common stock of Salem Communications Corporation outstanding. ================================================================================ 2 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "ACT") BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT We have no obligation to deliver, and have not delivered, to our security holders any annual reports covering the last fiscal year or proxy soliciting material to our security holders with respect to any annual or other meeting of security holders. 2 3 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 11 Item 2. Properties.................................................. 11 Item 3. Legal Proceedings........................................... 11 Item 4. Submission of Matters to a Vote of Security Holders......... 11 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......................................... 12 Item 6. Selected Consolidated Financial Information ................ 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 13 Item 7A Quantitative and Qualitative Disclosures About Market Risk.. 21 Item 8. Financial Statements and Supplementary Data................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 21 PART III Item 10. Directors and Executive Officers of the Registrant.......... 22 Item 11. Executive Compensation...................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. 28 Item 13. Certain Relationships and Related Transactions.............. 29 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................... 32 Signatures.................................................. 38 Financial Statements........................................ F-1 Schedule II -- Valuation and Qualifying Accounts............ S-1 Index to Exhibits........................................... E-1
3 4 PART I ITEM 1. BUSINESS. From time to time, in both written reports and oral statements, we make "forward-looking statements" within the meaning of Federal and state securities laws. Disclosures that use words such as we "believe," "anticipate," "expect," "may" or "plan" and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current expectations and are based upon data available to us at the time of the statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by us about our business. These projections or forward-looking statements fall under the safe harbors of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All metropolitan statistical area ("MSA") rank information used in this report is from the Fall 1998 Radio Market Survey Schedule & Population Rankings published by The Arbitron Company. According to the Radio Market Survey, the population estimates used were based upon 1990 U.S. Bureau Census estimates updated and projected to January, 1999 by Market Statistics, based on the data from Sales & Marketing Management's 1997 Survey of Buying Power. Information regarding the number of radio stations in the United States featuring religious talk and music formats, the number of stations featuring religious formats, the size of the listening audience for religious programming and the number of stations owned and/or operated in the top 25 radio markets by competitors of the company have been obtained from the 1999 Broadcasting & Cable Yearbook, The M Street Journal (November 18, 1998), Religion & Media Quarterly (July 1997) and the 1998 Directory of Religious Media. GENERAL Salem is the largest U.S. radio broadcasting company, measured by number of stations and audience coverage, providing programming targeted at audiences interested in religious and family issues. Our core business, developed over the last 25 years, is the ownership and operation of radio stations in large metropolitan markets. We own or operate 45 radio stations, including 33 stations which broadcast to 19 of the top 25 markets in terms of audience size. Our competitor with the next highest presence in the top 25 markets owns and/or operates 16 stations in 8 of such major markets. We also operate Salem Radio Network(R), a national radio network offering syndicated talk, news and music programming to over 1,100 affiliated radio stations. Traditionally, we have programmed radio stations with our primary format, talk programming with religious and family themes. This format generally features nationally syndicated and local programs produced by organizations that purchase block program time on our stations. We also program some of our radio stations with news/talk and music formats that complement our primary format. Our founders, our current CEO and chairman, are career radio broadcasters who have owned and operated radio stations with religious and family issues formats for the last 25 years. As Salem has grown, we have recruited managers with strong radio backgrounds and a commitment to our format. Our senior managers have an average of 25 years of industry experience and 9 years with Salem. Our management has a track record of successfully identifying, acquiring and operating new radio stations. We continue to seek new ways to expand and integrate our distribution and content capabilities. We recently acquired magazine, Internet and software businesses that direct their content to persons with interests that are similar to those of our targeted radio audience. We will continue to opportunistically pursue acquisitions of new media and other businesses that serve our audience. We plan to use these businesses, together with our radio stations and network, to attract and retain a larger audience and customer base. 4 5 We were incorporated in California in 1986 in connection with a combination of most of the radio station holdings of our principal shareholders, Edward G. Atsinger III and Stuart W. Epperson. Each of the principal shareholders owned 50% of our outstanding common stock. New Inspiration Broadcasting Company, Inc., the licensee of KKLA-FM, Los Angeles, and Golden Gate Broadcasting Company, Inc., the licensee of KFAX-AM, San Francisco, were owned by the principal shareholders and Mr. Epperson's wife, Nancy A. Epperson. New Inspiration and Golden Gate were both "S corporations," as that term is defined in the Internal Revenue Code of 1986, as amended. In August 1997, we, New Inspiration and Golden Gate effected a reorganization pursuant to which New Inspiration and Golden Gate became our wholly owned subsidiaries. The S corporation status of New Inspiration and Golden Gate was terminated in the reorganization. As a result of the reorganization our outstanding common stock is owned by Mr. Atsinger (50%), Mr. Epperson (36.8%) and Mrs. Epperson (13.2%). See "Securities Ownership of Certain Beneficial Owners and Management." DEVELOPMENT OF THE BUSINESS In 1998, we completed the purchase of the following radio stations:
PURCHASE DATE MARKET STATION MSA RANK(1) PRICE ---- ------ ------- ----------- ----------- August 1998 Los Angeles, CA KIEV-AM 2 33,210,000 August 1998 Seattle-Tacoma, WA KKMO-AM 14 500,000 October 1998 Houston, TX KTEK-AM 10 2,561,000(2) Minneapolis, MN KYCR-AM 18
- ------------------------- (1) "MSA" means metropolitan statistical area. (2) Combined purchase price for KTEK-AM and KYCR-AM acquisitions. 5 6 RADIO STATIONS We own and operate 45 radio stations in 27 markets. The following table sets forth information about each of Salem's stations in order of market size:
MSA MARKET(1) RANK(2) STATION CALL LETTERS YEAR ACQUIRED --------- ------- -------------------- ------------- New York, NY(3)................ 1 WMCA-AM; WWDJ-AM 1989; 1994 Los Angeles, CA................ 2 KKLA-FM; KLTX-AM; 1985; 1986; KIEV-AM 1998 Chicago, IL.................... 3 WYLL-FM 1990 San Francisco, CA.............. 4 KFAX-AM 1984 Philadelphia, PA............... 5 WFIL-AM; WZZD-AM 1993; 1994 Dallas-Ft. Worth, TX........... 7 KWRD-FM 1996 Boston, MA..................... 8 WEZE-AM 1997 Washington, D.C................ 9 WAVA-FM 1992 Houston-Galveston, TX.......... 10 KKHT-FM; KENR-AM; 1995; 1995; KTEK-AM 1998 Seattle-Tacoma, WA............. 14 KGNW-AM; KLFE-AM; 1985; 1994;(4); KKOL-AM; KKMO-AM 1998 Phoenix, AZ.................... 15 KPXQ-AM 1996 San Diego, CA.................. 16 KPRZ-AM 1986 Minneapolis-St. Paul, MN....... 18 KKMS-AM; KYCR-AM 1996; 1998 Baltimore, MD.................. 20 WITH-AM(5) 1997 Pittsburgh, PA................. 21 WORD-FM; WPIT-AM 1989; 1993 Denver-Boulder, CO............. 23 KRKS-FM; KRKS-AM; 1993; 1994; KNUS-AM 1996 Cleveland, OH.................. 24 WHK-AM; WCCD-AM 1997 Portland, OR................... 25 KPDQ-FM; KPDQ-AM 1986; 1986 Cincinnati, OH................. 26 WTSJ-AM 1997 Sacramento, CA................. 28 KFIA-AM; KTKZ-AM 1995; 1997 Riverside-San Bernardino, CA... 29 KKLA-AM(6) 1986 Columbus, OH................... 33 WRFD-AM 1982 San Antonio, TX................ 34 KSLR-AM 1994 Akron, OH...................... 68 WHLO-AM 1997 Colorado Springs, CO........... 93 KGFT-FM; KBIQ-FM; 1996; 1996; KPRZ-FM 1996 Oxnard, CA..................... 106 KDAR-FM 1974 Canton, OH..................... 123 WHK-FM(7) 1997
- ------------------------- (1) Actual city of license may differ from metropolitan market served. (2) "MSA" means metropolitan statistical area. (3) This market includes the Nassau-Suffolk, NY Metro market which independently has a MSA rank of 17. (4) The company operates the station, which is licensed to a corporation owned by the principal shareholders of the company, under the terms of a local marketing agreement. The principal shareholders and the company are parties to an Option to Purchase Agreement whereunder the company has been granted an option to purchase KKOL-AM from the principal shareholders at any time on or before December 31, 1999. (5) The station is simulcast with WAVA-FM, Washington, D.C. (6) The station is simulcast with KKLA-FM, Los Angeles. (7) The station is simulcast with WHK-AM, Cleveland. 6 7 Program Revenue. For the year ended December 31, 1998, we derived 35.5% and 14.7% of our gross revenue, or $30.3 million and $12.6 million, respectively, from the sale of nationally syndicated and local block program time. We derive nationally syndicated program revenue from a programming customer base consisting primarily of geographically diverse, well-established non-profit religious and educational organizations that purchase time on stations in a large number of markets in the United States. Nationally syndicated program producers typically purchase 13, 26 or 52 minute blocks on a Monday through Friday basis and may offer supplemental programming for weekend release. We obtain local program revenue from community organizations and churches that typically purchase time primarily for weekend release and from local speakers who purchase daily releases. We have been successful in assisting quality local programs to expand into national syndication. Advertising Revenue. For the year ended December 31, 1998, we derived 30.6% of our gross revenue, or $26.1 million from the sale of local spot advertising and 5.2% of our gross revenue, or $4.5 million from the sale of national spot advertising. Operations. Each of the radio markets in which we have a presence has a general manager who is responsible for day-to-day operations, local spot advertising sales and, where applicable, local program sales for all of our stations in the market. We pay our general managers a base salary plus a percentage of the respective station's net operating income. For each station we also have a staff of full and part-time engineering, programming and sales personnel. We pay our sales staff on a commission basis. We have decentralized our operations in response to the rapid growth we have experienced in recent years. Our operations vice presidents, some of whom are also station general managers, oversee several markets on a regional basis. Our operations vice presidents are experienced radio broadcasters with expertise in sales, programming and production. We will continue to rely on this strategy of decentralization and encourage operations vice presidents to apply innovative techniques to the operations they oversee which, if successful, can be implemented in our other stations. Our corporate headquarters personnel oversee the placement and rate negotiation for all nationally syndicated programs. Centralized oversight of this component of company revenue is necessary because our key program customers purchase time in many of our markets. Corporate headquarters personnel also are responsible for centralized reporting and financial functions, benefits administration, engineering oversight and other support functions designed to provide resources to local management. Satellite Radio. In August 1998 we expanded our reach by entering into an exclusive agreement with XM Satellite Radio, Inc. to develop, produce, supply and market religious and family issues audio programming which will be distributed by a subscriber-based satellite digital audio radio service. XM Satellite Radio, Inc. is one of two FCC licensees for this service (which is expected to commence in the year 2000) and it will have the capability of providing up to 100 channels of audio programming. We have agreed to provide religious and family issues talk programming on one channel and youth and adult religious music programming on two additional channels. We believe that the listening audiences for our radio stations, which provide the financial support for program producers purchasing time on these stations, are responsive to affinity advertisers that promote products targeted to audiences interested in religious and family issues and are receptive to direct response appeals such as those offered through infomercials. All of our stations have affinity advertising customers in their respective markets. Local church groups and many community organizations such as rescue missions and family crisis support services can often effectively reach their natural constituencies by advertising on religious format stations. Significant advertising is also purchased by local and nationally affiliated religious bookstores, publishers specializing in inspirational and religious literature and other businesses that desire to specifically target audiences interested in religious and family issues. We also generate spot advertising revenue from general market retailers, including automobile dealers and grocery store chains, in many of our stations' markets. 7 8 SALEM RADIO NETWORK(R) In 1993, we established Salem Radio Network(R) in connection with our acquisition of certain assets of the former CBN Radio Network. Establishment of Salem Radio Network(R) was a part of our overall business strategy to develop a national network of affiliated radio stations anchored by our owned and operated radio stations in major markets. Salem Radio Network(R) which is headquartered in Dallas, develops, produces and syndicates a broad range of programming specifically targeted to religious and family issues talk and music stations as well as general market news/talk stations. Currently, we have rights to six full-time satellite channels and all Salem Radio Network(R) product is delivered to affiliates via satellite. As of January 31, 1999, Salem Radio Network(R) had approximately 1,100 affiliate stations, including our owned and operated stations, that broadcast one or more of the offered programming options. These programming options feature talk shows, news and music. Network operations also include commission revenue of Salem Radio Representatives from unaffiliated customers and an allocation of operating expenses estimated to relate to such commissions. Salem Radio Representatives, a wholly owned subsidiary of Salem, sells all national commercial advertising placed on Salem Radio Network's commercial affiliate radio stations. Salem Radio Network's gross revenue for the year ended December 31, 1998 was $6.1 million. Salem Radio Network(R) incurred a net operating loss of $392,000 for the year ended December 31, 1998. Salem Radio Representatives. The company established Salem Radio Representatives in 1992 as a sales representation company specializing in placing national advertising on religious format radio stations. Salem Radio Network(R) has an exclusive relationship with Salem Radio Representatives, for the sale of available Salem Radio Network(R) spot advertising. Salem Radio Representatives receives a commission on all Salem Radio Network(R) sales. Salem Radio Representatives also contracts with individual radio stations to sell air time to national advertisers desiring to include selected company stations in national buys covering multiple markets. 8 9 NEW MEDIA Internet. In January 1999, we purchased the assets of OnePlace, LLC for $6.2 million. OnePlace, based in Greensboro, North Carolina, provides Internet e-commerce, consumer profiling and other information technologies to the Christian products industry. In addition, OnePlace(TM) publishes a variety of content and software, including church management software and GuardiaNet(TM), an Internet based web screening software. Magazines. In January 1999, we purchased CCM Communications, Inc. for $1.9 million. CCM, based in Nashville, Tennessee, has published magazines since 1978 which follow the contemporary Christian music industry. CCM's flagship publication, CCM Magazine, is a monthly music magazine offering interviews with artists, issue-oriented features, album reviews and concert schedules. Through CCM's recent acquisition of the Christian Research Report, the leading trade publication providing rating information to contemporary Christian music formatted radio stations, and its continued publication of CCM Update, the leading trade publication providing rating information to contemporary Christian music producers and retailers, we are uniquely positioned to track contemporary Christian music audience trends. Software Publishing. In January 1999, we agreed to purchase the assets of NavPress Software, based in Austin, Texas, for $550,000. NavPress is a developer and supplier of electronic Bible and Christian reference books and Bible study software applications, including its best known products WORDsearch and LESSONmaker. Included within the company's product lines are Bible translations, commentaries, dictionaries, maps and illustrations, and classic Christian works. 9 10 COMPETITION Radio. The radio broadcasting industry, including the religious and family issues format segment of this industry, is a highly competitive business. The financial success of each of our radio stations that features talk programming is dependent, to a significant degree, upon its ability to generate revenue from the sale of block program time to national and local religious and educational organizations. We compete for this program revenue with a number of different commercial and noncommercial radio station licensees. While no group owner in the United States specializing in the religious format approaches Salem in size of potential listening audience and presence in major markets, religious format stations exist and enjoy varying degrees of prominence and success in all markets. We own and operate 33 radio stations, which broadcast to 19 of the top 25 radio markets in terms of audience size. Our competitor with the next highest presence in the top 25 markets owns and/or operates only 16 stations in 8 of such major markets. We also compete for revenue in the spot advertising market with other commercial religious format and general format radio station licensees. We compete in the spot advertising market with other media as well, including broadcast television, cable television, newspapers, magazines, direct mail and billboard advertising. Competition may also come from new media technologies and services that are being developed or introduced. These include delivery of audio programming by cable television and satellite systems, digital audio radio services, the Internet, personal communications services and the proposed authorization by the FCC of a new service of low powered, limited coverage FM radio stations. Digital audio broadcasting may deliver multiformat digital radio services by satellite to national and regional audiences. The quality of programming delivered by digital audio broadcasting would be equivalent to compact disc. The delivery of live and stored audio programming through the Internet has also created new competition. In addition, the anticipated commencement of satellite delivered digital audio radio services, which are intended to deliver multiple audio programming formats to local and national audiences, may create additional competition. We have attempted to address these existing and potential competitive threats through our recent Internet acquisition and through our exclusive arrangement to provide religious and family issues talk and music formats on one of the two FCC licensees of satellite digital audio radio services. Network. Salem Radio Network(R) competes with other commercial radio networks that offer news and talk programming to religious and general format stations and two noncommercial networks that offer religious music formats. Salem Radio Network(R) also competes with other radio networks for the services of talk show personalities. New Media. Our magazines compete for readers and advertisers with other publications that follow the religious music industry and publications that address issues of interest to church leadership. Our Internet business competes with other companies that deliver on-line audio programming and with web sites that offer content and e-commerce capabilities targeted to persons interested in religious and family issues. EMPLOYEES At March 1, 1999, Salem employed 569 full-time and 235 part-time employees. None of Salem's employees are covered by collective bargaining agreements, and we consider our relations with our employees to be good. 10 11 ITEM 2. PROPERTIES. The types of properties required to support our radio stations include offices, studios and tower and antenna sites. A station's studios are generally housed with its office in a downtown or business district. We generally select our tower and antenna sites to provide maximum market coverage. Salem Radio Network(R) operations are supported by offices and studios from which its programming originates or is relayed from a remote point of origination. The operations of our new media businesses are supported by office facilities. Our stations' studios and offices, Salem Radio Network's operations, the operations of our new media businesses and our corporate headquarters are located in leased facilities. Salem Radio Network(R) leases satellite transponders used for delivery of its programming. We either own or lease our radio station tower and antenna sites. We do not anticipate difficulties in renewing those leases that expire within the next several years or in obtaining other lease arrangements, if necessary. We lease certain property from the principal shareholders or trusts and partnerships created for the benefit of the principal shareholders and their families. See "Certain Relationships and Related Transactions -- Leases from Principal Shareholders." All such leases have cost of living adjustments. Based upon our management's assessment and analysis of local market conditions for comparable properties, we believe such leases do not have terms that vary materially from those that would have been available from unaffiliated parties. No one property is material to our overall operations. We believe that our properties are in good condition and suitable for our operations; however, we continually evaluate opportunities to upgrade our properties. We own substantially all of our equipment, consisting principally of transmitting antennae, transmitters, studio equipment and general office equipment. ITEM 3. LEGAL PROCEEDINGS. We are involved in various routine legal proceedings, incident to the ordinary course of our business. We believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our consolidated financial condition or our results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On March 10, 1999, the security holders of the company gave their unanimous written consent to re-elect as directors of the company, the following five individuals: Edward G. Atsinger III, Stuart W. Epperson, Eric H. Halvorson, Richard A. Riddle, Roland S. Hinz. No other matters have been submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the period covered by this report. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. (a) There is no established public trading market for the company's common stock. (b) HOLDERS. As of March 31, 1999, there are three holders of the company's common stock. (c) DIVIDENDS. No cash dividends were declared for any class of common equity in the last two fiscal years. See "Management's Discussion and Analysis of Financial Condition and Operating Results" for description of limitations on the company's ability to declare dividends. ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION. The selected consolidated financial information should be read in conjunction with the company's consolidated financial statements.
Year Ended December 31 ------------------------------------------------------------ 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- (dollars in thousands except per share data and ratios) Statement of Operations Data: Net revenue ............................. $ 38,575 $ 48,168 $ 59,010 $ 67,912 $ 77,891 Operating expenses: Station operating expenses ............ 22,179 27,527 33,463 39,626 42,526 Corporate expenses .................... 3,292 3,799 4,663 6,210 7,395 Tax reimbursements to S corporations ........................ 977 2,057 2,038 1,780 -- Depreciation and amortization ......... 7,633 7,884 8,394 12,803 14,058 -------- -------- -------- -------- -------- Operating expenses ...................... 34,081 41,267 48,558 60,419 63,979 -------- -------- -------- -------- -------- Net operating income .................. 4,494 6,901 10,452 7,493 13,912 Other income (expense: Interest income/expense, net .......... (3,438) (6,327) (6,838) (12,476) (15,650) Gain (loss) on disposal of assets ..... (482) (7) 16,064 4,285 236 Other income (expense) ................ (135) (255) (270) (389) (422) -------- -------- -------- -------- -------- Total other income (expense) ............ (4,055) (6,589) 8,956 (8,580) (15,836) Income (loss) before income taxes and extraordinary item ..................... 439 312 19,408 (1,087) (1,924) Provision (benefit) for income taxes .... (247) (204) 6,655 106 (343) -------- -------- -------- -------- -------- Income (loss) before extraordinary item . 686 516 12,753 (1,193) (1,581) Extraordinary gain (loss) (1) ........... -- (394) -- (1,185) -- -------- -------- -------- -------- -------- Net income (loss) ....................... $ 686 $ 122 $ 12,753 $ (2,378) $ (1,581) ======== ======== ======== ======== ======== Pro forma net income (loss) (2) ......... $ 848 $ 1,024 $ 12,838 $ (770) $ (1,581) ======== ======== ======== ======== ======== Other Data: Cash flows provided by operating activities ............................. $ 7,482 $ 7,681 $ 10,495 $ 7,314 $ 11,015 Cash flows used in investing activities . $(18,806) $(27,681) $(18,923) $(26,326) $(31,762) Cash flows provided by financing activities ............................. $ 11,827 $ 19,227 $ 9,383 $ 18,695 $ 21,019 Broadcast cash flow (3) ................. $ 16,396 $ 20,641 $ 25,547 $ 28,286 $ 35,365 Broadcast cash flow margin (4) .......... 42.5% 42.9% 43.3% 41.7% 45.4% EBITDA (3) .............................. $ 13,104 $ 16,842 $ 20,884 $ 22,076 $ 27,970 Capital expenditures .................... $ 2,441 $ 3,040 $ 6,982 $ 7,521 $ 7,360 Purchase of radio stations .............. $ 14,935 $ 24,550 $ 59,621 $ 19,436 $ 33,682 Earnings to fixed charges ratio (5) ..... 1.1x 1.0x 3.2x .9x .9x
December 31 ---------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Balance Sheet Data: Cash and cash equivalents ....... $ 1,780 $ 1,007 $ 1,962 $ 1,645 $ 1,917 Working capital ................. 1852 1,088 8,258 9,843 11,539 Intangible assets, net .......... 46,748 61,923 106,781 120,083 141,776 Total assets .................... 82,041 104,817 159,185 184,813 207,750 Long-term debt (including current portion) ....................... 60,656 81,020 121,790 154,500 178,610 Shareholders' equity ............ 13,160 13,282 20,354 10,682 9,101
- --------------- (1) The extraordinary loss in 1995 and 1997 relates to the write-off of loan and related fees related to the repayment of long-term debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 of the Notes to Consolidated Financial Statements. (2) The company's consolidated financial data for the periods presented include the results of operations, assets and liabilities of New Inspiration and Golden Gate, which were both S corporations under common ownership and control with the company prior to the reorganization. The S corporation status of New Inspiration and Golden Gate was terminated in the reorganization. Federal and state income taxes (except for a 1.5% state franchise tax) are not provided for New Inspiration and Golden Gate in the consolidated statements of operations of the company for the periods presented because the tax attributes of S corporations are passed through to their shareholders. Prior to the reorganization, New Inspiration and Golden Gate reimbursed the S corporation shareholders for their individual income tax liabilities on the earnings of the S corporations. These tax reimbursements to S corporation shareholders are reflected as an operating expense in the company's consolidated financial statements. In August 1997, the company, New Inspiration and Golden Gate effected the reorganization pursuant to which the S corporations became wholly owned by the company. To give effect to the reorganization, including the termination of the S corporation status of New Inspiration and Golden Gate, pro forma net income excludes the tax reimbursements to S corporation shareholders (because such amounts would not have been paid had New Inspiration and Golden Gate been subject to income taxes) and includes a pro forma tax provision at an estimated combined federal and state income tax rate of approximately 40% (to reflect an estimated income tax provision (benefit) of the company) as if the reorganization had occurred at the beginning of each period presented in the company's consolidated financial data. See "Business--General." The following table reflects the pro forma adjustments to historical net income:
Year Ended December 31 ------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------ (dollars in thousands) Pro Forma Information Income (loss) before income taxes and extraordinary item as reported above ... $ 439 $ 312 $19,408 $(1,087) $(1,924) Add back tax reimbursements to S corporation shareholders ............... 977 2,057 2,038 1,780 -- ------- ------- ------- ------- ------- Pro forma income (loss before income taxes and extraordinary item ........... 1,416 2,369 21,446 693 (1,924) Pro forma income tax provision (benefit) 568 951 8,608 278 (343) ------- ------- ------- ------- ------- Pro forma income (loss) before extraordinary item ..................... 848 1,418 12,838 415 (1,581) Extraordinary gain (loss) ............... -- (394) -- (1,185) -- ------- ------- ------- ------- ------- Pro forma net income (loss) ............. $ 848 $ 1,024 $12,838 $ (770) $(1,581) ======= ======= ======= ======= =======
- --------------- (3) "Broadcast cash flow" consists of net operating income before tax reimbursements to S corporation shareholders, depreciation and amortization and corporate expenses. "EBITDA" consists of net operating income before tax reimbursements to S corporation shareholders and depreciation and amortization. Although broadcast cash flow and EBITDA are not measures of performance calculated in accordance with GAAP, management believes that they are useful to an investor in evaluating the company because they are measures widely used in the broadcast industry to evaluate a radio company's operating performance. However, broadcast cash flow and EBITDA should not be considered in isolation or as substitutes for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP as a measure of liquidity or profitability. Moreover, broadcast cash flow and EBITDA are not measures of performance calculated in accordance with GAAP, these measures are not necessarily comparable to similarly titled measures employed by other companies. (4) Broadcast cash flow margin is broadcast cash flow as a percentage of net revenue. (5) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income from operations before income taxes plus fixed charges, and "fixed charges" consist of interest expense plus an allocation of a portion of rent expense representing interest. For the years ended December 31, 1995, 1997 and 1998, the company's earnings were inadequate to cover fixed charges; the coverage deficiency for the years ended December 31, 1995, 1997 and 1998 was $313,000, $1.0 million and $1.9 million, respectively. 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes included elsewhere in this report. Our consolidated financial statements are not directly comparable from period to period due to our acquisition activity. The principal sources of our revenue are: - the sale of block program time, both to national and local program producers, - the sale of broadcast time on our radio stations for advertising, both to national and local advertisers, and - the sale of broadcast time for advertising on Salem Radio Network(R). The following table shows gross revenue and the percentage of gross revenue for each revenue source.
YEAR ENDED DECEMBER 31 ----------------------------------------------------- 1996 1997 1998 --------------- --------------- --------------- (DOLLARS IN THOUSANDS) Block program time: National................... $26,610 40.8% $27,664 37.0% $30,337 35.5% Local...................... 10,869 16.7 11,392 15.2 12,558 14.7 ------- ----- ------- ----- ------- ----- 37,479 57.5 39,056 52.5 42,895 50.2 Advertising: National................... 4,088 6.3 3,621 4.8 4,458 5.2 Local...................... 17,416 26.7 21,143 28.3 26,106 30.6 ------- ----- ------- ----- ------- ----- 21,504 33.0 24,764 33.1 30,564 35.8 Infomercials(1).............. 3,819 5.1 4,121 4.8 Salem Radio Network.......... 5,270 8.1 6,186 8.3 6,053 7.1 Other........................ 888 1.4 1,005 1.3 1,778 2.1 ------- ----- ------- ----- ------- ----- Gross revenue................ 65,141 100.0% 74,830 100.0% 85,411 100.0% ===== ===== ===== Less agency commissions...... 6,131 6,918 7,520 ------- ------- ------- Net revenue.................. $59,010 $67,912 $77,891 ======= ======= =======
- --------------- (1) Prior to 1997, classification of revenue (i.e., national program, national advertising, local program or local advertising) from infomercials was determined at the discretion of local station general managers. In 1997, we began including revenue from infomercials in a separate category in order to establish uniformity of classification of revenue. Our revenue is affected primarily by the program rates our radio stations charge and by the advertising rates our radio stations and Salem Radio Network(R) charge. Correspondingly, the rates for block program time are based upon our stations' ability to attract audiences that will support the program producers through contributions and purchases of their products. Advertising rates are based upon the demand for on-air inventory, which in turn is based on our stations' and Salem Radio Network's ability to produce results for its advertisers. Each of our stations and Salem Radio Network(R) have a general pre-determined level of on-air inventory that they make available for block programs and advertising, which may vary at different times of the day. In recent years we have begun to place greater emphasis on the development of local spot sales in all of our 13 14 markets. We encourage general managers and sales managers to create more spot inventory for sale. Additional spot inventory can be created in a variety of ways, such as removing programming which generates marginal audience response and adjusting the start time of programs to add inventory in more desirable dayparts. Our quarterly revenue varies throughout the year, as is typical in the radio broadcasting industry. Quarterly revenue from the sale of block program time does not tend to vary, however, since program rates are generally set annually. Our cash flow is affected by the transition period experienced by stations we have acquired that previously operated with formats other than the religious and family issues formats. During the transition period when we develop the station's program customer and listener base, such stations typically do not generate significant cash flow from operations. In the broadcasting industry, radio stations often utilize trade or barter agreements to exchange advertising time for goods or services (such as other media advertising, travel or lodging), in lieu of cash. In order to preserve most of its on-air inventory for cash advertising, we generally enter into trade agreements only if the goods or services bartered to us will be used in our business. We have minimized our use of trade agreements and have generally sold over 90% of our advertising time for cash. In addition, it is our general policy not to preempt advertising spots paid for in cash with advertising spots paid for in trade. The primary operating expenses incurred in the ownership and operation of our radio stations include employee salaries and commissions, and facility expenses (e.g., rent and utilities). In addition to these expenses our network incurs programming costs and lease expenses for satellite communication facilities. We also incur and will continue to incur significant depreciation, amortization and interest expense as a result of completed and future acquisitions of stations, and due to existing borrowings and future borrowings, including outstanding senior subordinated notes and borrowings under our Credit Agreement. The performance of a radio group, such as us, is customarily measured by the ability of its stations to generate Broadcast Cash Flow and EBITDA. Broadcast Cash Flow is defined as net operating income before tax reimbursements to S corporation shareholders, depreciation and amortization and corporate expenses. EBITDA is defined as net operating income before tax reimbursements to S corporation shareholders and depreciation and amortization. Although Broadcast Cash Flow and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles, and should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of generally accepted accounting principles, we believe that Broadcast Cash Flow and EBITDA are useful because they are generally recognized by the radio broadcasting industry as a measure of performance and are used by analysts who report on the performance of broadcast companies. Our consolidated statements of operations have included an operating expense called "tax reimbursements to S corporation shareholders." These amounts represent the income tax liability of our shareholders created by the income of New Inspiration and Golden Gate, which prior to the Reorganization were each S corporations. We consider the nature of this operating expense to be essentially equivalent to an income tax provision and have excluded this expense from the calculation of Broadcast Cash Flow and EBITDA for periods prior to August 13, 1997. Commencing August 13, 1997, pretax income of New Inspiration and Golden Gate is included in our consolidated income tax return and in our computation of the income tax provision included in our consolidated statement of operations. 14 15 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net Revenue. Net revenue increased approximately $10.0 million or 14.7% to $77.9 million in 1998 from $67.9 million in 1997. The inclusion of revenue from the acquisitions of radio stations and revenue generated from local marketing agreements entered into during 1998 and 1997 provided approximately $2.2 million of the increase. For stations owned and operated over the comparable period in 1998 and 1997, net revenue improved approximately $7.8 million or 11.6% to $75.2 million in 1998 from $67.4 million in 1997 due primarily to an increase in revenue at the stations we acquired in 1996 that previously operated with formats other than religious and family issues formats, program rate increases and to a lesser extent to increases in on-air inventory and improved selling efforts at both the national and local level. Revenue from advertising as a percentage of our gross revenue increased from 33.1% in 1997 to 35.8% in 1998. Revenue from block program time as a percentage of our gross revenue decreased from 52.5% in 1997 to 50.2% in 1998. This change in our revenue mix is primarily due to our efforts to develop more local spot sales in all of our markets. Station Operating Expenses. Station operating expenses increased approximately $2.9 million or 7.3% to $42.5 million in 1998 from $39.6 million in 1997. Approximately $1.2 million of such increase was due to the inclusion of expenses from the acquisitions of radio stations and expenses incurred for local marketing agreements entered into during 1998 and 1997. For stations owned and/or operated over the comparable periods in 1998 and 1997, station operating expenses increased approximately $1.7 million or 4.3% to $41.0 million in 1998 from $39.3 million in 1997 primarily due to selling and production expenses incurred to produce the increased revenue in the periods, as described above. This increase was offset in part by a one-time credit of $453,000 that we recorded in 1998. The credit related to music licensing fees and represented the proceeds of a settlement between us and the two largest performance rights organizations. Broadcast Cash Flow. Broadcast Cash Flow increased approximately $7.1 million or 25.1% to $35.4 million in 1998 from $28.3 million in 1997. As a percentage of net revenue, Broadcast Cash Flow increased to 45.4% in 1998 from 41.7% in 1997. The increase is primarily attributable to the one-time credit for music licensing fees and the improved performance of stations and networks acquired in 1996 and 1997 that previously operated with formats other than religious and family issues formats. These acquired and reformatted stations typically produce lower margins during the early phase of the transition period from a non-religious format to a religious and family issues format. Broadcast Cash Flow margins improve as we implement scheduled program rate increases and increase spot advertising revenue on our stations. Corporate Expenses. Corporate expenses increased approximately $1.2 million or 19.4% to $7.4 million in 1998 from $6.2 million in 1997, primarily due to bonuses totaling $538,000 paid to our president and to our chairman of the board in 1998, and additional personnel and overhead costs associated with station acquisitions in 1998. EBITDA. EBITDA increased approximately $5.9 million or 26.7% to $28.0 million in 1998 from $22.1 million in 1997. As a percentage of net revenue, EBITDA increased to 35.9% in 1998 from 32.5% in 1997. The increase is primarily attributable to the one-time credit for music licensing fees and the improved performance of stations and networks acquired in 1996 and 1997 that previously operated with formats other than religious and family issues formats. 15 16 Tax Reimbursements to S Corporation Shareholders. There were no tax reimbursements to S corporation shareholders for 1998 because of the reorganization of the predecessor to the company which took place in August 1997, compared to $1.8 million in tax reimbursements to S corporation shareholders for 1997. New Inspiration and Golden Gate became wholly-owned subsidiaries of the predecessor to the company in August 1997 pursuant to a reorganization. The S corporation status of New Inspiration and Golden Gate was terminated in the reorganization. Depreciation and Amortization. Depreciation and amortization expense increased approximately $1.3 million or 10.2% to $14.1 million in 1998 from $12.8 million in 1997, primarily due to radio station and network acquisitions consummated during 1998 and 1997. Other Income (Expense). Interest income was essentially unchanged for the year ended December 31, 1998 compared to 1997. Gain (loss) on disposal of assets decreased $4.1 million from $4.3 million in 1997 to $.2 million in 1998. The gain in 1997 was primarily due to the sale of WPZE-AM, Boston. Interest expense increased approximately $3.2 million or 25.2% to $15.9 million in 1998 from $12.7 million in 1997, primarily due to interest expense associated with additional borrowings to fund acquisitions consummated during 1998 and 1997. Other expense was essentially unchanged for the year ended December 31, 1998 compared to 1997. Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes as a percentage of income (loss) before income taxes and extraordinary item (i.e., effective tax rate) was (17.8)% for 1998 and 9.8% for 1997. The effective tax rate in 1998 differs from the federal statutory income tax rate of 34.0% because of the effect of state income taxes and certain expenses that are not deductible for tax purposes. The effective tax rate in 1997 differs from the federal statutory income tax rate of 34.0% because of the effect of state income taxes, the establishment of a deferred tax liability and provision of approximately $609,000 resulting from the reorganization, offset by the inclusion of income from New Inspiration and Golden Gate, which were S corporations (and therefore, not subject to federal income taxes) prior to the reorganization in August 1997. Net Loss. We recognized a net loss of approximately $1.6 million in 1998, compared to a net loss of approximately $2.4 million in 1997. Included in the net loss for 1997 is a $1.2 million extraordinary loss for the write off of deferred financing costs and termination fees related to the repayment of our prior credit agreement which we repaid in full upon issuance of the old notes on September 25, 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net Revenue. Net revenue increased approximately $8.9 million or 15.1% to $67.9 million in 1997 from $59.0 million in 1996. The inclusion of revenue from the acquisitions of radio stations and revenue generated from local marketing agreements entered into during 1997 and 1996 provided approximately $6.4 million of the increase. For stations owned and operated over the comparable period in 1997 and 1996, net revenue improved approximately $2.5 million or 4.4% to $58.7 million in 1997 from $56.2 million in 1996 due primarily to program rate increases and to a lesser extent to increases in on-air inventory and improved selling efforts at both the national and local level. Revenue from advertising as a percentage of our gross revenue was essentially unchanged from 1996 to 1997. Revenue from block program time as a percentage of our gross revenue decreased from 57.5% in 1996 to 52.5% in 1997. Revenue from informercials was 5.1% of gross revenue in 1997. Prior to 1997, classification of revenue (i.e., national program, national advertising, local program or local advertising) from infomercials was determined at the 16 17 discretion of local station general managers. This change in our revenue mix is primarily due to our efforts to develop more local spot sales in all of our markets, and to the separate reporting of revenue from infomercials beginning in 1997. Station Operating Expenses. Station operating expenses increased approximately $6.1 million or 18.2% to $39.6 million in 1997 from $33.5 million in 1996. Approximately $5.2 million of such increase was due to the inclusion of expenses from the acquisitions of radio stations and expenses incurred for local marketing agreements entered into during 1997 and 1996. For stations owned and/or operated over the comparable periods in 1997 and 1996, station operating expenses increased approximately $0.9 million or 3% to $30.9 million in 1997 from $30.0 million in 1996 primarily due to selling and production expenses incurred to produce the increased revenue in the periods, as described above. Broadcast Cash Flow. Broadcast Cash Flow increased approximately $2.8 million or 11.0% to $28.3 million in 1997 from $25.5 million in 1996. As a percentage of net revenue, Broadcast Cash Flow decreased to 41.7% in 1997 from 43.2% in 1996. The decrease is primarily attributable to lower margins achieved during the transition period of the stations and networks acquired in 1996 and 1997 that previously operated with formats other than religious and family issues formats. Corporate Expenses. Corporate expenses increased approximately $1.5 million or 31.9% to $6.2 million in 1997 from $4.7 million in 1996, primarily due to additional personnel and overhead costs associated with station acquisitions in 1997 (approximately $896,000 of the increase), bonuses paid to corporate officers in 1997 (approximately $155,000 of the increase), the write-off of costs incurred for potential station acquisitions which were abandoned (approximately $172,000 of the increase), and expenses incurred for officers' life insurance (approximately $277,000 of the increase), in 1997. EBITDA. EBITDA increased approximately $1.3 million or 6.3% to $22.1 million in 1997 from $20.8 million in 1996. As a percentage of net revenue, EBITDA decreased to 32.5% in 1997 from 35.3% in 1996. The decrease is primarily attributable to lower margins achieved during the transition period of the stations and networks acquired in 1996 and 1997 that previously operated with formats other than religious and family issues formats, and to increased corporate expenses in 1997 as compared to 1996. Tax Reimbursements to S Corporation Shareholders. Tax reimbursements to S corporation shareholders decreased approximately $0.2 million or 10.0% to $1.8 million in 1997 from $2.0 million in 1996, primarily due to decreased taxable income of the S corporations as a result of the termination of the S corporation status of New Inspiration and Golden Gate in August 1997. Depreciation and Amortization. Depreciation and amortization expense increased approximately $4.4 million or 52.4% to $12.8 million in 1997 from $8.4 million in 1996, primarily due to radio station and network acquisitions consummated during 1997 and 1996. Other Income (Expense). Interest income decreased $293,000 to $230,000 in 1997 from $523,000 in 1996, primarily due to interest income earned in 1996 on a $14.0 million deposit from the sale of KDBX-FM, Portland. Gain (loss) on disposal of assets decreased $11.8 million from $16.1 million in 1996 to $4.3 million in 1997. The gain in 1997 was primarily due to the sale of WPZE-AM, Boston. The gain in 1996 was primarily due to the sale of KDBX-FM, Portland and KDFX-AM, Dallas. Interest expense increased approximately $5.3 million or 71.6% to $12.7 million in 1997 from $7.4 million in 1996, primarily due to interest expense associated with additional borrowings to fund acquisitions 17 18 consummated during 1997 and 1996. Other expense was essentially unchanged for the year ended December 31, 1997 compared to 1996. Provision (Benefit) for Income Taxes. Income tax provision (benefit) as a percentage of income (loss) before income taxes and extraordinary item (i.e., effective tax rate) was 9.8% for 1997 and 34.3% for 1996. The effective tax rate in 1997 differs from the federal statutory income tax rate of 34.0% because of the effect of state income taxes, the establishment of a deferred tax liability and provision of approximately $609,000 resulting from the reorganization offset by the inclusion of income from New Inspiration and Golden Gate, which were S corporations (and, therefore, not subject to federal income taxes) prior to the reorganization in August 1997. The effective tax rate in 1996 differs from the federal statutory income tax rate of 34.0% because of the effect of state income taxes, the effect of gains realized on the sale of radio stations in 1997, offset by the inclusion of income from New Inspiration and Golden Gate, which were S corporations (and, therefore, not subject to federal income taxes) prior to the reorganization in August 1997. Net Income (Loss). We recognized a net (loss) of approximately $2.4 million in 1997, compared to net income of $12.8 million in 1996. Included in the net loss for 1997 is a $1.2 million extraordinary loss for the write off of deferred financing costs and termination fees related to the repayment of our prior credit agreement which we repaid in full upon issuance of the old notes on September 25, 1997. LIQUIDITY AND CAPITAL RESOURCES In the past, we principally financed acquisitions of radio stations through borrowings, including borrowings under credit agreements with banks, and, to a lesser extent, from cash flow from operations and selected asset dispositions. In September 1997, we issued and privately placed $150 million principal amount of 9 1/2% Senior Subordinated Notes due 2007. In March 1998, we consummated an offer for all outstanding notes, which were subject to certain restrictions on transfer, in exchange for notes registered pursuant to the Securities Act of 1933, as amended and thus not subject to such transfer restrictions. Pursuant to the exchange offer, the $150 million in principal amount of new notes were issued and a like amount of the old notes were canceled. Reference in this report to the notes includes both the new notes and the old notes. In September 1997, we used the net proceeds from the sale of the notes to repay substantially all of our outstanding indebtedness under a line of credit agreement, at which time such facility was canceled and we entered into the current credit agreement. We anticipate funding future acquisitions from operating cash flow and borrowings, including borrowings under the credit agreement. At December 31, 1998, $24.0 million was outstanding under our credit agreement. The maximum amount that we may borrow under our credit agreement is limited by our debt to cash flow ratio, adjusted for recent radio station acquisitions as defined in the credit agreement (the "Adjusted Debt to Cash Flow Ratio"). At December 31, 1998, the maximum Adjusted Debt to Cash Flow Ratio allowed under the credit agreement was 6.75 to 1. Our ability to borrow for the purpose of acquiring a radio station is further limited by the credit agreement in that we may not borrow for an acquisition if the Adjusted Debt to Cash Flow Ratio is greater than 6.00 to 1. At December 31, 1998, the Adjusted Debt to Cash Flow Ratio was 5.99 to 1, resulting in total borrowing availability (i.e., in addition to amounts already outstanding) of approximately $22.6 million, $483,000 of which can currently be used for radio station acquisitions. In addition to debt service requirements under the credit agreement, we are required to pay $14.3 million per annum in interest on the Notes. 18 19 We fund expenditures for operations, administrative expenses and debt service from operating cash flow. We believe that cash flow from operations and borrowings under the credit agreement should be sufficient to permit us to meet our financial obligations and to fund our operations for at least the next twelve months. The credit agreement contains certain additional restrictive covenants customary for credit facilities of the size, type and purpose contemplated which, among other things, and with certain exceptions, limits our ability to enter into affiliate transactions, pay dividends, consolidate, merge or effect certain asset sales, make certain investments or loans and change the nature of our business. The credit agreement also requires us to satisfy certain financial covenants, which covenants will require the maintenance of specified financial ratios and compliance with certain financial tests, including ratios for maximum leverage as described above (not greater than 6.75 to 1 at December 31, 1998), minimum interest coverage (not less than 1.25 to 1 at December 31, 1998), minimum debt service coverage (a static ratio of not less than 1.1 to 1) and minimum fixed charge coverage (a static ratio of not less than 1.1 to 1). We also have revolving credit facilities with Messrs. Atsinger and Epperson, totaling $5 million. At December 31, 1998, $1.8 million was outstanding under the agreement with Mr. Atsinger. Amounts borrowed under these facilities are payable upon demand and bear interest at a floating rate that is at all times at least 1% lower than the rate for base rate borrowings under our credit agreement. We will borrow under our credit agreement when Mr. Atsinger demands repayment. In January 1999, we purchased the assets of OnePlace, LLC, for $6.2 million, and all the outstanding shares of stock of CCM Communications, Inc., for $1.9 million. OnePlace is engaged in the business of applying Internet e-commerce, consumer profiling and other information technologies in the Christian products industry. CCM Communications publishes magazines which follow the contemporary Christian music industry. The purchases were financed primarily by an additional borrowing. We amended our credit agreement to allow for such a borrowing, increasing the maximum permitted leverage ratio to not greater than 7.00 to 1 through June 29, 1999. After the borrowing for these acquisitions the Adjusted Debt to Cash Flow Ratio was 6.22 to 1, resulting in total borrowing availability of approximately $23.3 million, none of which can currently be used for radio station acquisitions. In January 1999, we also agreed to purchase the assets of NavPress Software, Inc., for $550,000. NavPress Software develops and supplies electronic Bible and Christian reference books and Bible study software applications. Net cash provided by operations increased to $11.0 million for the year ended December 31, 1998, compared to $7.3 million in 1997 due primarily to increased net operating income in 1998. Net cash provided by operations decreased to $7.3 million for the year ended December 31, 1997, compared to $10.5 million in 1996 due primarily to decreased net operating income in 1997. Net cash used in investing activities increased to $31.8 million for the year ended December 31, 1998, compared to $26.3 million for 1997 primarily due primarily to radio station acquisitions (four stations purchased for $33.7 million in 1998 compared to eight stations purchased for $19.4 million in 1997). Net cash used in investing activities increased to $26.3 million for the year ended December 31, 1997, compared to $18.9 million for 1996 primarily due to the proceeds of the sales of KDBX-FM, Portland and KDFX-AM, Dallas offsetting the cash used in investing activities in 1996. 19 20 Net cash provided by financing activities was $21.0 million for the year ended December 31, 1998, and $18.7 million for 1997, and $9.4 million for 1996, primarily due to increased long-term debt borrowings in 1997 and 1998. YEAR 2000 COMPUTER SYSTEM COMPLIANCE The term "year 2000 issue" (the year 2000 referred to as "Y2K") is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery as the year 2000 is approached and reached. These problems generally arise from the fact that most of the world's computer hardware and software have historically used only two digits (instead of four) to identify the year in a date, often meaning that the computer will fail to distinguish dates in the "2000's" from dates in the "1900's." These problems may also arise from other sources as well, such as the use of special codes and conventions in software that make use of the date field. In early 1998 we began implementing the assessment phase of our plan to address the Y2K issue in each broadcast area and have substantially completed a Y2K assessment phase of our computer, broadcast and environmental systems, redundant power systems and other critical systems including: (i) digital audio systems, (ii) traffic scheduling and billing systems, (iii) accounting and financial reporting systems, and (iv) local area networking infrastructure. As part of the assessment phase, we initiated formal communication with all of our key business partners to identify their exposure to the Y2K issue. This assessment will target potential external risks related to the Y2K issue and is still in progress, but is expected to be completed by the end of the second quarter of 1999. Key business partners include local and national programmers and advertisers, suppliers of communication services, financial institutions and suppliers of utilities. Amounts related to the assessment phase are primarily internal costs, are expensed as incurred, and have not been material to date and are not expected to be material through completion of the phase. The remediation phase is the next step in our plan to address the Y2K issue. Activities during this phase are in progress and include, if necessary, the actual repair, replacement, or upgrade of our systems based on the findings of the assessment phase. Systems which are Y2K ready include local area networks, digital audio systems, and traffic scheduling and billing systems. We have implemented a new accounting and financial reporting system which is Y2K ready. Costs related to this new system (approximately $200,000) will be included in capital expenditures. The final plan phase, the testing phase, will include the actual testing of the enhanced and upgraded systems. This process will include internal and external user review confirmation, as well as unit testing and integration testing with other system interfaces. The testing schedule is being developed and will begin during the second quarter of 1999 and is expected to be completed by the end of the third quarter. Based on test results and assessment of outside risks, contingency plans will be developed as determined necessary. We would expect to complete such plans in the fourth quarter of 1999. We anticipate minimal business disruption from both external and internal factors. However, possible risks include, but are not limited to, loss of power and communication links which are not subject to our control. We believe that our Y2K compliance issues from all phases of our plan will be resolved on a timely basis and that any related costs will not have a material impact on our operations, cash flows, or financial condition of future periods. 20 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Derivative Instruments. We do not invest, and during the year ended December 31, 1998 did not invest, in market risk sensitive instruments. Market Risk. Our market risk exposure with respect to financial instruments is to changes in the "prime rate" in the United States. We may borrow up to $75 million under a revolving credit facility. At December 31, 1998, we had borrowed $24 million. Amounts outstanding under the revolving credit facility bear interest at a base rate, at Salem's option, of the bank's prime rate or LIBOR. For purposes of determining the interest rate in 1998 the prime rate spread ranged from 0% to 1.75%, and the LIBOR spread ranged from 1% to 3%. At December 31, 1998, the interest rate on amounts outstanding under the revolving credit facility was 8.25%. In January 1999, the revolving credit facility was amended to change certain required loan ratio terms and to amend the interest rate spreads. As of January 1, 1999, the interest rate spread ranges from 0% to 2.25%, and the LIBOR spread ranges from 1% to 3.5%. At December 31, 1998, a hypothetical 100 basis point increase in the prime rate would result in additional interest expense of $240,000 on an annualized basis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by this item are set forth at the end of this Annual Report on Form 10-K beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 21 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers, directors and key employees of Salem Communications Corporation and its subsidiaries and their ages and positions with the company are as follows:
NAME AGE POSITION ---- --- -------- Edward G. Atsinger III......... 59 President, Chief Executive Officer and Director Stuart W. Epperson............. 62 Chairman of the Board Eric H. Halvorson.............. 49 Executive Vice President, Chief Operating Officer, General Counsel and Director Greg R. Anderson............... 52 President, Salem Radio Network Dirk Gastaldo.................. 43 Vice President and Chief Financial Officer Kenneth L. Gaines.............. 60 Vice President - Operations Dave Armstrong................. 53 Vice President - Operations and General Manager/KKLA-FM/AM, KLTX-AM and KIEV-AM Joe D. Davis................... 55 Vice President - Operations and General Manager/WMCA-AM and WWDJ-AM Kenneth W. Sasso............... 52 Vice President - Operations and General Manager/KGFT-FM, KPRZ-FM and KBIQ-FM David Ruleman.................. 52 Vice President - Operations and General Manager/WAVA-FM/AM W. Douglas Young............... 48 Chief Executive Officer, OnePlace, Ltd. John W. Styll.................. 47 President, CCM Communications, Inc. Richard A. Riddle.............. 54 Director Roland S. Hinz................. 60 Director
All directors hold office until the next annual meeting of shareholders following their election, or until their successors are elected and qualified. Officers are elected annually by the board of directors and serve at the discretion of the board. Mr. Atsinger has been President, Chief Executive Officer and a director of Salem since its inception. He has been engaged in the ownership and operation of radio stations since 1969 and is a member of the board of directors of the National Religious Broadcasters. Mr. Epperson has been Chairman of Salem since its inception. Mr. Epperson has been engaged in the ownership and operation of radio stations since 1961. In addition, he is a member of the board of directors of the National Religious Broadcasters. Mr. Epperson is married to Nancy A. Epperson who is Mr. Atsinger's sister. Mr. Halvorson has been Chief Operating Officer of Salem since 1995, Executive Vice President of the company since 1991 and a director of the company since 1988. From 1991 to the present, Mr. Halvorson has also served as the General Counsel of the company. Mr. Halvorson was the managing partner of the law firm of Godfrey & Kahn, S.C.-Green Bay from 1988 until 1991. From 1985 to 1988, he was Vice President and General Counsel of the company. From 1976 until 1985, he was an associate and then a partner of Godfrey & Kahn, S.C.-Milwaukee. Mr. Halvorson was a Certified Public Accountant with Arthur Andersen & Co. from 1971 to 1973. 22 23 Mr. Anderson has been President of Salem Radio Network(R) since 1994. From 1993 to 1994, Mr. Anderson was the Vice President-General Manager of the Network. Mr. Anderson was employed by Multimedia, Inc. from 1980 to 1993. After serving as program director and general manager at Multimedia stations in Greenville, Shreveport and Milwaukee, he was named Vice President, Operations, of the Multimedia radio division in 1987 and was subsequently appointed as Executive Vice President and group head of Multimedia's radio division. Mr. Gastaldo has been Chief Financial Officer of Salem since 1993, and a Vice President of the company since 1992. From 1992 to 1993, Mr. Gastaldo was Vice President-Administration of the company, and from 1989 to 1991 he was Manager-Internal Audit of the company. He was a Certified Public Accountant with Ernst & Young from 1978 to 1989. Mr. Gaines has been Vice President-Operations of Salem since 1994. Prior to that time, he served as General Manager of KKLA-FM from 1992 to 1994 and General Manager of WYLL-FM from 1990 to 1992. Mr. Gaines has been involved in the management of radio stations since 1964. He served as Executive Vice President of Commonwealth Communications from 1988 to 1990, Vice President of Penn Communications from 1985 to 1988, Executive Vice President of Broadstreet Communications from 1974 to 1985 and Vice President and General Manager of Metromedia from 1964 to 1974. Mr. Armstrong has been Vice President-Operations of Salem since 1996 and General Manager of KKLA-FM/AM since 1994. He has also supervised operations of KLTX-AM since January 1997 and of KIEV-AM since August 1998. Mr. Armstrong has 28 years of radio broadcast experience and has been general manager of stations in Santa Ana and Orange, California. Mr. Davis has been Vice President-Operations of Salem since 1996 and General Manager of WMCA-AM since 1989. He has also been the General Manager of WWDJ-AM since 1994. He has previously served as Vice President and Executive Director of Christian Fund for the Disabled as well as President of Practice Resources, Inc., Davis Eaton Corporation and Vintage Specialty Advertising company. Mr. Sasso has been Vice President-Operations of Salem since 1996 and General Manager of the company's Colorado Springs stations from 1994 to present. He also served as General Manager of the company's Denver stations from 1995 to 1996. Mr. Sasso is the former owner of eight radio stations in Florida, Mississippi and Louisiana which were sold in 1989. From 1969 to 1979 he served in various radio management capacities for King Broadcasting and The American Broadcasting Companies. Mr. Ruleman has been Vice President - Operations of Salem since January, 1999 and General Manager of WAVA-AM/FM since 1992. He was General Manager of KPRZ-AM from 1986 to 1992. From 1973 to 1986, Mr. Ruleman served as Vice President of Palomar Broadcasting Corporation, a group owner of radio stations in Southern California. Mr. Young has been Chief Executive Officer of OnePlace, Ltd. since January, 1999, Chief Executive Officer and a stockholder of its predecessor corporation, OnePlace, LLC since August, 1998. From 1997 to 1998 Mr. Young served as Chief Executive Officer of Landmark Community Interests, an Internet-based technology company controlled by Landmark Communications, Inc. He served as President of networkMCI Digital Imaging, the web site development and electronic commerce implementation division of MCI Telecommunications, from 1995 to 1997. Prior to 1995 Mr. Young founded and developed 23 24 several technology companies including Image Technology, Inc., and Advanced MediaGraphics Center, both of which companies were sold to MCI Telecommunications. Mr. Styll founded Praise Productions, the predecessor of CCM Communications, Inc., in 1978 and has served as the President of CCM Communications, Inc. since its incorporation in 1979. He served as President of the Gospel Music Association from 1991 to 1994 and as President of the Christian Music Trade Association from 1996 to 1998. Mr. Styll is a member of the National Academy of Recording Arts and Sciences. Mr. Riddle has been a director of Salem since September, 1997. Mr. Riddle is an independent businessman specializing in providing financial assistance and consulting to manufacturing companies. Since 1991 he has been the President of Richray Industries, a holding company for various manufacturing companies. He was President and majority stockholder of I. L. Walker company from 1988 to 1997 when the company was sold. He also was Chief Operating Officer and majority stockholder of Richter Manufacturing from 1970 to 1987. Mr. Hinz has been a Director of Salem since September, 1997. Mr. Hinz has been the owner and President of Hi-Torque Publishing company, a publisher of magazines covering the motorcycling and biking industries, since 1981. He is active in a number of non-profit organizations and serves as Chairman of the Fund Development Committee of English Language Institute China. Mr. Hinz also serves on the boards of directors of Gordon Conwell Theological Seminary, Association for Community Education, Inc., Truth for Life, and Lake Avenue Congregational Church. 24 25 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all compensation paid by the company for 1998, 1997 and 1996 to the company's Chief Executive Officer and the four highest paid executive officers of the company. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION COMPENSATION - ---------------------------- ---- -------- -------- ------------ ------------ Edward G. Atsinger III.... 1996 $400,000 $350,000(1) $ 996,372(2) $ -- President, Chief 1997 400,000 -- 890,192(2) -- Executive Officer 1998 400,000 250,000 -- -- and Director Stuart W. Epperson........ 1996 400,000 350,000(1) 1,012,319(2) -- Chairman of the Board 1997 400,000 -- 890,192(2) -- 1998 400,000 288,000 -- -- Eric H. Halvorson......... 1996 255,000 85,000 -- 909(3) Executive Vice President 1997 270,000 85,000 -- 63,525(4) Chief Operating Officer 1998 285,000 87,500 -- 570(3) and Director Dave Armstrong............ 1996 149,019 15,000 -- 585(3) Vice President- 1997 163,683 -- -- 19(3) Operations 1998 175,658 38,000 -- 876(3) Joe D. Davis.............. 1996 159,026 -- -- 950(3) Vice President- 1997 163,524 -- -- 950(3) Operations 1998 172,362 20,000 -- 1,000(3)
- ------------------------- (1) Distributions of net income from New Inspiration and Golden Gate (in an amount equal to the amount above that necessary to meet individual tax liabilities, discussed in footnote 2 to this table, that had previously been taxed, but not distributed, to the S corporation shareholders. See the company's Consolidated Statements of Shareholders' Equity included elsewhere in this report. (2) Tax reimbursement payments made to satisfy individual federal and state income tax liabilities generated by New Inspiration and Golden Gate as a result of their S corporation status. See the company's Consolidated Statements of Shareholders' Equity included elsewhere in this report. (3) Represents employer matching contributions to individuals' 401(k) accounts. (4) Includes cancellation of $25,000 indebtedness owed to the company by Mr. Halvorson plus accrued interest of $7,420 and a distribution to Mr. Halvorson of $30,155, an amount equal to the tax liability incurred by Mr. Halvorson as a result of cancellation of this debt. COMPENSATION OF DIRECTORS Officers of Salem who also serve as directors do not receive compensation for their services as directors other than the compensation they receive as officers of Salem. Directors of Salem who are not also officers or employees of Salem were paid a one-time fee of $7,500 in 1998 and receive $2,500 per quarter for their services as directors of Salem. Directors of Salem are entitled to reimbursement of their reasonable out-of-pocket expenses in connection with their travel to and attendance at board meetings. 25 26 EMPLOYMENT AGREEMENTS Edward G. Atsinger III entered into an employment agreement with Salem effective as of August 1, 1997, pursuant to which he will serve as President and Chief Executive Officer of the company for an annual salary of $400,000 and an annual bonus determined at the discretion of the board of directors, for an initial period of three years. The employment agreement with Mr. Atsinger provides Salem with a right of first refusal on corporate opportunities, which includes acquisitions of radio stations in any market in which Salem is interested, and includes a noncompete provision for a period of two years from the cessation of Mr. Atsinger's employment with the company and a nondisclosure provision which is effective for the term of the employment agreement and indefinitely thereafter. In addition to the requirements of his employment agreement, since the inception of the company Mr. Atsinger has been obligated under applicable state law to first present corporate opportunities to Salem before pursuing any such opportunity himself. Under the terms of his employment agreement, Mr. Atsinger is also entitled to participate in any benefit plans provided by Salem to its employees. If Mr. Atsinger is terminated without cause by Salem, he is entitled to severance payments equal to his salary for the greater of six months and the remainder of the term of his agreement. In addition, subject to certain exceptions, if Salem declines to renew Mr. Atsinger's agreement after the initial period, he is entitled to severance payments equal to his salary for three months. Stuart W. Epperson entered into an employment agreement with Salem effective as of August 1, 1997, pursuant to which he will serve as Chairman of the company for an annual salary of $400,000 and an annual bonus determined at the discretion of the board of directors, for an initial period of three years. The employment agreement with Mr. Epperson provides Salem with a right of first refusal on corporate opportunities, which might include acquisitions of radio stations in any market in which Salem is interested, and includes a noncompete provision for a period of two years from the cessation of Mr. Epperson's employment with the company and a nondisclosure provision which is effective for the term of the employment agreement and indefinitely thereafter. In addition to the requirements of his employment agreement, since the inception of Salem Mr. Epperson has been obligated under applicable state law to first present corporate opportunities to Salem before pursuing any such opportunity himself. Under the terms of his employment agreement, Mr. Epperson is also entitled to participate in any benefit plans provided by Salem to its employees. If Mr. Epperson is terminated without cause by Salem, he is entitled to severance payments equal to his salary for the greater of six months and the remainder of the term of his agreement. In addition, subject to certain exceptions, if Salem declines to renew Mr. Epperson's agreement after the initial period, he is entitled to severance payments equal to his salary for three months. Eric H. Halvorson entered into an employment agreement with Salem effective as of November 1991, pursuant to which he serves as Executive Vice President of Salem at an annual salary starting at $175,000, with annual increases of $11,000 to $14,000, for a period of seven years. The agreement was subsequently amended in April 1996 to extend the term for one additional year and increase the base salary to $255,000, $270,000 and $285,000 for 1996, 1997 and 1998, respectively, and was again amended in July 1997 to extend the term through December 2003 at a base salary of $300,000 for each year after 1998. The employment agreement provides that Mr. Halvorson may participate in any benefit plans provided by Salem to its employees. If Mr. Halvorson is terminated without cause by Salem, he is entitled to severance payments equal to his salary for the remaining 26 27 term of his agreement. Mr. Halvorson also entered into a deferred compensation agreement with Salem effective as of November 1991, pursuant to which Mr. Halvorson will receive (i) 50% of the average of his three highest years of compensation, payable for a period of ten consecutive years, if he remains employed by Salem until age 60, or (ii) a discounted amount, based upon the compensation he would have received if he had remained employed until age 60, if his employment terminates for any reason after the term of the employment agreement or before he reaches age 60 by reason of death, disability or termination by Salem without cause. Greg R. Anderson entered into an employment agreement with Salem Radio Network(R) effective as of October 1994, pursuant to which he serves as President of Salem Radio Network(R) for a period of three years at an annual salary of $120,000, $126,000 and $132,300 for each year during the term of the agreement, respectively. The agreement was subsequently amended in December 1995 to increase Mr. Anderson's base salary to $162,300 and was amended again in August 1997 to extend the term for three additional years. Mr. Anderson is also entitled to participate in any benefit plans provided by Salem Radio Network(R) to its employees and is entitled to receive 6 months severance payment upon termination by Salem at any time before the end of the term of the employment agreement. 401(K) PLAN The company adopted a 401(k) savings plan in 1993 for the purpose of providing, at the option of the employee, retirement benefits to full-time employees of the company and its subsidiaries. Contributions to the 401(k) savings plan are made by the employee and, on a voluntary basis, by the company. The company currently matches 10% of the employee's contributions to the 401(k) savings plan which do not exceed 10% of the employee's annual compensation. The company made a contribution of $87,000 to the 401(k) savings plan during the year ended December 31, 1998. 27 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information with respect to the beneficial ownership of all of Salem's common stock. In addition, the table below provides the total economic interest and voting power of all shareholders. The address of the individuals listed below is 4880 Santa Rosa Road, Suite 300, Camarillo, California 93012.
CLASS A CLASS B PERCENT OF COMMON STOCK COMMON STOCK VOTES OF ------------------- ---------------- ALL CLASSES OF NAME OF BENEFICIAL OWNER(1) NUMBER % NUMBER % COMMON STOCK - --------------------------- ------- ------ ------ ------- -------------- Edward G. Atsinger III(2) 81,672 50.00% 40,836 50.00% 50.00% Stuart W. Epperson(3) 60,184 36.80% 30,092 36.80% 36.80% Nancy A. Epperson 21,488 13.20% 10,744 13.20% 13.20%
- ------------------------- (1) Stuart W. Epperson and Nancy A. Epperson are husband and wife. (2) Edward G. Atsinger III is the President, Chief Executive Officer and a director of the company. (3) Stuart W. Epperson is the Chairman of the Board of the company. 28 29 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CERTAIN LOAN TRANSACTIONS In December 1997, the company borrowed $2.0 million from Mr. Atsinger pursuant to a promissory note with a revolving principal amount of up to $2.5 million. The outstanding balance on the note as of December 31, 1998 was $1.8 million. The note is a demand note which bears interest at a floating rate that is currently 8%. During the term of the note, the interest rate will at all times be 1% lower than the rate for base rate borrowings under the company's revolving credit facility. The company will borrow under the revolving credit facility when Mr. Atsinger demands repayment. The note is outstanding as of the date hereof. In January 1998, the company borrowed $1.5 million from Mr. Epperson pursuant to a promissory note with a revolving principal amount of up to $2.5 million. In May 1998, the company repaid $1.5 million and there was no outstanding balance on the note as of December 31, 1998. The note is a demand note which bears interest at floating rate that is currently 8%. During the term of the note, the interest rate will at all times be 1% lower than the rate for base rate borrowings under the company's revolving credit facility. The company will borrow under the revolving credit facility when Mr. Epperson demands repayment. The note is outstanding as of the date hereof. In 1997, the company purchased split-dollar life insurance policies for its then-sole shareholders, Messrs. Atsinger and Epperson. Mr. Epperson selected a policy in the amount of $20 million while Mr. Atsinger selected a policy in the amount of $40 million, resulting in a premium difference of $94,000 between the two policies, which difference was paid to Mr. Epperson in cash in the form of an interest-free loan. The loan will be called upon payment by Mr. Atsinger of $94,000 to the company. LEASES WITH PRINCIPAL SHAREHOLDERS The company leases the studios and tower and antenna sites described in the table below from Messrs. Atsinger and Epperson or trusts and partnerships created for the benefit of Messrs. Atsinger and Epperson and their families. All such leases have cost of living adjustments. Based upon management's assessment and analysis of local market conditions for comparable properties, the company believes that such leases do not have terms that vary materially from those that would have been available from unaffiliated parties.
Station Call Current Expiration Market Letters Faculties Leased Annual Rental Date (1) - ------------------------- ------------ ---------------- ------------- ---------- Leases with both Messrs. Atsinger and Epperson: - ----------------------------------------------- Los Angeles, CA KKLA-AM Antenna/Tower/Studios $ 46,260 2002 KLTX-AM Antenna/Tower 140,172 2002 Chicago, IL WYLL-FM Antenna/Tower 42,048 2002 San Francisco, CA KFAX-AM Antenna/Tower 145,680 2003 Philadelphia, PA WFIL-AM/ Antenna/Tower/Studios 112,044 2004 WZZD-AM Houston-Galveston, TX KKHT-FM Antenna/Tower 150,000 2008 KENR-AM Antenna/Tower 32,184 2005 KTEK-AM Antenna/Tower 16,800 2009 Seattle-Tacoma, WA KGNW-AM Antenna/Tower 36,444 2002 KLFE-AM Antenna/Tower 26,484 2004 KKOL-AM Antenna/Tower 36,000 2007 Minneapolis-St. Paul, MN KKMS-AM Antenna/Tower/Studios 135,120 2006 Pittsburgh, PA WORD-FM Antenna/Tower 27,156 2003 Denver-Boulder, CO KNUS-AM Antenna/Tower 18,816 2006 Cleveland, OH WHK-AM Antenna/Tower 34,080 2008 Portland, OR KPDQ-AM/FM Studios 61,680 2002 Antenna/Tower 14,016 2002 Cincinnati, OH WTSJ-AM Antenna/Tower/Studios 24,096 2007 Sacramento, CA KFIA-AM Antenna/Tower 80,916 2006 San Antonio, TX KSLR-AM Antenna/Tower 34,730 2007 Akron, OH WHLO-AM Antenna/Tower 12,162 2007 Canton, OH WHK-FM Antenna/Tower 12,162 2007 ------------ $ 1,239,050 ------------
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Leases with Mr. Atsinger: - ------------------------- San Diego, CA KPRZ-FM Antenna/Tower 46,812 2002 ----------- $ 1,285,862
- --------------- (1) The expiration date reported for certain facilities represents the expiration date assuming exercise of lease term extensions at the company's option. Rental expense paid by the company to Messrs. Atsinger and Epperson or trusts or partnerships created for the benefit of their families for 1998 amounted to approximately $1,050,000. Rental expense paid by the company to Mr. Atsinger or trusts created for the benefit of his family for 1998 amounted to approximately $60,000. MANAGEMENT SERVICES CONTRACT The company provides management services for Sonsinger, Inc. which is the licensee of KKOL-AM, Seattle. Messrs. Atsinger and Epperson are the owners of 100% of the outstanding shares of Sonsinger. Messrs. Atsinger and Epperson and the company are parties to an Option to Purchase Agreement whereunder the company has been granted an option to purchase KKOL-AM from Messrs. Atsinger and Epperson at any time on or before December 31, 1999 at a price equal to the lower of the cost of the station to Messrs. Atsinger and Epperson, $1.4 million, and its fair market value as determined by an independent appraisal. Pursuant to a local marketing agreement with Sonsinger, entered into June 13, 1997, the company programs KKOL-AM and sells all the airtime. The company retains all of the revenue and incurs all of the expenses related to the operation of KKOL-AM and incurred approximately $164,000 in local marketing fees under this agreement in 1998. 30 31 TOWER CONSTRUCTION CONTRACT In October 1997, in order to reduce the indebtedness under the revolving credit facility, the company assigned its contract with a tower construction company to build a broadcast tower in Houston to Messrs. Atsinger and Epperson, subject to the principal shareholders obtaining financing. Messrs. Atsinger and Epperson reimbursed the company for its costs and expenses of $3.7 million on December 31, 1997. The antenna for the company's station in Houston, KKHT-FM,is located on the tower and the company pays rent at an annual rate of $150,000 to Messrs. Atsinger and Epperson. RADIO STATIONS OWNED BY THE EPPERSONS Mrs. Epperson has personally acquired four radio stations in the Norfolk-Virginia Beach-Newport News, Virginia market. Additionally, Mr. Epperson has personally acquired certain radio stations in the Greensboro-Winston-Salem, North Carolina market. These Virginia and North Carolina markets are not currently served by stations owned and operated by the company. Acquisitions in such markets are not part of the company's current business and acquisition strategies. TRANSPORTATION SERVICES SUPPLIED BY PRINCIPAL From time to time, Salem rents an airplane and a helicopter from Atsinger Aviation LLC, which is owned by Mr. Atsinger. As approved by the independent members of Salem's board of directors, Salem rents these aircraft on an hourly basis at below-market rates and uses them for general corporate needs. In 1998, the company paid $69,180 to Atsinger Aviation for airplane rental; no amounts were paid for helicopter rental in 1998. 31 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. --------------------- The financial statements required to be filed hereunder are set forth at the end of this Report beginning on page F-1. 2. Exhibits. ---------
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 3.01+ Articles of Incorporation of Salem. 3.02+ Bylaws of Salem 4.01+ Indenture between Salem Communications Corporation, a California corporation, certain named guarantors and The Bank of New York, as Trustee, dated as of September 25, 1997, relating to the 9 1/2% Series A and Series B Senior Subordinated Notes due 2007. 4.02+ Form of 9 1/2% Senior Subordinated Note (filed as part of Exhibit 4.01). 4.03+ Form of Note Guarantee (filed as part of Exhibit 4.01). 4.04+ Credit Agreement, dated as of September 25, 1997, among Salem, the several Lenders from time to time parties thereto, and The Bank of New York, as administrative agent for the Lenders (incorporated by reference to Exhibit 4.07 of the previously filed Registration Statement on Form S-4). 4.05+ Borrower Security Agreement, dated as of September 25, 1997, by and between Salem and The Bank of New York, as Administrative Agent of the Lenders (incorporated by reference to Exhibit 4.08 of the previously filed Registration Statement on Form S-4). 4.06+ Subsidiary Guaranty and Security Agreement dated as of September 25, 1997, by and between Salem, certain named guarantors, and The Bank of New York, as Administrative Agent (incorporated by reference to Exhibit 4.09 of the previously filed Registration Statement on Form S-4). 4.07++ Amendment No. 1 and Consent No. 1, dated as of August 5, 1998, to the Credit Agreement, dated as of September 25, 1997, by and among Salem, The Bank of New York, as Administrative Agent for the Lenders, Bank of America NT&SA, as documentation agent, and the several Lenders (incorporated by reference to Exhibit 10.02 of previously filed Current Report on Form 8-K).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 4.08 Amendment No. 2 and Consent No. 2, dated as of January 22, 1999, to the Credit Agreement, dated as of September 25, 1997, by and among Salem, The Bank of New York, as Administrative Agent for the Lenders, Bank of America NT&SA, as documentation agent, and the Lenders. 10.01+ Employment Agreement, dated as of August 1, 1997, between Salem and Edward G. Atsinger III. 10.02+ Employment Agreement, dated as of August 1, 1997, between Salem and Stuart W. Epperson. 10.03.01+ Employment Contract, dated November 7, 1991, between Salem and Eric H. Halvorson. 10.03.02+ First Amendment to Employment Contract, dated April 22, 1996, between Salem and Eric H. Halvorson. 10.03.03+ Second Amendment to Employment Contract, dated July 8, 1997, between Salem and Eric H. Halvorson. 10.03.04+ Deferred Compensation Agreement, dated November 7, 1991, between Salem and Eric H. Halvorson. 10.04.01+ Employment Agreement, dated February 9, 1995, between Salem Radio Network Incorporated and Greg R. Anderson. 10.04.02+ Letter Agreement dated December 22, 1995, by Inspiration Media of Texas, Inc. re compensation of Greg R. Anderson under Employment Agreement with Salem Radio Network Incorporated. 10.04.03+ First Amendment to Employment Agreement, dated August 1, 1997 between Salem Radio Network Incorporated and Greg R. Anderson. 10.05.01+ Antenna/tower lease between Caron Broadcasting, Inc. (WHLO-AM/Akron, Ohio) and Messrs. Atsinger and Epperson expiring 2007. 10.05.02+ Antenna/tower/studio lease between Caron Broadcasting, Inc. (WTSJ-AM/Cincinnati, Ohio) and Messrs. Atsinger and Epperson expiring 2007. 10.05.03+ Antenna/tower lease between Caron Broadcasting, Inc. (WHK-FM/Canton, Ohio) and Messrs. Atsinger and Epperson expiring 2007. 10.05.04+ Antenna/tower/studio lease between Common Ground Broadcasting, Inc.(KKMS-AM/Eagan, Minnesota) and Messrs. Atsinger and Epperson expiring in 2006.
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EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 10.05.05+ Antenna/tower lease between Common Ground Broadcasting, Inc. (WHK-AM/Cleveland, Ohio) and Messrs. Atsinger and Epperson expiring 2008. 10.05.06+ Antenna/tower lease (KFAX-FM/Hayward, California) and Salem Broadcasting Company, a partnership consisting of Messrs. Atsinger and Epperson, expiring in 2003. 10.05.07+ Antenna/tower/studio lease between Inland Radio, Inc. (KKLA-AM/San Bernardino, California) and Messrs. Atsinger and Epperson expiring 2002. 10.05.08+ Antenna/tower lease between Inspiration Media, Inc. (KGNW-AM/Seattle, Washington) and Messrs. Atsinger and Epperson expiring in 2002. 10.05.09+ Antenna/tower lease between Inspiration Media, Inc. (KLFE-AM/Seattle, Washington) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring in 2004. 10.05.11.01+ Antenna/tower/studio lease between Pennsylvania Media Associates, Inc. (WZZD-AM/ WFIL-AM/Philadelphia, Pennsylvania) and Messrs. Atsinger and Epperson, as assigned from WEAZ-FM Radio, Inc., expiring 2004. 10.05.11.02+ Antenna/tower/studio lease between Pennsylvania Media Associates, Inc. (WZZD-AM/ WFIL-AM/Philadelphia, Pennsylvania) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2004. 10.05.12+ Antenna/tower lease between Radio 1210, Inc. (KPRZ-AM/ Olivenhain, California) and The Atsinger Family Trust expiring in 2002. 10.05.13+ Antenna/tower lease between Salem Media Corporation (WYLL-FM/Arlington Heights, Illinois) and Messrs. Atsinger and Epperson expiring in 2002. 10.05.14+ Antenna/turner/studio leases between Salem Media Corporation (KLTX-AM/Long Beach and Paramount, California) and Messrs. Atsinger and Epperson expiring in 2002. 10.05.15+ Antenna/tower lease between Salem Media of Colorado, Inc. (KNUS-AM/Denver-Bolder, Colorado) and Messrs. Atsinger and Epperson expiring 2006. 10.05.16+ Antenna/tower lease between Salem Media of Ohio, Inc. (WRFD-AM/Columbus, Ohio) and Messrs. Atsinger and Epperson expiring 2002.
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EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 10.05.17.01+ Studio Lease between Salem Media of Oregon, Inc. (KPDQ-AM/FM/Portland, Oregon) and Edward G. Atsinger III, Mona J. Atsinger, Stuart W. Epperson, and Nancy K. Epperson expiring 2002. 10.05.17.02+ Antenna/tower lease between Salem Media of Oregon, Inc. (KPDQ-AM/FM/Raleigh Hills, Oregon and Messrs. Atsinger and Epperson expiring 2002. 10.05.18+ Antenna/tower lease between Salem Media of Pennsylvania, Inc. (WORD-FM/WPIT-AM/ Pittsburgh, Pennsylvania) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2003. 10.05.19+ Antenna/tower lease between Salem Media of Texas, Inc. (KSLR-AM/San Antonio, Texas) and Epperson-Atsinger 1983 Family Trust expiring 2007. 10.05.20+ Antenna/tower lease between South Texas Broadcasting, Inc. (KENR-AM/Houston-Galveston, Texas) and Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2005. 10.05.21+ Antenna/tower lease between Vista Broadcasting, Inc. (KFIA-AM/Sacramento, California) and The Atsinger Family Trust and Stuart W. Epperson Revocable Living Trust expiring 2006. 10.05.22 Antenna/tower lease between South Texas Broadcasting, Inc. (KKHT-FM/Houston-Galveston, Texas) and Sonsinger Boradcasting Company of Houston, LP expiring 2008. 10.05.23 Antenna/tower lease between Inspiration Media of Texas, Inc. (KTEK-AM/Alvin, Texas) and The Atsinger Family Trust and The Stuart W. Epperson Revocable Living Trust expiring 2009. 10.06.01+ Asset Purchase Agreement dated as of June 5, 1996 by and between Radio 94 of Phoenix Limited Partnership and Salem Media of Arizona, Inc. (KOOL-AM, Phoenix, Arizona). 10.06.02+ Asset Purchase Agreement dated as of September 3, 1996 by and between Caron Broadcasting, Inc. and Mortenson Broadcasting Company of Canton, LLC and Mortenson Broadcasting Company of Akron, LLC (WTOF-FM, Canton, Ohio and WHLO-AM, Akron, Ohio). 10.06.03.01+ Asset Purchase Agreement dated March 28, 1996 by and between American Radio Assistance Corporation and Common Ground Broadcasting, Inc. (KDBX-FM, Banks, Oregon). 10.06.03.02+ First Amendment to Asset Purchase Agreement dated as of July 22, 1996 by and between American Radio Systems Corporation and Common Ground Broadcasting, Inc. (KDBX-FM, Banks, Oregon).
35 36
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 10.06.04.01+ Asset Purchase Agreement dated as of April 23, 1996 by and between OmniAmerica Group and WHK License Partnership and Inspiration Media of Ohio, Inc. (WHK-AM, Cleveland, Ohio). 10.06.04.02+ First Amendment to the Asset Purchase Agreement dated as of July 23, 1996 by and between OmniAmerica Group and WHK License Partnership and Inspiration Media of Ohio, Inc. (WHK-AM, Cleveland, Ohio). 10.06.04.03+ Second Amendment to Asset Purchase Agreement dated as of August 12, 1996 by and between OmniAmerica Group and WHK License Partnership and Inspiration Media of Ohio, Inc. (WHK-AM, Cleveland, Ohio). 10.06.05+ Asset Purchase Agreement dated as of September 30, 1996 by and between Infinity Broadcasting Corporation of Dallas and Inspiration Media of Texas, Inc. (KEWS, Arlington, Texas; KDFX, Dallas, Texas). 10.06.06.01+ Asset Purchase Agreement dated as of December 4, 1996 by and between Backbay Broadcasters, Inc. and New England Continental Media, Inc. (WBNW-AM, Boston, Massachusetts). 10.06.06.02+ First Amendment to the Asset Purchase Agreement dated as of February, 1997 by and between Backbay Broadcasters, Inc. and New England Continental Media, Inc. (WBNW-AM, Boston, Massachusetts). 10.06.07+ Asset Purchase Agreement dated June 2, 1997 by and between New England Continental Media, Inc. and Hibernia Communications, Inc. (WPZE-AM, Boston, Massachusetts). 10.06.08+ Option to Purchase dated as of August 18, 1997 by and between Sonsinger, Inc. and Inspiration Media, Inc. (KKOL-AM, Seattle, Washington). 10.06.09++ Asset Purchase Agreement dated as of April 13, 1998 by and between New Inspiration Broadcasting Company and First Scientific Equity Devices Trust (KIEV-AM, Glendale, California) (incorporated by reference to Exhibit 2.01 of the previously filed Current Report on Form 8-K). 10.07.01+ Tower Purchase Agreement dated August 22, 1997 by and between Salem and Sonsinger Broadcasting Company of Houston, L.P. 10.07.02+ Amendment to the Tower Purchase Agreement dated November 10, 1997 by and between Salem and Sonsinger Broadcasting Company of Houston, L.P. 10.07.03+ Promissory Note dated November 11, 1997 made by Sonsinger Broadcasting Company of Houston, L.P. payable to Salem.
36 37
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 10.07.04+ Promissory Note dated December 24, 1997 made by Salem payable to Edward G. Atsinger III. 10.07.05+ Promissory Note dated December 24, 1997 made by Salem payable to Stuart W. Epperson. 10.08.01+ Local Programming and Marketing Agreement dated June 13, 1997 between Sonsinger, Inc. and Inspiration Media, Inc. 12.01 Statement regarding computation of ratio of earnings to fixed charges. 21.01 Subsidiaries of Salem. 27.01 Financial Data Schedule
- ----------------- + Incorporated by reference to the exhibit of the same number, unless otherwise noted, of Salem's Registration Statement on Form S-4 (No. 333-41733), as amended, as declared effective by the Securities and Exchange Commission on February 9, 1998. ++ Incorporated by reference to Salem's Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 4, 1998. (b) Reports on Form 8-K. -------------------- On September 4, 1998, the company filed a Current Report on Form 8-K, reporting Item 2, in connection with the acquisition of the assets of radio station KIEV-AM, Glendale, California. 37 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SALEM COMMUNICATIONS CORPORATION March 31, 1999 By: /s/ Edward G. Atsinger III ------------------------------------- Edward G. Atsinger III President and Chief Executive Officer March 31, 1999 By: /s/ Dirk Gastaldo ------------------------------------- Dirk Gastaldo Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Edward G. Atsinger III President and Chief Executive Officer - --------------------------------------- (Principal Executive Officer) March 31, 1999 Edward G. Atsinger III /s/ Dirk Gastaldo Vice President and Chief Financial - --------------------------------------- Officer March 31, 1999 Dirk Gastaldo (Principal Financial Officer) /s/ Eileen E. Hill Vice President--Accounting & Taxation - --------------------------------------- (Principal Accounting Officer) March 31, 1999 Eileen E. Hill /s/ Edward G. Atsinger III Director - --------------------------------------- March 31, 1999 Edward G. Atsinger III /s/ Stuart W. Epperson Director - --------------------------------------- March 31, 1999 Stuart W. Epperson /s/ Eric H. Halvorson Director - --------------------------------------- March 31, 1999 Eric H. Halvorson Director _______________________________________ March 31, 1999 Richard A. Riddle Director _______________________________________ March 31, 1999 Roland S. Hinz
38 39 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998...................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998.......................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1997 and 1998.............. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998.......................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 40 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Salem Communications Corporation We have audited the accompanying consolidated balance sheets of Salem Communications Corporation as of December 31, 1997 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Salem Communications Corporation at December 31, 1997 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Woodland Hills, California March 24, 1999 F-2 41 SALEM COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31 -------------------- 1997 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 1,645 $ 1,917 Accounts receivable (less allowance for doubtful accounts of $1,249 in 1997 and $862 in 1998).................... 12,227 14,289 Other receivables......................................... 81 67 Prepaid expenses.......................................... 640 658 Prepaid income taxes...................................... 48 -- Deferred income taxes..................................... 2,254 2,443 -------- -------- Total current assets........................................ 16,895 19,374 Property, plant and equipment, net.......................... 36,638 40,749 Intangible assets: Broadcast licenses........................................ 138,837 167,870 Noncompetition agreements................................. 14,593 14,593 Customer lists and contracts.............................. 4,094 4,094 Favorable and assigned leases............................. 1,800 1,800 Goodwill.................................................. 5,999 6,689 Other intangible assets................................... 972 2,567 -------- -------- 166,295 197,613 Less accumulated amortization............................. 46,212 55,837 -------- -------- Intangible assets, net...................................... 120,083 141,776 Notes receivable from shareholders.......................... 94 94 Bond issue costs............................................ 4,907 4,657 Other assets................................................ 6,196 1,100 -------- -------- Total assets................................................ $184,813 $207,750 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,050 $ 1,676 Accrued expenses.......................................... 476 489 Accrued compensation and related.......................... 1,381 1,613 Accrued interest.......................................... 3,804 3,968 Income taxes.............................................. 341 89 -------- -------- Total current liabilities................................... 7,052 7,835 Long-term debt.............................................. 154,500 178,610 Deferred income taxes....................................... 12,122 11,581 Other liabilities........................................... 457 623 Shareholders' equity: Common stock, no par value; authorized 100,000 shares; issued and outstanding 81,672 shares................... 5,832 5,832 Retained earnings......................................... 4,850 3,269 -------- -------- Total shareholders' equity.................................. 10,682 9,101 -------- -------- Total liabilities and shareholders' equity.................. $184,813 $207,750 ======== ========
See accompanying notes. F-3 42 SALEM COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------- 1996 1997 1998 ------- -------- -------- Gross broadcasting revenue..................... $65,141 $ 74,830 $ 85,411 Less agency commissions........................ 6,131 6,918 7,520 ------- -------- -------- Net broadcasting revenue....................... 59,010 67,912 77,891 Operating expenses: Station operating expenses................... 33,463 39,626 42,526 Corporate expenses (including $800 in shareholder salaries in 1996 and 1997 and $1,338 in shareholder salaries and bonuses in 1998 )................................. 4,663 6,210 7,395 Tax reimbursements to S corporation shareholders.............................. 2,038 1,780 -- Depreciation and amortization................ 8,394 12,803 14,058 ------- -------- -------- Operating expenses........................... 48,558 60,419 63,979 ------- -------- -------- Operating income............................... 10,452 7,493 13,912 Other income (expense): Interest income.............................. 523 230 291 Gain (loss) on disposal of assets............ 16,064 4,285 236 Interest expense............................. (7,361) (12,706) (15,941) Other expense................................ (270) (389) (422) ------- -------- -------- Income (loss) before income taxes and extraordinary item........................... 19,408 (1,087) (1,924) Provision (benefit) for income taxes........... 6,655 106 (343) ------- -------- -------- Income (loss) before extraordinary item........ 12,753 (1,193) (1,581) Extraordinary loss on early extinguishment of debt (net of income tax benefit of $659 in 1997)........................................ -- (1,185) -- ------- -------- -------- Net income (loss).............................. $12,753 $ (2,378) $ (1,581) ======= ======== ======== Pro forma information (unaudited): Income (loss) before income taxes and extraordinary item as reported above......... $19,408 $ (1,087) $ (1,924) Add back tax reimbursements to S Corporation shareholders................................. 2,038 1,780 -- ------- -------- -------- Pro forma income (loss) before income taxes and extraordinary item........................... 21,446 693 (1,924) Pro forma provision (benefit) for income taxes........................................ 8,608 278 (343) ------- -------- -------- Pro forma income (loss) before extraordinary item......................................... 12,838 415 (1,581) Extraordinary loss............................. -- (1,185) -- ------- -------- -------- Pro forma net income (loss).................... $12,838 $ (770) $ (1,581) ======= ======== ========
See accompanying notes. F-4 43 SALEM COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON RETAINED STOCK EARNINGS TOTAL ------ -------- ------- Shareholders' equity, January 1, 1996............ $5,832 $ 7,450 $13,282 Net income....................................... 12,753 12,753 Shareholder distributions........................ -- (5,501) (5,501) ------ ------- ------- Shareholders' equity, December 31, 1996.......... 5,832 14,702 20,534 Net loss......................................... -- (2,378) (2,378) Shareholder distributions........................ -- (7,474) (7,474) ------ ------- ------- Shareholders' equity, December 31, 1997.......... 5,832 4,850 10,682 Net loss......................................... -- (1,581) (1,581) ------ ------- ------- Shareholders' equity, December 31, 1998.......... $5,832 $ 3,269 $ 9,101 ====== ======= =======
See accompanying notes. F-5 44 SALEM COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 --------------------------------- 1996 1997 1998 -------- --------- -------- OPERATING ACTIVITIES Net income (loss)......................................... $ 12,753 $ (2,378) $ (1,581) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 8,394 12,803 14,058 Amortization of bank loan fees.......................... 109 175 42 Amortization of bond issue costs........................ -- 126 531 Deferred income taxes................................... 6,133 (1,022) (730) (Gain) loss on sale of assets........................... (16,064) (4,285) (236) Loss on early extinguishment of debt.................... -- 1,844 -- Changes in operating assets and liabilities: Accounts receivable................................... (1,370) (1,572) (2,048) Prepaid expenses and other current assets............. (111) (473) (18) Accounts payable and accrued expenses................. 258 1,844 1,035 Other liabilities..................................... 270 78 166 Income taxes.......................................... 123 174 (204) -------- --------- -------- Net cash provided by operating activities................. 10,495 7,314 11,015 INVESTING ACTIVITIES Capital expenditures.................................... (6,982) (7,521) (7,360) Purchases of radio stations............................. (21,160) (19,436) (33,682) Deposits on radio station acquisitions.................. (6,314) (4,907) 4,907 Proceeds from disposal of property, plant and equipment and intangible assets................................. 15,867 5,120 4,226 Other assets............................................ (334) 418 147 -------- --------- -------- Net cash used in investing activities..................... (18,923) (26,326) (31,762) FINANCING ACTIVITIES Proceeds from issuance of long-term debt and note payable to shareholder................................ 23,800 222,710 40,500 Payments of long-term debt and note payable to shareholder........................................... (15,430) (190,100) (19,000) Payments of bank loan fees.............................. -- (1,025) -- Payments of costs related to debt refinancing........... -- (417) -- Payments of bond issue costs............................ -- (5,033) (281) Repayments (additions) of shareholder notes and repayment of accrued interest receivable--net......... 4,614 (66) (200) Proceeds from shareholder notes payable................. 1,900 100 -- Distributions to shareholders........................... (5,501) (7,474) -- -------- --------- -------- Net cash provided by financing activities................. 9,383 18,695 21,019 -------- --------- -------- Net (decrease) increase in cash and cash equivalents...... 955 (317) 272 Cash and cash equivalents at beginning of year.......... 1,007 1,962 1,645 -------- --------- -------- Cash and cash equivalents at end of year.................. $ 1,962 $ 1,645 $ 1,917 ======== ========= ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest.............................................. $ 6,158 $ 9,523 $ 14,965 Income taxes.......................................... 400 295 591 Noncash transactions: Acquisition of radio station (KWRD-FM in 1996, KIEV-AM in 1998) Fair market value of assets acquired.................. $ 40,100 $ -- $ 33,210 Debt to seller........................................ (30,500) -- (2,810) Fair market value of assets exchanged................. (8,000) -- -- -------- --------- -------- Cash paid (reflected in deposits on radio station acquisitions)........................................... $ 1,600 $ -- $ 30,400 ======== ========= ========
See accompanying notes. F-6 45 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Reorganization The accompanying consolidated financial statements of Salem Communications Corporation (Salem or the Company) include the Company and its wholly-owned subsidiaries. Prior to the reorganization described below (the Reorganization) the financial statements had been presented on a combined basis and included Salem, New Inspiration Broadcasting Company, Inc. (New Inspiration), Golden Gate Broadcasting Company, Inc. (Golden Gate) and Beltway Media Partners (Beltway), and all of these entities were under common control. New Inspiration and Golden Gate were S corporations for income tax purposes. Salem, New Inspiration and Golden Gate were the partners of Beltway. The combined financial statements were entitled Salem Broadcasting Entities. Pursuant to the Reorganization the financial statements have been renamed and the disclosure of common stock information has been retroactively restated for all periods presented as if the Reorganization had been completed as of the beginning of the earliest period presented. All significant intercompany balances and transactions have been eliminated. The Company is a holding company with substantially no assets, operations or cash flows other than its investments in subsidiaries. All of the Company's subsidiaries are Guarantors of the 9 1/2% Senior Subordinated Notes due 2007 (the Notes) discussed in Note 4. The Guarantors (i) are wholly owned subsidiaries of the Company, (ii) comprise all the Company's direct and indirect subsidiaries and (iii) have fully and unconditionally guaranteed on a joint and several basis, the Notes. The Company has not presented separate financial statements and other disclosures concerning the Guarantors because management has determined that such information is not material to investors. In August 1997, the Company, New Inspiration and Golden Gate effected the Reorganization pursuant to which New Inspiration and Golden Gate became wholly-owned subsidiaries of the Company, with Beltway remaining a partnership. The Company accounted for the Reorganization as a combination of entities under common control, which is a method similar to a pooling of interests. In October 1998, the Company, New Inspiration and Golden Gate contributed their partnership interests in Beltway to Salem Media of Virginia, Inc. (SMV), thereby dissolving Beltway. SMV is an indirectly wholly-owned subsidiary of the Company. The S Corporation status of New Inspiration and Golden Gate was terminated in the Reorganization. Prior to the Reorganization, New Inspiration and Golden Gate distributed cash and promissory notes to their respective shareholders in the aggregate amount of $8.5 million. Of such amount, $1.8 million, equal to the estimated federal and state income tax liability of the S corporation shareholders on the earnings of New Inspiration and Golden Gate, was paid by New Inspiration and Golden Gate in cash. The balance, $6.7 million representing the balance of the net income of New Inspiration and Golden Gate that had previously been taxed, but not distributed to the shareholders, was paid in the form of promissory notes. In September 1997, the Company financed the repayment of these promissory notes by an additional borrowing. F-7 46 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Description of Business Salem is a domestic U.S. radio broadcast company which focuses on talk and music programming targeted at audiences interested in religious and family issues. Salem operated 45 and 43 radio stations across the United States at December 31, 1998 and 1997, respectively. The Company also owns and operates Salem Radio Network (SRN), SRN News Network (SNN), Salem Music Network (SMN) and Salem Radio Representatives (SRR). SRN, SNN and SMN are radio networks which produce and distribute talk, news and music programming to Salem's radio stations and other independent radio station affiliates. SRR sells commercial air time to national advertisers for Salem's radio stations and networks, and for independent radio station affiliates. The significant accounting policies of Salem are summarized below and conform with generally accepted accounting principles and reflect practices appropriate to the radio broadcasting industry. Segments The Company operates in one reportable segment. Revenue Recognition Revenue from radio programs and commercial advertising is recognized when broadcast. Salem's customers principally include not-for-profit charitable organizations and commercial advertisers. Advertising by the radio stations exchanged for goods and services is recorded as the advertising is broadcast and is valued at the fair market value of goods or services received or to be received. The value of the goods and services received in such barter transactions is charged to expense when used. Barter revenue for the years ended December 31, 1996, 1997 and 1998, was approximately $1,498,000, $1,743,000 and $2,510,000, respectively. Barter expenses were approximately the same. Cash Equivalents Salem considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. The recorded amount for cash and cash equivalents approximates the fair market value. Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives as follows: Buildings......................................... 40 years Office furnishings and equipment.................. 5 - 10 years Antennae, towers and transmitting equipment....... 20 years Studio and production equipment................... 10 years Record and tape libraries......................... 20 years Automobiles....................................... 5 years Leasehold improvements............................ 15 years
F-8 47 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The carrying value of property, plant and equipment is evaluated periodically in relation to the operating performance and anticipated future cash flows of the underlying radio stations and businesses for indicators of impairment. When indicators of impairment are present and the undiscounted cash flows estimated to be generated from these assets are less than the carrying value of these assets an adjustment to reduce the carrying value (if necessary) to the fair market value of the assets is recorded. No adjustments to the carrying amounts of property, plant and equipment have been made during the years ended December 31, 1996, 1997 and 1998. Intangible Assets Intangible assets acquired in conjunction with the acquisition of various radio stations are being amortized over the following estimated useful lives using the straight-line method: Broadcast licenses............................ 10 - 25 years Noncompetition agreements..................... 3 - 5 years Customer lists and contracts.................. 10 years Favorable and assigned leases................. Life of the lease Goodwill...................................... 15 - 40 years Other......................................... 5 - 10 years
The carrying value of intangibles is evaluated periodically in relation to the operating performance and anticipated future cash flows of the underlying radio stations and businesses for indicators of impairment. When indicators of impairment are present and the undiscounted cash flows estimated to be generated from these assets are less than the carrying amounts of these assets, an adjustment to reduce the carrying value (if necessary) to the fair market value of these assets is recorded. No adjustments to the carrying amounts of intangible assets have been made during the year ended December 31, 1996, 1997 and 1998. Bond Issue Costs Bond issue costs are being amortized over the term of the Notes as an adjustment to interest expense. Tax Reimbursements to S Corporation Shareholders "Tax reimbursements to S Corporation shareholders" represents additional salary payments made in the amount necessary to satisfy individual federal and state income tax liabilities of the S Corporation shareholders on the earnings of New Inspiration and Golden Gate prior to the Reorganization. Income Taxes The Company accounts for income taxes in accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 prescribes the liability method of F-9 48 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) providing for deferred income taxes. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Federal and state income taxes (except for 1.5% state franchise tax) have not been provided through August 12, 1997 for New Inspiration and Golden Gate because they were S Corporations and income tax attributes of S Corporations are passed through to their shareholders. Concentrations of Business and Credit Risks The majority of the Company's operations are conducted in several locations across the country. The Company's credit risk is spread across a large number of customers, none of which accounted for a significant volume of revenue or outstanding receivables. The Company does not normally require collateral on credit sales; however, credit histories are reviewed before extending substantial credit to any customer. The Company establishes an allowance for doubtful accounts based on customers' payment history and perceived credit risks. Bad debts have been within management's expectations. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain reclassifications were made to the prior year financial statements to conform to the current year presentation. 2. ACQUISITIONS AND DISPOSITIONS OF ASSETS Pro forma information to present operating results as if the acquisitions discussed below had occurred at the beginning of the year acquired is not presented because the Company, generally, changes the programming format of the radio stations such that the source and nature of revenue and operating expenses are significantly different than they were prior to the acquisition and, accordingly, historical and pro forma financial information is not considered meaningful by management. Pro forma and historical financial information of radio stations acquired where the format was not changed is not significant to the consolidated financial position or operating results of the Company. F-10 49 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the year ended December 31, 1998, the Company purchased the assets (principally intangibles) of the following radio stations:
PURCHASE ACQUISITION DATE STATION MARKET SERVED PRICE ---------------- ------- ------------- -------------- (IN THOUSANDS) August 21, 1998.......... KKMO-AM Tacoma, WA $ 500 August 26, 1998.......... KIEV-AM Los Angeles, CA 33,210 October 30, 1998......... KYCR-AM Golden Valley, MN 500 October 30, 1998......... KTEK-AM Alvin, TX 2,061 ------- $36,271 =======
The purchase price has been allocated to the assets acquired as follows:
ASSET AMOUNT ----- -------------- (IN THOUSANDS) Property and equipment........................... $ 4,507 Broadcast licenses............................... 29,627 Goodwill and other intangibles................... 2,137 ------- $36,271 =======
In 1998, the Company sold the assets (principally intangibles) of radio stations KTSL-FM (Spokane, WA) for $1.3 million and KAVC-FM (Lancaster, CA) for $1.6 million. During the year ended December 31, 1997, the Company purchased the assets (principally intangibles) of the following radio stations:
PURCHASE ACQUISITION DATE STATION MARKET SERVED PRICE ---------------- ------- ------------- -------------- (IN THOUSANDS) January 21, 1997.................... WHK-AM Cleveland, OH $ 6,220 February 20, 1997................... WHK-FM Canton, OH 5,903 February 20, 1997................... WHLO-AM Akron, OH 1,995 February 28, 1997................... WEZE-AM Boston, MA 7,030 April 2, 1997....................... KTKZ-AM Sacramento, CA 1,385 July 18, 1997....................... WITH-AM Baltimore, MD 1,114 July 18, 1997....................... WTSJ-AM Cincinnati, OH 1,114 October 24, 1997.................... WCCD-AM Parma, OH 700 ------- $25,461 =======
F-11 50 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The purchase price has been allocated to the assets acquired as follows:
ASSET AMOUNT ----- -------------- (IN THOUSANDS) Property and equipment........................... $ 3,634 Broadcast licenses and other intangibles......... 21,827 ------- $25,461 =======
In November 1997, the Company sold the assets (principally intangibles) of radio station WPZE-AM (Boston, MA) for $5 million. Proceeds from the sale (included in other assets as a deposit at December 31, 1997) were initially being held by a qualified intermediary under a like-kind exchange agreement to preserve the Company's ability to effect a tax-deferred exchange. The Company did not effect a tax-deferred exchange and received the proceeds from the sale in 1998. During the year ended December 31, 1996, the Company purchased the assets (principally intangibles) (and in the case of KBIQ-FM, all of the outstanding shares of common stock) of the following radio stations:
PURCHASE ACQUISITION DATE STATION MARKET SERVED PRICE ---------------- ------- ------------- -------------- (IN THOUSANDS) February 1, 1996... KTSL-FM Spokane, WA $ 900 February 1, 1996... KLTE-FM Kirksville, MO 550 February 1, 1996... KPRZ-FM Colorado Springs, CO 1,400 March 1, 1996...... KGFT-FM Colorado Springs, CO 3,000 March 15, 1996..... KNUS-AM Denver, CO 1,100 October 5, 1996.... KPXQ-AM Phoenix, AZ 6,500 October 25, 1996... KBIQ-FM Colorado Springs, CO 2,825 December 6, 1996... KKMS-AM Minneapolis, MN 1,894 December 30, 1996............. KWRD-FM Dallas, TX 40,100 April 3, 1996...... Standard News Network Washington, D.C -- August 1, 1996..... The Word in Music Colorado Springs, CO 120 August 23, 1996.... Morningstar Radio Network Nashville, TN 1,232 ------- $59,621 =======
The purchase price has been allocated to the assets acquired as follows:
ASSET AMOUNT ----- -------------- (IN THOUSANDS) Property and equipment........................... $ 3,767 Broadcast licenses............................... 53,116 Goodwill and other intangibles................... 2,738 ------- $59,621 =======
F-12 51 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In 1996, the Company sold the assets (principally intangibles) of radio stations WTJY-FM (Johnstown, Ohio), for $1.5 million, KLTE-FM (Kirksville, Missouri), for $550,000 and KDBX-FM (Banks, Oregon), for $14 million. In addition, KDFX-AM (Dallas, Texas), was exchanged as part of the purchase price of KWRD-FM. The Company received approximately $8 million of value of KDFX-AM towards the total purchase price of KWRD-FM of $40.1 million, resulting in a gain recognized of approximately $4.0 million. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at December 31:
DECEMBER 31 ------------------ 1997 1998 ------- ------- (IN THOUSANDS) Land............................................... $ 325 $ 1,440 Buildings.......................................... 1,477 1,417 Office furnishings and equipment................... 8,902 9,775 Antennae, towers and transmitting equipment........ 25,652 25,665 Studio and production equipment.................... 14,033 14,817 Record and tape libraries.......................... 442 511 Automobiles........................................ 68 69 Leasehold improvements............................. 3,684 3,797 Construction-in-progress........................... 4,054 8,767 ------- ------- 58,637 66,258 Less accumulated depreciation...................... 21,999 25,509 ------- ------- $36,638 $40,749 ======= =======
4. LONG-TERM DEBT Long-term debt consisted of the following at:
DECEMBER 31 ------------------- 1997 1998 -------- -------- (IN THOUSANDS) Revolving line of credit with banks................ $ 2,500 $ 24,000 9 1/2% Senior Subordinated Notes due 2007.......... 150,000 150,000 Obligation to acquire KIEV-AM property............. -- 2,810 Unsecured note payable to shareholder with interest at 9% in 1997 and 8 1/4% in 1998................. 2,000 1,800 -------- -------- $154,500 $178,610 ======== ========
Since the note payable to banks and revolving line of credit carry floating interest rates, the carrying amount approximates their fair market value. The Notes were issued in September 1997 at par. At December 31, 1998, their fair market value was approximately $156.8 million. F-13 52 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Revolving Line of Credit with Banks In September 1997, Salem entered into a new credit agreement with five banks (the Credit Agreement) to provide for borrowing capacity of up to $75 million under a revolving line of credit (reduced to $72.3 million as of December 31, 1998). The maximum amount that the Company may borrow under the Credit Agreement is limited by the Company's debt to cash flow ratio, adjusted for recent radio station acquisitions as defined in the Credit Agreement (the Adjusted Debt to Cash Flow Ratio). At December 31, 1998, the maximum Adjusted Debt to Cash Flow Ratio allowed under the Credit Agreement was 6.75 to 1.00. The Company's ability to borrow for the purpose of acquiring a radio station is further limited by the Credit Agreement in that the Company may not borrow for an acquisition if the Adjusted Debt to Cash Flow Ratio is greater than 6.00 to 1.00. At December 31, 1998, the Adjusted Debt to Cash Flow Ratio was 5.99 to 1.00, resulting in total borrowing availability (i.e., in addition to amounts already outstanding) of approximately $22.6 million, approximately $483,000 of which can currently be used for radio station acquisitions. The note evidencing the indebtedness bears interest at a fluctuating base rate plus a spread that was determined by Salem's Adjusted Debt to Cash Flow Ratio. At Salem's option, the base rate is either a bank's prime rate or LIBOR. For purposes of determining the interest rate the prime rate spread ranges from 0% to 1.75%, and the LIBOR spread ranges from 1% to 3%. At December 31, 1998, the interest rate on amounts outstanding under the Credit Agreement was 8.25%. Interest is payable quarterly. Commencing March 31, 1999, the commitment under the Credit Agreement reduces by $2.5 million quarterly through December 31, 2003, and by $6.25 million quarterly through June 30, 2004. The Credit Agreement expires August 31, 2004. The classification of the amounts due under the revolving line of credit in the accompanying balance sheet at December 31, 1998 is based on the terms of the Credit Agreement. In January 1999, the Credit Agreement was amended to increase the maximum Adjusted Debt to Cash Flow Ratio to 7.00 to 1.00 through June 29, 1999. The interest rate spreads were also amended. The prime rate spread ranges from 0% to 2.25%, and the LIBOR spread ranges from 1% to 3.5%. The Credit Agreement with the banks (a) provides for restrictions on additional borrowings and leases; (b) prohibits Salem, without prior approval from the banks, from paying dividends, liquidating, merging, consolidating or selling its assets or business, and (c) requires Salem to maintain certain financial ratios and other covenants. Salem has pledged all of its assets as collateral under the Credit Agreement. Additionally, all the Company's stock holdings in its subsidiaries are pledged as collateral. In September 1997, in connection with the issuance of the Notes and the Credit Agreement the Company repaid all amounts due under its previous revolving line of credit with the banks. The Company wrote off certain deferred financing costs and terminated all of its interest rate swap and cap agreements associated with the line of credit (see Note 5). The write-off and termination fees of $1,185,000, net of a $659,000 income tax benefit, was recorded as an extraordinary item in the accompanying statement of operations for the year ended December 31, 1997. F-14 53 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9 1/2% Senior Subordinated Notes due 2007 The Notes bear interest at 9 1/2% per annum, with interest payment dates on April 1 and October 1, commencing April 1, 1998. Principal is due on the maturity date, October 1, 2007. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after October 1, 2002, at the redemption prices specified in the indenture. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by the Guarantors (the Company's subsidiaries). The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including the Company's obligations under the Credit Agreement. The indenture limits the incurrence of additional indebtedness by the Company, the payment of dividends, the use of proceeds of certain asset sales, and contains certain other restrictive covenants affecting the Company. In March 1998, the Company consummated an exchange offer for the original notes (Original Notes) which were issued in September 1997. The exchange offer commenced when the Company's registration statement under the Securities Act of 1933 was declared effective. The Notes are identical in all material respects to the Original Notes except that the Notes do not contain terms with respect to transfer restrictions. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by the Guarantors. The Notes are in general freely transferable without further registration under the Securities Act of 1933. Other Debt In August 1998, in connection with the Company's acquisition of KIEV-AM, the Company agreed to lease the real property on which the station's towers and transmitter are located for $10,000 per month. The Company also agreed to purchase the property for $3 million in February 2000. The Company recorded this transaction in a manner similar to a capital lease. The amount recorded as a long-term obligation at December 31, 1998, represents the present value of the future commitments under the lease and purchase contract, discounted at 8.5%. At December 31, 1998 and 1997, the Company owed $1.8 million and $2 million, respectively, to one of its shareholders. Interest is payable monthly. The note is payable upon demand by the shareholder. The Company intends to refinance the borrowing if demanded by the shareholder with the proceeds from a borrowing under the Credit Agreement. Accordingly, the amount is reflected as long-term debt in the accompanying balance sheet at December 31, 1998, consistent with the terms of the Credit Agreement. F-15 54 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Maturities of Long-Term Debt Principal repayment requirements under all long-term debt agreements outstanding at December 31, 1998, for each of the next five years and thereafter are as follows: 1999......................................... $ -- 2000......................................... 2,810 2001......................................... -- 2002......................................... -- 2003......................................... 3,500 Thereafter................................... 172,300 -------- $178,610 ========
5. INTEREST RATE CAP AND SWAP AGREEMENTS In 1996 and 1997 Salem had entered into interest rate swap and cap agreements to reduce the impact of changes in interest rates on its floating-rate long-term debt. In September 1997, in connection with the issuance of the Notes and the Credit Agreement the Company terminated all of its interest rate swap and cap agreements for aggregate fees of $417,000. The Company wrote off these costs (unamortized swap fee of $201,000 and the swap termination fee of $417,000) in September 1997. This write-off, net of income tax benefit, was included in the extraordinary loss in the accompanying statement of operations for the year ended December 31, 1997 (see Note 4). 6. INCOME TAXES As discussed in Note 1, prior to the Reorganization, New Inspiration and Golden Gate were S Corporations for income tax purposes. Accordingly, any federal and state income tax liability on net income of the S Corporations has been the liability of shareholders of the S Corporations. The S Corporation status of New Inspiration and Golden Gate was terminated in the Reorganization, which was effective August 13, 1997, and the income of New Inspiration and Golden Gate will thereafter be subject to federal and state income taxes. The accompanying consolidated statements of operations include an unaudited pro forma income tax adjustment, using an estimated combined effective tax rate of approximately 40%, to reflect the estimated income tax expense of the Company as if New Inspiration and Golden Gate had been subject to federal and state income taxes for the periods presented. In connection with the Reorganization, which resulted in the termination of the S Corporation status of New Inspiration and Golden Gate, the Company recorded a deferred tax liability and provision of approximately $609,000 in December 1997. F-16 55 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The consolidated provision (benefit) for income taxes for Salem consisted of the following at December 31:
1996 1997 1998 ------ ------- ----- (IN THOUSANDS) Current: Federal...................................... $ 189 $ (149) $ -- State........................................ 333 618 387 ------ ------- ----- 522 469 387 Deferred: Federal...................................... 5,737 (1,162) (467) State........................................ 396 140 (263) ------ ------- ----- 6,133 (1,022) (730) Current tax benefit reflected in net extraordinary loss........................... -- (659) -- ------ ------- ----- Income tax provision (benefit)................. $6,655 $ 106 $(343) ====== ======= =====
The consolidated deferred tax asset and liability consisted of the following at December 31:
1997 1998 ------- ------- (IN THOUSANDS) Deferred tax assets: Financial statement accruals not currently deductible...................................... $ 610 $ 665 Net operating loss, AMT credit and other carryforwards................................... 2,224 2,367 State taxes........................................ 197 122 ------- ------- Total deferred tax assets............................ 3,031 3,154 Valuation allowance for deferred tax assets.......... (95) (95) ------- ------- Net deferred tax assets.............................. 2,936 3,059 Deferred tax liabilities: Excess of net book value of property, plant and equipment for financial reporting purposes over tax basis....................................... 3,806 4,263 Excess of net book value of intangible assets for financial reporting purposes over tax basis..... 8,118 7,305 Other.............................................. 880 629 ------- ------- Total deferred tax liabilities....................... 12,804 12,197 ------- ------- Net deferred tax liabilities......................... $ 9,868 $ 9,138 ======= =======
F-17 56 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A reconciliation of the statutory federal income tax rate to the effective tax rate, as a percentage of income before income taxes, is as follows:
YEAR ENDED DECEMBER 31, -------------------- 1996 1997 1998 ---- ---- ---- Statutory federal income tax rate................. 34% (34)% (34)% State income taxes, net........................... 3 49 4 Nondeductible expenses............................ -- 5 7 Exclusion of income taxes of S corporations and the Partnership................................. (7) (76) -- Change in taxable entity (S corporation to C corporation).................................... -- 56 -- Other, net........................................ 4 10 5 -- --- --- 34% 10% (18)% == === ===
The S Corporations had book income (loss) before income taxes of $3,800,000 and $2,400,000 in 1996 and 1997, respectively. These amounts include the S Corporations' 85% ownership interest in Beltway. At December 31, 1998, the Company has net operating loss carryforwards for federal income tax purposes of approximately $5,800,000 which expire in years 2010 through 2018 and for state income tax purposes of approximately $4,600,000 which expire in years 1999 through 2013. The Company has federal alternative minimum tax credit carryforwards of approximately $147,000. For financial reporting purposes, a valuation allowance of $95,000 has been provided in 1998 and 1997 to offset a portion of the deferred tax assets related to the state net operating loss carryforwards. 7. COMMITMENTS AND CONTINGENCIES Salem leases various land, offices, studios and other equipment under operating leases that expire over the next 10 years. The majority of these leases are subject to escalation clauses and may be renewed for successive periods ranging from one to five years on terms similar to current agreements and except for specified increases in lease payments. Rental expense included in operating expense under all lease agreements was $3,800,000, $4,800,000 and $4,800,000 in 1996, 1997, and 1998 respectively. F-18 57 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1998, are as follows:
RELATED PARTIES OTHER TOTAL ------- ------- ------- (IN THOUSANDS) 1999...................................... $1,102 $ 3,895 $ 4,997 2000...................................... 1,102 3,421 4,523 2001...................................... 1,102 2,696 3,798 2002...................................... 747 2,165 2,912 2003...................................... 690 1,961 2,651 Thereafter................................ 1,100 10,440 11,540 ------ ------- ------- $5,843 $24,578 $30,421 ====== ======= =======
The Company is involved in certain legal actions and claims arising in the normal course of business. It is the opinion of management that such litigation and claims will be resolved without material effect on the Company's consolidated financial position, operations and cash flows. The Company has a deferred compensation agreement with one of its officers, which provides for retirement payments to the officer for a period of ten consecutive years, if he remains employed by the Company until age 60. The retirement payments are based on a formula defined in the agreement. The estimated obligation under the deferred compensation agreement is being provided for over the service period. At December 31, 1997 and 1998, a liability of approximately $370,000 and $432,000 respectively, is included in other liabilities in the accompanying balance sheet for the amounts earned under this agreement. 8. RELATED PARTY TRANSACTIONS In December 1997, the Company borrowed $2 million from a shareholder pursuant to a promissory note with a revolving principal amount of up to $2.5 million. The outstanding balance on the note as of December 31, 1998 and 1997 was $1.8 million and $2 million, respectively (see Note 4). The note is a demand note which bears interest at a floating rate (8 1/4% at December 31, 1998). During the term of the note, the interest rate will at all times be 1% lower than the rate for base rate borrowings under the Company's Credit Agreement. The Company will borrow under the Credit Agreement when the shareholder demands repayment. In January 1998, the Company borrowed $1.5 million from another shareholder pursuant to another promissory note with a revolving principal amount of up to $2.5 million. The Company repaid all amounts outstanding in May 1998. There were no amounts outstanding at December 31, 1998 and 1997. The note is a demand note which bears interest at a floating rate. During the term of the note, the interest rate will at all times be 1% lower than the rate for base rate borrowings under the Company's Credit Agreement. The Company will borrow under the Credit Agreement when the shareholder demands repayment of any amounts outstanding. F-19 58 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A shareholder's trust owns real estate on which certain assets of two radio stations are located. Salem, in the ordinary course of its business, entered into two separate lease agreements with this trust. Rental expense included in operating expense for 1996, 1997 and 1998 amounted to $57,000, $57,000 and $60,000, respectively. Land and buildings occupied by various Salem radio stations are leased from the shareholders of Salem. Rental expense under these leases included in operating expense for 1996, 1997 and 1998 amounted to $800,000, $1,000,000 and $1,000,000, respectively. In October 1997, the Company assigned its contract with a tower construction company to build a broadcast tower in Houston to the principal shareholders subject to the principal shareholders obtaining financing. The principal shareholders obtained such financing on December 31, 1997 and reimbursed the Company for its costs and expenses under the contract, which amounted to approximately $3.7 million. At December 31, 1995, notes receivable from shareholders totaled approximately $3,400,000. The notes bore interest at the Applicable Federal Rate and were payable upon demand. In December 1996, New Inspiration and Golden Gate distributed $5.5 million to the shareholders, of which $4.8 million was used by the shareholders to repay the notes receivable and accrued interest. In June 1997, the Company entered into a local marketing agreement (LMA) with a corporation, Sonsinger, Inc. (Sonsinger), owned by two of Salem's shareholders for radio station KKOL-AM. The shareholders and the Company are parties to an Option to Purchase Agreement whereunder the Company has been granted an option to purchase KKOL-AM from the shareholders at any time on or before December 31, 1999 at a price equal to the lower of the cost of the station to the shareholders, $1.4 million, and its fair market value as determined by an independent appraisal. Under the LMA, Salem programs KKOL-AM and sells all the airtime. Salem retains all of the revenue and incurs all of the expenses related to the operation of KKOL-AM and incurred approximately $64,000 and $164,000 in 1997 and 1998, respectively in LMA fees to Sonsinger. From time to time, the Company rents an airplane and a helicopter from a company which is owned by one of the principal shareholders. As approved by the independent members of the Company's board of directors, the Company rents these aircraft on an hourly basis at below-market rates and uses them for general corporate needs. Total rental expense for these aircraft for 1996, 1997 and 1998 amounted to approximately $38,000, $60,000 and $69,000, respectively. 9. DEFINED CONTRIBUTION PLAN In 1993, the Company established a 401(k) defined contribution plan (the Plan), which covers all eligible employees (as defined in the Plan). Participants are allowed to make nonforfeitable contributions up to 15% of their annual salary, but may not exceed the annual maximum contribution limitations established by the Internal Revenue Service. The Company currently matches 10% of the amounts contributed by each participant but does not match participants' contributions in excess of 10% of their compensation per pay period. Effective January 1, 1999 the Company matches 25% of the amounts contributed by each participant but does not match participants' contributions in excess of 6% of their F-20 59 SALEM COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) compensation per pay period. The Company contributed and expensed $48,000, $80,000 and $87,000 to the Plan in 1996, 1997 and 1998 respectively. 10. SUBSEQUENT EVENTS In January 1999, the Company purchased the assets of OnePlace, LLC (OnePlace), for $6.2 million, and all the outstanding shares of stock of CCM Communications, Inc. (CCM), for $1.9 million. OnePlace is engaged in the business of applying Internet e-commerce, consumer profiling and other information technologies in the Christian products industry. CCM publishes magazines which follow the contemporary Christian music industry. The purchases were financed primarily by an additional borrowing. The Company amended its Credit Agreement with the banks to allow for such a borrowing (see Note 4). In January 1999, the Company also agreed to purchase the assets of NavPress Software, Inc. (NavPress), for $550,000. NavPress develops and supplies electronic Bible and Christian reference books and Bible study software applications. F-21 60 SALEM COMMUNICATIONS CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Additions Deductions ------------------------ ------------------------- Balance at Charged to Charged to Balance at Beginning of cost and other Bad debt End of Description Period expenses accounts write-offs Period - ------------------------------ ------------ ---------- ---------- ---------- ---------- (dollars in thousands) Year Ended December 31, 1996 ... $ 704 $ 1,067 $- $ (766) $ 1,005 Allowance for doubtful accounts Year Ended December 31, 1997 ... 1,005 1,283 - (1,039) 1,249 Allowance for doubtful accounts Year Ended December 31, 1998 ... 1,249 2,087 - (2,474) 862 Allowance for doubtful accounts
S-1 61 SALEM COMMUNICATIONS CORPORATION INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGES ------- ----------- ------------ 4.08 Amendment No. 2 and Consent No. 2, dated as of January 22, 1999, to the Credit Agreement, dated as of September 25, 1997, by and among Salem, The Bank of New York, as Administrative Agent for the Lenders, Bank of America NT&SA, as documentation agent, and the Lenders. 10.05.22 Antenna/tower lease between South Texas Broadcasting, Inc. (KKHT-FM/Houston-Galveston, Texas) and Sonsinger Broadcasting Company of Houston, LP expiring 2008. 10.05.23 Antenna/tower lease between Inspiration Media of Texas, Inc. (KTEK-AM/Alvin, Texas) and The Atsinger Family Trust and The Stuart W. Epperson Revocable Living Trust expiring 2009. 12.01 Statement regarding computation of ratio of earnings to fixed charges. 21.01 Subsidiaries of Salem. 27.01 Financial Data Schedule
E-1 EX-4.08 2 ADMENDMENT #2 TO CREDIT AGREEMENT 1 EXHIBIT 4.08 SALEM COMMUNICATIONS CORPORATION AMENDMENT NO. 2 AND CONSENT NO. 2 AMENDMENT NO. 2 AND CONSENT NO. 2 (this "Amendment"), dated as of January 22, 1999, to the Credit Agreement, dated as of September 25, 1997, by and among SALEM COMMUNICATIONS CORPORATION, a California corporation (the "Borrower"), THE BANK OF NEW YORK, as administrative agent for the Lenders thereunder (in such capacity, the "Administrative Agent"), BANK OF AMERICA NT&SA, as documentation agent, and the Lenders party thereto, as amended by Amendment No. 1 and Consent No. 1, dated as of August 5, 1998 (the "Credit Agreement"). RECITALS I. Except as otherwise provided herein, capitalized terms used herein which are not defined herein shall have the meanings set forth in the Credit Agreement. II. The Borrower has requested the consent of the Administrative Agent for the acquisition by (i) OnePlace, Ltd. (a wholly-owned Subsidiary) of substantially all of the assets of OnePlace, LLC for $6,000,000 plus 50% of the investment banking fee up to a maximum of $150,000 (the "OnePlace Acquisition"), (ii) the Borrower of 100% of the outstanding stock of CCM Communications, Inc. for $2,000,000 (the "CCM Acquisition") and (iii) a newly created wholly-owned Subsidiary ("Newco NavPress") of substantially all of the assets of NavPress Software Inc. for approximately $550,000 (the "NavPress Acquisition"). III. The Borrower has requested that, in connection with such Acquisitions, the leverage covenant be amended. In consideration of the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and pursuant to Section 11.1 of the Credit Agreement, the Borrower and the Administrative Agent agree as follows: 1. Notwithstanding anything to the contrary contained in the first paragraph of Section 8.3 of the Credit Agreement, the Administrative Agent consents to the following: (a) the OnePlace Acquisition, provided that (i) the consideration therefor given by the Borrower and the Subsidiaries in the aggregate shall in no event exceed $6,000,000 plus 50% of the investment banking fee up to a maximum of $150,000, and (ii) in all other respects, the OnePlace Acquisition is consummated in accordance with the terms of the Loan Documents including, without limitation, the last paragraph of Section 8.3, and OnePlace, Ltd. shall become a party to the Subsidiary Guaranty and execute and deliver all documents (including, without limitation, UCC 2 financing statements) that the Administrative Agent shall reasonably require in connection therewith; (b) the CCM Acquisition, provided that (i) the consideration therefor given by the Borrower and the Subsidiaries in the aggregate shall in no event exceed $2,000,000, and (ii) in all other respects, the CCM Acquisition is consummated in accordance with the terms of the Loan Documents including, without limitation, the last paragraph of Section 8.3; and (c) the NavPress Acquisition provided that (i) the consideration therefor given by the Borrower and the Subsidiaries in the aggregate shall in no event exceed approximately $550,000, and (ii) in all other respects, the NavPress Acquisition is consummated in accordance with the terms of the Loan Documents including, without limitation, the last paragraph of Section 8.3, and Newco NavPress shall become a party to the Subsidiary Guaranty and execute and deliver all documents (including, without limitation, UCC financing statements) that the Administrative Agent shall reasonably require in connection therewith. 2. Section 1.1 of the Credit Agreement is amended by amending and restating in its entirety the definition of "Amendment Effective Date" to read as follows: "Amendment No. 1 Effective Date": the "Amendment Effective Date" as defined in Amendment No. 1 and Consent No. 1, dated as of August 5, 1998. 3. Section 1.1 of the Credit Agreement is amended by amending and restating in its entirety paragraph (a) of the definition of "Applicable Margin" to read as follows: (a) subject to paragraph (b) of this definition, at all times during the applicable periods set forth below, (i) with respect to the unpaid principal amount of the ABR Loans, the percentage set forth below under the heading "Alternate Base Rate Margin" next to the applicable period and (ii) with respect to the unpaid principal amount of the Eurodollar Loans, the percentage set forth below under the heading "Eurodollar Rate Margin" next to the applicable period:
Alternate Base Eurodollar Period Rate Margin Rate Margin ------ -------------- ----------- when the Total Leverage Ratio is equal to or greater than 6.50:1.00 2.250% 3.500% when the Total Leverage Ratio is equal to or greater than 6.00:1.00 but less than 6.50:1.00 1.750% 3.000% when the Total Leverage Ratio is
-2- 3 equal to or greater than 5.50:1.00 but less than 6.00:1.00 1.250% 2.500% when the Total Leverage Ratio is equal to or greater than 5.00:1.00 but less than 5.50:1.00 1.000% 2.250% when the Total Leverage Ratio is equal to or greater than 4.50:1.00 but less than 5.00:1.00 0.500% 1.750% when the Total Leverage Ratio is equal to or greater than 4.00:1.00 but less than 4.50:1.00 0.250% 1.500% when the Total Leverage Ratio is equal to or greater than 3.50:1.00 but less than 4.00:1.00 0.000% 1.250% when the Total Leverage Ratio is less than 3.50:1.00 0.000% 1.000%
4. Section 1.1 of the Credit Agreement is amended by adding the following new definitions of "Amendment No. 2 Effective Date" and "Newco NavPress"): "Amendment No. 2 Effective Date": the "Amendment Effective Date" as defined in Amendment No. 2 and Consent No. 2, dated as of January 22, 1999. "Newco NavPress": the wholly-owned Subsidiary created to acquire substantially all of the assets of NavPress Software Inc. 5. Section 6.1 of the Credit Agreement is amended and restated in its entirety to read as follows: 6.1 Total Leverage Ratio. Maintain at all times a Total Leverage Ratio not greater than the applicable ratio set forth below opposite the applicable period set forth below:
Periods Ratio ------- ----- Effective Date through June 29, 1998 7.00:1.00
-3- 4 June 30, 1998 to but excluding Amendment No. 1 Effective Date 6.25:1.00 Amendment No. 1 Effective Date to but excluding Amendment No. 2 Effective Date 6.75:1.00 Amendment No. 2 Effective Date through June 29, 1999 7.00:1.00 June 30, 1999 through September 29, 1999 6.75:1.00 September 30, 1999 through December 30, 1999 6.00:1.00
6. Section 6.3 of the Credit Agreement is amended to change each reference to "Amendment Effective Date" contained therein to "Amendment No. 1 Effective Date". 7. Section 8.1 of the Credit Agreement is amended to amend and restate clause (iv) thereof in its entirety to read as follows: (iv) intercompany Indebtedness between the Borrower and its Subsidiaries, provided that intercompany Indebtedness of the following Subsidiaries: OnePlace, Ltd., CCM Communications, Inc. and Newco NavPress to the Borrower (excluding intercompany Indebtedness incurred by OnePlace, Ltd. to finance the purchase price of substantially all of the assets of OnePlace, LLC and intercompany Indebtedness incurred by Newco NavPress to finance the purchase price of substantially all of the assets of NavPress Software Inc.) shall not at any time exceed $1,000,000 in the aggregate for all such Subsidiaries; and 8. Sections 1 - 7 of this Amendment shall not become effective until the date (the "Amendment Effective Date") that the Administrative Agent shall have received (i) this Amendment executed by the Required Lenders, the Borrower and the Subsidiary Guarantors and (ii) a certificate of the Secretary or Assistant Secretary of each of the Borrower and the Subsidiary Guarantors attaching a true and complete copy of the resolutions of its Board of Directors or other action (in form and substance reasonably satisfactory to the Administrative Agent) authorizing this Amendment and setting forth the incumbency of its officer(s) authorized to execute and deliver this Amendment (including signature specimens). 9. In all other respects the Credit Agreement and other Loan Documents shall remain in full force and effect. -4- 5 10. In order to induce the Administrative Agent to execute this Amendment and the Lenders to consent hereto, the Borrower and the Subsidiary Guarantors each (a) certifies that, immediately before and after giving effect to this Amendment, all representations and warranties contained in the Loan Documents to which it is a party shall be true and correct in all respects, (b) certifies that, immediately before and after giving effect to this Amendment, no Default or Event of Default shall exist under the Loan Documents, and (c) agrees to pay the reasonable fees and disbursements of counsel to the Administrative Agent incurred in connection with the preparation, negotiation and closing of this Amendment. 11. Each of the Borrower and the Subsidiary Guarantors (a) reaffirms and admits the validity, enforceability and continuation of all Loan Documents to which it is a party, and its obligations thereunder, and (b) agrees and admits that as of the date hereof it has no valid defenses to or offsets against any of its obligations to the Administrative Agent, the Documentation Agent, the Issuer or any of the Lenders under the Loan Documents to which it is a party. 12. This Amendment may be executed in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same document. It shall not be necessary in making proof of this Amendment to produce or account for more than one counterpart signed by the party to be changed. 13. This Amendment shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York, without regard to principles of conflict of laws. -5- 6 SALEM COMMUNICATIONS CORPORATION AMENDMENT NO. 2 AND CONSENT NO. 2 The parties have caused this Amendment to be duly executed as of the date first written above. SALEM COMMUNICATIONS CORPORATION By: /s/ DIRK GASTALDO ----------------------------- Name: Dirk Gastaldo Title: VP/CFO THE BANK OF NEW YORK As Administrative Agent By: Name: Title: -6- 7 SALEM COMMUNICATIONS CORPORATION AMENDMENT NO. 2 AND CONSENT NO. 2 The parties have caused this Amendment to be duly executed as of the date first written above. SALEM COMMUNICATIONS CORPORATION By: Name: Title: THE BANK OF NEW YORK As Administrative Agent By: /s/ STEPHEN M. NETTLER ------------------------------- Name: Stephen M. Nettler Title: Assistant Vice President -7- 8 SALEM COMMUNICATIONS CORPORATION AMENDMENT NO. 2 AND CONSENT NO. 2 ATEP RADIO, INC. BISON MEDIA, INC. CARON BROADCASTING, INC. COMMON GROUND BROADCASTING, INC. GOLDEN GATE BROADCASTING COMPANY, INC. INLAND RADIO, INC. INSPIRATION MEDIA OF TEXAS, INC. INSPIRATION MEDIA, INC. NEW ENGLAND CONTINENTAL MEDIA, INC. NEW INSPIRATION BROADCASTING COMPANY, INC. PENNSYLVANIA MEDIA ASSOCIATES, INC. RADIO 1210, INC. SALEM COMMUNICATIONS CORPORATION, A DELAWARE CORPORATION SALEM MEDIA CORPORATION SALEM MEDIA OF CALIFORNIA, INC. SALEM MEDIA OF COLORADO, INC. SALEM MEDIA OF OHIO, INC. SALEM MEDIA OF OREGON, INC. SALEM MEDIA OF PENNSYLVANIA, INC. SALEM MEDIA OF VIRGINIA, INC. SALEM MEDIA OF TEXAS, INC. SALEM MUSIC NETWORK, INC. SALEM RADIO NETWORK INCORPORATED SALEM RADIO REPRESENTATIVES, INC. SOUTH TEXAS BROADCASTING, INC. SRN NEWS NETWORK, INC. VISTA BROADCASTING, INC. By: /s/ ERIC H. HALVORSON ------------------------------------ Name: Eric H. Halvorson Title: Vice President -8- 9 SALEM COMMUNICATIONS CORPORATION AMENDMENT NO. 2 AND CONSENT NO. 2 THE BANK OF NEW YORK By: /s/ STEPHEN M. NETTLER -------------------------------- Name: Stephen M. Nettler Title: Assistant Vice President -9- 10 SALEM COMMUNICATIONS CORPORATION AMENDMENT NO. 2 AND CONSENT NO. 2 BANK OF AMERICA NT & SA By: /s/ JOHN J. SULLIVAN -------------------------------- Name: John J. Sullivan Title: Vice President -10- 11 SALEM COMMUNICATIONS CORPORATION AMENDMENT NO. 2 AND CONSENT NO. 2 BANKBOSTON, N.A. By: /s/ JENNIFER BURAS -------------------------------- Name: Jennifer Buras Title: Director -11- 12 SALEM COMMUNICATIONS CORPORATION AMENDMENT NO. 2 AND CONSENT NO. 2 FLEET BANK, NA. By: /s/ WILLIAM WEISS -------------------------------- Name: William Weiss Title: Assistant Vice President -12- 13 SALEM COMMUNICATIONS CORPORATION AMENDMENT NO. 2 AND CONSENT NO. 2 UNION BANK OF CALIFORNIA, N.A By: /s/ LENA M. BRYANT -------------------------------- Name: Lena M. Bryant Title: Assistant Vice President -13- EX-10.05.22 3 LEASE AGREEMENT FOR KKHT-FM 1 EXHIBIT 10.05.22 TOWER LEASE AGREEMENT - SPLENDORA, TEXAS This agreement is entered into on this 1st day of June, 1998, between SOUTH TEXAS BROADCASTING, INC. (KKHT-FM) ("LESSEE"), and Sonsinger Broadcasting Company of Houston, LP. ( "Lessor"). ARTICLE I DEFINITIONS The terms listed below when spelled with initial capital letters have the following meanings in this agreement: 1.1 ADJUSTMENT DATE shall mean the first day of February following the first anniversary of the Commencement Date and each subsequent first day of February this Agreement remains in effect. 1.2 AGREEMENT means this Tower Lease Agreement, including the schedules and any other executed attachments and/or addenda all of which are made part of this Agreement. 1.3 ANTENNA means the device identified as "Antenna" on Schedule 5.1 consisting of a Commercial FM Broadcast Main and Auxiliary Antenna, also a STL antenna as identified in Schedule 5.1 The Antennas must be designed so as to reduce, to the fullest extent possible, any wind loading on the Tower, as hereinafter defined. 1.4 ANTENNA LOCATION means the location or locations for the placement of the Antenna as set forth in Section 5.1 hereof. 1.5 ARTICLE or ARTICLES means one or more of the articles of this Agreement. 1.6 CABLE ROUTE means the locations designed from time to time by Lessor for placement of Lessee's cabling on Lessor's Property, as hereinafter defined. 1.7 CABLING means the coaxial, waveguide, wire or other cabling or transmission lines of Lessee not to exceed one such line for each antenna on the Tower. 1.8 COMMENCEMENT DATE means 12:01 AM on the date specified in this Agreement as the Commencement Date of the Initial Term, as hereinafter defined. 1.9 EQUIPMENT means any device, equipment, structure, buildings, material and apparatus used or useful in the operation of a Commercial FM Broadcast Radio Transmitting Station and associated equipment approved by Lessor for use on Lessor's Property. Notwithstanding anything in this Agreement to the contrary, the Equipment shall be paid for, furnished and installed by Lessee. 1.10 EQUIPMENT SPACE means the area provided for the Transmitters and associated broadcast transmission equipment as designated in Schedule 5.2 by Lessor for the limited purpose of constructing, installation, maintenance, operation, repair or removal of the equipment. Notwithstanding anything in this Agreement to the contrary, any item to be constructed or installed at the Equipment Space pursuant to this Agreement shall be paid for, constructed and maintained by Lessee. 1.11 EXPIRATION DATE means 11:59 PM on the date specified in this Agreement as the date on which the Initial Term or any extended term of this Agreement expires. 1.12 FACILITIES and FACILITY refer collectively or individually to any and all Equipment, Cabling, Antenna and/or buildings or other structures required to be constructed pursuant to Section 5.2 hereof, as the context may indicate. 1.13 INITIAL TERM means the period from the Commencement Date to the date set forth in Section 3.3. 1.14 LEASED SPACE refers collectively or individually to any or every Equipment Space, Cable Route, and/or Antenna Location, as the context may indicate. 1.15 LESSEE'S EMPLOYEES means any employee, officer, or partner of Lessee; any agent, contractor, or subcontractor of Lessee, and any employee, officer, or partner of such agent, contractor, or subcontractor; and any person placed on the Authorized Entry List, as set forth in Section 8.2, at the request of Lessee. 1.16 LESSOR'S PROPERTY means the land, buildings, towers, fixtures, and other improvements comprising the Lessor's premises in which the Leased Space is located. 1.17 MONTHLY RENT shall have the meaning as defined in Section 4.2(c) hereof. 1.18 RENT means the consideration paid by Lessor to Lessee pursuant to this Agreement. 2 1.19 SCHEDULE or SCHEDULES means one or more schedules attached to this Agreement. 1.20 INTENTIONALLY REMOVED 1.21 SECTION or SECTIONS means one or more of the sections of this Agreement. 1.22 TOWER means the antenna tower located upon Lessor's Property in Splendora, Texas. ARTICLE II SCOPE OF THE AGREEMENT 2.1 LEASE. This Agreement sets forth the terms and conditions under which Lessor agrees to lease space to Lessee. Lessee agrees to use the Leased Space and related rights only in accordance with the terms and conditions of this Agreement; to comply with all applicable governmental regulations and requirements of law pertaining to Lessee's activities in or around Lessor's Property; to pay all fees, charges, costs and expenses in accordance with this Agreement promptly when due; to keep the Facilities properly maintained; and to comply in all respects with each of the obligations, duties, rules, conditions, and requirements applicable to Lessee under this Agreement. 2.2 NO OTHER USE. Lessee will use the Leased Space solely for operating the Antenna and Equipment for it's Commercial Broadcast Tramsmitter site, only for the purpose and benefit of South Texas Broadcasting Inc. Lessee will not make any other use of the Leased Space and related rights provided under this Agreement. Lessee shall not use Lessor's Property or any portion thereof, including the Equipment Space, for purpose of maintaining the studios , offices , off premises storage of Lessee. 2.3 NO OTHER RIGHTS. Only the Leased Space and related rights described in this Agreement are provided under this Agreement. Lessor does not provide any service or product under this Agreement. ARTICLE III TERM OF THE AGREEMENT; TERMINATION; RENEWALS 3.1 COMMENCEMENT DATE. The Commencement Date shall be the date when Lessee begins construction or when Lessee commences with any part of the installation on Lessor's property. 3.2 COMMENCEMENT CERTIFICATION. When the Commencement Date has been determined, such date shall be evidenced by a Certificate, in form and substance similar to Exhibit A, executed and acknowledged by Lessor and Lessee and delivered by each to the other. 3.3 EXPIRATION DATE. The Expiration Date of this Agreement shall be the day preceding the Tenth (10th) year anniversary of the Commencement Date, except that if such date is not the last day of a calendar month, the Expiration Date of this Agreement shall be the last day of the month in which the Tenth (10th) anniversary of the Commencement Date falls. If the term has been extended as provided in Section 3.4, the Expiration Date shall be the last day of the term as so extended. 3.4 LEASE OPTION. Lessee shall have the option, if Lessee is not at the time in default under this Agreement, to extend the term of this Agreement for one (1) period of five (5) years each (the "Extension Term"), on the same terms, covenants and conditions herein contained. The word "Term" as used in this Agreement shall be deemed to include the Extension Term when and if the Agreement is extended. The option to extend the Term shall automatically be deemed to have been exercised unless Lessee shall deliver to Lessor written notice of Lessee's election not to extend as provided herein on or before one hundred eighty (180) days prior to the Expiration Date. 3.5 TERMINATION BY LAW. Lessor shall have the right to terminate this Agreement, upon notice to Lessee, and shut down and/or remove Lessee's Antenna, Cabling and Equipment if: (a) This Agreement is required to be terminated by ruling or regulation of the Federal Communications Commission ("FCC") or the Federal Aviation Administration ("FAA") or by reason of any violation of the Communications Act of 1934, as amended, arising out of Lessee's use of the Leased Premises; or (b) A final determination, not subject to appeal, of any local, state or federal governmental body that Lessee's Facilities or the placement and/or operation of Lessee's Facilities is in violation of any laws, rules or regulations of any local state or federal agencies including, without limitation, any land use provisions and/or any zoning and/or planning code.; or (c) A final determination, not subject to appeal, that Lessee's Facilities fail to meet in any material respect the requirements imposed by law or the rules and regulations of local, state and federal agencies and Lessee shall have failed to cure said matters within ten (10) days of such final determination and written notice thereof. 2 3 ARTICLE IV FEES AND CHARGES; BILLING 4.1 PAYMENT OF RENT. Lessee agrees to pay rent to Lessor, without notice or demand, from the Commencement Date through the Expiration Date, or such earlier date as this Agreement is terminated as provided herein, at: Sonsinger Broadcasting of Houston LP 4880 Santa Rosa Road, Suite 300 Camarillo, California 93012 Attention: Accounting 805-987-0400 or to such other person or place as Lessor may designate from time to time by notice to Lessee. 4.2 RENT. (a) Beginning with the Commencement Date, and continuing to the first Adjustment Date, the base rent shall be the sum of $ 150,000.00 per annum, payable in equal monthly installments of $12,500.00 in advance of the first day of each month (and thereafter on each and every Adjustment Date the monthly rent shall be computed according to Section 4.2(b)); provided, however, that the installment of the base rent payable for the first full month of the term shall be due and payable on the full execution and delivery of this Agreement. If the Commencement Date and/or Expiration Date occur on a day other than the first day of a calendar month, rent shall be prorated for the month in which the Commencement Date and/or Expiration Date occurs. (b) During the one (1) year period beginning with each Adjustment Date, the monthly rent payable by Lessee shall reflect an adjustment, as herein provided, for the change, if any, from the year in which the Commencement Date falls, in the Consumer Price Index for All Urban Consumers [Base Year 1982-84=100] ("CPI") as measured in February and published by the United States Department of Labor, Bureau of Labor Statistics; i.e., during the one (1) year period beginning with the Adjustment Date, the monthly rent shall be the product obtained by multiplying the Base Rent times a fraction, the numerator of which shall be the CPI for February of the year such Adjustment Date falls and the denominator of which shall be the CPI for February of the year in which the Commencement Date falls. Notwithstanding the results of the foregoing calculation, the annual base rent payable by Lessee hereunder shall not in any event be less than 105% of the annual base rent payable during the immediately preceding one (1) year period. In the event that the Bureau of Labor Statistics shall change the base period for the CPI, the new index number shall be substituted for the old index number in making the above computation. In the event the Bureau of Labor Statistics ceases publishing the CPI, or materially changes the method of its computation, Lessor and Lessee shall accept comparable statistics on the purchasing power of the consumer dollar as published at the time of said discontinuation or change by a responsible financial periodical of recognized authority to be chosen by Lessor subject to reasonable consent of Lessee. (c) As used herein, "Monthly Rent" shall refer to the rent to be paid by Lessee pursuant to this Section 4.2. 4.3 ADDITIONAL RENT. Lessee shall pay or reimburse Lessor within ten (10) days after receipt of a statement from Lessor for all taxes, including without limitation, real estate taxes, personal property taxes, ad valorem taxes and special assessments, levied against Lessor which are attributable to Lessee, or its assigns, as a result of the Facilities, buildings or structures placed or operated on Lessor's Property by Lessee or services offered by Lessee on Lessor's Property (but excluding any taxes attributable to Lessor's Property), which statement shall include, at the request of Lessee, such documentation as is reasonably necessary to substantiate said amounts. In addition, Lessee shall pay or reimburse Lessor within ten (10) days after receipt of a statement for any state or local tax of any kind (except income taxes) arising from or attributable to this Agreement. 4.4 NO NOTICE. From and after the Commencement Date, Lessee will pay to Lessor the Monthly Rent. Said installments are due and payable in advance, without notice or demand. Although Lessor may, for its own convenience, issue bills to Lessee, any failure of Lessor to issue a timely bill will not relieve Lessee of its obligation to pay Monthly Rent without notice or demand. 4.5 NO SET-OFF. Except as otherwise provided in this Agreement, Lessee will pay all Rent, fees, costs, and expenses without deduction or set-off of any kind. 4.6 INTENTIONALLY REMOVED 3 4 ARTICLE V GRANT OF LEASED SPACE AND EQUIPMENT SPACE 5.1 ANTENNA LOCATION. Lessor, in consideration of the rents to be paid and the covenants contained herein, hereby leases to Lessee the Antenna Location as generally depicted on Schedule 5.1 for the limited purpose of installing, maintaining, operating, or repairing the Antenna in accordance with this Agreement, and to pass through portions of the Lessor's Property designated by Lessor for ingress to and egress from the Antenna Location. All site work for the use of the Antenna Location shall be performed by Lessee and at the expense of Lessee. 5.2 EQUIPMENT SPACE. Lessor, in further consideration of the rents to be paid and covenants contained herein, hereby grants to Lessee the Equipment Space as reasonably determined by Lessor, for the limited purpose of installing, maintaining, operating, repairing, or removing the Equipment in accordance with this Agreement; and to pass through portions of the Lessor's Property designated by Lessor for ingress to and egress from the Equipment Space. All site work for the use of the Equipment Space shall be performed by Lessee and at the expense of Lessee. In the event Lessor determines, in its sole and absolute discretion and which determination shall be specified in advance of the Commencement Date, that Lessee's Equipment shall not reside in the buildings and other structures on Lessor's property currently designed to house such equipment, Lessee, at Lessee's sole cost and expense, shall be required to construct such buildings or structures on that portion of Lessor's property designated by Lessor, at its sole and absolute discretion and as generally depicted on Schedule 5.2, and Lessee shall house its Equipment in such buildings or structures. Notwithstanding anything in this Agreement to the contrary, in the event Lessee is required by Lessor to construct a permanent building or other permanent structure on Lessor's Property, at the expiration of the term of this Agreement, the permanent building and other permanent structures shall, at the sole election of Lessor, become the property of Lessor. 5.3 CABLE ROUTE. Lessor, in further consideration of the rents to be paid and the covenants herein contained, hereby leases to Lessee the Cable Route as reasonably determined by Lessor, for the limited purpose of installing, maintaining or repairing the Cabling in accordance with this Agreement; and to pass through portions of the Lessor's Property designated by Lessor for ingress to and egress from the Cable Route. All site work for the use of the Cable Route shall be performed by Lessee and at the expense of Lessee. ARTICLE VI INSTALLATIONS OF FACILITIES 6.1 SPECIFICATIONS. Lessor shall prepare specifications for Lessee's delivery of the Facilities to Lessor's property and Lessee's installation of the Facilities in the Leased Space. All such specifications shall be based upon information contained in the Schedules hereto and engineering data furnished by Lessee and may include the requirement of Lessee to provide, at Lessee's expense, the purchase and installation of such equipment for protecting Lessor's or its tenants' property. 6.2 PRIOR APPROVAL. Prior to the initiation by Lessee of the delivery, installation, replacement, modification or removal of Facilities, Lessee must obtain the prior written approval of Lessor to Lessee's proposed scheduling of work and Lessee's choice of vendors and contractors. Lessor, at its sole discretion and election, may condition said approval on obtaining additional information and/or requiring schedule changes and substitution of vendors and contractors. Lessor's approval of any act or action of Lessee or Lessee's Employees pursuant to this Agreement shall not be considered an endorsement, representation, or warranty regarding the viability of said scheduling, and/or the ability of said vendor or contractor to perform the work intended by Lessee. Lessee shall deliver, construct and install the Facilities in strict conformity with the specifications, schedules, and choice of vendors and contractors approved by Lessor. 6.3 DELIVERY & INSTALLATION OF FACILITIES. Lessee shall furnish, construct and install all Facilities. Physical delivery of the Facilities to Lessor's property and all installation work performed by Lessee shall be performed in accordance with the specifications and approvals furnished pursuant to this Article. 6.4 LESSEE'S RESPONSIBILITIES. Notwithstanding anything in this Agreement to the contrary, Lessee has the sole responsibility for any product liability claims, product warranty claims, delays and service outages of Lessee that may result from defective Facilities, improper scheduling, improper installation, or any other matter, irrespective of the cause. 4 5 ARTICLE VII USE OF LEASED SPACE 7.1 FACILITIES. Lessee may bring the Facilities into the Leased Space at Lessee's own risk and expense. Equipment shall be confined to the Equipment Space, Cabling shall be confined to the Cabled Route, and the Antenna shall be confined to the Antenna Location. 7.2 OTHER MATERIALS. In addition to the Facilities, Lessee may bring into the Leased Space, at Lessee's own risk and expense (a) any materials and apparatus specially identified in written engineering specifications approved in writing by Lessor, and (b) small tools and portable test equipment as needed to perform Lessee's obligations under this Agreement. Lessee's rights under this Section 7.2 are subject to the conditions that all such materials, apparatus, tools, and test equipment will remain at all times in the care, custody, and control of Lessee's Employees. 7.3 NEGATIVE COVENANTS. Lessee may not bring into the Leased Space any material, apparatus, facilities, tools, or equipment other than those identified in this Agreement unless Lessee first obtains written permission from Lessor. Without limiting the foregoing, Lessee is specifically informed that the following are not permitted within the Leased Space or in or upon the Lessor's Property: wet cell batteries, explosives, flammable liquids or gases, alcohol, controlled substances, weapons, toxic materials, hazardous waste, pollutants, contaminants, asbestos and asbestos related products, polychlorinated biphenyl's (PCB's), petroleum, crude oil or any fraction or distillate thereof, and any similar equipment and/or materials. Lessee shall not use or permit Lessor's Property to be used by any dangerous, toxic, noxious, offensive, or unlawful purposes. 7.4 EMERGENCY NUMBER. During the term of this Agreement and any extension thereof, Lessor and Lessee shall provide the other with a telephone number which, if called, will ring at a location that is staffed by their respective agents 24 hours each and every day, 7 days a week and every week. Lessee and Lessor shall notify each other promptly in the event of any change in such telephone number. 7.5 NON-EXCLUSIVE USE. (a) Lessee understands that Lessee's use of Lessor's Property is non-exclusive and, subject to Lessee's right to use the Leased Space, Lessor reserves the right to lease Lessor's Property, and any portion thereof, to any person or entity, and Lessor shall have the right to retain all amounts received therefrom. Lessee agrees that it shall cooperate with Lessor and Lessor's other tenants in the use of Lessor's Property. (b) In the event Lessor, in its sole and absolute discretion, determines that Lessor's Property has an immediate shortage of required space for future tenants, Lessor shall have the exclusive right to cause the Facilities to be made available to such future tenants ("Multiple Use"); provided that in the event Lessor shall cause the Multiple Use to occur (i) Lessee shall not be required to incur any cost or expense associated with the Multiple Use, and (ii) the Multiple Use shall be compatible with and not unreasonably interfere with Lessee's use of the Tower pursuant to this Agreement. 7.6 LESSEE'S COOPERATION. In the event it is necessary for Lessee to reduce, limit or cease its use of its Facilities or the Leased Premises so that Lessor, or any other tenant of Lessor may install, maintain, repair, remove or otherwise work upon their facilities in compliance with then current OSHA, FCC and ANSI standards, including such standards relating to radio frequency radiation, or such other and further health and safety standards imposed by any federal, state or local authority, Lessee agrees to cooperate with the party seeking to conduct said installation, maintenance, repairs, removal or work and temporarily reduce, limit or cease its use of its Facilities or the Leased Premises; provided said party takes all reasonable steps to minimize the amount of time Lessee shall so operate and said party shall take all reasonable steps to schedule such installation, maintenance, repairs, removal or work at a time convenient to Lessee. Notwithstanding the foregoing, Lessee shall not be entitled to any abatement in rent or any other amount, fees or damages for its compliance with this Section. ARTICLE VIII RIGHT OF ENTRY 8.1 ACCESS. Lessee shall have reasonable access to the Leased Space; provided access to the Leased Space shall be regulated pursuant to the rules and regulations described in Section 23.5 and access to Tower may be limited based upon the reasonable discretion of Lessor. 8.2 AUTHORIZED PERSONNEL. All persons, contractors and/or engineers installing, maintaining, repairing, removing or otherwise working on the Facilities shall be approved in advance by Lessor, which approval shall not be unreasonably withheld. A list ("Authorized Entry List") of those persons, contractors and/or engineers approved by Lessor shall be maintained by Lessor. Prior to the Commencement Date, Lessee will submit to Lessor a proposed "Authorized Entry List". Lessor may request additional information from Lessee before granting its approval, which approval may not be unreasonably withheld. Lessee will promptly give notice to Lessor, both orally and in writing, of the name of any person who ceases to be one of Lessee's employees or agents or whom Lessee wishes to remove from the "Authorized Entry List". 5 6 8.3 QUALIFIED PERSONNEL. Lessee represents and warrants that on the date hereof and each and every date prior to the last act to be performed by Lessee pursuant to this Agreement, including Section 9.2 hereof, Lessee's Employees and any other person(s) installing, maintaining, repairing, removing or otherwise working on the Facilities or otherwise on Lessor's Property at the request or direction of Lessee shall be a technician qualified to perform said duties and have been trained in compliance with then current OSHA, FCC and ANSI standards, including such standards relating to radio frequency radiation. ARTICLE IX PROTECTION OF SERVICE AND PROPERTY 9.1 CONTINUITY OF USE. The continuity of the use and services of the Tower by Lessor and other tenants of Lessor is of paramount importance. Lessee and Lessee's Employees will at all times exercise the highest degree of care to prevent damages to the Lessor's Property and to all other real and personal property of Lessor, its customers and other tenants of Lessor's Property. Lessee and Lessee's Employees will perform any work and use the Facilities in a manner that will protect all other persons, structures, equipment, utilities, and/or work areas of any kind against injury, damage or interruption of service. Lessee and Lessee's Employees will not use any Facilities, equipment, tools or methods which, in the sole judgment of Lessor, might endanger or interfere with the services of Lessor, its customers or other tenants of Lessor's Property. Lessor reserves the right to take any action needed to cease or prevent any harm to the personnel, property and/or services of Lessor or its customers or any other tenants of Lessor's Property. 9.2 LESSEE'S OBLIGATION TO RESTORE. Notwithstanding anything in this Agreement to the contrary, if in the performance of any work, act or operation, Lessee or Lessee's Employees disturb the property, equipment, broadcast pattern or services of Lessor, its customers, , or other tenants of Lessor's property, including, without limitation, such action as would require, pursuant to the FCC, Lessor, its customers, or other tenants of Lessor's Property to perform a partial or full proof of performance of their broadcast pattern, Lessee will restore such property, equipment or broadcast pattern to its former condition including, without limitation, conducting and performing such partial or full proof of performance as may be required by the FCC, all at Lessee's expense. If Lessee does not promptly restore to its former condition any property, equipment or broadcasting pattern that was disturbed by Lessee or Lessee's Employees, Lessor may restore such property to its former condition at Lessee's sole expense; and the amount expended by Lessor pursuant to this Section 9.2 shall be deemed reasonably incurred and immediately due and shall be repaid by Lessee, together with interest at the rate of 18 percent per annum, upon demand of Lessor. Notwithstanding any provision in this Agreement to the contrary, the provisions of this Section 9.2 shall survive the termination of the Agreement for 24 months. 9.3 INTERFERENCE WITH A BROADCASTING ACTIVITY. (a) Lessee shall conduct its broadcasting activities in accordance with all FCC regulations and sound engineering practices and shall cooperate to the fullest extent with other tenants and Lessor so as to anticipate and prevent any interference with any and all tenants installed prior to the installation of the Facilities of Lessee or any alteration thereto. In the event the use of Lessee's Facilities results in interference with, or signal diminution of any equipment of any tenant installed prior to the installation of the Facilities of Lessee or any alteration thereto and the equipment receiving such interference is operating in accordance with manufacturer's specifications, good engineering practice and the rules of the FCC, Lessee shall, upon notice from Lessor, take all necessary steps to correct and eliminate the interference and/or signal diminution within a reasonable length of time, but in no event more than twenty-four (24) hours after having been given such notice by Lessor, unless otherwise agreed to in writing. If the interference and/or signal diminution is not eliminated within such twenty-four (24) hour period, Lessee shall reduce power to a level resulting in the cessation of such interference, or if that is unavailing, shall cease using the Facility causing the interference and/or signal diminution, except for tests of short duration under terms acceptable to Lessor in order to eliminate the problem, and Lessee will not resume operation using full power of such equipment until the problem is eliminated. Failure of Lessee to comply with the terms of this Section 9.3(a) shall constitute a material breach of this Agreement. (b) Lessee shall comply with any conditions which the FCC and/or any other governmental authority may impose with respect to the installation and/or operation of Lessee's Facilities which Lessee may install on/or adjacent to the Tower and Equipment Space pursuant to this Agreement, and shall pay for all legal, engineering and other expenses incident thereto. (c) Lessor will neither make nor allow changes or installations to be made on the Tower which will impair or interfere in any way with Lessee's signals or broadcast operations. In the event such interference to Lessee's signals or operations does occur, Lessor shall be so notified and shall take immediate steps to correct such interference; provided nothing herein shall require Lessor to correct or require to correct any interference caused by the facilities of the Lessor or , any other tenant on the tower prior to the installation of Lessee's Facilities or such matter which pre-dated the installation of Lessee's Facilities, unless such interference is caused by a defect or malfunction in the facilities or the operation thereof is not in accordance with FCC authorizations. Failure of Lessor to comply with the term of this Section 9.3(c) within thirty (30) days of notice, shall constitute a material breach of this Agreement. (d) Lessee shall also bear the full cost of purchase and installation of any necessary filter devices as may be necessary to reduce intermodulation products caused by the co-location of the Lessee'and other pre-existing tenant's facilities and which are attributable to Lessee's Facilities. 6 7 (e) Lessor shall require in all future agreements to lease space on the Tower, provisions substantially similar to those contained in Article IX hereof. Notwithstanding the foregoing, any costs, fees or expenses, including, without limitation, attorneys fees and a reasonable fee for any time expended by Lessor's engineers, incurred by Lessor in enforcing said provisions due to (i) interference caused by Lessee's Facilities or their operation or (ii) at the request or demand of Lessee, shall be paid by Lessee within ten (10) days after its receipt of written notice of said amounts; provided Lessor shall assign its rights to collect said amounts from the interfering party if different from Lessee. 9.4 QUIET ENJOYMENT. Except as otherwise set forth in this Agreement, Lessor shall not alter, make adjustments to, relocate or otherwise modify or tamper with Lessee's Facilities. ARTICLE X INSPECTION 10.1 WORK IN PROGRESS. Lessor, its employees and agents may inspect and observe any work while in progress or after completion to ascertain whether the work is in accordance with the specifications and requirements of this Agreement. Lessor may require Lessee to correct any faulty work. However, inspection or observation by Lessor or by its agents of work performed by Lessee or Lessee's Employees will not relieve Lessee of full responsibility for the proper performance of the work. 10.2 TIME. Lessor, its agent and its designees (including without limitation building inspectors, fire marshals, and other officials) may inspect the Leased Space and the Facilities at any time. At Lessee's request, Lessee's Employees on the Authorized Entry List may accompany Lessor during such inspections except when, in the sole judgment of Lessor, safety or service considerations require otherwise. ARTICLE XI UTILITIES 11.1 LESSEE RESPONSIBILITY. Lessee shall be responsible, at Lessee's sole cost, for obtaining, using and paying for all utility services to the Leased Premises for Lessee's use including, without limitation, electricity, air conditioning, heat, water, sewer, telephone, waste disposal and gas (collectively referred to herein as "Utilities"). Lessor may, in its sole and absolute discretion, provide said services to Lessee at Lessor's actual cost in which event Lessee's use shall be separately metered and paid by Lessee to Lessor within ten (10) days of Lessee's receipt of an invoice indicating the amount due . 11.2 INTERRUPTION. Under no circumstances shall Lessor be liable for any interruption or failure in the supply of any Utilities to the Leased Space, nor shall Lessee have any right to an abatement in rent or offset to rent in the event of any interruption or failure in the supply of any Utilities to the Leased Space. ARTICLE XII OWNERSHIP OF FACILITIES 12.1 RISK OF LOSS. Except as otherwise provided in this Agreement, all Facilities shall be owned by Lessee, and Lessee shall bear all risk of loss and/or damage to the Facilities. 12.2 OWNERSHIP. Any and all Facilities on Lessor's Property, except utility service and any building or structure installed by Lessee (which, at the expiration of the term of this Agreement, shall, at the sole election and discretion of Lessor, be the property of Lessor), shall remain the personal property of Lessee notwithstanding the fact that it may be affixed or attached to the realty or Lessor's Property, and shall, subject to all terms and conditions of this Agreement, during the Agreement, any extension thereof or upon the termination thereof belong to and be removable by Lessee. All other machinery, equipment, buildings, structures and trade fixtures attached to Lessor's Property, shall, upon termination of this agreement, be deemed fixtures and, at the sole election of Lessor, become the property of Lessor. 7 8 ARTICLE XIII MAINTENANCE AND REPAIR 13.1 FACILITIES. Lessee will, at its own risk and expense, maintain and repair, including replacement if necessary (collectively referred to as "Maintenance"), the Antenna, Equipment, Cabling, buildings, structures and any other items or things placed on Lessor's Property by Lessee pursuant to this Agreement. All Maintenance shall be performed in a manner suitable to Lessor so as not to conflict with the use of Lessor's Property by Lessor, or any other tenant of Lessor. All Maintenance shall be provided by qualified technicians, authorized to enter Lessor's Property pursuant to Section 7.2. 13.2 ADDITIONAL REMEDY. In the event Lessee shall fail to make the Maintenance required by Section 13.1 hereof within ten (10) days written notice by Lessor (or, if required, such longer period of time if Lessee notifies Lessor that such maintenance has commenced within ten (10) days and Lessee diligently attempts to complete such Maintenance) or shall fail to perform any of its duties pursuant to Article IX hereafter within 24 hours after notice from Lessor, Lessor shall have the right to make such Maintenance or to perform such duty for the account of Lessee, and any expense, charge or cost incurred by Lessor shall be paid by Lessee to Lessor within ten (10) business days of its receipt of invoice from Lessor. This Section 13.2 shall be construed as an additional remedy granted to Lessor and not in limitation of any other rights and remedies which Lessor has or may have in such circumstances. 13.3 LESSOR'S PROPERTY. Except as otherwise provided herein and repairs occasioned by the negligence of the Lessee or Lessee's Employees or representatives, Lessee shall not be responsible for repairs and or maintenance of Lessor's Property. Without limiting the foregoing, the parties agree that Lessor shall be responsible for maintaining the Tower in accordance with the requirements of the FCC and the Federal Aviation Administration. ARTICLE XIV NO ALTERATIONS Except as specifically set forth in this Agreement, Lessee may not make any alterations, additions and/or improvements to any part of the Lessor's Property, the Leased Space, the Antenna, Equipment, and/or Cabling without the prior written consent of the Lessor, which consent shall be given in Lessor's sole discretion and election. ARTICLE XV REPRESENTATIONS, WARRANTIES AND OTHER OBLIGATIONS 15.1 LESSOR'S REPRESENTATIONS AND WARRANTIES. Lessor represents and warrants that: (a) The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary actions on the part of Lessor and shall not constitute a breach or violation under any agreement to which Lessor is a party. (b) To the best of Lessor's knowledge, there are no violations of any federal, state, county or municipal law, ordinance, order, regulations or requirement with respect to the Leased Space, and as of the date of this Agreement, no notice of any kind relating thereto (which would adversely affect the transactions contemplated by this Agreement) has been issued by public authorities having jurisdiction over the Leased Space. (c) There is no action, suit or proceeding pending or, to Lessor's knowledge, threatened against or affecting the Leased Space or any portion thereof and Lessor has not received notice, written or otherwise, of any litigation affecting or concerning the Leased Space relating to or arising out of its ownership, management, use or operation. (d) Lessor's Property is and will remain in material compliance at all times during the Initial Term and any Extension Term with all federal, state, county, municipal, local, administrative and other governmental laws, statutes, ordinances, codes, rules, regulations and orders pertaining thereto, including, without limitation, to the extent applicable, all zoning laws and building codes, all environmental laws and all regulations of the FAA and the FCC. 15.2 LESSEE'S REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants that: (a) The Facilities and the operation thereof do not and will result in exposure of workers or the general public to levels of radio frequency radiation in excess of the "Radio Frequency Protection Guides" recommended in "American National Standard Safety Levels With Respect to Human Exposure to Radio Frequency Electromagnetic Fields, 300 KHz to 100 GHz," issued by the American National Standards Institute ("Acceptable Radio Frequency Radiation Standards"). 8 9 (b) The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary actions on the part of Lessee and shall not constitute a breach or violation under any agreement to which Lessee is a party. This Agreement constitutes a valid and binding agreement and obligation of Lessee, enforceable in accordance with its terms. (c) Lessee will conduct its activities on Lessor's Property in compliance with all applicable laws, including, without limitation, all OSHA, FCC, and FAA rules and regulations, environmental laws, and any rule or law applicable to the construction or operation of Lessee's Facilities. (d) The Leased Space is and will remain in material compliance at all times during the Term and any Extension Term with all federal, state, county, municipal, local, administrative and other governmental laws, statutes, ordinances, codes, rules, regulations and orders pertaining thereto, including, without limitation, to the extent applicable, all zoning laws and building codes and all regulations of the FAA and the FCC. (e) No agent, broker or other person, entity or firm acting on behalf of or under the authority of Lessee or any affiliate of Lessee is or will be entitled to any broker's or finder's fee or any other commission or similar fee, directly or indirectly, in connection with the transactions contemplated by this Agreement. ARTICLE XVI EVENTS OF DEFAULT 16.1 DEFAULT OF LESSEE. Any of the following events shall constitute an "event of default" on the part of Lessee: (a) The failure of Lessee to pay any amount due hereunder, and continuation of such failure for more than five (5) days after Lessee's receipt of written notice thereof from Lessor; provided however that Lessor shall not be required to provide such written notice to Lessee more than twice in any twelve (12) month period prior to declaring such failure to pay an event of default; or (b) The failure of Lessee to comply with the provisions of Article IX hereof. (c) The failure of Lessee to fulfill any other obligation hereunder or the inaccuracy of any representation or warranty and the continuation of such failure or inaccuracy for more than ten (10) days after notice by Lessor, provided, however, that if the nature of Lessee's failure is such that more than ten (10) days is required for its cure, then Lessee shall not be deemed to be in default if Lessee has commenced such cure within the ten (10) day period, demonstrates to Lessor's reasonable satisfaction that such default is curable and thereafter diligently prosecutes such cure to completion. 16.2 TERMINATION OF DEFAULT BY LESSEE. If an event of default on the part of Lessee shall occur at any time, Lessor, at its election, may give Lessee a notice of termination specifying a day not less than thirty (30) days thereafter on which the term of this Agreement shall end. If such notice is given, the Agreement shall expire on the day so specified as fully and completely as if that day were the day herein originally fixed for such expiration, and Lessee shall then quit and surrender the Leased Space to Lessor. If the Agreement is terminated pursuant to this Section, Lessee shall remain liable to Lessor for the payment of rent for the remainder of the lease term and without prejudice to any other right or remedy which Lessor may have hereunder or by law and which shall, at the sole election and discretion of Lessor, become immediately due and payable. Notwithstanding the foregoing, Lessor shall attempt to mitigate any damages it may suffer as a result of the default of this Agreement by Lessee. Notwithstanding any waiver of any prior breach or event of default hereunder, Lessor may re-enter the Leased Space either by reasonable force or otherwise, or dispossess Lessee, any legal representative of Lessee or other occupant of the Leased Space by appropriate suit, action or proceeding and remove its effects and hold the Leased Space as if this Agreement had not been made. Notwithstanding anything in this Agreement to the contrary, and in addition to any other remedies Lessor may have, if an event of default shall occur, Lessor, at its election, may stop providing Utilities to Lessee's Facilities and/or the Leased Space and Lessee specifically waives any and all claims for damages against Lessor arising from a loss Utilities to the Leased Space. 16.3 DEFAULT OF LESSOR. The failure of Lessor to comply with any of its obligations under the terms of this Agreement, and continuation of such failure to cure for more than ten (10) days after notice by Lessee, shall constitute a default on the part of Lessor; provided however that if the nature of Lessor's default is such that more than ten (10) days is required for its cure, then Lessor shall not be deemed to be in default if Lessor has commenced such cure within the ten (10) day period, demonstrates to Lessee's reasonable satisfaction that such default is curable and thereafter diligently prosecutes such cure to completion. 16.4 TERMINATION BY DEFAULT OF LESSOR. If an event of default on the part of Lessor shall occur at any time, Lessee, at its election, may give Lessor a notice of termination specifying a day not less than thirty (30) days thereafter on which the term of this Agreement shall end. If such notice is given, the Agreement shall expire on the day so specified as fully and completely as if that day were the day herein originally fixed for such expiration, and Lessee shall then quit and surrender the Leased Space to Lessor and have no further obligation to Lessor hereunder. 9 10 ARTICLE XVII INSURANCE 17.1 LESSEE'S INSURANCE. Lessee shall, at its sole expense, maintain commercial public liability insurance against claims for personal injury, bodily injury, wrongful death and property damage occurring on, in or about Lessor's Property under policies and with companies reasonably acceptable to Lessor, affording insurance protection to limits of not less than Three Million Dollars ($3,000,000.00) for combined single limit with respect to any one occurrence and Five Million Dollars ($5,000,000.00) in the aggregate for all occurrences within each policy year. Lessee shall also maintain "all risk" or special form policies of property insurance covering the Facilities and any improvements of Lessee located on the Lessor's Property for the full replacement cost. Lessor, its managing agent, all mortgagees, and such other parties as Lessor may reasonably designate shall be named as additional insureds on each such policy pertaining to Lessor's Property and shall be furnished with a certificate thereof. Each such policy of insurance shall, to the extent obtainable at no extra premium, provide: (a) that any claim shall be payable notwithstanding any act, whether of commission or omission, negligent or otherwise, of Lessor, of Lessee, of any other tenant or of any agent, employee, representative, visitor or guest of any of them, which act might otherwise result in the forfeiture of the insurance afforded by such policy, and (b) that Lessor shall not be liable to the insurer by reason of any payment by the insurer to Lessor, or any such other tenant. In addition, each such policy shall provide an agreement by the insurer that the policy will not be canceled or modified to reduce coverage as to risk, amount or named insured without at least fifteen (15) days' prior written notice to Lessee, Lessor, mortgagees, and all other named insureds. 17.2 WAIVER. Neither Lessor, nor their representatives, agents, or employees shall be liable to Lessee or to anyone claiming through Lessee or to any insurance company (by way of subrogation or otherwise) insuring Lessee for any business interruption or for any loss or damage to any building, structure or other tangible property, or injury to or death of persons occurring on or about Lessor's Property, or in any manner growing out of or connected with Lessee's use or occupation of the Lessor's Property, or the use or occupation of the Lessor's Property by Lessee's agents, employees, representatives, visitors or guests even though such business interruption, loss, damage, injury or death might have been occasioned by the negligence of Lessor or their agents or employees, to the extent that such business interruption, loss, damage, injury or death is or could be covered by an "all risk" or special form policy of property insurance, regardless of whether such insurance policies are actually carried. Each insurance policy carried by Lessee hereto shall contain a clause incorporating such waiver of subrogation and a clause to the effect that the foregoing waiver shall not affect the right of the insured party to recover under such policy. 17.3 LESSEE'S OBLIGATION TO REIMBURSE. Should Lessee store or maintain any materials or equipment, or do any acts which result in an increase in the rate or premium of any insurance coverage required to be provided by Lessor pursuant to this Agreement, Lessee shall immediately reimburse Lessor for the full amount of any such increase or shall remove them if Lessor so requires. ARTICLE XVIII INDEMNIFICATION 18.1 INDEMNIFICATION BY LESSEE. Lessee shall indemnify Lessor and its agents, officers and employees and hold Lessor and its agents, officers and employees harmless from and against all claims, actions, losses, damages, liabilities and expense (including reasonable attorneys' fees) incurred by or asserted against Lessor whether during or after the term of this Agreement, including by reason of personal injury, loss of life, or damage to property, caused by or resulting from, in whole or any material part: (i) any breach of this Agreement by Lessee; (ii) Lessee's breach of any warranty contained in this Agreement; (iii) any negligent or intentional act or omission of Lessee, Lessee's Employees, agents, invitees or contractors, whether in, on, about or with respect to the Leased Space or Lessor's Property; (iv) the use by Lessee of any part of the Leased Space or Lessor's Property; (v) any work undertaken by or at the request of Lessee on or about the Leased Space; (vi) any inspection, observation or any action undertaken by Lessor pursuant to Article IX hereof; (vii) the claim, existence or discovery of any hazardous substance on Lessor's Property arising from Lessee's activities; (vii) any other activity undertaken by or at the request of Lessee pursuant to or in connection with this Agreement; or (ix) the presence of any individuals on the Leased Space or Lessor's Property as a result of Lessee's request or this Agreement. 18.2 DEFENSE BY LESSEE. If Lessor so elects by notice to Lessee, Lessee shall have the obligation of defending, at its sole cost and expense, by counsel selected by Lessee and approved by Lessor (such approval not to be unreasonably withheld), against any claim to which the foregoing indemnity may apply. Lessor may assume, or require that such defense be assumed, by Lessor and counsel selected by Lessor, at the cost and expense of Lessee if Lessor is for any reason dissatisfied with the defense by Lessee, or believes that its interests would be better served thereby. In any case where Lessee is defending any such claim, Lessor may participate in the defense thereof by counsel selected by it, but at Lessor's expense. Lessee shall not enter into any settlement of any claim without the consent of Lessor, which consent shall not be unreasonably withheld. 10 11 18.3 INDEMNIFICATION BY LESSOR. Lessor shall indemnify Lessee and hold Lessee harmless from and against all claims, actions, losses, damages, liabilities and expenses (including reasonable attorneys' fees) incurred by or asserted against Lessee, whether during or after the term of this Agreement, including by reason of personal injury, loss of life, or damage to property, caused by or resulting from in whole or any material part, (i) any breach of this Agreement by Lessor, (ii) Lessor's breach of any warranty contained in this Agreement, and (iii) any willfully negligent act or omission of Lessor, its employees, agents, invitees or contractors, whether in, on, about or with respect to the Leased Space or Lessor's Property; provided, however, that Lessor shall not be required to indemnify Lessee for any damages, injury, loss or expense arising out of Lessee's or its agents', employees', invitees' or contractors' negligent acts or omissions. 18.4 DEFENSE BY LESSOR. If Lessee so elects by notice to Lessor, Lessor shall have the obligation of defending, at its sole cost and expense, by counsel selected by Lessor and approved by Lessee (such approval not to be unreasonably withheld), against any claim to which the foregoing indemnity may apply. Lessee may assume, or require that such defense be assumed, by Lessee and counsel selected by Lessee, at the cost and expense of Lessor if Lessee is for any reason dissatisfied with the defense by Lessor, or believes that its interests would be better served thereby. In any case where Lessor is defending any such claim, Lessee may participate in the defense thereof by counsel selected by it, but at Lessee's expense. Lessor shall not enter into any settlement of any claim without the consent of Lessee, which consent shall not be unreasonably withheld. ARTICLE XIX RECONSTRUCTION OF DAMAGED PREMISES 19.1 REPAIR. Except as otherwise provided in this Agreement, if Lessor's Property, or any portion thereof, is partially or totally destroyed by fire or other casualty so as to become partially or totally unusable, Lessor may repair or reconstruct the damage to Lessor's Property to the extent and in the manner required to meet the then current needs of Lessor. 19.2 RENT ABATEMENT. This Agreement will remain in full force and effect pending repair or replacement of the damaged or destroyed premises, but the obligation of Lessee to pay the Monthly Rent will be abated during any period in excess of five (5) business days that due to damage to or destruction of the Lessor's Property (other than by the fault of Lessee) the Leased Space is not capable of being used for Lessee's purposes as set forth herein. The monthly installments will resume when the Leased Space is again capable of being used for such purpose, irrespective of whether Lessee has resumed its use of the Leased Space. 19.3 ELECTION NOT TO REPAIR. Notwithstanding anything to the contrary in Sections 19.1 and 19.2, Lessor may, at its sole and absolute discretion, elect not to repair or rebuild Lessor's Property, or any portion thereof. Lessor will promptly notify Lessee within forty-five (45) days of the event causing the damage or destruction, if such option is elected. If Lessee did not in any way cause the fire or other casualty and if either (i) Lessor has elected not to rebuild or repair Lessor's Property or (ii) reconstruction has not commenced within one hundred eighty (180) days after the fire or other casualty, Lessee may, by written notice to Lessor, terminate this Agreement provided said notice is received by Lessor on or before two hundred twenty five (225) days after the fire or other casualty and before the reconstruction has commenced. ARTICLE XX FORCE MAJEURE 20.1 FORCE MAJEURE. Except for Lessee's obligation to pay Rent, and except as set forth in Article XIX above, neither party shall be held liable for any delay or failure in performance of any part of this Agreement from any cause beyond its control and without its fault or negligence, such as acts of God, acts of civil or military authority, government regulations, strikes, labor disputes, embargoes, epidemics, war, terrorist acts, riots, insurrections, fire, explosions, earthquakes, nuclear accidents, floods, power blackouts or brownouts or surges, volcanic action, other major environmental disturbances, unusually severe weather conditions, inability to secure products or services of other persons or transportation facilities, or act or omissions of transportation common carriers (collectively referred to as "Force Majeure Conditions"). 20.2 TERMINATION BY FORCE MAJEURE. If any such Force Majeure Condition occurs and is the proximate cause of a delay or failure in performance of any part of a party's obligations under this Agreement for more than ninety (90) days, the other party may, by written notice given to the party whose performance was delayed or who failed to perform, terminate this Agreement or that part of this Agreement that is affected by such delay or failure to perform 11 12 ARTICLE XXI SAFETY 21.1 FACILITIES. Lessee is responsible for the safety of all Facilities, buildings, structures and other materials brought by Lessee onto Lessor's Property, and for the safety of all work performed by Lessee's Employees in the delivery, provision, installation, operation, maintenance, repair and removal of the Facilities, buildings, structures and any other material brought by Lessee onto Lessor's Property. In discharging this responsibility, Lessee shall comply (and shall cause Lessee's Employees to comply) with the requirements of the Occupational Safety and Health Act of 1970, as amended; and with any other federal, state, or local act or other requirements of law affecting safety and health. 21.2 VIOLATIONS. Lessee shall be responsible for any violation by Lessee or Lessee's Employees of any safety or health standard under this Agreement. If any material furnished or any work performed by Lessee or Lessee's Employees gives rise to a safety or health violation, Lessee will immediately remedy such condition and will indemnify, defend, and hold Lessor it's employees, agents, officers, representatives, affiliates, parent, subsidiaries and their affiliated companies, and their employees, agents, officers and representatives) harmless from any penalty, fine, or liability in connection with such a violation. ARTICLE XXII PERMITS, LICENSES, APPROVALS 22.1 FCC PERMITS. Lessee will apply for and obtain, at its sole cost and expense, FCC construction permits applicable to the installation of the Facilities, and will meet all FCC license and other requirements and restrictions. The FCC construction permit(s) must be approved before any construction or installation activity begins. A completed copy of Lessee's FCC application and License will be supplied to Lessor along with the executed agreement. 22.2 FAA APPROVAL. Lessee will notify the FAA of any Tower modifications and Antenna installations, that may be required by Lessee, and will use reasonable efforts to obtain any FAA-required permits, license, or approvals associated with Lessee's Facilities. Lessee will pay for all costs and expenses it incurs in obtaining or attempting to obtain any permits, license, or approvals. 22.3 OTHER PERMITS OR LICENSE. Lessee shall apply for and obtain, at its sole cost and expense, any and all License, permits, variances or other governmental approvals required to install, operate and maintain its Facilities in the Leased Space; provided that Lessee shall not submit any such applications without the prior written consent of Lessor, which consent shall not be unreasonably withheld. 12 13 ARTICLE XXIII MISCELLANEOUS PROVISIONS 23.1 SEVERABILITY. If any one or more of the provisions contained in this Agreement is, for any reason, held to be unenforceable in any respect under applicable state law or laws of the United States of America, such unenforceability will not affect any other provision of this Agreement, but this Agreement will then be construed in such a way as will achieve the intent of such unenforceable provision or provisions to the extent permitted by law. 23.2 ASSIGNMENT BY LESSOR. Notwithstanding any of the provisions of this Agreement, Lessor may assign, in whole or in part, Lessor's interest in this Agreement. In the event Lessor assigns this Agreement to a successor owner of the Leased Space, Lessor shall be and is hereby relieved of all liability arising after the consummation of such assignment under any and all covenants and obligations contained in or derived from this Agreement or arising out of any act, occurrence or omission relating to the Leased Space occurring after the consummation of such assignment, but only upon the condition that, as part of such Assignment, Lessor will cause the Assignee to agree, in writing, to carry out any and all of the covenants and obligations of Lessor under this Agreement occurring after the consummation of Lessor's assignment of its interest in and to this Agreement. In the event of an assignment of Lessor's interest in this Agreement to a Lender, as hereinafter defined, or a designee of a Lender, (i) the assignee shall have no obligation to Lessee hereunder other than, provided Lessee is not in default hereof, the obligation of quiet enjoyment, (ii) all amounts required to be paid to Lessor hereunder from Lessee shall be paid to the assignee, and (iii) Lessee shall not assert against such assignee any claims, defenses, setoffs or counterclaims that it might have had against Lessor. 23.3 ASSIGNMENT BY LESSEE. Lessee may not assign this Agreement without the prior written consent of Lessor which consent shall not unreasonably be withheld. Lessee may not sublet this Agreement, the Leased Space, or any portion thereof without the prior written consent of Lessor, which consent shall be given or withheld in Lessor's sole and absolute discretion. Under no circumstance shall this Agreement be assigned by Lessee to any party which does not agree in writing to be bound by all terms and conditions contained herein and, notwithstanding Lessee's assignment of this Agreement, Lessee shall remain liable for all obligations of Lessee pursuant to this Agreement until such time as this Agreement is terminated. 23.4 CONDEMNATION. In the event Lessor's Property or any portion thereof is taken pursuant to a condemnation proceeding or by eminent domain, such that Lessor, or Lessee can no longer operate telecommunications equipment on Lessor's property, this Agreement shall, at Lessor's sole and absolute discretion, terminate without liability to either party and Lessee shall not be entitled to any portion of any award arising out of such proceedings. 23.5 RULES AND REGULATIONS. From time to time, Lessor shall be entitled to create and enforce rules and regulations governing the use of Lessor's Property. Lessee agrees Lessee and Lessee's employees shall abide by said rules and regulations. Lessor agrees that it shall not create or enforce any unreasonable rules or regulations which would unduly prejudice Lessee's use of the Leased Space, or which would prevent reasonable access to the Leased Space by Lessee, as herein provided. 23.6 RESTORATION ON TERMINATION. Upon the termination of the Agreement for any reason, Lessee will restore the Leased Space to its original condition, normal wear and tear excepted, at Lessee's sole cost and expense. Any fixtures including, without limitation, all Antenna, Cabling and Equipment, goods or other property of Lessee not removed within ten (10) days after any quitting, vacating or abandonment of the Leased Premises, or upon Lessee's eviction therefrom, shall be considered abandoned, and Lessor shall have the right, without notice to Lessee, to sell or otherwise dispose of same without having to account to Lessee for any part of the proceeds of such sale. 23.7 NOTICES. All notices, demands, and requests required or permitted to be given hereunder shall be in writing and sent certified mail, return receipt requested. To Lessee: South Texas Broadcasting Inc KKHT-FM 6161 Savoy Ste 1200 Houston, Texas 77036 To Lessor Sonsinger Broadcasting of Houston LP c/o Salem Communications Corporation 4880 Santa Rosa Road, Suite 300 Camarillo, CA 93012 Facsimile No: (805) 384-4505 Attn: Jonathan L. Block, Esq. Either party hereto may change the place for notice to it by sending like written notice to the other party hereto. 23.8 SUBORDINATION. Unless a Lender, as hereinafter defined, shall otherwise elect as provided herein, Lessee's rights under this Agreement shall be subject and subordinate to the operation and effect of any existing or future Lien, as hereinafter defined, affecting Lessor's Property and to any extensions, modifications or amendments of any such mortgage. Lessee's acknowledgment and agreement of subordination provided for in this Section is self-operative and no further instrument of subordination shall be required. However, within ten (10) working days 13 14 after request, Lessee shall execute a subordination, non-disturbance and attornment agreement in form satisfactory to Lessor. If a Lender shall so elect by notice to Lessee or by the recording of a unilateral declaration of subordination, then this Agreement and Lessee's rights hereunder shall be superior and prior in right to the Lien of which such Lender has the benefit, with the same force and effect as if this Agreement had been executed, delivered and recorded prior to the execution, delivery and recording of such Lien, as the case may be, subject, nevertheless, to such conditions as may be set forth in any such notice of declaration. The term "Lien" means any mortgage, deed of trust or other security instrument constituting a lien upon all or any portion of the Lessor's Property. The term "Lender" means a party having the benefit of the Lien, whether as mortgagee, trustee, note holder or otherwise. Lessor shall make a reasonable effort to obtain from any Lender an agreement that the Lender shall not disturb Lessee's quiet possession in the event of foreclosure. If any proceedings are brought for foreclosure, or in the event the exercise of the power of sale under any mortgage or deed of trust made by the Lessor encumbering the Leased Space, Lessee shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Lessor under this Agreement. 23.9 BINDING EFFECT. The provisions of this Agreement shall apply to, bind and inure to the benefit of Lessor and Lessee, their respective successors, legal representatives or assigns. 23.10 ENTIRE AGREEMENT/MODIFICATIONS. This Agreement contains the entire understanding and agreement between the parties. No representative, agent or employee of Lessor has been authorized to make any representations or promises with reference to the within agreement or to vary, alter or modify the terms hereof. No additions, changes or modifications shall be binding unless reduced to writing and signed by the parties. 23.11 RESOLUTION OF CLAIMS AND DISPUTES. Regardless of the place of execution, this Agreement shall be deemed to be a contract made in Houston, Texas and shall be interpreted as a contract to be performed wholly in the State of Texas. The law of the State of Texas shall be applied without regard to the principles of conflicts of laws. Lessee expressly waives any presumption or rule, if any, which requires this Agreement to be construed against Lessor. Any claims or disputes arising out of this Agreement shall be resolved only by mediation or, if mediation does not resolve the claim or dispute within ten (10) days of notice demanding mediation, by arbitration in accordance with the Rules for Commercial Arbitration of the American Arbitration Association and any award therefrom shall be rendered by the arbitrators as a judgment in any trial court having jurisdiction in the City of Houston, Texas, or of any other court having competent jurisdiction. 23.12 WAIVER. Failure of any party to complain of any act or omission on the part of any other party in breach or default of this Agreement, no matter how long the same may continue, shall not be deemed to be a waiver by said party of any of its rights hereunder. No waiver by any party at any time, express or implied, of any breach of any provision of this Agreement shall be deemed a waiver of a breach of any other provision of this Agreement or a consent to any subsequent breach of the same or other provisions. 23.13 ESTOPPEL. Either party shall at any time, upon ten (10) days' prior written request from the other party, execute, acknowledge and deliver to the requesting party a statement in writing (a) certifying this Agreement to be unmodified and in full force and effect (or, if modified, stating the nature of such modification), and the date to which the rent and other charges have been paid in advance, if any uncured defaults hereunder on the part of the requesting party, or specifying such defaults if they are claimed. 23.14 REASONABLENESS. Except as specifically set forth herein to the contrary, any approval, consent or permission required to be given hereunder by any party shall not be unreasonably withheld, delayed or conditioned. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. LESSOR: LESSEE: SONSINGER BROADCASTING COMPANY OF SOUTH TEXAS BROADCASTING INC. KKHT-FM HOUSTON, LLP By Sonsinger Management, Inc. its General Partner By: /s/ ERIC H. HALVORSON By: /s/ ERIC H. HALVORSON -------------------------------- -------------------------------- Eric H. Halvorson Eric H. Halvorson Vice President Vice President 14 15 EXHIBIT A COMMENCEMENT DATE AGREEMENT This Commencement Date Agreement is entered into on this 1st day of June, 1998, between SOUTH TEXAS BROADCASTING, INC. KKHT-FM. ("Lessee"), and SONSINGER BROADCASTING COMPANY OF HOUSTON, LP. ( "Lessor"). WHEREAS, Lessor and Lessee entered into a lease dated June 1, 1998 (the "Lease"), setting forth the terms of occupancy and use by Lessee of a certain tower on Lessor's Property, as defined in the Lease; and WHEREAS, the Lease is for a term of ten (10) years with the "Commencement Date" of the term being defined in Section 3.1 of the Lease; and WHEREAS, it has been determined in accordance with the provisions of Section 3.1 of the Lease that July 1, 1998 is the Commencement Date of the term of the Lease; and WHEREAS, the Lease provides that the parties shall execute a confirmation of the actual Commencement Date of the term thereof, when such date has been determined. NOW, THEREFORE, the parties hereto confirm that the Commencement Date of the term of the Lease is July 1, 1998. This Agreement is executed by the parties for the purpose of providing a record of the Commencement Date of the term of the Lease and commencement of rental payments and does not modify, amend or alter any of the terms or conditions of the Lease. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. IN WITNESS WHEREOF, the parties have executed this Commencement Date Agreement as of the day and year first above written. LESSOR: LESSEE: SONSINGER BROADCASTING COMPANY SOUTH TEXAS BROADCASTING, INC. KKHT-FM By Sonsinger Management, Inc., its General Partner By: /s/ ERIC H. HALVORSON By: /s/ ERIC H. HALVORSON -------------------------------- -------------------------------- Eric H. Halvorson Eric H. Halvorson Vice President Vice President 15 EX-10.05.23 4 LEASE AGREEMENT FOR KTEK-AM 1 EXHIBIT 10.05.23 LEASE AGREEMENT This Agreement ("Agreement") is made as of the 30th day of October, 1998, by and between EDWARD G. ATSINGER III and MONA J. ATSINGER, not individually but solely as Trustees of the ATSINGER FAMILY TRUST, and STUART W. EPPERSON, not individually but solely as Trustee of the STUART W. EPPERSON REVOCABLE LIVING TRUST, collectively referred to herein as "Lessor", and INSPIRATION MEDIA OF TEXAS, INC. ("Lessee"), a Texas corporation. WHEREAS, Lessor owns certain land (the "Land") and Lessee owns certain improvements thereon (the "Improvements"), which Land and Improvements together comprise certain parcels of real property located in the County of Brazoria, State of Texas, more particularly described as set forth in Exhibit "A", which is attached hereto and made a part hereof (the "Real Property"); and, WHEREAS, Lessee uses said Real Property in operating its radio station KTEK-AM, Alvin, Texas; and, WHEREAS, the parties are desirous of making a mutually suitable and satisfactory agreement whereby Lessor will lease to Lessee the Real Property (constituting the "Leased Premises") on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the following covenants, agreements, conditions and representations, the parties hereto agree as follows: SECTION 1 USE OF THE LEASED PREMISES (a) Lessor, in consideration of the rents to be paid and covenants herein contained, hereby leases to Lessee the Leased Premises. (b) Lessee may use the Leased Premises for the operation of its radio station, and, in connection therewith, for the installation, repair, maintenance, operation, housing and removal of its Improvements and other related broadcasting equipment (together comprising the "Installations"). Lessee is fully familiar with the physical condition of the Land and has received the same in good order and condition, and agrees that the Land complies in all respects with all requirements of this Agreement. Lessee shall use the Land exclusively for purposes associated with the operation of a radio station. (c) Lessee shall have the right from time to time to substitute Installations of similar kind and character for those hereinabove specified, provided such changes shall be approved in advance by Lessor, and Lessor shall not unreasonably delay or withhold its approval. In the event Lessee submits any such changes for Lessor's approval and Lessor does not respond within thirty (30) days after Lessor's receipt thereof, then such changes shall be deemed approved by Lessor, so long as such changes otherwise comply with this Agreement, five (5) days after Lessor's receipt of notice that it has not responded. 2 (d) Lessee shall have access to the Leased Premises twenty-four (24) hours per day, seven (7) days per week, for the purpose of installing, maintaining and repairing its Installations, provided that the contractors performing such work are reasonably acceptable to Lessor. (e) Lessor shall not be responsible for repairs or maintenance to the Installations, except for repairs occasioned by the negligence of Lessor, its agents, employees or contractors. (f) During the Term (as hereinafter defined), Lessor and Lessee shall each provide the other with a telephone number which, if called will ring at a location that is staffed by their respective agents twenty-four (24) hours each and every day, seven (7) days each and every week; and Lessor and Lessee shall notify each other promptly in the event of any change in such telephone number. (g) Lessee shall not use or permit the Leased Premises to be used by any dangerous, toxic, noxious or offensive trade or business, or for any unlawful purpose. (h) Lessee shall not directly or indirectly create or permit to be created or to remain, and will discharge any mortgage, lien, security interest, encumbrance or charge on, pledge of or conditional sale or other title retention agreement with respect to the Real Property or any part thereof or Lessee's interest therein other than (i) this Agreement, (ii) any lien, including a mortgage on the leasehold interest of Lessee, which may be approved by the Lessor in writing, which approval shall not be unreasonably withheld, (iii) liens for impositions not yet payable, or payable without the addition of any fine, penalty, interest or cost for non-payment, or being contested as permitted by Paragraph 3(d), below, and (iv) liens of mechanics, materialmen, suppliers or vendors, or rights thereto, incurred in the ordinary course of business for sums which under the terms of the related contracts are not at the time due, provided that adequate provision for the payment thereof shall have been made. SECTION 2 TERM AND RENT (a) The term of this Lease (the "Term") shall commence on October 30, 1998 (the "Commencement Date"), and shall expire on October 30, 2008 (the "Expiration Date"). If the Term has been extended as provided in subparagraph (b), below, the Expiration Date shall be the last day of the Term as so extended. (b) Lessee shall have the option, if Lessee is not at the time in default under this Agreement, to extend the Term of this Agreement for up to two (2) successive periods of five (5) years each (the "Extended Terms"), and, except as set forth in subparagraph (c), below, on the same terms, covenants and conditions herein contained. The word "Term" as used in this Agreement shall be deemed to include the Extended Terms when and if the Agreement is extended. Each option to extend the Term shall be exercised only by Lessee's delivery to Lessor by United States mail on or before ninety (90) days prior to the commencement of the renewal term of written notice of Lessee's election to extend as provided herein. -2- 3 (c) Lessee agrees to pay rent to Lessor from the Commencement Date through the Expiration Date, or such earlier date as this Agreement is terminated as provided herein, at 4880 Santa Rosa Road, Suite 300, Camarillo, CA 93012, Attn: Accounting, or to such other person or place as Lessor may designate from time to time by notice to Lessee, in the following amounts and in the following manner: (i) During the first year beginning with the Commencement Date Lessee shall pay a base rent of SIXTEEN THOUSAND EIGHT HUNDRED AND NO/100 DOLLARS ($16,800) per annum, in equal monthly installments of ONE THOUSAND FOUR HUNDRED AND NO/100 DOLLARS ($1,400.00) (the "Base Rent") in advance on the first day of each month; and thereafter on each and every Adjustment Date (hereinafter defined) the monthly rent shall be computed according to subparagraph (ii) below. (ii) The term "Adjustment Date" shall mean the first (1st) through the ninth (9th) anniversaries of the Commencement Date. During the one (1) year period beginning with each Adjustment Date, the monthly rent payable by Lessee shall reflect an adjustment, as herein provided, for an increase, if any, in the Consumer Price Index for All Urban Consumers, All Items, U.S. Cities Average [Base Year 1982/84=100] ("CPI") published by the United States Department of Labor, Bureau of Labor Statistics, as measured in February of each year; i.e., during the one (1) year period beginning with the Adjustment Date, the monthly rent shall be the product obtained by multiplying the Base Rent times a fraction, the numerator of which shall be the CPI for February of the year in which the Adjustment Date falls and the denominator of which shall be the CPI for February of the year in which the Commencement Date falls. Notwithstanding the results of the foregoing calculation, the monthly amount payable by Lessee hereunder shall not in any event be less than the monthly rental paid during the immediately preceding one (1) year period. In the event that the Bureau of Labor Statistics shall change the base period for the CPI, the new index number shall be substituted for the old index numbers in making the above computation. In the event the Bureau of Labor Statistics ceases publishing the CPI, or materially changes the method of its computation, Lessor and Lessee shall accept comparable statistics on the purchasing power of the consumer dollar as published at the time of said discontinuation or change by a responsible financial periodical of recognized authority to be then chosen by Lessor subject to reasonable consent of Lessee. (d) Rent and all other sums payable to Lessor hereunder shall be paid without notice, demand, counterclaim, set-off, deduction or defense and without abatement, suspension, deferment, diminution or reduction. Except as expressly provided herein, Lessee waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Agreement or the Real Property or any part thereof, or to any abatement, suspension, deferment, diminution or reduction of rent or any other sum payable by Lessee hereunder. SECTION 3 CHARGES AND UTILITIES (a) Lessee, at its sole expense, shall keep the Real Property and the adjoining streets and -3- 4 ways in good and clean order and condition and will promptly make all necessary or appropriate repairs, replacements and renewals thereof, whether interior or exterior, structural or non-structural, ordinary or extraordinary, foreseen or unforeseen. All repairs, replacements and renewals shall be equal in quality and class to the original work. Lessee waives any right created by any law now or hereafter in force to make repairs to the Real Property at Lessor's expense. Lessee, at its sole expense, shall do or cause others to do every act necessary or appropriate for the preservation and safety of the Real Property whether or not the Lessor shall be required by any legal requirement to take such action or be liable for failure to do so. (b) If not at the time in default under this Agreement, Lessee, at its sole expense, may make reasonable alterations of and additions to the Improvements or any part thereof, provided that any alteration or addition (i) shall not change the general character of the Improvements, or reduce the fair market value thereof below their value immediately before such alteration or addition, or impair their usefulness, (ii) is effected with due diligence, in a good and workmanlike manner and in compliance with all legal requirements and insurance requirements, (iii) is promptly and fully paid for by Lessee, (iv) is made, in case the estimated cost of such alteration or addition exceeds Ten Thousand Dollars ($10,000), under the supervision of an architect or engineer satisfactory to Lessor and in accordance with plans, specifications and cost estimates approved by Lessor, and (v) does not interfere with Lessor's rights of use under this Agreement. (c) Subject to subparagraph (d), below, relating to contests, Lessee shall pay all taxes, assessments (including without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term hereof), ground rents, water, sewer or similar rents, rates and charges, excises, levies, license fees, permit fees, inspection fees and other authorization fees and other charges in each case, whether general or special, ordinary or extraordinary, foreseen or unforeseen, of every character (including all interest and penalties thereof), which at any time during or in respect of the Term hereof may be assessed, levied, confirmed or imposed on or in respect of or be a lien upon the Real Property or any part thereof or any rent therefrom or any estate, right or interest therein, or any occupancy, use or possession of or activity conducted on the Real Property or any part thereof, other than any income or excess profits tax imposed upon the Lessor's general income or revenues, but excluding any income or excess profits or franchise taxes of Lessor determined on the basis of general income or revenue or any interest or penalties in respect thereof. Lessee shall furnish to Lessor for inspection within thirty (30) days after written request, official receipts of the appropriate taxing authority or other proof satisfactory to Lessor evidencing such payment. If by law any such amount may be paid in installments, Lessee shall be obligated to pay only those installments as they become due from time to time before any interest, penalty, fine or cost may be added thereto; and any such amount relating to the fiscal period of the taxing authority, part of which is included within the Term and a part of which extends beyond the Term shall, if Lessee shall not be in default under this Agreement, be apportioned between Lessee and Lessor as of the expiration of the Term of this Agreement. (d) Lessee, at its sole expense, may contest, after prior written notice to Lessor, by appropriate legal proceedings conducted in good faith and with due diligence, the amount or -4- 5 validity or application, in whole or in part, of any tax, lien or other imposition on the Real Property, provided that (i) Lessee shall first make all contested payments, under protest if it desires, (ii) neither the Real Property nor any part thereof or interest therein nor any such rents or other sums would be in any danger of being sold, forfeited, lost or interfered with, and (iii) Lessee shall have furnished such security, if any, as may be required in the proceedings or reasonably requested by Lessor. (e) Lessee shall pay or cause to be paid all charges for all public or private utility services and all sprinkler systems and protective services at any time rendered to or in connection with the Real Property or any part thereof, will comply with all contracts relating to any such services, and will do all other things required for the maintenance and continuance of all such services. SECTION 4 INSURANCE AND INDEMNIFICATION (a) Lessee shall, at its sole cost and expense, during the Term hereof, obtain or provide and keep in full force for the benefit of Lessor, as an additional named insured (i) general public liability insurance, insuring Lessor against any and all liability or claims or liability arising out of, occasioned by or resulting from any accident or other occurrence in or about the Real Property arising out of any act or omission of Lessee or any officer, employee, agent or contractor of Lessee, for injuries to any person or persons, with limits of not less than One Million Dollars ($1,000,000.00) for injuries to one person, One Million Dollars ($1,000,000.00) for injuries to more than one person, in any one accident or occurrence, and for loss or damage to the property of any person or persons, for not less than One Million Dollars ($1,000,000.00); (ii) insurance with respect to the Improvements against loss or damage by fire, lightning, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, aircraft, vehicles, smoke and other risks from time to time included under "extended coverage" policies, in an amount equal to at least One Hundred Percent (100%) of the full replacement value of the Improvements and, in any event, in an amount sufficient to prevent Lessor or Lessee from becoming a co-insurer of any partial loss under the applicable policies, which shall be written on a replacement cost basis; (iii) appropriate workers' compensation or other insurance against liability arising from claims of workers in respect of and during the period of any work on or about the Real Property; and (iv) insurance against such other hazards and in such amounts as is customarily carried by owners and operators of similar properties, and as Lessor may reasonably require for its protection. Lessee shall comply with such other requirements as Lessor, or any mortgagee, may from time to time reasonably request for the protection by insurance of their respective interests. The policy or policies of insurance maintained by Lessee pursuant to this Paragraph shall be of a company or companies authorized to do business in California and a certificate thereof shall be delivered to Lessor, together with evidence of the payment of the premiums therefor, not less than fifteen (15) days prior to the commencement of the Term hereof or of the date when Lessee shall enter upon the Leased Premises, whichever occurs sooner. At least fifteen (15) days prior to the expiration or termination date of any policy, Lessee shall deliver a certificate of a renewal or replacement policy with proof of the payment of the premium therefor. Any such insurance -5- 6 required by this Paragraph may, at Lessee's option, be provided through a blanket policy or policies. (b) Lessee shall indemnify Lessor and hold Lessor harmless from and against all claims, actions, losses, damages, liabilities and expenses (including reasonable attorneys' fees) incurred by or asserted against Lessor, whether during or after the Term of this Agreement, including by reason of personal injury, loss of life, or damage to property, caused by or resulting from in whole or any material part, (i) any breach of this Agreement by Lessee, (ii) any negligent or intentional act or omission of Lessee, its employees, agents, invitees or contractors, whether in, on, about or with respect to the Leased Premises or otherwise, (iii) the use by Lessee of any part of the Leased Premises, (iv) any work undertaken by or at the request of Lessee on or about the Leased Premises, (v) any other activity undertaken by or at the request of Lessee pursuant to or in connection with this Agreement, or (vi) the presence of any individuals on the Leased Premises as a result of Lessee's request or this Agreement; provided, however, that Lessee shall not be required to indemnify Lessor for any damages, injury, loss or expense arising out of Lessor's or its agents', employees', invitees' or contractors' negligent acts or omissions. (c) If Lessor so elects by notice to Lessee, Lessee shall have the obligation of defending, at its sole cost and expense, by counsel selected by Lessee and approved by Lessor (such approval not to be unreasonably withheld), against any claim to which the foregoing indemnity may apply. Lessor may assume, or require that such defense be assumed, by Lessor and counsel selected by Lessor, at the cost and expense of Lessee if Lessor is for any reason dissatisfied with the defense by Lessee, or believes that its interests would be better served thereby. In any case where Lessee is defending any such claim, Lessor may participate in the defense thereof by counsel selected by it, but at Lessor's expense. Lessee shall not enter into any settlement of any claim without the consent of Lessor, which consent shall not be unreasonably withheld. (d) Lessor shall indemnify Lessee and hold Lessee harmless from and against all claims, actions, losses, damages, liabilities and expenses (including reasonable attorneys' fees) incurred by or asserted against Lessee, whether during or after the Term of this Agreement, including by reason of personal injury, loss of life, or damage to property, caused by or resulting from in whole or any material part, (i) any breach of this Agreement by Lessor, (ii) any negligent or intentional act or omission of Lessor, its employees, agents, invitees or contractors, whether in, on, about or with respect to the Leased Premises or otherwise, (iii) the use by Lessor of any part of the Leased Premises, (iv) any work undertaken by or at the request of Lessor on or about the Leased Premises, (v) any other activity undertaken by or at the request of Lessor pursuant to or in connection with this Agreement, or (vi) the presence of any individuals on the Leased Premises as a result of Lessor's request or this Agreement; provided, however, that Lessor shall not be required to indemnify Lessee for any damages, injury, loss or expense arising out of Lessee's or its agents', employees', invitees' or contractors' negligent acts or omissions. (e) If Lessee so elects by notice to Lessor, Lessor shall have the obligation of defending, at its sole cost and expense, by counsel selected by Lessor and approved by Lessee (such approval not to be unreasonably withheld), against any claim to which the foregoing indemnity may apply. Lessee may assume, or require that such defense be assumed, by Lessee and counsel -6- 7 selected by Lessee, at the cost and expense of Lessor if Lessee is for any reason dissatisfied with the defense by Lessor, or believes that its interests would be better served thereby. In any case where Lessor is defending any such claim, Lessee may participate in the defense thereof by counsel selected by it, but at Lessee's expense. Lessor shall not enter into any settlement of any claim without the consent of Lessee, which consent shall not be unreasonably withheld. (f) Nothing in this Agreement shall be construed so as to authorize or permit any insurer of Lessor or Lessee to be subrogated to any right of Lessor or Lessee against the other. Each of Lessor and Lessee hereby releases the other to the extent of its insurance coverage for any loss or damage caused by fire or any of the extended coverage casualties, even if such fire or other casualty shall be brought about by the fault or negligence of the other party or persons for whose acts said party is liable. SECTION 5 REPRESENTATIONS, WARRANTIES AND OTHER OBLIGATIONS (a) Lessor represents and warrants that: (i) The execution and performance of this Agreement shall not constitute a breach or violation under any Agreement to which Lessor is a party. (ii) To the best of Lessor's knowledge, there are no violations of any federal, state, county or municipal law, ordinance, order, regulations or requirement with respect to the Leased Premises, and as of the date of this Agreement, no notice of any kind relating thereto (which would adversely affect the transactions contemplated by this Agreement) has been issued by public authorities having jurisdiction over the Leased Premises. (iii) No person or party other than Lessor has a right to use the Leased Premises for any purpose which would affect Lessee's right to use the Leased Premises as contemplated hereunder. (iv) Lessor has not received written notice of pending or contemplated condemnation proceedings affecting the Leased Premises or any part thereof. (v) To the best of Lessor's knowledge, there is no action, suit or proceeding pending or threatened against or affecting the Leased Premises or any portion thereof and Lessor has not received notice written or otherwise of any litigation affecting or concerning the Leased Premises relating to or arising out of its ownership, management, use or operation. Lessor shall give to Lessee prompt notice of institution of any such proceeding or litigation. (vi) To the best of Lessor's knowledge, there are presently no proceedings for overdue real estate taxes assessed against the Leased Premises for any fiscal period. (vii) Lessor shall promptly advise Lessee in writing of any written notice received from any governmental authority to comply with the terms, provisions and requirements -7- 8 of any local, state and federal laws, ordinances, directives, orders, regulations and requirements which apply to any portion of the Leased Premises or to any adjacent street or other public area or to the maintenance, operation or use thereof. (viii) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary actions on the part of Lessor (none of which actions have been modified or rescinded and all of which actions are in full force and effect). This Agreement constitutes a valid and binding agreement and obligation of Lessor, enforceable in accordance with its terms. (ix) Subject to liens and encumbrances of record, Lessor owns good and marketable title in fee simple to the Real Property on which the Leased Premises are located, and Lessor acknowledges that Lessee is relying upon the foregoing representation and warranty in entering into this Agreement and in expending moneys in connection herewith. Lessor shall not encumber or permit any encumbrances, liens or restrictions on Lessee's Installations, except with the prior written approval of Lessee. (b) Each party shall comply in all material respects with all local, state and federal laws, statutes, ordinances, rules, regulations, orders and decrees that it knows to be applicable in connection with its activities and operations at the Leased Premises, and Lessor shall require the same representation and warranty from all additional users of the facilities at the Leased Premises. (c) The parties agree that, during the Term of this Agreement neither party shall intentionally do anything at the Leased Premises which will interfere with or adversely affect the operations of the other party. (d) In the event that during the Term of this Agreement there shall be an actual condemnation or foreclosure and taking of all of the Leased Premises, or a portion thereof such that it renders the premises unsuitable for broadcasting, this Agreement may be terminated by written notice from either party to the other and thereafter each of the parties shall be relieved of any future liability to the other under this Agreement, except as to obligations accrued and not yet discharged at the date of termination. Following any condemnation or foreclosing order, Lessee may continue to use the property for operations under the terms of this Agreement until Lessee finds and begins to utilize new facilities or until prevented by the condemning or foreclosing authority from utilizing the Leased Premises, whichever occurs first. (e) Lessee represents and warrants that its Installations to be located on or about the Leased Premises, together with the existence of the equipment of Lessor, and the operation thereof do not and will not result in exposure of workers or the general public to levels of radio frequency radiation in excess of the "Radio Frequency Protection Guides" recommended in "American National Standard Safety Levels With Respect to Human Exposure to Radio Frequency Electromagnetic Fields, 300 KHz to 100 GHz," issued by the American National Standards Institute ("Acceptable Radio Frequency Radiation Standards"). -8- 9 (f) Lessee covenants that it will not at any time during the Term of this Agreement, transmit, store, handle or dump toxic or hazardous wastes anywhere at or around the Leased Premises. (g) Lessee shall promptly advise Lessor in writing of any written notice received from any governmental authority to comply with the terms, provisions and requirements of any local, state and federal laws, ordinances, directives, orders, regulations, and requirements which apply to any portion of the Leased Premises or to any adjacent street or other public area or the maintenance, operation or use thereof. (h) Lessee represents and warrants that the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary actions on the part of Lessee (none of which actions have been modified or rescinded and all of which actions are in full force and effect). This Agreement constitutes a valid and binding agreement and obligation of Lessee, enforceable in accordance with its terms. (i) Lessee warrants unto Lessor that the Improvements (including the radio tower(s) located on the Real Property) are and will remain in material compliance at all times during the Term and any Extension Term with all federal, state, county, municipal, local, administrative and other governmental laws, statutes, ordinances, codes, rules, regulations and orders pertaining thereto, including, without limitation, to the extent applicable, all zoning laws and building codes and all regulations of the Federal Aviation Administration ("FAA") and the Federal Communications Commission ("FCC"). (j) In case of any material damage to or destruction of the Real Property or any part thereof, Lessee shall promptly give written notice thereof to Lessor and any mortgagee, generally describing the nature and extent of such damage or destruction. In case of any damage to or destruction of the Improvements or any parts thereof, Lessee, whether or not the insurance proceeds, if any, on account of such damage or destruction shall be sufficient for the purpose, at its sole expense, shall promptly commence and complete the restoration, replacement or rebuilding of the Improvements as nearly as possible to their value, condition and character immediately prior to such damage or destruction. (k) Lessee will execute, acknowledge and deliver to the Lessor, promptly upon request, a certificate certifying that (i) this Agreement is unmodified and in full force and effect (or, if there have been modifications, that the Agreement is in full force and effect, as modified, and stating the modifications), (ii) the dates, if any, to which rent and other sums payable hereunder have been paid, and (iii) no notice has been received by Lessee of any default which has not been cured, except as to defaults specified in said certificate. Any such certificate may be relied upon by any prospective purchaser or mortgagee of the Real Property or any part thereof. (l) Lessor will execute, acknowledge and deliver to the Lessee or any mortgagee, promptly upon request, a certificate certifying that (i) this Agreement is unmodified and in full force and effect (or, if there have been modifications, that the Agreement is in full force and -9- 10 effect, as modified, and stating the modifications), (ii) the dates, if any, to which rent and other sums payable hereunder have been paid, and (iii) whether or not, to the knowledge of Lessor, there are then existing any defaults under this Agreement (and if so, specifying the same). Any such certificate may be relied upon by any prospective purchaser transferee or mortgagee of Lessee's interest under this Agreement. SECTION 6 EVENTS OF DEFAULT (a) Any of the following events shall constitute a default on the part of Lessee: (i) The failure of Lessee to pay rent or additional rent, and continuation of such failure for more than ten (10) days after Lessee's receipt of written notice thereof from Lessor; provided, however, that Lessor shall not be required to provide such written notice to Lessee more than twice in any twelve (12) month period prior to declaring such failure to pay an event of default; or (ii) The failure of Lessee to cure any other default under the terms hereof, and continuation of such failure to cure for more than thirty (30) days after notice by Lessor, provided, however, that if the nature of Lessee's default is such that more than thirty (30) days is required for its cure, then Lessee shall not be deemed to be in default if Lessee has commenced such cure within the thirty (30) day period, demonstrates to Lessor's reasonable satisfaction that such default is curable and thereafter diligently prosecutes such cure to completion; or (iii) Lessee is finally and without further right of appeal or review, adjudicated a bankrupt or insolvent, or has a receiver appointed for all or substantially all of its business or assets on the ground of its insolvency, or has a trustee appointed for it after a petition has been filed for Lessee's reorganization under the Bankruptcy Act of the United States, or any future law of the United States having the same general purpose, or if Lessee shall make an assignment for the benefit of its creditors, or if Lessee's interest hereunder shall be levied upon or attached, which levy or attachment shall not be removed within twenty (20) days from the date thereof. (b) If an event of default on the part of Lessee shall occur at any time, Lessor, at its election, may give Lessee a notice of termination specifying a day not less than thirty (30) days thereafter on which the Term of this Agreement shall end, unless such default shall be cured within said period, or, if the default is such that more than thirty (30) days is required for its cure, unless Lessee has commenced such cure within said period. If such notice is given, the Agreement shall expire on the day so specified as fully and completely as if that day were the day herein originally fixed for such expiration, and Lessee shall then quit and surrender the Leased Premises to Lessor, but Lessee shall remain liable for the payment of rent during the full period which would otherwise constitute the balance of the Term of this Agreement; and without prejudice to any other right or remedy which it may have hereunder or by law, and notwithstanding any waiver of any prior breach of condition or event of default hereunder, Lessor may re-enter the Leased Premises either by reasonable force or otherwise, or dispossess -10- 11 Lessee, any legal representative of Lessee or other occupant of the Leased Premises by appropriate suit, action or proceeding and remove its effects and hold the Leased Premises as if this Agreement had not been made. (c) The failure of Lessor to cure any default under the terms hereof, and continuation of such failure to cure for more than thirty (30) days after notice by Lessee, shall constitute a default on the part of Lessor; provided, however, that if the nature of Lessor's default is such that more than thirty (30) days is required for its cure, then Lessor shall not be deemed to be in default if Lessor has commenced such cure within the thirty (30) day period, demonstrates to Lessee's reasonable satisfaction that such default is curable and thereafter diligently prosecutes such cure to completion. (d) If an event of default on the part of Lessor shall occur at any time, Lessee, at its election, may give Lessor a notice of termination specifying a day not less than thirty (30) days thereafter on which the Term of this Agreement shall end, unless such default shall be cured within said period, or, if the default is such that more than thirty (30) days is required for its cure, unless Lessor has commenced such cure within said period. If such notice is given, the Agreement shall expire on the day so specified as fully and completely as if that day were the day herein originally fixed for such expiration, and Lessee shall then quit and surrender the Leased Premises to Lessor, and Lessee shall not be liable for payment of rent for any period after such expiration. SECTION 7 ASSIGNMENT Lessee shall not assign this Agreement nor sublet any portion of the Leased Premises without the prior written consent of the Lessor, which consent shall not be unreasonably withheld. Notwithstanding any assignment or sublease, Lessee shall remain primarily liable under this Agreement. SECTION 8 SUBORDINATION, NONDISTURBANCE AND ATTORNMENT This Agreement shall not be a lien against the Leased Premises in respect to any mortgages and security agreements placed or hereafter to be placed by Lessor upon the Leased Premises. The recording of such mortgages and security agreements shall have preference and precedence and be superior and prior in lien to this Agreement, irrespective of the date of recording, and Lessee agrees to execute any instruments, without cost, which may be deemed necessary or desirable to further effect the subordination of this Agreement. Lessor shall make a reasonable effort to obtain from any mortgagees or lenders holding an interest in the nature of a mortgage in the Leased Premises an agreement that the mortgagee or lender shall not disturb Lessee's quiet possession in the event of foreclosure. If any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by the Lessor encumbering the Leased Premises, Lessee shall attorn to the purchaser -11- 12 upon any such foreclosure or sale and recognize such purchaser as the Lessor under this Lease. SECTION 9 NON-LIABILITY OF LESSOR Lessor shall not be liable for any damages or injury which may be sustained by Lessee or any other person by reason of the failure, breakage, leakage or obstruction of the water, sewer, plumbing, roof, drains, leaders, electrical, air conditioning or any other equipment; or by reason of the elements; or resulting from the carelessness, negligence or improper conduct of Lessee, its agents, employees, contractors, invitees, assignees or successors; or attributable to any interference with or the interruption of or failure of any services, beyond the control of Lessor, to be supplied by Lessor. SECTION 10 QUIET ENJOYMENT (a) Lessor agrees that it shall not enforce any unreasonable rules or regulations which would unduly prejudice the conduct of Lessee's business, or which would prevent full and free access to the Leased Premises by Lessee, as herein provided. (b) Lessor reserves and shall at all times have the right to re-enter the Real Property to inspect the same, to supply any service to be provided by Lessor to Lessee hereunder, and to show the Real Property to prospective purchasers, mortgagees, or lessees, to post notices of non-responsibility, without abatement of rent, provided entrance to the Real Property shall not be denied Lessee. SECTION 11 SALE OF LEASED PREMISES BY LESSOR Notwithstanding any of the provisions of this Lease, Lessor (a) may assign, in whole or in part, Lessor's interest in this Lease and (b) may sell all or part of the Real Property. In the event of any sale or exchange of the Leased Premises by Lessor and assignment by Lessor of this Lease, Lessor shall be and is hereby relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Leased Premises occurring after the consummation of such sale or exchange and assignment, but only upon the condition that, as part of such sale or exchange, Lessor will cause the grantee to agree in writing to assume to carry out any and all of the covenants and obligations of Lessor under this Lease occurring after the consummation of Lessor's assignment of its interest in and to this Lease. -12- 13 SECTION 12 BROKERAGE The parties acknowledge and agree that this Agreement has not been brought about as a result of the services of any real estate broker, firm or corporation, and each indemnifies and saves the other harmless from any and all claims from any person(s) claiming to have rendered real estate services in connection with this Agreement. SECTION 13 SURRENDER OF PREMISES Upon the expiration of the Term hereof, Lessee shall surrender the Leased Premises, and, at Lessor's option, all interest of the Lessee in and to the Improvements (including the radio towers located on the Land), to Lessor in good order and condition, reasonable wear and tear excepted. Any equipment, fixtures, goods or other property of Lessee not removed within ten (10) days after any quitting, vacating or abandonment of the Leased Premises, or upon Lessee's eviction therefrom, shall be considered abandoned, and Lessor shall have the right, without notice to Lessee, to sell or otherwise dispose of same without having to account to Lessee for any part of the proceeds of such sale. SECTION 14 NOTICES All notices, demands, and requests required or permitted to be given hereunder shall be in writing and sent certified mail, return receipt requested, and if to Lessor, at 4880 Santa Rosa Road, Suite 300, Camarillo, CA 93012, Attn: Edward G. Atsinger III, and if Lessee, at 4880 Santa Rosa Road, Suite 300, Camarillo, CA 93012, Attn: Accounting. Either party hereto may change the place for notice to it by sending like written notice to the other party hereto. SECTION 15 BINDING NATURE The provisions of this Agreement shall apply to, bind and inure to the benefit of Lessor and Lessee, their respective successors, legal representatives or assigns. The terms of this Agreement and any disputes arising therefrom, shall be governed by the laws of the State of Texas. SECTION 16 ENTIRE AGREEMENT This Agreement contains the entire understanding and agreement between the parties. No -13- 14 representative, agent or employee of Lessor has been authorized to make any representations or promises with reference to the within agreement or to vary, alter or modify the terms hereof. No additions, changes or modifications shall be binding unless reduced to writing and signed by the parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. LESSOR: LESSEE ATSINGER FAMILY TRUST INSPIRATION MEDIA OF TEXAS, INC. /S/ EDWARD G. ATSINGER, III /S/ ERIC H. HALVORSON - ------------------------------------------ --------------------------------- EDWARD G. ATSINGER, III ERIC H. HALVORSON Trustee Vice-President STUART W. EPPERSON REVOCABLE LIVING TRUST /S/ STUART W. EPPERSON - ------------------------------------------ STUART W. EPPERSON Trustee -14- EX-12.01 5 COMPUTATION OF RATIOS 1 EXHIBIT 12.01 SALEM COMMUNICATIONS CORPORATION STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 ----------------------------------------------- 1994 1995 1996 1997 1998 ------ ------ ------- ------- ------- Pretax income (loss) from continuing operations............... $ 439 $ 312 $19,408 $(1,087) $(1,924) Interest expense...................... 3,668 6,646 7,361 12,706 15,941 Interest portion of rent expense...... 829 1,041 1,274 1,601 1,615 ------ ------ ------- ------- ------- Earnings............................ $4,936 $7,999 $28,043 $13,220 $15,632 ====== ====== ======= ======= ======= Interest expense...................... $3,668 $6,646 $ 7,361 $12,706 $15,941 Interest portion of rent expense...... 829 1,041 1,274 1,601 1,615 ------ ------ ------- ------- ------- Fixed charges....................... $4,497 $7,687 $ 8,635 $14,307 $17,556 ====== ====== ======= ======= ======= Ratio of earnings to fixed charges.... 1.1 1.0 3.2 0.9 0.9 ====== ====== ======= ======= =======
EX-21.01 6 SUBSIDIARIES OF SALEM 1 EXHIBIT 21.01 SUBSIDIARIES OF SALEM COMMUNICATIONS CORPORATION, A CALIFORNIA CORPORATION ATEP Radio, Inc. Bison Media, Inc. Caron Broadcasting, Inc. CCM Communications, Inc. Common Ground Broadcasting, Inc. Golden Gate Broadcasting Company, Inc. Inland Radio, Inc. Inspiration Media, Inc. Inspiration Media of Texas, Inc. Kingdom Direct, Inc. New England Continental Media, Inc. New Inspiration Broadcasting Company, Inc. Oasis Radio, Inc. OnePlace, Ltd. Pennsylvania Media Associates, Inc. Radio 1210, Inc. Salem Communications Corporation (a Delaware corporation) Salem Media of California, Inc. Salem Media of Colorado, Inc. Salem Media Corporation Salem Media of Ohio, Inc. Salem Media of Oregon, Inc. Salem Media of Pennsylvania, Inc. Salem Media of Texas, Inc. Salem Media of Virginia, Inc. Salem Music Network, Inc. Salem Radio Network Incorporated Salem Radio Representatives, Inc. South Texas Broadcasting, Inc. SRN News Network, Inc. Vista Broadcasting, Inc. EX-27.01 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,917 0 15,218 862 0 19,374 66,258 25,509 207,750 7,835 178,610 0 0 5,832 3,269 207,750 0 85,411 0 69,412 422 2,087 15,941 (1,924) (343) (1,581) 0 0 0 (1,581) 0 0
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