SALEM MEDIA GROUP, INC. /DE/ - Quarter Report: 2010 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

OR

[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________________ TO __________________

COMMISSION FILE NUMBER 000-26497

SALEM COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		77-0121400 (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
4880 SANTA ROSA ROAD CAMARILLO, CALIFORNIA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		93012 (ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-0400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X ]

No  [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  

Yes [   ]

No  [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.    

Large accelerated filer [   ]

Accelerated filer

   

 [      ]

Non-accelerated filer   [   ]

Smaller Reporting Company

 [ X  ]

(Do not check if a Smaller Reporting Company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]

No  [ X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A		Outstanding at August 3, 2010
Common Stock, $0.01 par value per share		18,490,617 shares

Class B		Outstanding at August 3, 2010
Common Stock, $0.01 par value per share		5,553,696 shares

SALEM COMMUNICATIONS CORPORATION
INDEX

			PAGE NO.
COVER PAGE
INDEX
FORWARD LOOKING STATEMENTS			3
PART I - FINANCIAL INFORMATION
	Item 1.   Condensed Consolidated Financial Statements.		4
	Item 2.   Management’s Discussion and Analysis of Financial Condition                and Results of Operations.		22
	Item 3.   Quantitative and Qualitative Disclosures About Market Risk.		38
	Item 4T.   Controls and Procedures.		39
PART II - OTHER INFORMATION			39
	Item 1.    Legal Proceedings.		39
	Item 1A. Risk Factors.		39
	Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.		39
	Item 3.   Defaults Upon Senior Securities.		39
	Item 4.   (Removed and Reserved)		39
	Item 5.   Other Information.		39
	Item 6.   Exhibits.		39
SIGNATURES			40
EXHIBIT INDEX			41

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FORWARD-LOOKING STATEMENTS

From time to time, in both written reports (such as this report) and oral statements, Salem Communications Corporation (“Salem” or the “company,” including references to Salem by “we,” “us” and “our”) makes “forward-looking statements” within the meaning of federal and state securities laws.  Disclosures that use words such as the company “believes,” “anticipates,” “estimates,” “expects,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995.  These forward-looking statements reflect the company’s current expectations and are based upon data available to the company at the time the statements are made.  Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations.  These risks, as well as other risks and uncertainties, are detailed in Salem’s reports on Forms 10-K, 10-Q and 8-K filed with or furnished to the Securities and Exchange Commission.  Forward-looking statements made in this report speak as of the date hereof.  Except as required by law, the company undertakes no obligation to update or revise any forward-looking statements made in this report. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by Salem about its business.  These projections or forward-looking statements fall under the safe harbors of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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PART I – FINANCIAL INFORMATION

SALEM COMMUNICATIONS CORPORATION

ITEM 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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SALEM COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
				December 31, 2009			June 30, 2010
				(Note 1)			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	8,945		$	3,475
	Restricted cash				100			100
	Trade accounts receivable (less allowance for doubtful accounts of $10,303 in 2009 and $9,519 in 2010)				27,289			27,047
	Other receivables				282			304
	Assets held for sale				—			676
	Prepaid expenses				3,177			3,858
	Deferred income taxes				4,700			4,916
Total current assets					44,493			40,376
Property, plant and equipment (net of accumulated depreciation of $107,141 in 2009 and $112,702 in 2010)					121,174			119,049
Broadcast licenses					375,317			375,317
Goodwill					17,642			18,110
Other indefinite-lived intangible assets					1,961			1,961
Amortizable intangible assets (net of accumulated amortization of $18,412 in 2009 and $19,300 in 2010)					2,881			6,094
Bond issue costs					7,078			6,896
Bank loan fees					1,515			1,341
Notes receivable					2,673			2,046
Other assets					4,311			4,635
Total assets				$	579,045		$	575,825
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	1,758		$	1,328
	Accrued expenses				5,318			6,871
	Accrued compensation and related expenses				4,677			5,162
	Accrued interest				2,450			1,243
	Deferred revenue				6,005			5,881
	Income tax payable				87			64
	Current portion of long-term debt and capital lease obligations				78			93
Total current liabilities					20,373			20,642
Long-term debt and capital lease obligations, less current portion					313,969			307,739
Deferred income taxes					38,973			39,763
Deferred revenue					7,728			7,912
Other liabilities					803			777
Total liabilities					381,846			376,833
Commitments and contingencies
Stockholders’ equity:
	Class A common stock, $0.01 par value; authorized 80,000,000 shares; 20,437,742 and 20,607,719 issued and 18,120,092 and 18,290,069 outstanding at December 31, 2009 and June 30, 2010, respectively				204			206
	Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding at December 31, 2009 and June 30, 2010				56			56
	Additional paid-in capital				228,839			229,728
	Retained earnings				2,106			3,008
	Treasury stock, at cost (2,317,650 shares at December 31, 2009 and June 30, 2010)				(34,006)			(34,006)
Total stockholders’ equity					197,199			198,992
Total liabilities and stockholders’ equity				$	579,045		$	575,825
See accompanying notes

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SALEM COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of Salem Communications Corporation (“Salem,” "we" or the “Company”) include the Company and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated.

Information with respect to the three and six months ended June 30, 2009 and 2010 is unaudited.  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the Company.  The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.  For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2009.

The balance sheet at December 31, 2009 included in this report has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP.

Description of Business

Salem is a domestic commercial radio broadcasting company that provides programming targeting audiences interested in Christian and family-themed content.  Our core business is the ownership and operation of radio stations in large metropolitan markets.  Upon the close of all announced transactions we will own and operate 95 radio stations across the United States.  We also own and operate Salem Radio Network® (“SRN”), SRN News Network (“SNN”), Salem Music Network (“SMN”), Reach Satellite Network (“RSN”), Salem Media Representatives (“SMR”) and Vista Media Representatives (“VMR”). SRN, SNN, SMN and RSN are radio networks that produce and distribute talk, news and music programming to numerous radio stations in the U.S., including some of our own stations.  SMR and VMR sell commercial air time to national advertisers for Salem’s radio stations and networks, as well as for independent radio station affiliates.  

In addition to our radio broadcast business, we also own and operate a non-broadcast media division.  This division consists of Salem Web Network (“SWN”), a provider of online Christian and conservative-themed content in addition to audio and video streaming, Salem Publishing™, a publisher of Christian magazines and Xulon Press^™, a provider of print-on-demand publishing services targeting the Christian audience. SWN’s content, both in text and audio, can be accessed through our national portals that include OnePlace.com, Crosswalk.com^®, Christianity.com and Townhall.com^®. SWN’s content can also be accessed through our local radio station websites, which provide content of interest to local listeners.  We also own and operate Salem Consumer Products, an online site providing books, DVD’s and editorial content.  The revenue and related operating expenses of these businesses are reported as “non-broadcast” on our condensed consolidated Statements of Operations.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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.  Significant areas for which management uses estimates are allowance for bad debts, income tax valuation allowance, impairment analysis for indefinite-lived intangible assets including broadcast licenses and goodwill, impairment analysis on other long-lived assets, stock-based compensation expense, and liabilities incurred under our partial self-insurance plan.  

NOTE 2. RECLASSIFICATIONS

Certain reclassifications were made to the prior year financial statements to conform to the current year presentation.  These reclassifications include the operating results of WRFD-AM, Columbus, Ohio which are now shown as part of continuing operations from discontinued operations.  We had entered into an Asset Purchase Agreement (“APA”) on July 31, 2008, to sell this radio station and exit the Columbus market.  At that time, the Condensed Consolidated Balance Sheets and Statements of Operations for all periods presented were reclassified to reflect the operating results and net assets of this market as a discontinued operation as of the date of the APA through December 2009.  The sale was expected to close in the fourth quarter of 2009.  On December 30, 2009, the buyer of the radio station advised us that they would not be able to meet the terms of the APA.  Because of the buyer terminating the agreement, we

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have reclassified the accompanying Condensed Consolidated Balance Sheets and Statements of Operations for all periods presented to reflect the operating results and net assets of this market in continuing operations.   

NOTE 3.  IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

We account for goodwill and other indefinite-lived intangible assets in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 350 “Intangibles—Goodwill and Other.”  We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired.  Broadcast licenses account for approximately 95% of our indefinite-lived intangible assets.  Goodwill and magazine mastheads account for the remaining 5%.  We complete our annual impairment tests in the fourth quarter of each year unless events or circumstances indicate that an asset may be impaired.  During the period ended June 30, 2010, we did not have indications of impairment for our broadcast licenses.  Based on deteriorating macro-economic factors, including declining radio industry revenues throughout 2009 and a weakening in prevailing radio station transaction multiples, we tested our broadcast licenses for impairment during the interim period ended June 30, 2009.  

The valuation of intangible assets is subjective and based on estimates rather than precise calculations. If actual future results are not consistent with the assumptions and estimates used, we may be exposed to impairment charges in the future, the amount of which may be material.  The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820 “Fair Value Measurements and Disclosures” as Level 3 inputs discussed in detail in Note 12 “Fair Value Accounting.”  

When performing our impairment testing for broadcast licenses we review the financial performance of the market clusters against established internal benchmarks.  The first step of our impairment testing process compares the fair value as determined from valuations obtained in prior periods from an independent third-party to the carrying value to determine the degree by which the amounts differ.  For our impairment reviews completed during 2009, we compared our actual operating revenues as of the period end to the projected revenues used in the most recent appraisals. Markets with actual operating results that exceeded the projections, which were not subject to changes in other assumptions such as the weighted average cost of capital, were deemed not to be impaired.

The second step of our impairment testing process compared the carrying value of the broadcast licenses for each market cluster to the station operating income (“SOI”) for each market cluster as of the period end.  If the carrying value of the broadcast licenses was less than six times the annualized SOI, the broadcast licenses were deemed not to be impaired. As radio stations are typically sold on the basis of a multiple of projected operating income usually up to a multiple of eight, we believe that a benchmark of six appears conservative even in today’s market.  We evaluate the SOI multiples used in our testing based on market data available as of each testing date.

For the market clusters that did not meet the internal benchmarks, Bond & Pecaro, an independent third-party appraisal and valuation firm, was engaged to perform an appraisal of the indefinite-lived asset(s). Bond & Pecaro utilized an income approach to value broadcast licenses.  The income approach measures the expected economic benefits that the broadcast licenses provides and discounts these future benefits using a discounted cash flow analysis. The discounted cash flow analysis assumes that the broadcast licenses are held by hypothetical start-up stations and the values yielded by the discounted cash flow analysis represent the portion of the stations value attributable solely to the broadcast license.  The discounted cash flow model incorporates variables such as projected revenues, operating profit margins, and a discount rate. The variables used reflect historical company growth trends, industry projections, and the anticipated performance of the business. The discounted cash flow projection period was determined to be ten years; which is typically the time radio station operators and investors expect to recover their investments as widely used by industry analysts in their forecasts.

The key assumptions used in the Bond & Pecaro analysis to estimate the fair value of each major category of assets in our broadcast segment for the interim period ended June 30, 2009, were as follows:

As of the interim testing period ended June 30, 2009:		Broadcast Licenses		Goodwill
Discount rate		9.5%		9.5%
Market growth rates next 12 months		(13.2%) - (15.2%)		(13.2%) - (15.2%)
Out-year market growth range		(0.2%) – 2.5%		(0.2%) – 2.5%
Market share range		0.7% - 20.2%		0.7% - 20.2%
Operating profit margin range		4.7% - 40.9%		4.7% - 40.9%

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We also test goodwill balances within the broadcast segment for impairment on an annual basis and between annual tests when there are indications of impairment.  The first step of our goodwill impairment test, used to identify potential impairment, compares the appraised fair value of the market cluster for markets with actual operating results that exceeded the estimates used in the appraisal model to the carrying value of the market cluster, including goodwill.  If the appraised fair value exceeded the carrying value, goodwill was deemed not to be impaired.  For market clusters that were not appraised, we determined the implied fair value of the market cluster as a multiple of SOI as noted in our second test of the FCC license value.  If the implied fair value exceeded the carrying value of the market cluster, goodwill was deemed not to be impaired.  Market clusters that did not meet these two tests were subject to appraisal.  

The second test of the goodwill impairment test, used to measure the impairment loss, compared either the appraised value or the implied fair value of the market cluster including goodwill to the carrying value of the market cluster including goodwill.  If the carrying value exceeded these amounts, a loss was recognized in an amount equal to the excess.  

The results of our impairment testing for our broadcast segment for the testing period ended June 30, 2009, was as follows:

As of the interim testing period ended June 30, 2009
Market Cluster		Indication of impairment based on internal benchmarks		Percentage by which fair value exceeds carrying value
Dallas-Fort Worth, TX		Yes		0.0%	(1)
Portland, OR		Yes		0.0%	(1)
Colorado Springs, CO		Yes		66.6%
Note (1)   Markets with a 0.0% spread between fair value and carrying value were deemed to be impaired as of the balance sheet date with corresponding adjustments to the FCC license value recorded.

As a result of our review and valuation for the testing period ended June 30, 2009, we recognized a pre-tax impairment charge of $12.1 million associated with the value of broadcast licenses in the Dallas and Portland markets and $0.4 million associated with the value of goodwill in the Dallas market.  These broadcast impairments were driven in part by declining revenue at the industry and market levels, declining radio stations transaction multiples and a higher cost of capital. The impairments are indicative of a trend in the broadcast industry and are not unique to the Company.

We also complete our non-broadcast annual impairment tests in the fourth quarter of each year unless events or circumstances indicate that an asset may be impaired.  Based on actual operating results that did not meet or exceed those projected in recent valuations, we determined that interim testing of our non-broadcast goodwill and other indefinite lived assets was appropriate as of the testing period ending June 30, 2010.  We also performed a review of these assets as of June 30, 2009, based on deteriorating macro-economic factors, including declining publishing revenues.

The first step of our impairment testing compares the fair value as determined from an independent third-party to the carrying value to determine the degree by which the amounts differed.  For our impairment reviews completed during 2010, we compared our actual operating revenues as of the period end to the projected revenues used in the most recent appraisals.  Reporting units with actual operating results that exceeded the projections, which were not subject to changes in other assumptions such as the weighted average cost of capital, were deemed not to be impaired.

The second step of our impairment testing process compared the carrying value of the indefinite-lived intangible assets, specifically mastheads and goodwill, for each reporting unit as of the testing date to the enterprise value. Enterprise value is defined as six times the net operating income for each reporting unit as of the trailing 12 months plus the net book value of the property, plant and equipment of the operating unit. As media entities are typically sold on the basis of a multiple of projected operating income, usually in excess of eight, we believe that a benchmark of six appears conservative even in today’s market. We evaluate the multiples used in our testing based on market data available as of each testing date. If the carrying value of the intangibles is less than the enterprise value, the intangible assets are deemed not to be impaired.

For the reporting units that did not meet the internal benchmarks, Bond & Pecaro, an independent third-party appraisal and valuation firm, was engaged to perform an appraisal of the indefinite-lived intangible asset(s). Bond & Pecaro utilized an income approach to estimate the fair value of the businesses. The income approach measures the expected economic benefits these assets bring to the holder. The fair value of the business may be expressed by discounting these future benefits. The discounted cash flow model incorporated variables such as projected revenues, operating cash flow margins, and a discount rate. The variables used reflect historical company growth trends, industry projections, and the anticipated performance of the business. The discounted cash flow projection period was determined to be ten years; which is typically the time media and technology property investors expect to recover their investments as widely used by industry analysts in their forecasts.

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The key assumptions used in the Bond & Pecaro analysis to estimate the fair value of each major category of assets in our non-broadcast segment for each testing period were as follows:

As of the interim testing period ended June 30, 2010		Other indefinite-lived intangible assets		Goodwill
Discount rate		9.0%		9.0%
Operating cash flow growth rate		2.0%		2.0%
Long-term growth rate		2.0%		2.0%

As of the interim testing period ended June 30, 2009:		Other indefinite-lived intangible assets		Goodwill
Discount rate		9.0%		9.0%
Operating cash flow growth rate		2.0%		2.0%
Long-term growth rate		2.0%		2.0%

We also test goodwill balances within the non-broadcast segment for impairment on an annual basis and between annual dates when there are indications of impairment. The first step of the goodwill impairment test is used to identify potential impairment by comparing the appraised fair value of the reporting unit to the carrying value of the reporting unit including goodwill. If the appraised fair value exceeded the carrying value, goodwill was deemed not to be impaired. For reporting units that were not appraised, we used the implied fair value of the reporting unit, or enterprise value, as noted in our second test of the internal review. If the implied fair value exceeded the carrying value, goodwill was deemed not to be impaired. If these criteria are not met, a second test was applied.

The second test of the goodwill impairment test, used to measure the amount of any impairment loss, compared either the appraised fair value or the implied fair value of the reporting unit including goodwill to the carrying value of the reporting unit including goodwill. If the carrying value exceeded these amounts, a loss was recognized in an amount equal to the excess.  

The results of our impairment testing process for our non-broadcast segment for each testing period were as follows:

As of the interim testing period ended June 30, 2010
Reporting Unit		Indication of impairment based on internal benchmarks		Percentage by which fair value exceeds carrying value
Salem Publishing		Yes		28.7%
Xulon Press		Yes		75.8%

As of the interim testing period ended June 30, 2009
Reporting Unit		Indication of impairment based on internal benchmarks		Percentage by which fair value exceeds carrying value
Salem Publishing		Yes		0.0%
Note (1)   Entities with a 0.0% spread between fair value and carrying value were deemed to be impaired as of the balance sheet date with corresponding adjustments to the goodwill and masthead values recorded.

During the interim testing period for the period ended June 30, 2009, we recognized an impairment charge of $1.2 million associated with the value of goodwill and mastheads in our non-broadcast segment.  For the interim testing period ended June 30, 2010, there were no impairment losses recognized.

The economic downturn over the last two years has negatively impacted our ability to generate revenues. The discount rate assumptions used are based on an assessment of the risk inherent in the future cash flows of the respective market clusters and reporting units. Cash flows and operating income for each of our reporting units is contingent upon the ability of the entity to generate revenues. Our radio stations are to varying degrees dependent upon advertising for their revenues. Our non-broadcast operating entities are also dependent upon advertising revenue. Included in our broadcast valuation estimates are a 3% decline in advertising revenue for 2010 as compared to 2009 followed by up to a 2.5% increase in 2011 as compared to 2010. Included in our non-broadcast valuation estimates are projected profit margins of up to 3.3%projected for 2011.  Failure to achieve the anticipated growth rates and/or declines in excess of those amounts may result in future impairment losses, the amount of which may be material.

NOTE 4.  SIGNIFICANT TRANSACTIONS

On June 1, 2010, we redeemed $17.5 million of our 9⁵/₈% Notes for $18.9 million, or at a price equal to 103% of the face value.  This transaction resulted in a $1.1 million pre-tax loss on the early retirement of debt, including $0.1 million of unamortized discount and $0.4 million of bond issues costs associated with the 9⁵/₈%  Notes.  .   

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On June 8, 2010, we completed the acquisition of tangle.com and GodTube.com, Christian content and community websites, for $2.5 million.   The accompanying Condensed Consolidated Balance Sheets and Statements of Operations for the three and six months ended June 30, 2010, reflect the operating results and net assets of these entities as of the acquisition date.  

On February 12, 2010, we completed the acquisition of HotAir.com, a website blog featuring news, analysis and commentary, for $2.0 million.  The accompanying Condensed Consolidated Balance Sheets and Statements of Operations for the three and six months ended June 30, 2010, reflect the operating results and net assets of this entity as of the acquisition date.

A summary of our acquisitions for the six months ended June 30, 2010, none of which were material to our consolidated financial position as of the date of acquisition, is as follows:

Acquisition Date		Description		Total Cost
				(Dollars in thousands)
February 12, 2010		HotAir.com (business acquisition)		$	2,000
June 8, 2010		tangle.com / GodTube.com (business acquisition)			2,500
Various		Purchase of various Internet domain names (asset purchases)			150
				$	4,650

Under the acquisition method of accounting as specified in FASB ASC Topic 805, the total acquisition consideration is allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of the transaction.  We obtained an independent third-party appraisal of the estimated fair value of the acquired net assets as of the acquisition date for the transaction noted.  

The total acquisition consideration was allocated to the total assets acquired as follows:

			Total Assets Acquired
			(Dollars in thousands)
Asset
	PP&E	$	82
	Goodwill		468
	Customer lists and contracts		1,790
	Domain and brand names		2,030
	Other amortizable intangible assets		280
		$	4,650

Pending Transactions:

On June 24, 2010, we entered into an agreement to sell radio station KXMX-AM, Los Angeles, California, for $12.0 million.  The sale is expected to close in the third quarter of 2010.  We have collected an earnest deposit on the sale of $1.0 million that is included in current liabilities as of June 30, 2010.  The sale is subject to the approval by the FCC and is expected to close late in the fourth quarter of 2010.

On April 9, 2010, we entered into an APA to purchase radio station WWRC-AM, Washington, D.C., for $3.1 million.  The purchase is subject to the approval by the FCC and is expected to close in the third quarter of 2010.  We began operating this station on May 15, 2010 under terms of a Local Marketing Agreement (“LMA”) with the current owner.    The accompanying Condensed Consolidated Balance Sheets and Statements of Operations for the three and six months ended June 30, 2010, reflect the operating results and net assets of this entity as of the LMA date.  The purchase was approved by the FCC and closed on August 3, 2010.

On March 5, 2010, we entered into an APA to re-acquire KTEK-AM, Houston, Texas for $3.7 million, which includes forgiveness of the promissory note that we received upon our original sale of the station.  We began programming the station pursuant to a Time Brokerage Agreement (“TBA”) with the current owner on March 8, 2010.  The accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 reflect the operating results of this entity as of the TBA date.  The purchase is subject to the approval by the FCC and is expected to close in the latter half of 2010.

Discontinued Operations

We sold radio station WRRD-AM in Milwaukee, Wisconsin for $3.8 million on March 28, 2008 and sold radio station WFZH-FM in Milwaukee, Wisconsin for $8.1 million on May 30, 2008.  The Milwaukee market cluster was reported as a discontinued operation in accordance with FASB ASC Subtopic 205-20 “Discontinued Operations” for all periods presented.  During the three and

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six months ended June 30, 2009, we incurred facility related costs associated with the Milwaukee facility that were reported as discontinued operations.  

On July 31, 2008, we entered into an agreement to sell radio station WRFD-AM in Columbus, Ohio for $4.0 million.  As a result of the sale, we were to exit the Columbus, Ohio market.  The Condensed Consolidated Balance Sheets and Statements of Operations for all periods presented were reclassified as of the date of the APA to reflect the operating results and net assets of this market as a discontinued operation.  The sale was expected to close in the fourth quarter of 2009.  On December 30, 2009, the buyer of the radio station advised us that they would not be able to meet the terms of the APA.  Because of the buyer terminating the agreement, we reclassified operating results and net assets of this market into continuing operations as of December 2009 and for all periods presented.  In January 2010, we collected a $0.2 million termination fee from the buyer pursuant to the APA that is included as a component of other income in the accompanying Condensed Consolidated Statement of Operations.  

The following table sets forth the components of income from discontinued operations as reclassified, net of tax, for the three and six months ended June 30, 2009:

			Three Months Ended			Six Months Ended
			June30,			June 30,
			2009			2009
			(Dollars in thousands)
Net revenue		$	—		$	(3)
Operating expenses			(34)			2
Operating income (loss)		$	34		$	(5)
Gain (loss) on sale of radio station assets			—			—
Income (loss) from discontinued operations		$	34		$	(5)
Benefit from income taxes			(2)			(18)
Income from discontinued operations, net of tax		$	36		$	13

 NOTE 5. STOCK OPTION PLAN

The Company has one stock option plan.  The Amended and Restated 1999 Stock Incentive Plan (the “Plan”) allows the Company to grant stock options to employees, directors, officers and advisors of the Company.  The Plan also provides for grants of restricted stock.  A maximum of 3,100,000 shares are authorized under the Plan.  Options generally vest over a four year period and have a maximum term of five years from the vesting date.  The Plan provides that vesting may be accelerated in certain corporate transactions of the Company.  The Plan provides that the Board of Directors, or a committee appointed by the Board, has discretion, subject to certain limits, to modify the terms of outstanding options.  We recognize non-cash stock based compensation expense related to the estimated fair value of stock options granted in accordance with FASB ASC Topic 718 “Compensation—Stock Compensation.”

The following table reflects the components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2010:

Stock option and restricted stock grants

The Plan allows the Company to grant stock options and shares of restricted stock to employees, directors, officers and advisors of the Company.  The option exercise price is set at the closing price of the Company’s common stock on the date of grant, and the related number of shares granted is fixed at that point in time.  Eligible employees may receive stock options annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. In addition, certain management and professional level employees typically receive a stock option grant upon commencement of employment.

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Non-employee directors of the Company have received restricted stock grants that vest one year from the date of issuance as well as stock options that vest immediately.  The Plan does not allow key employees and directors (restricted persons) to exercise an option during pre-defined black out periods.  Restricted persons may participate in a 10b5-1 Plan to exercise options during black out periods according to predefined criteria.

We use the Black-Scholes option valuation model to estimate the grant date fair value of stock options.  The expected volatility reflects the consideration of the historical volatility of our stock as determined by the closing price over a six to twelve year term that is generally commensurate with the expected term of the option.  The expected dividend rate is zero as no dividends, other than the payment of special dividends in 2006 and 2007, have been paid.  The expected term of the option is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rates for periods within the expected term of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted.  We use historical data to estimate future forfeiture rates to apply against the gross amount of compensation expense determined using the option valuation model.

The weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model were as follows for the three and six months ended June 30, 2009 and 2010:

			Three Months Ended June 30,					Six Months Ended June 30,
			2009		2010			2009		2010
Expected volatility			82.46%		—%			76.40%		94.26
Expected dividends			—%		—%			—%		—%
Expected term (in years)			6.2		—			6.1		7.3
Risk-free interest rate			2.42%		—%			2.29%		3.11%

Stock option information with respect to the Company’s stock-based compensation plans during the six months ended June 30, 2010 is as follows:

The aggregate intrinsic value represents the difference between the Company’s closing stock price on June 30, 2010 of $3.71 and the option exercise price of the shares for stock options that were in the money, multiplied by the number of shares underlying such options.

The fair values of shares of restricted stock are determined based on the closing price of the Company common stock on the grant dates.  Information regarding the Company’s restricted stock during the six months ended June 30, 2010 is as follows:   

				Weighted Average Grate
Restricted Stock		Shares		Date Fair Value
Non-Vested at January 1, 2010		5,000		$         0.36
Granted		10,000		2.03
Lapsed		(5,000)		0.36
Forfeited		—		—
Non-Vested at June 30, 2010		10,000		$         2.03

As of June 30, 2010, there was $2.2 million of total unrecognized compensation cost related to non-vested awards of stock options and restricted shares.  This cost is expected to be recognized over a weighted-average period of 2.2 years.  The total fair value of options vested during the six months ended June 30, 2010 and 2009, was $0.9 million and $0.7 million, respectively.

NOTE 6.  RECENT ACCOUNTING PRONOUNCEMENTS

With the exception of those listed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2010, as compared to the recent accounting pronouncements described in our

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annual report on Form 10-K for the year ended December 31, 2009, that are of material significance, or have potential material significance, on our financial position, results of operations or cash flows.

In February 2010, the FASB issued Accounting Standards Update ("ASU") No.2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which is included in the FASB Accounting Standards Codification (the "ASC") Topic 855 (Subsequent Events).  ASU 2010-09 clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued.  ASU 2010-09 is effective upon the issuance of the final update and had no impact on our financial position, results of operations or cash flows.

Effective January 2010, an amendment to the Consolidation Topic of the Codification (“ASU 810”)  replaced the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis.  The qualitative analysis is based on identifying the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”).  The party that meets both these criteria is deemed to have a controlling financial interest.  The party with the controlling financial interest is considered to be the primary beneficiary and as a result is required to consolidate the VIE.  The amendment to ASU 810 had no impact on our financial position, results of operations or cash flows.

In January 2010, the FASB issued ASU 2010-06, “ Improving Disclosures about Fair Value Measurements ” which provides amendments to the FASB ASC Subtopic 820-10 that require new disclosures regarding (i) transfers in and out of Level 1 and Level 2 fair value measurements and (ii) activity in Level 3 fair value measurements. ASU 2010-06 also clarifies existing disclosures regarding (i) the level of asset and liability disaggregation and (ii) fair value measurement inputs and valuation techniques.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  We are currently evaluating the disclosure impact of adoption on our condensed consolidated financial statements.   

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 provides guidance for arrangements with multiple deliverables.  Specifically, the updated accounting standard requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices.  ASU 2009-13 also eliminates the residual method of allocation and requires use of the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables.  ASU 2009-13 is effective as of January 2011 with early adoption permitted.  We adopted the provisions of ASU No. 2009-13 as of January 1, 2010, which did not impact our accounting for multiple-deliverables.  Multiple-deliverables apply when we enter into bundled advertising agreements that include spot advertisements on our radio stations, Internet banner placements, print magazine advertisements and booth space at specific events or some combination thereof.  The multiple deliverables contained in each agreement are accounted for separately over their respective delivery period provided that they are separate units of accounting.  The selling price used for each deliverable is based on vendor specific objective evidence if available or estimated selling price if vendor specific objective evidence is not available.  Objective evidence of fair value includes the price charged for each element when it is sold separately.  The estimated selling price is the price that we would transact if the deliverable were sold regularly on a standalone basis.  Arrangement consideration is allocated at the inception of each arrangement to all deliverables using the relative selling price method.  The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price.  The adoption of ASU 2009-13 did not change the units of accounting, how we allocate consideration to various units of accounting, or the timing of revenue recognition.

NOTE 7. EQUITY TRANSACTIONS

We account for stock-based compensation expense in accordance with FASB ASC Topic 718 “Compensation—Stock Expense.”  As a result, $0.4 million and $0.7 million of non-cash stock-based compensation expense has been recorded to additional paid-in capital for the three and six months ended June 30, 2010, respectively, in comparison to $0.1 million and $0.2 million for the three and six months ended June 30, 2009.  

NOTE 8. NOTES PAYABLE AND LONG-TERM DEBT

On December 1, 2009, our parent company, Salem Communications Corporation, entered into a new senior credit facility, which is a revolving credit facility (“Revolver”).  We believe that the Revolver will allow us to meet our ongoing operating requirements, fund capital expenditures, and satisfy our debt service requirements.  The Revolver is a three-year $30 million revolving credit facility, which includes a $5 million subfacility for standby letters of credit, a subfacility for swingline loans of up to $5 million and an optional $10 million incremental facility under which we may increase the commitments available, subject to the terms and conditions of the credit agreement relating to the Revolver facility (the “Credit Agreement”).  Amounts outstanding under the Revolver bear

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interest at a rate based on LIBOR plus a spread of 3.50% per annum or at the Base Rate (as defined in the Credit Agreement) plus a spread of 2.50% per annum plus 2.50%, at our option as of the date of determination.  Additionally, we pay a commitment fee on the unused balance of 0.75% per year.  If an event of default occurs, the interest rate may increase by 2.00% per annum. Amounts outstanding under the Revolver may be paid and then reborrowed at Salem’s discretion without penalty or premium.

With respect to financial covenants, the Credit Agreement includes a maximum leverage ratio of 7.0 to 1.0 and a minimum interest coverage ratio of 1.5 to 1. The Credit Agreement also includes other negative covenants that are customary for credit facilities of this type, including covenants that, subject to exceptions described in the Credit Agreement, restrict the ability of Salem and the guarantors (i) to incur additional indebtedness; (ii) to make investments; (iii) to make distributions, loans or transfers of assets; (iv) to enter into, create, incur, assume or suffer to exist any liens; (v) to sell assets; (vi) to enter into transactions with affiliates; (vii) to merge or consolidate with, or dispose of all or substantially all assets to, a third party; (viii) to prepay indebtedness; and (ix) to pay dividends.  As of June 30, 2010, our leverage ratio was 5.86 to 1.0 and our interest coverage ratio was 1.72 to 1.0.  We were and remain compliant with our debt covenants.  

Our parent company, Salem Communications Corporation, has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of the parent company other than the subsidiary guarantors are minor.  

Senior Secured Second Lien Notes

On December 1, 2009, we issued $300.0 million principal amount of 9⁵/₈% Senior Secured Second Lien Notes due December 2016 (“9⁵/₈% Notes”) at a discount for $298.1 million resulting in an effective yield of 9.75%.  Interest is due and payable on June 15 and December 15 of each year, commencing June 15, 2010 until maturity.  We are not required to make principal payments on the 9⁵/₈% Notes that are due in full in December 2016.  The 9⁵/₈% Notes are guaranteed by all of our existing domestic restricted subsidiaries.  We are required to pay $28.9 million per year in interest on the 9⁵/₈% Notes.  As of June 30, 2010, accrued interest on the 9⁵/₈% Notes was $1.2 million.  The discount is being amortized to interest expense over the term of the 9⁵/₈% Notes based on the effective interest method.  For the three and six months ended June 30, 2010, approximately $48,000 and $0.1 million, respectively, of the discount has been recognized as interest expense.  The carrying amount of the 9⁵/₈% Notes is $298.1 million and $280.8 million as of December 31, 2009 and June 30, 2010, respectively.  

On June 1, 2010, we redeemed $17.5 million of our 9⁵/₈% Notes for $18.9 million, or at a price equal to 103% of the face value.  This transaction resulted in a $1.1 million pre-tax loss on the early retirement of debt which includes $0.1 million of unamortized discount and $0.4 million of bond issues costs associated with the 9⁵/₈%  Notes.  

Prior Credit Facility

Our wholly-owned subsidiary, Salem Communications Holding Corporation (“Salem Holding”), was the borrower under our prior credit facilities.  The prior credit facilities included a $75.0 million senior secured reducing revolving credit facility (“revolving credit facility”), a $75.0 million term loan B facility (“Term Loan B facility”) and a $165.0 million term loan C facility (“term loan C facility”).  On December 1, 2009, we used the proceeds of the 9⁵/₈% Notes, a portion of the senior credit facility, and approximately $27 million of cash on hand to fully repay amounts outstanding under the Term Loan B of $71.2 million, the Term Loan C of $160.0 million, and to fully repay all outstanding aggregate principal of $89.7 million on the 7¾% Notes.

Swingline Credit Facility

On June 1, 2005, we entered into an agreement for a swingline credit facility (“Swingline”) with a borrowing capacity of $5.0 million.  The agreement was most recently amended on June 1, 2009 and had a borrowing capacity of $4.3 million. The interest rate was the bank’s prime rate plus 0.75% per annum.  We terminated the Swingline on December 1, 2009.

7³/₄% Notes

In December 2002, Salem Holding issued $100.0 million principal amount of 7³/₄% Notes.  On December 1, 2009, we used the net proceeds from the 9⁵/₈% Notes together with other available funds to fund the payment of consideration and certain costs relating to the early settlement of the Tender Offer and consent solicitation with respect to the remaining outstanding aggregate principal amount of $89.7 million on the 7³/₄% Notes.  Accrued interest on the tendered 7³/₄% Notes was also paid.  Since all outstanding 7³/₄% Notes were tendered, accepted for payment and cancelled, the indenture relating to the 7³/₄% Notes was discharged as of that date.

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Summary of long-term debt obligations

Long-term debt consisted of the following:

		As of December 31, 2009			As of June 30, 2010
		(Dollars in thousands)
Revolver under senior credit facility	$	15,000		$	26,000
95/8% senior secured second lien notes due 2016		298,111			280,813
Capital leases and other loans		936			1,019
		314,047			307,832
Less current portion		78			93
	$	313,969		$	307,739

In addition to the amounts listed above, we also have interest payments related to our long-term debt as follows as of June 30, 2010:

·

Outstanding borrowings of $26 million under the revolver, with interest payments due at LIBOR plus 3.50% or at prime rate plus 2.50%;

·

$282.5 million notional amount notes with semi-annual interest payments at an annual rate of 9⁵/₈%; and

·

Commitment fees of 0.75% on the unused portion of the revolver.

Other Debt

We have several capital leases related to various office equipment.  The obligation recorded at December 31, 2009 and June 30, 2010 represents the present value of future commitments under the lease agreements.

Maturities of Long-Term Debt

Principal repayment requirements under all long-term debt agreements outstanding at June 30, 2010 for each of the next five years and thereafter are as follows:

			Amount
			(Dollars in thousands)
2011		$	93
2012			26,102
2013			97
2014			78
2015			69
Thereafter			281,393
		$	307,832

NOTE 9.  AMORTIZABLE INTANGIBLE ASSETS

The following tables provide details, by major category, of the significant classes of amortizable intangible assets:

		As of June 30, 2010
					Accumulated
		Cost			Amortization			Net
		(Dollars in thousands)
Customer lists and contracts		$	12,838		$	(10,013)		$	2,825
Domain and brand names			7,627			(4,790)			2,837
Favorable and assigned leases			1,581			(1,400)			181
Other amortizable intangible assets			3,348			(3,097)			251
		$	25,394		$	(19,300)		$	6,094

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		As of December 31, 2009
					Accumulated
		Cost			Amortization			Net
		(Dollars in thousands)
Customer lists and contracts		$	11,018		$	(9,826)		$	1,192
Domain and brand names			5,626			(4,236)			1,390
Favorable and assigned leases			1,581			(1,365)			216
Other amortizable intangible assets			3,068			(2,985)			83
		$	21,293		$	(18,412)		$	2,881

Based on the amortizable intangible assets as of June 30, 2010, we estimate amortization expense for the next five years to be as follows:

Year Ending December 31,			Amortization Expense
			(Dollars in thousands)
2010 (July – Dec)		$	1,119
2011			1,693
2012			1,064
2013			800
2014			788
Thereafter			630
Total		$	6,094

NOTE 10.  BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share has been computed using the weighted average number of Class A and Class B shares of common stock outstanding during the period.  Diluted net earnings per share is computed using the weighted average number of shares of Class A and Class B common stock outstanding during the period plus the dilutive effects of stock options.

Options to purchase 1,369,925 and 1,559,885 shares of Class A common stock and unvested restricted stock shares of 5,000 and 10,000 were outstanding at June 30, 2009 and 2010.  Diluted weighted average shares outstanding exclude outstanding stock options whose exercise price is in excess of the average price of the Company’s stock price.  These options are excluded from the respective computations of diluted net income or loss per share because their effect would be anti-dilutive.  There were no dilutive shares for the quarter end June 30, 2009.  As of June 30, 2010, there were 723,259 dilutive shares.   

NOTE 11. DERIVATIVE INSTRUMENTS  

During 2005, we entered into three interest rate swap transactions intended to offset the risks associated with the variable interest rate on our then outstanding Term Loan C.  The interest rate swaps were designated and qualified as cash flow hedges under FASB ASC Topic 815 “Derivatives and Hedging.”   The effective portion of the gain or loss on these derivative instruments was reported as a component of other comprehensive income (outside earnings) and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affected earnings.  Effective October 1, 2008, we elected a one-month reset on our Term Loan C rather than a three-month, resulting in the swaps no longer qualifying as a cash flow hedge.  As the interest rate swap agreements contained a three month reset period, the swaps were no longer effective and no longer qualified as a cash flow hedge.  Changes in the fair value of these swaps as of October 1, 2008 were reported in current period income rather than deferred in other comprehensive income.  For the three and six months ended June 30, 2009, we recorded $0.2 million and $0.4 million of accumulated other comprehensive losses into current period earnings in order to recognize the impact over the same period in which the hedged transactions affected earnings.  We also recorded an additional $2.3 million and $2.4 million of expenses during the three and six months ended June 30, 2009 associated with the changes in fair value of the ineffective portion of the swaps transactions.  On December 1, 2009, the swap transactions were terminated when the underlying Term Loan C was paid in full.  

NOTE 12.  FAIR VALUE ACCOUNTING

FASB ASC Topic 820 “Fair Value Measurements and Disclosures” established a single definition of fair value in generally accepted accounting principles and expanded disclosure requirements about fair value measurements.  The provision applies to other accounting pronouncements that require or permit fair value measurements.  We adopted the fair value provisions for financial assets and financial liabilities effective January 1, 2008.  The adoption had a material impact on our condensed consolidated financial position, results of operations or cash flows.  We adopted fair value provisions for nonfinancial assets and nonfinancial liabilities

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effective January 1, 2009.  This includes applying the fair value concept to (i) nonfinancial assets and liabilities initially measured at fair value in business combinations; (ii) reporting units or nonfinancial assets and liabilities measured at fair value in conjunction with goodwill impairment testing; (iii) other nonfinancial assets measured at fair value in conjunction with impairment assessments; and (iv) asset retirement obligations initially measured at fair value.  As of June 30, 2010 and December 31, 2009, the carrying value of cash and cash equivalents, trade accounts receivables, accounts payable, accrued expenses and accrued interest approximates fair value due to the short-term nature of such instruments.  The carrying value of other long-term liabilities approximates fair value as the related interest rates approximate rates currently available to the Company.

NOTE 13. INCOME TAXES

We account for income taxes in accordance with FASB ASC Topic 740 “Income Taxes.”  During 2009, we recognized a net increase of $0.1 million in liabilities and at December 31, 2009, had $3.8 million in liabilities for unrecognized tax benefits.  Included in this liability amount were $0.1 million accrued for the related interest, net of federal income tax benefits, and $0.1 million for the related penalty recorded in income tax expense on our Condensed Consolidated Statements of Operations.  We recorded an increase in our unrecognized tax benefits of $.1 million as of June 30, 2010.

NOTE 14. COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries, incident to its business activities, are parties to a number of legal proceedings, lawsuits, arbitration and other claims, including the proceeding described below.  Such matters are subject to many uncertainties and outcomes that are not predictable with assurance.  The Company maintains insurance that may provide coverage for such matters.  Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters.  The Company believes, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the Company’s consolidated financial position, results of operations or cash flows.

On July 10, 2010, Asia Vision, Inc. and Rehan Siddiqi amended a complaint they had previously filed in Texas state court, naming Salem Communications Corp., South Texas Broadcasting, Inc. and one of Salem’s officers as defendants.  In their complaint, Asia Vision claims that Salem interfered with Asia Vision’s contract to purchase radio station KTEK-AM.  On July 21, 2010, Salem was served with the complaint but the Salem officer has not been served.  Salem has retained counsel, has tendered defense of the matter to several insurance companies, and will vigorously defend this action.

NOTE 15. SEGMENT DATA

FASB ASC Topic 280 “Segment Reporting” requires companies to provide certain information about their operating segments.  We have one reportable operating segment - radio broadcasting.  The remaining non-reportable segments consist of our Internet businesses, SWN, Townhall.com, and Salem Consumer Products and our publishing businesses, Salem Publishing and Xulon Press, which do not meet the reportable segment quantitative thresholds and accordingly are aggregated below as non-broadcast. The radio-broadcasting segment also operates various radio networks.

Management uses operating income before depreciation, amortization, cost of denied tower site and abandoned projects, impairment of indefinite-lived intangible assets and (gain) loss on disposal of assets, as its measure of profitability for purposes of assessing performance and allocating resources.

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NOTE 16. RELATED PARTY TRANSACTIONS

Our board of directors has adopted a written policy for review, approval and monitoring of transactions between the Company and its related parties.  Related parties include our directors, executive officers, nominees to become a director, any person beneficially owning more than 5% of any class of our stock, immediate family members of any of the foregoing, and any entity in which any of the forgoing persons is employed or is a general partner or principal or in which the person has a 10% or greater beneficial ownership interest.  The policy covers material transactions in which a related party had, has or will have a direct or indirect interest.  

On June 3, 2010, we entered into a related party transaction under which the Company purchased the former primary residence of our President, Radio Division.  The transaction was entered to facilitate the relocation of the President, Radio Division, in order to effectively perform his job related duties.  We obtained an independent third-party appraisal of the purchase price of the residence.  The residence is reflected as assets held for sale on the accompanying condensed consolidated balance sheet as of June 30, 2010.  We believe that we will sell the property at an amount equal to or greater than the carrying value.

On March 31, 2010, we recorded a loss of $0.2 million associated with a second lien real estate note with an employee.  

NOTE 17.  SUBSEQUENT EVENTS

On August 3, 2010, we completed the acquisition of WWRC-AM in Washington DC for $3.1 million.  Subsequent events reflect all applicable transactions through the date of this filing.  

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ITEM 2. 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 the condensed consolidated financial statements and related notes included elsewhere in this report.  Our condensed consolidated financial statements are not directly comparable from period to period due to acquisitions and dispositions of selected assets of radio stations and acquisitions of non-broadcast businesses.  See Note 4 of our condensed consolidated financial statements for additional information.

We believe that we are the largest commercial U.S. radio broadcasting company that provides programming targeting audiences interested in Christian and family-themed content, as measured by number of stations and audience coverage.  Our core business is the ownership and operation of radio stations in large metropolitan markets. Upon completion of all announced transactions, we will own a national portfolio of 95 radio stations in 37 markets, including 59 stations in 22 of the top 25 markets, which consists of 27 FM stations and 68 AM stations. We are one of only three commercial radio broadcasters with radio stations in all of the top 10 markets. We are the seventh largest operator measured by number of stations overall and the third largest operator measured by number of stations in the top 25 markets.  We also program the Family Talk^™ Christian-themed talk format station on XM Radio, Channel 170.

Our radio business focuses on the clustering of strategic formats, mainly Christian Teaching and Talk, Contemporary Christian Music and conservative News Talk.  We own and operate Salem Radio Network® (“SRN”), a national radio network that syndicates music, news and talk to approximately 2,000 affiliated radio stations, in addition to our owned and operated stations.  We also own and operate Salem Media Representatives® (“SMR”), a national radio advertising sales firm with offices in 12 U.S. cities.

In addition to our radio broadcast business, we also own and operate a non-broadcast media division.  This division consists of Salem Web Network (“SWN”), a provider of online Christian content and streaming, Salem Publishing™, a publisher of Christian magazines and Xulon Press, a provider of print-on-demand publishing services targeting the Christian audience.  SWN’s content, both in text, audio and video, can be accessed through our national portals that include OnePlace.com, Crosswalk.com, Christianity.com and Townhall.com®.  SWN’s content can also be accessed through our local radio station websites, which provide content of interest to local listeners.  

Our principal business strategy is to improve our national radio platform and to invest in and build non-broadcast businesses as the breadth of the media marketplace also expands to deliver compelling content to audiences interested in Christian and family-themed programming and conservative news talk.  Our national presence in broadcasting, Internet and publishing gives advertisers a platform that is a powerful way to broadly reach Christian audiences.

We program 39 of our stations with our Christian Teaching and Talk format, which is talk programming with Christian and family themes.  A key programming strategy on our Christian Teaching and Talk radio stations is to sell blocks of time to a variety of religious and charitable organizations that create compelling radio programs.  Typically, more than 90% of our block programming partners annually renew their respective relationships with us.  Based on these renewal rates, we believe that block programming provides a steady and consistent stream of revenue and cash flow.  The top ten programmers have averaged over 15 years on the air and have remained relatively constant.  Total programming revenue has comprised 35% to 41% of total net broadcast revenue from 2006 through 2009.  We also program 23 News Talk stations, 11 Contemporary Christian Music stations, seven business format stations, and six Spanish-language Christian Teaching and Talk stations.  SRN supports our strategy by allowing us to reach listeners in markets where we do not own or operate stations.  Additionally, we operate numerous Internet websites and publish periodicals and books that target similar audiences in order to provide cross-platform synergies.

We are fundamentally committed to broadcasting, Internet and publishing formats and programming emphasizing Christian, conservative news talk and family themes.  As part of this business philosophy, we may choose not to switch to other formats or pursue potentially more profitable business opportunities in response to changing audience preferences.

We maintain a website at www.salem.cc.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are available free of charge through our website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).  Any information found on our website is not a part of, or incorporated by reference into, this or any other report of the Company filed with, or furnished to, the SEC.

OVERVIEW

      As a radio broadcasting company with a national radio network, we derive our broadcast revenue primarily from the sale of broadcast time and radio advertising on a national and local basis.

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 Historically, our principal sources of revenue have been:

·

the sale of block program time, both to national and local program producers,

·

the sale of advertising time on our radio stations, both to national and local advertisers, and

·

the sale of advertising time on our national radio network.

The rates we are able to charge for broadcast time and advertising time are dependent upon several factors, including:

·

audience share,

·

how well our stations perform for our clients,

·

the size of the market,

·

the general economic conditions in each market, and

·

supply and demand on both a local and national level.

Our sources of revenue and product offerings also increasingly include non-broadcast businesses, including our Internet and publishing businesses.

			Three Months Ended June 30,								Six Months Ended June 30,
			2009		2009		2010		2010		2009		2009		2010		2010
			(Dollars in thousands)
Block program time
	National		$      9,775		22.2%		$      9,672		21.3%		$    19,680		22.8%		$    18,795		21.6%
	Local		7,752		17.6%		7,817		17.2%		15,725		18.2%		15,739		18.1%
			17,527		39.8%		17,489		38.5%		35,405		41.0%		34,534		39.7%
Advertising:
	National		3,123		7.1%		3,647		8.0%		5,758		6.7%		6,855		7.9%
	Local		16,166		36.8%		16,492		36.3%		31,253		36.2%		30,375		35.0%
			19,289		43.9%		20,139		44.3%		37,011		42.9%		37,230		42.9%
	Infomercials		1,882		4.3%		1,732		3.8%		3,804		4.4%		3,551		4.1%
	Network		3,734		8.5%		3,977		8.7%		7,402		8.6%		8,177		9.4%
	Other		1,513		3.5%		2,134		4.7%		2,718		3.1%		3,387		3.9%
Net broadcast revenue			$    43,945		100.0%		$    45,471		100.0%		$    86,340		100.0%		$    86,879		100.0%

Our broadcast revenue is affected primarily by the program rates our radio stations charge, the level of broadcast airtime sold and by the advertising rates our radio stations and networks charge.  The rates for block programming 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 advertising time, which in turn is based on our stations’ and networks’ ability to produce results for their advertisers.  We do not subscribe to traditional audience measuring services for our Christian Teaching and Talk stations.  Instead, we have marketed ourselves to advertisers based upon the responsiveness of our audiences. In selected markets, we do subscribe to Arbitron, which develops quarterly reports to measure a radio station’s audience share in the demographic groups targeted by advertisers.  Each of our radio stations and our networks has a pre-determined level of time that they make available for block programming and/or advertising, which may vary at different times of the day.

Arbitron has developed new technology to collect data for its ratings service.  The Portable People Meter^TM (PPM^TM ) is a small, pager-sized device that does not require active manipulation by the end user and is capable of automatically measuring radio, television, Internet, satellite radio and satellite television signals that are encoded for the service by the broadcaster. The PPM offers a number of advantages over the traditional diary ratings collection system including ease of use, more reliable ratings data and shorter time periods between when advertising runs and when audience listening or viewing habits can be reported. This service is already in a number of our markets and is scheduled to be introduced in more markets in the future. It is not yet clear what impact, if any, the introduction of the PPM will have on our revenues for stations that subscribe to Arbitron.

As is typical in the radio broadcasting industry, our second and fourth quarter advertising revenue generally exceeds our first and third quarter advertising revenue.  This seasonal fluctuation in advertising revenue corresponds with quarterly fluctuations in the retail advertising industry. Quarterly revenue from the sale of block programming time does not tend to vary significantly, however, because program rates are generally set annually and are recognized on a per program basis.

Our cash flow has historically been affected by a transitional period experienced by radio stations when, due to the nature of the radio station, our plans for the market and other circumstances, we find it beneficial to change its format.  This transitional period is when we develop a radio station’s listener and customer base. During this period, a station may generate negative or insignificant cash flow.

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In the broadcasting industry, radio stations often utilize trade or barter agreements to exchange advertising time for goods or services in lieu of cash. In order to preserve the sale of our advertising time for cash, 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 most of our advertising time for cash.  In 2009, we sold 97% of our advertising time for cash. In addition, it is our general policy not to preempt advertising paid for in cash with advertising paid for in trade.

The primary operating expenses incurred in the ownership and operation of our radio stations include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities, (iii) marketing and promotional expenses and (iv) music license fees.  In addition to these expenses, our network incurs programming costs and lease expenses for satellite communication facilities.  We also incur and expect to continue to incur significant depreciation, amortization and interest expense as a result of completed and future acquisitions and existing and future borrowings.

Salem Web Network™ and Townhall.com^®, our Internet businesses, earn revenues from the sales of streaming services, sales of advertising and, to a lesser extent, sales of software and software support contracts. Salem Publishing™, our publishing business, earns its revenue by selling advertising in and subscriptions to its publications and by selling books. Xulon Press™ generally earns its revenue from the publishing of books. The revenue and related operating expenses of these businesses are reported as “non-broadcast” on our Condensed Consolidated Statement of Operations.

SAME STATION DEFINITION

In the discussion of our results of operations below, we compare our results between periods on an as reported basis (that is, the results of operations of all radio stations and network formats owned or operated at any time during either period) and on a “same station” basis.  With regard to fiscal quarters, we include in our same station comparisons the results of operations of radio stations or radio station clusters and networks that we own or operate in the same format during the quarter, as well as the corresponding quarter of the prior year.  Same station results for a full year are based on the sum of the same station results for the four quarters of that year.

RESULTS OF OPERATIONS

     The following table sets forth certain statements of operations data for the periods indicated and shows percentage changes: