ITEM 1. CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SALEM MEDIA GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and
per share data)
|
|
December 31, 2016
(Note 1)
|
|
|
September 30, 2017
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
130
|
|
|
$
|
4
|
|
Trade accounts receivable (net of allowances of $10,420 in 2016 and $10,627 in 2017)
|
|
|
37,260
|
|
|
|
35,862
|
|
Other receivables (net of allowances of $260 in 2016 and $145 in 2017 )
|
|
|
751
|
|
|
|
990
|
|
Inventories (net of reserves of $2,226 in 2016 and $1,611 in 2017)
|
|
|
670
|
|
|
|
809
|
|
Prepaid expenses
|
|
|
6,287
|
|
|
|
7,288
|
|
Deferred income taxes - current
|
|
|
9,411
|
|
|
|
—
|
|
Total current assets
|
|
|
54,509
|
|
|
|
44,953
|
|
Notes receivable (net of allowance of $564 in 2016 and $794 in 2017)
|
|
|
65
|
|
|
|
92
|
|
Land held for sale
|
|
|
1,000
|
|
|
|
1,000
|
|
Property and equipment (net of accumulated depreciation of $156,024 in 2016 and $161,848 in 2017)
|
|
|
102,790
|
|
|
|
102,203
|
|
Broadcast licenses
|
|
|
388,517
|
|
|
|
388,720
|
|
Goodwill
|
|
|
25,613
|
|
|
|
26,436
|
|
Other indefinite-lived intangible assets
|
|
|
332
|
|
|
|
313
|
|
Amortizable intangible assets (net of accumulated amortization of $44,488 in 2016 and $46,007 in 2017)
|
|
|
14,408
|
|
|
|
14,276
|
|
Deferred financing costs
|
|
|
82
|
|
|
|
549
|
|
Deferred income taxes – non-current
|
|
|
—
|
|
|
|
1,877
|
|
Other assets
|
|
|
2,952
|
|
|
|
3,205
|
|
Total assets
|
|
$
|
590,268
|
|
|
$
|
583,624
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,968
|
|
|
$
|
3,721
|
|
Accrued expenses
|
|
|
15,658
|
|
|
|
12,427
|
|
Accrued compensation and related expenses
|
|
|
8,133
|
|
|
|
9,865
|
|
Accrued interest
|
|
|
77
|
|
|
|
6,481
|
|
Current portion of deferred revenue
|
|
|
9,491
|
|
|
|
10,835
|
|
Income taxes payable
|
|
|
223
|
|
|
|
174
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
590
|
|
|
|
6,741
|
|
Total current liabilities
|
|
|
39,140
|
|
|
|
50,244
|
|
Long-term debt and capital lease obligations less unamortized debt issuance costs, net of current portion
|
|
|
261,084
|
|
|
|
249,375
|
|
Fair value of interest rate swap
|
|
|
514
|
|
|
|
—
|
|
Deferred income taxes
|
|
|
60,769
|
|
|
|
54,644
|
|
Deferred rent expense
|
|
|
9,596
|
|
|
|
9,633
|
|
Deferred revenue less current portion
|
|
|
5,252
|
|
|
|
6,427
|
|
Other long-term liabilities
|
|
|
67
|
|
|
|
64
|
|
Total liabilities
|
|
|
376,422
|
|
|
|
370,387
|
|
Commitments and contingencies (Note 18)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Class A common stock, $0.01 par value; authorized 80,000,000 shares; 22,593,130 and 22,927,201 issued and 20,275,480 and 20,609,551 outstanding at December 31, 2016 and September 30, 2017, respectively
|
|
|
226
|
|
|
|
227
|
|
Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding at December 31, 2016 and September 30, 2017
|
|
|
56
|
|
|
|
56
|
|
Additional paid-in capital
|
|
|
243,607
|
|
|
|
245,800
|
|
Accumulated earnings
|
|
|
3,963
|
|
|
|
1,160
|
|
Treasury stock, at cost (2,317,650 shares at December 31, 2016 and September 30, 2017)
|
|
|
(34,006
|
)
|
|
|
(34,006
|
)
|
Total stockholders’ equity
|
|
|
213,846
|
|
|
|
213,237
|
|
Total liabilities and stockholders’ equity
|
|
$
|
590,268
|
|
|
$
|
583,624
|
|
See accompanying notes
SALEM MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per
share data)
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Net broadcast revenue
|
|
$
|
51,052
|
|
|
$
|
48,424
|
|
|
$
|
149,768
|
|
|
$
|
145,479
|
|
Net digital media revenue
|
|
|
11,999
|
|
|
|
10,446
|
|
|
|
34,056
|
|
|
|
31,998
|
|
Net publishing revenue
|
|
|
8,221
|
|
|
|
6,563
|
|
|
|
19,802
|
|
|
|
19,048
|
|
Total net revenue
|
|
|
71,272
|
|
|
|
65,433
|
|
|
|
203,626
|
|
|
|
196,525
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast operating expenses, exclusive of depreciation and amortization shown below (including $412 and $431 for the three months ended September 30, 2016 and 2017, respectively, and $1,231 and $1,284 for the nine months ended September 30, 2016 and 2017, respectively, paid to related parties)
|
|
|
37,434
|
|
|
|
37,040
|
|
|
|
109,455
|
|
|
|
108,807
|
|
Digital media operating expenses, exclusive of depreciation and amortization shown below
|
|
|
9,172
|
|
|
|
8,169
|
|
|
|
26,815
|
|
|
|
25,241
|
|
Publishing operating expenses, exclusive of depreciation and amortization shown below
|
|
|
8,020
|
|
|
|
6,686
|
|
|
|
19,951
|
|
|
|
18,705
|
|
Unallocated corporate expenses exclusive of depreciation and amortization shown below (including $147 and $98 for the three months ended September 30, 2016 and 2017, respectively, and $254 and $218 for the nine months ended September 30, 2016 and 2017, respectively, paid to related parties)
|
|
|
4,147
|
|
|
|
4,233
|
|
|
|
11,928
|
|
|
|
13,183
|
|
Depreciation
|
|
|
2,976
|
|
|
|
3,082
|
|
|
|
8,950
|
|
|
|
9,171
|
|
Amortization
|
|
|
1,341
|
|
|
|
1,135
|
|
|
|
3,673
|
|
|
|
3,420
|
|
Change in the estimated fair value of contingent earn-out consideration
|
|
|
(196
|
)
|
|
|
(12
|
)
|
|
|
(458
|
)
|
|
|
(54
|
)
|
Impairment of long-lived assets
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
|
|
—
|
|
Impairment of indefinite-lived long-term assets other than goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
Net (gain) loss on the sale or disposal of assets
|
|
|
(457
|
)
|
|
|
95
|
|
|
|
(2,008
|
)
|
|
|
(410
|
)
|
Total operating expenses
|
|
|
62,437
|
|
|
|
60,428
|
|
|
|
179,006
|
|
|
|
178,082
|
|
Operating income
|
|
|
8,835
|
|
|
|
5,005
|
|
|
|
24,620
|
|
|
|
18,443
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
|
|
3
|
|
Interest expense
|
|
|
(3,726
|
)
|
|
|
(4,802
|
)
|
|
|
(11,252
|
)
|
|
|
(12,156
|
)
|
Change in the fair value of interest rate swap
|
|
|
856
|
|
|
|
—
|
|
|
|
(1,325
|
)
|
|
|
357
|
|
Loss on early retirement of long-term debt
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
(32
|
)
|
|
|
(2,775
|
)
|
Net miscellaneous income and (expenses)
|
|
|
7
|
|
|
|
(80
|
)
|
|
|
7
|
|
|
|
(80
|
)
|
Net income before income taxes
|
|
|
5,955
|
|
|
|
124
|
|
|
|
12,022
|
|
|
|
3,792
|
|
Provision for income taxes
|
|
|
3,763
|
|
|
|
170
|
|
|
|
6,121
|
|
|
|
1,506
|
|
Net income (loss)
|
|
$
|
2,192
|
|
|
$
|
(46
|
)
|
|
$
|
5,901
|
|
|
$
|
2,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.08
|
|
|
$
|
—
|
|
|
$
|
0.23
|
|
|
$
|
0.09
|
|
Diluted earnings (loss) per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.08
|
|
|
$
|
—
|
|
|
$
|
0.23
|
|
|
$
|
0.09
|
|
Distributions per share
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
Basic weighted average shares outstanding
|
|
|
25,815,242
|
|
|
|
26,144,796
|
|
|
|
25,617,307
|
|
|
|
26,036,333
|
|
Diluted weighted average shares outstanding
|
|
|
26,183,182
|
|
|
|
26,144,796
|
|
|
|
26,012,930
|
|
|
|
26,454,923
|
|
See accompanying notes
SALEM MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Dollars in thousands)
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,901
|
|
|
$
|
2,286
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation
|
|
|
458
|
|
|
|
1,693
|
|
Tax benefit related to stock options exercised
|
|
|
264
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
12,623
|
|
|
|
12,591
|
|
Amortization of deferred financing costs
|
|
|
475
|
|
|
|
645
|
|
Accretion of financing items
|
|
|
155
|
|
|
|
74
|
|
Accretion of acquisition-related deferred payments and contingent consideration
|
|
|
55
|
|
|
|
32
|
|
Provision for bad debts
|
|
|
688
|
|
|
|
1,548
|
|
Deferred income taxes
|
|
|
5,684
|
|
|
|
1,409
|
|
Change in the fair value of interest rate swap
|
|
|
1,325
|
|
|
|
(357
|
)
|
Change in the estimated fair value of contingent earn-out consideration
|
|
|
(458
|
)
|
|
|
(54
|
)
|
Impairment of long-lived assets
|
|
|
700
|
|
|
|
—
|
|
Impairment of indefinite-lived long-term assets other than goodwill
|
|
|
—
|
|
|
|
19
|
|
Loss on early retirement of long-term debt
|
|
|
32
|
|
|
|
2,775
|
|
Net gain on the sale or disposal of assets
|
|
|
(2,008
|
)
|
|
|
(410
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,380
|
|
|
|
(463
|
)
|
Inventories
|
|
|
147
|
|
|
|
(139
|
)
|
Prepaid expenses and other current assets
|
|
|
(718
|
)
|
|
|
(1,001
|
)
|
Accounts payable and accrued expenses
|
|
|
(39
|
)
|
|
|
4,879
|
|
Deferred rent
|
|
|
1,183
|
|
|
|
3
|
|
Deferred revenue
|
|
|
(4,444
|
)
|
|
|
(310
|
)
|
Other liabilities
|
|
|
—
|
|
|
|
(3
|
)
|
Income taxes payable
|
|
|
106
|
|
|
|
(49
|
)
|
Net cash provided by operating activities
|
|
|
26,509
|
|
|
|
25,168
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash paid for capital expenditures net of tenant improvement allowances
|
|
|
(7,240
|
)
|
|
|
(6,800
|
)
|
Capital expenditures reimbursable under tenant improvement allowances and trade agreements
|
|
|
(486
|
)
|
|
|
(50
|
)
|
Escrow deposits related to acquisitions
|
|
|
(228
|
)
|
|
|
(30
|
)
|
Purchases of broadcast assets and radio stations
|
|
|
(718
|
)
|
|
|
(1,662
|
)
|
Purchases of digital media businesses and assets
|
|
|
(3,153
|
)
|
|
|
(1,690
|
)
|
Purchases of publishing businesses assets
|
|
|
(3,318
|
)
|
|
|
—
|
|
Proceeds from sale of broadcast assets
|
|
|
3,147
|
|
|
|
602
|
|
Other
|
|
|
(398
|
)
|
|
|
(224
|
)
|
Net cash used in investing activities
|
|
|
(12,394
|
)
|
|
|
(9,854
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments under Term Loan B
|
|
|
(5,000
|
)
|
|
|
(263,000
|
)
|
Proceeds from borrowings under Revolver and ABL Facility
|
|
|
35,601
|
|
|
|
60,133
|
|
Payments on Revolver and ABL Facility
|
|
|
(37,837
|
)
|
|
|
(53,980
|
)
|
Payment of interest rate swap
|
|
|
—
|
|
|
|
(783
|
)
|
Proceeds from bond offering
|
|
|
—
|
|
|
|
255,000
|
|
Payment of debt issuance costs
|
|
|
—
|
|
|
|
(6,837
|
)
|
Payments of acquisition-related contingent earn-out consideration
|
|
|
(99
|
)
|
|
|
(14
|
)
|
Payments of deferred installments due from acquisition activity
|
|
|
(3,421
|
)
|
|
|
(225
|
)
|
Proceeds from the exercise of stock options
|
|
|
969
|
|
|
|
501
|
|
Payments of capital lease obligations
|
|
|
(80
|
)
|
|
|
(93
|
)
|
Payment of cash distributions on common stock
|
|
|
(5,000
|
)
|
|
|
(5,089
|
)
|
Book overdraft
|
|
|
734
|
|
|
|
(1,053
|
)
|
Net cash used in financing activities
|
|
|
(14,133
|
)
|
|
|
(15,440
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(18
|
)
|
|
|
(126
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
98
|
|
|
|
130
|
|
Cash and cash equivalents at end of period
|
|
$
|
80
|
|
|
$
|
4
|
|
See accompanying notes
SALEM MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (continued)
(Dollars in thousands)
(Unaudited)
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest
|
|
$
|
10,644
|
|
|
$
|
4,962
|
|
Cash paid for income taxes
|
|
$
|
67
|
|
|
$
|
128
|
|
Other supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Barter revenue
|
|
$
|
3,886
|
|
|
$
|
4,152
|
|
Barter expense
|
|
$
|
3,734
|
|
|
$
|
4,012
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures reimbursable under tenant improvement allowances
|
|
$
|
486
|
|
|
$
|
50
|
|
Current value of deferred cash payments (short-term)
|
|
$
|
1,566
|
|
|
$
|
—
|
|
Net assets and liabilities assumed non-cash acquisition
|
|
|
—
|
|
|
|
2,852
|
|
Assets acquired under capital leases
|
|
$
|
—
|
|
|
$
|
16
|
|
Debt issuance costs accrued
|
|
$
|
—
|
|
|
$
|
132
|
|
See accompanying notes
SALEM MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Salem Media
Group, Inc. (“Salem” “we,” “us,” “our” or the “company”) include the
company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Effective
February 19, 2015, we changed our name from Salem Communications Corporation to Salem Media Group, Inc. Salem was formed in 1986
as a California corporation and was reincorporated in Delaware in 1999. Our content is intended for audiences interested in Christian
and family-themed programming and conservative news talk. We maintain a website at www.salemmedia.com.
Information with respect to the three and nine months ended September
30, 2017 and 2016 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 10 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 unaudited interim financial statements
should
be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report for Salem
filed on Form 10-K for the year ended December 31, 2016. Our results are subject to seasonal fluctuations. Therefore,
the
results of operations for the interim periods presented are not necessarily indicative of the results of operations for the full
year.
The balance sheet at December 31, 2016 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 multimedia company specializing in Christian
and conservative content. Our media properties are comprised of radio broadcasting, digital media, and publishing entities. We
have three operating segments: (1) Broadcast, (2) Digital Media, and (3) Publishing, which are discussed in Note 19 – Segment
Data. Our foundational business is radio broadcasting, which includes the ownership and operation of radio stations in large metropolitan
markets. We also own and operate Salem Radio Network® (“SRN”), SRN News Network (“SNN”), Today’s
Christian Music (“TCM”), Singing News Network (formerly Solid Gospel Network) and Salem Media Representatives
TM
(“SMR”). SRN, SNN, TCM and Singing News Network are networks that develop, produce and syndicate a broad range of programming
specifically targeted to Christian and family-themed talk stations, music stations and general News Talk stations throughout the
United States, including Salem-owned and operated stations. SMR, a national advertising sales firm with offices in ten U.S. cities,
specializes in placing national advertising on religious and other format commercial radio stations. Each of our radio stations
has a website specifically designed for that station from which our audience can access our entire library of digital content and
online publications.
Our digital media based businesses provide Christian, conservative,
investing and health-themed content, e-commerce, audio and video streaming, and other resources digitally through the web. Salem
Web Network™ (“SWN”) websites include Christian content websites; OnePlace.com, Christianity.com, Crosswalk.com®,
GodVine.com, GodTube.com, CrossCards.com, LightSource.com, Jesus.org, BibleStudyTools.com, iBelieve.com, CCMmagazine.com and ChristianHeadlines.com,
and our conservative opinion websites; collectively known as Townhall Media, include Townhall.com™, HotAir.com, Twitchy.com,
HumanEvents.com, RedState.com, and BearingArms.com. We also publish digital newsletters through Eagle Financial Publications, which
provide market analysis and non-individualized investment strategies from financial commentators on a subscription basis.
Our church e-commerce websites, including WorshipHouseMedia.com,
SermonSpice.com, SermonSearch.com, ChurchStaffing.com, and ChristianJobs.com, offer a variety of digital resources including videos,
song tracks, sermon archives and job listings to pastors and Church leaders. E-commerce also includes Eagle Wellness, which sells
nutritional supplements.
Our web content is accessible through all of our radio station websites
that feature content of interest to local audiences throughout the United States.
Our publishing operating segment is comprised of three businesses:
(1) Regnery Publishing, a traditional book publisher that has published dozens of bestselling books by leading conservative authors
and personalities, including Ann Coulter, Newt Gingrich, David Limbaugh, Ed Klein, Mark Steyn and Dinesh D’Souza; (2) Salem
Author Services, our self-publishing service for authors through Xulon Press and Mill City Press; and (3)
Singing News
®
magazine, previously Salem Publishing™ which produced and distributed print magazines.
Variable Interest Entities
We may enter into agreements or investments with other entities
that could qualify as variable interest entities (“VIEs”) in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 810 “
Consolidation.”
A
VIE is consolidated in the financial statements if
we are deemed to be the primary beneficiary. The primary beneficiary
is the entity that holds the majority of the beneficial interests in the VIE, either explicitly or implicitly. A VIE is an entity
for which the primary beneficiary’s interest in the entity can change with variations in factors other than the amount of
investment in the entity. We perform our evaluation for VIE’s upon entry into the agreement or investment. We re-evaluate
the VIE when or if events occur that could change the status of the VIE.
We may enter into lease arrangements with entities controlled by
our principal stockholders or other related parties. We believe that the requirements of FASB ASC Topic 810 do not apply to these
entities because the lease arrangements do not contain explicit guarantees of the residual value of the real estate, do not contain
purchase options or similar provisions and the leases are at terms that do not vary materially from leases that would have been
available with unaffiliated parties. Additionally, we do not have an equity interest in the entities controlled by our principal
stockholders or other related parties and we do not guarantee debt of the entities controlled by our principal stockholders or
other related parties.
We also enter into Local Marketing Agreements (“LMAs”)
or Time Brokerage Agreements (“TBAs”) contemporaneously with entering into an Asset Purchase Agreement (“APA”)
to acquire or sell a radio station. Typically, both LMAs and TBAs are contractual agreements under which the station owner/licensee
makes airtime available to a programmer/licensee in exchange for a fee and reimbursement of certain expenses. LMAs and TBAs are
subject to compliance with the antitrust laws and the communications laws, including the requirement that the licensee must maintain
independent control over the station and, in particular, its personnel, programming, and finances. The FCC has held that such agreements
do not violate the communications laws as long as the licensee of the station receiving programming from another station maintains
ultimate responsibility for, and control over, station operations and otherwise ensures compliance with the communications laws.
The requirements of FASB ASC Topic 810 may apply to entities under
LMAs or TBAs, depending on the facts and circumstances related to each transaction. As of September 30, 2017, we did not have implicit
or explicit arrangements that required consolidation under the guidance in FASB ASC Topic 810.
Use of Estimates
The preparation of financial statements in conformity with GAAP
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 include:
|
·
|
asset impairments, including goodwill, broadcasting licenses, other indefinite-lived intangible assets, and assets held for
sale;
|
|
·
|
probabilities associated with the potential for contingent earn-out consideration;
|
|
·
|
fair value measurements;
|
|
·
|
allowance for doubtful accounts;
|
|
·
|
sales returns and allowances;
|
|
·
|
reserves for royalty advances;
|
|
·
|
fair value of equity awards;
|
|
·
|
self-insurance reserves;
|
|
·
|
estimated lives for tangible and intangible assets;
|
|
·
|
income tax valuation allowances; and
|
|
·
|
uncertain tax positions.
|
These estimates require the use of judgment as future events and
the effect of these events cannot be predicted with certainty. The estimates will change as new events occur, as more experience
is acquired and as more information is obtained. We evaluate and update our assumptions and estimates on an ongoing basis and we
may consult outside experts to assist as considered necessary.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. These include the reclassification of land held for sale from current assets
to long term assets based on the APA term that exceeds twelve months and the reclassification of Salem Consumer Products (“SCP”)
from our digital media segment to our broadcast segment. SCP sells books, DVD’s and editorial content developed by our on-air
personalities. SCP was reclassed to include revenue from all network sources, in broadcast to assess the overall performance of
each network program. Refer to Note 19 – Segment Data for an explanation of this reclassification.
Recent Accounting Pronouncements
Changes to accounting principles are established by the FASB in
the form of ASUs to the FASB’s Codification. We consider the applicability and impact of all ASUs
on
our
financial position, results of operations, cash flows, or presentation thereof. Described below are ASUs that are not
yet effective, but may be applicable to our financial position, results of operations, cash flows, or presentation thereof. ASUs
not listed below were assessed and determined to not be applicable to our financial position, results of operations, cash flows,
or presentation thereof.
In September 2017, the FASB issued ASU 2017-13,
Revenue Recognition (Topic 605), Revenue from Contracts
with Customers (Topic 606), Leases (Topic 840), and Leases (
Topic 842). ASU 2017-13 provides additional clarification including
the addition of SEC paragraphs to the new revenue and leases sections of the Codification.
We
do not expect these clarifications to have a material impact on our financial position, results of operations, cash flows, or presentation
thereof.
In August 2017, the FASB issued ASU 2017-12, "
Derivatives
and Hedging: Targeted Improvements to Accounting for Hedging Activities
," which improves the financial reporting of hedging
relationships to better align risk management activities in financial statements and make certain targeted improvements to simplify
the application of the hedge accounting guidance in current GAAP. The standard is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial
statements that have not yet been issued.
We do not expect
the
adoption of this accounting standard to have a material impact
on our
financial position, results of operations, cash flows, or presentation thereof.
In May 2017, the FASB issued ASU 2017-09, “
Compensation
– Stock Compensation (Topic 718) Scope of Modification Accounting,
” which clarifies when to account for a change
in the terms or conditions of a share-based payment award as a modification. ASU 2017-09 requires modification accounting only
if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the
change in terms or conditions. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years.
We do not expect
the adoption of this
accounting standard to have a material impact
on our
financial
position, results of operations, cash flows, or presentation thereof.
In March 2017, the FASB issued ASU 2017-08, “
Receivables
– Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium on Purchased Callable Debt Securities
,” which amends
the amortization period for certain purchased callable debt securities held at a premium to a shorter period based on the earliest
call date. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years.
We do not expect
the adoption of this accounting standard
to have a material impact
on our
financial position, results of
operations, cash flows, or presentation thereof.
In February 2017, the FASB issued ASU 2017-05, “
Other Income
– Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20)
,” which clarifies the scope and
application of ASC Topic 610-20 on accounting for the sale or transfer of nonfinancial assets, that is an asset with physical value
such as real estate, equipment, intangibles or similar property. ASU 2017-05 is effective for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years.
We have not yet
evaluated the impact of the adoption of this accounting standard
on
our
financial position, results of operations, cash flows, or presentation thereof.
In January 2017, the FASB issued ASU 2017-04, “
Intangibles
– Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
,” which eliminates the requirement
to calculate the implied fair value of goodwill in Step 2 of the goodwill impairment test. Under ASU 2017-04, goodwill impairment
charges will be based on the excess of a reporting unit’s carrying amount over its fair value as determined in Step 1 of
the testing. ASU 2017-04 is effective for interim and annual testing dates after January 1, 2019, with early adoption permitted
for interim and annual goodwill impairment testing dates after January 1, 2017.
We
have not yet
evaluated the impact of the adoption of this accounting standard
on
our
financial position, results of operations, cash flows, or presentation thereof.
In January 2017, the FASB issued ASU 2017-01, “
Business
Combinations – Clarifying the Definition of a Business
,” which clarifies the definition of a business for determining
whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 is effective for
fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We
expect the adoption of ASU 2017-01 to impact the purchase price allocation of any future radio station acquisitions that will be
considered asset acquisitions under the new guidance rather than business acquisitions. We do not expect the change to have a material
impact on our financial position, results of operations, cash flows, or presentation thereof.
In November 2016, the FASB issued ASU 2016-18, “
Statements
of Cash Flows (Topic 230): Restricted Cash,
” which provides guidance on the presentation of restricted cash or restricted
cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. We do not expect the adoption of ASU 2016-18 to have a material impact on our cash flows
or presentation thereof.
In October 2016, the FASB issued ASU 2016-16 “
Intra-Entity
Transfers of Assets Other Than Inventory
,” which modifies existing guidance for the accounting for income tax consequences
of intra-entity transfers of assets.
This ASU requires entities to immediately
recognize the tax consequences on intercompany asset transfers (excluding inventory) at the transaction date, rather than deferring
the tax consequences under current GAAP. The guidance is effective for fiscal years beginning after December 15, 2018, and interim
reports within those fiscal years, with early adoption permitted only as of the first quarter of a fiscal year.
We do not
expect the adoption of ASU 2016-16 to have a material impact on our financial position, results of operations, cash flows, or presentation
thereof.
In August 2016, the FASB issued ASU 2016-15, “
Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”
which clarifies how entities should
classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing diversity in practice
related to eight specific types of transactions. The guidance is effective for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of ASU 2016-15 to have
a material impact on our financial cash flows or presentation thereof.
In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments-Credit
Losses,”
which changes the impairment model for most financial assets and certain other instruments. For trade and other
receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking
“expected loss” model that will replace today’s “incurred loss” model and generally will result in
the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will
measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The guidance
is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption
permitted.
We have not yet
evaluated the impact of the adoption
of this accounting standard
on our
financial position, results
of operations, cash flows, or presentation thereof.
In February 2016, the FASB issued ASU 2016-02, “
Leases
(Topic 842),” which requires that lessees recognize a right-of-use asset and a lease liability for all leases with lease
terms greater than twelve months in the balance sheet. ASU 2016-02 requires additional disclosures including the significant judgments
made by management to provide insight into the revenue and expense to be recognized from existing contracts and the timing and
uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years, with early adoption permitted. We have not yet determined the dollar impact of recording
operating leases on our statement of financial position. The adoption of ASU 2016-02 will have a material impact
on
our
financial position and the presentation thereof. Our existing credit facility stipulates that our covenants are based
on GAAP as of the agreement date. Therefore, the material impact of recording right-to-use assets and lease liabilities on our
statement of financial position is not expected to impact the compliance status for any covenant.
In January 2016, the FASB issued ASU 2016-01, “
Recognition
and Measurement of Financial Assets and Financial Liabilities
,” which provides updated guidance that enhances the reporting
model for financial instruments, including amendments, to address aspects of recognition, measurement, presentation and disclosure.
The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. With
the exception of the early application guidance applicable to certain entities, early adoption of the amendments is not permitted.
We have not yet
evaluated the impact of the adoption of this accounting
standard
on our
financial position, results of operations, cash
flows, or presentation thereof.
In May 2014, the FASB issued ASU 2014-09, “
Revenue from Contracts with Customers (Topic 606),”
and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016,
within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-13 respectively (ASU 2014-09, ASU 2015-14,
ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, and ASU 2017-13, collectively, “Topic 606”). Topic 606 supersedes
nearly all existing revenue recognition guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for
those goods or services. Topic 606 defines a five-step process to achieve this core principle and, in doing so, it is possible
more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. These
estimates include identifying performance obligations in the contract, estimating the amount of variable consideration to include
in the transaction price and allocating the transaction price to each separate performance obligation, among others. The guidance
is effective for us as of January 2018, the first interim period within fiscal years beginning on or after December 15, 2017, using
either of two methods: (1) retrospective application of Topic 606 to each prior reporting period presented with the option to elect
certain practical expedients as defined within Topic 606 or (2) retrospective application of Topic 606 with the cumulative
effect of initially applying Topic 606 recognized at the date of initial application and providing certain additional disclosures
as defined per Topic 606. We have developed a project plan for the implementation of ASC 606 and all related ASU’s as
of the effective date with further analysis planned during the remainder of 2017 to complete the implementation plan. Based on
our evaluation of a sample of revenue contracts with customers against the requirements of the standard, we believe that the reporting
of revenue as principal (gross) or agent (net) will impact our consolidated financial statements. We may sell advertising that
includes placement on third party websites that we currently report on a gross basis as principal due to having latitude in establishing
the sales price and bearing credit risk. Under new guidance, we will report this revenue net as agent because the third party is
primarily responsible for fulfilling the service. Preliminarily, we plan to adopt Topic 606 pursuant to the modified retrospective
application method of Topic 606. We do not believe that there will be a material impact to our revenues upon adoption as the practice
of selling advertising on third party websites has not been widely used. We expect this type of sale to grow in popularity in future
periods with the net incremental revenue reported in our financials. We continue to evaluate the impact of our pending adoption
of Topic 606 and our preliminary assessments are subject to change.
NOTE 2. IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE
ASSETS
Approximately 71% of our total assets as of September 30, 2017 consist
of indefinite-lived intangible assets, such as broadcast licenses, goodwill and mastheads, the value of which depends significantly
upon the operating results of our businesses. In the case of our radio stations, we would not be able to operate the properties
without the related FCC license for each property. Broadcast licenses are renewed with the FCC every eight years for a nominal
cost that is expensed as incurred. We continually monitor our stations’ compliance with the various regulatory requirements.
Historically, all of our broadcast licenses have been renewed at the end of their respective periods, and we expect that all broadcast
licenses will continue to be renewed in the future. Accordingly, we consider our broadcast licenses to be indefinite-lived intangible
assets in accordance with FASB ASC Topic 350, “
Intangibles – Goodwill and Other
.” Broadcast licenses account
for approximately 94% of our indefinite-lived intangible assets. Goodwill and mastheads account for the remaining 6%. We do not
amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently
if events or circumstances indicate that an asset may be impaired.
We complete our annual impairment tests in the fourth quarter of each year. We believe that our estimate
of the value of our broadcast licenses, mastheads, and goodwill is a critical accounting estimate as the value is significant in
relation to our total assets, and our estimates incorporate variables and assumptions that are based on past experiences and judgment
about future operating performance of our markets and business segments. If actual operating results are less favorable than the
assumptions and estimates we used, or if we reduce our estimates of future operating results, we are subject to future impairment
charges, 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 16.
Throughout 2017, we continued to evaluate our print magazine business
due to declines in operating results and projected revenues. We ceased publishing Preaching Magazine
™
, YouthWorker
Journal
™
, FaithTalk Magazine
™
and Homecoming® The Magazine upon delivery of the May 2017
print publications. We tested print magazines for impairment as of March 31, 2017 based on our decision to cease publications and
recorded an impairment charge of $19,000 associated with mastheads. There were no changes in depreciable lives of any property
or equipment associated with these magazines as each individually identifiable asset had been fully depreciated.
NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS
We account for property and equipment in accordance with FASB ASC
Topic 360-10, “
Property, Plant and Equipment
.” We periodically review our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Our review requires
us to estimate the fair value of assets when events or circumstances indicate that they may be impaired. The fair value measurements
for our long-lived assets use significant observable inputs that reflect our own assumptions about the estimates that market participants
would use in measuring fair value including assumptions about risk. If actual future results are less favorable than the assumptions
and estimates we used, we are subject to future impairment charges, the amount of which may be material. We reviewed long-lived
assets associated with Preaching Magazine
™
, YouthWorker Journal
™
, FaithTalk Magazine
™
and Homecoming® The Magazine as of March 31, 2017, due to our decision to cease publishing these magazines as of the May 2017
issue. We recorded a $1.9 million decrease in the cost and a $1.9 million decrease in the accumulated amortization for fully amortized
assets, including subscriber lists and domain names associated with these magazines. There was no impairment loss or adjustment
required to the previously estimated useful lives of these assets. There were no further indications of impairment present as of
September 30, 2017.
NOTE 4. ACQUISITIONS AND RECENT TRANSACTIONS
During the nine month period ended September 30, 2017, we completed
or entered into the following transactions:
Debt
On May 19, 2017, we closed on a private offering of $255.0 million
aggregate principal amount of 6.75% senior secured notes due 2024 (the “Notes”) and concurrently entered into a five-year
$30.0 million senior secured asset-based revolving credit facility, which includes a $5.0 million subfacility for standby letters
of credit and a $7.5 million subfacility for swingline loans (“ABL Facility”) due May 19, 2022. The net proceeds from
the offering of the Notes, together with borrowings under the ABL Facility, were used to repay outstanding borrowings, including
accrued and unpaid interest, on our previously existing senior credit facilities consisting of a term loan (“Term Loan B”)
and a revolving credit facility of $25.0 million (“Revolver”), and to pay fees and expenses incurred in connection
with the Notes offering and the ABL Facility (collectively, the “Refinancing”).
In connection with the Refinancing, on May 19, 2017, we repaid $258.0
million in principal on the Term Loan B and paid interest due as of that date. We recorded a $0.6 million pre-tax loss on the early
retirement of long-term debt related to the unamortized discount and a $1.5 million pre-tax loss on the early retirement of long-term
debt related to unamortized debt issuance costs associated with the Term Loan B. We also terminated the Revolver as of May 19,
2017. We repaid $4.1 million in outstanding principal on the Revolver and paid interest due as of that date. We recorded a $56,000
pre-tax loss on the early retirement of long-term debt related to unamortized debt issuance costs associated with the Revolver.
On February 28, 2017, we repaid $3.0 million principal on the Term
Loan B of $300.0 million, and paid interest due as of that date. We recorded a $6,200 pre-tax loss on the early retirement of long-term
debt related to the unamortized discount and $18,000 in unamortized debt issuance costs associated with the principal repayment.
On January 30, 2017, we repaid $2.0 million in principal on the
Term Loan B and paid interest due as of that date. We recorded a $4,500 pre-tax loss on the early retirement of long-term debt
related to the unamortized discount and $12,000 in unamortized debt issuance costs associated with the principal repayment.
Equity
On September 12, 2017, we announced a quarterly equity distribution
in the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.7 million was paid on September
29, 2017 to all Class A and Class B common stockholders of record as of September 22, 2017.
On August 9, 2017, a restricted stock award of 33,066 shares was
granted to an executive that vested immediately. The fair value of the restricted stock award was measured based on the grant date
market price of our common shares and expensed as of the vesting date. The restricted stock award contains transfer restrictions
under which they cannot be sold, pledged, transferred or assigned until three months from vesting date. The recipient of this restricted
stock award is entitled to all of the rights of absolute ownership of the
restricted
stock from the date of grant, including the right to vote the shares and to receive dividends.
Restricted stock awards are
independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The
award is considered issued and outstanding from the vest date of grant.
On June 1, 2017, we announced a quarterly equity distribution in
the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.7 million was paid on June 30,
2017 to all Class A and Class B common stockholders of record as of June 16, 2017.
On March 9, 2017, we announced a quarterly equity distribution in
the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.7 million was paid on March
30, 2017 to all Class A and Class B common stockholders of record as of March 20, 2017.
On March 24, 2017, a restricted stock award of 178,592 shares was
granted to certain members of management that vested immediately. The fair value of each restricted stock award was measured based
on the grant date market price of our common shares and expensed as of the vesting date. These restricted stock awards contained
transfer restrictions under which they could not be sold, pledged, transferred or assigned until three months from vesting date.
Recipients of these restricted stock awards were entitled to all the rights of absolute ownership of the
restricted
stock from the date of grant, including the right to vote the shares and to receive dividends.
Restricted stock awards are
independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The
awards were considered issued and outstanding from the vest date of grant.
Acquisitions – Broadcast
On September 15, 2017, we closed on the acquisition of real property,
including the land, tower and broadcasting facilities, of radio station WSPZ-AM in Bethesda, Maryland for $1.5 million in cash.
We recognized goodwill of approximately $13,000 associated with the going concern value of the existing income generating leases
acquired with the broadcast tower.
On July 24, 2017, we closed on the acquisition of the FM translator
construction permit in Eaglemount, Washington, for $40,000 in cash. The FM translator will be relocated to the Portland, Oregon
market for use by our KDZR-AM radio station.
On June 28, 2017, we closed on the acquisition of an FM translator
construction permit in Festus, Missouri for $40,000 in cash. The FM translator will be relocated to the St. Louis, Missouri market
for use by our KXFN-FM radio station.
On March 14, 2017, we closed on the acquisition of an FM translator
construction permit in Quartz Site, Arizona for $20,000 in cash. The FM translator will be relocated to the San Diego, California
market for use by our KPRZ-AM radio station.
On March 1, 2017, we closed on the acquisition of an FM translator
construction permit in Roseburg, Oregon for $45,000 in cash. The FM translator will be relocated to the Portland, Oregon market
for use by our KPDQ-AM radio station.
On January 16, 2017, we closed on the acquisition of an FM translator
in Astoria, Oregon for $33,000 in cash. The FM translator will be relocated to the Seattle, Washington market for use by our KGNW-AM
radio station.
On January 6, 2017, we closed on the acquisition of an FM translator
construction permit in Mohave Valley, Arizona for $20,000 in cash. The FM translator will be relocated to the San Diego, California
market for use by our KCBQ-AM radio.
Acquisitions − Digital Media
On August 31, 2017, we acquired the TeacherTube.com website and
related assets for $1.1 million in cash. TeacherTube.com is an online instructional video sharing community for teachers, students
and parents. We recorded goodwill of approximately $0.4 million associated with the expected synergies to be realized from combining
this website and related assets into our existing digital media platform. The accompanying Condensed Consolidated Statement of
Operations reflects the operating results as of the closing date within our digital media operating segment.
On August 31, 2017, we acquired the Intelligence Report newsletter and related assets valued at $2.5 million
and we assumed deferred subscription liabilities of $2.9 million. We paid no cash to the seller upon closing. We recorded goodwill
of approximately $0.4 million associated with the expected synergies to be realized from combining this financial publication and
related assets into our existing digital media platform. The accompanying Condensed Consolidated Statement of Operations reflects
the operating results as of the closing date within our digital media operating segment.
On July 6, 2017, we acquired the TradersCrux.com website and related assets for $0.3 million in cash.
As part of the purchase agreement, we may pay up to an additional $0.1 million in contingent earn-out consideration within one
year upon the achievement of income benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions
as to the ability of TradersCrux.com to achieve the income targets at the time of closing, we estimated the fair value of the contingent
earn-out consideration to be $18,750, which approximates the discounted present value due to the earn-out period of less than one
year. We recorded goodwill of approximately $900 associated with the expected synergies to be realized from combining this website
and related assets into our existing digital media platform.
On June 8, 2017, we acquired a Portuguese Bible mobile application
and related assets for $65,000 in cash. As part of the purchase agreement, we may pay up to an additional $20,000 in contingent
earn-out consideration over the next twelve months based on the achievement of certain revenue benchmarks. Using a probability-weighted
discounted cash flow model based on our own assumptions as to the ability of the Portuguese Bible mobile’s applications to
achieve the revenue targets at the time of closing, we estimated the fair value of the contingent earn-out consideration to be
$16,500, which approximated the discounted present value due to the earn-out period of less than one year.
On March 15, 2017, we acquired the website prayers-for-special-help.com
and related assets for $0.2 million in cash. We recorded goodwill of approximately $15,000 with the expected synergies to be realized
from combining these applications into our existing digital media platform. The accompanying Condensed Consolidated Statement of
Operations reflects the operating results as of the closing date within our digital media operating segment.
A summary of our business acquisitions and asset purchases during
the nine month period ended September 30, 2017, none of which were individually or in the aggregate material to our Condensed Consolidated
financial position as of the respective date of acquisition, is as follows:
Acquisition
Date
|
|
Description
|
|
Total
Cost
|
|
|
|
|
|
(Dollars in thousands)
|
|
September 15, 2017
|
|
Real property of radio station WSPZ-AM in Bethesda,
Maryland (business acquisition)
|
|
$
|
1,500
|
|
August 31, 2017
|
|
TeacherTube.com (business acquisition)
|
|
|
1,100
|
|
August 31, 2017
|
|
Intelligence Reporter newsletter (business acquisition)
|
|
|
—
|
|
July 24, 2017
|
|
FM Translator construction permit, Eaglemount, Washington (asset
acquisition)
|
|
|
40
|
|
July 6, 2017
|
|
TradersCrux.com (business acquisition)
|
|
|
298
|
|
June 28, 2017
|
|
FM Translator construction permit, Festus, Missouri (asset acquisition)
|
|
|
40
|
|
June 8, 2017
|
|
Portuguese Bible Mobile Applications (business acquisition)
|
|
|
82
|
|
March 15, 2017
|
|
Prayers for Special Help (business acquisition)
|
|
|
245
|
|
March 14, 2017
|
|
FM Translator construction permit, Quartz Site, Arizona (asset purchase)
|
|
|
20
|
|
March 1, 2017
|
|
FM Translator construction permit, Roseburg, Oregon (asset purchase)
|
|
|
45
|
|
January 16, 2017
|
|
FM Translator, Astoria, Oregon (asset purchase)
|
|
|
33
|
|
January 1, 2017
|
|
FM Translator construction permit, Mohave Valley,
Arizona (asset purchase)
|
|
|
20
|
|
|
|
|
|
$
|
3,423
|
|
The operating results of our business acquisitions and asset purchases
are included in our consolidated results of operations from their respective closing date or the date that we began operating them
under an LMA or TBA. Under the acquisition method of accounting as specified in FASB ASC Topic 805, “
Business Combinations
,”
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.
Estimates of the fair value include discounted estimated cash flows
to be generated by the assets and their expected useful lives based on historical experience, market trends and any synergies believed
to be achieved from the acquisition. Acquisitions may include contingent consideration, the fair value of which is estimated as
of the acquisition date as the present value of the expected contingent payments as determined using weighted probabilities of
the payment amounts. We may retain a third-party appraiser to estimate the fair value of the acquired net assets as of the acquisition
date. As part of the valuation and appraisal process, the third-party appraiser prepares a report assigning estimated fair values
to the various assets acquired. These fair value estimates are subjective in nature and require careful consideration and judgment.
Management reviews the third party reports for reasonableness of the assigned values.
We believe that these valuations and analysis provide appropriate
estimates of the fair value for the net assets acquired as of the acquisition date. These initial valuations are subject to refinement
during the measurement period, which may be up to one year from the acquisition date. During this measurement period, we may retroactively
record adjustments to the net assets acquired based on additional information obtained for items that existed as of the acquisition
date. Upon the conclusion of the measurement period, any adjustments are reflected in our Condensed Consolidated Statements of
Operations. To date, we have not recorded adjustments to the estimated fair values used in our acquisition consideration during
or after the measurement period.
Property and equipment are recorded at the estimated fair value
and depreciated on a straight-line basis over their estimated useful lives. Finite-lived intangible assets are recorded at their
estimated fair value and amortized on a straight-line basis over their estimated useful lives. Goodwill, which represents the organizational
systems and procedures in place to ensure the effective operation of the entity, may also be recorded and tested for impairment.
Costs associated with acquisitions, such as consulting and legal fees, are expensed as incurred. We recognized costs associated
with acquisitions of $0.1 million during the nine month period ended September 30, 2017 compared to $0.3 million during the same
period of the prior year, which are included in unallocated corporate expenses in the accompanying Condensed Consolidated Statements
of Operations.
The total acquisition consideration is equal to the sum of all cash
payments, the fair value of any deferred payments and promissory notes, and the present value of any estimated contingent earn-out
consideration. We estimate the fair value of contingent earn-out consideration using a probability-weighted discounted cash flow
model. The fair value measurement is based on significant inputs that are not observable in the market and thus represent a Level
3 measurement as defined in Note 16 - Fair Value Measurements.
The following table summarizes the total acquisition consideration
for the nine month period ended September 30, 2017:
Description
|
|
Total Consideration
|
|
|
|
(Dollars in thousands)
|
|
Cash payments made upon closing
|
|
$
|
3,352
|
|
Escrow deposits paid in prior years
|
|
|
35
|
|
Present value of estimated fair value of contingent earn-out consideration
|
|
|
36
|
|
Total purchase price consideration
|
|
$
|
3,423
|
|
The fair value of the net assets acquired was allocated as follows:
|
|
Net Broadcast
|
|
|
Net Digital Media
|
|
|
Total Net
|
|
|
|
Assets Acquired
|
|
|
Assets Acquired
|
|
|
Assets Acquired
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
1,487
|
|
|
$
|
479
|
|
|
$
|
1,966
|
|
Broadcast licenses
|
|
|
198
|
|
|
|
—
|
|
|
|
198
|
|
Goodwill
|
|
|
13
|
|
|
|
810
|
|
|
|
823
|
|
Customer lists and contracts
|
|
|
—
|
|
|
|
314
|
|
|
|
314
|
|
Domain and brand names
|
|
|
—
|
|
|
|
647
|
|
|
|
647
|
|
Subscriber base and lists
|
|
|
—
|
|
|
|
2,316
|
|
|
|
2,316
|
|
Non-compete agreements
|
|
|
—
|
|
|
|
11
|
|
|
|
11
|
|
|
|
$
|
1,698
|
|
|
$
|
4,577
|
|
|
$
|
6,275
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
—
|
|
|
|
(2,852
|
)
|
|
|
(2,852
|
)
|
|
|
$
|
1,698
|
|
|
$
|
1,725
|
|
|
$
|
3,423
|
|
Pending Transactions
On September 15, 2017, we entered an APA to acquire radio station
WSPZ-AM in Bethesda, Maryland for $0.6 million in cash from a related party. We began programming the station under an LMA within
our Washington DC broadcast market on the same date. The accompanying Condensed Consolidated Statement of Operations reflects
the operating results of this station as of the LMA date within our broadcast segment. The acquisition is subject to the approval
of the FCC and is expected to close in the fourth quarter of 2017.
In August 2017, we received an escrow deposit under an agreement to sell land in Covina, California for
$1.0 million dollars. The land is recorded in assets held for sale and has not been used in operations. The sale is subject to
the buyer’s ability to complete due diligence on their expected use of the land and is currently expected to close in the
latter half of 2020.
We are programming radio station KHTE-FM, Little Rock, Arkansas,
under a 36 month TBA that began on April 1, 2015. The TBA is extendable for up to 48 months. We have the option to acquire the
station for $1.2 million in cash during the TBA period. The accompanying Condensed Consolidated Statements of Operations included
in this quarterly report on Form 10-Q reflect the operating results of this entity as of the TBA date within our broadcast segment.
Divestitures
On June 1, 2017, we received $0.6 million in cash for a former transmitter
site in our Dallas, Texas market that had been leased to a third-party.
Due to operating results during the three month period ended March
31, 2017 that did not meet management’s expectations, we ceased publishing Preaching Magazine
™
, YouthWorker
Journal
™
, FaithTalk Magazine
™
and Homecoming® The Magazine upon delivery of the May 2017
print publications. On May 30, 2017, we received $10,000 for Preaching Magazine
™
and YouthWorker Journal
™
.
The purchaser assumed all deferred subscription liabilities for these publications resulting in a pre-tax gain on the sale or disposal
of assets of approximately $56,000.
On January 3, 2017, Word Broadcasting began operating our Louisville
radio stations (WFIA-AM; WFIA-FM; WGTK-AM) under a twenty-four month TBA.
NOTE 5. CONTINGENT EARN-OUT CONSIDERATION
Our acquisitions may include contingent earn-out consideration as
part of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. The
fair value of the contingent earn-out consideration is estimated as of the acquisition date at the present value of the expected
contingent payments to be made using a probability-weighted discounted cash flow model for probabilities of possible future payments.
The present value of the expected future payouts is accreted to interest expense over the earn-out period. The fair value estimates
use unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks
and discount rates used in the calculations. The unobservable inputs are defined in FASB ASC Topic 820, “
Fair Value Measurements
and Disclosures,”
as Level 3 inputs discussed in detail in Note 16.
We review the probabilities of possible future payments to the estimated
fair value of any contingent earn-out consideration on a quarterly basis over the earn-out period. Actual results are compared
to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase
or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability
will increase or decrease, up to the contracted limit, as applicable. Changes in the estimated fair value of the contingent earn-out
consideration are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair
value of the contingent earn-out consideration may materially impact and cause volatility in our operating results.
TradersCrux.com
We acquired the TradersCrux.com website and related assets for $0.3
million in cash on July 6, 2017. We paid $0.3 million in cash upon closing and may pay up to an additional $0.1 million in contingent
earn-out consideration within one year upon the achievement of income benchmarks. Using a probability-weighted discounted cash
flow model based on our own assumptions as to the ability of TradersCrux.com to achieve the income targets at the time of closing,
we estimated the fair value of the contingent earn-out consideration to be $18,750, which approximates the discounted present value
due to the earn-out of less than one year.
We review the fair value of the contingent earn-out consideration
quarterly over the earn-out period to compare actual revenues achieved and projected to the estimated revenues used in our forecasts.
Any changes in the estimated fair value of the contingent earn-out consideration will be reflected in our results of operations
in the period they are identified, up to the maximum future value outstanding under the contract of $0.1 million. There were no
changes in our estimates of the fair value of the contingent earn-out consideration as of the three month period ended September
30, 2017.
Portuguese Bible Mobile Application
We acquired a Portuguese Bible mobile application and related assets
on June 8, 2017. We paid $65,000 in cash upon closing and may pay up to an additional $20,000 in contingent earn-out consideration
during the twelve month period ending June 8, 2018 based on the achievement of certain revenue benchmarks. Using a probability-weighted
discounted cash flow model based on our own assumptions as to the ability of the Portuguese Bible mobile applications to achieve
the revenue targets at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $16,500,
which approximated the discounted present value due to the earn-out of less than one year.
We review the fair value of the contingent earn-out consideration
quarterly over the earn-out period to compare actual revenues achieved and projected to the estimated revenues used in our forecasts.
Any changes in the estimated fair value of the contingent earn-out consideration will be reflected in our results of operations
in the period they are identified, up to the maximum future value outstanding under the contract of $20,000. We recorded an increase
of $1,700 in the estimated fair value of the contingent earn-out consideration that is reflected in our results of operations for
the three month period ended September 30, 2017. The increase is due to a higher likelihood of achieving the revenue targets based
on actual results to date that exceed our original estimates.
Turner Investment Products
We acquired Mike Turner’s line of investment products, including
TurnerTrends.com and other domain names and related assets on September 13, 2016. We paid $0.4 million in cash upon closing and
may pay up to an additional $0.1 million in contingent earn-out consideration during the twelve month period ended September 13,
2017 based on the achievement of certain revenue benchmarks. Using a probability-weighted discounted cash flow model based on our
own assumptions as to the ability of Turner’s investment products to achieve the revenue targets at the time of closing,
we estimated the fair value of the contingent earn-out consideration to be $74,000, which was recorded at the discounted present
value of $66,000. The discount is being accreted to interest expense over the twelve month earn-out period. We believe that our
experience with digital subscriptions and websites provides a reasonable basis for our estimates.
We review the fair value of the contingent earn-out consideration
quarterly over the earn-out period to compare actual subscriber revenues achieved and projected to the estimated subscriber revenues
used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration will be reflected in our
results of operations in the period they are identified, up to the maximum future value outstanding under the contract of $74,000.
During the three and nine month period ended September 30, 2017, we recorded a net decrease of $14,000 and $53,000, respectively,
in the estimated fair value of the contingent earn-out consideration that is reflected in our results of operations. These decreases
were based on the likelihood of achieving the revenue targets based on actual results to date that were lower than our original
estimates. We made no additional cash payments to the seller during the earn-out period ended September 13, 2017.
Daily Bible Devotion
We acquired Daily Bible Devotion mobile applications on May 6, 2015.
We paid $1.1 million in cash upon closing and may pay up to an additional $0.3 million in contingent earn-out consideration payable
over the next two years based upon the achievement of cumulative session benchmarks for each mobile application. Using a probability-weighted
discounted cash flow model based on our own assumptions as to the ability of Bible Devotional Applications to achieve the session
benchmarks at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $165,000, which was
recorded at the discounted present value of $142,000. The discount is being accreted to interest expense over the two-year earn-out
period. We believe that our experience with digital mobile applications and websites provides a reasonable basis for our estimates.
We reviewed the fair value of the contingent earn-out consideration
quarterly over the two-year earn-out period to compare actual cumulative sessions achieved to the estimated cumulative sessions
used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration were reflected in our results
of operations in the period they were identified, up to the maximum amount due under the contract of $165,000 less any amounts
paid to date. As of the six month period ended June 30, 2017, the end of the earn-out period, we recorded a net decrease of $4,000
in the estimated fair value of the contingent earn-out consideration based on actual session results at the end of the earn-out
period. We paid a total of $75,000 in cash for amounts due under the contingent earn-out as of the end of the term on May 6, 2017.
Over the total two-year earn out period, we paid a total of $75,000 to the seller with no payments made during the nine month period
ended September 30, 2017.
Bryan Perry Newsletters
On February 6, 2015, we acquired the assets and assumed the deferred
subscription liabilities for Bryan Perry Newsletters, paying no cash to the seller upon closing. Future contingent earn-out consideration
due to the seller was based upon 50% of the net subscriber revenues achieved over the two-year period from date of close with no
minimum or maximum contractual amount due. Using a probability-weighted discounted cash flow model based on our revenue projections
at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $171,000, which we recorded
at the discounted present value of $158,000. The discount was accreted to interest expense over the two-year earn-out period. We
paid a total of $91,000 to the seller over the two year earn out period, of which approximately $14,000 was paid during the six
month period ended June 30, 2017, which concluded the earn-out period.
Eagle Publishing
On January 10, 2014, we acquired the entities of Eagle Publishing,
including Regnery Publishing, HumanEvents.com, RedState.com, Eagle Financial Publications and Eagle Wellness. The base purchase
price was $8.5 million, with $3.5 million paid in cash upon closing, and deferred payments of $2.5 million each due January 2015
and January 2016. The purchase agreement included contingent earn-out consideration of up to $8.5 million based upon the achievement
of certain revenue benchmarks established for calendar years 2014, 2015 and 2016 for each of the Eagle entities. Using a probability-weighted
discounted cash flow model based on the likelihood of achievement of the benchmarks at the time of closing, we estimated the fair
value of the contingent earn-out consideration to be $2.4 million, which was recorded at the discounted present value of $2.0 million.
The discount was accreted to interest expense over the three-year earn-out period. We paid a total of $0.9 million in cash for
amounts due under the contingent earn-out as of the end of the term on December 31, 2016.
The following table reflects the changes in the present value of
our acquisition-related estimated contingent earn-out consideration during the three and nine month periods ended September 30,
2017 and 2016:
|
|
Three Months Ended September 30, 2017
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Accrued Expenses
|
|
|
Other Liabilities
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Beginning Balance as of July 1, 2017
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
31
|
|
Acquisitions
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
Accretion of acquisition-related contingent earn-out consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Change in the estimated fair value of contingent earn-out consideration
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
(12
|
)
|
Reclassification of payments due in next 12 months to short-term
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending Balance as of September 30, 2017
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Accrued Expenses
|
|
|
Other Liabilities
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Beginning Balance as of July 1, 2016
|
|
$
|
441
|
|
|
$
|
—
|
|
|
$
|
441
|
|
Acquisitions
|
|
|
66
|
|
|
|
—
|
|
|
|
66
|
|
Accretion of acquisition-related contingent earn-out consideration
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
Change in the estimated fair value of contingent earn-out consideration
|
|
|
(196
|
)
|
|
|
—
|
|
|
|
(196
|
)
|
Reclassification of payments due in next 12 months to short-term
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payments
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
(11
|
)
|
Ending Balance as of September 30, 2016
|
|
$
|
305
|
|
|
$
|
—
|
|
|
$
|
305
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Accrued Expenses
|
|
|
Other Liabilities
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Beginning Balance as of January 1, 2017
|
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
66
|
|
Acquisitions
|
|
|
36
|
|
|
|
—
|
|
|
|
36
|
|
Accretion of acquisition-related contingent earn-out consideration
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
Change in the estimated fair value of contingent earn-out consideration
|
|
|
(54
|
)
|
|
|
—
|
|
|
|
(54
|
)
|
Reclassification of payments due in next 12 months to short-term
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payments
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
(14
|
)
|
Ending Balance as of September 30, 2017
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Accrued Expenses
|
|
|
Other Liabilities
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Beginning Balance as of January 1, 2016
|
|
$
|
173
|
|
|
$
|
602
|
|
|
$
|
775
|
|
Acquisitions
|
|
|
66
|
|
|
|
—
|
|
|
|
66
|
|
Accretion of acquisition-related contingent earn-out consideration
|
|
|
13
|
|
|
|
8
|
|
|
|
21
|
|
Change in the estimated fair value of contingent earn-out consideration
|
|
|
(404
|
)
|
|
|
(54
|
)
|
|
|
(458
|
)
|
Reclassification of payments due in next 12 months to short-term
|
|
|
556
|
|
|
|
(556
|
)
|
|
|
—
|
|
Payments
|
|
|
(99
|
)
|
|
|
—
|
|
|
|
(99
|
)
|
Ending Balance as of September 30, 2016
|
|
$
|
305
|
|
|
$
|
—
|
|
|
$
|
305
|
|
NOTE 6. INVENTORIES
Inventories consist of finished goods that include books printed
for sale by Regnery Publishing and wellness products for sale on our e-commerce sites. All inventories are valued at the lower
of cost or market as determined on a First-In First-Out (“FIFO”) cost method and reported net of estimated reserves
for obsolescence.
The following table provides details of inventory on hand by segment:
|
|
As of December 31, 2016
|
|
|
As of September 30, 2017
|
|
|
|
(Dollars in thousands)
|
|
Regnery Publishing book inventories
|
|
$
|
2,473
|
|
|
$
|
2,026
|
|
Reserve for obsolescence – Regnery Publishing
|
|
|
(2,104
|
)
|
|
|
(1,544
|
)
|
Inventory, net - Regnery Publishing
|
|
|
369
|
|
|
|
482
|
|
Wellness products
|
|
$
|
423
|
|
|
$
|
394
|
|
Reserve for obsolescence – Wellness products
|
|
|
(122
|
)
|
|
|
(67
|
)
|
Inventory, net - Wellness products
|
|
|
301
|
|
|
|
327
|
|
Consolidated inventories, net
|
|
$
|
670
|
|
|
$
|
809
|
|
NOTE 7. BROADCAST LICENSES
The following table presents the changes in broadcasting licenses
that include capital projects and acquisitions of radio stations and FM translators as discussed in Note 4 of our Condensed Consolidated
financial statements.
Broadcast Licenses
|
|
Twelve Months Ended
December 31, 2016
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period before cumulative loss on impairment
|
|
$
|
492,032
|
|
|
$
|
494,058
|
|
Accumulated loss on impairment
|
|
|
(99,001
|
)
|
|
|
(105,541
|
)
|
Balance, beginning of period after cumulative loss on impairment
|
|
|
393,031
|
|
|
|
388,517
|
|
Acquisitions of radio stations
|
|
|
74
|
|
|
|
—
|
|
Acquisitions of FM translators and construction permits
|
|
|
1,645
|
|
|
|
198
|
|
Capital projects to improve broadcast signal and strength
|
|
|
307
|
|
|
|
5
|
|
Impairments based on estimated fair value of broadcast licenses
|
|
|
(6,540
|
)
|
|
|
—
|
|
Balance, end of period before cumulative loss on impairment
|
|
|
494,058
|
|
|
|
494,261
|
|
Accumulated loss on impairment
|
|
|
(105,541
|
)
|
|
|
(105,541
|
)
|
Balance, end of period after cumulative loss on impairment
|
|
$
|
388,517
|
|
|
$
|
388,720
|
|
NOTE 8. GOODWILL
The following table presents the changes in goodwill including acquisitions
as discussed in Note 4 of our Condensed Consolidated financial statements.
Goodwill
|
|
Twelve Months Ended
December 31, 2016
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period before cumulative loss on impairment
|
|
$
|
26,560
|
|
|
$
|
27,642
|
|
Accumulated loss on impairment
|
|
|
(1,997
|
)
|
|
|
(2,029
|
)
|
Balance, beginning of period after cumulative loss on impairment
|
|
|
24,563
|
|
|
|
25,613
|
|
Acquisitions of radio stations and broadcast businesses
|
|
|
—
|
|
|
|
13
|
|
Acquisitions of digital media entities
|
|
|
237
|
|
|
|
810
|
|
Acquisitions of publishing entities
|
|
|
845
|
|
|
|
—
|
|
Impairment charge during year
|
|
|
(32
|
)
|
|
|
—
|
|
Balance, end of period before cumulative loss on impairment
|
|
|
27,642
|
|
|
|
28,465
|
|
Accumulated loss on impairment
|
|
|
(2,029
|
)
|
|
|
(2,029
|
)
|
Ending period balance
|
|
$
|
25,613
|
|
|
$
|
26,436
|
|
NOTE 9. PROPERTY AND EQUIPMENT
The following is a summary of the categories of our property and
equipment:
|
|
As of December 31, 2016
|
|
|
As of September 30, 2017
|
|
|
|
(Dollars in thousands)
|
|
Land
|
|
$
|
32,402
|
|
|
$
|
33,008
|
|
Buildings
|
|
|
29,070
|
|
|
|
29,018
|
|
Office furnishings and equipment
|
|
|
37,386
|
|
|
|
37,135
|
|
Office furnishings and equipment under capital lease obligations
|
|
|
228
|
|
|
|
244
|
|
Antennae, towers and transmitting equipment
|
|
|
84,144
|
|
|
|
85,450
|
|
Antennae, towers and transmitting equipment under capital lease obligations
|
|
|
795
|
|
|
|
795
|
|
Studio, production and mobile equipment
|
|
|
28,668
|
|
|
|
29,322
|
|
Computer software and website development costs
|
|
|
20,042
|
|
|
|
22,756
|
|
Record and tape libraries
|
|
|
27
|
|
|
|
27
|
|
Automobiles
|
|
|
1,373
|
|
|
|
1,342
|
|
Leasehold improvements
|
|
|
14,696
|
|
|
|
18,626
|
|
Construction-in-progress
|
|
|
9,983
|
|
|
|
6,328
|
|
|
|
$
|
258,814
|
|
|
$
|
264,051
|
|
Less accumulated depreciation
|
|
|
(156,024
|
)
|
|
|
(161,848
|
)
|
|
|
$
|
102,790
|
|
|
$
|
102,203
|
|
Depreciation expense was approximately $3.1 million and $3.0 million,
for the three month periods ended September 30, 2017 and 2016, respectively, and $9.2 million and $9.0 million for the nine month
periods ended September 30, 2017 and 2016, respectively. Included in this amount is $10,000 and $30,000 for the three and nine
month periods ended September 30, 2017 and $11,000 and $32,000 for the three and nine month periods ended September 30, 2016, on
assets acquired under capital lease obligations. Accumulated depreciation of assets acquired under capital leases was $176,000
and $146,000 at September 30, 2017 and December 31, 2016, respectively.
NOTE 10. AMORTIZABLE INTANGIBLE ASSETS
The following tables provide details, by major category, of the
significant classes of amortizable intangible assets:
|
|
As of September 30, 2017
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(Dollars in thousands)
|
|
Customer lists and contracts
|
|
$
|
22,865
|
|
|
$
|
(20,681
|
)
|
|
$
|
2,184
|
|
Domain and brand names
|
|
|
20,109
|
|
|
|
(14,139
|
)
|
|
|
5,970
|
|
Favorable and assigned leases
|
|
|
2,379
|
|
|
|
(2,018
|
)
|
|
|
361
|
|
Subscriber base and lists
|
|
|
8,797
|
|
|
|
(4,402
|
)
|
|
|
4,395
|
|
Author relationships
|
|
|
2,771
|
|
|
|
(2,171
|
)
|
|
|
600
|
|
Non-compete agreements
|
|
|
2,029
|
|
|
|
(1,263
|
)
|
|
|
766
|
|
Other amortizable intangible assets
|
|
|
1,333
|
|
|
|
(1,333
|
)
|
|
|
—
|
|
|
|
$
|
60,283
|
|
|
$
|
(46,007
|
)
|
|
$
|
14,276
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(Dollars in thousands)
|
|
Customer lists and contracts
|
|
$
|
22,599
|
|
|
$
|
(20,070
|
)
|
|
$
|
2,529
|
|
Domain and brand names
|
|
|
19,821
|
|
|
|
(12,970
|
)
|
|
|
6,851
|
|
Favorable and assigned leases
|
|
|
2,379
|
|
|
|
(1,972
|
)
|
|
|
407
|
|
Subscriber base and lists
|
|
|
7,972
|
|
|
|
(5,304
|
)
|
|
|
2,668
|
|
Author relationships
|
|
|
2,771
|
|
|
|
(1,824
|
)
|
|
|
947
|
|
Non-compete agreements
|
|
|
2,018
|
|
|
|
(1,012
|
)
|
|
|
1,006
|
|
Other amortizable intangible assets
|
|
|
1,336
|
|
|
|
(1,336
|
)
|
|
|
—
|
|
|
|
$
|
58,896
|
|
|
$
|
(44,488
|
)
|
|
$
|
14,408
|
|
Amortization expense was approximately $1.1 million and $1.4 million
for the three month period ended September 30, 2017 and 2016, respectively, and $3.4 million and $3.7 million for the nine month
period ended September 30, 2017 and 2016, respectively. Based on the amortizable intangible assets as of September 30, 2017, we
estimate amortization expense for the next five years to be as follows:
Year Ended December 31,
|
|
Amortization Expense
|
|
|
|
(Dollars in thousands)
|
|
2017 (Oct – Dec)
|
|
$
|
1,173
|
|
2018
|
|
|
4,576
|
|
2019
|
|
|
4,006
|
|
2020
|
|
|
2,714
|
|
2021
|
|
|
1,159
|
|
Thereafter
|
|
|
648
|
|
Total
|
|
$
|
14,276
|
|
NOTE 11. LONG-TERM DEBT
Salem Media Group, Inc. has no independent assets or operations,
the subsidiary guarantees relating to certain debt are full and unconditional and joint and several, and any subsidiaries of Salem
Media Group, Inc. other than the subsidiary guarantors are minor.
6.75% Senior Secured Notes
On May 19, 2017, we issued in a private placement the Notes, which were guaranteed on a senior secured
basis by our existing subsidiaries (the “Subsidiary Guarantors”). The Notes bear interest at a rate of 6.75% per year
and mature on June 1, 2024, unless earlier redeemed or repurchased. Interest initially accrues on the Notes from May 19, 2017 and
is payable semi-annually, in cash in arrears, on June 1 and December 1 of each year, commencing December 1, 2017.
The Notes and the ABL Facility are secured by liens on substantially
all of our and the Subsidiary Guarantors’ assets, other than certain excluded assets. The ABL Facility has a first-priority
lien on our and the Subsidiary Guarantor’s accounts receivable, inventory, deposit and securities accounts, certain real
estate and related assets (the “ABL Priority Collateral”). The Notes are secured by a first-priority lien on substantially
all other assets of ours and the Subsidiary Guarantors (the “Notes Priority Collateral”). There is no direct lien on
our Federal Communications Commission (“FCC”) licenses to the extent prohibited by law or regulation.
We may redeem the Notes, in whole or in part, at any time on or
after June 1, 2020 at a price equal to 100% of the principal amount of the Notes plus a “make-whole” premium as of,
and accrued and unpaid interest, if any, to, but not including, the redemption date. At any time on or after June 1, 2020, we may
redeem some or all of the Notes at the redemption prices (expressed as percentages of the principal amount to be redeemed) set
forth in the Notes, plus accrued and unpaid interest, if any, to, but not including, the redemption date. In addition, we may redeem
up to 35% of the aggregate principal amount of the Notes before June 1, 2020 with the net cash proceeds from certain equity offerings
at a redemption price of 106.75% of the principal amount plus accrued and unpaid interest, if any, to, but not including, the redemption
date. We may also redeem up to 10% of the aggregate original principal amount of the Notes per twelve month period before June
1, 2020 at a redemption price of 103% of the principal amount plus accrued and unpaid interest to, but not including, the redemption
date.
The indenture relating to the Notes (the “Indenture”)
contains covenants that, among other things and subject in each case to certain specified exceptions, limit our ability and the
ability of our restricted subsidiaries to: (i) incur additional debt; (ii) declare or pay dividends, redeem stock or make other
distributions to stockholders; (iii) make investments; (iv) create liens or use assets as security in other transactions; (v) merge
or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; (vi) engage in transactions with affiliates;
and (vii) sell or transfer assets.
The Indenture provides for the following events of default (each,
an “Event of Default”): (i) default in payment of principal or premium on the Notes at maturity, upon repurchase, acceleration,
optional redemption or otherwise; (ii) default for 30 days in payment of interest on the Notes; (iii) the failure by us or certain
restricted subsidiaries to comply with other agreements in the Indenture or the Notes, in certain cases subject to notice and lapse
of time; (iv) the failure of any guarantee by certain significant Subsidiary Guarantors to be in full force and effect and enforceable
in accordance with its terms, subject to notice and lapse of time; (v) certain accelerations (including failure to pay within any
grace period) of other indebtedness of ours or any restricted subsidiary if the amount accelerated (or so unpaid) is at least $15
million; (vi) certain judgments for the payment of money in excess of $15 million; (vii) certain events of bankruptcy or insolvency
with respect to us or any significant subsidiary; and (vii) certain defaults with respect to any collateral having a fair market
value in excess of $15 million. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in
principal amount of the outstanding Notes may declare the principal of the Notes and any accrued interest on the Notes to be due
and payable immediately, subject to remedy or cure in certain cases. Certain events of bankruptcy or insolvency are Events of Default
which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default.
We are required to pay $17.2 million per year in interest on the
Notes. As of September 30, 2017, accrued interest on the Notes was $6.4 million.
We incurred debt issuance costs of $6.3 million that were recorded
as a reduction of the debt proceeds that are being amortized to non-cash interest expense over the life of the Notes using the
effective interest method. During the three and nine month periods ended September 30, 2017, $0.2 million and $0.3 million, respectively,
of debt issuance costs associated with the Notes were recognized as interest expense.
Asset-Based Revolving Credit Facility
On May 19, 2017, the Company also entered into the ABL Facility pursuant to a Credit Agreement (the “Credit
Agreement”) by and among us, as a borrower, our subsidiaries party thereto, as borrowers, Wells Fargo Bank, National Association,
as administrative agent and lead arranger, and the lenders that are parties thereto. We used the proceeds of the ABL Facility,
together with the net proceeds from the Notes offering, to repay outstanding borrowings under our previously existing senior credit
facilities, and related fees and expenses. Going forward, the proceeds of the ABL Facility will be used to provide ongoing working
capital and for other general corporate purposes (including permitted acquisitions).
The ABL Facility is a five-year $30.0 million revolving credit facility
due May 19, 2022, which includes a $5.0 million subfacility for standby letters of credit and a $7.5 million subfacility for swingline
loans. All borrowings under the ABL Facility accrue at a rate equal to a base rate or LIBOR rate plus a spread. The spread, which
is based on an availability-based measure, ranges from 0.50% to 1.00% for base rate borrowings and 1.50% to 2.00% for LIBOR rate
borrowings. If an event of default occurs, the interest rate may increase by 2.00% per annum. Amounts outstanding under the ABL
Facility may be paid and then reborrowed at our discretion without penalty or premium. Additionally, we pay a commitment fee on
the unused balance of 0.25% to 0.375% per year.
The ABL Facility is secured by a first-priority lien on the ABL
Priority Collateral and by a second-priority lien on the Notes Priority Collateral. There is no direct lien on the Company’s
FCC licenses to the extent prohibited by law or regulation (other than the economic value and proceeds thereof).
The Credit Agreement includes a springing fixed charge coverage
ratio of 1.0 to 1.0, which is tested during the period commencing on the last day of the fiscal month most recently ended prior
to the date on which Availability (as defined in the Credit Agreement) is less than the greater of 15% of the Maximum Revolver
Amount (as defined in the Credit Agreement) and $4.5 million and continuing for a period of 60 consecutive days after the first
day on which Availability exceeds such threshold amount. 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 the borrowers and their subsidiaries (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 assets to a third
party, except as permitted thereby; (viii) to prepay indebtedness; and (ix) to pay dividends.
The Credit Agreement provides for the following events of default:
(i) default for non-payment of any principal or letter of credit reimbursement when due or any interest, fees or other amounts
within five days of the due date; (ii) the failure by any borrower or any subsidiary to comply with any covenant or agreement contained
in the Credit Agreement or any other loan document, in certain cases subject to applicable notice and lapse of time; (iii) any
representation or warranty made pursuant to the Credit Agreement or any other loan document is incorrect in any material respect
when made; (iv) certain defaults of other indebtedness of any borrower or any subsidiary of indebtedness of at least $10 million;
(v) certain events of bankruptcy or insolvency with respect to any borrower or any subsidiary; (vi) certain judgments for the payment
of money of $10 million or more; (vii) a change of control; and (viii) certain defaults relating to the loss of FCC licenses, cessation
of broadcasting and termination of material station contracts. If an event of default occurs and is continuing, the Administrative
Agent and the Lenders may accelerate the amounts outstanding under the ABL Facility and may exercise remedies in respect of the
collateral.
We incurred debt issue costs of $0.6 million that were recorded
as an asset and are being amortized to non-cash interest expense over the term of the ABL Facility using the effective interest
method. During the three and nine month periods ended September 30, 2017, $63,000 and $86,000, respectively, of debt issue costs
associated with the Notes were recognized as interest expense. At September 30, 2017, the blended interest rate on amounts outstanding
under the ABL Facility was 2.98%.
We report outstanding balances on the ABL Facility as short-term
regardless of the maturity date based on use of the ABL Facility to fund ordinary and customary operating cash needs with frequent
repayments. We believe that our borrowing capacity under the ABL Facility allows us to meet our ongoing operating requirements,
fund capital expenditures and satisfy our debt service requirements for at least the next twelve months.
Prior Term Loan B and Revolving Credit Facility
Our prior credit facility consisted of a term loan of $300.0 million
(“Term Loan B”) and a revolving credit facility of $25.0 million (“Revolver”). The Term Loan B was issued
at a discount for total net proceeds of $298.5 million. The discount was amortized to non-cash interest expense over the life of
the loan using the effective interest method. For each of the three months ended September 30, 2017 and 2016, approximately $0
and $51,000, respectively, of the discount associated with the Term Loan B was recognized as interest expense. For each of the
nine months ended September 30, 2017 and 2016, approximately $74,000 and $155,000, respectively, of the discount associated with
the Term Loan B was recognized as interest expense.
The Term Loan B had a term of seven years, maturing in March 2020.
On May 19, 2017, we used the net proceeds of the Notes and a portion of the ABL Facility to fully repay amounts outstanding under
the Term Loan B of $258.0 million and under the Revolver of $4.1 million. We recorded a loss on the early retirement of long-term
debt of $2.1 million, which included $1.5 million of unamortized debt issuance costs on the Term Loan B and the Revolver and $0.6
million of unamortized discount on the Term Loan B.
The following payments or prepayments of the Term Loan B were made
during the year ended December 31, 2016 and through the date of the termination, including interest through the payment date as
follows:
Date
|
|
Principal Paid
|
|
|
Unamortized Discount
|
|
|
|
(Dollars in Thousands)
|
|
May 19, 2017
|
|
$
|
258,000
|
|
|
$
|
550
|
|
February 28, 2017
|
|
|
3,000
|
|
|
|
6
|
|
January 30, 2017
|
|
|
2,000
|
|
|
|
5
|
|
December 30, 2016
|
|
|
5,000
|
|
|
|
12
|
|
November 30, 2016
|
|
|
1,000
|
|
|
|
3
|
|
September 30, 2016
|
|
|
1,500
|
|
|
|
4
|
|
September 30, 2016
|
|
|
750
|
|
|
|
—
|
|
June 30, 2016
|
|
|
441
|
|
|
|
1
|
|
June 30, 2016
|
|
|
750
|
|
|
|
—
|
|
March 31, 2016
|
|
|
750
|
|
|
|
—
|
|
March 17, 2016
|
|
|
809
|
|
|
|
2
|
|
Debt issuance costs were amortized to non-cash interest expense
over the life of the Term Loan B using the effective interest method. For each of the three months ended September 30, 2017 and
2016, approximately $0 and $140,000, respectively, of the debt issuance costs associated with the Term Loan B were recognized as
interest expense. For each of the nine months ended September 30, 2017 and 2016, approximately $203,000 and $423,000 respectively,
of the debt issuance costs associated with the Term Loan B were recognized as interest expense.
Debt issuance costs associated with the Revolver were recorded as
an asset in accordance with ASU 2015-15. The costs were amortized to non-cash interest expense over the five year life of the Revolver
using the effective interest method based on an imputed interest rate of 4.58%. For each of the three month periods ended September
30, 2017 and 2016, we recorded amortization of deferred financing costs of approximately $0 and $17,000. For each of the nine month
periods ended September 30, 2017 and 2016, we recorded amortization of deferred financing costs of approximately $26,000 and $52,000.
Summary of long-term debt obligations
Long-term debt consisted of the following:
|
|
As of December 31, 2016
|
|
|
As of September 30, 2017
|
|
|
|
(Dollars in thousands)
|
|
6.75% Senior Secured Notes
|
|
$
|
—
|
|
|
$
|
255,000
|
|
Less unamortized debt issuance costs based on imputed interest rate of 7.08%
|
|
|
—
|
|
|
|
(6,004
|
)
|
6.75% Senior Secured Notes net carrying value
|
|
|
—
|
|
|
|
248,996
|
|
Asset-Based Revolving Credit Facility principal outstanding
|
|
|
—
|
|
|
|
6,629
|
|
Term Loan B principal amount
|
|
|
263,000
|
|
|
|
—
|
|
Less unamortized discount and debt issuance costs based on imputed interest rate of 4.78%
|
|
|
(2,371
|
)
|
|
|
—
|
|
Term Loan B net carrying value
|
|
|
260,629
|
|
|
|
—
|
|
Revolver principal outstanding
|
|
|
477
|
|
|
|
—
|
|
Capital leases and other loans
|
|
|
568
|
|
|
|
491
|
|
Long-term debt and capital lease obligations less unamortized debt issuance costs
|
|
|
261,674
|
|
|
|
256,116
|
|
Less current portion
|
|
|
(590
|
)
|
|
|
(6,741
|
)
|
Long-term debt and capital lease obligations less unamortized debt issuance costs, net of current portion
|
|
$
|
261,084
|
|
|
$
|
249,375
|
|
In addition to the outstanding amounts listed above, we also have
interest payments related to our long-term debt as follows as of September 30, 2017:
|
·
|
Outstanding borrowings of $6.6 million under the ABL Facility, with interest payments due at LIBOR plus 1.5% to 2.0% per annum;
|
|
·
|
$255.0 million aggregate principal amount of Notes with semi-annual interest payments at an annual rate of 6.75%; and
|
|
·
|
Commitment fee of 0.25% to 0.375% on the unused portion of the ABL Facility.
|
Other Debt
We have several capital leases related to office equipment. The
obligation recorded at December 31, 2016 and September 30, 2017 represents the present value of future commitments under the capital
lease agreements.
Maturities of Long-Term Debt and Capital Lease Obligations
Principal repayment requirements under all long-term debt agreements
outstanding at September 30, 2017 for each of the next five years and thereafter are as follows:
|
|
Amount
|
|
For the Twelve Months Ended September 30,
|
|
(Dollars in thousands)
|
|
2018
|
|
$
|
6,741
|
|
2019
|
|
|
108
|
|
2020
|
|
|
107
|
|
2021
|
|
|
121
|
|
2022
|
|
|
43
|
|
Thereafter
|
|
|
255,000
|
|
|
|
$
|
262,120
|
|
NOTE 12. STOCK INCENTIVE PLAN
Our Amended and Restated 1999 Stock Incentive Plan (the “Plan”)
provides for grants of equity-based awards to employees, non-employee directors and officers, and advisors of the company (“Eligible
Persons”). The Plan is designed to promote the interests of the company using equity investment interests to attract, motivate,
and retain individuals.
A maximum of 5,000,000 shares of common stock are authorized under
the Plan. All awards have restriction periods tied primarily to employment and/or service. The Plan allows for accelerated or continued
vesting in certain circumstances as defined in the Plan including death, disability, a change in control, and termination or retirement.
The Board of Directors, or a committee appointed by the Board, has discretion subject to limits defined in the Plan, to modify
the terms of any outstanding award.
Under the Plan, the Board, or a committee appointed by the Board,
may impose restrictions on the exercise of awards during pre-defined blackout periods. Insiders may participate in plans established
pursuant to Rule 10b5-1 under the Exchange Act that allow them to exercise awards subject to pre-established criteria.
We recognize non-cash stock-based compensation expense based on
the estimated fair value of awards in accordance with FASB ASC Topic 718 “
Compensation—Stock Compensation
.”
Stock-based compensation expense fluctuates over time as a result of the vesting periods for outstanding awards and the number
of awards that actually vest. We adopted ASU 2016-09, “
Improvements to Employee Share-Based Payment Accounting”
as of January 1, 2017. The adoption of this ASU did not materially impact our financial position, results of operations, or
cash flows.
The following table reflects the components of stock-based compensation
expense recognized in the Condensed Consolidated Statements of Operations for the three and nine month periods ended September
30, 2017 and 2016:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Stock option
compensation expense included in corporate expenses
|
|
$
|
94
|
|
|
$
|
27
|
|
|
$
|
296
|
|
|
$
|
126
|
|
Restricted stock shares
compensation expense included in corporate expenses
|
|
|
—
|
|
|
|
225
|
|
|
|
24
|
|
|
|
1,100
|
|
Stock option compensation
expense included in broadcast operating expenses
|
|
|
19
|
|
|
|
7
|
|
|
|
67
|
|
|
|
41
|
|
Restricted stock shares
compensation expense included in broadcast operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
224
|
|
Stock option compensation
expense included in digital media operating expenses
|
|
|
12
|
|
|
|
6
|
|
|
|
51
|
|
|
|
25
|
|
Restricted stock shares
compensation expense included in digital media operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
124
|
|
Stock option compensation
expense included in publishing operating expenses
|
|
|
9
|
|
|
|
3
|
|
|
|
20
|
|
|
|
17
|
|
Restricted
stock shares compensation expense included in publishing operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36
|
|
Total
stock-based compensation expense, pre-tax
|
|
$
|
134
|
|
|
$
|
268
|
|
|
$
|
458
|
|
|
$
|
1,693
|
|
Tax
benefit (expense) for stock-based compensation expense
|
|
|
(54
|
)
|
|
|
(107
|
)
|
|
|
(183
|
)
|
|
|
(677
|
)
|
Total
stock-based compensation expense, net of tax
|
|
$
|
80
|
|
|
$
|
161
|
|
|
$
|
275
|
|
|
$
|
1,016
|
|
Stock Option and Restricted Stock Grants
Eligible employees may receive stock option awards annually with
the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. Incentive
and non-qualified stock option awards allow the recipient to purchase shares of our common stock at a set price, not to be less
than the closing market price on the date of award, for no consideration payable by the recipient. The related number of shares
underlying the stock option is fixed at the time of the grant. Options generally vest over a four-year period with a maximum term
of five years from the vesting date. In addition, certain management and professional level employees may receive stock option
awards upon the commencement of employment.
The Plan also allows for awards of restricted stock, which have
been granted periodically to non-employee directors of the company. Awards granted to non-employee directors are made in exchange
for their services to the company as directors and therefore, the guidance in FASB ASC Topic 505-50 “
Equity Based Payments
to Non Employees
” is not applicable. Restricted stock awards contain transfer restrictions under which they cannot be
sold, pledged, transferred or assigned until the period specified in the award, generally from one to five years. Restricted stock
awards are independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient.
The awards are considered issued and outstanding from the vest date of grant.
The fair value of each award is estimated as of the date of the
grant using the Black-Scholes valuation model. The expected volatility reflects the consideration of the historical volatility
of our common stock as determined by the closing price over a six to ten year term commensurate with the expected term of the award.
Expected dividends reflect the amount of quarterly distributions authorized and declared on our Class A and Class B common stock
as of the grant date. The expected term of the awards are based on evaluations of historical and expected future employee exercise
behavior. The risk-free interest rates for periods within the expected term of the award are based on the U.S. Treasury yield curve
in effect during the period the options were granted. We have used historical data to estimate future forfeiture rates to apply
against the gross amount of compensation expense determined using the valuation model. These estimates have approximated our actual
forfeiture rates.
There were no stock options granted during the nine month period
ended September 30, 2017. The weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes
valuation model were as follows for the three and nine month periods ended September 30, 2016:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
September 30, 2016
|
|
Expected volatility
|
|
n/a
|
|
|
47.03
|
%
|
Expected dividends
|
|
n/a
|
|
|
5.36
|
%
|
Expected term (in years)
|
|
n/a
|
|
|
7.4
|
|
Risk-free interest rate
|
|
n/a
|
|
|
1.64
|
%
|
Activity with respect to the company’s option awards during
the nine month period ended September 30, 2017 is as follows:
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
|
Weighted
Average
Remaining Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(Dollars in thousands,
except weighted average exercise price and weighted average grant date fair value)
|
|
Outstanding at January 1, 2017
|
|
|
1,720,000
|
|
|
$
|
5.12
|
|
|
$
|
2.89
|
|
|
4.5 years
|
|
$
|
2,428
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
(122,413
|
)
|
|
|
4.09
|
|
|
|
2.04
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(143,125
|
)
|
|
|
5.85
|
|
|
|
2.99
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
1,454,462
|
|
|
$
|
5.18
|
|
|
$
|
2.95
|
|
|
3.9 years
|
|
$
|
2,292
|
|
Exercisable at September 30, 2017
|
|
|
954,959
|
|
|
$
|
5.63
|
|
|
$
|
3.76
|
|
|
2.9 years
|
|
$
|
1,146
|
|
Expected to Vest
|
|
|
474,278
|
|
|
$
|
5.19
|
|
|
$
|
2.97
|
|
|
3.9 years
|
|
$
|
1,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the difference between
the company’s closing stock price on September 30, 2017 of $6.60 and the option exercise price of the shares for stock options
that were in the money, multiplied by the number of shares underlying such options. The total fair value of options vested during
the nine month periods ended September 30, 2017 and 2016 was $0.9 million and $1.1 million, respectively.
As of September 30, 2017, there was $0.2 million of total unrecognized
compensation cost related to non-vested stock option awards. This cost is expected to be recognized over a weighted-average period
of 1.6 years.
On August 9, 2017, a restricted stock award of 33,066 shares was
granted to an executive that vested immediately. The fair value of the restricted stock award was measured based on the grant date
market price of our common shares and expensed as of the vesting date. The restricted stock award contains transfer restrictions
under which they cannot be sold, pledged, transferred or assigned until three months from vesting date. The recipient of this restricted
stock award is entitled to all of the rights of absolute ownership of the
restricted
stock from the date of grant, including the right to vote the shares and to receive dividends.
Restricted stock awards are
independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The
award is considered issued and outstanding from the vest date of grant.
On February 24, 2017, a restricted stock award of 178,592 shares
was granted to certain members of management that vested immediately. The fair value of each restricted stock award was measured
based on the grant date market price of our common shares and expensed as of the vesting date. These restricted stock awards contained
transfer restrictions under which they could not be sold, pledged, transferred or assigned until three months from vesting date.
Recipients of these restricted stock awards were entitled to all of the rights of absolute ownership of the
restricted
stock from the date of grant including the right to vote the shares and to receive dividends.
Restricted stock awards are
independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The
awards were considered issued and outstanding from the vest date of grant.
Activity with respect to the company’s restricted stock awards
during the nine month period ended September 30, 2017 is as follows:
Restricted Stock Awards
|
|
Shares
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
|
Weighted Average Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
(Dollars in thousands,
except weighted average exercise price and weighted average grant date fair value)
|
|
Outstanding at January 1, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Granted
|
|
|
211,658
|
|
|
|
7.01
|
|
|
0.2 years
|
|
|
1,484
|
|
Lapse of restrictions
|
|
|
(178,592
|
)
|
|
|
7.05
|
|
|
—
|
|
|
1,259
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at September 30, 2017
|
|
|
33,066
|
|
|
$
|
6.80
|
|
|
0.2 years
|
|
$
|
225
|
|
NOTE 13. EQUITY TRANSACTIONS
We account for stock-based compensation expense in accordance with
FASB ASC Topic 718, “
Compensation-Stock Compensation
.” As a result, $0.3 million and $1.7 million of non-cash
stock-based compensation expense has been recorded to additional paid-in capital for the three and nine month periods ended September
30, 2017, respectively, in comparison to $0.1 million and $0.5 million for the three and nine month periods ended September 30,
2016, respectively.
While we intend to pay regular quarterly distributions, the actual
declaration of such future distributions and the establishment of the per share amount, record dates, and payment dates are subject
to final determination by our Board of Directors and dependent upon future earnings, cash flows, financial and legal requirements,
and other factors. The current policy of the Board of Directors is to review each of these factors on a quarterly basis to determine
the appropriate amount, if any, to allocate toward a cash distribution. In recent years, distributions have been approximately
20% of Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, and less cash paid for interest.
Adjusted EBITDA is a non-GAAP financial measure defined in Item 2, Management’s Discussion and Analysis of Financial Condition
and Results of Operations included with this quarterly report on Form 10-Q. Future distributions, if any, are likely to be approximately
30% of Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, and less cash paid for interest.
The following table shows distributions that have been declared
and paid since January 1, 2016:
Announcement Date
|
|
Payment Date
|
|
Amount Per Share
|
|
|
Cash Distributed
(
in thousands
)
|
|
September 12, 2017
|
|
September 29, 2017
|
|
$
|
0.0650
|
|
|
$
|
1,701
|
|
June 1, 2017
|
|
June 30, 2017
|
|
$
|
0.0650
|
|
|
$
|
1,697
|
|
March 9, 2017
|
|
March 30, 2017
|
|
$
|
0.0650
|
|
|
$
|
1,691
|
|
December 7, 2016
|
|
December 31, 2016
|
|
$
|
0.0650
|
|
|
$
|
1,678
|
|
September 9, 2016
|
|
September 30, 2016
|
|
$
|
0.0650
|
|
|
$
|
1,679
|
|
June 2, 2016
|
|
June 30, 2016
|
|
$
|
0.0650
|
|
|
$
|
1,664
|
|
March 10, 2016
|
|
April 5, 2016
|
|
$
|
0.0650
|
|
|
$
|
1,657
|
|
Based on the number of shares of Class A and Class B currently outstanding,
we expect to pay total annual distributions of approximately $6.8 million during the year ended December 31, 2017.
NOTE 14. 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. Restricted stock awards that vested
immediately during the three month period ended March 31, 2017, were included in the weighted average number of common shares used
to compute basic earnings per share because these restricted stock awards contained dividend participation and voting rights. 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 1,454,462 and 1,729,000 shares of Class A
common stock were outstanding at September 30, 2017 and 2016, respectively. 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.
As of September 30, 2017 and 2016 there were 335,682 and 367,940 dilutive shares, respectively.
NOTE 15. DERIVATIVE INSTRUMENTS
We are exposed to fluctuations in interest rates. We actively monitor
these fluctuations and use derivative instruments from time to time to manage the related risk. In accordance with our risk management
strategy, we may use derivative instruments only for the purpose of managing risk associated with an asset, liability, committed
transaction, or probable forecasted transaction that is identified by management. Our use of derivative instruments may result
in short-term gains or losses that may increase the volatility of our earnings.
Under FASB ASC Topic 815, “
Derivatives and Hedging,”
the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument
shall be 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 affects earnings. The remaining gain or loss on the derivative instrument,
if any, shall be recognized currently in earnings.
On March 27, 2013, we entered into an interest rate swap agreement
with Wells Fargo that began on March 28, 2014 with a notional principal amount of $150.0 million. The agreement was entered to
offset risks associated with the variable interest rate on the Term Loan B. Payments on the swap are due on a quarterly basis with
a LIBOR floor of 0.625%. Pursuant to the terms, the swap was set to expire on March 28, 2019 at a fixed rate of 1.645%. The interest
rate swap agreement was not designated as a cash flow hedge, and as a result, all changes in the fair value were recognized in
the current period statement of operations rather than through other comprehensive income. On May 19, 2017, in connection with
our Refinancing, we paid $0.8 million to terminate the interest rate swap.
The following table summarizes the fair value of our derivative
instruments that are measured at fair value:
|
|
As of December 31, 2016
|
|
|
As of September 30, 2017
|
|
|
|
(Dollars in thousands)
|
|
Fair value of interest rate swap
|
|
$
|
514
|
|
|
$
|
—
|
|
NOTE 16. FAIR VALUE MEASUREMENTS
FASB ASC Topic 820 “
Fair Value Measurements and Disclosures,
”
established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring fair value.
This framework defines three levels of inputs to the fair value measurement process and requires that each fair value measurement
be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.
The three broad levels of inputs defined by the FASB ASC Topic 820 hierarchy are as follows:
|
•
|
Level 1 Inputs
—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting
entity has the ability to access at the measurement date;
|
|
•
|
Level 2 Inputs
—inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable
for substantially the full term of the asset or liability; and
|
|
•
|
Level 3 Inputs
—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s
own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based
on the best information available in the circumstances (which might include the reporting entity’s own data).
|
As of September 30, 2017, 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.
We have certain assets that are measured at fair value on a non-recurring
basis that are adjusted to fair value only when the carrying values exceed the fair values. The categorization of the framework
used to price the assets is considered Level 3 due to the subjective nature of the unobservable inputs used when estimating the
fair value.
The following table summarizes the fair value of our financial assets
and liabilities that are measured at fair value:
|
|
September 30, 2017
|
|
|
|
Total Fair Value
and Carrying
Value on Balance
|
|
|
Fair Value Measurement Category
|
|
|
|
Sheet
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of other indefinite-lived intangible assets
|
|
$
|
313
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
313
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of contingent earn-out consideration included in accrued expenses
|
|
|
38
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38
|
|
Long-term debt and capital lease obligations less unamortized debt issuance costs
|
|
|
256,116
|
|
|
|
—
|
|
|
|
256,116
|
|
|
|
—
|
|
NOTE 17. INCOME TAXES
We recognize deferred tax assets and liabilities for future tax
consequences attributable to differences between our consolidated financial statement carrying amount of assets and liabilities
and their respective tax bases. We measure these deferred tax assets and liabilities using enacted tax rates expected to apply
in the years in which these temporary differences are expected to reverse. We recognize the effect on deferred tax assets and liabilities
resulting from a change in tax rates in income in the period that includes the date of the change. We recorded no adjustments to
our unrecognized tax benefits as of September 30, 2017 and 2016.
We prospectively
adopted ASU 2015-17, “
Income Taxes, Balance Sheet Classification of Deferred Taxes”
as of January 1, 2017. ASU
2015-17 requires that deferred tax assets and liabilities be classified as non-current on the balance sheet instead of separating
the deferred tax assets and liabilities into current and non-current amounts. Our Condensed Consolidated Balance Sheet as of March
31, 2017 reflects the adoption of this guidance with a $9.4 million reduction in current deferred income tax assets, a $1.9 million
increase in non-current deferred income tax assets and a $7.5 million reduction in non-current deferred income tax liabilities.
Other than this revised presentation, the adoption of this ASU had no impact on our financial position, results of operations,
or cash flows.
At December 31, 2016, we had net operating loss carryforwards for
federal income tax purposes of approximately $150.7 million that expire in 2020 through 2034 and for state income tax purposes
of approximately $1,021.2 million that expire in years 2017 through 2036. For financial reporting purposes at December 31, 2016
we had a valuation allowance of $4.5 million, net of federal benefit, to offset $4.2 million of the deferred tax assets related
to the state net operating loss carryforwards and $0.3 million associated with asset impairments. Our evaluation was performed
for tax years that remain subject to examination by major tax jurisdictions, which range from 2013 through 2016.
The amortization of our indefinite-lived intangible assets for tax
purposes but not for book purposes creates deferred tax liabilities. A reversal of deferred tax liabilities may occur when indefinite-lived
intangibles: (1) become impaired; or (2) are sold, which would typically only occur in connection with the sale of the assets of
a station or groups of stations or the entire company in a taxable transaction. Due to the amortization for tax purposes and not
book purposes of our indefinite-lived intangible assets, we expect to continue to generate deferred tax liabilities in future periods
exclusive of any impairment losses in future periods. These deferred tax liabilities and net operating loss carryforwards result
in differences between our provision for income tax and cash paid for taxes.
Valuation Allowance (Deferred Taxes)
For financial reporting purposes, we recorded a valuation allowance
of $4.5 million as of September 30, 2017 to offset a portion of the deferred tax assets related to the state net operating loss
carryforwards. We regularly review our financial forecasts in an effort to determine our ability to utilize the net operating loss
carryforwards for tax purposes. Accordingly, the valuation allowance is adjusted periodically based on our estimate of the benefit
the company will receive from such carryforwards.
NOTE 18. COMMITMENTS AND CONTINGENCIES
The Company enters into various agreements in the normal course
of business that contain minimum guarantees. These minimum guarantees are often tied to future events, such as future revenue earned
in excess of the contractual level. Accordingly, the fair value of these arrangements is zero.
The Company also records contingent earn-out consideration representing
the estimated fair value of future liabilities associated with acquisitions that may have additional payments due upon the achievement
of certain performance targets. The fair value of the contingent earn-out consideration is estimated as of the acquisition date
as the present value of the expected contingent payments as determined using weighted probabilities of the expected payment amounts.
We review the probabilities of possible future payments to estimate the fair value of any contingent earn-out consideration on
a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used
in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions,
the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit,
as applicable. Changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations
in the period in which they are identified. Changes in the estimated fair value of the contingent earn-out consideration may materially
impact and cause volatility in our operating results.
The Company and its subsidiaries, incident to its business activities,
are parties to a number of legal proceedings, lawsuits, arbitration and other claims. Such matters are subject to many uncertainties
and outcomes that are not predictable with assurance. We evaluate claims based on what we believe to be both probable and reasonably
estimable. With the exception of the matter described below, we are unable to ascertain the ultimate aggregate amount of monetary
liability or the financial impact with respect to these matters. The company maintains insurance that may provide coverage for
such matters.
In April 2016, pursuant to a counterclaim
to a collection suit initiated by Salem, an award was issued against Salem for breach of contract and attorney fees. We filed an
appeal against the award as well as a malpractice lawsuit against the lawyer that represented Salem in the collection lawsuit.
A legal reserve of $0.5 million was recorded representing the total possible loss contingency without third party recoveries from
our appeal, malpractice lawsuit or insurance claims. In March 2017, the case and all counterclaims were settled for a net amount
of $0.3 million.
NOTE 19. SEGMENT DATA
FASB ASC Topic 280, “
Segment Reporting
,
”
requires companies to provide certain information about their operating segments. We have three operating segments: (1) Broadcast,
(2) Digital Media and (3) Publishing. Unallocated corporate expenses include shared services, such as accounting and finance, human
resources, legal, tax and treasury that are not directly attributable to any one of our operating segments.
During the third quarter of 2016, we reclassed Salem Consumer Products,
our e-commerce business that sells books, DVD’s and editorial content developed by our on-air personalities, from our Digital
Media segment to our Broadcast segment. With this reclassification, all revenue and expenses generated by on-air hosts, including
broadcast programs and e-commerce product sales are consolidated to assess the financial performance of each network program.
Our operating segments reflect how
our
chief operating decision makers, which we define as a collective group of senior executives, assess the performance of each
operating segment and determine the appropriate allocations of resources to each segment. We continue to review our operating segment
classifications to align with operational changes in our business and may make future changes as necessary.
We measure and evaluate our operating segments based on operating
income and operating expenses that do not include allocations of costs related to corporate functions, such as accounting and finance,
human resources, legal, tax and treasury; nor do they include costs such as amortization, depreciation, taxes or interest expense.
Changes to our operating segments did not impact the reporting units used to test non-amortizable assets for impairment. All prior
periods presented are updated to reflect the new composition of our operating segments.
Segment
performance, as defined by Salem, is not necessarily comparable to other similarly titled captions of other companies.
The table below presents financial information for each operating
segment as of September 30, 2017 and 2016 based on the new
composition
of our operating s
egments:
|
|
Broadcast
|
|
|
Digital
Media
|
|
|
Publishing
|
|
|
Unallocated
Corporate
Expenses
|
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
Three Months Ended September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
48,424
|
|
|
$
|
10,446
|
|
|
$
|
6,563
|
|
|
$
|
—
|
|
|
$
|
65,433
|
|
Operating
expenses
|
|
|
37,040
|
|
|
|
8,169
|
|
|
|
6,686
|
|
|
|
4,233
|
|
|
|
56,128
|
|
Net operating
income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration and
net (gain) loss on the sale or disposal of assets
|
|
$
|
11,384
|
|
|
$
|
2,277
|
|
|
$
|
(123
|
)
|
|
$
|
(4,233
|
)
|
|
$
|
9,305
|
|
Depreciation
|
|
|
1,920
|
|
|
|
792
|
|
|
|
159
|
|
|
|
211
|
|
|
|
3,082
|
|
Amortization
|
|
|
11
|
|
|
|
860
|
|
|
|
264
|
|
|
|
—
|
|
|
|
1,135
|
|
Change
in the estimated fair value of contingent earn-out consideration
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
Net
(gain) loss on the sale or disposal of assets
|
|
|
97
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
95
|
|
Net
operating income (loss)
|
|
$
|
9,356
|
|
|
$
|
637
|
|
|
$
|
(546
|
)
|
|
$
|
(4,442
|
)
|
|
$
|
5,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
51,052
|
|
|
$
|
11,999
|
|
|
$
|
8,221
|
|
|
$
|
—
|
|
|
$
|
71,272
|
|
Operating
expenses
|
|
|
37,434
|
|
|
|
9,172
|
|
|
|
8,020
|
|
|
|
4,147
|
|
|
|
58,773
|
|
Net operating
income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration and
net (gain) loss on the sale or disposal of assets
|
|
$
|
13,618
|
|
|
$
|
2,827
|
|
|
$
|
201
|
|
|
$
|
(4,147
|
)
|
|
$
|
12,499
|
|
Depreciation
|
|
|
1,753
|
|
|
|
840
|
|
|
|
174
|
|
|
|
209
|
|
|
|
2,976
|
|
Amortization
|
|
|
22
|
|
|
|
1,091
|
|
|
|
228
|
|
|
|
—
|
|
|
|
1,341
|
|
Change
in the estimated fair value of contingent earn-out consideration
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
(183
|
)
|
|
|
—
|
|
|
|
(196
|
)
|
Net
(gain) loss on the sale or disposal of assets
|
|
|
(633
|
)
|
|
|
176
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(457
|
)
|
Net
operating income (loss)
|
|
$
|
12,476
|
|
|
$
|
733
|
|
|
$
|
(18
|
)
|
|
$
|
(4,356
|
)
|
|
$
|
8,835
|
|
|
|
Broadcast
|
|
|
Digital
Media
|
|
|
Publishing
|
|
|
Unallocated
Corporate
Expenses
|
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
145,479
|
|
|
$
|
31,998
|
|
|
$
|
19,048
|
|
|
$
|
—
|
|
|
$
|
196,525
|
|
Operating expenses
|
|
|
108,807
|
|
|
|
25,241
|
|
|
|
18,705
|
|
|
|
13,183
|
|
|
|
165,936
|
|
Net operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration, impairments and net (gain) loss on the sale or disposal of assets
|
|
$
|
36,672
|
|
|
|
6,757
|
|
|
$
|
343
|
|
|
$
|
(13,183
|
)
|
|
$
|
30,589
|
|
Depreciation
|
|
|
5,668
|
|
|
|
2,389
|
|
|
|
515
|
|
|
|
599
|
|
|
|
9,171
|
|
Amortization
|
|
|
46
|
|
|
|
2,494
|
|
|
|
879
|
|
|
|
1
|
|
|
|
3,420
|
|
Change in the estimated fair value of contingent earn-out consideration
|
|
|
—
|
|
|
|
(54
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(54
|
)
|
Impairment of indefinite-lived long-term assets other than goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
Net (gain) loss on the sale or disposal of assets
|
|
|
(399
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
(2
|
)
|
|
|
(410
|
)
|
Net operating income (loss)
|
|
$
|
31,357
|
|
|
$
|
1,928
|
|
|
$
|
(1,061
|
)
|
|
$
|
(13,781
|
)
|
|
$
|
18,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
149,768
|
|
|
$
|
34,056
|
|
|
$
|
19,802
|
|
|
$
|
—
|
|
|
$
|
203,626
|
|
Operating expenses
|
|
|
109,455
|
|
|
|
26,815
|
|
|
|
19,951
|
|
|
|
11,928
|
|
|
|
168,149
|
|
Net operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration, impairments and net (gain) loss on the sale or disposal of assets
|
|
$
|
40,313
|
|
|
$
|
7,241
|
|
|
$
|
(149
|
)
|
|
$
|
(11,928
|
)
|
|
$
|
35,477
|
|
Depreciation
|
|
|
5,431
|
|
|
|
2,392
|
|
|
|
489
|
|
|
|
638
|
|
|
|
8,950
|
|
Amortization
|
|
|
67
|
|
|
|
3,233
|
|
|
|
372
|
|
|
|
1
|
|
|
|
3,673
|
|
Change in the estimated fair value of contingent earn-out consideration
|
|
|
—
|
|
|
|
(119
|
)
|
|
|
(339
|
)
|
|
|
—
|
|
|
|
(458
|
)
|
Impairment of long-lived assets
|
|
|
700
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
Net (gain) loss on the sale or disposal of assets
|
|
|
(2,175
|
)
|
|
|
182
|
|
|
|
(21
|
)
|
|
|
6
|
|
|
|
(2,008
|
)
|
Net operating income (loss)
|
|
$
|
36,290
|
|
|
$
|
1,553
|
|
|
$
|
(650
|
)
|
|
$
|
(12,573
|
)
|
|
$
|
24,620
|
|
|
|
Broadcast
|
|
|
Digital
Media
|
|
|
Publishing
|
|
|
Unallocated
Corporate
|
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
—
|
|
|
$
|
327
|
|
|
$
|
482
|
|
|
$
|
—
|
|
|
$
|
809
|
|
Property and equipment, net
|
|
|
86,187
|
|
|
|
6,603
|
|
|
|
1,326
|
|
|
|
8,087
|
|
|
|
102,203
|
|
Broadcast licenses
|
|
|
388,720
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
388,720
|
|
Goodwill
|
|
|
3,594
|
|
|
|
20,946
|
|
|
|
1,888
|
|
|
|
8
|
|
|
|
26,436
|
|
Other indefinite-lived intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
313
|
|
|
|
—
|
|
|
|
313
|
|
Amortizable intangible assets, net
|
|
|
361
|
|
|
|
10,720
|
|
|
|
3,190
|
|
|
|
5
|
|
|
|
14,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
—
|
|
|
$
|
300
|
|
|
$
|
370
|
|
|
$
|
—
|
|
|
$
|
670
|
|
Property and equipment, net
|
|
|
86,976
|
|
|
|
6,634
|
|
|
|
1,779
|
|
|
|
7,401
|
|
|
|
102,790
|
|
Broadcast licenses
|
|
|
388,517
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
388,517
|
|
Goodwill
|
|
|
3,581
|
|
|
|
20,136
|
|
|
|
1,888
|
|
|
|
8
|
|
|
|
25,613
|
|
Other indefinite-lived intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
332
|
|
|
|
—
|
|
|
|
332
|
|
Amortizable intangible assets, net
|
|
|
407
|
|
|
|
9,927
|
|
|
|
4,069
|
|
|
|
5
|
|
|
|
14,408
|
|
NOTE 20. SUBSEQUENT EVENTS
Subsequent events reflect all applicable transactions through the
date of the filing.
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 on Form 10-Q
and our audited Consolidated
Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016. This discussion, as well as various
other sections of this quarterly report, contains and refers to statements that constitute
forward-looking statements, as
defined under the Private Securities Litigation Reform Act of 1995.
Such
statements relate to our intent, belief or current expectations with respect to our future operating, financial and strategic performance
that involve risks and uncertainties and are not guarantees of future performance.
Historical operating results are not necessarily indicative
of future operating results. Actual future results may differ from those contained in or implied by the forward-looking statements
as a result of various factors. These factors include, but are not limited to, risks and uncertainties relating to the need for
additional funds to service our debt and to execute our business strategy, our ability to access borrowings under our ABL,
reductions
in revenue forecasts,
our ability to renew our broadcast licenses, changes in interest rates, the timing of, our ability to
complete any acquisitions or dispositions, costs and synergies resulting from the integration of any completed acquisitions, our
ability to effectively manage costs, our ability to drive and manage growth, the popularity of radio as a broadcasting and advertising
medium, changes in consumer tastes, the impact of general economic conditions in the United States or in specific markets in which
we do business, industry conditions, including existing competition and future competitive technologies and cancellation, disruptions
or postponements of advertising schedules in response to national or world events, our ability to generate revenues from new sources,
including local commerce and technology-based initiatives, the impact of regulatory rules or proceedings that may affect our business
from time to time, the future write off of any material portion of the fair value of our FCC broadcast licenses and goodwill, and
other risk factors described from time to time in our filings with the Securities and Exchange Commission, including our Annual
Report on Form 10-K for the year ended December 31, 2016 and any subsequently filed Forms 10-Q and Forms 8-K. Many of these risks
and uncertainties are beyond our control, and the unexpected occurrence or failure to occur of any such events or matters could
significantly alter our actual results of operations or financial condition.
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
various Internet and publishing businesses. Refer to Note 4 of our Condensed Consolidated Financial Statements for details of each
of these transactions.
Salem Media Group, Inc. (“Salem”) is a domestic multimedia
company specializing in Christian and conservative content, with media properties comprising radio broadcasting, digital media,
and publishing. Effective February 19, 2015, we changed our name from Salem Communications Corporation to Salem Media Group, Inc.
Salem was formed in 1986 as a California corporation and was reincorporated in Delaware in 1999. Our content is intended for audiences
interested in Christian and family-themed programming and conservative news talk. We maintain a website at www.salemmedia.com.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these 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 SEC.
The information 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
We have three operating segments
:
(1) Broadcast, (2) Digital Media, and (3) Publishing, which also
qualify as reportable segments. Our operating segments
reflect how
our
chief operating decision makers, which we define
as a collective group of senior executives, assess the performance of each operating segment and determine the appropriate allocations
of resources to each segment. We continually review our operating segment classifications to align with operational changes in
our business and may make changes as necessary.
During the third quarter of 2016, we reclassed Salem Consumer Products,
our e-commerce business that sells books, DVD’s and editorial content developed by our on-air personalities, from Digital
Media to Broadcast to assess the performance of each network program based on all revenue sources. Changes to our operating segments
did not impact the reporting units used to test non-amortizable assets for impairment. All prior periods presented are updated
to reflect the new composition of our operating segments. Refer to Note 19 – Segment Data in the notes to our Condensed Consolidated
financial statements contained in Item 1 of this quarterly report on Form 10-Q for additional information.
We measure and evaluate our operating segments based on operating
income and operating expenses that exclude costs related to corporate functions, such as accounting and finance, human resources,
legal, tax and treasury. We also exclude costs such as amortization, depreciation, taxes and interest expense when evaluating the
performance of our operating segments.
Our principal sources of broadcast
revenue include:
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the sale of block program time to national and local program producers;
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the sale of advertising time on our radio stations to national and local advertisers;
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the sale of advertising time on our national network;
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the syndication of programming on our national network;
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product sales and royalties for on-air host materials, including podcasts and programs;
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the sale of banner advertisements on our station websites or on our mobile applications;
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the sale of digital streaming advertisements on our station websites or on our mobile applications;
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the sale of advertisements included in digital newsletters;
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fees earned for creating custom web pages or social media promotions on behalf of our advertisers;
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revenue from station events, including ticket sales and sponsorships; and
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listener purchase programs, often called non-traditional revenue, where revenue is generated by promoting discounted goods
and services to our listeners from special discounts and incentives offered to our listeners.
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The rates we are able to charge
for broadcast air time and other advertisements are dependent upon several factors, including:
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how well our stations and digital platform perform for our clients;
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the size of the market and audience reached;
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the number of impressions delivered;
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the number of page views achieved;
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the number of events held, the number of event sponsorships sold and the attendance at each event;
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the general economic conditions in each market; and
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supply and demand on both a local and national level.
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Our principal sources of digital media revenue include:
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the sale of digital banner advertisements on our websites and mobile applications;
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the sale of digital streaming advertisements on websites and mobile applications;
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the support and promotion to stream third-party content on our websites;
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the sale of advertisements included in digital newsletters;
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the digital delivery of newsletters to subscribers;
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the number of video and graphic downloads; and
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the sale and delivery of wellness products.
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Our principal sources of publishing revenue include:
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the sale of books and e-books;
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subscription fees for our print magazine;
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the sale of print magazine advertising;
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the sale of digital advertising on our magazine websites and digital newsletters; and
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publishing fees from authors.
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Broadcasting
Our foundational business is radio broadcasting, which includes
the ownership and operation of radio stations in large metropolitan markets. We also own and operate Salem Radio Network® (“SRN”),
SRN News Network (“SNN”), Today’s Christian Music (“TCM”), Singing News Network (formerly Solid Gospel
Network), and Salem Media Representatives
TM
(“SMR”). SRN, SNN, TCM and Singing News Network are networks
that develop, produce and syndicate a broad range of programming specifically targeted to Christian and family-themed talk stations,
music stations and News Talk stations throughout the United States, including Salem-owned and operated stations. SMR, a national
advertising sales firm with offices in ten U.S. cities, specializes in placing national advertising on religious and other format
commercial radio stations.
Our five main formats are (1) Christian Teaching and Talk, (2) News
Talk, (3) Contemporary Christian Music, (4) Spanish Language Christian Teaching and Talk and (5) Business.
Christian Teaching and Talk.
We currently program 43 of our
radio stations in our foundational format, Christian Teaching and Talk, which is talk programming emphasizing Christian and family
themes. Through this format, a listener can hear Bible teachings and sermons, as well as gain insight to questions related to daily
life, such as raising children or religious legal rights in education and in the workplace. This format uses block programming
time to offer a learning resource and a source of personal support for listeners. Listeners often contact our programmers to ask
questions, obtain materials on a subject matter or receive study guides based on what they have learned on the radio.
Block Programming.
We sell blocks of airtime on
our Christian Teaching and Talk format stations to a variety of national and local religious and charitable organizations that
we believe create compelling radio programs. Historically, more than 95% of these religious and charitable organizations renew
their annual programming relationships with us. Based on our historical renewal rates, we believe that block programming provides
a steady and consistent source of revenue and cash flows. Our top ten programmers have remained relatively constant and average
more than 30 years on-air. Over the last five years, block-programming revenue has generated 40% to 43% of our total net broadcast
revenue.
Satellite Radio.
We program SiriusXM Channel 131,
the exclusive Christian Teaching and Talk channel on SiriusXM, reaching the entire nation 24 hours a day, seven days a week.
News Talk.
We currently program 33 of our radio stations
in a News Talk format. Our research shows that our News Talk format is highly complementary to our core Christian Teaching and
Talk format. As programmed by Salem, both of these formats express conservative views and family values. Our News Talk format also
provides for the opportunity to leverage syndicated talk programming produced by SRN to radio stations throughout the United States.
Syndication of our programs allows Salem to reach audiences in markets in which we do not own or operate radio stations.
Contemporary Christian Music.
We currently program 13 radio
stations in a Contemporary Christian Music (“CCM”) format, branded The FISH® in most markets. Through the CCM format,
we are able to bring listeners the words of inspirational recording artists, set to upbeat contemporary music. Our music format,
branded “Safe for the Whole Family
®
”, features sounds that listeners of all ages can enjoy and lyrics that
can be appreciated. The CCM genre continues to be popular. We believe that the listener base for CCM is underserved in terms of
radio coverage, particularly in larger markets, and that our stations fill an otherwise void area in listener choices.
Spanish Language Christian Teaching and Talk.
We currently
program eight of our radio stations in a Spanish Language Christian Teaching and Talk format. This format is similar to our core
Christian Teaching and Talk format in that it broadcasts biblical and family-themed programming, but the programming is specifically
tailored for Spanish-speaking audiences. Additionally, block programming on our Spanish Language Christian Teaching and Talk stations
is primarily local while Christian Teaching and Talk stations are primarily national.
Business
. We currently program 13 of our radio stations in
a business format. Our business format features financial commentators, business talk, and nationally recognized Bloomberg programming.
The business format operates similar to our Christian Teaching and Talk format in that it features long-form block programming.
Each of our radio stations has a website specifically designed for
that station. The station websites have digital banner advertisements, streaming, links to purchase goods featured by on-air advertisers,
and links to our other digital media sites.
Revenues generated from our radio stations are reported as broadcast
revenue in our Condensed Consolidated financial statements included in Part 1 of this quarterly report on Form 10-Q. Broadcast
revenues are impacted by the rates radio stations can charge for programming and advertising time, the level of airtime sold to
programmers and advertisers, the number of impressions delivered or downloads made, and the number of events held, including the
size of the event and the number of attendees. Block programming rates 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 market ourselves to advertisers based on the responsiveness of our audiences. We do not subscribe to traditional
audience measuring services for most of our radio stations. In select markets, we subscribe to Nielsen Audio, which develops quarterly
reports measuring 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 available for block programming and/or advertising, which may vary at different
times of the day.
Nielsen Audio uses the Portable People Meter
TM
(“PPM
”
)
technology to collect data for its ratings service. PPM is a small device that is capable of automatically measuring radio, television,
Internet, satellite radio and satellite television signals encoded by the broadcaster. The PPM offers a number of advantages over
traditional diary ratings collection systems, including ease of use, more reliable ratings data, shorter time periods between when
advertising runs and actual listening data, and little manipulation of data by users. A disadvantage of the PPM includes data fluctuations
from changes to the “panel” (a group of individuals holding PPM devices). This makes all stations susceptible to some
inconsistencies in ratings that may or may not accurately reflect the actual number of listeners at any given time.
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. Additionally, we experience
increased demand for advertising during election years by way of political advertisements. Quarterly revenue from the sale of block
programming time does not tend to vary significantly because program rates are generally set annually and are recognized on a per
program basis.
Our cash flows from broadcasting are affected by transitional periods
experienced by radio stations when, based on the nature of the radio station, our plans for the market and other circumstances,
we find it beneficial to change the station format. During this transitional period, when we develop a radio station’s listener
and customer base, the station may generate negative or insignificant cash flow.
Trade or barter agreements are common in the broadcast industry.
Our radio stations utilize barter agreements to exchange airtime for goods or services in lieu of cash. We enter barter agreements
if the goods or services to be received can be used in our business or can be sold to our audience under listener purchase programs.
We minimize the use of barter agreements with our general policy being not to preempt airtime paid for in cash for airtime sold
under a barter agreement. During the nine month period ended September 30, 2017, 98% of our broadcast revenue was sold for cash
compared to 97% during the same period of the prior year.
Broadcast operating expenses include: (i) employee salaries,
commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities, (iii) marketing
and promotional expenses, (iv) production and programming expenses, and (v) music license fees. In addition to these expenses,
our network incurs programming costs and lease expenses for satellite communication facilities.
Digital Media
Web-based and digital content has been a growth area for Salem and
continues to be a focus of future development. Our digital media-based businesses provide Christian, conservative, investing and
health-themed content, e-commerce, audio and video streaming, and other resources digitally through the web. Salem Web Network™
(“SWN”) websites include Christian content websites: OnePlace.com, Christianity.com, Crosswalk.com®, GodVine.com,
GodTube.com, CrossCards.com, LightSource.com, Jesus.org, BibleStudyTools.com, iBelieve.com, CCMmagazine.com and ChristianHeadlines.com.
Our conservative opinion websites, collectively known as Townhall Media, include Townhall.com™, HotAir.com, Twitchy.com,
HumanEvents.com, RedState.com, and BearingArms.com. We also publish digital newsletters through Eagle Financial Publications, which
provide market analysis and non-individualized investment strategies from financial commentators on a subscription basis.
Our church e-commerce websites, including WorshipHouseMedia.com,
SermonSpice.com, SermonSearch.com, ChurchStaffing.com, and ChristianJobs.com, offer a variety of digital resources including videos,
song tracks, sermon archives and job listings to pastors and Church leaders.
E-commerce also includes Eagle Wellness, which is a seller of nutritional
supplements.
The revenues generated from this segment are reported as digital
media revenue in our Condensed Consolidated Statements of Operations included in this quarterly report on Form 10-Q. Digital media
revenues are impacted by the rates our sites can charge for advertising time, the level of advertisements sold, the number of impressions
delivered or the number of products sold and the number of digital subscriptions sold. Like our broadcasting segment, 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. We also experience fluctuations
in quarter-over-quarter comparisons based on the date on which the Easter holiday is observed, as this holiday generates a higher
volume of product downloads from our church product sites. Additionally, we experience increased demand for advertising time and
placement during election years for political advertisements.
The primary operating expenses incurred by our digital media businesses
include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent
and utilities, (iii) marketing and promotional expenses, (iv) royalties, (v) streaming costs, and (vi) cost of goods
sold associated with e-commerce sites.
Publishing
Our publishing operations include book publishing through Regnery
Publishing, print magazines and our self-publishing services. Regnery Publishing has published dozens of bestselling books by leading
conservative authors and personalities, including Ann Coulter, Newt Gingrich, David Limbaugh, Ed Klein, Mark Steyn and Dinesh D’Souza.
Books are sold in traditional printed form and as eBooks.
Salem Publishing™ produces and distributes the
Singing
News
®
magazine and operates a website specifically designed for this print magazine. The website has digital
banner advertisements, streaming, links to purchase goods featured by advertisers, and links to our other digital media sites.
Salem Author Services includes Xulon Press™ and Mill City Press which offer print-on-demand self-publishing services for
authors. We acquired Mill City Press from Hillcrest Publishing Group, Inc., on August 1, 2016. Xulon Press™ publishes books
for Christian authors while Mill City Press publishes books for all general market publications.
The revenues generated from this segment are reported as publishing
revenue in our Condensed Consolidated Statements of Operations included in this quarterly report on Form 10-Q. Publishing revenue
is impacted by the retail price of books and e-books, the number of books sold, the number and retail price of e-books sold, the
number and rate of print magazine subscriptions sold, the rate and number of pages of advertisements sold in each print magazine,
and the number and rate at which self-published books are published. Regnery Publishing revenue is impacted by elections as it
generates higher levels of interest and demand for publications containing conservative and political based opinions.
The primary operating expenses incurred by our Publishing businesses
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) cost of goods sold that includes printing and production
costs, fulfillment costs, author royalties and inventory reserves.
KNOWN TRENDS AND UNCERTAINTIES
Broadcast revenue growth remains challenged, which we believe is
due to several factors, including increasing competition from other forms of content distribution and time spent listening by audio
streaming services, podcasts and satellite radio. This increase in competition and mix of radio listening time may lead advertisers
to conclude that the effectiveness of radio has diminished. To minimize the impact of these factors, we continue to enhance our
digital assets to complement our broadcast content. We also support industry initiatives to increase the number of smartphones
and other wireless devices that contain an enabled FM tuner as well as provide initiatives for wireless carriers in the United
States to permit these FM tuners to receive the free over-the-air local radio stations.
Our broadcast revenues are particularly dependent on advertising
from our Los Angeles and Dallas markets, which generated 15.3% and 19.3%, respectively, of our net broadcast advertising revenue
for the nine month period ended September 30, 2017.
Revenues from print magazines, including advertising revenue and
subscription revenues, are challenged both economically and by the increasing use of other mediums that deliver comparable information.
Book sales are contingent upon overall economic conditions and our ability to attract and retain authors. Because digital media
has been a growth area for us, decreases in digital revenue streams could adversely affect our operating results, financial condition
and results of operations. Digital revenue is impacted by the nature and delivery of page views. We have experienced a shift in
the number of page views from desktop devices to mobile devices. While mobile page views have increased dramatically, they carry
a lower number of advertisements per page which are generally sold at lower rates. Digital media revenue is impacted by page views
and the number of advertisements per page. Declines in desktop page views impact revenue as mobile devices carry lower rates and
less advertisement per page. To minimize the impact that any one of these areas could have, we continue to explore opportunities
to cross-promote our brands and our content, and to strategically monitor costs.
Key
Financial Performance Indicators –
SAME STATION DEFINITION
In the discussion of our results of operations below, we compare our broadcast operating results between
periods on an as-reported basis, which includes the operating results of all radio stations and networks owned or operated at any
time during either period and on a Same-Station basis. Same Station is a Non-GAAP financial measure used both in presenting our
results to stockholders and the investment community as well as in our internal evaluations and management of the business. We
believe that Same Station Operating Income provides a meaningful comparison of period over period performance of our core broadcast
operations as this measure excludes the impact of new stations, the impact of stations we no longer own or operate, and the impact
of stations operating under a new programming format. Our presentation of Same Station Operating Income is not intended to be considered
in isolation or as a substitute for the most directly comparable financial measures reported in accordance with GAAP. Our definition
of Same Station Operating Income is not necessarily comparable to similarly titled measures reported by other companies. Refer
to “NON-GAAP FINANCIAL MEASURES” presented after our results of operations for a reconciliation of these non-GAAP performance
measures to the most comparable GAAP measures.
We define Same Station net broadcast revenue as net broadcast revenue
from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well
as the corresponding quarter of the prior year. We define Same Station broadcast operating expenses as broadcast operating expenses
from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well
as the corresponding quarter of the prior year. Same Station Operating Income includes those stations we own or operate in the
same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating
Income for a full calendar year is calculated as the sum of the Same Station results for each of the four quarters of that year.
Reclassifications
During the three months ended September 30, 2017, we reclassified
certain revenue streams within our digital media operating segment and certain revenue streams within our publishing operating
segment to conform to the current period presentation.
RESULTS OF OPERATIONS
Three months ended September 30, 2017 compared to the three
months ended September 30, 2016
The following factors affected our results of operations and cash
flows for the three months ended September 30, 2017 as compared to the same period of the prior year:
Financing
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On May 19, 2017, we closed on a private offering of $255.0 million aggregate principal amount of 6.75% senior secured notes
due 2024 (the “Notes”) and concurrently entered into a five-year $30.0 million senior secured asset-based revolving
credit facility. The net proceeds from the offering of the Notes, together with borrowings under the ABL Facility, were used to
repay outstanding borrowings, including accrued and unpaid interest, on our previously existing senior credit facilities consisting
of a term loan (“Term Loan B”) and a revolving credit facility of $25.0 million (“Revolver”), and to pay
fees and expenses incurred in connection with the Notes offering and the ABL Facility (collectively, the “Refinancing”).
As a result of this refinancing, we made no prepayments of principal during the three month period ended September 30, 2017, as
compared to the same period of the prior year.
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Acquisitions
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On September 15, 2017, we closed on the acquisition of real property, including the land, towers and facilities, of radio station
WSPZ-AM in Bethesda, Maryland for $1.5 million in cash.
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On August 31, 2017, we acquired the TeacherTube.com website and related assets for $1.1 million in cash.
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On August 31, 2017, we acquired the Intelligence Report newsletter and related assets valued at $2.5 million and we assumed
deferred subscription liabilities of $2.9 million. We paid no cash to the seller upon closing.
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On July 24, 2017, we closed on the acquisition of the FM translator construction permit in Eaglemount, Washington, for $40,000
in cash. The FM translator will be relocated to the Portland, Oregon market for use by our KDZR-AM radio station.
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On July 6, 2017, we acquired the TradersCrux.com website and related assets for $0.3 million in cash. As part of the purchase
agreement, we may pay up to an additional $0.1 million in contingent earn-out consideration within one year upon the achievement
of income benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of
TradersCrux.com to achieve the income targets at the time of closing, we estimated the fair value of the contingent earn-out consideration
to be $18,750, which approximates the discounted present value due to the earn-out of less than one year.
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Net Broadcast Revenue
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|
Three
Months Ended September 30,
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2016
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2017
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Change $
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Change %
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2016
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2017
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(Dollars
in thousands)
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|
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% of Total
Net Revenue
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Net Broadcast Revenue
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$
|
51,052
|
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$
|
48,424
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|
$
|
(2,628
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)
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(5.1
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)%
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|
71.6
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%
|
|
|
74.0
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%
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Same Station Net Broadcast Revenue
|
|
$
|
50,670
|
|
|
$
|
48,321
|
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|
$
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(2,349
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)
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|
|
(4.6
|
)%
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The following table shows the dollar amount and percentage of net
broadcast revenue for each broadcast revenue source.
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Three Months Ended September 30,
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2016
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2017
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(Dollars in thousands)
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Block program time:
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National
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$
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12,425
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24.3
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%
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$
|
12,014
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|
|
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24.8
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%
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Local
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9,137
|
|
|
|
17.9
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|
|
|
8,640
|
|
|
|
17.8
|
|
|
|
|
21,562
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|
|
|
42.2
|
|
|
|
20,654
|
|
|
|
42.6
|
|
Broadcast Advertising:
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National
|
|
|
3,300
|
|
|
|
6.5
|
|
|
|
3,325
|
|
|
|
6.9
|
|
Local
|
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|
16,098
|
|
|
|
31.5
|
|
|
|
14,341
|
|
|
|
29.6
|
|
|
|
|
19,398
|
|
|
|
38.0
|
|
|
|
17,666
|
|
|
|
36.5
|
|
Station Digital
|
|
|
1,734
|
|
|
|
3.4
|
|
|
|
1,639
|
|
|
|
3.4
|
|
Infomercials
|
|
|
741
|
|
|
|
1.5
|
|
|
|
605
|
|
|
|
1.2
|
|
Network
|
|
|
4,723
|
|
|
|
9.2
|
|
|
|
4,558
|
|
|
|
9.4
|
|
Other Revenue
|
|
|
2,894
|
|
|
|
5.7
|
|
|
|
3,302
|
|
|
|
6.8
|
|
Net Broadcast Revenue
|
|
$
|
51,052
|
|
|
|
100.0
|
%
|
|
$
|
48,424
|
|
|
|
100.0
|
%
|
In late August 2017, our Houston broadcast market was
impacted by Hurricane Harvey followed by Hurricane Irma in early September that impacted our Miami, Tampa and Orlando
broadcast markets. We estimate total lost revenues from both storms to be approximately $0.1 million across all broadcast
markets impacted, which includes orders that were cancelled in anticipation of the storms and losses for programs
and advertisements that could not broadcast due to the loss of power.
The net decline in block programming revenue of $0.9 million
includes a $0.6 million decline in programming on our Christian Teaching stations, a $0.3 million decline in programming on our
Business format stations, and a decline of $0.2 million decline in programming previously generated from our Louisville market,
that was partially offset by a $0.2 million increase in programming on our News Talk format stations. Declines in programming,
particularly at the local level, resulted from program cancellations that we believe are due to increased competition from other
broadcasters. Declines in national programming revenue reflect the non-renewal of a program that was featured on 19 of our Christian
Teaching and Talk stations and declines in business programs as they pursue content that remains in compliance with securities
rules and regulations. There were no changes in programming rates as compared to the same period of the prior year, however
our programming rates may be impacted in the future due to this increased competition.
Advertising revenue, net of agency commissions, declined by $1.7
million, of which $0.6 million was due to political advertising that was recognized during the third quarter of 2016 based on the
elections cycle. The remaining $1.1 million decline includes a $1.0 million decline in local advertising on our CCM stations, particularly
in our Dallas market, due to lower ratings and an increase in competition from other advertisers and a $0.2 million decline in
local advertising on our Christian Teaching and Talk format stations. These declines resulted from increased competition from other
broadcasters and agencies that reduce the number of advertisements placed. This can, in turn, create lower demand and lower rates.
We have undertaken efforts to retool our music, image and promotions to capture a younger demographic that we believe will improve
the ratings for our CCM stations in the Dallas market. We are beginning to see some improved ratings but it will take additional
time to turn the improved ratings into improved revenue.
Digital revenue generated from our radio station and network websites
declined by $0.1 million due to the number of political related digital campaigns during the third quarter of 2016 based on the
elections cycle. Rates charged were consistent with those during the same period of the prior year.
Declines in infomercial revenue reflect our effort to feature programming
that is tailored to our audience and consistent with our company values. We continue to seek alternatives to infomercial programs
that we believe are not of interest to our audience.
Network revenue decreased $0.2 million due to due to the number
of political related campaigns during the third quarter of 2016 based on the elections cycle. Rates charged were consistent with
those during the same period of the prior year.
Other revenue increased $0.4 million due to a $0.2 million increase
in event revenue due to higher attendance and ticket sales for local events such as concerts and speaking events, a $0.1 million
increase in listener purchase program revenue from a higher audience demand with respect to participation in sales incentives and
discount programs and $0.1 million increase in broadcast tower rental fees.
On a Same Station basis, net broadcast revenue decreased $2.3 million,
which reflects these items net of the impact of stations that were acquired or are operating under different formats.
Net Digital Media Revenue
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change
$
|
|
|
Change
%
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
%
of Total Net Revenue
|
|
Net Digital Media Revenue
|
|
$
|
11,999
|
|
|
$
|
10,446
|
|
|
$
|
(1,553
|
)
|
|
|
(12.9
|
)%
|
|
|
16.8
|
%
|
|
|
16.0
|
%
|
The following table shows the dollar amount and percentage of net
digital media revenue for each digital media revenue source.
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Digital Advertising, net
|
|
$
|
7,305
|
|
|
|
60.9
|
%
|
|
$
|
6,111
|
|
|
|
58.5
|
%
|
Digital Streaming
|
|
|
1,103
|
|
|
|
9.2
|
|
|
|
1,107
|
|
|
|
10.6
|
|
Digital Subscriptions
|
|
|
1,561
|
|
|
|
13.0
|
|
|
|
1,646
|
|
|
|
15.8
|
|
Digital Downloads
|
|
|
1,111
|
|
|
|
9.2
|
|
|
|
950
|
|
|
|
9.1
|
|
e-commerce
|
|
|
600
|
|
|
|
5.0
|
|
|
|
545
|
|
|
|
5.2
|
|
Other Revenues
|
|
|
319
|
|
|
|
2.7
|
|
|
|
87
|
|
|
|
0.8
|
|
Net Digital Media Revenue
|
|
$
|
11,999
|
|
|
|
100.0
|
%
|
|
$
|
10,446
|
|
|
|
100.0
|
%
|
Digital advertising revenue, net of agency commissions, declined
by $1.2 million on a consolidated basis. This decline was attributable to lower page views on our conservative opinion websites,
primarily Townhall Media, as compared to the same period of the prior year due to the timing of the 2016 election and a reduction
in political advertisements. Page views for conservative opinion websites are typically higher during election years due to higher
level of interest in content, for both desktop and mobile devices. Changes in the Facebook newsfeed algorithm have negatively impacted
the volume of our desktop page views. Page views from Facebook declined 22.0% as compared to the same period of the prior year.
To offset declines in page views generated from Facebook, we have continued to develop and promote the use of mobile applications,
particularly for our Christian mobile applications. As mobile page views carry fewer advertisements and typically have shorter
site visits, our growth in mobile application generated traffic is larger than our growth in revenue.
Digital streaming revenue was consistent with that of the same period
of the prior year with no changes in sales volume or rates.
Digital subscription revenue increased $0.1 million due to higher distribution levels including additional
subscriptions from acquisitions including Turner Investment Products in September of 2016 and Intelligence Reporter in August of
2017 that were partially offset by declines in the number of subscribers to Skousen’s Five Star Trader and Fast Money Alert
newsletters. There were no changes in subscription rates as compared to the same period of the prior year.
Digital download revenue decreased $0.2 million due to a lower volume
of downloads as compared to the same period of the prior year due in part to content featured during 2016 that covered the 15
th
anniversary of the September 11
th
terrorist attacks. There were no changes in rates charged to our customers for digital
downloads as compared to the same period of the prior year.
E-commerce revenue declined by $0.1 million due to discounts offered on products sold through our wellness
website. The average price per unit declined 17% while the number of products sold increased 10.0%. The discounts result from increased
competition in the online market place that is driving prices down.
Other revenue includes miscellaneous sources such as event revenue, revenue sharing arrangements for purchases
made from applications, and mail list rentals. The decrease of $0.2 million reflects the impact of a Townhall and Red State Gathering
event held during third quarter of 2016 leading up to the presidential election.
Net Publishing Revenue
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Net Publishing Revenue
|
|
$
|
8,221
|
|
|
$
|
6,563
|
|
|
$
|
(1,658
|
)
|
|
|
(20.2
|
)%
|
|
|
11.5
|
%
|
|
|
10.0
|
%
|
The following table shows the dollar amount and percentage of net
publishing revenue for each publishing revenue source.
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Book Sales
|
|
$
|
6,410
|
|
|
|
78.0
|
%
|
|
$
|
5,633
|
|
|
|
85.8
|
%
|
Estimated Sales Returns & Allowances
|
|
|
(1,645
|
)
|
|
|
(20.0
|
)
|
|
|
(1,595
|
)
|
|
|
(24.3
|
)
|
E-Book Sales
|
|
|
755
|
|
|
|
9.2
|
|
|
|
621
|
|
|
|
9.5
|
|
Self-Publishing Fees
|
|
|
1,634
|
|
|
|
19.9
|
|
|
|
1,096
|
|
|
|
16.7
|
|
Print Magazine Subscriptions
|
|
|
327
|
|
|
|
4.0
|
|
|
|
287
|
|
|
|
4.4
|
|
Print Magazine Advertisements
|
|
|
272
|
|
|
|
3.3
|
|
|
|
183
|
|
|
|
2.8
|
|
Digital Advertising
|
|
|
217
|
|
|
|
2.6
|
|
|
|
106
|
|
|
|
1.6
|
|
Other Revenue
|
|
|
251
|
|
|
|
3.0
|
|
|
|
232
|
|
|
|
3.5
|
|
Net Publishing Revenue
|
|
$
|
8,221
|
|
|
|
100.0
|
%
|
|
$
|
6,563
|
|
|
|
100.0
|
%
|
On a consolidated basis, book sales declined by $0.8
million due to a reduction in the number of print books sold by Regnery Publishing based on a lower number of release dates
within the period. Book sales from Salem Author Services, our self-publishing operations of Xulon Press and Mill City Press,
were consistent with the same period of the prior year. The decrease in sales from Regnery Publishing reflects a 17% reduction in
sales volume that was partially offset by a 4% increase in the average price per unit sold. Within Salem Author
Services, consolidated sales includes a $0.2 million increase in sales from Mill City Press offset by a $0.2 million decline
in sales from Xulon Press™. These results include the impact of Hurricane Irma, which resulted in delays in production
due to the loss of power in the Orlando area. We estimate the impact to be approximately $0.2 million of revenue for the
three months ended September 30, 2017. There were no changes in rates charged as compared to the same period of the prior
year. Sales of Regnery Publishing books are directly attributable to the composite mix of titles released and available in
each period. Revenues can vary significantly based on the book release date and the number of titles that achieve bestseller lists, which can increase awareness and demand for a book.
The $0.1 million decrease in estimated sales returns and allowances
resulted from lower sales of Regnery Publishing print books, a reduction in the historical average return rate for Regnery Political
books, and a reduction to the reserve for backlist titles.
Regnery Publishing e-book sales decreased $0.1 million due to a
30% decrease in the average sales price per unit in addition to a 33% decrease in the number of books sold. E-book sales can also
vary based on the composite mix of titles released and available in each period. Revenues vary significantly based on the book
release date and the number of titles that achieve bestseller lists, which can increase awareness and demand
for the book.
Self-publishing fees decreased overall by $0.5 million due to a
decline of $0.6 million from a lower sales volume for Xulon Press™ that was offset by a $0.1 million increase in volume from
Mill City Press, which was acquired on August 1, 2016. There were no changes in fees charged to our customers as compared to the
same period of the prior year. We believe that our ability to cross-promote our self-publishing services to authors interested
in Regnery Publishing provides us with ongoing growth potential.
Declines in print magazine subscription and print magazine advertising
revenue are due to the continual decline within this business and our planned reduction in the number of print publications produced.
We ceased publishing Preaching Magazine
™
, YouthWorker Journal
™
, FaithTalk Magazine
™
and Homecoming® The Magazine as of the May 2017 publication due to continual declines in the number of subscribers. Lower demand
and distribution levels resulted in corresponding declines in advertising revenues.
Digital adverting revenue decreased $0.1 million due to the closure
of the Salem Publishing Homecoming website and transfer of the Preaching.com and Youthworker.com websites to our Salem Web Network
division with the ceasing of publications of these print magazines. There were no changes in sales volume or rates.
Broadcast Operating Expenses
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Broadcast
Operating Expenses
|
|
$
|
37,434
|
|
|
$
|
37,040
|
|
|
$
|
(394
|
)
|
|
|
(1.1
|
)%
|
|
|
52.5
|
%
|
|
|
56.6
|
%
|
Same Station Broadcast
Operating Expenses
|
|
$
|
37,013
|
|
|
$
|
36,938
|
|
|
$
|
(75
|
)
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
Broadcast operating expenses declined by $0.4 million including
a $0.7 million reduction in employee related expenses including sales-based commissions and incentives consistent with lower revenues
that was offset by a $0.3 million increase in bad debt expense.
On a same-station basis, broadcast operating expenses decreased
by $0.1 million. The decrease in broadcast operating expenses on a same station basis reflects these items net of the impact of
start-up costs associated with acquisitions of $0.1 million and $0.4 million associated with the Louisville market.
Digital Media Operating Expenses
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Digital Media Operating Expenses
|
|
$
|
9,172
|
|
|
$
|
8,169
|
|
|
$
|
(1,003
|
)
|
|
|
(10.9
|
)%
|
|
|
12.9
|
%
|
|
|
12.5
|
%
|
Digital media operating expense declined by $1.0 million due to
a $0.3 million reduction in sales-based commissions and incentives consistent with lower revenues, a $0.2 million decline royalty
fees, a $0.2 million reduction in travel and entertainment costs, a $0.1 million decrease in professional services, and a $0.1
million combined reduction in facility related expenses and advertising costs.
Publishing Operating Expenses
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Publishing Operating Expenses
|
|
$
|
8,020
|
|
|
$
|
6,686
|
|
|
$
|
(1,334
|
)
|
|
|
(16.6
|
)%
|
|
|
11.3
|
%
|
|
|
10.2
|
%
|
Publishing operating expenses declined by $1.3 million of which
$0.6 million was due to lower payroll related expenses and $0.6 million related to a lower consolidated cost of goods sold. Cost
of goods sold includes a $0.7 million decline for Regnery Publishing based on a reduction in the number of books sold and a $0.1
million decline for Salem Publishing, which reduced the number of print publications produced, offset by a $0.2 million increase
from a higher sales volume for Salem Author Services. The gross profit margin for Regnery Publishing was 55% for the three months
ended September 30, 2017 as compared to 49% for the same period of the prior year as declines in sales volume resulted in comparable
savings in material costs. Regnery Publishing margins are impacted by the volume of e-book sales, which have higher margins due
to the nature of delivery and lack of sales returns and allowances. The gross profit margin for our self-publishing entities was
20% for the three months ended September 30, 2017, as compared to 36% for the same period of the prior year due to higher material
costs, including paper costs associated with sales of print-on-demand books.
Unallocated Corporate Expenses
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Unallocated
Corporate Expenses
|
|
$
|
4,147
|
|
|
$
|
4,233
|
|
|
$
|
86
|
|
|
|
2.1
|
%
|
|
|
5.8
|
%
|
|
|
6.5
|
%
|
Unallocated corporate expenses include shared services, such as
accounting and finance, human resources, legal, tax and treasury, that are not directly attributable to any one of our operating
segments. The increase of $0.1 million reflects the non-cash stock-based compensation charge associated with a restricted stock
award and a $0.1 million increase in net payroll related costs associated with higher staffing levels and annual pay increases
that were offset by a $0.1 million decline in legal fees.
Depreciation Expense
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Depreciation Expense
|
|
$
|
2,976
|
|
|
$
|
3,082
|
|
|
$
|
106
|
|
|
|
3.6
|
%
|
|
|
4.2
|
%
|
|
|
4.7
|
%
|
Depreciation expense increased $0.1 million compared to the same
period of the prior year. The increase reflects the impact of recent capital expenditures associated with computer software and
office equipment that have shorter estimated useful lives than towers and broadcast assets. There were no changes in our depreciation
methods or in the estimated useful lives of our asset groups.
Amortization Expense
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Amortization Expense
|
|
$
|
1,341
|
|
|
$
|
1,135
|
|
|
$
|
(206
|
)
|
|
|
(15.4
|
)%
|
|
|
1.9
|
%
|
|
|
1.7
|
%
|
Amortization expense decreased by $0.2 million compared to the same
period of the prior year. Increases in amortization associated with acquisitions, including Cycle Prophet and Mill City Press in
September 2016, were offset with a reductions due to intangible assets acquired with Eagle Publishing and WorshipHouseMedia.com
that were fully amortized as of June 30, 2017. There were no changes in our amortization methods or the estimated useful lives
of our intangible asset groups.
Change in the Estimated Fair Value of Contingent Earn-Out Consideration
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Change in
the Estimated Fair Value of Contingent Earn-Out Consideration
|
|
$
|
(196
|
)
|
|
$
|
(12
|
)
|
|
$
|
184
|
|
|
|
(93.9
|
)%
|
|
|
(0.3
|
)%
|
|
|
—
|
%
|
Acquisitions may include contingent earn-out consideration as part
of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. We review
the probabilities of possible future payments to estimate the fair value of any contingent earn-out consideration on a quarterly
basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts.
Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated
fair value of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit, as applicable.
During the three month period ended September 30, 2017, we decreased
the estimated fair value of our contingent earn-out liabilities by $12,000 compared to a net decrease of $196,000 during the same
period of the prior year. These changes are based on actual results as compared to the estimates used in our probability analysis
for each contingency. Refer to Note 5 of our Condensed Consolidated financial statements for a detailed analysis of the changes
in our assumptions and the impact for each contingency.
Changes in the estimated fair value of the contingent earn-out consideration
are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair value of the
contingent earn-out consideration may materially impact and cause volatility in our operating results.
Net (Gain) Loss on the Sale or Disposal of Assets
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Net (Gain)
Loss on the Sale or Disposal of Assets
|
|
$
|
(457
|
)
|
|
$
|
95
|
|
|
$
|
552
|
|
|
|
(120.8
|
)%
|
|
|
(0.6
|
)%
|
|
|
0.1
|
%
|
The net loss on the sale or disposal of assets of $0.1 million for
the three month period ended September 30, 2017 includes $77,000 related to transmitter equipment in Dallas, Texas that is no longer
in use and in addition to various other fixed asset disposals. We recorded a net loss of $2,000 for equipment damaged in our Tampa,
Florida market as a result of hurricane Irma in September 2017.
The net gain on the sale or disposal of assets of $0.5 million for
the three month period ended September 30, 2016 includes a $0.7 million gain from a land easement in our South Carolina market
offset by $0.2 million in various fixed asset disposals.
Other Income (Expense)
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Interest
Income
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Interest Expense
|
|
|
(3,726
|
)
|
|
|
(4,802
|
)
|
|
|
(1,076
|
)
|
|
|
28.9
|
%
|
|
|
(5.2
|
)%
|
|
|
(7.3
|
)%
|
Change in the Fair Value
of Interest Rate Swap
|
|
|
856
|
|
|
|
—
|
|
|
|
(856
|
)
|
|
|
(100.0
|
)%
|
|
|
1.2
|
%
|
|
|
—
|
%
|
Loss on Early Retirement
of Long-Term Debt
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
18
|
|
|
|
(100.0
|
)%
|
|
|
—
|
%
|
|
|
—
|
%
|
Net Miscellaneous Income
and (Expenses)
|
|
|
7
|
|
|
|
(80
|
)
|
|
|
(87
|
)
|
|
|
(1,242.9
|
)%
|
|
|
—
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income represents earnings on excess cash and interest
due under promissory notes.
Interest expense includes interest due on outstanding debt balances,
interest due on our swap agreement prior to termination, and non-cash accretion associated with deferred installments and contingent
earn-out consideration associated with our acquisition activity. The increase of $1.1 million reflects the Notes and ABL outstanding
as of the period ending September 30, 2017 with interest payable in December 2017, as compared to the Term Loan B and Revolver
during the same period of the prior year.
The $0.9 million decline in the fair value of interest rate swap
reflects the termination of our swap agreement on May 19, 2017, as comparted to the mark-to-market fair value adjustment during
the same period of the prior year.
There was no loss on early retirement of long-term debt as compared
to the same period of the prior year when a repayment was made on our then outstanding Term Loan B.
Net miscellaneous income and expenses includes royalty income and
usage fees for real estate properties. During the three months ending September 30, 2017, we recorded a non-recurring loss of $78,000
on an investment.
Provision for Income Taxes
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Provision
for Income Taxes
|
|
$
|
3,763
|
|
|
$
|
170
|
|
|
$
|
(3,593
|
)
|
|
|
(95.5
|
)%
|
|
|
5.3
|
%
|
|
|
0.3
|
%
|
Our provision for income taxes decreased $3.6 million to $0.2 million from $3.8 million for the same period
of the prior year due to the $1.6 million out-of-period adjustment recognized at September 30, 2016 and the impact of our current
period tax analysis that reflects pre-tax operating income of $0.1 million. The provision for income taxes as a percentage of income
before income taxes, or the effective tax rate was 137.9% for the three months ended September 30, 2017 compared to 63.2% for the
same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 35.0% due
to the effect of state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance
from the utilization of certain state net operating loss carryforwards. The effective tax rate for the current period of 137.9%
is based on the operating results and the impact of non-deductible expenses, changes in the valuation allowance and discrete tax
items. Net income before income taxes for the three months ended September 30, 2017 was $0.1 million; the tax adjustments (excluding
discrete tax items) amounted to $117,000; and discrete items including incentive stock options, non-qualified stock options, and
restricted stock, amounted to $53,000.
Net Income (Loss)
|
|
Three
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Net Income
(Loss)
|
|
$
|
2,192
|
|
|
$
|
(46
|
)
|
|
$
|
(2,238
|
)
|
|
|
(102.1
|
)%
|
|
|
3.1
|
%
|
|
|
(0.1
|
)%
|
We recognized a net loss of $46,000 for the three month period ended
September 30, 2017 compared to net income $2.2 million during the same period of the prior year. Net operating income decreased
by $3.8 million due to a $5.8 million decline in net revenue that was offset by a $2.0 million decline in operating expenses. The
impact of our operating results resulted in a $3.6 million decrease in our provision for income taxes that was offset by a $1.1
million increase in interest expense and the $0.8 million favorable impact of our interest rate swap on the prior year.
Nine months ended September 30, 2017 compared to the nine
months ended September 30, 2016
The following factors affected our results of operations and cash
flows for the nine months ended September 30, 2017 as compared to the same period of the prior year:
Financing
|
·
|
On May 19, 2017, we closed on a private offering of Notes and concurrently entered into the ABL Facility.
The net proceeds from the offering of the Notes, together with borrowings under the ABL Facility, were used to repay outstanding
borrowings, including accrued and unpaid interest, on our previously existing senior credit facilities consisting of the Term Loan
B Revolver, and to pay fees and expenses incurred in connection with the Notes offering and the ABL Facility.
|
|
·
|
On February 28, 2017, we repaid $3.0 million in principal on the Term Loan B and paid interest due as of that date. We recorded
a $6,200 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $18,000 in unamortized
debt issuance costs associated with the principal repayment.
|
|
·
|
On January 30, 2017, we repaid $2.0 million in principal on the Term Loan B and paid interest due as of that date. We recorded
a $4,500 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $12,000 in unamortized
debt issuance costs associated with the principal repayment.
|
Acquisitions
|
·
|
On September 15, 2017, we closed on the acquisition of real property, including the land, towers and facilities, of radio station
WSPZ-AM in Bethesda, Maryland for $1.5 million in cash.
|
|
·
|
On August 31, 2017, we acquired the TeacherTube.com website and related assets for $1.1 million in cash.
|
|
·
|
On August 31, 2017, we acquired the Intelligence Report newsletter and related assets valued at $2.5 million and we assumed
deferred subscription liabilities of $2.9 million. We paid no cash to the seller upon closing.
|
|
·
|
On July 24, 2017, we closed on the acquisition of the FM translator construction permit in Eaglemount, Washington, for $40,000
in cash. The FM translator will be relocated to the Portland, Oregon market for use by our KDZR-AM radio station.
|
|
·
|
On July 6, 2017, we acquired the TradersCrux.com website and related assets for $0.3 million in cash. As part of the purchase
agreement, we may pay up to an additional $0.1 million in contingent earn-out consideration within one year upon the achievement
of income benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of
TradersCrux.com to achieve the income targets at the time of closing, we estimated the fair value of the contingent earn-out consideration
to be $18,750, which approximates the discounted present value due to the earn-out of less than one year.
|
|
·
|
On June 28, 2017, we closed on the acquisition of an FM translator construction permit in Festus, Missouri for $40,000 in cash.
The FM translator will be relocated to the St. Louis, Missouri market for use by our KXFN-FM radio station.
|
|
·
|
On June 8, 2017, we acquired a Portuguese Bible mobile application for $85,000 in cash. We may pay up to an additional $20,000
in contingent earn-out consideration over the next twelve months based on the achievement of certain revenue benchmarks.
|
|
·
|
On March 15, 2017, we acquired the website prayers-for-special-help.com for $0.2 million in cash.
|
|
·
|
On March 14, 2017, we closed on the acquisition of an FM translator construction permit in Quartz Site, Arizona for $20,000
in cash. The FM translator will be relocated to the San Diego, California market for use by our KPRZ-AM radio station.
|
|
·
|
On March 1, 2017, we closed on the acquisition of an FM translator construction permit in Roseburg, Oregon for $45,000 in cash.
The FM translator will be relocated to the Portland, Oregon market for use by our KPDQ-AM radio station.
|
|
·
|
On January 16, 2017, we closed on the acquisition of an FM translator in Astoria, Oregon for $33,000 in cash. The FM translator
will be relocated to the Seattle, Washington market for use by our KGNW-AM radio station.
|
|
·
|
On January 6, 2017, we closed on the acquisition of an FM translator construction permit in Mohave Valley, Arizona for $20,000
in cash. The FM translator will be relocated to the San Diego, California market for use by our KCBQ-AM radio.
|
Net Broadcast Revenue
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Net Broadcast
Revenue
|
|
$
|
149,768
|
|
|
$
|
145,479
|
|
|
$
|
(4,289
|
)
|
|
|
(2.9
|
)%
|
|
|
73.6
|
%
|
|
|
74.0
|
%
|
Same Station Net Broadcast
Revenue
|
|
$
|
148,523
|
|
|
$
|
144,848
|
|
|
$
|
(3,675
|
)
|
|
|
(2.5
|
)%
|
|
|
|
|
|
|
|
|
The following table shows the dollar amount and percentage of net
broadcast revenue for each broadcast revenue source.
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Block program time:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
$
|
36,881
|
|
|
|
24.6
|
%
|
|
$
|
36,439
|
|
|
|
25.0
|
%
|
Local
|
|
|
27,151
|
|
|
|
18.1
|
|
|
|
25,852
|
|
|
|
17.8
|
|
|
|
|
64,032
|
|
|
|
42.7
|
|
|
|
62,291
|
|
|
|
42.8
|
|
Broadcast Advertising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
|
9,724
|
|
|
|
6.5
|
|
|
|
9,961
|
|
|
|
6.8
|
|
Local
|
|
|
47,792
|
|
|
|
31.9
|
|
|
|
43,365
|
|
|
|
29.8
|
|
|
|
|
57,516
|
|
|
|
38.4
|
|
|
|
53,326
|
|
|
|
36.6
|
|
Station Digital
|
|
|
5,036
|
|
|
|
3.4
|
|
|
|
5,239
|
|
|
|
3.6
|
|
Infomercials
|
|
|
1,957
|
|
|
|
1.3
|
|
|
|
1,821
|
|
|
|
1.3
|
|
Network
|
|
|
12,930
|
|
|
|
8.6
|
|
|
|
13,198
|
|
|
|
9.1
|
|
Other Revenue
|
|
|
8,297
|
|
|
|
5.6
|
|
|
|
9,604
|
|
|
|
6.6
|
|
Net Broadcast Revenue
|
|
$
|
149,768
|
|
|
|
100.0
|
%
|
|
$
|
145,479
|
|
|
|
100.0
|
%
|
In late August 2017, our Houston broadcast market was
impacted by Hurricane Harvey followed by Hurricane Irma in early September that impacted our Miami, Tampa and Orlando
broadcast markets. We estimate total lost revenues from both storms to be approximately $0.1 million across all broadcast
markets impacted, which includes orders cancelled in anticipation of the storms and losses for programs and
advertisements that could not broadcast due to the loss of power.
The net decline in block programming revenue of $1.7 million includes a $1.3 million decline in programming
on our Christian Teaching and Talk stations, a $0.5 million decline in programming on our Business stations and a $0.6 million
decline programming previously generated from our Louisville market, which was offset by a $0.8 million increase programming on
our News Talk stations. Declines, particularly from local programming, resulted from cancellations that we believe are due to
increased competition from other broadcasters. Declines in national programming revenue reflect the non-renewal of a program that
was featured on 19 of our Christian Teaching and Talk stations and declines in business programs as they pursue content that remains
in compliance with securities rules and regulations. There were no changes in programming rates as compared to the same period
of the prior year, however rates may be impacted in the future due to this increased competition for programming dollars.
Advertising revenue, net of agency commissions, decreased by $4.2
million of which $1.5 million was due to political advertising that was recognized during 2016 based on the elections cycle. The
remaining $2.7 million decrease includes a $2.2 million decline in local advertising on our CCM stations, particularly in our Dallas
market due to lower ratings and from higher competition from other broadcasters and a $0.6 million decrease in local advertising
on our Christian Teaching and Talk stations. Higher competition from other broadcasters and agencies reduce the number of advertisements
placed that in turns creates lower demand and lower rates, particularly for unsold spots. We have undertaken efforts to retool
our music, image and promotions to capture a younger demographic that we believe will improve the ratings for our CCM stations
in the Dallas market. We are beginning to see some improved ratings but it will take additional time to turn the improved ratings
into improved revenue.
Digital revenue generated from our radio station and network websites
increased $0.2 million, which reflects an increase in sales of licensed products through Salem Consumer Products. There were no
changes in rates as compared to the same period of the prior year.
Declines in infomercial revenue reflect our effort to feature programming
that is tailored to our audience and consistent with our company values. We continue to seek alternatives to infomercial programs
that we believe are not of interest to our audience.
Network revenue increased by $0.3 million, including a $0.6 million
increase from a revenue share agreement and a $0.2 million increase in advertising sales with our national talk shows that we believe
is attributable to our increased exposure and media presence during the 2016 presidential debates that were offset by a $0.5 million
decline in political advertising revenue based on the 2016 election cycle.
Other revenue increased $1.3 million due to a $0.7 million increase
in listener purchase program revenue from a higher audience demand with respect to participation in sales incentives and discount
programs, a $0.5 million increase in event revenue due to higher attendance and ticket sales for local events such as concerts
and speaking events, and a $0.1 million increase in broadcast tower rental fees.
On a Same Station basis, net broadcast revenue decreased $3.7 million,
which reflects these items net of the impact of stations that were acquired or are operating under different formats.
Net Digital Media Revenue
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Net Digital
Media Revenue
|
|
$
|
34,056
|
|
|
$
|
31,998
|
|
|
$
|
(2,058
|
)
|
|
|
(6.0
|
)%
|
|
|
16.7
|
%
|
|
|
16.3
|
%
|
The following table shows the dollar amount and percentage of net
digital media revenue for each digital media revenue source.
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Digital Advertising, Net
|
|
$
|
19,727
|
|
|
|
57.9
|
%
|
|
$
|
18,391
|
|
|
|
57.5
|
%
|
Digital Streaming
|
|
|
3,360
|
|
|
|
9.9
|
|
|
|
3,371
|
|
|
|
10.5
|
|
Digital Subscriptions
|
|
|
4,550
|
|
|
|
13.3
|
|
|
|
4,766
|
|
|
|
14.9
|
|
Digital Downloads
|
|
|
4,118
|
|
|
|
12.1
|
|
|
|
3,644
|
|
|
|
11.4
|
|
e-commerce
|
|
|
1,799
|
|
|
|
5.3
|
|
|
|
1,558
|
|
|
|
4.9
|
|
Other Revenue
|
|
|
502
|
|
|
|
1.5
|
|
|
|
268
|
|
|
|
0.8
|
|
Net Digital Media Revenue
|
|
$
|
34,056
|
|
|
|
100.0
|
%
|
|
$
|
31,998
|
|
|
|
100.0
|
%
|
Digital advertising revenue, net of agency commissions, declined
by $1.3 million on a consolidated basis. This decline was attributable to lower page views on our conservative opinion websites,
primarily Townhall Media, as compared to the same period of the prior year due to the timing of the 2016 election. Page views for
conservative opinion websites are typically higher during election years due to higher level of interest in content, both desktop
and mobile. Changes in the Facebook newsfeed algorithm have negatively impacted the volume of our desktop page views. Page views
from Facebook declined 25.4% as compared to the same period of the prior year. To offset declines in page views generated from
Facebook, we have continued to develop and promote the use of mobile applications, particularly for our Christian mobile applications.
As mobile page views carry fewer advertisements and typically have shorter site visits, our growth in mobile application generated
traffic is larger than our growth in revenue.
Digital streaming revenue was consistent with the prior year with
no changes in sales volume or rates.
Digital subscription revenue increased by $0.2 million due to higher distribution levels from acquisitions
including Retirement Watch and Turner Investment Products in 2016 and Intelligence Reporter in August of 2017, that were partially
offset by a decline in the number of subscribers to Skousen’s Five Star Trader and Fast Money Alert newsletters. There were
no changes in subscriber rates as compared to the same period of the prior year.
Digital download revenue declined by $0.5 million due to a lower
volume of downloads generated as compared to the same period of the prior year. Of this decline, $0.3 million was attributable
to WorshipHouseMedia.com and $0.2 million was attributable to SermonSpice.com. Declines in downloads of third-party produced videos
are common throughout the industry as users become more adept at creating their own content. We believe that our content is unique
and valuable and that the number of downloads of our content will not be impacted as severely by user created content. In addition,
there was a lower volume of downloads as compared to the same period of the prior year due in part to content in 2016 that covered
the 15
th
anniversary of the September 11
th
terrorist attacks. There were no changes in rates charged to our
customers for digital downloads as compared to the same period of the prior year.
E-commerce revenue declined by $0.2 million due to discounts offered on products sold through our wellness
website. The average price per unit declined 15% with a 2% decline in the number of products sold. The discounts result from increased
competition in the online market place that is driving prices down
.
Other revenue includes event revenue, revenue sharing arrangements for purchases made from applications,
and mail list rentals. The decrease of $0.2 million reflects the impact of a Townhall and Red State Gathering event held during
third quarter of 2016 leading up to the presidential election.
Net Publishing Revenue
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Net Publishing
Revenue
|
|
$
|
19,802
|
|
|
$
|
19,048
|
|
|
$
|
(754
|
)
|
|
|
(3.8
|
)%
|
|
|
9.7
|
%
|
|
|
9.7
|
%
|
The following table shows the dollar amount and percentage of net
publishing revenue for each publishing revenue source.
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Book Sales
|
|
$
|
14,242
|
|
|
|
71.9
|
%
|
|
$
|
13,594
|
|
|
|
71.4
|
%
|
Estimated Sales Returns & Allowances
|
|
|
(4,082
|
)
|
|
|
(20.6
|
)
|
|
|
(2,969
|
)
|
|
|
(15.6
|
)
|
E-Book Sales
|
|
|
1,712
|
|
|
|
8.7
|
|
|
|
1,463
|
|
|
|
7.7
|
|
Self-Publishing Fees
|
|
|
4,680
|
|
|
|
23.6
|
|
|
|
3,972
|
|
|
|
20.8
|
|
Print Magazine Subscriptions
|
|
|
1,087
|
|
|
|
5.5
|
|
|
|
892
|
|
|
|
4.7
|
|
Print Magazine Advertisements
|
|
|
726
|
|
|
|
3.7
|
|
|
|
605
|
|
|
|
3.2
|
|
Digital Advertising
|
|
|
583
|
|
|
|
2.9
|
|
|
|
545
|
|
|
|
2.8
|
|
Other Revenue
|
|
|
854
|
|
|
|
4.3
|
|
|
|
946
|
|
|
|
5.0
|
|
Net Publishing Revenue
|
|
$
|
19,802
|
|
|
|
100.0
|
%
|
|
$
|
19,048
|
|
|
|
100.0
|
%
|
On a consolidated basis, book sales declined by $0.6 million
due to a $1.9 million decline in book sales from Regnery Publishing that were offset by a $1.2 million increase in book sales
from Salem Author Services, our self-publishing operations of Xulon Press and Mill City Press. Regnery Publishing book sales
declined 16% in volume with a 1% reduction in the average price per unit sold. The $1.2 million increase in book sales
generated from Salem Author Services included a $1.1 million increase from Mill City Press, which we acquired on August 1,
2016, and a $0.1 million increase in book sales from Xulon Press™. These results include the impact of Hurricane Irma,
which resulted in delays in production due to the loss of power in the Orlando area. We estimate the impact to be
approximately $0.2 million of revenue for the three months ended September 30, 2017. There were no changes in rates charged
as compared to the same period of the prior year. Sales of books through Regnery Publishing are directly attributable
to the number of titles released each period and the composite mix of titles. Revenues can vary significantly based on the
book release date and the number of titles that achieve bestseller lists, which can increase awareness and demand for
the book.
The $1.1 million decrease in estimated sales returns and allowances
resulted from lower sales of Regnery Publishing print books, a reduction in the historical average return rate for Regnery Political
books and a reduction to the reserve associated with backlist titles.
Regnery Publishing e-book sales decreased $0.2 million due to a
decrease in sales volume of 6% and a decrease of 18% in the average price per unit sold. E-book sales can also vary based on the
composite mix of titles released and available in each period. Revenues can vary significantly based on the book release date and
the number of titles that achieve bestseller lists, which can increase awareness and demand for the book.
Self-publishing fees decreased $0.7 million which includes a $1.3
million decline in sales volume from Xulon Press™ that was offset by a $0.6 million increase in sales volume from Mill City
Press, which was acquired in August 2016. There were no changes in self-publishing fees charged to authors as compared to the same
period of the prior year. We believe that our ability to cross-promote our self-publishing services to authors interested in Regnery
Publishing provides us with ongoing growth potential.
Declines in print magazine subscription and print magazine advertising
revenue are due to the continual decline within this business and our planned reduction in the number of print publications produced.
We ceased publishing Preaching Magazine
™
, YouthWorker Journal
™
, FaithTalk Magazine
™
and Homecoming® The Magazine as of the May 2017 publication due to continual declines in the number of subscribers. Lower demand
and distribution levels resulted in corresponding declines in advertising revenues.
Digital adverting revenue decreased $38,000 due to the closure of
the Salem Publishing Homecoming website and transfer of the Preaching.com and Youthworker.com websites to our Salem Web Network
division with the ceasing of publications of these print magazines. There were no changes in sales volume or rates.
Other revenue consists of miscellaneous sources such as change fees,
trailers and website revenues. The increase of $0.1 million was generated by Mill City Press that was acquired on August 1, 2016.
Broadcast Operating Expenses
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Broadcast
Operating Expenses
|
|
$
|
109,455
|
|
|
$
|
108,807
|
|
|
$
|
(648
|
)
|
|
|
(0.6
|
)%
|
|
|
53.8
|
%
|
|
|
55.4
|
%
|
Same Station Broadcast
Operating Expenses
|
|
$
|
108,144
|
|
|
$
|
107,964
|
|
|
$
|
(180
|
)
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
Broadcast operating expenses declined by $0.6 million including
a $0.9 million reduction in sales-based commissions and incentives consistent with lower revenues, a $0.7 million favorable litigation
matter, and a $0.3 million decline in music license fees, that were offset by a $0.7 million increase in bad debt expense, a $0.4
million increase in payroll related costs associated with higher personnel levels and annual rate increases, and a $0.2 million
increase in non-cash stock-based compensation expense.
On a same-station basis, broadcast operating expenses decreased
by $0.2 million. The decrease in broadcast operating expenses on a same station basis reflects these items net of the impact of
start-up costs associated with acquisitions and format changes and the impact of the Louisville market LMA.
Digital Media Operating Expenses
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Digital Media
Operating Expenses
|
|
$
|
26,815
|
|
|
$
|
25,241
|
|
|
$
|
(1,574
|
)
|
|
|
(5.9
|
)%
|
|
|
13.2
|
%
|
|
|
12.8
|
%
|
Digital media operating expenses declined by $1.6 million due to
a $0.6 million reduction in sales-based commissions and incentives, a $0.4 million reduction in advertising and promotion costs,
a $0.4 million reduction in royalties and a $0.3 million decrease in travel and entertainment costs that were offset by a $0.1
million increase in bad debt expenses.
Publishing Operating Expenses
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Publishing
Operating Expenses
|
|
$
|
19,951
|
|
|
$
|
18,705
|
|
|
$
|
(1,246
|
)
|
|
|
(6.2
|
)%
|
|
|
9.8
|
%
|
|
|
9.5
|
%
|
Publishing operating expenses declined by $1.2 million of which
$0.6 million was due to a reduction in the consolidated cost of goods sold. Cost of goods sold reflects a $1.4 million decline
for Regnery Publishing based on a reduction in the number of books sold and a $0.2 million decline for Salem Publishing, which
reduced the number of print publications produced, offset by a $1.0 million increase in the cost of goods sold for Salem Author
Services. The gross profit margin for Regnery Publishing was 52% for the nine months ended September 30, 2017 as compared to 48%
for the same period of the prior year. Regnery Publishing margins are impacted by the volume of e-book sales, which have higher
margins due to the nature of delivery and lack of sales returns and allowances. The gross profit margin for our self-publishing
entities was 27% for the nine months ended September 30, 2017 as compared to 31% for the same period of the prior year due to higher
paper costs. In addition, there was a $0.7 million decline in payroll related expenses and a $0.2 million decline in travel and
entertainment expenses that were offset by a $0.3 million increase in advertising and promotion expenses.
Unallocated Corporate Expenses
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Unallocated
Corporate Expenses
|
|
$
|
11,928
|
|
|
$
|
13,183
|
|
|
$
|
1,255
|
|
|
|
10.5
|
%
|
|
|
5.9
|
%
|
|
|
6.7
|
%
|
Unallocated corporate expenses include shared services, such as
accounting and finance, human resources, legal, tax and treasury, that are not directly attributable to any one of our operating
segments. The net increase of $1.3 million includes a $0.9 million non-cash stock-based compensation charge associated with restricted
stock awards and a $0.5 million increase in net payroll related costs due to higher staffing levels and annual rate increases that
were offset by a $0.2 million decrease professional fees.
Impairment of Long-Lived Assets
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Impairment
of Long-Lived Assets
|
|
$
|
700
|
|
|
$
|
—
|
|
|
$
|
(700
|
)
|
|
|
(100.0
|
)%
|
|
|
0.3
|
%
|
|
|
—
|
%
|
Based on changes in management’s planned usage, we classified
land in Covina, California as held for sale as of June 2012. At that time we evaluated the land for impairment in accordance with
guidance for impairment of long-lived assets held for sale. We determined that the carrying value of the land exceeded the estimated
fair value less costs to sell and recorded an impairment charge of $5.6 million associated with the land based on our estimated
sale price at that time. In December 2012, after several purchase offers for the land were terminated, we obtained a third-party
valuation for the land. Based on the fair value determined by the third-party, we recorded an additional impairment charge of $1.2
million associated with the land. While we continued to market the land for sale and had no intention to use the land in our operations,
we had not received successful offers. Based on the amount of time that the land had been held for sale, we obtained a third-party
valuation for the land as of June 2016. Based on this fair value appraisal, we recorded an additional $0.7 million impairment charge
associated with the land during the three months ended June 30, 2016. In August 2017, we received an escrow deposit under an agreement
to sell the land in Covina, California for $1.0 million dollars. The land is recorded in assets held for sale and has not been
used in operations. The sale is subject to the buyer’s ability complete due diligence on their expected use of the land and
is currently expected to close in the latter half of 2020.
Impairment of Indefinite-Lived Long-Term Assets Other Than Goodwill
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Impairment
of Indefinite-Lived Long-Term Assets Other Than Goodwill
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
|
100.0
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
We reviewed magazine mastheads for impairment at June 30, 2017 based
on management’s plan to cease publishing Preaching Magazine
™
, YouthWorker Journal
™
, FaithTalk
Magazine
™
and Homecoming® The Magazine upon issuance of the May 2017 issues. We have received purchase offers
from third parties interested in acquiring the rights to continue publishing Preaching Magazine
™
, but we have
not closed on or agreed to final terms. Because of the likelihood that these print magazines would be sold or otherwise disposed
of before the end of their previously estimated life, we performed impairment tests as of March 31, 2017. Due to reductions in
forecasted operating cash flows and indications of interest from potential buyers, we then recorded an impairment charge of $19,000
associated with mastheads.
Depreciation Expense
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Depreciation
Expense
|
|
$
|
8,950
|
|
|
$
|
9,171
|
|
|
$
|
221
|
|
|
|
2.5
|
%
|
|
|
4.4
|
%
|
|
|
4.7
|
%
|
Depreciation expense increased $0.2 million compared to the same
period of the prior year. The increase reflects the impact of recent capital expenditures associated with computer software and
office equipment that have shorter estimated useful lives than towers and broadcast assets. There were no changes in our depreciation
methods or in the estimated useful lives of our asset groups.
Amortization Expense
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Amortization
Expense
|
|
$
|
3,673
|
|
|
$
|
3,420
|
|
|
$
|
(253
|
)
|
|
|
(6.9
|
)%
|
|
|
1.8
|
%
|
|
|
1.7
|
%
|
The decline in amortization expense reflects the impact of the intangible
assets acquired with Eagle Publishing and WorshipHouseMedia.com that were fully amortized as during 2017, compared to generating
amortization expense of $0.9 million during the prior year that were offset with the $0.6 million amortization of intangible assets
acquired related to 2016 acquisitions of Cycle Prophet in September 2016 and Mill City Press in September 2016. There were no changes
in our amortization methods or in the estimated useful lives of our intangible asset groups.
Change in the Estimated Fair Value of Contingent Earn-Out Consideration
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Change in
the Estimated Fair Value of Contingent Earn-Out Consideration
|
|
$
|
(458
|
)
|
|
$
|
(54
|
)
|
|
$
|
404
|
|
|
|
(88.2
|
)%
|
|
|
(0.2
|
)%
|
|
|
—
|
%
|
Our acquisitions may include contingent earn-out consideration as
part of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. We
review the probabilities of possible future payments to estimate the fair value of any contingent earn-out consideration on a quarterly
basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts.
Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated
fair value of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit, as applicable.
During the nine month period ended September 30, 2017, we decreased
the estimated fair value of our contingent earn-out liabilities by $54,000 compared to a net decrease of $458,000 during the same
period of the prior year. These changes are based on actual results as compared to the estimates used in our probability analysis
for each contingency. Refer to Note 5 of our Condensed Consolidated financial statements for a detailed analysis of the changes
in our assumptions and the impact for each contingency.
Changes in the estimated fair value of the contingent earn-out consideration
are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair value of the
contingent earn-out consideration may materially impact and cause volatility in our operating results.
Net Gain on the Sale or Disposal of Assets
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Net Gain
on the Sale or Disposal of assets
|
|
$
|
(2,008
|
)
|
|
$
|
(410
|
)
|
|
$
|
1,598
|
|
|
|
(79.6
|
)%
|
|
|
(1.0
|
)%
|
|
|
(0.2
|
)%
|
The net gain on the sale or disposal of assets of $0.4 million for
the nine month period ended September 30, 2017 includes a $0.5 million gain from the sale of a former transmitter site in our Dallas,
Texas market and a $16,000 net gain from disposals within our print magazine segment that was offset a $77,000 loss related to
transmitter equipment in Dallas, Texas that is no longer in use in addition to various other fixed asset disposals. We recorded
a net loss of $2,000 for equipment damaged in our Tampa, Florida market as a result of hurricane Irma in September 2017.
The net gain on the sale or disposal of assets of $2.0 million for
the nine month period ended September 30, 2016 includes a $1.9 million gain on the sale of our Miami tower site and $0.7 million
gain from a land easement in our South Carolina market offset by a $0.4 million charge associated with the relocation of our offices
in the Washington D.C. market and various losses from fixed asset disposals.
Other Income (Expense)
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Interest
Income
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
|
|
(25.0
|
)%
|
|
|
—
|
%
|
|
|
—
|
%
|
Interest Expense
|
|
|
(11,252
|
)
|
|
|
(12,156
|
)
|
|
|
(904
|
)
|
|
|
8.0
|
%
|
|
|
(5.5
|
)%
|
|
|
(6.2
|
)%
|
Change in the Fair Value
of Interest Rate Swap
|
|
|
(1,325
|
)
|
|
|
357
|
|
|
|
1,682
|
|
|
|
(126.9
|
)%
|
|
|
(0.7
|
)%
|
|
|
0.2
|
%
|
Loss on Early Retirement
of Long-Term Debt
|
|
|
(32
|
)
|
|
|
(2,775
|
)
|
|
|
(2,743
|
)
|
|
|
8,571.9
|
%
|
|
|
—
|
%
|
|
|
(1.4
|
)%
|
Net Miscellaneous Income
and (Expenses)
|
|
|
7
|
|
|
|
(80
|
)
|
|
|
(87
|
)
|
|
|
(1,242.9
|
)%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income represents earnings on excess cash and interest
due under promissory notes.
Interest expense includes interest due on outstanding debt balances,
interest due on our swap agreement prior to termination, and non-cash accretion associated with deferred installments and contingent
earn-out consideration associated with our acquisition activity. The increase of $0.9 million reflects the Notes outstanding as
of the period ending September 30, 2017 with interest payable in December 2017, as compared to the Term Loan B during the same
period of the prior year.
The $1.7 million favorable impact of change in the fair value of
interest rate swap reflects the mark-to-market impact prior to the termination of our swap agreement on May 19, 2017. There was
no loss on early retirement of long-term debt as compared to the same period of the prior year when a repayment was made on our
then outstanding Term Loan B.
Loss on early retirement of long-term debt reflects $0.6 million
of the unamortized discount and $1.5 million of unamortized debt issuance costs associated with the payoff and termination of the
Term Loan B on May 19, 2017, $0.1 million of unamortized debt issuance costs associated with the Revolver terminated on May 19,
2017, and a $0.6 million loss to exit and terminate our swap agreement on May 19, 2017, as well as $41,000 of the unamortized discount
and unamortized debt issuance costs associated with prior principal redemptions of the Term Loan B.
Net miscellaneous income and expenses includes royalty income and
usage fees for real estate properties. During the nine months ending September 30, 2017, we recorded a non-recurring loss of $78,000
on an investment.
Provision for Income Taxes
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Provision
for Income Taxes
|
|
$
|
6,121
|
|
|
$
|
1,506
|
|
|
$
|
(4,615
|
)
|
|
|
(75.4
|
)%
|
|
|
3.0
|
%
|
|
|
0.08
|
%
|
Our provision for income taxes decreased $4.6 million to $1.5 million
for the nine months ended September 30, 2017 compared to $6.1 million for the same period of the prior year due to the $1.6 million
out-of-period adjustment recognized at September 30, 2016 and the impact of our current period tax analysis that reflects pre-tax
operating income of $0.1 million with no changes in our annualized tax adjustments. The provision for income taxes as a percentage
of income before income taxes, or the effective tax rate was 39.7% for the nine months ended September 30, 2017 compared to 50.9%
for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of
35.0% due to the effect of state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation
allowance from the utilization of certain state net operating loss carryforwards.
Net Income (Loss)
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
% of Total
Net Revenue
|
|
Net Income (Loss)
|
|
$
|
5,901
|
|
|
$
|
2,286
|
|
|
$
|
(3,615
|
)
|
|
|
(61.3
|
)%
|
|
|
2.9
|
%
|
|
|
1.2
|
%
|
We recognized net income of $2.3 million for the nine month period
ended September 30, 2017 compared to $5.9 million in the same period of the prior year. The $3.6 million decline includes a $6.2
million decline in net operating income, a $2.7 million increase in loss on the early retirement of long-term debt, and a $0.9
million increase in interest expense offset by a $4.6 million decrease in our provision for income taxes and a $1.7 million favorable
impact of the change in fair value of our interest rate swap.
NON-GAAP FINANCIAL MEASURES
Management uses certain non-GAAP financial measures defined below
in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding the impact
of various items on our financial statements. We use these non-GAAP financial measures to evaluate financial results, develop budgets,
manage expenditures and as a measure of performance under compensation programs.
Our presentation of these non-GAAP financial measures should not
be considered as a substitute for or superior to the most directly comparable financial measures as reported in accordance with
GAAP.
Item 10(e) of Regulation S-K defines and prescribes the conditions
under which certain non-GAAP financial information may be presented in this report. We closely monitor EBITDA, Adjusted EBITDA,
Station Operating Income (“SOI”), Same Station net broadcast revenue, Same Station broadcast operating expenses, Same
Station Operating Income, Digital Media Operating Income, and Publishing Operating Income (Loss), all of which are non-GAAP financial
measures. We believe that these non-GAAP financial measures provide useful information about our core operating results, and thus,
are appropriate to enhance the overall understanding of our financial performance. These non-GAAP financial measures are intended
to provide management and investors a more complete understanding of our underlying operational results, trends and performance.
The performance of a radio broadcasting company is customarily measured
by the ability of its stations to generate SOI. We define SOI as net broadcast revenue less broadcast operating expenses. Accordingly,
changes in net broadcast revenue and broadcast operating expenses, as explained above, have a direct impact on changes in SOI.
SOI is not a measure of performance calculated in accordance with GAAP. SOI should be viewed as a supplement to and not a substitute
for our results of operations presented on the basis of GAAP. We believe that SOI is a useful non-GAAP financial measure to investors
when considered in conjunction with operating income (the most directly comparable GAAP financial measures to SOI), because it
is generally recognized by the radio broadcasting industry as a tool in measuring performance and in applying valuation methodologies
for companies in the media, entertainment and communications industries. SOI is commonly used by investors and analysts who report
on the industry to provide comparisons between broadcasting groups. We use SOI as one of the key measures of operating efficiency
and profitability, including our internal reviews associated with impairment analysis of our indefinite-lived intangible assets.
SOI does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cash activity
in accordance with GAAP and our income statement presents our financial performance prepared in accordance with GAAP. Our definition
of SOI is not necessarily comparable to similarly titled measures reported by other companies.
We define Same Station net broadcast revenue as net broadcast revenue
from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well
as the corresponding quarter of the prior year. We define Same Station broadcast operating expenses as broadcast operating expenses
from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well
as the corresponding quarter of the prior year. Same Station Operating Income includes those stations we own or operate in the
same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating
Income for a full calendar year is calculated as the sum of the Same Station-results for each of the four quarters of that year.
We use Same Station Operating Income, a non-GAAP financial measure, both in presenting our results to stockholders and the investment
community, and in our internal evaluations and management of the business. We believe that Same Station Operating Income provides
a meaningful comparison of period over period performance of our core broadcast operations as this measure excludes the impact
of new stations, the impact of stations we no longer own or operate, and the impact of stations operating under a new programming
format. Our presentation of Same Station Operating Income is not intended to be considered in isolation or as a substitute for
the most directly comparable financial measures reported in accordance with GAAP. Our definition of Same Station net broadcast
revenue, Same Station broadcast operating expenses and Same Station Operating Income is not necessarily comparable to similarly
titled measures reported by other companies.
We apply a similar methodology to our digital media and publishing
group. Digital Media Operating Income is defined as net digital media revenue less digital media operating expenses. Publishing
Operating Income (Loss) is defined as net publishing revenue less publishing operating expenses. Digital Media Operating Income
and Publishing Operating Income (Loss) are not measures of performance in accordance with GAAP. Our presentations of these non-GAAP
financial performance measures are not to be considered a substitute for or superior to our operating results reported in accordance
with GAAP. We believe that Digital Media Operating Income and Publishing Operating Income (Loss) are useful non-GAAP financial
measures to investors, when considered in conjunction with operating income (the most directly comparable GAAP financial measure),
because they are comparable to those used to measure performance of our broadcasting entities. We use this analysis as one of the
key measures of operating efficiency, profitability and in our internal review. This measurement does not purport to represent
cash provided by operating activities. Our statement of cash flows presents our cash activity in accordance with GAAP and our income
statement presents our financial performance in accordance with GAAP. Our definitions of Digital Media Operating Income and Publishing
Operating Income (Loss) are not necessarily comparable to similarly titled measures reported by other companies.
We define EBITDA as net income before interest, taxes, depreciation,
and amortization. We define Adjusted EBITDA as EBITDA before net gains or losses on the sale or disposal of assets, before changes
in the estimated fair value of contingent earn-out consideration, before gains on bargain purchases, before the change in fair
value of interest rate swaps, before impairments, before net miscellaneous income and expenses, before loss on early retirement
of long-term debt, before (gain) loss from discontinued operations and before non-cash compensation expense. EBITDA and Adjusted
EBITDA are commonly used by the broadcast and media industry as important measures of performance and are used by investors and
analysts who report on the industry to provide meaningful comparisons between broadcasters. EBITDA and Adjusted EBITDA are not
measures of liquidity or of performance in accordance with GAAP and should be viewed as a supplement to and not a substitute for
or superior to our results of operations and financial condition presented in accordance with GAAP. Our definitions of EBITDA and
Adjusted EBITDA are not necessarily comparable to similarly titled measures reported by other companies.
For all non-GAAP financial measures, investors should consider the
limitations associated with these metrics, including the potential lack of comparability of these measures from one company to
another.
We use non-GAAP financial measures to evaluate financial performance,
develop budgets, manage expenditures, and determine employee compensation. Our presentation of this additional information is not
to be considered as a substitute for or superior to the most directly comparable measures reported in accordance with GAAP.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
In the tables below, we present a reconciliation of net broadcast
revenue, the most comparable GAAP measure, to Same Station net broadcast revenue, and broadcast operating expenses, the most comparable
GAAP measure to Same Station broadcast operating expense. We show our calculation of Station Operating Income and Same Station
Operating Income, which is reconciled from net income, the most comparable GAAP measure and our calculation of Digital Media Operating
Income and Publishing Operating Income (Loss). Our presentation of these non-GAAP measures are not to be considered a substitute
for or superior to the most directly comparable measures reported in accordance with GAAP.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Reconciliation of Net Broadcast Revenue to Same Station Net Broadcast Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Net broadcast revenue
|
|
$
|
51,052
|
|
|
$
|
48,424
|
|
|
$
|
149,768
|
|
|
$
|
145,479
|
|
Net broadcast revenue – acquisitions
|
|
|
―
|
|
|
|
(58
|
)
|
|
|
—
|
|
|
|
(398
|
)
|
Net broadcast revenue – dispositions
|
|
|
(382
|
)
|
|
|
(45
|
)
|
|
|
(1,187
|
)
|
|
|
(131
|
)
|
Net broadcast revenue – format change
|
|
|
―
|
|
|
|
―
|
|
|
|
(58
|
)
|
|
|
(102
|
)
|
Same Station net broadcast revenue
|
|
$
|
50,670
|
|
|
$
|
48,321
|
|
|
$
|
148,523
|
|
|
$
|
144,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Broadcast Operating Expenses To Same Station Broadcast Operating Expenses
|
|
|
|
|
|
|
|
|
Broadcast operating expenses
|
|
$
|
37,434
|
|
|
$
|
37,040
|
|
|
$
|
109,455
|
|
|
$
|
108,807
|
|
Broadcast operating expenses – acquisitions
|
|
|
(9
|
)
|
|
|
(102
|
)
|
|
|
(9
|
)
|
|
|
(635
|
)
|
Broadcast operating expenses – dispositions
|
|
|
(412
|
)
|
|
|
―
|
|
|
|
(1,214
|
)
|
|
|
(102
|
)
|
Broadcast operating expenses – format change
|
|
|
―
|
|
|
|
―
|
|
|
|
(88
|
)
|
|
|
(106
|
)
|
Same Station broadcast operating expenses
|
|
$
|
37,013
|
|
|
$
|
36,938
|
|
|
$
|
108,144
|
|
|
$
|
107,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Station Operating Income to Same Station Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
Station Operating Income
|
|
$
|
13,618
|
|
|
$
|
11,384
|
|
|
$
|
40,313
|
|
|
$
|
36,672
|
|
Station operating (income) loss –acquisitions
|
|
|
9
|
|
|
|
44
|
|
|
|
9
|
|
|
|
237
|
|
Station operating (income) loss – dispositions
|
|
|
30
|
|
|
|
(45
|
)
|
|
|
27
|
|
|
|
(29
|
)
|
Station operating (income) loss – format change
|
|
|
―
|
|
|
|
―
|
|
|
|
30
|
|
|
|
4
|
|
Same Station – Station Operating Income
|
|
$
|
13,657
|
|
|
$
|
11,383
|
|
|
$
|
40,379
|
|
|
$
|
36,884
|
|
In the table below, we present our calculations of Station Operating
Income, Digital Media Operating Income and Publishing Operating Income (Loss). Our presentation of these non-GAAP performance indicators
are not to be considered a substitute for or superior to the directly comparable measures reported in accordance with GAAP.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Calculation of Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss)
|
|
|
|
|
|
Net broadcast revenue
|
|
$
|
51,052
|
|
|
$
|
48,424
|
|
|
$
|
149,768
|
|
|
$
|
145,479
|
|
Less broadcast operating expenses
|
|
|
(37,434
|
)
|
|
|
(37,040
|
)
|
|
|
(109,455
|
)
|
|
|
(108,807
|
)
|
Station Operating Income
|
|
$
|
13,618
|
|
|
$
|
11,384
|
|
|
$
|
40,313
|
|
|
$
|
36,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net digital media revenue
|
|
$
|
11,999
|
|
|
$
|
10,446
|
|
|
$
|
34,056
|
|
|
$
|
31,998
|
|
Less digital media operating expenses
|
|
|
(9,172
|
)
|
|
|
(8,169
|
)
|
|
|
(26,815
|
)
|
|
|
(25,241
|
)
|
Digital Media Operating Income
|
|
$
|
2,827
|
|
|
$
|
2,277
|
|
|
$
|
7,241
|
|
|
$
|
6,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net publishing revenue
|
|
$
|
8,221
|
|
|
$
|
6,563
|
|
|
$
|
19,802
|
|
|
$
|
19,048
|
|
Less publishing operating expenses
|
|
|
(8,020
|
)
|
|
|
(6,686
|
)
|
|
|
(19,951
|
)
|
|
|
(18,705
|
)
|
Publishing Operating Income (Loss)
|
|
$
|
201
|
|
|
$
|
(123
|
)
|
|
$
|
(149
|
)
|
|
$
|
343
|
|
In the table below, we present a reconciliation of net income, the
most directly comparable GAAP measure to Station Operating Income, Digital Media Operating Income and Publishing Operating Income
(Loss). Our presentation of these non-GAAP performance indicators are not to be considered a substitute for or superior to the
most directly comparable measures reported in accordance with GAAP.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Reconciliation of Net Income (Loss) to Operating Income and Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss)
|
|
Net income (Loss)
|
|
$
|
2,192
|
|
|
$
|
(46
|
)
|
|
$
|
5,901
|
|
|
$
|
2,286
|
|
Plus provision for income taxes
|
|
|
3,763
|
|
|
|
170
|
|
|
|
6,121
|
|
|
|
1,506
|
|
Plus loss on early retirement of long-term debt
|
|
|
18
|
|
|
|
―
|
|
|
|
32
|
|
|
|
2,775
|
|
Plus change in fair value of interest rate swap
|
|
|
(856
|
)
|
|
|
―
|
|
|
|
1,325
|
|
|
|
(357
|
)
|
Plus interest expense, net of capitalized interest
|
|
|
3,726
|
|
|
|
4,802
|
|
|
|
11,252
|
|
|
|
12,156
|
|
Less interest income
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
Less net miscellaneous (income) and expenses
|
|
|
(7
|
)
|
|
|
80
|
|
|
|
(7
|
)
|
|
|
80
|
|
Net operating income
|
|
$
|
8,835
|
|
|
$
|
5,005
|
|
|
$
|
24,620
|
|
|
$
|
18,443
|
|
Less net (gain) loss on the sale or disposal of assets
|
|
|
(457
|
)
|
|
|
95
|
|
|
|
(2,008
|
)
|
|
|
(410
|
)
|
Less change in the estimated fair value of contingent earn-out consideration
|
|
|
(196
|
)
|
|
|
(12
|
)
|
|
|
(458
|
)
|
|
|
(54
|
)
|
Plus impairment of long-lived assets
|
|
|
―
|
|
|
|
―
|
|
|
|
700
|
|
|
|
―
|
|
Plus impairment of indefinite-lived long-term assets other than goodwill
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
19
|
|
Plus depreciation and amortization
|
|
|
4,317
|
|
|
|
4,217
|
|
|
|
12,623
|
|
|
|
12,591
|
|
Plus unallocated corporate expenses
|
|
|
4,147
|
|
|
|
4,233
|
|
|
|
11,928
|
|
|
|
13,183
|
|
Combined Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss)
|
|
$
|
16,646
|
|
|
$
|
13,538
|
|
|
$
|
47,405
|
|
|
$
|
43,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Station Operating Income
|
|
$
|
13,618
|
|
|
$
|
11,384
|
|
|
$
|
40,313
|
|
|
$
|
36,672
|
|
Digital Media Operating Income
|
|
|
2,827
|
|
|
|
2,277
|
|
|
|
7,241
|
|
|
|
6,757
|
|
Publishing Operating Income (Loss)
|
|
|
201
|
|
|
|
(123
|
)
|
|
|
(149
|
)
|
|
|
343
|
|
|
|
$
|
16,646
|
|
|
$
|
13,538
|
|
|
$
|
47,405
|
|
|
$
|
43,772
|
|
In the table below, we present a reconciliation of Adjusted EBITDA
to EBITDA to Net Income, the most directly comparable GAAP measure. EBITDA and Adjusted EBITDA are non-GAAP financial performance
measures that are not to be considered a substitute for or superior to the most directly comparable measures reported in accordance
with GAAP.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Reconciliation of Adjusted EBITDA to EBITDA to Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,192
|
|
|
$
|
(46
|
)
|
|
$
|
5,901
|
|
|
$
|
2,286
|
|
Plus interest expense, net of capitalized interest
|
|
|
3,726
|
|
|
|
4,802
|
|
|
|
11,252
|
|
|
|
12,156
|
|
Plus provision for income taxes
|
|
|
3,763
|
|
|
|
170
|
|
|
|
6,121
|
|
|
|
1,506
|
|
Plus depreciation and amortization
|
|
|
4,317
|
|
|
|
4,217
|
|
|
|
12,623
|
|
|
|
12,591
|
|
Less interest income
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
EBITDA
|
|
$
|
13,997
|
|
|
$
|
9,142
|
|
|
$
|
35,893
|
|
|
$
|
28,536
|
|
Less net (gain) loss on the sale or disposal of assets
|
|
|
(457
|
)
|
|
|
95
|
|
|
|
(2,008
|
)
|
|
|
(410
|
)
|
Less change in the estimated fair value of contingent earn-out consideration
|
|
|
(196
|
)
|
|
|
(12
|
)
|
|
|
(458
|
)
|
|
|
(54
|
)
|
Plus impairment of long-lived assets
|
|
|
―
|
|
|
|
―
|
|
|
|
700
|
|
|
|
―
|
|
Plus impairment of indefinite-lived long-term assets other than goodwill
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
19
|
|
Plus changes the fair value of interest rate swap
|
|
|
(856
|
)
|
|
|
―
|
|
|
|
1,325
|
|
|
|
(357
|
)
|
Plus net miscellaneous (income) and expenses
|
|
|
(7
|
)
|
|
|
80
|
|
|
|
(7
|
)
|
|
|
80
|
|
Plus loss on early retirement of long-term debt
|
|
|
18
|
|
|
|
―
|
|
|
|
32
|
|
|
|
2,775
|
|
Plus non-cash stock-based compensation
|
|
|
134
|
|
|
|
268
|
|
|
|
458
|
|
|
|
1,693
|
|
Adjusted EBITDA
|
|
$
|
12,633
|
|
|
$
|
9,573
|
|
|
$
|
35,935
|
|
|
$
|
32,282
|
|
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The discussion and analysis of our financial condition and results
of operations are based upon our Condensed Consolidated financial statements, which have been prepared in accordance with GAAP.
The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates
on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
Significant areas for which management
uses estimates include:
|
·
|
asset impairments, including goodwill, broadcasting licenses and other indefinite-lived intangible assets;
|
|
·
|
probabilities associated with the potential for contingent earn-out consideration;
|
|
·
|
fair value measurements;
|
|
·
|
allowance for doubtful accounts;
|
|
·
|
sales returns and allowances;
|
|
·
|
reserves for royalty advances;
|
|
·
|
fair value of equity awards;
|
|
·
|
self-insurance reserves;
|
|
·
|
estimated lives for tangible and intangible assets;
|
|
·
|
income tax valuation allowances; and
|
|
·
|
uncertain tax positions.
|
These estimates require the use of judgment as future events and
the effect of these events cannot be predicted with certainty. The estimates will change as new events occur, as more experience
is acquired and as more information is obtained. We evaluate and update our assumptions and estimates on an ongoing basis and we
may consult outside experts to assist as considered necessary.
We believe the following accounting policies and the related judgments
and estimates are critical accounting policies that affect the preparation of our Condensed Consolidated financial statements.
Goodwill, Broadcast Licenses and Other Indefinite-Lived Intangible
Assets
We have accounted for acquisitions for which a significant amount
of the purchase price was allocated to broadcast licenses and goodwill. Approximately 71% of our total assets at September 30,
2017, consisted of indefinite-lived intangible assets including broadcast licenses, goodwill and mastheads. The value of these
indefinite-lived intangible assets depends significantly upon the operating results of our businesses. We do not amortize goodwill
or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances
indicate that an asset may be impaired. We perform our annual impairment testing during the fourth quarter of each year, which
coincides with our budget and planning process for the upcoming year.
We believe that our estimate of the value of our broadcast licenses,
mastheads, and goodwill is a critical accounting estimate as the value is significant in relation to our total assets, and our
estimates incorporate variables and assumptions that are based on experiences and judgment about future operating performance of
our markets and business segments. We did not find reconciliation to our current market capitalization meaningful in the determination
of our enterprise value given current factors that impact our market capitalization, including but not limited to: limited trading
volume, the impact of our publishing segment operating losses and the significant voting control of our Chairman and Chief Executive
Officer.
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. If actual future results are less favorable than the assumptions
and estimates we used, we are subject to future impairment charges, 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
16.
We are permitted to perform a qualitative assessment as to whether
it is more likely than not that an indefinite-lived intangible asset is impaired. This qualitative assessment requires significant
judgment in considering events and circumstances that may affect the estimated fair value of our indefinite-lived intangible assets
and requires that we weigh these events and circumstances by what we believe to be the strongest to weakest indicator of potential
impairment. If it is more likely than not that an impairment exists, we are required to perform a quantitative analysis to estimate
the fair value of the assets.
Our analysis includes the following events and circumstances that
could affect the estimated fair value of indefinite-lived intangible assets, presented in the order of what we believe to be the
strongest to weakest indicators of impairment:
|
(1)
|
the difference between any recent fair value calculations and the carrying value;
|
|
(2)
|
financial performance, such as station operating income, including performance as compared to projected results used in prior
estimates of fair value;
|
|
(3)
|
macroeconomic economic conditions, including limitations on accessing capital that could affect the discount rates used in
prior estimates of fair value;
|
|
(4)
|
industry and market considerations such as a declines in market-dependent multiples or metrics, a change in demand, competition,
or other economic factors;
|
|
(5)
|
operating cost factors, such as increases in labor, that could have a negative effect on future expected earnings and cash
flows;
|
|
(6)
|
legal, regulatory, contractual, political, business, or other factors;
|
|
(7)
|
other relevant entity-specific events such as changes in management or customers; and
|
|
(8)
|
any changes to the carrying amount of the indefinite-lived intangible asset.
|
The primary assumptions used in the Greenfield Method are:
|
(1)
|
gross operating revenue in the station’s designated market area;
|
|
(2)
|
normalized market share;
|
|
(3)
|
normalized profit margin;
|
|
(4)
|
duration of the “ramp-up” period to reach normalized operations, (which was assumed to be three years),
|
|
(5)
|
estimated start-up costs (based on market size);
|
|
(6)
|
ongoing replacement costs of fixed assets and working capital;
|
|
(7)
|
the calculations of yearly net free cash flows to invested capital; and
|
|
(8)
|
amortization of the intangible asset, or the broadcast license.
|
When we are required to perform a quantitative analysis to estimate
the fair value of mastheads, the Relief from Royalty method is used. The Relief from Royalty method estimates the fair value of
mastheads through use of a discounted cash flow model that incorporates a hypothetical “royalty rate” that a third-party
owner would be willing to pay in lieu of owning the asset. The royalty rate is based on observed royalty rates for comparable assets
as of the measurement date. We adjust the selected royalty rate to account for a percentage of the royalty fee that could be attributed
to the use of other intangibles, such as goodwill, time in existence, trade secrets and industry expertise. The adjusted royalty
rate represents the royalty fee remaining that could be attributed to the use of the masthead only.
When performing Step 1 of our annual impairment testing for goodwill,
the fair value of each applicable reporting unit is estimated using a discounted cash flow analysis, which is a form of the income
approach. The discounted cash flow analysis utilizes a five to seven year projection period to derive operating cash flow projections
from a market participant view. We make certain assumptions regarding future revenue growth based on industry market data, historical
performance and expected future performance. We also make assumptions regarding working capital requirements and ongoing capital
expenditures for fixed assets.
If the results of Step 1 indicate that the fair value of a reporting
unit is less than its carrying value, Step 2 is required. Under Step 2, the implied fair value of the reporting unit, including
goodwill, is calculated to determine the amount of the impairment.
We believe we have made reasonable estimates and assumptions to
calculate the estimated fair value of our indefinite-lived intangible assets, however, these estimates and assumptions are highly
judgmental in nature. Actual results can be materially different from estimates and assumptions. If actual market conditions are
less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the
estimated fair value of our indefinite-lived intangible assets below the amounts reflected on our balance sheet, we may recognize
future impairment charges, the amount of which may be material.
Sensitivity of Key Broadcasting Licenses and Goodwill Assumptions
When estimating the fair value of our broadcasting licenses and
goodwill, we make assumptions regarding revenue growth rates, operating cash flow margins and discount rates. These assumptions
require substantial judgment, and actual rates and margins may differ materially. We prepare a sensitivity analysis of these assumptions
and the hypothetical non-cash impairment charge that would have resulted if our estimated long-term revenue growth rates and estimated
discount rates were increased.
Impairment of Long-Lived Assets
We account for property and equipment in accordance with FASB ASC
Topic 360-10, “
Property, Plant and Equipment
.” We periodically review our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. In accordance
with authoritative guidance for impairment of long-lived assets, we must estimate the fair value of assets when events or circumstances
indicate that they may be impaired. The fair value measurements for our long-lived assets use significant observable inputs that
reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions
about risk. If actual future results are less favorable than the assumptions and estimates we used, we are subject to future impairment
charges, the amount of which may be material.
We believe we have made reasonable estimates and assumptions to
calculate the estimated fair value of our long-lived assets, however, these estimates and assumptions are highly judgmental in
nature. Actual results can be materially different from estimates and assumptions. If actual market conditions are less favorable
than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair
value of long-lived assets below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount
of which may be material.
Business Acquisitions
We account for business acquisitions in accordance with the acquisition
method of accounting as specified in FASB ASC Topic 805 “
Business Combinations
.” The total acquisition consideration
is allocated to assets acquired and liabilities assumed based on their estimated fair values as of the date of the transaction.
Estimates of the fair value include discounted estimated cash flows to be generated by the assets and their expected useful lives
based on historical experience, market trends and any synergies believed to be achieved from the acquisition. The excess of consideration
paid over the estimated fair values of the net assets acquired is recorded as goodwill and any excess of fair value of the net
assets acquired over the consideration paid is recorded as a gain on bargain purchase. Prior to recording a gain, the acquiring
entity must reassess whether all acquired assets and assumed liabilities have been identified and recognized and perform re-measurements
to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued.
Acquisitions may include contingent earn-out consideration, the
fair value of which is estimated as of the acquisition date as the present value of the expected contingent payments as determined
using weighted probabilities of the payment amounts.
A majority of our radio station acquisitions have consisted primarily
of the FCC licenses to broadcast in a particular market. We often do not acquire the existing format, or we change the format upon
acquisition when we find it beneficial. As a result, a substantial portion of the purchase price for the assets of a radio station
is allocated to the broadcast license.
We may retain a third-party appraiser to estimate the fair value
of the acquired net assets as of the acquisition date. As part of the valuation and appraisal process, the third-party appraiser
prepares a report assigning estimated fair values to the various asset categories in our financial statements. These fair value
estimates are subjective in nature and require careful consideration and judgment. Management reviews the third party reports for
reasonableness of the assigned values. We believe that the purchase price allocations represent the appropriate estimated fair
value of the assets acquired and we have not had to modify our purchase price allocations.
We estimate the economic life of each tangible and intangible asset
acquired to determine the period of time in which the asset should be depreciated or amortized. A considerable amount of judgment
is required in assessing the economic life of each asset. We consider our own experience with similar assets, industry trends,
market conditions and the age of the property at the time of our acquisition to estimate the economic life of each asset. If the
financial condition of the assets were to deteriorate, the resulting change in life or impairment of the asset could cause a material
impact and volatility in our operating results. To date, we have not experienced changes in the economic life established for each
major category of our assets.
Accounting for Contingent Earn-Out Consideration
Our acquisitions may include contingent earn-out consideration as
part of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. The
fair value of the contingent earn-out consideration is estimated as of the acquisition date at the present value of the expected
contingent payments to be made using a probability-weighted discounted cash flow model for probabilities of possible future payments.
The present value of the expected future payouts is accreted to interest expense over the earn-out period. The fair value estimates
use unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks
and discount rates used in the calculations. The unobservable inputs are defined in FASB ASC Topic 820, “
Fair Value Measurements
and Disclosures,”
as Level 3 inputs discussed in detail in Note 16.
We review the probabilities of possible future payments to the estimated
fair value of any contingent earn-out consideration on a quarterly basis over the earn-out period. Actual results are compared
to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase
or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability
will increase or decrease, up to the contracted limit, as applicable. Changes in the estimated fair value of the contingent earn-out
consideration are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair
value of the contingent earn-out consideration may materially impact and cause volatility in our operating results.
We recorded a net decrease to our estimated contingent earn-out
liabilities of $54,000 for the nine months ended September 30, 2017 and net decrease of $458,000 during the same period of the
prior year. The changes in our estimates reflect volatility from variables, such as revenue growth, page views and session time
as discussed in Note 5 – Contingent Earn-Out Consideration.
Fair Value Measurements
FASB ASC Topic 820, “
Fair Value Measurements and Disclosures,”
established a single definition of fair value in generally accepted accounting principles and requires expanded disclosure requirements
about fair value measurements. The provision applies to other accounting pronouncements that require or permit fair value measurements.
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.
The fair value provisions include guidance on how to estimate the
fair value of assets and liabilities in the current economic environment and reemphasize that the objective of a fair value measurement
remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of
the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and
we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate.
The degree of judgment utilized in measuring the fair value of financial
instruments generally correlates to the level of pricing observability. Pricing observability is affected by a number of factors,
including the type of financial instrument, whether the financial instrument is new to the market, and the characteristics specific
to the transaction. Financial instruments with readily available active quoted prices or for which fair value can be measured from
actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in
measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less (or no) pricing observability
and a higher degree of judgment utilized in measuring fair value.
FASB ASC Topic 820 established a hierarchal disclosure framework
associated with the level of pricing observability utilized in measuring fair value. This framework defined three levels of inputs
to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the
lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined
by the FASB ASC Topic 820 hierarchy are as follows:
|
•
|
Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity
has the ability to access at the measurement date;
|
|
•
|
Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable
for substantially the full term of the asset or liability; and
|
|
•
|
Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own
assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based
on the best information available in the circumstances (which might include the reporting entity’s own data).
|
We believe that we have used reasonable estimates and assumptions
to calculate the estimated fair value of our financial assets as discussed in Note 16.
Contingency Reserves
In the ordinary course of business, we are involved in various legal
proceedings, lawsuits, arbitration and other claims that are complex in nature and have outcomes that are difficult to predict.
Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect
to these matters. Certain of these proceedings are discussed in Note 18, Commitments and Contingencies, contained in our
Condensed Consolidated financial statements.
We record contingency reserves to the extent we conclude that it
is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The establishment
of the reserve is based on a review of all relevant factors, the advice of legal counsel, and the subjective judgment of management.
The reserves we have recorded to date have not been material to our Condensed Consolidated financial position, results of operations
or cash flows.
We believe that
our estimates and assumptions are
reasonable and that our reserves are accurately reflected.
While we believe that the final resolution of any known maters,
individually and in the aggregate, will not have a material adverse effect upon our Condensed Consolidated financial position,
results of operations or cash flows, it is p
ossible that we could incur
additional losses.
We maintain insurance that may provide coverage for such matters. Future claims against us, whether meritorious
or not, could have a material adverse effect upon our Condensed Consolidated financial position, results of operations or cash
flows, including losses due to costly litigation and losses due to matters that require significant amounts of management time
that can result in the diversion of significant operational resources.
Allowance for Doubtful Accounts
We evaluate the balance reserved in our allowance for doubtful accounts
on a quarterly basis based on our historical collection experience, the age of the receivables, specific customer information and
current economic conditions. Past due balances are generally not written-off until all collection efforts have been exhausted,
including use of a collections agency. A considerable amount of judgment is required in assessing the likelihood of ultimate realization
of these receivables, including the current creditworthiness of each customer. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We have not
modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We
believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Sales Returns and Allowances
We provide for estimated returns for products sold with the right
of return, primarily book sales associated with Regnery Publishing and nutritional products sold through Eagle Wellness. We record
an estimate of these product returns as a reduction of revenue in the period of the sale. Our estimates are based upon historical
sales returns, the amount of current period sales, economic trends and any changes in customer demand and acceptance of our products.
We regularly monitor actual performance to estimated return rates and make adjustments as necessary. Estimated return rates utilized
for establishing estimated returns reserves have approximated actual returns experience. However, actual returns may differ significantly,
either favorably or unfavorably, from these estimates if factors such as the historical data we used to calculate these estimates
do not properly reflect future returns or as a result of changes in economic conditions of the customer and/or the market. We have
not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates.
We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Barter Transactions
We may provide broadcast time or digital advertising placement to
customers in exchange for certain products, supplies or services. The terms of these exchanges generally permit for the preemption
of such broadcast time or digital placements in favor of customers who purchase these items for cash. We include the value of such
exchanges in net revenues and operating expenses. The value recorded for barter revenue and barter expense is based upon management’s
estimate of the fair value of the products, supplies or services received. We believe that our estimates and assumptions are reasonable
and that our barter revenue and barter expense are accurately reflected.
We record barter revenue as it is earned, typically when the broadcast
time is used or the digital advertisement is delivered. We record barter expense equal to the estimated fair value of the goods
or services received upon receipt or usage of the items as applicable. Barter advertising revenue included in broadcast revenue
for the three and nine month periods ended September 30, 2017 was approximately $1.6 million and $4.1 million, respectively, and
$1.4 million and $3.8 million for the three and nine month periods ended September 30, 2016, respectively. Barter expenses included
in broadcast operating expense for the three and nine month periods ended September 30, 2017 was approximately $1.6 million and
$3.9 million, respectively, and $1.3 million and $3.7 million for the three and nine month periods ended September 30, 2016, respectively.
Barter advertising revenue included in digital media revenue for the three and nine month periods ended September 30, 2017 was
approximately $7,000 and $47,000, respectively, and $14,000 and $36,000 for the three and nine month periods ended September 30,
2016, respectively. Barter expenses included in digital media operating expense for the three and nine month periods ended September
30, 2017 was approximately $1,000 and $84,000, respectively, and $18,000 and $24,500 for the three and nine month periods ended
September 30, 2016, respectively.
Inventory Reserves
Inventories consist of finished goods, including published books
and wellness products. Inventory is recorded at the lower of cost or market as determined on a First-In First-Out (“FIFO”)
cost method. We reviewed historical data associated with book and wellness product inventories held by Regnery Publishing and our
e-commerce wellness entities, as well as our own experiences to estimate the fair value of inventory on hand. Our analysis includes
a review of actual sales returns, our allowances, royalty reserves, overall economic conditions and product demand. We record a
provision to expense the balance of unsold inventory that we believe to be unrecoverable. We regularly monitor actual performance
to our estimates and make adjustments as necessary. Estimated inventory reserves may be adjusted, either favorably or unfavorably,
if factors such as the historical data we used to calculate these estimates do not properly reflect future returns or as a result
of changes in economic conditions of the customer and/or the market. We have not modified our estimate methodology and we have
not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are
reasonable and that our reserves are accurately reflected.
Reserves for Royalty Advances
Royalties due to book authors are paid in advance and capitalized.
Royalties are expensed as the related book revenues are earned or when we determine that future recovery of the royalty is not
likely. We reviewed historical data associated with royalty advances, earnings and recoverability based on actual results of Regnery
Publishing. Historically, the longer the unearned portion of an advance remains outstanding, the less likely it is that we will
recover the advance through the sale of the book. We apply this historical experience to outstanding royalty advances to estimate
the likelihood of recovery. A provision was established to expense the balance of any unearned advance which we believe is not
recoverable. Our analysis also considers other discrete factors, such as death of an author, any decision to not pursue publication
of a title, poor market demand or other relevant factors. We have not modified our estimate methodology and we have not historically
recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that
our reserves are accurately reflected.
Fair Value of Equity Awards
We account for stock-based compensation under the provisions of
FASB ASC Topic 718, “
Compensation—Stock Compensation
.” We record equity awards with stock-based compensation
measured at the fair value of the award as of the grant date. We determine the fair value of each award using the Black-Scholes
valuation model that requires the input of highly subjective assumptions, including the expected stock price volatility and expected
term of the award granted. The exercise price for each award is equal to or greater than the closing market price of Salem Media
Group, Inc. common stock as of the date of the award. We use the straight-line attribution method to recognize share-based compensation
costs over the expected service period of the award. Upon exercise, cancellation, forfeiture, or expiration of the award, deferred
tax assets for awards with multiple vesting dates are eliminated for each vesting period on a first-in, first-out basis as if each
vesting period was a separate award. We have not modified our estimates or assumptions used in our valuation model. We believe
that our estimates and assumptions are reasonable and that our stock based compensation is accurately reflected in our results
of operations.
Partial Self-Insurance on Employee Health Plan
We provide health insurance benefits to eligible employees under
a self-insured plan whereby we pay actual medical claims subject to certain stop loss limits. We record self-insurance liabilities
based on actual claims filed and an estimate of those claims incurred but not reported. Our estimates are based on historical data
and probabilities. Any projection of losses concerning our liability is subject to a high degree of variability. Among the causes
of this variability are unpredictable external factors such as future inflation rates, changes in severity, benefit level changes,
medical costs and claim settlement patterns. Should the actual amount of claims increase or decrease beyond what was anticipated,
we may adjust our future reserves. Our self-insurance liability was $0.8 million at September 30, 2017 and December 31, 2016. We
have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates.
Income Tax Valuation Allowances (Deferred Taxes)
In preparing our Condensed Consolidated financial statements, we
estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax exposure
and assessing temporary differences resulting from differing treatment of items for tax and financial statement purposes. Our judgments,
assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation
of current tax laws and possible outcomes of audits conducted by tax authorities. Reserves for income taxes to address potential
exposures involving tax positions that could be challenged by tax authorities are established if necessary. Although we believe
our judgments, assumptions and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution
of any future tax audits could significantly impact the amounts provided for income taxes in our Condensed Consolidated financial
statements.
We calculate our current and deferred tax provisions based on estimates
and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments
based on filed returns are generally recorded in the period when the tax returns are filed and the tax implications are known.
Tax law and rate changes are reflected in the income tax provision in the period in which such changes are enacted.
We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. We consider all available evidence, both positive and negative, including
historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation allowance. In the event we were to determine that we would
not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would
be charged to earnings in the period in which we make such a determination. Likewise, if we later determine that it is more likely
than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided
valuation allowance.
For financial reporting purposes, we recorded a valuation allowance
of $4.5 million as of September 30, 2017 and December 31, 2016 to offset $4.2 million of the deferred tax assets related to the
state net operating loss carryforwards and $0.3 million associated with asset impairments.
Income Taxes and Uncertain Tax Positions
We are subject to audit and review by various taxing jurisdictions.
We may recognize liabilities on our financial statements for positions taken on uncertain tax positions. When tax returns are filed,
it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others may
be subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.
Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. It
is inherently difficult and subjective to estimate such amounts, as this requires us to make estimates based on the various possible
outcomes. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, we believe it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any.
We review and reevaluate uncertain tax positions on a quarterly
basis. Changes in assumptions may result in the recognition of a tax benefit or an additional charge to the tax provision. During
the nine month period ended September 30, 2017, we did not recognize liabilities associated with uncertain tax positions. Accordingly,
we have no liabilities for uncertain tax positions recorded at September 30, 2017. Our evaluation was performed for all tax years
that remain subject to examination, which range from 2013 through 2016. There is currently one tax examination in process. The
City of New York began their audit of Salem’s 2013 and 2014 tax filings. We do not anticipate any material or significant
results from the audit.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds have been operating cash flow, borrowings under credit facilities and proceeds
from the sale of selected assets or businesses. We have historically funded, and will continue to fund, expenditures for operations,
administrative expenses, and capital expenditures from these sources. We have historically financed acquisitions through borrowings,
including borrowings under credit facilities and, to a lesser extent, from operating cash flow and from proceeds on selected asset
dispositions. We expect to fund future acquisitions from cash on hand, borrowings under our credit facilities, operating cash flow
and possibly through the sale of income-producing assets or proceeds from debt and equity offerings.
We
have assessed the current and expected economic outlook and our current and expected needs for funds and we believe that the borrowing
capacity under our current credit facilities allows us to meet our ongoing operating requirements, fund capital expenditures and
satisfy our debt service requirements for at least the next twelve months.
Our cash and cash equivalents decreased to $4,000 as of September
30, 2017 as compared to $130,000 at December 31, 2016. Working capital decreased $20.7 million to ($5.3) million at September 30,
2017 compared to $15.4 million at December 31, 2016 due to a $9.4 million reclass of current deferred income tax assets upon adoption
of ASU 2015-17, a $6.4 million increase in accrued interest on the Notes and a $6.1 million increase in Revolver debt on the ABL.
Operating Cash Flows
Our largest source of operating cash inflows are receipts from customers in exchange for advertising and
programming. Other sources of operating cash inflows include receipts from customers for digital downloads and streaming, book
sales, subscriptions, self-publishing fees, ticket sales, sponsorships, and vendor promotions. A majority of our operating cash
outflows consist of payments to employees, such as salaries and benefits, and vendor payments under facility and tower leases,
talent agreements, inventory purchases and recurring services such as utilities and music license fees. Our operating cash flows
are subject to factors such as fluctuations in preferred advertising media and changes in demand caused by shifts in population,
station listenership, demographics, and audience tastes. In addition, our operating cash flows may be affected if our customers
are unable to pay, delay payment of amounts owed to us, or if we experience reductions in revenue, or increases in costs and expenses.
Net cash provided by operating activities during the nine month
period ended September 30, 2017 decreased by $1.4 million to $25.2 million compared to $26.5 million during the same period of
the prior year. The decrease in cash provided by operating activities includes the impact of the following items:
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·
|
Net operating income decreased to $2.3 million compared to $5.9 million for the same period of the prior year;
|
|
·
|
Net accounts receivable decreased $1.4 million;
|
|
·
|
Our Day’s Sales Outstanding, or the average number of days to collect cash from the date of sale, increased to 66 days
at September 30, 2017 compared to 65 days for the same period of the prior year;
|
|
·
|
Net accounts payable and accrued expenses increased $4.5 million to $16.1 million for the nine month period ended September
30, 2017 compared to a decrease of $2.7 million to $19.2 million for the same period of the prior year; and
|
|
·
|
Net inventories on hand increased $0.1 million to $0.8 million at September 30, 2017 compared to a decrease of $0.1 million
to $0.7 million for the same period of the prior year.
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Investing Cash Flows
Our primary source of investing cash inflows includes
proceeds from the sale or disposal of assets or businesses. Our investing cash outflows include cash payments made to acquire businesses,
to acquire property and equipment and to acquire intangible assets such as domain names. While our focus continues to be on deleveraging
the company, we remain committed to explore and pursue strategic acquisitions.
In recent years, our acquisition agreements have
contained contingent earn-out arrangements that are payable in the future based on the achievement of predefined operating results.
We believe that these contingent earn-out arrangements provide some degree of protection with regard to our cash outflows should
these acquisitions not meet our operational expectations.
We plan to fund future purchases and any acquisitions from cash
on hand, operating cash flow or our credit facilities. These transactions include the acquisition of WSPZ-AM in our Washington
DC market for $0.6 million and an option to acquire radio station KHTE-FM, Little Rock, Arkansas, for $1.2 million in cash during
the TBA period under which we are programming the station. The 36 month TBA began on April 1, 2015, and contains an option to extend
to 48 months.
We undertake projects from time to time to upgrade our radio station
technical facilities and/or FCC broadcast licenses, expand our digital and web-based offerings, improve our facilities and upgrade
our computer infrastructures. The nature and timing of these upgrades and expenditures can be delayed or scaled back at the discretion
of management. Based on our current plans, we expect to incur capital expenditures of approximately $8.4 million during the remainder
of 2017.
Net cash used in investing activities during the nine month period
ended September 30, 2017 decreased $2.5 million to $9.9 million compared to $12.4 million during the same period of the prior year.
The decrease in cash used for investing activities includes:
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·
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Cash paid for acquisitions decreased $3.8 million to $3.4 million compared to $7.2 million during the same period of the prior
year;
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·
|
Cash paid for capital expenditures decreased $0.4 million to $6.8 million compared to $7.2 million during the same period of
the prior year; and
|
|
·
|
Cash paid for capital expenditures reimbursable under tenant improvement allowances decreased $0.4 million to $0.1 million
compared to $0.5 million during the same period of the prior year; and
|
|
·
|
Proceeds from the sale of assets decreased $2.5 million to $0.6 million compared to $3.1 million during the same period of
the prior year.
|
Financing Cash Flows
Financing cash inflows include borrowings under our credit facilities
and any proceeds from the exercise of stock options issued under our stock incentive plan. Financing cash outflows include repayments
of our credit facilities, the payment of equity distributions and payments of amounts due under deferred installments and contingency
earn-out consideration associated with acquisition activity.
We believe that cash payments for deferred installments and contingent
earn-out consideration that were entered contemporaneously with an acquisition are appropriately recorded as financing activities.
These payments are similar to seller financing arrangements in that cash payments are typically due one to three years after the
acquisition date. We referred to guidance in FASB ASC Topic 230-10-45-13 (c) which states that only advance payments, down payments,
or other amounts paid at the time of purchase or soon before or after a purchase of property, plant and equipment and other productive
assets are investing cash outflows. The guidance clarifies that incurring directly related debt to the seller is a financing transaction
and that subsequent payments of that debt are financing cash outflows. This is consistent with the guidance in FASB ASU 2016-15,
“
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”
which clarifies
how entities should classify certain cash receipts and cash payments on the statement of cash flows issued in August 2016. During
the nine month period ended September 30, 2017, we paid $14,000 in cash for contingent earn-out consideration due under acquisition
agreements and $0.2 million in cash for deferred installments.
On May 19, 2017, we closed on a private offering of the Notes and
concurrently entered into the ABL Facility. The net proceeds from the offering of the Notes, together with borrowings under the
ABL Facility, were used to repay outstanding borrowings, including accrued and unpaid interest, on our previously existing senior
credit facilities consisting of the Term Loan B and the Revolver, and to pay fees and expenses incurred in connection with the
Notes offering and the ABL Facility.
During the six month period ended June 30, 2017, the principal balances
outstanding under our previous credit facilities ranged from $258.0 million to $263.5 million. During the nine month period ended
September 30, 2017, the principal balances outstanding under the Notes and ABL Facility ranged from $258.0 million to $268.6 million.
These outstanding balances were ordinary and customary based on our operating and investing cash needs during this time.
Based on the number of shares of Class A and Class B common stock
currently outstanding we expect to pay total annual equity distributions of approximately $6.8 million in 2017. However, the actual
declaration of dividends and equity distributions, as well as the establishment of per share amounts, dates of record, and payment
dates are subject to final determination by our Board of Directors and depend upon future earnings, cash flows, financial and legal
requirements, and other factors. The current policy of the Board of Directors is to review each of these factors on a quarterly
basis to determine the appropriate amount, if any, to allocate toward a cash distribution. In recent years, distributions have
been approximately 20% of Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, and less cash
paid for interest. Adjusted EBITDA is a non-GAAP financial measure defined in Item 2, Management’s Discussion and Analysis
of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q. Future distributions, if any,
are likely to be approximately 30% of Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes,
and less cash paid for interest.
Our sole source of cash available for making any future equity distributions
is our operating cash flow, subject to our credit facilities and Notes, which contain covenants that restrict the payment of dividends
and equity distributions unless certain specified conditions are satisfied.
Net cash used in financing activities during the nine month period
ended September 30, 2017 increased by $1.3 million to $15.4 million from $14.1 million during the same period of the prior year.
The decrease in cash used for financing activities includes:
|
·
|
We paid the remaining principal balance outstanding on the Term Loan B of $258.0 million and terminated the Term Loan B;
|
|
·
|
We paid the remaining principal outstanding on the Revolver and terminated the related credit agreement;
|
|
·
|
We issued the 6.75% Senior Secured Notes and received gross proceeds of $255.0 million upon issuance;
|
|
·
|
We entered into the ABL Facility for $30.0 million and borrowed $39.8 million of proceeds thereunder;
|
|
·
|
We subsequently repaid $33.2 million on the ABL Facility;
|
|
·
|
We paid $0.2 million of cash against deferred installments due under our purchase agreements during the nine month period ended
September 30, 2017 compared to $3.4 million during the same period of the prior year;
|
|
·
|
We paid $14,000 of cash due for amounts earned under the contingent earn-out provision of our purchase agreements during the
nine month period ended September 30, 2017 compared to $0.1 million during the same period of the prior year;
|
|
·
|
The book overdraft use increased $1.8 million to $1.1 million use as of the period ended September 30, 2017 compared to a $0.7
million source for the same period of the prior year; and
|
|
·
|
We paid cash equity distributions of $5.1 million on our Class A and Class B common stock compared to $5.0 million for the
same period of the prior year.
|
Salem Media Group, Inc. has no independent assets or operations,
the subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of Salem Media Group, Inc. other
than the subsidiary guarantors are minor.
6.75% Senior Secured Notes
On May 19, 2017, we issued in a private placement the Notes, which were guaranteed on a senior secured
basis by our existing subsidiaries (the “Subsidiary Guarantors”). The Notes bear interest at a rate of 6.75% per year
and mature on June 1, 2024, unless earlier redeemed or repurchased. Interest initially accrues on the Notes from May 19, 2017 and
is payable semi-annually, in cash in arrears, on June 1 and December 1 of each year, commencing December 1, 2017.
The Notes and the ABL Facility are secured by liens on substantially
all of our and the Subsidiary Guarantors’ assets, other than certain excluded assets. The ABL Facility has a first-priority
lien on our and the Subsidiary Guarantor’s accounts receivable, inventory, deposit and securities accounts, certain real
estate and related assets (the “ABL Priority Collateral”). The Notes are secured by a first-priority lien on substantially
all other assets of ours and the Subsidiary Guarantors (the “Notes Priority Collateral”). There is no direct lien on
our Federal Communications Commission (“FCC”) licenses to the extent prohibited by law or regulation.
We may redeem the Notes, in whole or in part, at any time on or
after June 1, 2020 at a price equal to 100% of the principal amount of the Notes plus a “make-whole” premium as of,
and accrued and unpaid interest, if any, to, but not including, the redemption date. At any time on or after June 1, 2020, we may
redeem some or all of the Notes at the redemption prices (expressed as percentages of the principal amount to be redeemed) set
forth in the Notes, plus accrued and unpaid interest, if any, to, but not including, the redemption date. In addition, we may redeem
up to 35% of the aggregate principal amount of the Notes before June 1, 2020 with the net cash proceeds from certain equity offerings
at a redemption price of 106.75% of the principal amount plus accrued and unpaid interest, if any, to, but not including, the redemption
date. We may also redeem up to 10% of the aggregate original principal amount of the Notes per twelve month period before June
1, 2020 at a redemption price of 103% of the principal amount plus accrued and unpaid interest to, but not including, the redemption
date.
The indenture relating to the Notes (the “Indenture”)
contains covenants that, among other things and subject in each case to certain specified exceptions, limit our ability and the
ability of our restricted subsidiaries to: (i) incur additional debt; (ii) declare or pay dividends, redeem stock or make other
distributions to stockholders; (iii) make investments; (iv) create liens or use assets as security in other transactions; (v) merge
or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; (vi) engage in transactions with affiliates;
and (vii) sell or transfer assets.
The Indenture provides for the following events of default (each,
an “Event of Default”): (i) default in payment of principal or premium on the Notes at maturity, upon repurchase, acceleration,
optional redemption or otherwise; (ii) default for 30 days in payment of interest on the Notes; (iii) the failure by us or certain
restricted subsidiaries to comply with other agreements in the Indenture or the Notes, in certain cases subject to notice and lapse
of time; (iv) the failure of any guarantee by certain significant Subsidiary Guarantors to be in full force and effect and enforceable
in accordance with its terms, subject to notice and lapse of time; (v) certain accelerations (including failure to pay within any
grace period) of other indebtedness of ours or any restricted subsidiary if the amount accelerated (or so unpaid) is at least $15
million; (vi) certain judgments for the payment of money in excess of $15 million; (vii) certain events of bankruptcy or insolvency
with respect to us or any significant subsidiary; and (vii) certain defaults with respect to any collateral having a fair market
value in excess of $15 million. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in
principal amount of the outstanding Notes may declare the principal of the Notes and any accrued interest on the Notes to be due
and payable immediately, subject to remedy or cure in certain cases. Certain events of bankruptcy or insolvency are Events of Default
which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default.
We are required to pay $17.2 million per year in interest on the
Notes. As of September 30, 2017, accrued interest on the Notes was $6.4 million.
We incurred debt issuance costs of $6.3 million that were recorded
as a reduction of the debt proceeds that are being amortized to non-cash interest expense over the life of the Notes using the
effective interest method. During the three and nine month periods ended September 30, 2017, $0.2 million and $0.3 million, respectively,
of debt issuance costs associated with the Notes were recognized as interest expense.
Asset-Based Revolving Credit Facility
On May 19, 2017, the Company also entered into the ABL Facility
pursuant to a Credit Agreement (the “Credit Agreement”) by and among us, as a borrower, our subsidiaries party thereto,
as borrowers, Wells Fargo Bank, National Association, as administrative agent and lead arranger, and the lenders that are parties
thereto. We used the proceeds of the ABL Facility, together with the net proceeds from the Notes offering, to repay the Prior Facility
and related fees and expenses. Going forward, the proceeds of the ABL Facility will be used to provide ongoing working capital
and for other general corporate purposes (including permitted acquisitions).
The ABL Facility is a five-year $30.0 million revolving credit facility
due May 19, 2022, which includes a $5.0 million subfacility for standby letters of credit and a $7.5 million subfacility for swingline
loans. All borrowings under the ABL Facility accrue at a rate equal to a base rate or LIBOR rate plus a spread. The spread, which
is based on an availability-based measure, ranges from 0.50% to 1.00% for base rate borrowings and 1.50% to 2.00% for LIBOR rate
borrowings. If an event of default occurs, the interest rate may increase by 2.00% per annum. Amounts outstanding under the ABL
Facility may be paid and then reborrowed at our discretion without penalty or premium. Additionally, we pay a commitment fee on
the unused balance of 0.25% to 0.375% per year.
The ABL Facility is secured by a first-priority lien on the ABL
Priority Collateral and by a second-priority lien on the Notes Priority Collateral. There is no direct lien on the Company’s
FCC licenses to the extent prohibited by law or regulation (other than the economic value and proceeds thereof).
The Credit Agreement includes a springing fixed charge coverage
ratio of 1.0 to 1.0, which is tested during the period commencing on the last day of the fiscal month most recently ended prior
to the date on which Availability (as defined in the Credit Agreement) is less than the greater of 15% of the Maximum Revolver
Amount (as defined in the Credit Agreement) and $4.5 million and continuing for a period of 60 consecutive days after the first
day on which Availability exceeds such threshold amount. 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 the borrowers and their subsidiaries (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 assets to a third
party, except as permitted thereby; (viii) to prepay indebtedness; and (ix) to pay dividends.
The Credit Agreement provides for the following events of default:
(i) default for non-payment of any principal or letter of credit reimbursement when due or any interest, fees or other amounts
within five days of the due date; (ii) the failure by any borrower or any subsidiary to comply with any covenant or agreement contained
in the Credit Agreement or any other loan document, in certain cases subject to applicable notice and lapse of time; (iii) any
representation or warranty made pursuant to the Credit Agreement or any other loan document is incorrect in any material respect
when made; (iv) certain defaults of other indebtedness of any borrower or any subsidiary of indebtedness of at least $10 million;
(v) certain events of bankruptcy or insolvency with respect to any borrower or any subsidiary; (vi) certain judgments for the payment
of money of $10 million or more; (vii) a change of control; and (viii) certain defaults relating to the loss of FCC licenses, cessation
of broadcasting and termination of material station contracts. If an event of default occurs and is continuing, the Administrative
Agent and the Lenders may accelerate the amounts outstanding under the ABL Facility and may exercise remedies in respect of the
collateral.
We incurred debt issue costs of $0.6 million that were recorded
as an asset and are being amortized to non-cash interest expense over the term of the ABL Facility using the effective interest
method. During the three and nine month periods ended September 30, 2017, $63,000 and $86,000, respectively, of debt issue costs
associated with the Notes were recognized as interest expense. At September 30, 2017, the blended interest rate on amounts outstanding
under the ABL Facility was 2.98%.
We report outstanding balances on the ABL Facility as short-term
regardless of the maturity date based on use of the ABL Facility to fund ordinary and customary operating cash needs with frequent
repayments. We believe that our borrowing capacity under the ABL Facility allows us to meet our ongoing operating requirements,
fund capital expenditures and satisfy our debt service requirements for at least the next twelve months.
Prior Term Loan B and Revolving Credit Facility
Our prior credit facility consisted of a term loan of $300.0 million
(“Term Loan B”) and a revolving credit facility of $25.0 million (“Revolver”). The Term Loan B was issued
at a discount for total net proceeds of $298.5 million. The discount was amortized to non-cash interest expense over the life of
the loan using the effective interest method. For each of the three months ended September 30, 2017 and 2016, approximately $0
and $51,000, respectively, of the discount associated with the Term Loan B was recognized as interest expense. For each of the
nine months ended September 30, 2017 and 2016, approximately $74,000 and $155,000, respectively, of the discount associated with
the Term Loan B was recognized as interest expense.
The Term Loan B had a term of seven years, maturing in March 2020.
On May 19, 2017, we used the net proceeds of the Notes and a portion of the ABL Facility to fully repay amounts outstanding under
the Term Loan B of $258.0 million and under the Revolver of $4.1 million. We recorded a loss on the early retirement of long-term
debt of $2.1 million, which included $1.5 million of unamortized debt issuance costs on the Term Loan B and the Revolver and $0.6
million of unamortized discount on the Term Loan B.
The following payments or prepayments of the Term Loan B were made
during the year ended December 31, 2016 and through the date of the termination, including interest through the payment date as
follows:
Date
|
|
Principal Paid
|
|
|
Unamortized Discount
|
|
|
|
(Dollars in Thousands)
|
|
May 19, 2017
|
|
$
|
258,000
|
|
|
$
|
550
|
|
February 28, 2017
|
|
|
3,000
|
|
|
|
6
|
|
January 30, 2017
|
|
|
2,000
|
|
|
|
5
|
|
December 30, 2016
|
|
|
5,000
|
|
|
|
12
|
|
November 30, 2016
|
|
|
1,000
|
|
|
|
3
|
|
September 30, 2016
|
|
|
1,500
|
|
|
|
4
|
|
September 30, 2016
|
|
|
750
|
|
|
|
—
|
|
June 30, 2016
|
|
|
441
|
|
|
|
1
|
|
June 30, 2016
|
|
|
750
|
|
|
|
—
|
|
March 31, 2016
|
|
|
750
|
|
|
|
—
|
|
March 17, 2016
|
|
|
809
|
|
|
|
2
|
|
Debt issuance costs were amortized to non-cash interest expense
over the life of the Term Loan B using the effective interest method. For each of the three months ended September 30, 2017 and
2016, approximately $0 and $140,000, respectively, of the debt issuance costs associated with the Term Loan B were recognized as
interest expense. For each of the nine months ended September 30, 2017 and 2016, approximately $203,000 and $423,000 respectively,
of the debt issuance costs associated with the Term Loan B were recognized as interest expense.
Debt issuance costs associated with the Revolver were recorded as
an asset in accordance with ASU 2015-15. The costs were amortized to non-cash interest expense over the five year life of the Revolver
using the effective interest method based on an imputed interest rate of 4.58%. For each of the three month periods ended September
30, 2017 and 2016, we recorded amortization of deferred financing costs of approximately $0 and $17,000. For each of the nine month
periods ended September 30, 2017 and 2016, we recorded amortization of deferred financing costs of approximately $26,000 and $52,000.
Summary of long-term debt obligations
Long-term debt consisted of the following:
|
|
As of December 31, 2016
|
|
|
As of September 30, 2017
|
|
|
|
(Dollars in thousands)
|
|
6.75% Senior Secured Notes
|
|
$
|
—
|
|
|
$
|
255,000
|
|
Less unamortized debt issuance costs based on imputed interest rate of 7.08%
|
|
|
—
|
|
|
|
(6,004
|
)
|
6.75% Senior Secured Notes net carrying value
|
|
|
—
|
|
|
|
248,996
|
|
Asset-Based Revolving Credit Facility principal outstanding
|
|
|
—
|
|
|
|
6,629
|
|
Term Loan B principal amount
|
|
|
263,000
|
|
|
|
—
|
|
Less unamortized discount and debt issuance costs based on imputed interest rate of 4.78%
|
|
|
(2,371
|
)
|
|
|
—
|
|
Term Loan B net carrying value
|
|
|
260,629
|
|
|
|
—
|
|
Revolver principal outstanding
|
|
|
477
|
|
|
|
—
|
|
Capital leases and other loans
|
|
|
568
|
|
|
|
491
|
|
Long-term debt and capital lease obligations less unamortized debt issuance costs
|
|
|
261,674
|
|
|
|
256,116
|
|
Less current portion
|
|
|
(590
|
)
|
|
|
(6,741
|
)
|
Long-term debt and capital lease obligations less unamortized debt issuance costs, net of current portion
|
|
$
|
261,084
|
|
|
$
|
249,375
|
|
|
|
|
|
|
|
|
|
|
In addition to the outstanding amounts listed above, we also have
interest payments related to our long-term debt as follows as of September 30, 2017:
|
·
|
Outstanding borrowings of $6.6 million under the ABL Facility, with interest payments due at LIBOR plus 1.5% to 2.0% per annum;
|
|
·
|
$255.0 million aggregate principal amount of Notes with semi-annual interest payments at an annual rate of 6.75% ; and
|
|
·
|
Commitment fee of 0.25% to 0.375% on the unused portion of the ABL Facility.
|
Other Debt
We have several capital leases related to office equipment. The
obligation recorded at December 31, 2016 and September 30, 2017 represents the present value of future commitments under the capital
lease agreements.
Maturities of Long-Term Debt and Capital Lease Obligations
Principal repayment requirements under all long-term debt agreements
outstanding at September 30, 2017 for each of the next five years and thereafter are as follows:
|
|
Amount
|
|
For the Twelve Months Ended September 30,
|
|
(Dollars in thousands)
|
|
2018
|
|
$
|
6,741
|
|
2019
|
|
|
108
|
|
2020
|
|
|
107
|
|
2021
|
|
|
121
|
|
2022
|
|
|
43
|
|
Thereafter
|
|
|
255,000
|
|
|
|
$
|
262,120
|
|
Impairment Losses on Goodwill and Indefinite-Lived Intangible
Assets
Under FASB ASC Topic 350 “
Intangibles—Goodwill and
Other
,” indefinite-lived intangibles, including broadcast licenses, goodwill and mastheads are not amortized but instead
are tested for impairment at least annually, or more frequently if events or circumstances indicate that there may be an impairment.
Impairment is measured as the excess of the carrying value of the indefinite-lived intangible asset over its fair value. Intangible
assets that have finite useful lives continue to be amortized over their useful lives and are measured for impairment if events
or circumstances indicate that they may be impaired. Impairment losses are recorded as operating expenses. We have incurred significant
impairment losses in prior years with regard to our indefinite-lived intangible assets.
We perform our annual impairment testing during the fourth quarter
of each year, which coincides with our budget and planning process for the upcoming year. During our annual testing in the fourth
quarter of 2016, we recognized impairment charges of $7.0 million including a $6.5 million impairment of broadcast licenses and
$0.5 million impairment of mastheads. Broadcast licenses were deemed to be impaired in four of the twenty five markets tested.
Impairments were recorded in our Cleveland, Dallas, Detroit and Portland market clusters due to an increase in the risk-adjusted
discount rate or Weighted Average Cost of Capital (“WACC”). Mastheads were deemed to be impaired due to further reductions
in projected net revenues and increases in the WACC. We continue to evaluate our print magazine business due to recurring declines
in operating results and projected revenues. Due to operating results during the three month period ended March 31, 2017 that did
not meet management’s expectations, we ceased publishing Preaching Magazine
™
, YouthWorker Journal
™
,
FaithTalk Magazine
™
and Homecoming® The Magazine upon issuance of the May 2017 publication. We have received
purchase offers from third parties interested in acquiring the rights to continue publishing Preaching Magazine
™
,
but we have not closed on or agreed to final terms of the sale.
Because of the likelihood that these print magazines would be sold
or otherwise disposed of before the end of their previously estimated life, we performed impairment tests as of March 31, 2017.
Due to reductions in forecasted operating cash flows and indications of interest from potential buyers, we then recorded an impairment
charge of $19,000 associated with mastheads.
We believe that our estimate of the value of our broadcast licenses,
mastheads, and goodwill is a critical accounting estimate as the value is significant in relation to our total assets, and our
estimates incorporate variables and assumptions that are based on past experiences and judgment about future operating performance
of our markets and business segments. If actual future results are less favorable than the assumptions and estimates we used, we
are subject to future impairment charges, 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 16.
The valuation of intangible assets is subjective and based on estimates
rather than precise calculations. The fair value measurements of 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. If actual future results are less favorable than the assumptions and estimates we used, we are subject
to future impairment charges, the amount of which may be material. Given the current economic environment and uncertainties that
can negatively impact our business, there can be no assurance that our estimates and assumptions made for the purpose of our indefinite-lived
intangible fair value estimates will prove to be accurate.
While the impairment charges we have recognized are non-cash in
nature and did not violate the covenants on the then existing Revolver and Term Loan B, the potential for future impairment charges
can be viewed as a negative factor with regard to forecasted future performance and cash flows. We believe that we have adequately
considered the potential for an economic downturn in our valuation models and do not believe that the non-cash impairments in and
of themselves are a liquidity risk.
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2017, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.