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The following is an excerpt from a 10-K SEC Filing, filed by SALEM COMMUNICATIONS CORP /DE/ on 3/31/2006.
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SALEM COMMUNICATIONS CORP /DE/ - 10-K - 20060331 - PART_I

PART I

ITEM 1.      BUSINESS.

GENERAL

We believe that we are the largest commercial U.S. radio broadcasting company, measured by number of stations and audience coverage, providing programming targeted at audiences interested in Christian and family-themed radio programming. Our core business is the ownership and operation of radio stations in large metropolitan markets. Upon completion of all announced transactions, we will own a national portfolio of 104 radio stations in 40 markets, including 66 stations in 24 of the top 25 markets, which consists of 32 FM stations and 72 AM stations. We are one of only four commercial radio broadcasters with radio stations in all of the top 10 markets. We are the sixth largest operator measured by number of stations overall and the third largest operator measured by number of stations in the top 25 markets.

Our radio business is focused on the clustering of three strategic formats: Christian Teaching and Talk, Contemporary Christian Music and conservative News Talk. We also own and operate Salem Radio Network® (“SRN”), a national radio network that syndicates music, news and talk to approximately 2,000 affiliated radio stations, in addition to our owned and operated stations. Salem Radio Representatives® is a national radio advertising sales firm with offices in 13 U.S. cities. Additionally, Salem Web Network™ (“SWN”), a provider of online Christian content and streaming, and Salem Publishing™, a leading publisher of Christian magazines are owned and operated by Salem.

Business Strategy

Our principal business strategy is to expand and improve our national radio platform in order to deliver compelling content to audiences interested in Christian and family-themed programs. Our national presence gives advertisers a station platform that is a unique and a powerful way to reach a Christian audience.  We program 44 of our stations with our Christian Teaching and Talk format, which is talk programming with Christian and family themes. A key programming strategy on our Christian Teaching and Talk radio stations is to sell blocks of time to a variety of charitable organizations that create compelling radio programs.  We also program 34 News Talk and 14 Contemporary Christian Music stations. SRN supports our strategy by allowing us to reach listeners in markets where we do not own or operate stations.

Both our chief executive officer and our chairman are career radio broadcasters who have owned and operated radio stations for more than 30 years.

Acquisition Strategy

Since our initial public offering in July 1999, we have grown from 46 radio stations to 104 stations located in 40 radio markets. Our principal acquisition strategy is focused on acquiring stations in markets that have strong signals and will deliver an appropriate return on investment.  Because of our unique programming strategy that serves the Christian and family-themed audience, we usually must reformat each acquired station, which means we need to market and promote the new format, develop listenership, and cultivate a customer base to grow revenues. It can take five to six years of development for an acquired radio station to reach maturity. Over the long term, this strategy gives stations a competitive advantage and allows us to super-serve our large and loyal market segment.

We strive to build clusters of radio stations in each of our markets with each format targeting different demographic segments of the audience interested in Christian and family-themed programming. This clustering and programming segmentation strategy allows us to achieve greater penetration into each segment of our target market. We then are able to offer advertisers multiple audiences and to bundle the radio stations for advertising sales purposes when advantageous.

There are several potential benefits that result from operating multiple radio stations in the same market.  First, collectively our stations afford our clients a larger percentage of advertising time in that market. Second, the more stations we program, the greater the market share we can achieve in our target demographic groups through our distinctive programming. Third, we realize cost and operating efficiencies by consolidating sales, technical and administrative support and promotional functions where possible. Finally, the purchase of additional radio stations in an existing market allows us to leverage our market expertise to better serve our advertisers and our listeners through traditional and emerging media.   




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In addition to our radio station acquisitions, we are also looking for Christian content Internet and publishing opportunities that we can effectively integrate into our existing operations in a complementary manner.

Programming Strategy

Through the strength of our Christian Teaching and Talk format, the influence of our News Talk format and the growing popularity of our Contemporary Christian Music format, we are well-positioned to improve upon our leadership position in Christian and family-themed radio.

Christian Teaching and Talk.   Christian Teaching and Talk is our foundational format. Through this format, a listener can listen to Bible teaching and sermons, as well as gain answers to questions relating to daily life, from raising children to religious legal rights in education and the workplace.  This format serves as both a learning resource and as a personal support for listeners nationwide.  In response to the daily programming of our block programming partners, listeners call and write into these programs to ask questions, get more materials on a subject and receive study guides based on what they have learned on the radio.  

Block Programming.  O ur national station platform and focused programming strategy provides us with the ability to consistently offer block programmers on our Christian Teaching and Talk stations both scale and targeting efficiencies. Historically, more than 90 percent of our block programming partners renewed their respective relationships with us. As a result, our block programming business tends to be recession resilient and provides a steady and consistent stream of revenue and cash flow.

News Talk.   News talk programming is the second most popular radio format in the country, based both on listenership and number of radio stations.  Our research has shown that our News Talk format is highly complementary to our core format of Christian Teaching and Talk.  As programmed by Salem, both formats express conservative views and family values.  Our News Talk format also provides us with the opportunity to leverage syndicated talk programming produced by our network, SRN. Our nationally syndicated programs are distributed through approximately 2,000 affiliates.  

The FISH® - Contemporary Christian Music.   Through our CCM format, called The FISH® in most markets, we are able to bring listeners the words of inspirational recording artists, set to upbeat contemporary music. Our music format is branded “Safe for the Whole Family™”, with sounds that everyone enjoys and lyrics that parents appreciate. The CCM genre continues to be popular. The American Music Awards annually honors and recognizes this format. According to Nielson Christian SoundScan, sales of Christian music, including digital, rose 2.4 percent making CCM the sixth most popular music genre in America in 2005.  We believe this listener base has been underserved in terms of radio coverage, especially in the larger markets.  

XM Satellite Radio .  As America's most popular satellite radio service, XM reaches more than 5 million subscribers from coast to coast. Our satellite radio station, XM 170, is the exclusive Christian Teaching and Talk channel on XM, reaching the entire nation 24 hours a day, seven days a week.

Audience Growth

We grow our audience by programming high quality, compelling content on our radio stations that is tested and fine-tuned to appeal to our listeners in each of our strategic formats. We work to maximize audience share and then convert these audience share ratings to advertising revenue, minimize clutter and control operating costs. We rely on a combination of research, marketing, targeted promotions and live events that create visibility and brand awareness for our stations in their local markets.

Station Development

Approximately half of our radio stations are in a start-up or early development stage.  Less mature stations generally grow their revenue and cash flow at a faster rate than mature stations.  Our strategy is to drive start-up and development stage stations to maturity as rapidly and as effectively as possible.   In addition, we focus on improving same-station revenue and station operating income at our mature stations. The start-up to maturity process in most cases is a span of five to six years, beginning with a period of start-up losses, moving to breakeven, and then growing profitability. As our start-up and development stage stations mature, significant revenue and cash flow growth is realized. Operating income margins typically improve as radio stations mature due to the fact that many costs are fixed or grow at or around the rate of inflation while revenues of the station tend to grow at a faster rate.




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Technical Improvements

A key focus for us is looking for ways to improve a radio station’s broadcast signal so that it can reach as many listeners as possible, both during the day and at night.  We have completed a number of enhancements that will improve the coverage of a number of signals, including several in the top 25 markets. In 2005, Salem completed tower upgrade projects for WYLL-AM in Chicago, and for The Fish™ WFSH-FM in Atlanta. In early 2006, Salem launched KTRO-FM, a new station in Portland, Oregon.

Radio Advertising Sales

We have assembled an effective, highly trained sales staff responsible for converting audience share into revenue.  We operate with a focused, sales-oriented culture that rewards aggressive selling efforts through a generous commission and bonus compensation structure.  We hire and deploy teams of sales professionals for each of our stations or station clusters, and we provide these teams with the resources necessary to compete effectively in the markets in which we operate.  We utilize various sales strategies to sell and market our stations as stand-alones, in combination with other stations within a given market and across markets, where appropriate.

Marketing Platform to National Advertisers

Through our acquisitions, we have created a national platform of radio stations that reaches more than four million listeners weekly. National companies find advertising on all our radio stations to be an efficient and cost-effective way to reach this target audience.  Through Salem Radio Representatives®, we bundle and sell this national platform of radio stations to national advertisers thereby enhancing our revenue generating opportunities, expanding our base of advertisers, creating greater demand for our advertising time inventory, and making our sales effort more efficient.

Significant Community Involvement

We believe our active involvement and significant relationships in the Christian community provide a competitive advantage in targeting Christian audiences. Our proactive involvement in the Christian community in each of our markets significantly improves the marketability of our radio broadcast time to advertisers who are targeting such communities.  We believe that a radio station’s image should reflect the lifestyle and viewpoints of the target demographic group it serves.  We regularly partner with organizations that serve the Christian and family-themed audience and sponsor and support events important to this group. These events include listener rallies, pastor recognition events and concerts like Fishfest® and Celebrate Freedom ™.  These events connect us with our listeners and enable us to create enhanced awareness and name recognition in our markets. Involvement leads to increased effectiveness in developing and improving our programming formats, leading to greater listenership and higher ratings over the long term.

Corporate Structure

The management of our operations is decentralized. Our operations vice presidents, some of whom are also station general managers, oversee several markets on a regional basis. Our operations vice presidents are experienced radio broadcasters with expertise in sales, programming, marketing and production. We anticipate continuing to rely on this strategy of decentralization and encourage operations vice presidents to apply innovative techniques to the operations they oversee which, if successful, can be implemented at our other stations.

Our corporate headquarters personnel oversee the placement and rate negotiation for all national block programs. Centralized oversight of this component of our revenue is necessary because our key block program customers purchase time in many of our markets. Corporate headquarters personnel also are responsible for centralized accounting and finance functions, human resources, engineering, real estate, strategic direction and other support functions designed to provide resources to local management.

CORPORATE INFORMATION

We maintain a website at http://www.salem.cc. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are available free of charge through our website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).

Salem Communications Corporation was formed in 1986 as a California corporation and was reincorporated in Delaware in 1999. Salem Communications Holding Corporation (“Salem Holding”) was formed as a wholly-owned subsidiary of Salem Communications Corporation in May 2000. In May 2000, Salem Communications Corporation formed an additional wholly-owned




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subsidiary, Salem Communications Acquisition Corporation (“AcquisitionCo”), which has since acquired nine radio stations through its wholly-owned subsidiary SCA License Corporation. In August 2000, Salem Communications Corporation assigned substantially all of its assets and liabilities (other than stock of Salem Holding and AcquisitionCo) to Salem Holding.

In June 2001, Salem Holding effected a dividend to Salem Communications Corporation of Salem Holding’s publishing and Internet businesses. This transaction was effected as a dividend of the capital stock and membership interests, respectively, of Salem Holding’s wholly-owned subsidiaries CCM Communications, Inc. (“CCM”) and OnePlace, LLC (“OnePlace”). As a result, CCM and OnePlace became direct subsidiaries of Salem Communications Corporation. Subsequently, the membership interests of OnePlace were contributed to SCA License Corporation, and OnePlace became an indirect subsidiary of Salem. Salem Communications Corporation and all of its subsidiaries (other than Salem Holding) are guarantors of the borrowings under Salem Holding’s credit facility and Salem Holding’s $94.4 million 9% senior subordinated notes due 2011 (“9% Notes”) and $100.0 million 7¾% senior subordinated notes due 2010 (“7¾% Notes”).

DEVELOPMENT OF THE BUSINESS

In 2005, we completed the purchase of selected assets of the following radio stations:

           

MSA

   

Date

 

Market

 

Station

 

Rank (1)

 

Purchase Price

               

(Dollars in thousands)

January 19, 2005

 

KAST-FM

 

Portland, OR

 

23

 

$                       8,000

January 31, 2005

 

WKAT-AM

 

Miami, FL

 

12

 

10,000

January 31, 2005

 

KGBI-FM

 

Omaha, NE

 

71

 

10,000

March 15, 2005

 

WRMR-AM

 

Cleveland, OH

 

24

 

10,000

August 12, 2005

 

WGUL-AM and WLSS-AM

 

Tampa, FL and Sarasota, FL

 

18 and 73

 

8,700

September 1, 2005

 

KCRO-AM

 

Omaha, NE

 

71

 

3,150

December 7, 2005

 

KHLP-AM

 

Omaha, NE

 

71

 

900

               

 $                     50,750

(1) “MSA” means metropolitan statistical area per the Fall 2005 Radio Market Survey Schedule and Population Rankings published by the Arbitron Company, excluding The Commonwealth of Puerto Rico.

On February 11, 2005, the Company acquired the Internet website Christianity.com and its related operations for $3.4 million.  On December 15, 2005, the Company acquired the Internet website Churchstaffing.com and its related operations for $3.1 million.




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RADIO STATIONS

Upon the close of all announced transactions, the company will own and/or operate a national portfolio of 104 radio stations in 40 markets, including 32 FM stations and 72 AM stations. The following table sets forth information about each of Salem’s stations, in order of market size:

   

MSA

 

Station

 

Year

   

Market (1)

 

Rank (2)

 

Call Letters

 

Acquired

 

Format

                 

New York, NY

 

1, 17 (3)

 

WMCA-AM

 

1989

 

Christian Teaching and Talk

       

WWDJ-AM

 

1994

 

Christian Teaching and Talk

Los Angeles, CA

 

2

 

KKLA-FM

 

1985

 

Christian Teaching and Talk

       

KRLA-AM

 

1998

 

News Talk

 

 

 

 

KFSH-FM

 

2000

 

Contemporary Christian Music

       

KXMX-AM

 

2000

 

Ethnic Brokered Programming

Chicago, IL

 

3

 

WYLL-AM

 

2001

 

Christian Teaching and Talk

       

WIND-AM

 

2005

 

News Talk

San Francisco, CA

 

4, 33 (4)

 

KFAX-AM

 

1984

 

Christian Teaching and Talk

       

KNTS-AM

 

2001

 

News Talk

Dallas-Fort Worth, TX

 

5

 

KLTY-FM

 

1996

 

Contemporary Christian Music

       

KWRD-FM (5)

 

2000

 

Christian Teaching and Talk

 

 

 

 

KSKY-AM

 

2000

 

News Talk

Philadelphia, PA

 

6

 

WFIL-AM

 

1993

 

Christian Teaching and Talk

       

WNTP-AM

 

1994

 

News Talk

Houston-Galveston, TX

 

7

 

KNTH-AM

 

1995

 

News Talk

       

KTEK-AM

 

1998

 

Christian Teaching and Talk

 

 

 

 

KKHT-FM

 

2005

 

Christian Teaching and Talk

Washington, D.C.

 

8

 

WAVA-FM

 

1992

 

Christian Teaching and Talk

 

 

 

 

WAVA-AM

 

2000

 

Christian Teaching and Talk

Detroit, MI

 

9

 

WDTK-AM

 

2004

 

News Talk

       

WLQV-AM

 

2005

 

Christian Teaching and Talk

Atlanta, GA

 

10

 

WNIV-AM

 

2000

 

Christian Teaching and Talk

 

 

 

 

WLTA-AM

 

2000

 

Christian Teaching and Talk

       

WAFS-AM

 

2000

 

Ethnic Brokered Programming

 

 

 

 

WFSH-FM

 

2000

 

Contemporary Christian Music

       

WGKA-AM

 

2004

 

News Talk

Boston, MA

 

11

 

WEZE-AM

 

1997

 

Christian Teaching and Talk

 

 

 

 

WROL-AM

 

2001

 

Christian Teaching and Talk

       

WTTT-AM

 

2003

 

News Talk

Miami, FL

 

12

 

WKAT-AM

 

2004

 

News Talk

Seattle-Tacoma, WA

 

13

 

KGNW-AM

 

1986

 

Christian Teaching and Talk

 

 

 

 

KLFE-AM

 

1994

 

Christian Teaching and Talk

       

KTFH-AM (6)

 

1997

 

Ethnic Brokered Programming

 

 

 

 

KKMO-AM

 

1998

 

Spanish

       

KKOL-AM

 

1999

 

News Talk

 

 

 

 

KIKN-AM

 

2002

 

News Talk

Phoenix, AZ

 

14

 

KKNT-AM

 

1996

 

News Talk

 

 

 

 

KPXQ-AM

 

1999

 

Christian Teaching and Talk

Minneapolis-St. Paul, MN

 

15

 

KKMS-AM

 

1996

 

Christian Teaching and Talk

 

 

 

 

KYCR-AM

 

1998

 

News Talk

       

WWTC-AM

 

2001

 

News Talk

San Diego, CA

 

16

 

KPRZ-AM

 

1987

 

Christian Teaching and Talk

       

KCBQ-AM

 

2000

 

News Talk




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RADIO STATIONS, CONT.

                 
   

MSA

 

Station

 

Year

   

Market (1)

 

Rank (2)

 

Call Letters

 

Acquired

 

Format

                 

Tampa, FL

 

18

 

WTWD-AM (7)

 

2000

 

Christian Teaching and Talk

 

 

 

 

WTBN-AM (7)

 

2001

 

Christian Teaching and Talk

       

WGUL-AM

 

2005

 

News Talk

Baltimore, MD

 

20

 

WITH-AM

 

1997

 

News Talk

Denver-Boulder, CO

 

21

 

KRKS-FM

 

1993

 

Christian Teaching and Talk

       

KRKS-AM

 

1994

 

Christian Teaching and Talk

 

 

 

 

KNUS-AM

 

1996

 

News Talk

       

KBJD-AM (8)

 

1999

 

News Talk

Pittsburgh, PA

 

22

 

WORD-FM

 

1993

 

Christian Teaching and Talk

       

WPIT-AM

 

1993

 

Christian Teaching and Talk

Portland, OR

 

23

 

KPDQ-FM

 

1986

 

Christian Teaching and Talk

       

KPDQ-AM

 

1986

 

Christian Teaching and Talk

 

 

 

 

KFIS-FM

 

2002

 

Contemporary Christian Music

       

KTRO-FM (formerly KAST-FM

 

2005

 

News Talk

Cleveland, OH

 

24

 

WHKW-AM

 

2000

 

Christian Teaching and Talk

 

 

 

 

WKNR-AM

 

2000

 

Sports/Talk

       

WFHM-FM

 

2001

 

Contemporary Christian Music

 

 

 

 

WHK-AM

 

2005

 

News Talk

Sacramento, CA

 

25

 

KFIA-AM

 

1995

 

Christian Teaching and Talk

 

 

 

 

KTKZ-AM

 

1997

 

News Talk

       

KTKZ-FM

 

2002

 

News Talk

       

KKFS-FM

 

2005

 

Contemporary Christian Music

Riverside-San Bernardino, CA

 

26

 

KTIE-AM

 

2001

 

News Talk

San Antonio, TX

 

29

 

KSLR-AM

 

1994

 

Christian Teaching and Talk

 

 

 

 

KLUP-AM

 

2000

 

News Talk

Milwaukee-Racine, WI

 

32

 

WRRD-AM

 

2001

 

Christian Teaching and Talk

 

 

 

 

WFZH-FM

 

2001

 

Contemporary Christian Music

Orlando, FL

 

36

 

WORL-AM

 

2006

 

News Talk

       

WTLN-AM

 

2006

 

Christian Teaching and Talk

       

WHIM-AM

 

2006

 

Christian Teaching and Talk

Columbus, OH

 

37

 

WRFD-AM

 

1987

 

Christian Teaching and Talk

Nashville, TN

 

43

 

WBOZ-FM (9)

 

2000

 

Southern Gospel

       

WVRY-FM (9)

 

2000

 

Southern Gospel

 

 

 

 

WFFH-FM (10)

 

2002

 

Contemporary Christian Music

       

WFFI-FM (10)

 

2002

 

Contemporary Christian Music

Jacksonville, FL

 

47

 

WBGB-FM

 

2003

 

Contemporary Christian Music

       

WZNZ-AM

 

2003

 

Sports/Talk

 

 

 

 

WZAZ-AM

 

2003

 

Southern Gospel

       

WJGR-AM

 

2003

 

News Talk




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RADIO STATIONS, CONT.

                 
   

MSA

 

Station

 

Year

   

Market (1)

 

Rank (2)

 

Call Letters

 

Acquired

 

Format

                 

Louisville, KY

 

54

 

WFIA-FM

 

1999

 

Christian Teaching and Talk

       

WRVI-FM

 

1999

 

Contemporary Christian Music

 

 

 

 

WGTK-AM

 

2000

 

News Talk

       

WFIA-AM

 

2001

 

Christian Teaching and Talk

Honolulu, HI

 

62

 

KHNR-AM

 

2000

 

News Talk

 

 

 

 

KAIM-FM

 

2000

 

Contemporary Christian Music

       

KGU-AM

 

2000

 

Christian Teaching and Talk

 

 

 

 

KHCM-AM

 

2004

 

Country Music

       

KHNR-FM

 

2004

 

News Talk

 

 

 

 

KHUI-FM

 

2004

 

Traditional Hawaiian Music

       

KGMZ-FM

 

2005

 

Adult Nostalgia

Omaha, NE

 

71

 

KBGI-FM

 

2005

 

Contemporary Christian Music

       

KOTK-AM (formerly KHLP-AM)

 

2005

 

News Talk

       

KCRO-AM

 

2005

 

Christian Teaching and Talk

Sarasota-Bradenton, FL

 

73

 

WLSS-AM

 

2005

 

News Talk

Colorado Springs, CO

 

96

 

KGFT-FM

 

1996

 

Christian Teaching and Talk

 

 

 

 

KBIQ-FM

 

1996

 

Contemporary Christian Music

       

KZNT-AM

 

2003

 

News Talk

Youngstown-Warren, OH

 

118

 

WHKW-AM

 

2001

 

Christian Teaching and Talk

Oxnard-Ventura, CA

 

116

 

KDAR-FM

 

1974

 

Christian Teaching and Talk

Tyler-Longview, TX

 

148

 

KPXI-FM (4)

 

2000

 

Christian Teaching and Talk

      (1) Actual city of license may differ from metropolitan market served.

      (2) “MSA” means metropolitan statistical area per the Fall 2005 Radio Market Survey Schedule and Population Rankings published by the Arbitron Company, excluding the Commonwealth of Puerto Rico.

      (3) This market includes the Nassau-Suffolk, NY Metro market which independently has a MSA rank of 17.

      (4) This market includes the San Jose, CA market which independently has a MSA rank of 33.

      (5) KPXI-FM is simulcast with KWRD-FM, Dallas-Fort Worth, TX.

      (6) KTFH-AM is an expanded band AM station. Under current Federal Communications Commission (“FCC”) rules, we will be required to surrender to the FCC the license for either KTFH-AM or KLFE-AM on July 14, 2009.

      (7) WTBN-AM is simulcast with WTWD-AM, Tampa, FL.

      (8) KBJD-AM is an expanded band AM station. Under current FCC rules, we will be required to surrender to the FCC the license for either KBJD-AM or KRKS-AM on August 16, 2006.

      (9) WBOZ-FM is simulcast with WVRY-FM, Nashville, TN.

      (10) WFFH-FM is simulcast with WFFI-FM, Nashville, TN.




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PROGRAM REVENUE. For the year ended December 31, 2005, we derived 19.5% and 13.4% of our gross revenue, or $42.6 million and $29.3 million, respectively, from the sale of nationally syndicated and local block program time. We derive nationally syndicated program revenue from a programming customer base consisting primarily of geographically diverse, well-established non-profit religious and educational organizations that purchase time on stations in a large number of markets in the United States. Nationally syndicated program producers typically purchase 13, 26 or 52 minute blocks on a Monday through Friday basis and may offer supplemental programming for weekend release. We obtain local program revenue from community organizations and churches that typically purchase time primarily for weekend release and from local speakers who purchase daily releases. We believe our management has been successful in assisting quality local programs expand into national syndication.

ADVERTISING REVENUE. For the year ended December 31, 2005, we derived 45.5% of our gross revenue, or $99.6 million from the sale of local spot advertising and 8.2% of our gross revenue, or $18.0 million from the sale of national spot advertising.

SALEM RADIO NETWORK® AND SALEM RADIO REPRESENTATIVES

In 1993, we established SRN. Establishment of SRN was a part of our overall business strategy to develop a national network of affiliated radio stations anchored by our owned and operated radio stations in major markets. SRN, which is headquartered in Dallas, Texas, develops, produces and syndicates a broad range of programming specifically targeted to Christian and family-themed talk and music stations as well as general market News Talk stations. Currently, we have rights to several full-time satellite channels and all SRN product is delivered to affiliates via satellite.

SRN has approximately 2,000 affiliate stations, including our owned and operated stations, that broadcast one or more of the offered programming options. These programming options feature talk shows, news and music. The principal source of network revenue is from the sale of advertising time.

We established Salem Radio Representatives in 1992 as a sales representation company specializing in placing national advertising on religious format radio stations. SRN and our radio stations each have relationships with Salem Radio Representatives for the sale of available SRN spot advertising. Salem Radio Representatives receives a commission on all SRN sales. Salem Radio Representatives also contracts with individual radio stations to sell air time to national advertisers desiring to include selected company stations in national buys covering multiple markets.

We recognize our advertising and commission revenue from radio stations as the spots are aired. SRN’s gross revenue, including commission revenue for Salem Radio Representatives, for the year ended December 31, 2005 was $16.5 million.

OTHER MEDIA

Salem Web Network™.   Our online strategy centers on creating the premiere Internet platform serving the audience interested in Christian and family-themed content.  Leveraging our engaged and loyal radio listener base, SWN’s content, both in text and audio, can be accessed through our national portals which include OnePlace.com, Crosswalk.com, Christianity.com and through our 69 radio station websites, which  provide local content of interest to our local radio station listeners. In 2005 we acquired Christianity.com, ChristianJobs.com and ChurchStaffing.com. These recent acquisitions enhance our web leadership as a provider and distributor of Christian content and services for our target audience. SWN generates more than 400 million page views annually and has more than two million unique visitors each month.

Salem Publishing™.   Our leadership in the distribution of Christian content also extends into print through Salem Publishing, a magazine publisher serving the Christian audience and the Christian music industry. Last year, we published more than two million units. Our flagship publication, CCM Magazine®, has covered the contemporary Christian music industry for more than 25 years, playing an important role in the growth of contemporary Christian music. Salem Publishing™ is well positioned to grow with the addition of its other magazines: Homecoming Magazine, YouthWorker Journal™, Singing News Magazine, FaithTalk Magazine and CrossWalk.com Magazine.   

COMPETITION

RADIO. The radio broadcasting industry, including the segment of this industry that focuses on Christian and family themes, is a highly competitive business. The financial success of each of our radio stations that focuses on Christian Teaching and Talk is dependent, to a significant degree, upon its ability to generate revenue from the sale of block program time to national and local religious and educational organizations. We compete for this program revenue with a number of different commercial and noncommercial radio station licensees. While no commercial group owner in the United States specializing in Christian and family- themed programming approaches Salem in size of potential listening audience and presence in major markets, religious radio stations exist and enjoy varying degrees of prominence and success in all markets.

We also compete for revenue in the spot advertising market with other commercial religious format and general format radio station licensees. We compete in the spot advertising market with other media as well, including broadcast television, cable television, newspapers, magazines, direct mail, Internet and billboard advertising, some of which may be controlled by horizontally-integrated companies.

Competition may also come from new media technologies and services that are being developed or introduced. These include delivery of audio programming by cable television and satellite systems, digital audio radio services, personal communications services and the service of low powered, limited coverage FM radio stations authorized by the FCC. Digital audio broadcasting will deliver multiformat digital radio services by satellite to national and regional audiences. The quality of programming delivered by digital audio broadcasting would be equivalent to compact disc. The delivery of live and stored audio programming through the Internet has also created new competition. In addition, commencement of satellite delivered digital audio radio services, which delivers multiple audio programming formats to local and national audiences, has created competition. We have attempted to address these existing and potential competitive threats through a more active strategy to acquire and integrate new electronic communications formats including Internet acquisitions made by SWN and our exclusive arrangement to provide Christian and family-themed talk and music formats on one of the two FCC licensees of satellite digital audio radio services.

NETWORK. Salem Radio Network® (“SRN”) competes with other commercial radio networks that offer news and talk programming to religious and general format stations and two noncommercial networks that offer Christian music formats. SRN also competes with other radio networks for the services of talk show personalities.

OTHER MEDIA. Our magazines compete for readers and advertisers with other publications that follow the Christian music industry and publications that address themes of interest to church leadership. Our Internet business competes with other companies that deliver on-line audio programming and Christian family themed Internet content.

SEGMENTS

The Company has one reportable operating segment - radio broadcasting. The remaining non-reportable segments consist of SWN and Salem Publishing, which do not meet the reportable segment quantitative thresholds and accordingly are aggregated as other media. The radio broadcasting segment also operates various radio networks.  The Company has presented its segment information in Note 12 of the Notes to the Consolidated Financial Statements, Item 8 of Part II of this report, incorporated by reference.

EMPLOYEES

On March 3, 2006, Salem employed 1,147 full-time and 379 part-time employees. None of Salem’s employees are covered by collective bargaining agreements, and we consider our relations with our employees to be good.




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ITEM 1A.  RISK FACTORS

CERTAIN FACTORS AFFECTING SALEM    

We may choose not to pursue potentially more profitable business opportunities outside of our Christian and family-themed formats, or not to broadcast programming that violates our programming standards, either of which may have a material adverse effect on our business.

We are fundamentally committed to broadcasting formats and programming emphasizing Christian and family themes. We may choose not to switch to other formats or pursue potentially more profitable business opportunities in response to changing audience preferences. We do not intend to pursue business opportunities or air programming that would conflict with our core commitment to Christian and family themes formats or that would violate our programming standards, even if such opportunities or programming would be more profitable. Our decision not to pursue other formats or air programming inconsistent with our programming standards might result in lower operating revenues and profits than we might otherwise achieve.

We Must Respond To The Rapid Changes In Technology, Services And Standards Of Our Industry In Order To Remain Competitive

The radio broadcasting industries are subject to rapid technological change, evolving industry standards and the emergence of competition from new media technologies and services. We cannot assure you that we will have the resources to acquire new technologies or to introduce new services that could compete with these new technologies. Various new media technologies and services are being developed or introduced, including:

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satellite-delivered digital audio radio service, which has resulted in the introduction of new subscriber-based satellite radio services with numerous niche formats;

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audio programming by cable systems, direct-broadcast satellite systems, personal communications systems, content available over the Internet and other digital audio broadcast formats;

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in-band on-channel digital radio, which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services;

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low-power FM radio, which could result in additional FM radio broadcast outlets; and

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iPod music players.

We currently program one channel on XM Satellite Radio. However, we cannot assure you that this arrangement will continue, will be successful or enable us to adapt effectively to these new media technologies. We cannot predict the effect, if any, that competition arising from new technologies or regulatory change may have on the radio broadcasting industry or on our financial condition and results of operations.

If We Are Unable To Execute Our Acquisition Strategy Successfully, Our Business May Not Continue To Grow

We intend to continue to acquire radio stations as well as other complementary media businesses. Our acquisition strategy has been, and will continue to focus primarily on, the acquisition of radio stations in the top 50 markets. However, we may not be able to identify and consummate future acquisitions successfully, and stations that we do acquire may not increase our station operating income or yield other anticipated benefits. Acquisitions in markets in which we already own stations may not increase our station operating income due to saturation of audience demand. Acquisitions in smaller markets may have less potential to increase operating revenues. Our failure to execute our acquisition strategy successfully in the future could limit our ability to continue to grow in terms of number of stations or profitability.

We May Be Unable To Integrate The Operations And Management Of Acquired Stations Or Businesses, Which Could Have A Material Adverse Effect On Our Business And Operating Results

Since January 1, 2005, we have acquired the assets of 17 radio stations, three Internet businesses and one publishing business, and we expect to make acquisitions of other stations and related businesses in the future. We cannot assure you that we will be able to successfully integrate the operations or management of acquired stations and businesses and realize anticipated revenue synergies, or the operations or management of stations and businesses that might be acquired in the future. Continued acquisitions of stations will require us to manage a larger and likely more geographically diverse radio station portfolio than historically has been the case. Our inability to integrate and manage newly acquired stations or businesses successfully could have a material adverse effect on our business and operating results.

If We Are Unable To Implement Our Cluster Strategy, We May Not Realize Anticipated Operating Efficiencies

As part of our operating strategy, we attempt to realize efficiencies in operating costs and cross-selling of advertising by clustering the operations of two or more radio stations in a single market. However, there can be no assurance that this operating strategy will be successful. Furthermore, we cannot assure you that the clustering of radio stations in one market will not result in downward pressure on advertising rates at one or more of the existing or new radio stations within the cluster. There can be no assurance that any of our stations will be able to maintain or increase its current listening audiences and operating revenue in circumstances where we implement our clustering strategy.

Additionally, FCC rules and policies allow a broadcaster to own a number of radio stations in a given market and permit, within limits, joint arrangements with other stations in a market relating to programming, advertising sales and station operations. We believe that radio stations that elect to take advantage of these clustering opportunities may, in certain circumstances, have lower operating costs and may be able to offer advertisers more attractive rates and services. The future development of our business in new markets, as well as the maintenance of our business growth in those markets in which we do not currently have radio station clusters, may be negatively impacted by competitors who are taking advantage of these clustering opportunities by operating multiple radio stations within markets.

The restrictions on ownership of multiple stations in each market may prevent us from implementing our cluster strategy.

As part of our growth strategy, we seek to acquire additional radio stations in markets in which we already have existing stations.  However, our ability to acquire, operate and integrate any such future acquisitions as part of a cluster is limited by antitrust laws, the Federal Communications Act of 1934 (the “Communications Act”), FCC regulations and other applicable laws and regulations.  Changes to any of these laws or regulations may affect our ability to acquire additional stations in radio markets where we already own one or more radio stations.


The FCC’s local radio multiple ownership rules limit the number of radio stations in a market which an entity may own and with which the entity may have joint arrangements relating to programming, advertising sales and station operations.  The number of radio stations an entity may own or have such arrangements with in a given market varies depending on the total number of radio stations located in the market.  In 2003, the FCC modified its definition of the term “market” and its method of determining the number of radio stations located in a “market” for all but smaller radio markets.  Specifically, the FCC replaced its “signal contour method” of defining a market and determining the number of radio stations located in the market with the use of “geographic markets” delineated by The Arbitron Company (“Arbitron”), which is a commercial ratings service.  For smaller radio markets for which Arbitron has not delineated a geographic market, the FCC is conducting a rulemaking to determine whether the “signal contour method” should be replaced with another method of defining the market and determining the number of radio stations in the market.  The method the FCC uses in such smaller markets affects the number of radio stations an entity may own or have joint arrangements with relating to programming, advertising sales and station operations in areas adjacent to a delineated Arbitron market.  We cannot predict the outcome of the FCC’s rulemaking regarding smaller markets or whether it will include modifications to the Arbitron geographic markets method used in markets delineated by Arbitron.


The maximum numbers of radio stations an entity may own or have joint arrangements with relating to programming, advertising sales and station operations in different size markets (the “Ownership Limits”) under the FCC’s local radio multiple ownership rules were mandated by Congress in 1996.  In 2003, an order of the FCC retaining the 1996 Ownership Limits was remanded to the FCC by the 3 rd Circuit Court of Appeals for further consideration.  In addition, interest has been expressed by members of Congress to reduce the Ownership Limits.  We cannot predict whether or how the FCC will modify the Ownership Limits on remand or whether Congress will mandate a modification of the Ownership Limits.  


We cannot predict the impact of pending modifications to the FCC’s local radio multiple ownership rules on our business operations.  Likewise, we cannot predict whether there will be a change in the antitrust laws, Communications Act or other law governing the ownership or operation of radio stations, or whether the FCC , Department of Justice (“DOJ”) or Federal Trade Commission (“FTC”) will modify their regulations and policies governing the acquisition of additional radio stations in a market.  In addition, we cannot predict whether a private party will challenge acquisitions we propose in the future.  These events could adversely affect our ability to implement our cluster acquisition strategy.

Government Regulation Of The Broadcasting Industry By The FTC, DOJ And FCC May Limit Our Ability To Acquire Or Dispose Of Radio Stations And Enter Into Certain Agreements

The Communications Act and FCC rules and policies require prior FCC approval for transfers of control of, and assignments of, FCC licenses. The FTC and the DOJ evaluate transactions to determine whether those transactions should be challenged under federal antitrust laws. Over the past eight years, the FTC and the DOJ have been increasingly active in their review of radio station acquisitions. This is particularly the case when a radio broadcast company proposes to acquire an additional station in an existing market. As we have gained a presence in a greater number of markets and percentage of the top 50 markets, our future proposed transactions may be subject to more frequent and aggressive review by the FTC or the DOJ due to market concentration concerns. This increased level of review may be accentuated in instances where we propose to engage in a transaction with parties who themselves have multiple stations in the relevant market. The FCC might not approve a proposed radio station acquisition or disposition when the DOJ has expressed market concentration concerns with respect to the buy or sell side of a given transaction, even if the proposed transaction would otherwise comply with the FCC’s numerical limits on in-market ownership. We cannot be sure that the DOJ or the FTC will not seek to prohibit or require the restructuring of our future acquisitions or dispositions on these or other bases.

Were a complaint to be filed against us or other FCC licenses involved in a transaction with us, the FCC could delay the grant of, or refuse to grant, its consent to an assignment or transfer of control of licenses and effectively prohibit a proposed acquisition or disposition.


As noted in the immediately preceding risk factor, the FCC’s local radio multiple ownership rules limit the number of stations we may own or operate in a market.  This limits our ability to make future radio station acquisitions.  Additionally, this limits our ability to enter into agreements whereby we provide programming to or sell advertising on radio stations that we do not own.  

Capital Requirements Necessary to Implement Acquisitions Could Pose Risks

We face stiff competition from other broadcasting companies for acquisition opportunities. If the prices sought by sellers of these companies were to rise, we may find fewer acceptable acquisition opportunities. In addition, the purchase price of possible acquisitions could require additional debt or equity financing on our part. Since the terms and availability of this financing depend to a large degree upon general economic conditions and third parties over which we have no control, we can give no assurance that we will obtain the needed financing or that we will obtain such financing on attractive terms. In addition, our ability to obtain financing depends on a number of other factors, many of which are also beyond our control, such as interest rates and national and local business conditions. If the cost of obtaining needed financing is too high or the terms of such financing are otherwise unacceptable in relation to the acquisition opportunity we are presented with, we may decide to forego that opportunity. Additional indebtedness could increase our leverage and make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures. Additional equity financing could result in dilution to our shareholders.

The Accounting Treatment Of Goodwill And FCC Licenses Could Cause Future Losses Due To Asset Impairment

Under Statement of Financial Accounting Standards (“SFAS”) 142, goodwill and some indefinite-lived intangibles, including FCC licenses, are not amortized into results of operations, but instead are tested for impairment at least annually, with impairment being measured as the excess of the carrying value of the goodwill or intangible over its fair value. In addition, goodwill and intangible assets are tested more often for impairment as circumstances warrant. Intangible assets that have finite useful lives continue to be amortized over their useful lives and are measured for impairment in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Any impairment losses under SFAS No. 142 or SFAS No. 144 will be recorded as operating expenses. Our future impairment reviews could result in asset write-downs.

Because Of Our Holding Company Structure, We Depend On Our Subsidiaries For Cash Flow, And Our Access To This Cash Flow Is Restricted

We operate as a holding company. All of our radio stations are currently owned and operated by our subsidiaries. Salem Holding, our wholly owned subsidiary, is the borrower under our credit facilities and our senior subordinated debt. All of our station-operating subsidiaries are subsidiaries of Salem Communications Corporation. Further, we guaranteed Salem Holding’s obligations under the credit facilities and under the senior subordinated notes.

As a holding company, our only source of cash to pay our obligations, including corporate overhead and other trade payables, are distributions from our subsidiaries of their net earnings and cash flow. We currently expect that the net earnings and cash flow of our subsidiaries will be retained and used by them in their operations, including servicing their debt obligations, before distributions are made to us. Even if our subsidiaries elect to make distributions to us, we cannot assure you that applicable state law and contractual restrictions, including the dividend covenants contained in our credit facilities and senior subordinated notes, would permit such dividends or distributions.




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Our Business is Dependent Upon the Performance of Key Employees, On-Air Talent and Program Hosts

Our business is dependent upon the performance and continued efforts of certain key individuals, particularly Edward G. Atsinger III, our President and Chief Executive Officer, and Stuart W. Epperson, our Chairman of the Board. The loss of the services of either of Messrs. Atsinger or Epperson could have a material adverse effect upon us. We have entered into employment agreements with each of Messrs. Atsinger and Epperson. Both agreements expire in June 2007. Mr. Epperson has radio interests unrelated to Salem’s operations that will continue to impose demands on his time. Mr. Atsinger has an interest in an aviation business unrelated to Salem’s operations that will continue to impose demands on his time.

We also employ or independently contract with several on-air personalities and hosts of syndicated radio programs with significant loyal audiences both on a national level and in their respective markets. Although we have entered into long-term agreements with some of our executive officers, key on-air talent and program hosts to protect our interests in those relationships, we can give no assurance that all or any of these key employees will remain with us or will retain their audiences. Competition for these individuals is intense and many of our key employees are at-will employees who are under no legal obligation to remain with us. Our competitors may choose to extend offers to any of these individuals on terms, which we may be unwilling to meet. In addition, any or all of our key employees may decide to leave for a variety of personal or other reasons beyond our control. Furthermore, the popularity and audience loyalty of our key on-air talent and program hosts is highly sensitive to rapidly changing public tastes. A loss of such popularity or audience loyalty is beyond our control and could limit our ability to generate revenues.

We May Be Adversely Affected By New Statutes Dealing With Indecency

Congress currently has under consideration legislation that addresses the FCC’s enforcement of its rules concerning the broadcast of obscene, indecent, or profane material. Potential changes to enhance the FCC’s authority in this area include the ability to impose substantially higher monetary forfeiture penalties, consider violations to be “serious” offenses in the context of license renewal applications, and, under certain circumstances, designate a license for hearing to determine whether such license should be revoked. While we do not anticipate these regulations to impact us as significantly as some of our competitors given the nature of our programming, in the event that this or similar legislation is ultimately enacted into law, we could face increased costs in the form of fines and a greater risk that we could lose one or more of our broadcasting licenses.

If We Are Not Able To Obtain Financing Or Generate Sufficient Cash Flows From Operations, We May Be Unable To Fund Future Acquisitions

We may require significant financing to fund our acquisition strategy. This financing may not be available to us. The availability of funds under the credit facility at any time will be dependent upon, among other factors, our ability to satisfy financial covenants. Our future operating performance will be subject to financial, economic, business, competitive, regulatory and other factors, many of which are beyond our control. Accordingly, we cannot assure you that our future cash flows or borrowing capacity will be sufficient to allow us to complete future acquisitions or implement our business plan, which could have a material negative impact on our business and results of operations.

We may require significant financing to fund our acquisition strategy. This financing may not be available to us. The availability of funds under the credit facility at any time will be dependent upon, among other factors, our ability to satisfy financial covenants. Our future operating performance will be subject to financial, economic, business, competitive, regulatory and other factors, many of which are beyond our control. Accordingly, we cannot assure you that our future cash flows or borrowing capacity will be sufficient to allow us to complete future acquisitions or implement our business plan, which could result in the disposition of certain income-producing assets or otherwise have a material negative impact on our business and results of operations.

Our Substantial Indebtedness And Our Ability To Incur More Indebtedness Could Adversely Affect Our Financial Condition

We currently have a significant amount of indebtedness. At December 31, 2005, our total consolidated indebtedness was $327.5 million. Our substantial indebtedness could have important consequences, including:

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making it more difficult for us to satisfy our obligations with respect to borrowings under the credit facility and the subordinated notes;

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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other general corporate requirements;

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requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing our ability to use our cash flow to fund future working capital, capital expenditures, acquisitions and other general corporate requirements;

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placing us at a competitive disadvantage relative to those of our competitors that have less indebtedness;

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limiting our flexibility in planning for, or reacting to, changes in our business and the industry that could make us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulations;

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subjecting us to higher interest expense in the event of increases in interest rates because some of our indebtedness is at variable rates of interest; and

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causing us to sell income-producing assets that have market value.

We may incur additional indebtedness to fund future acquisitions and for other corporate purposes. If new indebtedness is added to our and our subsidiaries’ current indebtedness levels, the related risks that we and they now face could intensify.

To Service Our Indebtedness And Other Obligations, We Will Require A Significant Amount Of Cash. Our Ability To Generate Cash Depends On Many Factors Beyond Our Control

Our ability to make payments on and to refinance our indebtedness, to pay dividends and to fund capital expenditures will depend on our ability to generate cash in the future. This ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our businesses might not generate sufficient cash flow from operations. We might not be able to complete future offerings, and future borrowings might not be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

If We Cannot Attract The Anticipated Listener, Programmer And Advertiser Base For Our Newly Acquired Radio Stations, We May Not Recoup Associated Operating Costs Or Achieve Profitability For These Radio Stations

We frequently acquire new radio stations that previously broadcast in formats other than our primary formats. We continue to program some of these recently acquired stations in non-primary formats and we re-program others to one of our primary formats. During, and for a period after, the conversion of a radio station’s format, the radio station typically generates operating losses. The magnitude and duration of these losses depends on a number of factors, including the promotional and marketing costs associated with attracting listeners and advertisers to our radio station’s new format and the success of these efforts. There is no guarantee that the operation of these newly acquired stations or our operations in new formats will attract a sufficient listener and advertiser base. If we are not successful in attracting the listener and advertiser base we anticipate, we may not recoup associated operating costs or achieve profitability for these radio stations.

If We Do Not Maintain Or Increase Our Block Programming Revenues, Our Business And Operating Results May Be Adversely Affected

The financial success of each of our radio stations that features Christian Teaching and Talk programming is dependent, to a significant degree, upon our ability to generate revenue from the sale of block programming time to national and local religious organizations, which accounted for 32.3% and 32.9% of our gross broadcasting revenue during the years ended December 31, 2004, and 2005, respectively. We compete for this program revenue with a number of commercial and non-commercial radio stations. Due to the significant competition for this block programming, we may not be able to maintain or increase our current block programming revenue.

If We Are Unable To Maintain Or Grow Our Advertising Revenues, Our Business And Operating Results May Be Adversely Affected

Our radio stations with our Christian Teaching and Talk, Contemporary Christian Music and News Talk formats are substantially dependent upon advertising for their revenues. In the advertising market, we compete for revenue with other commercial religious format and general format radio stations, as well as with other media, including broadcast and cable television, newspapers, magazines, direct mail, Internet and billboard advertising. Due to this significant competition, we may not be able to maintain or increase our current advertising revenue.

A Sustained Economic Downturn In Key Salem Markets Could Negatively Impact Our Ability To Generate Broadcasting Revenues

We derive a substantial part of our revenues from the sale of advertising on our radio stations. For the years ended December 31, 2003, 2004 and 2005, 52.3%, 54.0%, and 53.7% of our broadcasting revenues, respectively, were generated from the sale of advertising. We are particularly dependent on revenue from stations in the Los Angeles and Dallas markets, which generated 8.4% and 7.5%, respectively, of our gross broadcasting revenues in 2005. Because substantial portions of our revenues are derived from local advertisers in these key markets, our ability to generate revenues in those markets could be adversely affected by local or regional economic downturns.

Environmental, Health, Safety and Land Use Laws and Regulations May Limit or Restrict Some of Our Operations

We must comply with various federal, state and local environmental, health, safety and land use laws and regulations which have a tendency to affect broadcast facilities differently than other uses.  We and our properties are subject to such laws and regulations relating to the use, storage, disposal, emission and release of hazardous and non-hazardous substances and employee health and safety, as well as zoning restrictions which may affect, among other things, the ability for us to improve or relocate our radio broadcasting facilities. Historically, we have not incurred significant expenditures to comply with these laws. However, existing laws, and those  which may be applied in the future, or a finding of a violation of or liability, could require us to make significant expenditures and otherwise limit or restrict some of our operations.

Acts Of War And Terrorism May Reduce Our Revenue And Have Other Negative Effects On Our Business

In response to the September 11, 2001, terrorist attacks on New York City and Washington, D.C., we increased our news and community service programming, which decreased the amount of broadcast time available for commercial advertising and block programming. In addition, these events caused advertisers to cancel advertisements on our stations. Continued acts of war and terrorism against the United States, and the country’s response thereto, including the current military actions in Iraq, may also cause a general slowdown in the U.S. advertising market, which could cause our revenues to decline due to advertising and/or programming cancellations, delays or defaults in payment, and other factors. In addition, these events may have other negative effects on our business, the nature and duration of which we cannot predict. If these acts of war or terrorism or weak economic conditions continue or worsen, our financial condition and results of operations may be materially and adversely affected.

Our Controlling Stockholders May Cause Us To Act, Or Refrain From Acting, In A Way That Minority Stockholders Do Not Believe Is In Their Best Interest

As of March 10, 2006, Edward G. Atsinger III, Stuart W. Epperson, Nancy A. Epperson and Edward C. Atsinger controlled approximately 85.6% of the voting power of our capital stock. These four stockholders thus have the ability to control fundamental corporate transactions requiring stockholder approval, including but not limited to, the election of all of our directors, except for two directors elected by holders of our Class A common stock, approval of merger transactions involving Salem and the sale of all or substantially all of Salem’s assets. The interests of any of these controlling stockholders may differ from the interests of our other stockholders and one or more of the controlling stockholders could take action or make decisions (or block action or decisions) that are not in the minority stockholders’ best interest.

If We Fail To Maintain Our Licenses With The FCC, We Would Be Prevented From Operating Affected Radio Stations

We operate each of our radio stations pursuant to one or more FCC broadcasting licenses. As each license expires, we apply for renewal of the license. However, we cannot be sure that any of our licenses will be renewed, and renewal is subject to challenge by third-parties or to denial by the FCC. The Communications Act and FCC rules and policies require prior FCC approval for transfers of control of, and assignments of, FCC licenses. Were a complaint to be filed against us or other FCC licensees involved in a transaction with us, the FCC could delay the grant of, or refuse to grant, its consent to an assignment or transfer of control of licenses and effectively prohibit a proposed acquisition or disposition. The failure to renew any of our licenses would prevent us from operating the affected station and generating revenue from it. If the FCC decides to include conditions or qualifications in any of our licenses, we may be limited in the manner in which we may operate the affected station.

Covenant Restrictions Under Salem Holding’s Credit Facility And Its Indentures Governing Its Outstanding Senior Subordinated Notes May Limit Our Ability To Operate Our Business

Salem Holding’s credit facility and the indentures governing its notes contain, among other things, covenants that restrict Salem’s, Salem Holding’s and their subsidiaries’ ability to finance future operations or capital needs or to engage in other business activities. The credit facility and each of such indentures restrict, among other things, our ability to:

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incur additional debt;

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pay dividends or make distributions;

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purchase or redeem stock;

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make investments and extend credit;

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engage in transactions with affiliates;

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create liens on assets;

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transfer and sell assets; and

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effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all of their assets.

These restrictions on management’s ability to operate Salem’s and Salem Holding’s business in accordance with their discretion could have a material adverse effect on our business. The covenants in each indenture of Salem Holding are subject to a number of important limitations and exceptions. These limitations and exceptions will, for example, allow Salem Holding to make certain restricted payments to, and investments in, Salem, subject to specified limitations.

In addition, Salem Holding’s credit facility requires us to maintain specified financial ratios and satisfy certain financial condition tests which may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet those financial ratios and financial condition tests. We cannot assure you that we will meet those tests or that the lenders will waive any failure to meet those tests. A breach of any of these covenants would result in a default under Salem Holding’s credit facility and its existing indentures. If an event of default occurs under any of these agreements, the lenders could, under the credit facility, elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable.

If we are unable to pay our obligations to the lenders under the credit facility or other future senior debt instruments, the lenders could proceed against any or all of the collateral securing the indebtedness to them. The collateral under the credit facility consists of substantially all of our existing assets. In addition, a breach of certain of the restrictions or covenants in these agreements, or an acceleration by these lenders of the obligations to them, would cause a default under Salem Holding’s notes. We may not have, or be able to obtain, sufficient funds to make accelerated payments, including payments on the notes, or to repay the notes in full after we pay the senior secured lenders to the extent of their collateral.

We May be Adversely Affected by a General Deterioration in Economic Conditions

The risks associated with our businesses become more acute in periods of a slowing economy or recession, which may be accompanied by a decrease in advertising.  A decline in the level of business activity of our advertisers could have an adverse effect on our revenues and profit margins. During the recent economic slowdown in the United States, many advertisers reduced their advertising expenditures. The impact of slowdowns on our business is difficult to predict, but they may result in reductions in purchases of advertising.   

Our Broadcasts Often Rely on Content Owned by Third Parties; Obtaining Such Content Could Be Costly And Require Us To Enter Into Disadvantageous License Or Royalty Arrangements

We rely heavily upon content and software owned by third parties in order to provide programming for our broadcasts. The cost of obtaining all necessary licenses and permission to use this third party content and software continues to increase. Although we attempt to avoid infringing known proprietary rights of third parties in our broadcasting efforts, we expect that we may be subject to legal proceedings and claims for alleged infringement from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making claims may be able to obtain an injunction, which could prevent us from broadcasting all or certain portions of individual radio broadcasts containing content owned by third parties. We also rely on software that we license from third parties, including software that is integrated with internally developed software and used to perform key broadcasting and accounting functions. We could lose the right to use this software or it could be made available to us only on commercially unreasonable terms. Although we believe that alternative software is available from other third-party suppliers or internal developments, the loss of or inability to maintain any of these software licenses or the inability of the third parties to enhance in a timely and cost-effective manner their products in response to changing customer needs, industry standards or technological developments could result in limitations or delays in broadcasting or accounting for programming by us until equivalent software could be developed internally or identified, licensed and integrated, which would harm our business.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.




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ITEM 2. PROPERTIES.

The types of properties required to support our radio stations include offices, studios and tower and antenna sites. A station’s studios are generally located in an office in a downtown or business district.  Tower and antenna sites are selected in areas that provide maximum market coverage. Our network operations are supported by offices and studios from which its programming originates or is relayed from a remote point of origination. The operations of our other media businesses are supported by office facilities.

Our radio stations’ studios and offices as well as the operations of our other media businesses are located in leased facilities. Our network leases satellite transponders used for delivery of its programming. We either own or lease our radio station tower and antenna sites. We believe we will be able to renew any such lease that expires or obtain comparable facilities, as necessary. We own our corporate office building, located in Camarillo, California, and the headquarters of SRN and Salem Radio Representatives, located in the Dallas, Texas metropolitan area. In January 2004, we purchased the property upon which our studio and office facilities for our Tampa, Florida stations are located. In October 2004, we purchased the property upon which our studio and office facilities for our Honolulu, Hawaii stations will be located once the construction is complete.  In October 2005, we purchased land in Los Angeles, California, to be used as the nighttime transmitter site for KRLA-AM Los Angeles.    

We lease certain property from our principal stockholders or trusts and partnerships created for the benefit of the principal stockholders and their families. These leases are described in “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” in Part III, Item 13 and in Note 8 of our consolidated financial statements. All such leases have cost of living adjustments. Based upon our management’s assessment and analysis of local market conditions for comparable properties, we believe such leases have terms that that are as favorable, or more favorable, to the company than those that would have been available from unaffiliated parties.

No one physical property is material to our overall operations. We believe that our properties are in good condition and suitable for our operations; however, we continually evaluate opportunities to upgrade our properties.

ITEM 3. LEGAL PROCEEDINGS.

We and our subsidiaries, incident to our business activities, are parties to a number of legal proceedings, lawsuits, arbitration and other claims including the purported class action described below. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance. Also, we maintain insurance which may provide coverage for such matters. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. We believe, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon our annual consolidated financial position, results of operations or cash flows.

On March 9, 2005, Pipefitters, Locals 522 and 633 Pension Trust Fund filed a Class Action Complaint for Violation of the Federal Securities Laws in the Superior Court of California for the County of Ventura against us, our directors, certain of our officers and certain underwriters of the company's April 2004 public offering of Class A common stock, on behalf of a putative class of all persons who purchased the company's equity securities pursuant to or traceable to that offering.  The complaint alleges that offering documents contained misstatements and omissions regarding the company's fixed assets and internal controls.  The complaint asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933, and seeks rescission or damages, interest, attorney's fees and costs, as well as equitable and injunctive relief.  The parties entered into a Stipulation of Settlement dated as of February 7, 2006, which provides for a full settlement of these claims in exchange for payment of $1.85 million to be paid by the company and its insurance carrier.  The settlement is subject to certain conditions set forth in the stipulation, including final court approval following notice to the class members. The Court granted Plaintiff's unopposed motion and application for preliminary approval of the settlement on March 27, 2006 and set a schedule for providing notice to the class members.  The hearing for final approval of the settlement is set for June 19, 2006.  The company recognized expenses of $0.7 million related to this settlement.  


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of fiscal 2005.




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