SalMar
Annual Report 2014

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KSALEM MEDIA GROUP, INC. /DE/ - SALMFiled: March 13, 2015 (period: December 31, 2014)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014OR¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-26497SALEM MEDIA GROUP, INC.(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0121400(STATE OR OTHER JURISDICTION OF INCORPORATION ORORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 4880 SANTA ROSA ROAD 93012CAMARILLO, CALIFORNIA ( ZIP CODE)(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-0400Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of the Exchange on which registeredClass A Common Stock, $0.01 par value per share The NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files).Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K.¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ¨Accelerated filer xNon-accelerated filer ¨Smaller Reporting Company ¨ (Do not check if Smaller Reporting Company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No x As of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $85,498,373 based on theclosing sale price as reported on the NASDAQ Global Market. Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Class A Outstanding at February 20, 2015Common Stock, $0.01 par value per share 19,783,365 sharesClass B Outstanding at February 20, 2015Common Stock, $0.01 par value per share 5,553,696 shares Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.DOCUMENTS INCORPORATED BY REFERENCE Document Parts Into Which IncorporatedProxy Statement for the Annual Meeting of Stockholders Part III, Items 10, 11, 12, 13 and 14 Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS PAGE PART I Item 1. Business 3 Item 1A. Risk Factors 22 Item 1B. Unresolved Staff Comments 42 Item 2. Properties 42 Item 3. Legal Proceedings 43 Item 4. Mine Safety Disclosures 43 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 43 Item 6. Selected Financial Data 45 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 50 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 90 Item 8. Financial Statements and Supplementary Data 91 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 146 Item 9A. Controls and Procedures 146 Item 9B. Other Information 148 PART III Item 10. Directors, Executive Officers and Corporate Governance 148 Item 11. Executive Compensation 148 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 148 Item 13. Certain Relationships and Related Transactions and Director Independence 148 Item 14. Principal Accounting Fees and Services 148 PART IV Item 15. Exhibits and Financial Statement Schedules 149 Signatures 162 Exhibit Index 164 Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. CERTAIN DEFINITIONS Unless the context requires otherwise, all references in this report to “Salem” or the “company,” including references to Salem by “we” “us” “our” and“its” refer to Salem Media Group, Inc. and our subsidiaries. All metropolitan statistical area (“MSA”) rank information used in this report, excluding information concerning The Commonwealth of Puerto Rico, isfrom the Fall 2014 Radio Market Survey Schedule & Population Rankings published by Nielson Audio (“Nielson”) (formerly Arbitron). According to theRadio Market Survey, the population estimates used are based upon the 2010 U.S. Bureau Census estimates updated and projected to January 1, 2015 byNielsen. NOTE REGARDING FORWARD-LOOKING STATEMENTS Salem Media Group, Inc. (“Salem” or the “company,” including references to Salem by “we,” “us” and “our”) makes “forward-looking statements” fromtime to time in both written reports (including this report) and oral statements, within the meaning of federal and state securities laws. Disclosures that usewords such as the company “believes,” “anticipates,” “estimates,” “expects,” “intends,” “will,” “may,” “intends,” “could,” “would,” “should” “seeks”“predicts,” or “plans” and similar expressions are intended to identify forward-looking statements, as defined under the Private Securities Litigation ReformAct of 1995. You should not place undue reliance on these forward-looking statements, which reflect our expectations based upon data available to the company as ofthe date of this report. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations.These risks, as well as other risks and uncertainties, are detailed in Salem’s reports on Forms 10-K, 10-Q and 8-K filed with or furnished to the Securities andExchange Commission. Except as required by law, the company undertakes no obligation to update or revise any forward-looking statements made in thisreport. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made bySalem about its business. These projections and other forward-looking statements fall under the safe harbors of Section 27A of the Securities Act of 1933, asamended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 2Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART I ITEM 1. BUSINESS. CORPORATE INFORMATION Salem Media Group, Inc. (“Salem”) is a domestic multi-media company with integrated operations consisting of radio broadcasting, digital media, andpublishing. On February 19, 2015, we changed our name from Salem Communications Corporation to Salem Media Group, Inc. Salem was formed in 1986 asa California corporation and was reincorporated in Delaware in 1999. Our content is intended for audiences interested in Christian and family-themedprogramming and conservative news talk. SEGMENT INFORMATION We have two reportable segments, radio broadcasting and digital media. Digital media (formerly “Internet and e-commerce”) became a reportablesegment as of the first quarter of 2011 upon the realization of organic and acquisition related revenue growth. Our acquisition of Eagle Publishing on January10, 2014, including Regnery Publishing, Eagle Financial Publications, Eagle Wellness, HumanEvents.com and RedState.com, resulted in operationalchanges to our business and a realignment of our operating segments. We now have three operating segments: (1) Broadcast, (2) Digital Media, and (3)Publishing. We changed the composition of our operating segments to reflect management’s view of the operating results for each segment. Our operating segments reflect how our chief operating decision makers, which we define as a collective group of senior executives, assess theperformance of each operating segment and determine the appropriate allocations of resources to each segment. Our operating segments do not all meet thequantitative thresholds to qualify as reportable segments; however, we have elected to disclose the results of these non-reportable operating segments as webelieve this information is useful to readers of our financial statements. We continue to review our operating segment classifications to align with operationalchanges in our business and may make future changes as necessary. We measure and evaluate results of our operating segments based on income and expenses that do not include allocations of costs related to corporatefunctions, such as accounting and finance, human resources, legal, tax and treasury; nor do they include costs such as amortization, depreciation, taxes orinterest expense. Changes to our operating segments did not impact the reporting units used to test non-amortizable assets for impairment. All prior periodspresented have been updated to reflect the new composition of our operating segments. Refer to Note 16 – Segment Data in the notes to our consolidatedfinancial statements contained in Item 8 of this annual report on Form 10-K for additional information. BUSINESS STRATEGY Our goal is to produce and deliver compelling content to all audiences interested in Christian and family-themed programming and conservative newstalk so that we are considered the market-leader for audiences, programmers and advertisers. Our media platform includes traditional media such as radiobroadcasting, book publishing and magazines as well as emerging media, that include web portals and digital media. We continually pursue expansion of ourmedia platform as the marketplace evolves while aggressively managing costs and cash flows. Expansion opportunities for our media platform includeincreasing the strength and reach of our broadcast signals, investing in and building Internet websites, promoting our authors and on-air talent, includingtheir publications, and increasing the distribution and page views of our publishing content. Our national presence in each of these mediums providesadvertisers and programmers with a powerful and integrated platform to reach audiences throughout the United States without compromising the sense ofcommunity involvement and branding we generate locally with sponsored events and promotions. We are fundamentally committed to programming and content emphasizing Christian values, conservative family themes and news. Our commitment tothese values means that we may choose not to switch to other formats or pursue potentially more profitable business opportunities in response to changes inaudience preferences. 3Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Broadcasting Our foundational business is the ownership and operation of radio stations in large metropolitan markets. Our radio stations carry national and localprogramming content as well as national and local advertisers. We produce and sponsor a number of community events that we believe are important inbuilding our brand identity. We also believe that our active community involvement, including remote broadcasts, client events, concerts and tie-ins tomajor events, builds station awareness and listener loyalty. We promote our station websites on-air and at community events that direct participants to ourstation websites specifically designed for each of our radio stations. Audiences can access our entire library of digital content and online publications fromeach of our station websites. To operate our broadcast entities efficiently, we assemble market clusters, or multiple radio stations that operate within the same geographic market.Several benefits are achievable when operating multiple radio stations in the same market. First, we can offer advertisers and programmers access to multipleaudiences by providing airtime on each radio station in that market when advantageous. Second, we realize cost and operating efficiencies by consolidatingsales, technical and administrative support, promotional functions and other shared overhead costs such as rent, when possible. Third, the addition of newradio stations into existing markets allows us to leverage our hands-on knowledge of that market to increase our appeal to new listeners and advertisers. Upon the close of all announced transactions, we will own and/or operate 108 radio stations in 39 markets, including 65 stations in 22 of the top 25markets, consisting of 32 FM radio stations and 76 AM radio stations. We are one of only three commercial radio broadcasters with radio stations in all of thetop 10 markets. We are the sixth largest radio broadcaster in the United States measured by number of stations overall and the third largest operator asmeasured by number of stations in the top 25 markets. We also program the Family Talk™ Christian-themed talk format station on SiriusXM Channel 131. We program our radio stations in formats that we believe target the various demographic segments of audiences interested in Christian and family-themed programming and conservative news talk content. Our five main formats are: (1) Christian Teaching and Talk, (2) News Talk, (3) ContemporaryChristian Music, (4) Spanish Language Christian Teaching and Talk and (5) Business. Christian Teaching and Talk. We currently program 42 of our radio stations in our foundational format, Christian Teaching and Talk, which is talkprogramming emphasizing Christian and family themes. Through this format, a listener can hear Bible teachings and sermons, as well as gain insight toquestions related to daily life, such as raising children or religious legal rights in education and in the workplace. This format uses block programming timeto offer a learning resource and a source of personal support for listeners. Listeners often contact our programmers to ask questions, obtain materials on asubject 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 andcharitable organizations that we believe create compelling radio programs. Historically, more than 95% of these religious and charitable organizationsrenew their annual programming relationships with us. Based on our historical renewal rates, we believe that block programming provides a steady andconsistent source of revenue and cash flows. Our top ten programmers have remained relatively constant and average nearly 25 years on-air. Over the lastfive years, block-programming revenue has comprised between 40% to 41% 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 24hours a day, seven days a week. News Talk. We currently program 28 of our radio stations in a News Talk format. Our research shows that our News Talk format is highly complementaryto our core Christian Teaching and Talk format. As programmed by Salem, both of these formats express conservative views and family values. Our NewsTalk format also provides for the opportunity to leverage syndicated talk programming produced by our network, Salem Radio Network® (“SRN”). SRN’snationally syndicated programs are distributed nationally through 2,500 affiliated radio stations. The syndication of our programs through SRN allows us toreach listeners in markets where we do not own or operate stations. Contemporary Christian Music. We currently program 12 radio stations in a Contemporary Christian Music (“CCM”) format, branded The FISH® inmost markets. Through the CCM format, we are able to bring listeners the words of inspirational recording artists, set to upbeat contemporary music. Ourmusic format, branded “Safe for the Whole Family®”, features sounds that listeners of all ages can enjoy and lyrics that can be appreciated. The CCM genrecontinues to be popular. We believe that this listener base is underserved in terms of radio coverage, particularly in larger markets, and that our stations fill anotherwise void area in listener choices. 4Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Spanish Language Christian Teaching and Talk. We currently program nine of our radio stations in a Spanish Language Christian Teaching and Talkformat. This format is similar to our core Christian Teaching and Talk format in that it broadcasts biblical and family-themed programming, but theprogramming is specifically tailored for Spanish-speaking audiences. Additionally, block programming on our Spanish Language Christian Teaching andTalk stations is primarily local rather than national. Business. We currently program 10 of our radio stations in a business format. Our business format features financial commentators, business talk, andnationally recognized Bloomberg programming. The business format operates similar to our Christian Teaching and Talk format in that it features long-formblock programming. Salem Radio Network® and Salem Media Representatives™ As part of our overall business strategy to expand our media platform, we operate a national network of affiliated radio stations. SRN, our wholly ownednational radio network develops, produces and syndicates 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. SRN is headquartered in Dallas,Texas and syndicates programming to approximately 2,500 affiliated radio stations. Currently we have rights to several full-time satellite channels to deliverSRN programs to affiliates via satellite. The principal source of network revenue is from the sale of advertising time. We also own and operate SRN News Network (“SNN”), Salem Music Network (“SMN”), Solid Gospel Network (“SGN”) and Salem MediaRepresentativesTM (“SMR”) a national advertising sales firm with offices in 11 U.S. cities. SMR specializes in placing national advertising on religious andother commercial radio stations. Like SRN, SNN, SMN and SGN are radio networks that produce and distribute talk, news and music programming to radiostations throughout the U.S., including Salem owned stations. SMR sells commercial airtime to national advertisers on our radio stations and through our networks, as well as for independent radio station affiliates.National companies often prefer to advertise across the United States as an efficient and cost effective way to reach their target audiences. Our advertisers canbenefit from our national platform, including SMR, under which we bundle and sell radio airtime, digital advertisements and placements, and magazineadvertisements that are distributed throughout the United States. SRN and our radio stations each have relationships with SMR for the sale of available SRNspot advertising. SMR also contracts with individual radio stations to sell airtime to national advertisers desiring to include selected company stations innational buys covering multiple markets. Advertising Revenue. We recognize advertising and commission revenue from radio stations as the spots air. For the year ended December 31, 2014, wederived 32.4% of our net broadcast revenue, or $62.6 million, from the sale of local spot advertising and 7.8% of our net broadcast revenue, or $15.0 million,from the sale of national spot advertising. Program Revenue. We recognize programming revenue as the programs air from radio stations. For the year ended December 31, 2014, we derived 23.3%and 17.9% of our net broadcast revenue, or $44.9 million and $34.6 million, respectively, from the sale of national and local block program time,respectively. We derive national program revenue primarily from geographically diverse, well-established non-profit religious and educational organizationsthat purchase time on our stations in a large number of markets in the United States. National program producers typically purchase 121/2, 25 or 50-minuteblocks of time on a Monday through Friday basis and may offer supplemental programming for weekend release. We obtain local program revenue fromcommunity organizations and churches that typically purchase blocks for weekend releases and from local speakers who purchase daily releases. We believethat our management team is successful in identifying and assisting quality local programs expand into national syndication. Network Revenue. SRN’s net revenue, including commission revenue for SMR, for the year ended December 31, 2014 was $15.8 million, or 8.2% of netbroadcast revenue. Revenues generated from each of our radio stations, networks, advertising firms and radio station websites, including banner and digital revenue arereported as broadcast revenue in our consolidated financial statements included in Item 8 of this annual report on Form 10-K. 5Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Digital Media Web-based and digital content has been a significant growth area for Salem and continues to be a focus of future development. Salem Web Network™(“SWN”) and our other web based businesses provide Christian and conservative-themed content, audio and video streaming, and other resources digitallythrough the web. SWN’s web portals include Christian content websites: OnePlace.com, Christianity.com, Crosswalk.com®, GodVine.com, Jesus.org andBibleStudyTools.com. Our conservative opinion websites, collectively known as Townhall Media, include Townhall.com™, HotAir.com, Twitchy.com,HumanEvents.com and RedState.com. We also issue digital newsletters, including Eagle Financial Publications, that provide market analysis and investmentadvice for individual subscribers from financial commentators. Church product websites including WorshipHouseMedia.com, SermonSpice.com, andChurchStaffing.com offer downloads and service platforms to pastors and other educators. Our web content is accessible through all of our radio stationwebsites that feature content of interest to local listeners throughout the United States. E-commerce sites include Salem Consumer Products, an e-commerce business that sells books, DVD’s and editorial content developed by our on-airpersonalities and Eagle Wellness, an online site offering complimentary health advice and sales of nutritional products. Our digital strategy is to continue to build a robust web-based platform designed for audiences interested in Christian and family-themed content andconservative news. The Internet continues to change the way in which media is delivered to audiences. Continual advancements with online search enginesand social media sites provide consumers with numerous methods to locate specific information and content online. These advancements have also enabled alarge number of individuals to create and publish content that may or may not be tailored to that specific consumer. Our editorial staff, including our on-airpersonalities, provide web-based commentaries, programs, text, and audio and video content that we believe to be knowledge-based, credible and reliable.This highly specific web-based content provides our advertisers a unique and powerful way to reach their targeted audiences. Revenue generated from our Christian websites, our conservative news and opinion websites, our e-commerce sites and our Church Products are reportedas digital media revenue on our consolidated financial statements included in Item 8 of this annual report on Form 10-K. Publishing Our acquisition of Regnery Publishing on January 10, 2014 represented a major shift in our publishing operating segment. Regnery Publishing is apublisher of conservative books that was founded in 1947. Regnery has published dozens of bestselling books by leading conservative authors andpersonalities, including Ann Coulter, Newt Gingrich, Michelle Malkin, David Limbaugh, Ed Klein, Laura Ingraham, Mark Steyn and Dinesh D'Souza. Our publishing operating segment also includes Salem Publishing™ and Xulon Press. Salem Publishing™ produces and distributes numerous Christianprint magazines, including: Homecoming® The Magazine, YouthWorker Journal™, Singing News®, FaithTalk Magazine™, and Preaching Magazine™.Through December 2014, we also printed and produced Townhall Magazine™. Xulon Press™ is a print-on-demand self-publishing service for Christianauthors. Our publishing strategy mirrors that of our other operating segments - to build and maintain a distribution network targeting audiences interested inChristian and family-themed content as well as conservative news. Content from our print magazines is also available on branded websites for eachpublication. Revenue generated from these entities is reported as publishing revenue in our consolidated financial statements included in Item 8 of this annual reporton Form 10-K. Audience Growth The continued success of our business is dependent upon our ability to reach a growing audience. We continually seek opportunities for growth byincreasing the strength and number of our broadcast signals, increasing the number of page-views on our digital platform, increasing book sales andincreasing our subscriber base for published magazines and digital content. To accomplish this, we produce content that we believe is both compelling andof high commercial value based on our market testing and fine-tuning. We rely on a combination of research, marketing, targeted promotions and live eventsto create visibility and brand awareness in each of our markets. By maximizing our audience share, we achieve higher ratings and page turns that can beconverted into advertising revenues. To maximize results, we cross-promote our content on each of our media platforms to enhance our brand names andreach our targeted audiences. We believe that the growth of our media platform provides advertisers with effective methods to reach an expanding audience. 6Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Technical Improvements We continually seek ways to expand our media reach from a technological perspective. For broadcasting, we seek growth opportunities by increasing thestrength and number of our broadcast signals that allows us to reach listeners for both our day and night signals. We have recently acquired several FMtranslators that allow our AM signals to offer multi-channel and HD channel programming. We continue to build or purchase websites that allow ouraudiences to view our content online or through digital streaming. Our website content is available on numerous iPhone® applications and all of our radiostations, in addition to some of our web portals, have iPhone® and android applications for digital streaming and viewing our content. Advertising Sales Professionals We have assembled an effective, highly trained sales staff that is responsible for converting our audience share into revenue. We operate a focused, sales-oriented culture that rewards selling efforts through a commission and bonus compensation structure. We hire sales professionals that are capable of sellingboth integrated and stand-alone advertisements. We provide our sales professionals with the tools and resources necessary to compete effectively in themarketplace. We sell and market our platforms as stand-alone products or in combination with other offerings. Based on our experience, we tailor ourplatform to meet each advertiser’s needs, including the geographic coverage area, event sponsorships and special features, digital promotions, e-mailsponsorships, and/or print advertisements. Significant Community Involvement We expect our public image to reflect the lifestyle and viewpoints of the target demographic groups that we serve. We regularly collaborate withorganizations serving the Christian and family-themed audience and we sponsor and support events important to this group. We believe that our ongoingactive involvement and our strong relationships within the Christian community provide us with a unique competitive advantage that significantly improvesthe marketability of our media platform to advertisers and programmers targeting such communities. Our sponsored events include listener rallies, speakingtours, pastor appreciation events and concerts such as our Celebrate Freedom® Music Festival and our Fishfest®. Local events such as these connect us withour listeners and enable us to create an enhanced awareness and name recognition in all of our markets. This involvement allows for increased effectivenessin developing and improving our programming formats, which contribute to a greater audience share and higher ratings over the long-term. Corporate Structure Management of our operations is decentralized. Our operational vice presidents and general managers are located throughout the United States. Weanticipate relying on this strategy of decentralization, which we believe encourages each general manager and vice president to apply innovative techniquesfor improving and growing their operations that may be beneficial in other markets. Our broadcast operations vice presidents are experienced radio broadcasters with expertise in sales, programming, marketing and production. Ourbroadcast operations vice presidents, some of whom are also station general managers, oversee several markets on a regional basis. Our SWN and publishingoperations vice presidents and general managers are located throughout the United States in offices in which our digital and publishing entities operate. All of our business segments receive executive leadership and oversight from our corporate staff. Corporate staff members have experience and expertisein, among other things, accounting and finance, treasury, risk management, insurance, information technology, human resources, legal, engineering, realestate, strategic direction and other support functions designed to provide resources to local management. Corporate staff oversees placement and ratenegotiations for our national block programs. Centralized oversight of our block programming is necessary because our key programming partners purchasetime in several of our radio markets. 7Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Recent Events During the year ended December 31, 2014, we completed or entered into the following transactions: Debt Throughout the year, we repaid $15.3 million in principal on our current senior secured credit facility, consisting of a term loan of $300.0 million (“TermLoan B”) and paid interest through each repayment date. We recorded a loss on early retirement of debt of $0.1 million related to the unamortized discountand $0.3 million in bank loan fees. Repayments of our Term Loan B were as follows: Date Principal Paid Unamortized Discount (Dollars in Thousands) December 31, 2014 $4,000 $16 November 28, 2014 4,000 15 September 29, 2014 5,000 18 March 31, 2014 2,250 8 Equity During the year ended December 31, 2014, after quarterly review of our earnings, cash flows, financial requirements, and other factors, our Board ofDirectors’ declared equity distributions to all stockholders of record of our Class A and Class B common stock as follows: Announcement Date Record Date Payment Date Amount Per Share Total Cash Distributed (in thousands) December 2, 2014 December 15, 2014 December 29, 2014 $0.0650 $1,646 September 2, 2014 September 16, 2014 September 30, 2014 $0.0625 1,579 May 27, 2014 June 16, 2014 June 30, 2014 $0.0600 1,514 March 6, 2014 March 17, 2014 March 31, 2014 $0.0575 1,444 The actual declaration of future distributions and the establishment of the per share amount, record dates, and payment dates are subject to finaldetermination by our Board of Directors and dependent upon future earnings, cash flows, financial requirements, and other factors. The current policy of theBoard 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 distributionwith the general principle of using approximately 20% of free cash flow. Free cash flow is a non-GAAP financial measure defined in Item 2, Management’sDiscussion and Analysis of Financial Condition and Results of Operations included with this annual report on Form 10-K. Acquisition of Eagle Publishing On January 10, 2014, we acquired the entities of Eagle Publishing, including Regnery Publishing, HumanEvents.com, RedState.com, Eagle FinancialPublications and Eagle Wellness. We began operating these entities as of the closing date. The base purchase price was $8.5 million, with $3.5 million paidin cash upon closing, and deferred payments of $2.5 million due January 2015 and $2.5 million due January 2016. We paid an additional $0.4 million ofcosts upon closing associated with liabilities incurred by the seller. On June 6, 2014, we paid $1.5 million of the $2.5 million deferred installment dueJanuary 2015. Based on the early payment, our deferred payment due January 2015 was reduced to $0.9 million. The deferred payments due January 2015and January 2016 were recorded at their present value of $0.9 million and $2.3 million, respectively, with the discount being amortized to non-cash interestexpense over the payment term using the effective interest method. As part of our purchase agreement, we may pay up to an additional $8.5 million of contingent earn-out consideration over the next three years based onthe achievement of certain revenue benchmarks established for calendar years 2014, 2015 and 2016 for each of the Eagle entities. The purchase priceincludes the original estimated fair value of the contingent earn-out consideration recorded at the present value of $2.0 million. The estimated fair value ofthe contingent earn-out consideration was determined using a probability-weighted discounted cash flow model. We determined the fair value of thecontingent consideration obligations by calculating the probability-weighted earn-out payments based on our assessment of the likelihood that thebenchmarks will be achieved. The probability-weighted earn-out payments were then discounted using a discount rate based on an internal rate of returnanalysis using the probability-weighted cash flows. The fair value measurement includes revenue forecasts which are a Level 3 measurement as discussed inNote 8 to our consolidated financial statements included in this annual report on Form 10-K. The fair value of the contingent earn-out consideration isreviewed quarterly over the earn-out period to compare actual revenue earned to the estimated revenue used in our forecasts. 8Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As of December 31, 2014, $0.9 million of the actual cash due toward the contingent earn-out consideration earned is recorded in current liabilities. Wemay pay up to an additional $5.9 million over the remaining earn-out period based on the achievement of certain revenue benchmarks. The estimated fairvalue of the contingent earn-out consideration is recorded at the present value of $1.7 million at December 31, 2014. Changes in the estimated fair value ofthe contingent earn-out consideration, up to the total contractual amount, are reflected in our results of operations in the periods in which they are identified.Changes in the fair value of the contingent earn-out consideration may materially impact and cause volatility in our future operating results. Changes in ourestimates for the contingent earn-out consideration are discussed in Note 4 to our consolidated financial statements included in this annual report on Form10-K. The accompanying consolidated statements of operations included in this annual report on Form 10-K reflect the operating results of these entities as ofthe closing date. We believe that strong author relationships, assembled creative talent agreements and the loyal readers of Eagle publications, as well as ourability to market and promote these products through our existing media platform, provides future economic benefits to us. For the year ended December 31,2014, we have recorded goodwill of $2.3 million representing the excess value of these future economic benefits. Other Acquisitions On December 23, 2014, we completed the acquisition of the construction permit for WLTE-FM in Pendleton, South Carolina for $0.5 million in cash.The asset acquisition cost is reflected in projects-in-process as of December 31, 2014. The station will operate within our Greenville, South Carolina market. On December 23, 2014, we completed the acquisition of an FM translator in Pickens, South Carolina for $0.2 million in cash. The asset acquisition costis included in projects-in-process as of December 31, 2014. The FM Translator will operate in our Greenville, South Carolina market. On December 22, 2014, we completed the acquisition of an FM translator in Bayshore Gardens, Florida for $0.1 million in cash. The asset acquisitioncost is included in projects-in-process as of December 31, 2014. The FM Translator will operate in our Tampa, Florida market. On November 24, 2014, we completed the acquisition of an FM translator in Travelers Rest, South Carolina for $0.2 million in cash. The assetacquisition cost is included in projects-in-process as of December 31, 2014. The FM Translator will operate in our Greenville, South Carolina market. On October 1, 2014, we completed the acquisition of radio station KXXT-AM in Phoenix, Arizona for $0.6 million in cash. We began operating thestation under a Local Marketing Agreement (“LMA”) as of June 6, 2014. The accompanying consolidated statements of operations included in this annualreport on Form 10-K reflects the operating results of this entity as of the LMA date. We recorded goodwill of $1,400 associated with the excess value of thisentity attributable to the audience reach obtained. On May 22, 2014, we completed the acquisition of radio station WOCN-AM, Miami, Florida and the related transmitter site for $2.5 million in cash. Theaccompanying consolidated statements of operations included in this annual report on Form 10-K reflects the operating results of this entity as of the closingdate. On November 24, 2014, we entered a Time Brokerage Agreement (“TBA”) with a programmer under which we will receive monthly license feesbeginning in December 2014 through November 2019. Upon acquisition, we recorded goodwill of $12,000 associated with the excess value of this entityattributable to the existing tower site, the related transmitter site and the audience reach obtained. On May 6, 2014, we completed the acquisition of WRTH-FM (formerly WOLT-FM) in Greenville, South Carolina for $1.1 million in cash. We beganoperating this station under a LMA as of February 28, 2014. The accompanying consolidated statements of operations included in this annual report on Form10-K reflect the operating results of this entity as of the LMA date. We recorded goodwill of $6,400 associated with the excess value of this entityattributable to the existing tower site and the audience reach obtained. 9Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. On April 15, 2014, we completed the acquisition of three FM translators for $0.4 million in cash. The asset acquisition cost is reflected in projects-in-process as of December 2014. The FM translators will serve our Orlando, Florida, Tampa, Florida and Omaha, Nebraska markets. On February 7, 2014, we completed the acquisition of radio stations KDIS-FM, Little Rock, Arkansas and KRDY-AM, San Antonio, Texas for $2.0million in cash. We began operating these stations as of the closing date. The accompanying consolidated statements of operations included in this annualreport on Form 10-K reflects the operating results of these entities as of the closing date. We recorded goodwill of $18,000 associated with the excess value ofthese entities attributable to existing tower sites and the audience reach obtained. Throughout the year ending December 31, 2014, we have acquired domain names for an aggregate amount of approximately $0.4 million in cash. A summary of our business acquisitions and asset purchases for the year ended December 31, 2014, none of which were individually or in the aggregatematerial to our consolidated financial position as of the respective date of acquisition, is as follows: Acquisition Date Description Total Cost (Dollars in thousands) December 23, 2014 WLTE-FM Pendleton, South Carolina (asset acquisition) $525 December 23, 2014 FM Translator, Pickens, South Carolina (asset acquisition) 185 December 22, 2014 FM Translator, Bayshore Gardens, Florida (asset acquisition) 140 November 24, 2014 FM Translator, Traveler’s Rest, South Carolina (asset acquisition) 200 October 1, 2014 KXXT-AM Phoenix, Arizona (business acquisition) 575 May 22, 2014 WOCN-AM Miami, Florida (business acquisition) 2,450 May 6, 2014 WRTH-FM (formerly WOLT-FM), Greenville, South Carolina (business acquisition) 1,125 April 15, 2014 FM Translators, Orlando, Florida, Tampa, Florida, Omaha, Nebraska (asset purchase) 357 February 7, 2014 KDIS-FM, Little Rock Arkansas and KRDY-AM, San Antonio, Texas (businessacquisition) 1,984 January 10, 2014 Eagle Publishing (business acquisition) 10,628 Various Purchases of domain names (asset purchases) 487 $18,656 Refer to Note 3 - Acquisitions and Recent Transactions in the notes to our consolidated financial statements contained in Item 8 of this annual report onForm 10-K for additional information and the accounting related to our acquisition activity. Pending Transactions On December 10, 2014, we entered into an Asset Purchase Agreement (“APA”) to acquire radio station WDYZ-FM in Orlando, Florida for $1.3 million incash. The purchase is subject to the approval of the FCC and is expected to close in the first quarter of 2015. On February 20, 2015, we entered into an APA to acquire radio station WDDZ-AM in Pittsburg, Pennsylvania for $1.0 million in cash. The purchase issubject to the approval of the FCC and is expected to close in the second quarter of 2015. On February 20, 2015, we entered into an APA to acquire radio station WDWD-AM in Atlanta, Georgia for $2.8 million in cash. The purchase is subjectto the approval of the FCC and is expected to close in the second quarter of 2015. Radio Stations Upon the close of all announced transactions, we will own and/or operate a national portfolio of 108 radio stations in 39 markets, consisting of 32 FMstations and 76 AM stations. The following table sets forth information about each of Salem’s stations, in order of market size: 10Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. MSA Station Year Market(1) Rank(2) Call Letters Acquired FormatNew York, NY 1, 19 (3) WMCA-AM 1989 Christian Teaching and Talk WNYM-AM 1994 News TalkLos Angeles, CA 2 KKLA-FM 1985 Christian Teaching and Talk KRLA-AM 1998 News Talk KFSH-FM 2000 Contemporary Christian MusicChicago, IL 3 WYLL-AM 2001 Christian Teaching and Talk WIND-AM 2005 News TalkSan Francisco, CA 4, 35 (4) KFAX-AM 1984 Christian Teaching and Talk KDOW-AM 2001 BusinessDallas-Fort Worth, TX 5 KLTY-FM 1996 Contemporary Christian Music KWRD-FM 2000 Christian Teaching and Talk KSKY-AM 2000 News Talk KVCE-AM Pending Business KTNO-AM 2012 Spanish Language Christian Teaching and TalkHouston-Galveston, TX 6 KNTH-AM 1995 News Talk KKHT-FM 2005 Christian Teaching and Talk KTEK-AM 2011 BusinessWashington, D.C. 7 WAVA-FM 1992 Christian Teaching and Talk WAVA-AM 2000 Christian Teaching and Talk WWRC-AM 2010 News TalkPhiladelphia, PA 8 WFIL-AM 1993 Christian Teaching and Talk WNTP-AM 1994 News TalkAtlanta, GA 9 WNIV-AM 2000 Christian Teaching and Talk WLTA-AM 2000 Christian Teaching and Talk WAFS-AM 2000 Business WFSH-FM 2000 Contemporary Christian Music WGKA-AM 2004 News Talk WDWD-AM Pending Christian Teaching and TalkBoston, MA 10 WEZE-AM 1997 Christian Teaching and Talk WROL-AM 2001 Christian Teaching and Talk WWDJ-AM 2003 Spanish Language Christian Teaching and TalkMiami, FL 11 WKAT-AM 2005 Spanish Language Christian Teaching and Talk WHIM-AM 2008 Christian Teaching and Talk WZAB-AM 2009 Business WOCN-AM 2014 EthnicDetroit, MI 12 WDTK-AM 2004 News Talk WLQV-AM 2006 Christian Teaching and TalkSeattle-Tacoma, WA 13 KGNW-AM 1986 Christian Teaching and Talk KLFE-AM (5) 1994 News Talk KNTS-AM (5) 1997 Spanish Language Christian Teaching and Talk KKOL-AM 1997 BusinessPhoenix, AZ 14 KKNT-AM 1996 News Talk KPXQ-AM 1999 Christian Teaching and Talk KXXT-AM 2014 Christian Teaching and TalkMinneapolis-St. Paul, MN 15 KKMS-AM 1996 Christian Teaching and Talk KYCR-AM 1998 Business WWTC-AM 2001 News TalkSan Diego, CA 16 KPRZ-AM 1987 Christian Teaching and Talk KCBQ-AM 2000 News TalkDenver-Boulder, CO 17 KRKS-FM 1993 Christian Teaching and Talk KRKS-AM (6) 1994 Christian Teaching and Talk KNUS-AM 1996 News Talk KBJD-AM (6) 1999 Spanish Language Christian Teaching and TalkTampa, FL 18 WTWD-AM (7) 2000 Christian Teaching and Talk WTBN-AM (7) 2001 Christian Teaching and Talk WLCC-AM 2012 Spanish Language Christian Teaching and Talk WGUL-AM 2005 News TalkPortland, OR 22 KPDQ-FM 1986 Christian Teaching and Talk KPDQ-AM 1986 Christian Teaching and Talk KFIS-FM 2002 Contemporary Christian Music KRYP-FM 2005 Regional MexicanRiverside-San Bernardino, CA 24 KTIE-AM 2001 News TalkPittsburgh, PA 25 WORD-FM 1993 Christian Teaching and Talk WPIT-AM 1993 Christian Teaching and Talk WDDZ-AM Pending News TalkSan Antonio, TX 26 KSLR-AM 1994 Christian Teaching and Talk KLUP-AM 2000 News Talk KRDY-AM 2014 Spanish Language Christian Teaching and TalkSacramento, CA 27 KFIA-AM 1995 Christian Teaching and Talk KTKZ-AM 1997 News TalkSource: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. KSAC-FM 2002 Business KKFS-FM 2006 Contemporary Christian MusicCleveland, OH 30 WHKW-AM 2000 Christian Teaching and Talk WFHM-FM 2001 Contemporary Christian Music WHK-AM 2005 News TalkOrlando, FL 32 WORL-AM 2006 News Talk WTLN-AM 2006 Christian Teaching and Talk WBZW-AM 2006 Business WDYZ-AM Pending Spanish Christian Teaching and TalkColumbus, OH 36 WRFD-AM 1987 Christian Teaching and Talk WTOH-FM 2013 News TalkNashville, TN 44 WBOZ-FM (8) 2000 Contemporary Christian Music WFFH-FM (8) 2002 Contemporary Christian Music WFFI-FM (8) 2002 Contemporary Christian MusicLouisville, KY 53 WFIA-FM 1999 Christian Teaching and Talk WGTK-AM 2000 News Talk WFIA-AM 2001 Christian Teaching and TalkGreenville, SC 58 WGTK-FM 2013 News Talk WRTH-FM(formerly WOLT-FM) 2014 Oldies WLTE-FM 2014 Classic HitsHonolulu, HI 62 KHNR-AM 2006 News Talk KAIM-FM 2000 Contemporary Christian Music KGU-AM 2000 Business KHCM-FM 2004 Country Music KHCM-AM 2000 Chinese KGU-FM 2004 Christian Teaching and Talk KKOL-FM 2005 OldiesOmaha, NE 74 KGBI-FM 2005 Contemporary Christian Music KOTK-AM 2005 Spanish Language Christian Teaching and Talk KCRO-AM 2005 Christian Teaching and TalkSarasota-Bradenton, FL 75 WLSS-AM 2005 News TalkLittle Rock, AR 82 KDIS-FM 2014 Christian Teaching and TalkColorado Springs, CO 89 KGFT-FM 1996 Christian Teaching and Talk KBIQ-FM 1996 Contemporary Christian Music KZNT-AM 2003 News TalkOxnard-Ventura, CA 120 KDAR-FM 1974 Christian Teaching and TalkYoungstown-Warren, OH 130 WHKZ-AM 2001 Christian Teaching and TalkWarrenton, Virginia WRCW-AM(formerly WKDL-AM) 2012 News Talk 11Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (1)Actual city of license may differ from metropolitan market served.(2)All metropolitan statistical area (“MSA”) rank information used in this annual report on Form 10-K, excluding information concerning TheCommonwealth of Puerto Rico, is from the Fall 2014 Radio Market Survey Schedule & Population Rankings published by Nielson. According to theRadio Market Survey, the population estimates used are based upon the 2010 U.S. Bureau Census estimates updated and projected to January 1, 2015by Nielsen Demographics.(3)This market includes the Nassau-Suffolk, NY Metro market, which independently has a MSA rank of 19.(4)This market includes the San Jose, CA market, which independently has a MSA rank of 35.(5)KNTS-AM is an expanded band AM station paired with KLFE-AM. The licenses for these stations include a condition requiring that one or the other besurrendered by July 15, 2009. However, the Federal Communications Commission (“FCC”) is currently permitting these paired expanded band stationsto continue to operate beyond the specified surrender date, pursuant to a special temporary authority (“STA”) granted by the FCC and a request forextension of that STA. 12Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (6)KBJD-AM is an expanded band AM station paired with KRKS-AM, which licenses have not been renewed by the FCC. The original license for KBJD-AM includes a condition requiring that one or the other paired license be surrendered by February 20, 2006. However, the FCC is currently permittingthese paired expanded band stations to continue to operate beyond their license expirations date pursuant to the pending license renewal applicationsfor those stations, and to continue to operate beyond the specified surrender date pursuant to an STA granted by the FCC and a request for extension ofsuch STA.(7)WTBN-AM is simulcast with WTWD-AM, Tampa, FL.(8)WBOZ-FM is trimulcast with WFFH-FM, Nashville, TN and WFFI-FM, Nashville, TN. Digital Media We own and operate the numerous Christian and Conservative opinion websites including: Salem Web Network™ Christian Content Websites: BibleStudyTools.com is a free Bible website for verse search and in-depth studies packed with commentaries, reading plans, and hundreds of helpfulresources designed as aids to Bible study. OnePlace.com™ is a leading provider of on-demand, online audio streaming for nearly 200 radio programs from more than 185 popular Christianbroadcast ministries. Oneplace.com serves as both a complement to and an extension of Salem’s block programming radio business. Crosswalk.com® offers compelling, editorial-driven, biblically-based, lifestyle content to Christians who take seriously their relationship withChrist. In addition, Crosswalk provides online devotional content. GodTube.com is a user-generated video sharing platform for Christian videos with faith-based, family-friendly content. CrossCards.com™ provides faith-based, inspirational e-greeting cards for all occasions and holidays. LightSource.com provides on-demand, video streaming for nearly 85 programs from more than 70 ministry partners. Christianity.com offers engaging articles and video focused on exploring the deeper, theological issues and apologetics of the Christian faith. It isalso a leading provider of online Bible trivia. Jesus.org offers a comprehensive database of biblical answers to the most common questions about the life and work of Jesus Christ. iBelieve.com creates editorial-driven, lifestyle content, focused on helping Christian women use personal experience to examine the deeper issues oflife and faith. CCMmagazine.com is the interactive version of what once was the Nashville-based CCM Magazine, which provides information and insight on theChristian music scene. GodVine.com is an online platform designed to share inspirational, family-friendly video through Facebook and other social media outlets. ChristianHeadlines.com reports the news of importance to the Christian audience with a headlines blog, persecution updates, Christian worldviewcommentary, and features on events from the worldwide Christian Church. Townhall Media - Conservative Opinion Websites: Townhall.com™ is an interactive community that brings users, conservative public policy organizations, congressional staff and political activiststogether under the broad umbrella of conservative thoughts, ideas and actions. HotAir.com is a leading news and commentary site with conservative news and opinions. Twitchy.com is a website featuring selected quotes and current events centered on US politics, global news, sports, entertainment, media, andbreaking news. RedState.com is the leading conservative, political news blog for right of center activists. 13Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Human Events.com is a conservative opinion website that provides news and commentary on issues of interest to the conservative community. Salem Church Products Websites: WorshipHouseMedia.com is an online church media resource, providing creative videos to churches to enhance worship and sermons. In addition,WorshipHouseKids.com provides children’s ministries with products to fulfill their visual needs. SermonSpice.com is an online provider of church media for local churches and ministries. ChurchStaffing.com™ is a source of job search information for churches and ministries offering a platform for personnel and staff relations. This siteallows those seeking employment to submit resumes and view job listings. ChristianJobs.com™ provides services catering to the hiring needs of Christian-based businesses, nonprofit organizations, and ministries. The siteconnects these organizations with thousands of job seekers through its online presence and partnerships with Salem’s radio stations. SermonSearch.com is a subscription-based resource for preachers and teachers with preparation materials like sermon outlines, illustrations, andpreaching ideas from many of America’s top Christian communicators. Our digital media operating segment also includes Salem Consumer Products, (“SCP”) which hosts several websites for our audience to purchaseChristian and conservative content from our on-air hosts and contributors. These sites include: ·ConservativeStore.com·ChristianBookstore.net·SRNStore.com Digital media also includes Eagle Financial Publications, which provide market analysis and investment advice for individual subscribers from financialcommentators. These Financial Publications are digitally delivered and reported in our digital media operating segment. Revenue generated from our digital media operating segment includes advertising arrangements based on cost-per-click or performance-basedadvertising; display advertisements where revenue is dependent upon the number of page views; and lead generating advertisements where revenue isdependent upon users registering for, or purchasing or demonstrating interest in, advertisers' products or services. We also generate revenue from digitalsubscriptions, streaming, downloads and product sales through our e-commerce sites. Revenue is recognized upon digital delivery or page views, downloadsand upon shipment of products. Revenue from this operating segment is reported as Digital Media revenue on our consolidated statements of operationsincluded in this annual report on Form 10-K. Publishing Our Publishing segment consists of Regnery Publishing, a publisher of conservative books, Xulon Press and Salem PublishingTM. Salem PublishingTM , our print magazine division, publishes magazines on a monthly or semi-monthly basis. Our publications include the followingChristian or conservative publications: ·Singing News®·Homecoming The Magazine·YouthWorker Journal™·Preaching Magazine™·FaithTalk Magazine™·Townhall Magazine™ (December 2014 issue was the last issue of this publication) Xulon Press™ is a print-on-demand self-publishing service for Christian authors. Revenue from this operating segment is reported as Publishing revenueon our consolidated statements of operations included in this annual report on Form 10-K. 14Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. COMPETITION We operate in a highly competitive broadcast and media business. We compete for listeners, advertisers and customers with other radio broadcasters, aswell as with other forms of media including broadcast and cable television, newspapers and magazines, book publishers, national and local digital services,outdoor advertising, direct mail, online marketing and media companies, social media platforms, web-based blogs, and mobile devices. BROADCASTING. Our broadcast audience ratings and market shares are subject to change, and any change in a particular market could have a materialadverse effect on the revenue of our stations located in that market. While we already compete in some of our markets with stations that offer similar formats,if another radio station were to convert its programming to a format similar to one of ours, or if an existing competitor were to strengthen its operations, ourstations could suffer reduced ratings and/or reduced revenues. In these circumstances, we could also incur significantly higher promotional and other relatedexpenses. We cannot assure that our stations will maintain or increase their current audience ratings and revenues. Christian and Family-Themed Radio. The segment of this industry that focuses on Christian and family themes is also 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 togenerate revenue from the sale of block program time to national and local religious and educational organizations. We compete for this program revenuewith a number of different commercial and non-commercial radio station licensees. While no commercial group owner in the United States specializing inChristian and family-themed programming approaches Salem in size of potential listening audience and presence in major markets, other religious radiostations exist and enjoy varying degrees of prominence and success in each of our markets. We also compete for advertising revenue with other commercial religious format and general format radio station licensees. Our competition foradvertising dollars includes other radio stations as well as broadcast television, cable television, newspapers, magazines, direct mail, online and billboardadvertising, some of which may be controlled by horizontally-integrated companies. Several factors can materially affect competitive advantage, including,but not limited to audience ratings, program content, management talent and expertise, sales talent and experience, audience characteristics, signal strength,and the number and characteristics of other radio stations in the same market. New Methods of Content Delivery. Competition also comes from new media technologies and services. These include delivery of audio programming bycable television and satellite systems, digital audio radio services, mobile devices including smart phone applications for iPhone® and Android®, personalcommunications services and the service of low powered, limited coverage FM radio stations authorized by the FCC. The delivery of live and stored audioprogramming through the Internet has also created new competition. In addition, satellite delivered digital audio radio, which deliver multiple audioprogramming formats to national audiences, has created competition. We have attempted to address these existing and potential competitive threats througha more active strategy to acquire and integrate new electronic communications formats including Internet acquisitions made by SWN and our exclusivearrangement to provide Christian and family-themed talk on SiriusXM, a satellite digital audio radio service. NETWORK. Salem Radio Network® competes with other commercial radio networks that offer news and talk programming to religious and generalformat stations and noncommercial networks that offer Christian music formats. SRN also competes with other radio networks for the services of talk showpersonalities. DIGITAL MEDIA. Salem Web Network™ and Townhall Media compete for visitors and advertisers with other companies that deliver on-line audioprogramming and Christian and conservative web-based content as well as providers of general market websites. The online media and distribution businesschanges quickly and is highly competitive. We compete to attract and maintain interactions with advertisers, consumers, content creators and web publishers.Salem Church Products competes for customers with other online sites that offer resources useful in ministries, preaching, teaching and for employmentwithin the Christian community. Eagle Wellness competes in a large, highly fragmented industry that includes specialty retailers, supermarkets, drugstores,mass merchants, multi-level marketing organizations, mail-order companies, other online retailers and pharmaceuticals. 15Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PUBLISHING. Regnery Publishing competes with other book publishers for readers and book sales as well as competes for product quality, customerservice, suitability of format and subject matter, author reputation, price, timely availability of both new titles and revisions of existing books, digitalavailability of published products, and timely delivery of products to customers. Print magazines compete for readers and advertisers with other printpublications, including those that also address themes of interest to church leadership and the Christian audience. Xulon Press™ competes for authors withother on-demand publishers including those focused exclusively on Christian book publishers. FEDERAL REGULATION OF RADIO BROADCASTING Introduction. The ownership, operation and sale of broadcast stations, including those licensed to Salem, are subject to the jurisdiction of the FCC,which acts under authority derived from The Communications Act of 1934, as amended, and the rules and regulations promulgated thereunder (the“Communications Act”). Among other things, the FCC assigns frequency bands for broadcasting; determines whether to approve certain changes inownership or control of station licenses; regulates transmission facilities, including power employed, antenna and tower heights, and location of transmissionfacilities; adopts and implements regulations and policies that directly or indirectly affect the ownership, operation and employment practices of stations;and has the power to impose penalties for violations of its rules under the Communications Act. The following is a brief summary of certain provisions of the Communications Act and of specific FCC regulations and policies. Failure to observe theseor other rules and policies can result in the imposition of various sanctions, including monetary forfeitures, the grant of “short” (less than the maximum)license renewal terms or, for particularly egregious violations, the denial of a license renewal application, the revocation of a license or the denial of FCCconsent to acquire additional broadcast properties. For further information concerning the nature and extent of federal regulation of broadcast stations youshould refer to the Communications Act, FCC rules and the public notices and rulings of the FCC. License Grant and Renewal. Radio broadcast licenses are granted for maximum terms of eight years. Licenses must be renewed through an application tothe FCC. Under the Communications Act, the FCC will renew a broadcast license if it finds that the station has served the public interest, convenience andnecessity, that there have been no serious violations by the licensee of the Communications Act or the rules and regulations of the FCC, and that there havebeen no other violations by the licensee of the Communications Act or the rules and regulations of the FCC that, when taken together, would constitute apattern of abuse. Petitions to deny license renewals can be filed by certain interested parties, including members of the public in a station’s market. Such petitions mayraise various issues before the FCC. The FCC is required to hold hearings on renewal applications if the FCC is unable to determine that renewal of a licensewould serve the public interest, convenience and necessity, or if a petition to deny raises a “substantial and material question of fact” as to whether the grantof the renewal application would be prima facie inconsistent with the public interest, convenience and necessity. In addition, during certain periods when arenewal application is pending, the transferability of the applicant’s license is restricted. The following table sets forth information with respect to each of our radio stations for which we own the license. Stations operated under an LMA are notreflected on this table. A broadcast station’s market may be different from its community of license. The coverage of an AM radio station is chiefly a functionof the power of the radio station’s transmitter, less dissipative power losses and any directional antenna adjustments. For FM radio stations, signal coveragearea is chiefly a function of the Effective Radiated Power (“ERP”) of the radio station’s antenna and the Height Above Average Terrain (“HAAT”) of the radiostation’s antenna. 16Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Market Station Call Letters Frequency Expiration Date of License FCC Class HeightAboveAverageTerrain (infeet) Power (inKilowatts)Day / Night New York, NY WMCA-AM AM June 2022 B N/A 5 / 5 WNYM-AM AM June 2022 B N/A 50 / 5 Los Angeles, CA KKLA-FM FM December 2021 B 2,959 10 KRLA-AM AM December 2021 B N/A 50 / 3 KFSH-FM FM December 2021 A 328 6 Chicago, IL WYLL-AM AM December 2020 B N/A 50 / 50 WIND-AM AM December 2020 B N/A 5 / 5 San Francisco, CA KFAX-AM AM December 2021 B N/A 50 / 50 KDOW-AM AM December 2021 D N/A 5 / 0.145 Dallas-Fort Worth, TX KLTY-FM FM August 2021 C 1,667 100 KWRD-FM FM August 2021 C 1,988 98 KSKY-AM AM August 2021 B N/A 20 / 0.7 KTNO-AM AM August 2021 B N/A 50 / 0.35 Houston-Galveston,TX KNTH-AM AM August 2021 B N/A 10/ 5 KKHT-FM FM August 2021 C 1,952 100 KTEK-AM AM August 2021 D N/A 2.5 Washington, D.C. WAVA-FM FM October 2019 B 604 33 WAVA-AM AM October 2019 D N/A 12 WWRC-AM AM October 2019 B N/A 35 / 5 Philadelphia, PA WFIL-AM AM August 2022 B N/A 5 / 5 WNTP-AM AM August 2022 B N/A 50 / 10 Atlanta, GA WNIV-AM AM April 2020 D N/A 5 / 0.039 WLTA-AM AM April 2020 C N/A 1 / 1 WAFS-AM AM April 2020 D N/A 25 WFSH-FM FM April 2020 C1 1,657 24 WGKA-AM AM April 2020 B N/A 14 / 049 Boston, MA WEZE-AM AM April 2014 B N/A 5 / 5 WROL-AM AM April 2014 B N/A 5 / 0.09 WWDJ-AM AM April 2014 B N/A 5 / 5 Miami, FL WKAT-AM AM February 2020 B N/A 5 / 1 WHIM-AM AM February 2020 B N/A 50 / 10 WZAB-AM AM February 2020 B N/A 4 / 5 WOCN-AM AM February 2020 B N/A 1 / 1 Detroit, MI WDTK-AM AM October 2020 C N/A 1 / 1 WLQV-AM AM October 2020 B N/A 50 / 10 Seattle-Tacoma, WA KGNW-AM AM February 2022 B N/A 50 / 5 KLFE-AM AM February 2022 B N/A 5 / 5 KNTS-AM AM February 2022 B N/A 10 / 1 KKOL-AM AM February 2022 B N/A 50 / 47 Phoenix, AZ KKNT-AM AM October 2021 B N/A 5 / 5 KPXQ-AM AM October 2021 B N/A 50 / 1 KXXT-AM AM October 2021 B N/A 15 / 0.25 Minneapolis-St. Paul,MN KKMS-AM AM April 2021 B N/A 5 / 5 KYCR-AM AM April 2021 B N/A 3.8 / 0.26 WWTC-AM AM April 2021 B N/A 5 / 5 San Diego, CA KPRZ-AM AM December 2021 B N/A 20 / 10 KCBQ-AM AM December 2021 B N/A 50 / 2.9 Denver-Boulder, CO KRKS-FM FM April 2021 C 984 100 KRKS-AM AM April 2021 B N/A 6.5 / 0.36 KNUS-AM AM April 2021 B N/A 5 / 5 KBJD-AM AM April 2021 B N/A 10 / 1 Tampa, FL WTWD-AM AM February 2020 B N/A 5 / 5 WTBN-AM AM February 2020 B N/A 5 / 5 WLCC-AM AM February 2020 B N/A 10 / 1 WGUL-AM AM February 2020 B N/A 5 / 1.5 Portland, OR KPDQ-FM FM February 2020 C 1,270 52 KPDQ-AM AM February 2020 B N/A 1 / 0.5 KFIS-FM FM February 2020 C1 1,266 7 KRYP-FM FM February 2020 C1 1,270 1.6 Riverside-SanBernardino, CA KTIE-AM AM December 2021 B N/A 2.5 / 0.96 Pittsburgh, PA WORD-FM FM August 2022 B 528 43 WPIT-AM AM August 2022 D N/A 5 / 0.024 San Antonio, TX KSLR-AM AM August 2021 B N/A 5 / 4.3 KLUP-AM AM August 2021 B N/A 5 / 1 Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. KRDY-AM AM August 2021 B N/A 10 / 1 Sacramento, CA KFIA-AM AM December 2021 B N/A 25 / 1 KTKZ-AM AM December 2021 B N/A 5 / 5 KSAC-FM FM December 2021 B1 1,010 2.55 KKFS-FM FM December 2021 A 328 6 Cleveland, OH WHKW-AM AM October 2020 B N/A 50 / 50 WFHM-FM FM October 2020 B 620 31 WHK-AM AM October 2020 B N/A 5 / 5 Orlando, FL WORL-AM AM February 2020 B N/A 1 / 1 WTLN-AM AM February 2020 B N/A 12 / 5 WBZW-AM AM February 2020 B N/A 5 / 0.35 Columbus, OH WRFD-AM AM October 2020 D N/A 23 WTOH-FM FM October 2020 A 505 2.6 Nashville, TN WBOZ-FM FM August 2020 A 328 6 WFFH-FM FM August 2020 A 453 3.2 WFFI-FM FM August 2020 A 755 1.15 Louisville, KY WFIA-FM FM August 2020 A 394 3.3 WGTK-AM AM August 2020 B N/A 5 / 5 WFIA-AM AM August 2020 D N/A 0.93 / 0.162 Greenville, SC WGTK-FM FM December 2019 0 14,895 100 WRTH-FM FM December 2019 0 495 2.7 WLTE-FM FM July 2017 A 397 4.1 Honolulu, HI KHNR-AM AM February 2022 B N/A 10 / 10 KAIM-FM FM February 2022 C 328 100 KGU-AM AM February 2022 B N/A 10 / 10 KHCM-FM FM February 2022 C1 46 80 KHCM-AM AM February 2022 B N/A 2 / 2 KGU-FM FM February 2022 C 1,965 100 KKOL-FM FM February 2022 C 1,965 100 Omaha, NE KGBI-FM FM June 2021 C 1,014 100 KOTK-AM AM June 2021 B N/A 1 / 0.33 KCRO-AM AM June 2021 D N/A 1 / 0.054 Sarasota-Bradenton,FL WLSS-AM AM February 2020 B N/A 5 / 3 Little Rock, AR KDIS-FM FM April 2017 0 312 3 Colorado Springs, CO KGFT-FM FM April 2021 C 2,218 78 KBIQ-FM FM April 2021 C 256 72 KZNT-AM AM April 2021 B N/A 5 / 0.54 Oxnard-Ventura, CA KDAR-FM FM December 2021 B1 1,289 1.5 Youngstown-Warren,OH WHKZ-AM AM October 2020 B N/A 5 / 5 Warrenton, Virginia WRCW-AM (formerlyWKDL-AM) AM April 2012 D N/A 3 / 0.125 17Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Radio station KNTS-AM is an expanded band station paired with station KLFE-AM in the Seattle, WA market, and station KBJD-AM is an expandedband station paired with KRKS-AM in the Denver, CO market. We are operating these four stations pursuant to FCC licenses or other FCC authority pendingresolution by the FCC of the issue of AM expanded band dual operating authority. Depending upon how the FCC resolves that issue, it is possible that wewill be required to surrender one station license in each station pair. Except for these stations, we are not currently aware of any facts that would prevent thetimely renewal of our licenses to operate our radio stations, although there can be no assurance that our licenses will be renewed. Ownership Matters. The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast license without theprior approval of the FCC. In determining whether to assign, transfer, grant or renew a broadcast license, the FCC considers a number of factors pertaining tothe licensee, including compliance with various rules limiting common ownership of media properties, the “character” of the licensee and those personsholding “attributable” interests therein, and compliance with the Communications Act’s limitation on alien ownership, as well as compliance with other FCCpolicies, including equal employment opportunity requirements. 18Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Under the Communications Act, a broadcast license may not be granted to or held by a corporation that has more than one-fifth of its capital stock ownedor voted by aliens or their representatives, by foreign governments or their representatives, or by non-U.S. corporations. Under the Communications Act, abroadcast license also may not be granted to or held by any corporation that is controlled, directly or indirectly, by any other corporation more than one-fourth of whose capital stock is owned or voted by aliens or their representatives, by foreign governments or their representatives, or by non-U.S.corporations. These restrictions apply in modified form to other forms of business organizations, including partnerships. We therefore may be restricted fromhaving more than one-fourth of our stock owned or voted by aliens, foreign governments or non-U.S. corporations. Multiple Ownership: The Communications Act and FCC rules also generally restrict the common ownership, operation or control of radio broadcaststations serving the same local market, of a radio broadcast station and a television broadcast station serving the same local market, and of a radio broadcaststation and a daily newspaper serving the same local market. The FCC also restricts the number of television stations an entity may own both in local marketsand nationwide. Our current ownership of radio broadcast stations complies with the FCC’s multiple ownership rules; however, these rules may limit the number ofadditional stations that we may acquire in the future in certain of our markets and could limit the potential buyers of any stations we may attempt to sell. TheFCC is also required by the Communications Act to review its broadcast ownership rules every four years. During 2009, the FCC held a series of hearingsdesigned to evaluate possible changes to its rules. In May 2010, the FCC formally initiated its 2010 quadrennial review of its media ownership rules with theissuance of a Notice of Inquiry (“NOI”). The NOI was intended to assist the Commission in establishing a framework within which to analyze whether itsmedia ownership rules remain “necessary in the public interest as a result of competition,” due to the dramatic changes occurring in the media marketplace.Numerous parties have filed comments and reply comments in response to the NOI. In June and July 2011, the FCC released to the public eleven economicstudies related to its media ownership rules. We believe that the next step will be for the FCC to issue a Notice of Proposed Rulemaking (“NPRM”) to seekcomment on specific proposed changes to its ownership rules in connection with the 2010 quadrennial review of the broadcast ownership rules and has nowconsolidated its 2010 quadrennial review with the 2014 quadrennial review of the ownership rules. The FCC has instructed its Media Bureau to complete thecombined 2010 and 2014 reviews by June 30, 2016. We can make no determination as to what effect, if any, the combined 2010 and 2014 quadrennialreviews will have on Salem. Attribution: Because of these multiple and cross-ownership rules, a purchaser of voting stock of the company that acquires an “attributable” interest inthe company may violate the FCC’s rule if it also has an attributable interest in other television or radio stations, or in daily newspapers, depending on thenumber and location of those radio or television stations or daily newspapers. Such a purchaser also may be restricted in the other companies in which it mayinvest, to the extent that these investments give rise to an attributable interest. If an attributable stockholder of the company violates any of these ownershiprules, the company may be unable to obtain from the FCC one or more authorizations needed to conduct its radio station business and may be unable toobtain FCC consents for certain future acquisitions. The FCC generally applies its television/radio/newspaper cross-ownership rules and its broadcast multiple ownership rules by considering the“attributable,” or cognizable, interests held by a person or entity. A person or entity can have an interest in a radio station, television station or dailynewspaper by being an officer, director, partner, member, or stockholder of a company that owns that station or newspaper. Whether that interest is cognizableunder the FCC’s ownership rules is determined by the FCC’s attribution rules. If an interest is attributable, the FCC treats the person or entity who holds thatinterest as an “owner” of the radio station, television station or daily newspaper in question, and therefore subject to the FCC’s ownership rules. On December22, 2011, the FCC issued a Notice of Proposed Rulemaking (“NPRM”) to seek comment on specific proposed changes to its ownership rules. In the NPRM,the FCC tentatively concluded to maintain its local radio ownership rules largely intact. Comments and Reply Comments have been received by the FCC inconnection with the NPRM (2010 quadrennial review). Since, as of this date, no Report and Order has been adopted by the FCC in connection with the localradio ownership rules proposals in the 2010 quadrennial review and is again reviewing those rules in connection with the 2014 quadrennial review,consolidating its 2010 quadrennial review with its 2014 quadrennial review, , we can make no determination as to what effect, if any, the combined 2010 and2014 quadrennial reviews will have on Salem, since action is not anticipated until 2016. Any officers and directors of a broadcast licensee, cable system owner, or daily newspaper owner are deemed to hold attributable interests in that entity.Generally, the officers and directors of any parent company that holds an attributable interest are themselves also deemed to hold the same attributableinterests as that company. In certain situations where a parent company is involved in businesses other than broadcasting, cable system operation, ornewspaper publishing, and an individual officer or director has duties and responsibilities wholly unrelated to the company’s broadcast, cable, or newspaperactivities, that officer or director may avoid attribution, but will need to submit a statement to the FCC documenting their lack of involvement in the relevantbusinesses. 19Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Generally, debt interests held in a broadcast licensee, cable system owner, daily newspaper publisher, or parent company are not deemed attributable.Debt holders will be subject to attribution, however, where the aggregate value of the equity and debt held in the broadcast, cable, or newspaper companyexceeds 33% of that company’s total asset value and the debt holder also holds another attributable interest in the relevant market or the debt holder suppliesover 15% of the programming, on a weekly basis, for the station in which the interest is held. Programming and Operation. The Communications Act requires broadcasters to serve the “public interest.” The FCC has gradually relaxed oreliminated many of the more formalized procedures it had developed in the past to promote the broadcast of certain types of programming responsive to theneeds of a station’s community of license. Although in recent years proposals have been put forth by the FCC to reinstitute certain formal procedures, none ofthese proposals have yet been adopted for radio stations. Licenses continue to be required, however, to present programming that is responsive to communityproblems, needs and interests and to maintain certain records demonstrating such responsiveness. Complaints from listeners concerning a station’sprogramming will be considered by the FCC when it evaluates the licensee’s renewal application, but such complaints may be filed and considered at anytime. Stations also must pay annual regulatory fees and fees associated with the filing of most applications. Stations also must follow various FCC rules thatregulate, among other things, political advertising, advertising for certain products or services (e.g. tobacco advertising), the broadcast of obscene or indecentprogramming, closed captioning, emergency programming, sponsorship identification and technical operations (including limits on radio frequencyradiation) and equal employment opportunity requirements. The broadcast of contests and lotteries is regulated by FCC rules. Failure to observe these or other rules and policies can result in the imposition of various sanctions, including monetary forfeitures, the grant of “short”(less than the maximum) renewal terms or, for particularly egregious violations, the denial of a license renewal application or the revocation of a license. Proposed Changes. As noted above, in May 2010, the FCC formally initiated its 2010 quadrennial review of its media ownership rules with theissuance of a Notice of Inquiry (NOI). The NOI is intended to assist the Commission in establishing a framework within which to analyze whether its mediaownership rules remain “necessary in the public interest as a result of competition,” due to the dramatic changes occurring in the media marketplace.Numerous parties have filed comments and reply comments in response to the NOI. In June and July 2011, the FCC released to the public eleven economicstudies related to its media ownership rules. On December 22, 2011, the FCC issued a Notice of Proposed Rulemaking (NPRM) in the 2010 quadrennialreview to seek comment on specific proposed changes to its ownership rules. In the 2010 quadrennial review NPRM, the FCC tentatively concluded tomaintain its local radio ownership rules largely intact. Comments and Reply Comments have been received by the FCC in connection with the NPRM. The2010 quadrennial review has now been consolidated in with the FCC’s 2014 quadrennial review of its ownership rules. Since, as of this date, no Report andOrder has been adopted by the FCC in connection with the local radio ownership rules proposals in the 2010 quadrennial review NPRM, and the FCC hasdirected its Media Bureau to complete the combined 2010 and 2014 reviews we can make no determination as to what effect, if any, this NPRM will have onSalem. The Congress and the FCC from time to time have under consideration, and may in the future consider and adopt, new laws, regulations and policiesregarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of the company’s radio stations, result inthe loss of audience share and revenue for the company’s radio stations, and affect the ability of the company to acquire additional radio stations or financesuch acquisitions. Such matters under consideration include, or may come to include:• proposals to require broadcast licenses to broadcast specific types and amounts of local programming;• proposals restricting the location of broadcast studios;• technical and frequency allocation matters, including potential reallocation of broadcast spectrum to other uses;• changes in multiple ownership and cross-ownership rules;• changes to broadcast technical requirements; and• proposals to require broadcasters to pay copyright royalties for over-the-air performance of sound recordings. The foregoing summary of certain provisions of the Communications Act and of specific FCC rules and policies does not purport to be comprehensive.For further information concerning the nature and extent of federal regulation of radio broadcast stations you should refer to the Communications Act, theFCC’s rules and the public notices and rulings of the FCC. 20Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Federal Antitrust Considerations. The Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”), which evaluate transactions todetermine whether those transactions should be challenged under the federal antitrust laws, are also active in their review of radio station acquisitions,particularly where an operator proposes to acquire additional stations in its existing markets. For an acquisition meeting certain size thresholds, the Hart-Scott-Rodino Improvements Act (“HSR Act”) and the rules promulgated thereunder requirethe parties to file Notification and Report Forms with the FTC and the DOJ and to observe specified waiting period requirements before consummating theacquisition. At any time before or after the consummation of a proposed acquisition, the FTC or the DOJ could take such action under the antitrust laws, as itdeems necessary or desirable in the public interest, including seeking to enjoin the acquisition or seeking divestiture of the business acquired or other assetsof the company. Acquisitions that are not required to be reported under the HSR Act may be investigated by the FTC or the DOJ under the antitrust lawsbefore or after consummation. In addition, private parties may under certain circumstances bring legal action to challenge an acquisition under the antitrustlaws. The DOJ also has stated publicly that it believes that LMAs and other similar agreements customarily entered into in connection with radio stationtransfers prior to the expiration of the waiting period under the HSR Act could violate the HSR Act. We can provide no assurances that our acquisition strategy will be adversely affected in any material respect by antitrust reviews. GEOGRAPHIC FINANCIAL INFORMATION Our operating segments are based in various locations throughout the United States. Our broadcast operating segment is particularly dependent onrevenue from our Los Angeles and Dallas markets which generated 14.3% and 24.0% , respectively, of our total net broadcasting advertising revenue for theyear ended December 31, 2014, 15.2% and 25.5%, respectively, for the year ended December 31, 2013, and 16.2% and 23.6%, respectively, for the yearended December 31, 2012.Because substantial portions of our broadcast advertising revenues are derived from local advertisers in Los Angeles and Dallas, our ability to generaterevenues in those markets could be adversely affected by local or regional economic downturns. EMPLOYEES As of February 17, 2015, we employed 1,177 employees in radio broadcasting, 186 employees in digital entities, 131 employees in printing andpublishing, and 111 employees in corporate functions. Of these employees, 1,230 are full-time and 375 are part-time employees. We consider our relationswith our employees to be good and none of our employees are covered by collective bargaining agreements. We employ on-air personalities and we may enter into employment agreements with these on-air personalities in order to protect our interests in theserelationships. However, on-air talent may be lost to competitors for a variety of reasons. While we do not believe that the loss of any one of our on-airpersonalities would have a material and adverse effect on our consolidated financial condition and results of operations, the loss of several key on-airpersonalities combined could have a material and adverse effect on our business. AVAILABLE INFORMATION Our Internet address is www.salemmedia.com. We make available free of charge on our investor relations website under the heading “SEC Filings” ourAnnual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Exchange Act. These reports are available as soon as reasonably practical after we electronically file them or furnishthem to the SEC. Any information found on our website is not a part of or incorporated by reference into, this or any other report of the company filed with,or furnished to, the SEC. 21Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 1A. RISK FACTORS You should carefully consider the risks described below before investing in our securities. Our business is subject to risks associated with generaleconomic conditions, geopolitical events, competition, technological obsolescence and employee relations. The risks described below, along with risks notcurrently known to us or that we currently believe are immaterial, may impair our business operations and liquidity in unfavorable ways. We operate in acontinually changing business environment in which new risk factors emerge from time to time. We can neither predict new risk factors, nor can we assess theimpact, if any, these new risk factors may have on our business. The extent to which any risk factor, or combination of risk factors, may affect our business,financial condition and results of operations could seriously and materially influence the trading price of our common stock. CERTAIN FACTORS AFFECTING SALEM We may choose not to pursue potentially more profitable business opportunities outside of our Christian, conservative news talk and family-themedformats, or not to broadcast programming that violates our programming standards, either of which may have a material and adverse effect on ourbusiness. We are fundamentally committed to broadcasting, digital and publishing formats and programming emphasizing Christian values, conservative familythemes and news. We may choose not to switch to other formats or pursue potentially more profitable business opportunities due to this commitment, whichcould result in lower operating revenues and profits than we might otherwise achieve. We also do not intend to pursue business opportunities or broadcastprogramming that would conflict with our core commitment to Christian and family-themed formats or that would violate our programming standards, even ifsuch opportunities or programming would be more profitable. Our decision not to pursue other formats, business opportunities and/or broadcast programmingthat is inconsistent with our programming standards may have a material and adverse effect on our business. RISKS ASSOCIATED WITH BUSINESS OPERATIONS We may be adversely affected by deteriorating economic conditions including the economic climate failing to improve. The risks associated with our businesses become more acute in periods of a slowing economy or recession, which are often accompanied by a decrease inadvertising. A decline in the level of business activity of our advertisers could have an adverse effect on our revenues and profit margins. During economicslowdowns in the United States, many advertisers have reduced their advertising expenditures. While the precise impact of economic slowdowns on ourbusiness is difficult to predict, our exposure to several risks increases with a slowing economy or a recession, including but not limited to:•Increasing pressure to sell advertising and block programming time at discounted rates;•Increases in the length of time to collect receivables and higher risks that accounts become uncollectible as our customers face tight creditmarkets;•Ministries are experiencing lower levels of donations that could negatively impact their ability to purchase and pay for block programming time;•We may not be able to find suitable replacements for ministries that can no longer purchase and pay for block programming;•Limitations on our ability to obtain additional financing to fund working capital, capital expenditures, acquisitions and other corporaterequirements;•Limitations on our ability to pursue projects that could have been beneficial; and•Impairment losses on the value of our indefinite-lived intangible assets including FCC broadcast licenses, goodwill, and mastheads andimpairment losses on other long-lived assets. Our results of operations could be negatively impacted by weak economic conditions of an individual business sector. A recession or downturn in the economy of any individual business sector could have a significant effect on us. Even with the recovery seen from the2008 economic recession, an individual business sector (such as the automotive industry) that tends to spend more on advertising than other sectors, mightbe forced to maintain a reduced level of advertising expenditures. If that sector experiences a slower recovery than the economy in general, that sector mayreduce its advertising expenditures further if additional downturns occur. If that sector’s spending represents a significant portion of our advertising revenues,any reduction in its advertising expenditures may negatively impact our results of operations. 22Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We must respond to the rapid changes in technology, services and standards of our industry in order to remain competitive. The radio broadcast industry is subject to rapid technological change, evolving industry standards and the emergence of competition from new mediatechnologies and services. We cannot make assurances that we will have the resources to acquire new technologies or to introduce new services that couldcompete with these new technologies. Various new media technologies and services are currently being developed or introduced, including but not limitedto: •Satellite-delivered digital audio radio service, which has resulted in the introduction of new subscriber-based satellite radio services withnumerous niche formats;•Audio programming by cable systems, direct-broadcast satellite systems, personal communications systems, content available over the Internetand other digital audio broadcast formats;•In-band on-channel digital radio, which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied bytraditional AM and FM radio services;•Low-power FM radio, which could result in additional FM radio broadcast outlets including additional low-power FM radio signals authorized inDecember 2010 under the Local Community Radio Act;•High Definition (“HD”) radio;•Internet radio and other audio content offerings such as Pandora and iHeart Radio; and•Personal digital audio devices (e.g. audio via WiFi, mobile phones, WiMAX, etc.) or other emerging next-generation networks and technologies. We currently program one channel on SiriusXM. We also offer pod-casts and downloads of portions of our programming; however, we cannot assure youthat this arrangement will be successful or enable us to adapt effectively to these new media technologies. We cannot predict the effect, if any, thatcompetition arising from new technologies or regulatory change(s) may have on the radio broadcast industry or on our financial condition and results ofoperations. The accounting treatment of goodwill and other indefinite-lived intangible assets could cause future losses due to asset impairment. Under Financial Accounting Standards (“FASB”) Accounting Standards Codification (“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 morefrequently 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 forimpairment if events or circumstances indicate that they may be impaired. Impairment losses are recorded as operating expenses. We incurred significantimpairment losses in prior years with regard to our indefinite-lived intangible assets. During the fourth quarter of 2014, we recognized impairment losses of$79,000 associated with mastheads and goodwill within our publishing segment. We perform our annual impairment testing during the fourth quarter at thesame time that we prepare our budget and financial forecasts for the following year. During our 2015 budget process held during the fourth quarter of 2014,we decided to cease publishing Townhall Magazine as of December 2014 and we are considering ceasing additional print magazines in the future. Theseimpairments were driven by reductions in our projected net revenues that were not offset with equal cost reductions from the planned decrease in the numberof our publications. The growth of digital-only publications, that are often free or significantly less than a print magazine has hindered the ability of thepublishing industry to recover from the economic recession that began in 2008. We believe that the impairments are indicative of trends in the publishingindustry as a whole and are not unique to our company or operations. 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 inmeasuring fair value including assumptions about risk. If actual future results are less favorable than the assumptions and estimates we used, we are subject tofuture impairment charges, the amount of which may be material. Given the current economic environment and uncertainties that can negatively impact ourbusiness, there can be no assurance that our estimates and assumptions made for the purpose of our indefinite-lived intangible fair value estimates will proveto be accurate. 23Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The impairment charges we have recognized are non-cash in nature and did not violate covenants on our then existing credit facilities or on our currentRevolver or Term Loan B. However, the potential for future impairment charges can be viewed as a negative factor with regard to forecasted futureperformance and cash flows. We believe that we have adequately considered the economic downturn in our valuation models and do not believe that thenon-cash impairments in and of themselves are a liquidity risk. We may not be able to utilize our deferred tax assets to offset future taxable income. As of December 31, 2014 , we had deferred tax assets, net of valuation allowances, of $81.6 million on our consolidated balance sheets included in thisannual report on Form 10-K. We expect to utilize these deferred tax assets to reduce consolidated income tax liabilities over a period not to exceed five years.However, we may not be able to fully utilize these deferred tax assets if future taxable income and related income tax liabilities are insufficient to allow theiruse. We may be required to record a larger valuation allowance against these deferred tax assets if we believe that we are unable to utilize them, which wouldhave an adverse material effect on our results of operations and financial position. If we are unable to execute our acquisition strategy successfully, our business may not continue to grow. We intend to continue to selectively acquire radio stations, FM translators, digital media entities and publishing businesses. With respect to theacquisition of radio stations, our acquisition strategy has been, and will continue to focus primarily on, the acquisition of stations in the top fifty (50)markets. However, we may not be able to identify and consummate future acquisitions successfully, and stations that we do acquire may not increase ourstation operating income or yield other anticipated benefits. Acquisitions in markets in which we already own stations may not increase our station operatingincome due to saturation of audience demand. Acquisitions in smaller markets may have less potential to increase operating revenues. With respect to ouracquisition strategy of digital and publishing businesses, we may not be able to identify and consummate the acquisition of future businesses successfully.Additionally, we may not be able to effectively integrate the operation of newly acquired businesses with our existing businesses, which could result inreduced operating income from our businesses. Our failure to execute our acquisition strategy successfully in the future could limit our ability to continue togrow 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 and adverse effect on ourbusiness and operating results. Acquisitions may have a substantial impact on our revenues, costs, cash flows, and financial position. During 2014 and 2013, we spent $18.7 million and$12.8 million, respectively, on acquisitions. With the 2014 acquisition of Eagle Publishing, we acquired several new businesses including a traditional bookpublishing business, a financial newsletter business and a wellness business, and while we anticipate that we will continue to effectively integrate thesebusinesses into our current operations, there can be no assurance of this. We expect to make additional acquisitions of radio stations, FM transmitters, digitalbusinesses and publishing businesses. Acquisitions involve risks and uncertainties, including difficulties in integrating acquired operations and in realizingexpected opportunities; diversions of management resources and loss of key employees; challenges with respect to operating new businesses; debt incurredin financing such acquisitions; and other unanticipated problems and liabilities. There can be no assurance that we will be able to successfully integrate theoperations or management of acquired radio stations and businesses and realize anticipated revenue synergies, or the operations or management of stationsand businesses that may be acquired in the future. Continued acquisitions will require us to manage a larger and likely more geographically diverse region of radio stations, digital portfolios andpublishing portfolios than historically has been the case. Our inability to integrate and manage newly acquired radio stations, digital businesses orpublishing entities successfully could have a material and adverse effect on our business and operating results. Some of our acquisition agreements contain contingent consideration, the value of which may impact future operating results. Some of our acquisition agreements include contingent earn-out consideration, the fair value of which is estimated as of the acquisition date based onthe present value of the expected contingent payments as determined using weighted probabilities of possible future payments. These fair value estimatescontain unobservable inputs and estimates that could materially differ from the actual future results. The fair value of the contingent earn out considerationcould increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of contingent earn-outs will be reflected in our results ofoperations in the period in which they are recognized, the amount of which may be material and cause volatility in our operating results. 24Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. If we are unable to implement our market 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 twoor more radio stations in a single market. However, there can be no assurance that this operating strategy will be successful. Furthermore, we cannot make anyassurance 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 newradio stations within the cluster. Furthermore, there can be no assurance that any of our stations will be able to maintain or increase its current listeningaudiences 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, jointarrangements with other stations in a market relating to programming, advertising sales and station operations. We believe that radio stations that elect totake advantage of these clustering opportunities may have lower operating costs and may be able to offer advertisers more attractive rates and services. Thefuture 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 haveradio station clusters, may be negatively impacted by competitors who are taking or may take advantage of these clustering opportunities by operatingmultiple radio stations within markets. We base capital allocation decisions primarily on our analysis of the predicted internal rate of return. If the estimates and assumptions we use incalculating the internal rate of return are inaccurate, our capital may be inefficiently allocated. If we fail to appropriately allocate our capital, our growthrate and financial results will be adversely affected. We continually seek opportunities for growth by increasing the strength and number of our broadcast signals, increasing the number of page views onour web platform and increasing the subscriber base of our magazines. In order to realize these growth opportunities, we must rely on continued technicalimprovements to expand our broadcasting, digital and publication footprint. When deciding which opportunities to pursue, we must predict the internal rateof return associated with each project. Our calculations are based on certain estimates and assumptions that may not be realized. Accordingly, the calculationof internal rate of return may not be reflective of our actual returns, and our capital may be inefficiently allocated. If we fail to appropriately allocate ourcapital, our growth rate and financial results will be adversely affected. 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, including Edward G. Atsinger III, our Chief ExecutiveOfficer, and Stuart W. Epperson, our Chairman of the Board. The loss of the services of such key individuals could have a material adverse effect upon us. Wehave entered into employment agreements with such key individuals. Mr. Epperson has radio interests unrelated to Salem’s operations that will continue toimpose 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 histime. Our success is highly dependent upon the retention of key employees throughout our organization. In addition, we are dependent upon our ability tocontinue to attract new employees with key skills to support continued business growth. We also employ or independently contract with several on-air personalities and hosts of syndicated radio programs with significant loyal audiences onboth a national level and in their respective local markets. Several of our on-air personalities have a presence that extends beyond our radio platforms intoother strategic areas. Although we have entered into long-term agreements with some of our executive officers, key on-air talent and program hosts to protectour 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. Ourcompetitors may choose to extend offers to any of these individuals on terms that we may be unable or unwilling to meet. In addition, any or all of our keyemployees 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 andcould limit our ability to generate revenues. 25Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. If we fail to maintain the continuance of strong relationships with our authors and other creative talent, as well as to develop relationships with newcreative talent, our business and financial performance could be materially and adversely affected. Our business, in particular the book publishing and financial publications, is highly dependent on maintaining strong relationships with the authors andother creative talent who produce the products and services sold to our customers. Any overall weakening of these relationships, or the failure to developsuccessful new relationships, could have a material adverse impact on our business and financial performance. Our syndicated programming is dependent upon maintenance of our transponder equipment, which is located at various customer sites. Delivery of our national programs is dependent upon transponder equipment that is located at various customer locations. The quality and durability ofthis equipment, as well as our ability to protect the equipment from damage, destruction or theft, directly impacts our ability to transmit programming. Lossesto this equipment and any business interruption may not be fully insurable. Our advertising revenues in certain markets are ratings-sensitive and subject to decline based on ratings agency projections. Nielson uses its own technology to collect data for its ratings service. The Portable People Meter TM (“PPM” ) is a small device that does not requireactive manipulation by the end user and is capable of automatically measuring radio, television, Internet, satellite radio and satellite television signals thatare encoded for the service by the broadcaster. The PPM offers a number of advantages over the traditional diary ratings collection system including ease ofuse, more reliable ratings data and shorter time periods between when advertising runs and when audience listening or viewing habits can be reported. Inmarkets where we subscribe to Nielson under the PPM, our ratings tend to fluctuate even when there are no significant programming or competitive changesin the market. PPM data can fluctuate when changes are made to the “panel” (a group of individuals holding PPM devices). This makes all stationssusceptible to inconsistencies in ratings that may or may not accurately reflect the actual number of listeners at any given time. If we cannot attract the anticipated listener, programmer and advertiser base for our newly-acquired radio stations, we may not recoup associatedoperating costs or achieve profitability for these radio stations. We frequently acquire selected assets of radio stations that previously broadcasted in formats other than our primary formats. We continue to programsome of these 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 radiostation’s format, the radio station typically generates operating losses. The magnitude and duration of these losses depends on a number of factors, includingthe 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 forthese radio stations. If we do not maintain or increase our block programming revenues, our business, financial condition and operating results may be materially andadversely affected. The financial success of each of our radio stations that feature Christian Teaching and Talk programming is significantly dependent upon our ability togenerate revenue from the sale of block programming time to national and local religious and educational organizations. Block programming accounted for41.2% of our net broadcast revenue for the year ended December 21, 2014 and 40.9% of our net broadcast revenue for the year ended December 31, 2013. Wecompete for this program revenue with a number of commercial and non-commercial radio stations. Due to the significant competition for this blockprogramming, we may not be able to maintain or increase our current block programming revenue, in which case, our business, financial condition and resultsof operations may be materially and adversely affected. 26Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. If we are unable to maintain or grow our advertising revenues, our business, financial condition and operating results may be materially and adverselyaffected. Our radio stations, websites and publications are to varying degrees dependent upon advertising for their respective 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 outlets including broadcast andcable television, newspapers, magazines, direct mail, online and billboard advertising. Due to this significant competition, we may not be able to maintain orincrease our current advertising revenue. Any sustained economic downturn could negatively impact our ability to generate revenues. If we are unable tomaintain and grow our advertising revenues, our business, financial condition and results of operations may be materially and adversely affected. After the economic recession of 2008 and 2009, we experienced a stabilization of advertising revenue. In 2012, we recorded record levels of politicaladvertising. There can be no assurance that our advertising revenue will not be volatile in the future or that such volatility will not have an adverse impact onour business, financial condition or results of operations. General economic conditions, including a prolonged weakness in the economy, may affect consumer purchases, which could adversely affect our wellnessproduct sales. Our wellness product operating results are dependent on a number of factors impacting consumer spending, including general economic and businessconditions; consumer confidence; wages and employment levels; the housing market; consumer debt levels; availability of consumer credit; credit andinterest rates; fuel and energy costs; energy shortages; taxes; general political conditions, both domestic and abroad; and the level of customer traffic withindepartment stores, malls and other shopping and selling environments. Consumer product purchases, including purchases of our wellness products, maydecline during recessionary periods. A prolonged downturn or an uncertain outlook in the economy may materially and adversely affect our wellness productbusiness, revenues and profits. Our business generates revenue from the sale of advertising, and the reduction in spending by or loss of advertisers could seriously harm our business. We derive a substantial part of our total revenues from the sale of advertising. For the years ended December 31, 2014, 2013 and 2012, 40.2%, 40.8%,and 41.3% of our total revenues, respectively, were generated from the sale of broadcast advertising. We are particularly dependent on revenue from our LosAngeles and Dallas markets which generated 14.3% and 24.0% , respectively of our total net broadcasting advertising revenue for the year ended December31, 2014, 15.2% and 25.5%, respectively, for the year ended December 31, 2013, and 16.2% and 23.6%, respectively, for the year ended December 31, 2012. Concentration of book publication sales may make it difficult for us to compete effectively in the publication market. The sale of printed book publications is concentrated in national, regional, and online bookstore chains. These bookstore chains account for a vastmajority of book publishing revenues. Due to this concentration of book publication sales, it may be difficult for us to compete effectively in the market,which could adversely affect our revenues and growth prospects. We face significant competition, which we expect will continue to intensify, and we may not be able to maintain or improve our competitive position ormarket share. We operate in a highly competitive broadcast and media business. We compete for advertisers and customers with other radio broadcasters, as well aswith other media sources including broadcast and cable television, newspapers and magazines, national and local digital services, outdoor advertising, directmail, online marketing and media companies, social media platforms, web-based blogs, and mobile telephony devices. We face intense competition from awide range of competitors, including online marketing and media companies, integrated social media platforms and other specialist and enthusiast websites. Our broadcast audience ratings and market shares are subject to change, and any change in a particular market could have a material adverse effect on therevenue of our stations located in that market. Salem Web Network competes for visitors and advertisers with other companies that deliver on-line audioprogramming and Christian and conservative Internet content as well as providers of general market Internet sites. Our book publishing business competes forreaders with other book publishers, including those targeted specifically at Christian and conservative audiences. Our print magazines compete for readersand advertisers with other print publications including those that follow the Christian music industry and those that address themes of interest to churchleadership and the Christian audience. Xulon Press™ competes for authors with other on-demand publishers including those focused exclusively onChristian book publishers. This competition could make it more difficult for us to provide value to our consumers, our advertisers and our content creators and result in increasedpricing pressure, reduced profit margins, increased sales and marketing expenses, decreased website traffic and failure to increase, or the loss of, market share,any of which would likely seriously harm our business, revenue, financial condition and results of operations. There can be no assurance that we will be ableto compete successfully against current or future competitors. 27Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Wellness products are a highly competitive industry. Our failure to compete effectively could adversely affect our market share, revenues and growthprospects. The U.S. nutritional supplements retail industry is large and highly fragmented among specialty retailers, supermarkets, drugstores, mass merchants,multi-level marketing organizations, on-line merchants, mail-order companies and a variety of other smaller participants. We believe that the market is highlysensitive to the introduction of new wellness products, which may rapidly capture a significant share of the market. In the U.S., we also compete for sales withheavily advertised national brands manufactured by large pharmaceutical and food companies, as well as other retailers. In addition, as some wellnessproducts become more mainstream, we experience increased price competition for those wellness products as more participants enter the market. We may notbe able to compete effectively and our attempts to do so may require us to reduce our prices, which may result in lower profit margins for our wellnessproducts. Failure to effectively compete could adversely affect our market share, revenues and growth prospects. If we are unable to continue to drive and increase visitors to our owned and operated websites and to our customer websites and convert these visitors intorepeat users and customers cost-effectively, our business, financial condition and results of operations could be adversely affected. We attract traffic to our owned and operated websites by offering content that is highly specific and that we believe to be relevant to our audiences. Howsuccessful we are in these efforts depends, in part, upon our continued ability to create and distribute high-quality, commercially valuable content in a cost-effective manner at scale that connects consumers with content that meets their specific interests and effectively enables them to share and interact with thecontent and supporting communities. We may not be able to create content in a cost-effective manner or that meets rapidly changing consumer demand in atimely manner, if at all. Any such failure to do so may adversely affect user and customer experiences and reduce traffic driven to our websites that couldadversely affect our business, revenue, financial condition and results of operations. Even if we succeed in driving traffic to our owned and operated websites and to our customer websites, neither we nor our advertisers and customers maybe able to monetize this traffic or otherwise retain consumers. Our failure to do so could result in decreases in customers and related advertising revenue,which could have a material adverse effect on our business, financial condition and results of operations. New technologies may increase competition with our broadcasting and printing operations. Our radio broadcasting business faces increasing competition from new technologies, such as broadband wireless, satellite radio and audio broadcastingby cable television systems, as well as new customer products, such as portable digital audio players and smart mobile phones. These new technologies andalternative media platforms compete with our radio stations for audience share and advertising revenues. The FCC also has approved new technologies foruse in the radio broadcasting industry, including the terrestrial delivery of digital audio broadcasting, which significantly enhances the sound quality ofradio broadcasts. We are unable to predict the effect that such technologies and related services and products will have on our broadcasting operations, butthe capital expenditures necessary to implement such technologies could be substantial. We cannot assure that we will continue to have the resources toacquire new technologies or to introduce new services to compete with other new technologies or services, and other companies employing such newtechnologies or services could increase competition with our businesses. Our printing business also faces increasing competition from new technologies, such as the Internet, eBook reader devices, and tablets. These newtechnologies and alternative media platforms compete with our printed books and magazines for audience share and advertising revenues. We must continueto expand our publishing businesses from traditional publishers to new digital technologies, We may make significant investments in new products andservices that may not be profitable, or whose profitability may be significantly lower than we have experienced. Success and continued growth dependsgreatly on developing new products and the means to deliver them in an environment of rapid technological change. Attracting new authors and retainingour existing business relationships, are critical to our success. 28Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We must respond to changes in consumer behavior as a result of new technologies in order to remain competitive. Technology, particularly digital technology used in the entertainment industry, continues to evolve rapidly, leading to alternative methods for thedelivery and storage of digital content. These technological advancements have driven changes in consumer behavior and have empowered consumers toseek more control over when, where and how they consume digital content. Content owners are increasingly delivering their content directly to consumersover the Internet, often without charge, and innovations in distribution platforms have enabled consumers to view such Internet-delivered content ontelevisions and portable devices. There is a risk that our responses to these changes and strategies to remain competitive, including distribution of ourcontent on a “pay” basis, may not be adopted by consumers. In publishing, the trend toward digital media may drive down the price consumers are willing tospend on our products disproportionately to the costs associated with generating literary content. Our failure to protect and exploit the value of our content,while responding to and developing new technology and business models to take advantage of advancements in technology and the latest consumerpreferences, could have a material adverse effect on our business, financial condition and results of operations. Our financial results would suffer if we fail to successfully meet market needs with our publishing business. The sale of books represents a substantial part of revenues for Regnery Publishing. We are subject to the risk that we will not successfully develop andexecute promotional strategies for new books that respond to customer trends, including trends related to demand for eBooks, or other technological changesthat will not meet market needs, which would have a material adverse effect on the financial results of Regnery Publishing and Salem as a whole. Unfavorable publicity or consumer perception of our wellness products, the ingredients they contain and any similar products distributed by othercompanies could cause fluctuations in our operating results and could have a material adverse effect on our reputation, the demand for our wellnessproducts and our ability to generate revenue. We are highly dependent upon consumer perception of the safety and quality of our wellness products and the ingredients they contain. Consumerperception of our wellness products and the ingredients they contain, as well as consumer perception of similar wellness products, can be significantlyinfluenced by scientific research or findings, national media attention and other publicity about wellness product use. A wellness product may be receivedfavorably, resulting in high sales associated with that product that may not be sustainable as consumer preferences change. Future scientific research orpublicity could be unfavorable to the wellness product industry or any of our particular wellness products or the ingredients they contain and may not beconsistent with earlier favorable research or publicity. A future research report or publicity that is perceived by our wellness product consumers as lessfavorable or that questions earlier research or publicity could have a material adverse effect on our ability to generate wellness product revenues. Unfavorablemarket perception of our wellness products could have a material adverse effect on our reputation, the demand for our wellness products, and our ability togenerate wellness product revenues. Our failure to appropriately respond to changing consumer preferences and demand for new wellness products could significantly harm our wellnessproducts customer relationships and wellness product sales. Wellness products are particularly subject to changing consumer trends and preferences. Our success depends in part on our ability to anticipate andrespond to these changes, and we may not be able to respond in a timely or commercially appropriate manner to these changes. If we are unable to do so, ourwellness product customer relationships and wellness product sales could be harmed significantly. Furthermore, the wellness products industry is characterized by rapid and frequent changes in demand for products and new product introductions. Ourfailure to accurately predict these trends could negatively impact consumer opinion of us as a source for the latest wellness products. This could harm ourwellness product customer relationships and cause losses to our market share. The success of our new wellness product offerings depends upon a number offactors, including our ability to: accurately anticipate customer needs; innovate and develop new wellness products; successfully commercialize newwellness products in a timely manner; price our wellness products competitively; manufacture and deliver our wellness products in sufficient volumes and ina timely manner; and differentiate our wellness product offerings from those of our competitors. If we do not introduce new wellness products or make enhancements to meet the changing needs of our customers in a timely manner, some of ourwellness products could become obsolete, which could have a material adverse effect on our wellness product revenues and wellness product operatingresults. The interruption or failure of our information technology and communications systems, or those of third parties that we rely upon, may materially andadversely affect our business, financial condition, and results of operations. The availability of our products and services depends on the continuing operation of our information technology and communications systems. Anydamage to or failure of our systems, or those of third parties that we rely upon (co-location providers for data servers, storage devices, and network access)could result in interruptions in our service, which could reduce our revenue and profits. Our systems are also vulnerable to damage or interruption fromearthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses or other attempts to harm our systems. 29Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Furthermore, third-party service providers may experience an interruption in operations or cease operations for any reason. If we are unable to agree onsatisfactory terms for continued data center hosting relationships, we would be forced to enter into a relationship with other service providers or assumehosting responsibilities ourselves. If we are forced to switch hosting facilities, we may not be successful in finding an alternative service provider onacceptable terms or in hosting the computer servers ourselves. We may also be limited in our remedies against these providers in the event of a failure ofservice. We also rely on third-party providers for components of our technology platform, such as hardware and software providers. A failure or limitation ofservice or available capacity by any of these third-party providers may materially and adversely affect our business, financial condition and results ofoperations. We may be unable to increase or maintain our digital advertising revenues, which could have a material adverse effect on our business, financialcondition and results of operations. We generate advertising revenue from the sale of digital display advertisements on our websites. Our ability to increase or maintain this advertisingrevenue is largely dependent upon the number of users actively visiting our websites. We also must increase user engagement with our advertisers in order toincrease our advertising revenues. Additionally, digital advertising techniques are evolving, and if our technology and advertisement serving techniques donot evolve to meet the needs of advertisers, our advertising revenue could decline. Changes in our business model, advertising inventory or initiatives couldalso cause a decrease in our advertising revenue. Because digital media is a concentrated growth area for us, any decrease in revenues in these areas couldaffect our business, financial condition and results of operations. Digital advertisements are reportedly becoming a means to distribute viruses over the Internet. If this practice becomes prevalent, it could result inconsumers becoming less inclined to click through digital advertisements, which could adversely affect the demand for digital advertising. Additionally, wedo not have long-term agreements with most of our digital advertisers. Any termination, change or decrease in our advertising relationships could have amaterial adverse effect on our revenues and profitability. If we do not maintain or increase our advertising revenues, our business, results of operations andfinancial condition could be materially and adversely affected. If Internet search engines' methodologies are modified, traffic to our websites and corresponding consumer origination volumes could decline. We depend in part on various Internet search engines, including Google®, Bing®, and Yahoo!®, to direct a significant amount of traffic to our websites. Our ability to maintain the number of visitors directed to our websites through which we distribute our content by search engines is not entirely within ourcontrol. Changes in the methodologies used by search engines to display results could cause our websites to receive less favorable placements, which couldreduce the number of unique visitors who link to our websites. Any reduction in the number of users directed to our websites could negatively affect ourability to earn revenue. If traffic on our websites declines, we may need to employ more costly resources to replace lost traffic, and such increased expensecould adversely affect our business, financial condition and results of operations. Wireless devices and mobile phones are used to access the Internet, and our online marketing services may not be as effective when accessed through thesedevices, which could cause harm to our business, financial condition and results of operations. The number of people who access the Internet through devices other than personal computers has increased substantially in the last few years. Ourwebsites were originally designed for persons accessing the Internet on a desktop or laptop computer. The smaller screens, lower resolution graphics and lessconvenient typing capabilities of wireless devices and mobile phones may make it more difficult for visitors to respond to our offerings. In addition, the costof mobile advertising is relatively high and may not be cost-effective for our services. We must also ensure that our licensing arrangements with third-partycontent providers allow us to make this content available on these devices. If we cannot effectively make our content, products and services available onthese devices, fewer consumers may access and use our content, products and services. In addition, if our services continue to be less effective or lesseconomically attractive for customers seeking to engage in advertising through these devices and this segment of Internet traffic grows at the expense oftraditional computer Internet access, we will experience difficulty attracting website visitors and attracting and retaining customers and our business,financial condition and results of operations will be harmed. 30Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As a creator and a distributor of multi-media content, we face potential liability and expenses for legal claims based on the nature and content of thematerials that we create and/or distribute, or that are accessible via our owned and operated websites and our network of customer websites. If we arerequired to pay damages or expenses in connection with these legal claims, our business, financial condition and results of operations may be harmed. We rely on the work product of various content creators to produce original programs, articles and content for our radio programs, websites and printpublications. We face potential liability based on a variety of theories, including defamation, negligence, unlawful practice of a licensed profession,copyright or trademark infringement or other legal theories based on the nature, creation or distribution of this information, and under various laws, includingthe Lanham Act and the Copyright Act. We may also be exposed to similar liability in connection with content that we do not create but that is posted to ourowned and operated websites and to our network of customer websites by users and other third parties through forums, comments, personas and other socialmedia features. In addition, it is also possible that visitors to our owned and operated websites and to our network of customer websites could make claimsagainst us for losses incurred in reliance upon information provided on our owned and operated websites or our network of customer websites. These claims,whether brought in the United States or abroad, could divert management time and attention away from our business and result in significant costs toinvestigate and defend, regardless of the merit of these claims. If we become subject to these or similar types of claims and are not successful in our defense,we may be forced to pay substantial damages. While we run our content through a rigorous quality control process, including an automated plagiarismprogram, there is no guarantee that we will avoid future liability and potential expenses for legal claims based on the content of the materials that we create ordistribute. Should the content distributed through our owned and operated websites and our network of customer websites violate the intellectual propertyrights of others or otherwise give rise to claims against us, we could be subject to substantial liability, which could have a negative impact on our business,financial condition and results of operations. We could face liability for the information we publish in our financial newsletters, including information based on data we obtain from other parties. We may be subject to claims for securities law violations, defamation (including libel and slander), negligence, or other claims relating to theinformation we publish in our financial newsletters. While we strive to minimize such risks, it is possible that we could be subject to potential enforcementactions by the Securities and Exchange Commission or civil liability for securities fraud to subscribers who invest on the basis of information provided in ourfinancial newsletters and related materials or by the independent financial commentators who provide newsletter content. For example, subscribers may takelegal action against us if they rely on published information, or market analysis that contains an error or on market strategies that do not perform as described,a company may claim that we have made a defamatory statement about it, its employees or its financial position. The authors of our newsletters also rely on avariety of outside parties as sources for some of the information we use in our published data. These sources include securities exchanges, fund companies,hedge funds, transfer agents, and other data providers. Accordingly, in addition to possible exposure for publishing incorrect information that results directlyfrom our own errors, we could face liability based on inaccurate data provided to us by others or based upon the actions of the authors. Defending claimsbased on the information we publish in our financial newsletters could be expensive and time-consuming and could adversely impact our business, operatingresults, and financial condition. Damage to our reputation could damage our businesses. Maintaining a positive reputation is critical to our ability to attract and maintain relationships with advertisers and our listeners. Damage to ourreputation could therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, amongothers, employee misconduct, litigation or regulatory action, failure to deliver minimum standards of service and quality, compliance failures and unethicalbehavior. Negative publicity regarding us, whether or not true, may also result in harm to our prospects. We rely on third parties to provide software and related services necessary for the operation of our business. We incorporate and include third-party software into and with our applications and service offerings and expect to continue to do so. The operation ofour applications and service offerings could be impaired if errors occur in the third-party software that we use. It may be more difficult for us to correct anydefects in third-party software because the development and maintenance of the software is not within our control. Accordingly, our business could beadversely affected in the event of any errors in this software. There can be no assurance that any third-party licensors will continue to make their softwareavailable to us on acceptable terms, to invest the appropriate levels of resources in their software to maintain and enhance its capabilities, or to remain inbusiness. Any impairment in our relationship with these third-party licensors could harm our ability to maintain and expand the reach of our service, increaselistener hours and sell advertising, each of which could harm our business, financial conditions and results of operations. 31Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We may have difficulty scaling and adapting our existing technology and network infrastructure to accommodate increased traffic and technologyadvances or changing business requirements, which could lead to the loss of current and potential customers and advertisers, and cause us to incurexpenses to make architectural changes. To be successful, our network infrastructure has to perform well and be reliable. The greater the user traffic and the greater the complexity of our productsand services, the more computing power we will need. In the future, we may spend substantial amounts to purchase or lease data centers and equipment,upgrade our technology and network infrastructure to handle increased traffic on our owned and operated websites and roll out new products and services.This expansion could be expensive and complex and could result in inefficiencies or operational failures. If we do not implement this expansionsuccessfully, or if we experience inefficiencies and operational failures during its implementation, the quality of our products and services and our users'experience could decline. This could damage our reputation and lead us to lose current and potential customers and advertisers. The costs associated withthese adjustments to our architecture could harm our operating results. Cost increases, loss of traffic or failure to accommodate new technologies or changingbusiness requirements could harm our business, financial condition and results of operations. Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events and to interruption by man-made problems such ascomputer viruses or terrorism. Our systems and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terroristattacks, acts of war, human errors, break-ins or similar events. A significant natural disaster, such as an earthquake, fire or flood, could have a material adverseimpact on our business, financial condition and results of operations. Our insurance coverage may be insufficient to compensate us for losses that may occur.Our principal executive offices are located in Southern California, a region known for seismic activity. In addition, acts of terrorism could also causedisruptions in our business or the economy as a whole. We rely heavily on servers, computers, communications systems and the Internet to conduct ourbusiness and provide high quality service to our listeners. Our servers may be vulnerable to cyber-security risks such as computer viruses and breakin’s.Disruptions in these services could negatively impact our ability to run our business, result in the loss of existing or potential listeners, the loss of existing orpotential advertisers and increase maintenance costs, each of which could materially and adversely affect our business, financial condition and results ofoperations. We have not experienced significant disruptions in running our business due to catastrophic events, earthquakes, computer viruses or terrorism. Cyber security and privacy breaches may hurt the company’s business, damage its reputation, increase its costs, and cause losses. Our information technology systems could be subject to invasion, cyber-attack, or data privacy breaches by employees, others with authorized access,and unauthorized persons. Such attacks could result in disruption to our operations, loss or disclosure of, or damage to, our or any of our customer’s orsupplier’s data or confidential information. Security measures may also be breached due to employee error, malfeasance, or otherwise. Additionally, outsideparties may attempt to fraudulently induce employees, customers or suppliers to disclose sensitive information in order to gain access to our data andinformation technology systems. Any such breach could result in significant legal and financial exposure, damage to our reputation, loss of competitiveadvantage, and a loss of confidence in the security of our information technology systems that could potentially have an impact on our operations. Becausethe techniques used to obtain unauthorized access, disable or degrade, or sabotage our information technology systems change frequently and often are notrecognized until launched, we may be unable to anticipate these techniques or to implement adequate preventive measures. Third parties that provide services for our operations could also be a source of security risk in the event of a failure of their own security systems andinfrastructure. In addition, sophisticated hardware and operating system software and applications that are procured from third parties may contain defects indesign or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of our information technology systems. Although we have developed systems and processes designed to protect information and prevent data loss and other security breaches, including systemsand processes designed to reduce the impact of a security breach, such measures cannot provide absolute security. Such breaches, whether successful orunsuccessful, could result in the incurrence of costs related to rebuilding internal systems, defending against litigation, responding to regulatory inquiries oractions, paying damages, or taking other remedial steps. 32Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Global privacy legislation, enforcement, and policy activity are rapidly expanding and creating a complex compliance environment. Our failure tocomply with federal, state, or international privacy related or data protection laws and regulations could result in proceedings against us by governmentalentities or others. Although we have insurance coverage for protecting against cyber security risks, it may not be sufficient to cover all possible claims andlosses that could have a material adverse effect on our business. We have not experienced significant disruptions in running our business due to invasion, cyber-attack, or data privacy breaches. Our business may be adversely affected by malicious applications that interfere with, or exploit security flaws in, our Internet websites and online services. Our business may be adversely affected by malicious applications that make changes to our users’ computers and interfere with their experience with ourwebsites. These applications may attempt to change our users’ Internet experience, including hijacking queries to our website, altering or replacing searchresults or otherwise interfering with our ability to connect with our users. The interference often occurs without disclosure or consent, resulting in a negativeexperience that users may associate with us. These applications may be difficult or impossible to uninstall or disable, may reinstall themselves and maycircumvent other applications’ efforts to block or remove them. The ability to reach users and provide them with a superior experience is critical to oursuccess. If our efforts to combat these malicious applications are unsuccessful, our reputation may be harmed and user traffic could decline, which woulddamage our business. We have not experienced significant interference with our websites or digital content. Privacy protection is increasingly demanding, and we may be exposed to risks and costs associated with security breaches, data loss, credit card fraud andidentity theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks. The protection of customer, employee, vendor, and other business data is critical to us. Federal, state, provincial and international laws and regulationsgovern the collection, retention, sharing and security of data that we receive from and about our employees, customers, vendors and franchisees. Theregulatory environment surrounding information security and privacy has been increasingly demanding in recent years, and may see the imposition of newand additional requirements by states and the federal government as well as foreign jurisdictions in which we do business. Compliance with theserequirements may result in cost increases due to necessary systems changes and the development of new processes to meet these requirements. In addition,customers have a high expectation that we will adequately protect their personal information. If we or our service provider fail to comply with these laws andregulations or experience a significant breach of customer, employee, vendor, franchisee or other company data, our reputation could be damaged and resultin an increase in service charges, suspension of service, lost sales, fines or lawsuits. The use of credit payment systems makes us more susceptible to a risk of loss in connection with these issues, particularly with respect to an externalsecurity breach of customer information that we or third parties (including those with whom we have strategic alliances) under arrangements with us control.A significant portion of our sales require the collection of certain customer data, such as credit card information. In order for our sales channel to function, weand other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securelyover public networks. In the event of a security breach, theft, leakage, accidental release or other illegal activity with respect to employee, customer, orvendor, with whom we have strategic alliances or other company data, we could become subject to various claims, including those arising out of thefts andfraudulent transactions, and may also result in the suspension of credit card services. This could cause consumers to lose confidence in our security measures,harm our reputation as well as divert management attention and expose us to potentially unreserved claims and litigation. Any loss in connection with thesetypes of claims could be substantial. In addition, if our electronic payment systems are damaged or cease to function properly, we may have to makesignificant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, we are reliant on these systems,not only to protect the security of the information stored, but also to appropriately track and record data. Any failures or inadequacies in these systems couldexpose us to significant unreserved losses, which could materially and adversely affect our business, financial condition and results of operations. Our brandreputation would likely be damaged as well. 33Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We are controlled by a few controlling stockholders who exercise control over most matters submitted to a shareholder vote and may have interests thatdiffer from other security holders. They may, therefore, take actions that are not in the interests of other security holders. As of December 31, 2014, Edward G. Atsinger III (Chief Executive Officer), Stuart W. Epperson (Chairman), Nancy A. Epperson (wife of Chairman) andEdward C. Atsinger (son of Chief Executive Officer) controlled approximately 84.5% in aggregate of the voting power of our capital stock. Thus, these fourstockholders have the ability to control fundamental corporate transactions requiring stockholder approval, including but not limited to, the election of all ofour directors, approval of merger transactions involving Salem and the sale of all or substantially all of Salem’s assets. The interests of any of thesecontrolling stockholders may differ from the interests of other stockholders in a material manner. The controlling stockholders hold all of the Class BCommon Stock, which have ten votes per share. Circumstances may occur in which the interests of the controlling stockholders could be in conflict with theinterests of other security holders and the controlling stockholders would have the ability to cause us to take actions in their interest. Our broadcasts often rely on content owned by third parties; obtaining such content could be costly and require us to enter into disadvantageous license orroyalty arrangements. We rely heavily upon content and software owned by third parties in order to provide programming for our broadcasts. The cost of obtaining allnecessary licenses and permission to use this third-party content and software continues to increase. Although we attempt to avoid infringing knownproprietary rights of third parties in our broadcasting efforts, we expect that we may be subject to legal proceedings and claims for alleged infringement fromtime to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could resultin 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 radiobroadcasts containing content owned by third parties. We also rely on software that we license from third parties, including software that is integrated withinternally developed software and used to perform key broadcasting and accounting functions. We could lose the right to use this software or it could bemade available to us only on commercially unreasonable terms. Although we believe that alternative software is available from other third-party suppliers orinternal 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 ordelays in broadcasting or accounting for programming by us until equivalent software can be developed internally or identified, licensed and integrated,which would harm our business. Poor perception of our brand, business or industry could harm our reputation and materially and adversely affect our business, financial condition andresults of operations. Our business is dependent upon attracting a large audience to our radio stations, websites and publications. Our brand, business and reputation arevulnerable to poor perception. Any damage to our reputation could harm our ability to attract and retain advertisers, customers and content creators, whichcould materially and adversely affect our financial condition and results of operations. If we are unable to protect our domain names, our reputation and brands could be adversely affected. We currently hold various domain name registrations relating to our brands. The registration and maintenance of domain names generally are regulatedby governmental agencies and their designees. Governing bodies may establish additional top-level domains, appoint additional domain name registrars ormodify the requirements for holding domain names. As a result, we may be unable to register or maintain relevant domain names. We may be unable, withoutsignificant cost or at all, to prevent third parties from registering domain names that are similar to, infringe upon or otherwise decrease the value of, ourtrademarks and other proprietary rights. Failure to protect our domain names could adversely affect our reputation and brands, and make it more difficult forusers to find our websites and our services. The efficacy of wellness products is supported by limited conclusive clinical studies, which could result in less market acceptance of these wellnessproducts and lower revenues or lower growth rates in revenues. Our wellness products are made from various ingredients including vitamins, minerals, amino acids, herbs, botanicals, fruits, berries and other substancesfor which there is a long history of human consumption. However, there is little long-term experience with human consumption of certain product ingredientsor combinations of ingredients in concentrated form. Although we believe all of our wellness products fall within the generally known safe limits for dailydoses of each ingredient contained within them, nutrition science is imperfect. Moreover, some people have peculiar sensitivities or reactions to nutrientscommonly found in foods, and may have similar sensitivities or reactions to nutrients contained in our wellness products. Furthermore, nutrition science issubject to change based on new research. New scientific evidence may disprove the efficacy of our wellness products or prove our wellness products to haveeffects not previously known. We could be adversely affected by studies that may assert that our wellness products are ineffective or harmful to consumers, orif adverse effects are associated with a competitor’s similar products. 34Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We are currently dependent on a limited number of independent suppliers and manufacturers of our wellness products, which may affect our ability todeliver our wellness products in a timely manner. If we are not able to ensure timely product deliveries, potential distributors and customers may not orderour wellness products, and our revenues may decrease. We rely entirely on a limited number of third parties to supply and manufacture our wellness products. These third parties are subject to FDA regulationand must operate in accordance with strict manufacturing requirements referred to as Current Good Manufacturing Practices(“CGMP’s”) for dietarysupplements. Our wellness products are manufactured on a purchase order basis only and manufacturers can terminate their relationships with us at any time.These third party manufacturers may be unable to satisfy our supply requirements, manufacture our wellness products on a timely basis and in compliancewith CGMP’s, fill and ship our orders promptly, provide services at competitive costs or offer reliable products and services. The failure to meet any of thesecritical needs and legal requirements would delay or reduce wellness product shipments and adversely affect our revenues, as well as jeopardize ourrelationships with our customers. In the event any of our third party manufacturers were to become unable or unwilling to continue to provide us withproducts in required volumes and at suitable quality levels, we would be required to identify and obtain acceptable replacement manufacturing sources.There is no assurance that we would be able to obtain alternative manufacturing sources on a timely basis. Additionally, all of our third party manufacturerssource the raw materials for our products, and if we were to use alternative manufacturers, we may not be able to duplicate the exact taste and consistencyprofile of the product from the original manufacturer. An extended interruption in the supply of our products would result in decreased product sales and ourrevenues would likely decline. We believe that we can meet our current supply and manufacturing requirements with our current suppliers and manufacturersor with available substitute suppliers and manufacturers. Historically, we have not experienced any delays or disruptions to our wellness product businesscaused by difficulties in obtaining supplies. We are dependent on our third party manufacturers to supply our wellness products in the compositions we require, and we do not independently analyzeour wellness products. Any errors in our wellness product manufacturing could result in wellness product recalls, contamination, significant legalexposure, reduced revenues and the loss of distributors. While we require that our manufacturers verify the accuracy of the contents of our wellness products, we do not have the expertise or personnel tomonitor the production of products by these third parties. We rely exclusively, without independent verification, on certificates of analysis regardingwellness product content provided by our third party suppliers and limited safety testing they perform. We cannot be assured that all of the third partiesinvolved in the manufacturing of our products are complying with government health and safety standards, and even if our wellness products meet thesestandards, they could otherwise become contaminated. Errors in the manufacture of our wellness products and the occurrence of contamination could result inproduct recalls, significant legal exposure, adverse publicity, decreased revenues and loss of distributors and endorsers. We also cannot be assured that theseoutside manufacturers will continue to supply wellness products to us reliably in the compositions we require. Any of these failures or occurrences couldnegatively affect our wellness products business and financial performance. The sale of our wellness products involves product liability and related risks that could expose us to significant insurance and loss expenses. We face an inherent risk of exposure to wellness product liability claims if the use of our wellness products results in, or is believed to have resulted in,illness or injury. Most of our wellness products contain combinations of ingredients, and there is little long-term experience with the effect of thesecombinations. In addition, interactions of these wellness products with other products, prescription medicines and over-the-counter drugs have not been fullyexplored or understood and may have unintended consequences. While our third party manufacturers perform tests in connection with the formulations of ourwellness products, these tests are not designed to evaluate the inherent safety of our wellness products. Although we maintain product liability insurance, it may not be sufficient to cover all product liability claims and such claims that may arise could havea material adverse effect on our business and financial condition. We carry product liability insurance coverage that requires us to pay deductibles/retentionswith primary and excess liability coverage above the deductible/retention amount. Because of our deductibles and self-insured retention amounts, we havesignificant exposure to fluctuations in the number and severity of claims. The successful assertion or settlement of an uninsured claim, a significant numberof insured claims or a claim exceeding the limits of our insurance coverage would harm us by adding further costs to our business and by diverting theattention of our senior management from the operation of our business. Even if we successfully defend a liability claim, the uninsured litigation costs andadverse publicity may be harmful to our business. 35Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Any product liability claim may increase our costs and adversely affect our revenues and operating income. Moreover, liability claims arising from aserious adverse event may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequateinsurance coverage in the future. In addition, our product liability insurance may fail to cover future product liability claims, which, if adversely determined,could subject us to substantial monetary damages. If the wellness products we sell do not have the healthful effects intended, our wellness products business may suffer. In general, our wellness products sold consist of nutritional supplements, which are classified in the United States as “dietary supplements” which donot currently require approval from the FDA or other regulatory agencies prior to sale. Although many of the ingredients in such wellness products arevitamins, minerals, herbs and other substances for which there is a long history of human consumption, they contain innovative ingredients or combinationsof ingredients. Although we believe all of such wellness products and the combinations of ingredients in them are safe when taken as directed, there is littlelong-term experience with human or other animal consumption of certain of these ingredients or combinations thereof in concentrated form. The wellnessproducts could have certain side effects if not taken as directed or if taken by a consumer that has certain medical conditions. Furthermore, there can be noassurance that any of the wellness products, even when used as directed, will have the effects intended or will not have harmful side effects. A slower growth rate in the nutritional supplement industry could lessen our wellness product sales and make it more difficult for us to achieve growth andbecome profitable. The wellness product industry has been growing at a strong pace over the past ten years, despite continued negative impacts of popular supplements likeEchinacea and ephedra on the supplement market. However, any reported medical concerns with respect to ingredients commonly used in wellness productscould negatively impact the demand for our products. If we are unable to maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy andcompleteness of our financial reports and the trading price of our Class A common stock may be negatively affected. We are subject to Section 404 of the Sarbanes-Oxley Act (SOX), which requires us to maintain internal control over financial reporting and to report anymaterial weaknesses in such internal controls. We have consumed and will continue to consume management resources and incur expenses for SOXcompliance on an ongoing basis. If we identify material weaknesses in our internal control over financial reporting, or if we are unable to comply with therequirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, investors may lose confidence in theaccuracy and completeness of our financial reports and the trading price of our Class A common stock could be negatively affected. Additionally, we couldbecome subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission (“SEC”), or otherregulatory authorities, which could require additional financial and management resources. The requirements of being a public company may strain our resources and divert management's attention. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the listing requirements of the NASDAQ Global SelectMarket, and other applicable securities rules and regulations. Compliance with these rules and regulations results in a higher level of legal and financialcompliance costs. In addition, complying with public disclosure rules makes our business more visible, which we believe may result in threatened or actual litigation,including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims donot result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of ourmanagement and harm our business and operating results. 36Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. RISKS ASSOCIATED WITH REGULATIONS The restrictions on ownership of multiple radio stations in each market may prevent us from implementing our broadcasting market cluster strategy. We seek to acquire additional radio stations in markets in which we already have existing stations. Our ability to acquire, operate and integrate any suchfuture acquisitions as part of a cluster is limited by antitrust laws, the Communications Act, FCC regulations and other applicable laws andregulations. Changes to any of these laws or regulations may affect our ability to acquire additional stations in radio markets where we already own one (1) ormore radio station(s). In 1996, Congress passed legislation that requires the FCC to periodically conduct reviews of its regulations, including those whichgovern the maximum number of radio stations an entity may own or have joint arrangements with relating to programming, advertising sales and stationoperations (the “Ownership Limits”). The FCC has adopted radio multiple ownership rules that depend upon the total number of radio stations located in themarket in determining the applicable Ownership Limits. In 2003, the FCC modified its definition of the term “market” and its method of determining thenumber of radio stations located in a “market.” Specifically, in larger markets, the FCC replaced its “signal contour method” of defining a market anddetermining the number of radio stations located in the market with the use of “geographic markets” delineated by Nielson, which is a commercial ratingsservice, as reported in the BIA database, as issued by BIA/Kelsey, a research and advisory company focused on the local advertising marketplace. For smallerradio markets for which Nielson has not delineated a geographic market, the “signal contour method” continues to be the method of defining the market anddetermining the number of radio stations in the market. The methods the FCC uses to define markets affect the number of radio stations an entity may own orhave joint arrangements with relating to programming, advertising sales and station operations in areas adjacent to a delineated Nielson market. In 2010, the FCC opened a new phase of rulemaking concerning its broadcast ownership rules. The FCC sought public comments on the existing rules,including arguments and factual data on their impact on competition, localism, and diversity and held public meetings around the country on the issue ofmedia ownership rules. The FCC 2010 quadrennial review of broadcast ownership rules is ongoing and has been consolidated into the FCC’s 2014quadrennial review of broadcast ownership rules, which commenced in Spring of 2014. The local radio ownership rule, the radio/television cross-ownershiprule and newspaper/broadcast cross-ownership rule are among the broadcast ownership rules being considered in the 2010 and 2014 quadrennial reviews. TheFCC has instructed its Media Bureau to complete the combined 2010 and 2014 reviews by June 30, 2016. We cannot predict the impact of possible modifications to the FCC’s local radio multiple ownership rules on our business operations. Likewise, wecannot predict whether there will be a change in the antitrust laws, Communications Act or other laws governing the ownership or operation of radio stations,or whether the FCC, DOJ or FTC will modify their regulations and policies governing or affecting the acquisition of additional radio stations in a market. Inaddition, we cannot predict whether a private party will challenge acquisitions we propose in the future. These events could adversely affect our ability toimplement 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 intocertain agreements. The Communications Act and FCC rules and policies require prior FCC approval for transfers of control of, and assignments of, FCC broadcast licenses.The FTC and the DOJ evaluate transactions to determine whether those transactions should be challenged under federal antitrust laws. As we have gained apresence in a greater number of markets and percentage of the top 50 markets, our future proposed transactions may be subject to more frequent andaggressive review by the FTC and/or the DOJ due to market concentration concerns. This increased level of review may be accentuated in instances where wepropose to engage in a transaction with parties who themselves have multiple stations in the relevant market. The FCC might not approve a proposed radiostation acquisition or disposition when the DOJ has expressed market concentration concerns with respect to the buy or sell side of a given transaction, evenif 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 willnot seek to prohibit or require the restructuring of our future acquisitions or dispositions on these or other bases. If a complaint was filed against us or other FCC licensees involved in a transaction with us, or an objection to the transaction itself, the FCC could delaythe 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. 37Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As noted in the immediately preceding risk factor, the FCC’s local radio multiple ownership rules limit the maximum number of stations we may own oroperate in a market. This may limit our ability to make future radio station acquisitions in certain markets. Additionally, this may limit our ability, in certainmarkets, to enter into agreements whereby we provide programming to or sell advertising on radio stations that we do not own. It could also limit our abilityto sell stations to other entities that already own stations in some markets. We may be adversely affected by statutes dealing with indecency. The Broadcast Decency Enforcement Act of 2005 enhances the FCC’s enforcement of its rules concerning the broadcast of obscene, indecent, or profanematerial became law in 2006. This legislation increased the FCC’s authority in this area to impose substantially higher monetary forfeiture penalties, up to$325,000 per violation and a total of $3,000,000 for any one (1) incident. While we do not anticipate these increased penalties to impact us as significantlyas some of our competitors given the nature of our programming, we could face increased costs in the form of fines as a result of this legislation. We may be subject to fines and other penalties related to violations of FCC indecency rules and other FCC rules and policies, the enforcement of whichhas increased in recent years, and complaints related to such violations may delay our renewal applications with the FCC. We provide live news reporting that is controlled by our on-air news talent. Although our on-air talent have been professional and careful in what theysay, there is always the possibility that information may be reported that is inaccurate or even in violation of certain indecency rules promulgated by theFCC. If we fail to maintain our broadcast 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 broadcast licenses, generally of eight years’ duration. As each license expires, weapply 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 todenial by the FCC. In evaluating a broadcast license renewal application, the FCC must grant the renewal if: (1) the station has served the public interest,convenience and necessity; (2) there have been no serious violations of the Communications Act or the FCC’s rules; and (3) there have been no otherviolations which, taken together, constitute a pattern of abuse. If, however, the station fails to meet these standards, the FCC may deny the application, afternotice and an opportunity for a hearing, or grant the application on terms and conditions that are appropriate, including renewal for less than the maximumterm otherwise allowed. The failure to renew any of our licenses would prevent us from operating the affected station and generating revenue from it. If theFCC 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. Proposed legislation requires radio broadcasters to pay higher royalties to record labels and recording artists. We must maintain music programming royalty arrangements with, and pay license fees to, Broadcast Music, Inc. (“BMI”), American Society ofComposers, Authors and Publishers (“ASCAP”), and SESAC, Inc. These organizations negotiate with copyright users, collect royalties and distribute them tosongwriters and music publishers. Currently, we pay royalties to song composers and publishers through BMI, ASCAP and SESAC. On December 18, 2007, legislation was introduced to Congress under the Performance Rights Act that would require terrestrial radio broadcasters to paya royalty to record labels and performing artists for use of their recorded songs. The proposed legislation would add an additional layer of royalties to be paiddirectly to the record labels and artists. The bill was reintroduced on February 4, 2009 and it appears that a similar bill may again be reintroduced in 2015. Asof February 13, 2015, none of these bills have been passed. It is currently unknown what proposed legislation, if any, will become law, and what significance this royalty would have on our results from operations,cash flows or financial position. Changes in regulations or user concerns regarding privacy and protection of user data, or any failure to comply with such laws, could diminish the valueof our services and cause us to lose customers and revenue. When a user visits our websites or certain pages of our customers' websites, we use technologies, including "cookies," to collect information related to theuser, such as the user's Internet Protocol, or IP, address, demographic information, and history of the user's interactions with advertisements previouslydelivered by us. The information that we collect about users helps us deliver appropriate content and targeted advertising to the user. A variety of federal,state and international laws and regulations govern the collection, use, retention, sharing and security of data that we receive from and about our users. Theexisting privacy-related laws and regulations are evolving and subject to potentially differing interpretations. We post privacy policies on all of our ownedand operated websites that set forth our policies and practices related to the collection and use of customer data. Any failure, or perceived failure, by us tocomply with our posted privacy policies or with industry standards or laws or regulations could result in a loss of customer confidence in us, or result inactions against us by governmental entities or others, all of which could potentially cause us to lose customers and revenues. 38Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In addition, various federal, state and foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. Newlaws may be enacted, or existing laws may be amended or re-interpreted, in a manner that limits our ability to analyze user data. If our access to user data islimited through legislation or any industry development, we may be unable to provide effective technologies and services to customers and we may losecustomers and revenue. Certain U.S. and foreign laws could subject us to claims or otherwise harm our business. We are subject to a variety of laws in the U.S. and abroad that may subject us to claims or other remedies. Our failure to comply with applicable laws maysubject us to additional liabilities, which could adversely affect our business, financial condition and results of operations. Laws and regulations that areparticularly relevant to our business address (a) privacy; (b) freedom of expression; (c) information security; (d) content and distribution of content, includingliability for user reliance on such content; (e) intellectual property rights, including secondary liability for infringement by others; (f) domain nameregistration; and (g) online advertising and marketing, including email marketing and unsolicited commercial email. Many applicable laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues of the Internet. Moreover, theapplicability and scope of the laws that do address the Internet remain uncertain. For example, the laws relating to the liability of providers of online servicesare evolving. Claims have been either threatened or filed against us under both U.S. and foreign laws for defamation, copyright infringement, cybersquattingand trademark infringement. In the future, claims may also be alleged against us based on tort claims and other theories based on our content, products andservices or content generated by our users. We receive, process and store large amounts of personal user data on our owned and operated websites and from our freelance content creators. Ourprivacy and data security policies govern the collection, use, sharing, disclosure and protection of this data. The storing, sharing, use, disclosure andprotection of personal information and user data are subject to federal, state and international privacy laws, the purpose of which is to protect the privacy ofpersonal information that is collected, processed and transmitted in or from the governing jurisdiction. If requirements regarding the manner in which certainpersonal information and other user data are processed and stored change significantly, our business may be adversely affected, impacting our financialcondition and results of operations. In addition, we may be exposed to potential liabilities as a result of differing views on the level of privacy required forcustomer and other user data we collect. Our failure or the failure of various third-party vendors and service providers to comply with applicable privacypolicies or applicable laws and regulations or any compromise of security that results in the unauthorized release of personal information or other user datacould adversely affect our business, financial condition and results of operations. Government regulation of the Internet is evolving, and unfavorable developments could have a material and adverse affect on our operating results. We are subject to general business regulations and laws, as well as regulations and laws specific to the Internet. Such laws and regulations cover taxation,user privacy, data collection and protection, copyrights, electronic contracts, sales procedures, automatic subscription renewals, credit card processingprocedures, customer protections, broadband Internet access and content restrictions. We cannot guarantee that we have been or will be fully compliant inevery jurisdiction, as it is not entirely clear how existing laws and regulations governing issues such as privacy, taxation and consumer protection apply tothe Internet. Moreover, as Internet commerce continues to evolve, increasing regulation by federal, state and foreign agencies becomes more likely. Theadoption of any laws or regulations that adversely affect the popularity or growth in use of the Internet, including laws limiting Internet neutrality, coulddecrease listener demand for our service offerings and increase our cost of doing business. Future regulations, or changes in laws and regulations or theirexisting interpretations or applications, could also hinder our operational flexibility, raise compliance costs and result in additional historical or futureliabilities for us, resulting in material and adverse impacts on our business and our operating results. 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 that have a tendency to affectbroadcast facilities differently than other uses. We are subject to such laws and regulations relating to the use, storage, disposal, emission and release ofhazardous and non-hazardous substances and employee health and safety, as well as zoning restrictions that may affect, among other things, the ability for usto improve or relocate our radio broadcasting facilities. Historically, we have not incurred significant expenditures to comply with these laws; however,existing laws, and those that may be applied in the future, or a finding of a violation of such laws or liability, could require us to make significantexpenditures and otherwise limit or restrict some of our operations. 39Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints, which can makecompliance costly and subject us to enforcement actions by governmental agencies. The processing, formulation, safety, manufacturing, packaging, labeling, advertising and distribution of our wellness products are subject to federal lawsand regulation by one or more federal agencies, including the FDA, the FTC, the CPSC, the USDA, and the EPA. These activities are also regulated by variousstate, local and international laws and agencies of the states and localities in which our wellness products are sold. Government regulations may prevent ordelay the introduction, or require the reformulation, of our wellness products, which could result in lost revenues and increased costs to us. For instance, theFDA regulates, among other things, the composition, safety, manufacture, labeling and marketing of dietary supplements (including vitamins, minerals,herbs, and other dietary ingredients for human use). The FDA may not accept the evidence of safety for any new dietary ingredient that we may wish tomarket, may determine that a particular dietary supplement or ingredient presents an unacceptable health risk based on the required submission of seriousadverse events or other information, and may determine that a particular claim or statement of nutritional value that we use to support the marketing of adietary supplement is an impermissible drug claim, is not substantiated, or is an unauthorized version of a "health claim." Any of these actions could prevent us from marketing particular wellness products or making certain claims or statements with respect to those wellnessproducts. The FDA could also require us to remove a particular wellness product from the market. Any future recall or removal would result in additionalcosts to us, including lost revenues from any wellness product that we are required to remove from the market, any of which could be material. Any wellnessproduct recalls or removals could also lead to an increased risk of litigation and liability, substantial costs, and reduced growth prospects. Additional or more stringent laws and regulations of dietary supplements and other wellness products have been considered from time to time. Thesedevelopments could require reformulation of some wellness products to meet new standards, recalls or discontinuance of some wellness products not able tobe reformulated, additional record-keeping requirements, increased documentation of the properties of some wellness products, additional or differentlabeling, additional scientific substantiation, or other new requirements. Any of these developments could increase our costs significantly. Our failure to comply with FTC regulations could result in substantial monetary penalties and could adversely affect our business, financial condition andresults of operations. The FTC exercises jurisdiction over the advertising of wellness products and has instituted numerous enforcement actions against dietary supplementcompanies for failure to have adequate substantiation for claims made in advertising or for the use of false or misleading advertising claims. Our failure tocomply with FTC regulations could result in substantial monetary penalties and could adversely affect our business, financial condition and results ofoperations. RISKS ASSOCIATED WITH OUR SUBSTANTIAL INDEBTEDNESS Capital requirements necessary to implement acquisitions could pose risks. We face competition from other companies for acquisition opportunities. If the prices sought by sellers of these companies were to rise, we may findfewer acceptable acquisition opportunities. In addition, the purchase price of possible acquisitions could require additional debt or equity financing on ourpart. Since the terms and availability of this financing depend to a large degree upon general economic conditions and third parties over which we have nocontrol, 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 toobtain financing depends on a number of other factors, many of which are also beyond our control, such as interest rates and national and local businessconditions. If the cost of obtaining needed financing is too high or the terms of such financing are otherwise unacceptable in relation to the acquisitionopportunity we are presented with, we may decide to forego that opportunity. Additional indebtedness could increase our leverage and make us morevulnerable to economic downturns and may limit our ability to withstand competitive pressures. 40Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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, which may not be available to us. The availability of funds under our existingsenior credit facility at any time is dependent upon, among other factors, our ability to satisfy financial covenants. Our future operating performance will besubject to financial, economic, business, competitive, regulatory and other factors, many of which are beyond our control. Accordingly, we cannot make anyassurances 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 have substantial debt and have the ability to incur additional debt. The principal and interest payment obligations of such debt may restrict our futureoperations and impair our ability to meet our obligations under such debt. At December 31, 2014, we and our subsidiary guarantors had approximately $277.8 million outstanding on our revolving credit facility with WellsFargo Bank Term Loan B.Our substantial debt may have important consequences. For instance, it could:•make it more difficult for us to satisfy our financial obligations,•require us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, whichwill reduce funds available for other business purposes, including capital expenditures, acquisitions and payment of dividends;•place us at a competitive disadvantage compared with some of our competitors that may have less debt and better access to capital resources; and•limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporatepurposes. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitiveand other factors, many of which are beyond our control. Our business may not generate sufficient cash flow, and future financings may not be available toprovide sufficient net proceeds, to meet these obligations or to successfully execute our business or acquisition strategies. The agreements governing our various debt obligations impose restrictions on our business and could adversely affect our ability to undertake certaincorporate actions. The agreements governing our debt obligations, including the agreements governing our Term Loan B, include covenants imposing significantrestrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential businessopportunities as they arise. These covenants place restrictions on our ability to, among other things:•incur additional debt;•declare or pay dividends, redeem stock or make other distributions to stockholders;•make investments;•create liens or use assets as security in other transactions;•merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;•engage in transactions with affiliates; and•sell or transfer assets. Our Term Loan B and our Revolver also require us to comply with a number of financial ratios and covenants and restricts our ability to make certaincapital expenditures. Our ability to comply with these agreements may be affected by events beyond our control, including prevailing economic, financial and industryconditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition orother corporate opportunities. The breach of any of these covenants or restrictions could result in a default under the Term Loan B and Revolver. An event ofdefault under any of our debt agreements could permit some of our lenders to declare all amounts borrowed from them to be immediately due and payable,together with accrued and unpaid interest, which could, in turn, trigger defaults under other debt obligations and the commitments of the lenders to makefurther extensions of credit under our Revolver could be terminated. If we were unable to repay debt to our lenders, or are otherwise in default under anyprovision governing our outstanding secured debt obligations, our secured lenders could proceed against us and the subsidiary guarantors and against thecollateral securing that debt. 41Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. To service our indebtedness, we will require a significant amount of cash. However, our ability to generate cash depends on many factors beyond ourcontrol. Our ability to make payments on, and to refinance, our indebtedness, and to fund capital expenditures, will depend on our ability to generate cash in thefuture, which, in turn, is subject to general economic, financial, competitive, regulatory and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow from operations and we may not have available to us future borrowings in an amount sufficient toenable us to pay our indebtedness. In these circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not beable to refinance any of our indebtedness on commercially reasonable terms, or at all. Without this financing, we could be forced to sell assets or secureadditional financing to make up for any shortfall in our payment obligations under unfavorable circumstances. In addition, we may not be able to sell assetsquickly enough or for sufficient amounts to enable us to meet our obligations. ITEM 1B. UNRESOLVED STAFF COMMENTS. Not Applicable. ITEM 2. PROPERTIES. We own or lease various properties throughout the United States from which we conduct business. No one physical property is material to our overallbusiness operations. We believe that each of our properties are in good condition and suitable for our operations; however, we continually evaluateopportunities to upgrade our properties. We believe that we will be able to renew existing leases when applicable or obtain comparable facilities, asnecessary. Corporate Our corporate headquarters are located in Camarillo, California where we own an approximately 40,000 square foot office building. Broadcasting The types of properties required to support our radio stations include offices, studios, transmitter, antenna and tower sites. A station’s studios aregenerally located in an office in a downtown or business district. Transmitter, antenna and tower sites are located in areas that provide maximum marketcoverage. Our SRN and SMR offices and Dallas radio stations are located in an office building in the Dallas, Texas metropolitan area, where we own anapproximately 34,000 square foot office building. Our radio network operates from various offices and studios from which the programming originates or isrelayed from a remote point of origination. Our network leases satellite transponders used for delivery of its programming. The lease agreements range fromone to thirty years remaining on the lease term. We also own office buildings in Honolulu, Hawaii; Tampa, Florida; and Orlando, Florida. We lease certain property from our principal stockholders or trusts and partnerships created for the benefit of the principal stockholders and theirfamilies. These leases are described in Note 12 of our consolidated financial statements. All such leases have cost of living adjustments. Based upon ourmanagement’s assessment and analysis of local market conditions for comparable properties, we believe such leases have terms that are as favorable as, ormore favorable, to the company than those that would have been available from unaffiliated parties. Digital Media The types of properties required to support our digital media operations include office buildings and data storage centers. Salem Web Network, includingTownhall, operates from leased office facilities in Richmond, Virginia; Arlington, Virginia; and Nashville, Tennessee. Eagle Financial Publications operatefrom leased offices in Washington D.C. Salem Consumer Products operates from our corporate office in Camarillo, California. The lease agreements rangefrom one to six years remaining on the lease term. 42Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Publishing Salem Publishing and Xulon Press operate from leased office facilities in Nashville, Tennessee, Washington D.C. and Orlando, Florida. RegneryPublishing operates from leased facilities in Washington, D.C. with inventory fulfillment handled through a third party in Jackson, Tennessee. The leaseagreements range from one to four years remaining on the lease term. 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. Suchmatters are subject to many uncertainties and outcomes that are not predictable with assurance. We maintain insurance that may provide coverage for suchmatters. 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 annualconsolidated financial position, results of operations or cash flows. ITEM 4. MINE AND SAFETY DISCLSOURES. Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES. Our Class A common stock trades on the NASDAQ Global Market® (“NASDAQ-NGM”) under the symbol SALM. On February 23, 2015, the companyhad approximately 43 stockholders of record (not including the number of persons or entities holding stock in nominee or street name through variousbrokerage firms) and 19,783,365 outstanding shares of its Class A common stock and two stockholders of record and 5,553,696 outstanding shares of itsClass B common stock. The following table sets forth for the fiscal quarters indicated the range of high and low sale price information per share of the Class Acommon stock of the company as reported on the NASDAQ-NGM. 2013 2014 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr High (mid-day) $8.40 $10.14 $8.50 $9.50 $10.34 $10.15 $9.83 $11.00 Low (mid-day) $5.19 $7.00 $7.20 $7.53 $8.15 $7.89 $5.04 $6.72 There is no established public trading market for the company’s Class B common stock. DIVIDEND POLICY Our dividend policy is based upon our Board of Directors’ current assessment of our business and the environment in which we operate. The actualdeclaration of dividends and distributions, as well as the establishment of per share amounts, dates of record, and payment dates are subject to finaldetermination by our Board of Directors and dependent upon future earnings, cash flows, financial requirements, and other factors. Our Board of Directorsreviews distributions on a quarterly basis and may, in its discretion, amend or repeal the level of distributions. The reduction or elimination of distributionsmay negatively affect the market price of our common stock. 43Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The following table shows quarterly distributions that have been declared and paid to all stockholders of record of our Class A and Class B commonstock since January 1, 2012: Announcement Date Record Date Payment Date Amount Per Share Cash Distributed (in thousands) December 2, 2014 December 15, 2014 December 29, 2014 $0.0650 $1,646 September 2, 2014 September 16, 2014 September 30, 2014 $0.0625 1,579 May 27, 2014 June 16, 2014 June 30, 2014 $0.0600 1,514 March 6, 2014 March 17, 2014 March 31, 2014 $0.0575 1,444 November 20, 2013 December 10, 2013 December 27, 2013 $0.0550 1,376 September 12, 2013 September 26, 2013 October 4, 2013 $0.0525 1,308 May 30, 2013 June 14, 2013 June 28, 2013 $0.0500 1,240 March 18, 2013 March 25, 2013 April 1, 2013 $0.0500 1,234 November 29, 2012 December 14, 2012 December 28, 2012 $0.0350 854 August 30, 2012 September 14, 2012 September 28, 2012 $0.0350 854 May 31, 2012 June 15, 2012 June 21, 2012 $0.0350 854 March 8, 2012 March 23, 2012 March 30, 2012 $0.0350 850 While we intend to review distributions payments on a quarterly basis, the actual declaration of such future distributions and the establishment of the pershare amount, record dates, and payment dates are subject to final determination by our Board of Directors and dependent upon future earnings, cash flows,financial 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 theappropriate amount, if any, to allocate toward a cash distribution with the general principle of using approximately 20% of free cash flow. Free cash flow is anon-GAAP financial measure defined in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations included with thisannual report on Form 10-K. Based on the number of shares of Class A and Class B common stock currently outstanding, and the currently approved distribution amount, we expectto pay total annual distributions of approximately $6.6 million in 2015. Our sole source of cash available for making any future distributions is our operating cash flow subject to our Term Loan B and Revolver, which containcovenants that restrict the payment of dividends and distributions unless certain specified conditions are satisfied. STOCK PRICE PERFORMANCE GRAPH The graph below compares the cumulative total stockholder return of the our Class A common stock with the cumulative total return of the NASDAQ -NMS equity index and the Bloomberg Broadcast and Cable Radio Index for a five year period commencing December 31, 2009 and ending December 31,2014. Our Class B common stock is not publicly traded and is not registered. The graph assumes that the value of an investment in our Class A common stockand each index was $100 on December 31, 2009 and that any dividends were reinvested. Stockholder returns over the indicated period are not indicative offuture stockholder returns. 44Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The stock price performance graph above shall not be deemed incorporated by reference by any general statement incorporating by reference this reportinto any filing under the Securities Act or the Exchange Act, except to the extent that the company specifically incorporates this information by referenceand shall not otherwise be deemed filed under such Acts. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 6. SELECTED FINANCIAL DATA. The selected financial data below as of and for the years ended December 31, 2014 and December 31, 2013, is derived from our audited consolidatedfinancial statements included in Item 8 of this annual report. The selected financial data as of and for the years ended December 31, 2010, December 31, 2011and December 31, 2012 is derived from our audited financial statements not included herein. The selected financial data should be read in conjunction with,and is qualified by reference to, our consolidated financial statements, related notes, other financial information included (incorporated by reference) herein,and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including the disclosure concerning the reconciliationfor historical Non-GAAP financial measures presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Non-GAAP Financial Measures” included in Item 7 of this annual report on Form 10-K. Certain reclassifications have been made to prior year financial data to conform to the current year presentation. These reclassifications include: (1) theseparation of our non-broadcast operating segment into two operating segments as of the first quarter of 2011, (2) the reporting of discontinued operations,(3) the reclassification of direct broadcast, direct digital and direct publishing expeneses from corporate expenses to the appropriate segment, and (4) thechange in composite of our operating segments as of December 2014 to conform to how our chief operating decision makers, which we define as a collectivegroup of senior executives, assesses the performance of each operating segment and determines the appropriate allocations of resources to each segment. We have two reportable segments, radio broadcasting and digital media. Digital media (formerly “Internet and e-commerce”) became a reportablesegment as of the first quarter of 2011 upon the realization of organic and acquisition related revenue growth. Our acquisition of Eagle Publishing on January10, 2014, including Regnery Publishing, Eagle Financial Publications, Eagle Wellness, HumanEvents.com and RedState.com, resulted in operationalchanges to our business and a realignment of our operating segments. We now have three operating segments: (1) Broadcasting, (2) Digital Media, and (3)Publishing. We changed the composition of our operating segments to reflect management’s view of the operating results for each segment. All prior periods presented have been updated to reflect the new composition of our operating segments. Refer to Note 16 – Segment Data in the notesto our consolidated financial statements contained in Item 8 of this annual report on Form 10-K for additional information. Note that our financial results arenot comparable from year to year due to acquisitions and dispositions of radio stations and other assets, impairments and other significant events: 45Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) Year Ended December 31, 2010 2011 2012 2013 2014 (Dollars in thousands, except share and per share data) Statement of Operations Data: Net broadcast revenue $177,139 $182,487 $187,640 $188,544 $192,923 Net digital media revenue 17,492 22,887 28,166 35,156 46,862 Net publishing revenue 11,827 12,792 13,373 13,234 26,751 Total revenue 206,458 218,166 229,179 236,934 266,536 Operating expenses: Broadcast operating expenses 113,952 119,602 126,514 129,857 138,564 Digital media operating expenses 15,618 19,568 22,848 25,741 36,232 Publishing operating expenses 11,944 12,344 13,339 14,280 26,143 Unallocated corporate expenses 13,468 13,835 14,396 16,081 17,092 Depreciation and amortization 14,588 14,971 14,647 15,262 18,825 Change in the estimated fair value of contingentearn-out consideration — — — — 734 Impairment of indefinite-lived long-term assets otherthan goodwill — — 88 1,006 34 Impairment of goodwill — — — 438 45 Impairment of long-lived assets — — 6,808 — — (Gain) loss on the sale or disposal of assets 255 (4,153) 49 (264) 251 Total operating expenses 169,825 176,167 198,689 202,401 237,920 Operating income from continuing operations 36,633 41,999 30,490 34,533 28,616 Other income (expense): Interest income 183 344 106 68 45 Interest expense (30,297) (27,665) (24,911) (16,892) (15,993)Change in fair value of interest rate swaps — — — 3,177 (2,702)Loss on early retirement of long-term debt (1,832) (2,169) (1,088) (27,795) (391)Net miscellaneous income and (expenses) (16) (40) 79 18 665 Total other expense, net (31,962) (29,530) (25,814) (41,424) (18,376)Income from continuing operations before incometaxes 4,671 12,469 4,676 (6,891) 10,240 Provision for (benefit from) income taxes 2,695 6,110 153 (4,192) 4,765 Income (loss) from continuing operations 1,976 6,359 4,523 (2,699) 5,475 Loss from discontinued operations, net of tax (44) (741) (95) (37) — Net income (loss) $1,932 $5,618 $4,428 $(2,736) $5,475 Basic earnings (loss) per share data: Earnings (loss) per share from continuing operations $0.08 $0.26 $0.18 $(0.11) $0.21 Loss per share from discontinued operations — (0.03) — — — Net earnings (loss) per share $0.08 $0.23 $0.18 $(0.11) $0.21 Diluted earnings (loss) per share data: Earnings (loss) per share from continuing operations $0.08 $0.26 $0.18 $(0.11) $0.21 Loss per share from discontinued operations — (0.03) — — — Net earnings (loss) per share $0.08 $0.23 $0.18 $(0.11) $0.21 Dividends per share $0.20 $― $0.14 $0.21 $0.24 Basic weighted average shares outstanding 24,086,829 24,475,102 24,577,605 24,938,075 25,336,809 Diluted weighted average shares outstanding 24,653,465 24,683,644 24,986,966 24,938,075 26,081,175 46Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) Year Ended December 31, 2010 2011 2012 2013 2014 (Dollars in thousands) Balance Sheet Data: Cash and cash equivalents $828 $67 $380 $65 $33 Broadcast licenses 378,362 371,420 373,720 381,836 385,726 Other intangible assets, net including goodwill 25,122 28,522 33,009 32,035 37,912 Total assets 574,486 561,310 562,181 575,113 583,159 Long-term debt (including current portion) 304,527 274,803 268,980 290,793 277,505 Stockholders’ equity 196,404 203,048 206,069 201,785 203,994 Cash flows related to: Operating activities $22,817 $31,757 $31,077 $28,735 41,925 Investing activities (13,777) (4,511) (19,066) (17,737) (21,734)Financing activities (16,150) (28,126) (11,697) (11,276) (20,223)Non-GAAP items: Station operating income (1) $63,187 $62,885 $61,126 $58,687 $54,359 Station operating income margin (2) 35.7% 34.5% 32.6% 31.1% 28.2%Digital media operating income (3) $1,874 $3,319 $5,318 $9,415 $10,630 Publishing operating income (loss) (4) $(117) $448 $34 $(1,046) $608 Adjusted EBITDA (5) $52,897 $53,727 $53,529 $52,842 $50,746 Free Cash Flow (6) $15,251 $19,926 $21,312 $25,318 $26,608 (1)We define non-GAAP station operating income as net broadcast revenue less broadcast operating expenses. (2)Non-GAAP station operating income margin is station operating income as a percentage of net broadcast revenue. (3)We define digital media operating income as net digital media revenue minus digital media operating expenses (4)We define publishing operating income net publishing revenue minus publishing operating expenses. (5)We define Non-GAAP Adjusted EBITDA as net income before interest, taxes, depreciation, amortization and change in fair value of interest rate swaps(“EBIDTA”) before gains or losses on the disposal of assets, changes in the estimated fair value of contingent earn-out consideration and non-cashcompensation expense. (6)We define Non-GAAP free cash flow as Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, less cash paid forinterest. Regulation G and Item 10(e) of Regulation S-K define and prescribe the conditions under which certain non-GAAP financial information may bepresented. We closely monitor EBITDA, Adjusted EBITDA, Station Operating Income (“SOI”), Digital media operating income, publishing operatingincome, and free cash flow, all of which are non-GAAP financial measures. We believe that these non-GAAP financial measures provide useful informationabout our core operating results and thus are appropriate to enhance the overall understanding of our financial performance. These non-GAAP measures areintended to provide management and investors a more complete understanding of our underlying operational results, trends and performance. Managementuses these non-GAAP financial measures to evaluate financial results, develop budgets, manage expenditures, and determine employee compensation. Ourpresentation of this additional information should not be considered as a substitute for or superior to the most directly comparable financial measures asreported in accordance with GAAP. The performance of a radio broadcasting company is customarily measured by the ability of its stations to generate SOI. We define SOI as net broadcastrevenue less broadcast operating expenses. Accordingly, changes in net broadcast revenue and broadcast operating expenses, as explained above, have adirect 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 nota 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, whenconsidered in conjunction with operating income (the most directly comparable GAAP financial measure to SOI), because it is generally recognized by theradio broadcasting industry as a tool in measuring performance and in applying valuation methodologies for companies in the media, entertainment andcommunications industries. SOI is commonly used by investors and analysts who report on the industry to provide comparisons between broadcastinggroups. We use SOI as one of the key measures of operating efficiency and profitability, including our internal reviews associated with impairment analysis ofour indefinite-lived intangible assets. SOI does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cashactivity in accordance with GAAP and our income statement presents our financial performance prepared in accordance with GAAP. Our definition of SOI isnot necessarily comparable to similarly titled measures reported by other companies. 47Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We apply a similar methodology to our digital media and publishing group. Digital media operating income is defined as net digital media revenueminus digital media operating expenses. Publishing operating income is defined as net publishing revenue minus publishing operating expenses. Digitalmedia operating income and publishing operating income are not measures of performance in accordance with GAAP. Our presentations of these non-GAAPperformance measures are not to be considered a substitute for or superior to our operating results reported in accordance with GAAP. We believe that DigitalMedia Operating Income and Publishing Media Operating Income are useful non-GAAP financial measure to investors, when considered in conjunction withoperating income (the most directly comparable GAAP financial measure), because they are comparable to those used to measure performance of ourbroadcasting entities. We use this analysis as one of the key measures of operating efficiency, profitability and in our internal review. This measurement doesnot purport to represent cash provided by operating activities. Our statement of cash flows presents our cash activity in accordance with GAAP and ourincome statement presents our financial performance in accordance with GAAP. Our definitions of digital media operating income and publishing operatingincome are not necessarily comparable to similarly titled measures reported by other companies. We define Adjusted EBITDA as net income before interest, taxes, depreciation, amortization and change in fair value of interest rate swaps (“EBITDA”)before gains or losses on the disposal of assets, changes in the estimated fair value of contingent earn-out consideration and non-cash compensation expense.Adjusted EBITDA is commonly used by the broadcast and media industry as important measures of performance and are used by investors and analysts whoreport on the industry to provide meaningful comparisons between broadcasters. Adjusted EBITDA is not a measure of liquidity or of performance inaccordance with GAAP, and should be viewed as a supplement to and not a substitute for or superior to our results of operations and financial conditionpresented in accordance with GAAP. Our definition of Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by othercompanies. We define free cash flow as Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, less cash paid for interest. Weconsider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by ouroperations after capital expenditures and cash paid for income taxes and interest. A limitation of free cash flow as a measure of financial performance is that itdoes not represent the total increase or decrease in our cash balance for the period. We use free cash flow, a non-GAAP financial measure, both in presentingour results to stockholders and the investment community, and in our internal evaluation and management of the business. Our presentation of free cash flowis not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Our definitionof free cash flow is not necessarily comparable to similarly titled measures reported by other companies. We discuss same station operating results, which we consider to be a key financial performance indicator. We define same station operating results as theoperating results of stations 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 prioryear. Same station results for our annual report are calculated as the sum of the same station-results for each of the four quarters of that year. We use samestation results, a non-GAAP financial measure, both in presenting our results to stockholders and the investment community, and in our internal evaluationand management of the business. Our presentation of same station results are not intended to be considered in isolation or as a substitute for the financialinformation prepared and presented in accordance with GAAP. Our definition of same station operating results is not necessarily comparable to similarlytitled measures reported by other companies. 48Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) RECONCILIATION OF STATION OPERATING INCOME TO NET INCOME (LOSS) Year Ended December 31, 2010 2011 2012 2013 2014 (Dollars in thousands) Station operating income $63,187 $62,885 $61,126 $58,687 $54,359 Plus digital media revenue 17,492 22,887 28,166 35,156 46,862 Plus publishing revenue 11,827 12,792 13,373 13,234 26,751 Less digital media operating expenses (15,618) (19,568) (22,848) (25,741) (36,232)Less publishing operating expenses (11,944) (12,344) (13,339) (14,280) (26,143)Less unallocated corporate expenses (13,468) (13,835) (14,396) (16,081) (17,092)Less depreciation and amortization (14,588) (14,971) (14,647) (15,262) (18,825)Less change in the estimated fair value of contingentearn-out consideration — — — — (734)Less impairment of indefinite-lived long-term assetsother than goodwill — — (88) (1,006) (34)Less impairment of goodwill — — — (438) (45)Less impairment of long-lived assets — — (6,808) — — Less gain (loss) on the sale or disposal of assets (255) 4,153 (49) 264 (251)Net operating income from continuing operations $36,633 $41,999 $30,490 $34,533 $28,616 Plus interest income 183 344 106 68 45 Less interest expense (30,297) (27,665) (24,911) (16,892) (15,993)Less change in fair value of interest rate swaps ― ― ― 3,177 (2,702)Less loss on early retirement of long-term debt (1,832) (2,169) (1,088) (27,795) (391)Less net miscellaneous income and (expenses) (16) (40) 79 18 665 Less provision for (benefit from) income taxes (2,695) (6,110) (153) 4,192 (4,765)Less loss from discontinued operations (44) (741) (95) (37) — Net income (loss) $1,932 $5,618 $4,428 $(2,736) $5,475 Reconciliation of Adjusted EBITDA to EBITDA tonet Income (Loss) Adjusted EBITDA $52,897 $53,727 $53,529 $52,842 $50,746 Less stock-based compensation (1,437) (950) (1,368) (1,849) (1,576)Less loss on early retirement of long-term debt (1,832) (2,169) (1,088) (27,795) (391)Less discontinued operations, net of tax (44) (741) (95) (37) — Less change in the estimated fair value of contingentearn-out consideration — — — — (734)Less impairment of indefinite-lived long-term assetsother than goodwill — — (88) (1,006) (34)Less impairment of goodwill — — — (438) (45)Less impairment of long-lived assets — — (6,808) — — Less gain (loss) on the sale or disposal of assets (255) 4,153 (49) 264 (251)EBITDA $49,329 $54,020 $44,033 $21,981 $47,715 Plus interest income 183 344 106 68 45 Less depreciation and amortization (14,588) (14,971) (14,647) (15,262) (18,825)Less interest expense (30,297) (27,665) (24,911) (16,892) (15,993)Less change in fair value of interest rate swaps ― ― ― 3,177 (2,702)Less provision for (benefit from) income taxes (2,695) (6,110) (153) 4,192 (4,765)Net income (loss) $1,932 $5,618 $4,428 $(2,736) $5,475 Reconciliation of Adjusted EBITDA to Free CashFlow Adjusted EBITDA $52,897 $53,727 $53,529 $52,842 $50,746 Less cash paid for interest (29,668) (26,053) (23,448) (16,747) (14,518)Less cash paid for taxes (159) (226) (220) (242) (257)Less net cash paid for capital expenditures (1) (7,819) (7,522) (8,549) (10,535) (9,363)Free Cash Flow $15,251 $19,926 $21,312 $25,3187 $26,608 (1)Net cash paid for capital expenditures reflects actual cash payments net of amounts reimbursed for tenant improvements allowances. 49Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financialstatements and related notes included elsewhere in this annual report on Form 10-K. Our consolidated financial statements are not directly comparable fromperiod to period due to acquisitions and dispositions of selected radio station assets, Internet and publishing businesses. Refer to Note 3 of our consolidatedfinancial statements under Item 8 of this annual report on Form 10-K for details of each of these transactions. Salem Media Group, Inc. (“Salem”) is a domestic multi-media company with integrated operations including radio broadcasting, digital media, andpublishing. Effective as of February 19, 2015, we changed our name from Salem Communications Corporation to Salem Media Group, Inc. Salem was formedin 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 onForm 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 reasonablypracticable after those reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Any information found on ourwebsite 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 two reportable segments, radio broadcasting and digital media. Digital media (formerly “Internet and e-commerce”) became a reportablesegment as of the first quarter of 2011 upon the realization of organic and acquisition related revenue growth. Our acquisition of Eagle Publishing on January10, 2014, including Regnery Publishing, Eagle Financial Publications, Eagle Wellness, Human Events and Red State, resulted in operational changes to ourbusiness and a realignment of our operating segments. We now have three operating segments: (1) Broadcast, (2) Digital Media, and (3) Publishing. Wechanged the composition of our operating segments to reflect management’s view of the operating results for each segment. Our operating segments reflect how our chief operating decision makers, which we define as a collective group of senior executives, assesses theperformance of each operating segment and determines the appropriate allocations of resources to each segment. Our operating segments do not all meet thequantitative thresholds to qualify as reportable segments; however, we have elected to disclose the results of these non-reportable operating segments as webelieve this information is useful to readers of our financial statements. We continue to review our operating segment classifications to align with operationalchanges 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 tocorporate 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 priorperiods presented have been updated to reflect the new composition of our operating segments. Refer to Note 16 – Segment Data in the notes to ourconsolidated financial statements contained in Item 8 of this annual report on Form 10-K for additional information. Our principal sources of broadcast revenues include: ·the sale of block program time to national and local program producers;·the sale of advertising time on our radio stations to national and local advertisers;·the sale of advertising time on our national network;·the syndication of programming on our national network;·the sale of banner advertisements on our station websites;·the sale of digital streaming on our station websites; and·revenue derived from station events, including ticket sales and sponsorships. The rates we are able to charge for broadcast time and advertising time are dependent upon several factors, including: ·audience share;·how well our stations perform for our clients; 50Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ·the size of the market;·the number of impressions delivered;·the number of page views achieved;·the number of events held, the number of sponsorships sold, and the attendance for each event;·the general economic conditions in each market; and·supply and demand on both a local and national level. Our principal sources of digital media revenue (formerly Internet and e-commerce revenue) include: ·the sale of Internet banner advertising;·the sale of digital streaming advertising;·the support and promotion to stream third-party content on our websites;·the demand for digital delivery of our newsletters and host materials;·product sales and royalties for on-air host materials;·the number of video and graphic downloads; and·the demand for our wellness products. Our principal sources of publishing revenue include: ·the sale of books and e-books;·subscription fees for our magazines;·the sale of print magazine advertising; and·publishing fees from authors. Broadcasting Our foundational business is the ownership and operation of radio stations in large metropolitan markets. We also own and operate Salem RadioNetwork® (“SRN”), SRN News Network (“SNN”), Salem Music Network (“SMN”), Solid Gospel Network (“SGN”), Salem Media Representatives (“SMR”)and Vista Media Representatives (“VMR”). SRN, SNN, SMN and SGN are networks that develop, produce and syndicate a broad range of programmingspecifically targeted to Christian and family-themed talk stations, music stations and general News Talk stations throughout the United States, includingSalem owned and operated stations. SMR, a national advertising sales firm with offices in 11 U.S. cities, specializes in placing national advertising onreligious and other commercial radio stations. As of December 2014, we merged Vista Media Representatives (“VMR”), our national advertising sales firmestablished for non-Christian format stations, into SMR as our SMR and VMR sales teams consistently pursue advertising for all station formats. We currently program 42 of our stations with our Christian Teaching and Talk format, which is talk programming with Christian and family themes. Wealso program 28 News Talk stations, 12 Contemporary Christian Music stations, 10 Business format stations, and nine Spanish-language Christian Teachingand Talk stations. The business format features financial commentators, business talk, and nationally recognized Bloomberg programming. The businessformat operates similar to our Christian Teaching and Talk format as it features long-form block programming. Each of our radio stations has a websitespecifically designed for that station. Revenues generated from our radio stations are reported as broadcast revenue in our consolidated financial statements include in Item 9 of this annualreport on form 10K. Broadcast revenues are impacted by the rates radio stations can charge for programming and advertising time, the level of airtime sold toprogrammers and advertisers, the number of impressions delivered or downloads made, and the number of events held, including the size of the event and thenumber of attendees. Block programming rates are based upon our stations’ ability to attract audiences that will support the program producers throughcontributions and purchases of their products. Advertising rates are based upon the demand for advertising time, which in turn is based on our stations andnetworks’ ability to produce results for their advertisers. We market ourselves to advertisers based on the responsiveness of our audiences. We do notsubscribe to traditional audience measuring services for most of our radio stations. In select markets, we subscribe to Nielsen Audio, which develops quarterlyreports 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. 51Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Nielsen Audio uses 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 diaryratings collection systems, including ease of use, more reliable ratings data, shorter time periods between when advertising runs and actual listening data, andlittle manipulation of data by users. A disadvantage of the PPM includes data fluctuations from changes to the “panel” (a group of individuals holding PPMdevices). This makes all stations susceptible to some inconsistencies in ratings that may or may not accurately reflect the actual number of listeners at anygiven time. In markets where we subscribe to Nielsen Audio under the PPM, our ratings have been less consistent. As is typical in the radio broadcasting industry, our second and fourth quarter advertising revenue generally exceeds our first and third quarteradvertising 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 blockprogramming 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, ourplans for the market and other circumstances, we find it beneficial to change the station format. During this transitional period, when we develop a radiostation’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 trade agreements to exchange advertising time for goods orservices in lieu of cash. We enter trade and barter agreements if the goods or services we receive can be used in our business or can be sold under ListenerPurchase Programs. We minimize use of trade agreements with our general policy of not preempting paid airtime for trade. In each of the years endingDecember 31, 2014 and 2013, we sold 97%, of our broadcast revenue for cash. Broadcast operating expenses include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent andutilities, (iii) marketing and promotional expenses, (iv) production and programming expenses, and (v) music license fees. In addition to these expenses, ournetwork incurs programming costs and lease expenses for satellite communication facilities. Digital Media (formerly “Internet and e-commerce”) Web based and digital content has been a significant growth area for Salem and continues to be a focus of future development. Salem Web Network™(“SWN”) and our other web based businesses provide Christian and conservative-themed content, audio and video streaming, and other resources digitallythrough the web. SWN’s web portals include Christian content websites: OnePlace.com, Christianity.com, Crosswalk.com®, GodVine.com, Jesus.org andBibleStudyTools.com. Our conservative opinion websites, collectively known as Townhall Media, include Townhall.com™, HotAir.com, Twitchy.com,HumanEvents.com and RedState.com. We also issue digital newsletters, including Eagle Financial Publications, that provide market analysis and investmentadvice for individual subscribers from financial commentators. Church product websites including WorshipHouseMedia.com, SermonSpice.com, andChurchStaffing.com offer downloads and service platforms to pastors and other educators. Our web content is accessible through all of our radio stationwebsites that feature content of interest to local listeners throughout the United States. E-commerce sites include Salem Consumer Products (“SCP”), an e-commerce business that sells books, DVD’s and editorial content developed by ouron-air personalities, Eagle Wellness, an online site offering complimentary health advice and sales of nutritional products. The revenues generated from this segment are reported as digital media revenue in our consolidated statements of operations included in this annualreport on Form 10-K. Digital media revenues are impacted by the rates our sites can charge for advertising time, the level of advertisements sold, the numberof impressions delivered or the number of downloads made, and the number digital subscriptions sold. Like our broadcasting segment, our second and fourthquarter advertising revenue generally exceeds our first and third quarter advertising revenue. This seasonal fluctuation in advertising revenue correspondswith quarterly fluctuations in the retail advertising industry. We also experience fluctuations in quarter over quarter comparisons based on the date in whichthe Easter holiday is observed, as this holiday generates a higher volume of video downloads from our church product sites. Additionally, we experienceincreased demand for advertising time and placement during election years for political advertisements. 52Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The primary operating expenses incurred in the ownership and operation of our Internet businesses include: (i) employee salaries, commissions andrelated employee benefits and taxes, (ii) facility expenses such as rent and utilities, (iii) marketing and promotional expenses, (iv) royalties, (v) streamingcosts, and (vi) cost of goods sold associated with SCP and Wellness products. Publishing Our acquisition of Regnery Publishing on January 10, 2014, represented a major shift in our publishing operating segment. Regnery Publishing is apublisher of conservative books that was founded in 1947. Regnery has published dozens of bestselling books by leading conservative authors andpersonalities, including Ann Coulter, Newt Gingrich, Michelle Malkin, David Limbaugh, Ed Klein, Laura Ingraham, Mark Steyn and Dinesh D'Souza. Our publishing operating segment also includes Salem Publishing™ and Xulon Press. Salem Publishing™ produces and distributes numerous Christianand conservative opinion print magazines, including: Homecoming® The Magazine, YouthWorker Journal™, Singing News®, FaithTalk Magazine™, andPreaching Magazine™. Through December 2014, we also printed and produced Townhall Magazine™. Xulon Press™ is a print-on-demand self-publishingservice for Christian authors. Revenues generated from these entities are reported as publishing revenue in our consolidated financial statements included in Item 8 of this annualreport on Form 10K. 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 thenumber and rate at which self-published books are made. Regnery Publishing revenue has been impacted by elections as they generate higher levels ofinterest and demand for publications containing conservative and political based opinions. Operating expenses incurred by Salem Publishing™ include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facilityexpenses such as rent and utilities, (iii) marketing and promotional expenses, (iv) printing and production costs, including paper costs, (v) cost of goods sold,and (vi) inventory reserves. KNOWN TRENDS AND UNCERTAINTIES Although advertising revenues have stabilized following the decline that began in 2008, broadcast advertising revenue growth remains challenged. Weare particularly dependent on broadcast revenue from our Los Angeles and Dallas markets, which generated 11.9% and 12.7%, respectively, of our netbroadcasting revenue for the year ending December 31, 2014. Revenues from print magazines, including advertising revenue and subscription revenues, arechallenged both economically and by the increase in use of other mediums to deliver the information. Book sales are contingent upon overall economicconditions and our ability to attract and retain authors. Because digital media is a concentrated growth area for us, decreases in revenue streams from theseareas could affect our operating results, financial condition and results of operations. To address these issues, we continue to explore opportunities in whichwe can cross-promote our brand and our content, including our broadcast markets, digital media, Internet sites, mobile applications, and our printing andpublication media. 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 includesthe operating results of all radio stations and networks owned or operated at any time during either period and on a “same-station” basis. Same stationoperating results include those stations that we own or operate in the same format on the first and last day of each quarter as well as the corresponding quarterof the prior year. Same station results for a full calendar year are calculated as the sum of the same station-results for each of the four quarters of that year.Same station results for our annual report are calculated as the sum of the same station-results for each of the four quarters of that year. We use same stationresults, a non-GAAP financial measure, both in presenting our results to stockholders and the investment community, and in our internal evaluation andmanagement of the business. Our presentation of same station results are not intended to be considered in isolation or as a substitute for the financialinformation prepared and presented in accordance with GAAP. Our definition of same station operating results is not necessarily comparable to similarlytitled measures reported by other companies. 53Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. RESULTS OF OPERATIONS Year Ended December 31, 2014 compared to the year ended December 31, 2013 The following factors affected our results of operations and our cash flows for the year ended December 31, 2014 as compared to the prior year: Financing Throughout the year ending December 31, 2014, we repaid $15.3 million in principal on our current senior secured credit facility, consisting of a termloan of $300.0 million (“Term Loan B”) and paid interest through each repayment date compared to $8.8 million in principal plus interest through eachrepayment date in the prior year. Equity Throughout the year ending December 31, 2014, we paid total distributions of $6.2 million over four quarters compared to total distributions of $5.2million over four quarters of the prior year. Acquisitions ·On December 23, 2014, we completed the acquisition of the construction permit for WLTE-FM in Pendleton, South Carolina for $0.5 million incash. The asset acquisition cost is reflected in projects-in-process as of December 2014. The station will be built and operated within ourGreenville, South Carolina market. ·On December 23, 2014, we completed the acquisition of an FM translator in Pickens, South Carolina for $0.2 million in cash. The assetacquisition cost is included in projects-in-process as of December 2014. The FM Translator will operate in our Greenville, South Carolinamarket. ·On December 22, 2014, we completed the acquisition of an FM translator in Bayshore Gardens, Florida for $0.1 million in cash. The assetacquisition cost is included in projects-in-process as of December 2014. The FM Translator will operate in our Tampa, Florida market. ·On November 24, 2014, we completed the acquisition of an FM translator in Travelers Rest, South Carolina for $0.2 million in cash. The assetacquisition cost is included in projects-in-process as of December 2014. The FM Translator will operate in our Greenville, South Carolinamarket. ·On October 1, 2014, we completed the acquisition of radio station KXXT-AM in Phoenix, Arizona for $0.6 million in cash. We began operatingthe station under an LMA as of June 6, 2014. The accompanying Consolidated Statements of Operations reflect the operating results of thisentity as of the LMA date. We recorded goodwill of $1,400 associated with the excess value of this entity attributable to the audience reachobtained. ·On June 6, 2014, we made an early payment of $1.5 million in cash against the $2.5 million deferred payment liability due January 2015 for ouracquisition of entities of Eagle Publishing. ·On May 22, 2014, we completed the acquisition of radio station WOCN-AM, Miami, Florida and the related transmitter site for $2.5 million incash. ·On May 6, 2014, we completed the acquisition of WRTH-FM (formerly WOLT-FM) in Greenville, South Carolina for $1.1 million in cash. ·On April 14, 2014, we completed the acquisition of three FM translators for $0.4 million in cash. The FM translators will serve our Orlando,Florida, Tampa, Florida and Omaha, Nebraska markets. ·On February 7, 2014, we completed the acquisition of radio stations KDIS-FM, Little Rock, Arkansas and KRDY-AM, San Antonio, Texas for$2.0 million in cash. ·We recorded an increase of $0.3 million in the fair value of the contingent earn-out consideration associated with our December 2013acquisition of Twitchy.com, which is reflected as an expense in our operating results for the year ending December 31, 2014. 54Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ·As of December 31, 2014, we paid $0.3 million in cash, the maximum amount earned for the first payment of the Twitchy contingent-earnconsideration and paid an additional $0.3 million in cash, the maximum amount earned for the second payment of the Twitchy contingent-earnconsideration in January 2015. ·On January 10, 2014, we acquired the entities of Eagle Publishing, including Regnery Publishing, HumanEvents.com, RedState.com, EagleFinancial Publications and Eagle Wellness. We began operating these entities as of the closing date. The base purchase price was $8.5 million,with $3.5 million paid in cash upon closing, and deferred payments of $2.5 million due January 2015 and $2.5 million due January 2016. Wepaid an additional $0.4 million of costs upon closing associated with liabilities incurred by the seller. oOn June 6, 2014, we paid $1.5 million of the $2.5 million deferred installment due January 2015. Based on the early payment, ourdeferred payment due January 2015 was reduced to $0.9 million. The deferred payments due January 2015 and January 2016 wererecorded at their present value of $0.9 million and $2.4 million, respectively, with the discount being amortized to non-cash interestexpense over the payment term using the effective interest method. oAs part of our purchase agreement, we may pay up to an additional $8.5 million of contingent earn-out consideration over the nextthree years based on the achievement of certain revenue benchmarks. We estimated the fair value of the contingent earn-outconsideration using a probability-weighted discounted cash flow model. We recorded the estimated fair value of the $8.5 million totalcontingent earn-out consideration at the present value of $2.0 million as of the closing date. oWe recorded a net increase of $0.4 million in the fair value of the contingent earn-out consideration associated with Eagle entities,which is reflected as an expense in our operating results for the year ending December 31, 2014. oAs of December 31, 2014, $0.9 million of the actual cash due toward the earned contingent earn-out consideration is recorded incurrent liabilities. We may pay up to an additional $5.9 million over the remaining earn-out period based on the achievement of certainrevenue benchmarks. The estimated fair value of the contingent earn-out consideration is recorded at the present value of $1.7 millionat December 31, 2014. Net Broadcast Revenue Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Net Broadcast Revenue $188,544 $192,923 $4,379 2.3% 79.6% 72.4%Same Station Net Broadcast Revenue $188,479 $191,372 $2,893 1.5% The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source. Year Ended December 31, 2013 2014 (Dollars in thousands) Block program time: National $44,486 23.6% $44,921 23.3%Local 32,608 17.3 34,600 17.9 77,094 40.9 79,521 41.2 Advertising: National 13,840 7.3 14,986 7.8 Local 63,007 33.4 62,566 32.4 76,847 40.7 77,552 40.2 Digital 4,847 2.7 5,108 2.7 Infomercials 4,970 2.6 3,906 2.0 Network 15,364 8.1 15,822 8.2 Other 9,422 5.0 11,014 5.7 Net broadcast revenue $188,544 100.0% $192,923 100.0% 55Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Block programming revenue increased $2.4 million, including a $0.9 million increase from national ministry programs on our Christian Teaching &Talk format stations, a $0.8 million increase from our News Talk format stations, a $0.4 million increase in local programs on our Spanish Christian Teaching& Talk format stations, and a $0.2 million increase from our business stations. Increases in our programming revenue reflect a higher number of programmersfeatured on-air that in turn creates a higher demand for premium time slots. The increase in demand results in realization of higher rates. Advertising revenue, net of agency commissions, reflects a net increase of $0.7 million overall that includes a $1.5 million increase in political basedadvertisements associated with local and congressional elections during 2014. Excluding political based advertisements, advertising revenues declined $0.8million, or 1.1%, due to a reduction in the number of advertisements placed during 2014. The declines include approximately $1.2 million from financialservices and $0.2 million from the automotive industry partially offset by an increase of $0.4 million from the medical and healthcare industry. Digital revenues generated from our broadcast division increased $0.3 million based on a volume of sales consistent with our efforts to promoteadvertising value from our station websites. Declines in infomercial revenue reflect our ongoing efforts to develop programming that is tailored to our listening audience and consistent with ourcompany values. We have reduced the use of infomercial programs that we believe are not of interest to our listeners. Political based advertisements increased network revenues by $0.5 million. Increases in other revenue of $1.6 million include $0.9 million from listener purchase programs, a popular on-air promotion that offers our listenersaccess to special discounts and incentives from local advertisers and $0.5 million of event revenue based on higher attendance and sponsorships at our localevents including distinguished speakers and concerts. Net Digital Media Revenue Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Net Digital Media Revenue $35,156 $46,862 $11,706 33.3% 14.8% 17.6% The following table shows the dollar amount and percentage of net digital media for each revenue source. Year Ended December 31, 2013 2014 (Dollars in thousands) Digital Advertising $21,523 61.2% $24,996 53.4%Digital Streaming 3,862 11.0 4,280 9.1 Digital Subscriptions — — 5,825 12.4 Digital Downloads 7,963 22.7 7,982 17.0 e-commerce 1,348 3.8 3,394 7.3 Other 460 1.3 385 0.8 Net digital media revenue $35,156 100.0% $46,862 100.0% We continue to acquire and build websites to deliver relevant content to our audience. On January 10, 2014, we acquired and began operatingHumanEvents.com, RedState.com, Eagle Financial Publications and Eagle Wellness. During 2013, we acquired Christnotes.org, Godupdates.org as well asTwitchy.com on December 10, 2013. Digital advertising revenue, net of agency commissions, increased $3.5 million, of which $3.2 million was related to our acquisitions that includeHumanEvents.com and Redstate.com as well as our December 10, 2013 acquisition of Twitchy.com. The remaining $0.3 million increase was based on highersales volumes. Increases in digital streaming revenue of $0.4 million reflect an increase in volume of streaming content from our Christian content websites. Digital subscription revenue is a new revenue stream from our acquisitions of Eagle Financial Publications. We issue digital newsletters that providemarket analysis and investment advice for individual subscribers from financial commentators. Increases in digital download revenues reflect a $0.2 million increase in the use of services on our websites, including ChurchStaffing.com andChristianJobs.com within our Church product division offset by a $0.3 million decline in the number of downloads from our SermonSpice.com website dueto an increase in competition from other providers that offer subscription options. Our e-commerce revenue reflects a $2.2 million increase from sales generated by Eagle Wellness products offset by a $0.2 million decline in the numberof books and DVD’s sold through our station websites. 56Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net Publishing Revenue Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Net Publishing Revenue $13,234 $26,751 $13,517 102.1% 5.6% 10.0% The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source. Year Ended December 31, 2013 2014 (Dollars in thousands) Book Sales $3,664 27.7% $13,793 51.6%e-Book Sales — — 2,655 9.9 Self-Publishing Fees 4,297 32.5 5,121 19.1 Print Magazine Subscriptions 2,308 17.4 2,055 7.7 Print Magazine Advertisements 2,172 16.4 1,983 7.4 Other 793 6.0 1,144 4.3 $13,234 100.0% $26,751 100.0% Revenue from book sales increased $10.1 million with $10.0 million from Regnery Publishing, which we acquired on January 10, 2014. RegneryPublishing generated $15.8 million in gross sales reported net of estimated sales returns and allowances of $5.8 million. Xulon Press book sales were $3.7million for the year ending December 31, 2013 compared to $3.6 million for the same period of the prior year. e-Book sales of $2.7 million for the year ending December 31, 2014, were generated from Regnery Publishing. Self-publishing fees from Xulon Press increased $0.8 million due to an increase in the number of authors utilizing these services. Our ability to cross-promote Xulon Press to authors that are not selected for publishing through Regnery is expected to benefit our publishing division. Print magazine revenue remains challenged with a $0.2 million decline in subscription revenue and a $0.2 million decline in advertising revenues basedon lower distribution levels. As of December 2014, we have discontinued printing and distributing Townhall Magazine, the content of which will only beavailable in the future in an online version. We continue to explore cost reductions in this segment to offset the eroding revenue base. Broadcast Operating Expenses Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Broadcast Operating Expenses $129,857 $138,564 $8,707 6.7% 54.8% 52.0%Same Station Broadcast Operating Expenses $129,721 $136,716 $6,995 5.4% Broadcast operating expenses reflect higher variable costs associated with the increase in broadcast revenues. Increases include $3.5 million inpersonnel-related costs including sales-based commissions, $2.5 million in advertising and event costs, $1.0 million in professional services, $0.8 million infacility-related costs, $0.4 million of travel costs, $0.2 million in music license fees, and $0.2 million in production and programing expenses. The increase inbroadcast operating expenses on a same-station basis reflects these items net of the impact of start-up costs associated with format changes and stationlaunches. Digital Media Operating Expenses Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Digital Media Operating Expenses $25,741 $36,232 $10,491 40.8% 10.9% 13.6% 57Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Increases in digital media operating expenses include $7.4 million of operating costs incurred by the Eagle entities acquired on January 10, 2014. Whilethese increases in operating expenses are consistent with our strategic acquisitions, we continue to seek cost effective ways to reduce our overhead costs andexpenses. Across all other digital platforms, we incurred higher variable costs consistent with the higher revenue generated from this segment. Increasesinclude $2.3 million in personnel related costs including sales-based commissions, $0.8 million in streaming and hosting expenses, $0.2 million inprofessional services and $0.1 million in advertising expenses that were partially offset by a $0.2 million decline in bad debt expenses due to increase incollections and a $0.2 million decline in royalties in line with the decrease in digital downloads from our SermonSpice.com website. Publishing Operating Expenses Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Publishing Operating Expenses $14,280 $26,143 $11,863 83.1% 6.0% 9.8% Regnery Publishing, which we acquired on January 10, 2014, generated $12.1 million of operating expenses including royalties of $3.9 million and costof sales of $3.7 million. The remaining operating expenses of Regnery Publishing included personnel and facility related costs. While these increases inoperating expenses are consistent with our strategic acquisitions, we continue to seek cost effective ways to reduce our overhead costs and expenses. Xulon Press incurred higher variable costs associated with their revenue growth, including an increase of $0.4 million in personnel-related costs from anincreases in the number of employees and in the number of hours worked to meet production demands and a $0.1 million increase in advertising expensesthat were offset by a $0.2 million decline in bad debt expenses due to an increase in collection activity. Our print magazines, which remain challenged with generating revenue, saw a decline in operating expenses of $0.3 million including $0.2 million inprinting and mailing costs and $0.1 million in personnel related costs. Unallocated Corporate Expenses Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Unallocated Corporate Expenses $16,081 $17,092 $1,011 6.3% 6.8% 6.4% Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax and treasury that are not specific toany one of our operating segments. Increases in these costs over the same period of the prior year include $1.0 million in personnel-related costs that includes$0.2 million of severance and $0.2 million in acquisition related costs partially offset by a $0.2 million decline in non-cash stock-based compensationexpense. While these increases in shared general and administrative services are consistent with our acquisition related growth and development, we continueto seek cost effective ways to reduce our overhead costs and expenses. Depreciation Expense Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Depreciation Expense $12,448 $12,629 $181 1.5% 5.3% 4.7% Depreciation expense increased due to recent acquisitions of property and equipment, including assets of Eagle entities acquired on January 10, 2014. Amortization Expense Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Amortization Expense $2,814 $6,196 $3,382 120.2% 1.2% 2.3% The increase in amortization expense reflects our acquisitions of Christnotes.org, Godupdates.org and Twitchy.com in 2013 and Eagle entities in January2014, that included intangible assets such as advertising agreements, customer lists and domain names. The estimated useful lives of these assets range fromone to five years, with the one-year assets amortized over the first twelve months from the acquisition date. Change in the Estimated Fair Value of Contingent Earn-Out Consideration Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Change in the estimated fair value of contingentearn-out consideration $— $734 $734 100.0% —% 0.3% 58Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We recorded an increase of $0.3 million in the fair value of the contingent earn-out consideration associated with our December 2013 acquisition ofTwitchy.com. The increase reflects actual page views in excess of those estimated at the time of our projections. We will continue to review our estimatesquarterly over the remaining one-year earn-out period. As of March 13, 2015, we have paid $0.6 million in cash toward the contingent earn-out considerationand may pay up to an additional $0.7 million over the remaining earn-out period based on the achievement of certain page view milestones established in thepurchase agreement. The estimated fair value of the contingent earn-out consideration is recorded at the present value of $0.4 million at December 31, 2014. We recorded a net increase of $0.4 million in the fair value of the contingent earn-out consideration associated with Eagle entities. The net increasereflects actual revenues earned by Eagle entities in excess of those estimated at the time of our projections. We will continue to review our estimates quarterlyover the remaining earn-out period of two years. As of December 31, 2014, $0.9 million of the actual cash due toward the contingent earn-out considerationearned is recorded in current liabilities. We may pay up to an additional $5.9 million over the remaining earn-out period based on the achievement of certainrevenue benchmarks. The estimated fair value of the contingent earn-out consideration is recorded at the present value of $1.7 million at December 31, 2014. Any changes in the estimated fair value of the contingent earn-out consideration, up to the contracted amount, will be reflected in our results ofoperations in future periods as they are identified. Changes in the fair value of the contingent earn-out consideration may materially impact and causevolatility in our future operating results. Impairment of Indefinite-Lived Long-Term Assets Other than Goodwill Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Impairment of indefinite-lived long-term assetsother than goodwill $1,006 $34 $(972) (96.6)% 0.4% —% Due to actual operating results that did not meet or exceed the expectations and assumptions used in our prior estimates of fair value, we performed aninterim valuation of our mastheads as of June 30, 2013. Based on our reductions in projected revenue growth and an increase in the discount rate from 8.5%to 9.0%, we determined that the carrying value of the mastheads were less than their estimated fair value. We recorded an impairment charge of $0.3 millionassociated with the mastheads. We perform our annual testing in the fourth quarter of each year. During our annual testing for 2013, we recorded anadditional $0.7 million impairment charge based on further reductions in the projected revenue growth and an increase in the discount rate from 9.0% to9.5%. During our annual testing for 2014, which coincides with our budget and financial forecasts process for the following year, we decided to ceasepublishing Townhall Magazine as of December 2014. We reduced our projected net revenues for the following year and we are considering ceasingadditional print magazines in the future. Although we expect to realize cost savings with the planned reduction in the number of print magazines produced,we do not expect the savings to create large gains. Based on the reductions in our projected net revenues and the reduction in the number of publications, werecorded an impairment loss of $34,000 associated with magazine mastheads. These impairments were driven by reductions in projected net revenues and a reduction in the number of publications produced. The growth of digital-only publications, that are often free to readers or at a significantly reduced cost to readers, has hindered the ability of the publishing industry to recover fromthe economic recession that began in 2008. We believe that the impairments are indicative of trends in the publishing industry as a whole and are not uniqueto our company or operations. Impairment of Goodwill Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Impairment of goodwill $438 $45 $(393) (89.7)% 0.2% —% Based on the impairments recognized to the value of our mastheads in 2013, we could not conclude that it was more likely than not that goodwillassociated with our magazine publishing unit was not impaired. We obtained an independent fair value of our magazine publishing unit as of June 2013.Based on this valuation, we determined that the carrying value of the goodwill was less than the implied value of goodwill as of that date and we recorded animpairment charge of $0.4 million. Based on the subsequent impairment of the fair value of mastheads, the carrying value of goodwill associated with ourmagazine publishing unit was not at risk of impairment as of our annual testing period. There were no indications of impairment present during the annualtesting period ending December 31, 2013. 59Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Based on the impairment recognized to the value of our mastheads in 2014, we could not conclude that it was more likely than not that goodwillassociated with our magazine publishing unit was not impaired. We obtained an independent fair value of our magazine publishing unit as of December2014. Based on this valuation, we determined that the carrying value of the goodwill was less than the implied value of goodwill as of that date and werecorded an impairment charge of $45,000. (Gain) loss on the Sale or Disposal of Assets Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue (Gain) loss on the sale or disposal of assets $(264) $251 $515 (195.1)% (0.1)% 0.1% The net loss on the sale or disposal of assets for the year ended December 31, 2014 includes a $0.2 million loss associated with the write-off of areceivable from a prior station sale, a $0.2 million loss associated with the sale of land in our Miami, Florida station offset by a $0.2 million note receivablesettlement and $0.1 million of insurance proceeds from a claim associated with one of our market as well as other insignificant fixed asset and equipmentdisposals. The net gain on disposal of assets for the same period of the prior year includes a $0.4 million pre-tax gain on the partial sale of land in our Clevelandmarket and a $0.1 million of insurance proceeds for damages at one of our stations offset by various fixed asset and equipment disposals. Other Income (Expense) Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Interest Income $68 $45 $(23) (33.8)% —% —%Interest Expense (16,892) (15,993) 899 (5.3)% (7.1)% (6.0)%Change in the fair value of interest rate swap 3,177 (2,702) (5,879) (185.0)% 1.3% (1.0)%Loss on early retirement of long-term debt (27,795) (391) 27,404 (98.6)% (11.7)% (0.1)%Net miscellaneous income and (expenses) 18 665 647 3,594.4% —% 0.2% Interest income represents earnings on excess cash. Interest expense reflects a decrease of $0.9 million due to the lower cost of capital under our TermLoan B as compared to our Terminated 95/8% Notes Senior Secured Second Lien Notes due 2016 which were repurchased in March 2013 in a cash tenderoffer (“Tender Offer”). The change in the fair value of interest rate swap reflects the mark-to-market fair value adjustment of the interest rate swap agreementthat we entered into on March 28, 2013. Net miscellaneous income and expenses includes $0.2 million of royalty income and fees for our real estate properties, $0.3 million of insuranceproceeds, and $0.2 million received in an eminent domain settlement. The loss on early retirement of long-term debt of $27.8 million includes the unamortized discount associated with the two $4.0 million repayments ofour Term Loan B, $26.9 million from the repurchase of $212.6 million of the outstanding 95/8% Notes and $0.9 million associated with the termination ofour then existing credit facilities in conjunction with the Term Loan B and revolving credit facility of $25.0 million entered into on March 14, 2013(“Revolver”). Provision for (Benefit from) Income Taxes Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Provision for (benefit from) income taxes $(4,192) $4,765 $8,957 (213.7)% (1.8)% 1.8% 60Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In accordance with FASB ASC Topic 740 Income Taxes, our tax provision for income taxes was $4.8 million for the year ended December 31, 2014compared to a tax benefit of $4.2 million for the same period of the prior year. The increase in our provision results from $10.2 million of pre-tax income fromcontinuing operations for the current period compared to a pre-tax loss from continuing operations of $6.9 for the same period of the prior year, net ofexpirations of certain state statute of limitations for prior year deductions and carryovers. Provision for income taxes as a percentage of income before incometaxes, or the effective tax rate, was 46.5% for the year ended December 31, 2014 compared to 60.8% for the same period of the prior year. The effective taxrate 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 fortax purposes, and changes in the valuation allowance related to the utilization of certain state net operating loss carryforwards. Loss From Discontinued Operations, Net of Tax Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Loss from discontinued operations, net of tax $(37) $— $37 (100.0)% —% —% The loss from discontinued operations for the year ending December 31, 2013 relates to expenses associated with facilities previously occupied bySamaritan Fundraising, which ceased operations in December 2011. Net Income (Loss) Year Ended December 31, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Net Income (loss) $(2,736) $5,475 $8,211 (300.1)% (1.2)% 2.1% We recognized net income of $5.5 million for the year ended December 31, 2014 compared to a loss of $2.7 million in the same period of the prior year.The favorable change of $8.2 million reflects the non-recurrence of the prior year $27.8 million loss from the early retirement of long-term debt and a $0.9million reduction in interest expense based on our new credit agreement entered in March 2013 offset by a $5.9 million decline in income from continuingoperations due to an increase in operating expenses of $35.5 million, a $9.0 million increase in our tax provision, and a $5.9 million increase in the chargeassociated with the change in fair value of our swap agreement, Year Ended December 31, 2013 compared to the year ended December 31, 2012 The following factors affected our results of operations and our cash flows for the year ended December 31, 2013 as compared to the prior year: Financing ·On March 14, 2013, we entered into a new senior secured credit facility, consisting of the Term Loan B of $300.0 million and Revolver of $25.0million. We used the proceeds of the new facility to tender for and redeem our Terminated 95/8% Notes, retire all other outstanding corporatedebt, and pay related fees. ·On March 14, 2013, we tendered for $212.6 million in aggregate principal amount of the Terminated 95/8% Notes for an aggregate purchaseprice of $240.3 million, or at a price equal to 110.65% of the face value of the Terminated 95/8% Notes in the Tender Offer. We paid $22.7million for this repurchase resulting in a $26.9 million pre-tax loss on the early retirement of long-term debt. ·On June 3, 2013, we redeemed the remaining $0.9 million of the Terminated 95/8% Notes that were outstanding after the Tender Offer. ·During the year ended December 31, 2013, we repaid $8.8 million in principal on our Term Loan B. Our repayments consisted of $0.8 millionon December 30, 2013, $4.0 million on September 30, 1013 and $4.0 million on June 28, 2013. We recorded a $33,000 pre-tax loss on the earlyretirement of long-term debt related to the unamortized discount associated with these repayments. ·On September 30, 2013, we repaid $2.0 million in principal on the seller-financed note due April 2014 related to our acquisition of WGTK-FM,in Greenville, South Carolina, on February 5, 2013. ·On March 27, 2013, we entered into an interest rate swap agreement with Wells Fargo Bank that began on March 28, 2014, with a notionalprincipal amount of $150.0 million to offset risks associated with the variable interest rate on our current senior secured credit facility. 61Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ·During the year ended December 31, 2013, we paid quarterly distributions of $5.2 million in total compared to $3.4 million in total in the prioryear. Acquisitions ·On December 10, 2013, we acquired the Twitchy.com website for $0.9 million paid in cash upon close of the transaction and up to $1.2 millionin contingent earn-out consideration payable based on the achievement of future page view targets. The fair value of the earn-out considerationbased on a weighted average probability of payment was $0.6 million. ·On December 9, 2013, we acquired the EverythingInspirational.com domain name along with fourteen Facebook pages and various otherChristian-themed social media intangible assets for $0.4 million in cash. We paid $0.1 million in cash upon closing and paid the remaining $0.3million in cash over three installments within 180 days from the closing date. ·On September 23, 2013, we entered into an APA to acquire radio stations KDIS-FM, Little Rock, Arkansas and KRDY-AM, San Antonio, Texasfor $2.5 million in cash, including $0.5 million related to the KRDY-AM tower site land in San Antonio, Texas. On December 20, 2013, weclosed on the land purchase for $0.5 million in cash. The radio station acquisitions closed on February 7, 2014. ·On September 11, 2013, we acquired the GodUpdates.org domain and Facebook page for $0.3 million in cash. ·On August 10, 2013, we acquired Christnotes.org for $0.5 million in cash. ·On February 15, 2013, we completed the acquisition of WTOH-FM (formerly WJKR-FM), Columbus, Ohio, for $4.0 million in cash. ·On February 5, 2013, we completed the acquisition of WGTK-FM (formerly WMUU-FM), Greenville, South Carolina, for $5.4 million,consisting of $1.0 million in cash, a $2.0 million note payable in April 2014, and a $3.0 million advertising credit. We paid the $2.0 millionnote, including accrued interest of $8,500 in September 2013. Net Broadcast Revenue Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Net Broadcast Revenue $187,640 $188,544 $904 0.5% 81.9% 79.6%Same Station Net Broadcast Revenue $187,419 $186,714 $(705) (0.4)% The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source. Year Ended December 31, 2012 2013 (Dollars in thousands) Block program time: National $43,468 23.2% $44,486 23.6%Local 32,321 17.2 32,608 17.3 75,789 40.4 77,094 40.9 Advertising: National 14,200 7.6 13,840 7.3 Local 63,233 33.7 63,007 33.4 77,433 41.3 76,847 40.7 Digital 4,460 2.4 4,847 2.7 Infomercials 6,112 3.3 4,970 2.6 Network 16,083 8.5 15,364 8.1 Other 7,763 4.1 9,422 5.0 Net broadcast revenue $187,640 100.0% $188,544 100.0% Block programming revenue increased $1.3 million, of which $1.2 million was generated from national programming revenue on our Christian,Teaching and Talk format radio stations. The increase is due to an increase in the number of programmers featured on-air and corresponding rate increases forpremium time slots based on demand. 62Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Advertising revenues, reported net of agency commissions, were impacted by political revenues, which were $0.4 million in 2013 compared to $2.3million in 2012. Excluding the impact of political, advertising revenues increased by $1.3 million due to higher rates generated from national spot sales onour Contemporary Christian Music format radio stations. Rates charged in these formats are ratings-sensitive and positively impacted during the year. Digital broadcast revenue includes banner advertisements and streaming advertisements that increased $0.4 million due to a higher volume of salesconsistent with the promotion of our broadcast station websites. Declines in infomercial revenues of $1.1 million reflect our ongoing efforts to develop programming that is tailored to our listening audience andconsistent with our company values. We have reduced the use of infomercial programs that we believe are not of interest to our listeners. Declines in network revenue reflect the impact of political revenues, of which $0.6 million was recognized in 2013 compared to $2.0 million in 2012.Excluding political revenues, network revenue increased $0.7 million due to higher compensation received for network programs in select markets andincreased distribution of SRN programming. Increases in other revenue include $1.3 million in listener purchase program revenue, a popular on-air promotion that offers our listeners access to specialdiscounts and incentives from local advertisers and $0.2 million in rental revenue generated from radio tower subleases. On a same-station basis, net broadcast revenue was impacted by the decline in political advertising with $1.0 million recognized in 2013 in local &national advertising and network revenue compared to $4.3 million in 2012. Net Digital Media Revenue Year Ended December31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Net Digital Media Revenue $28,166 $35,156 $6,990 24.8% 12.3% 14.8% The following table shows the dollar amount and percentage of net digital media for each revenue source. Year Ended December 31, 2012 2013 (Dollars in thousands) Digital Advertising $16,923 60.1% $21,523 61.2%Digital Streaming 3,399 12.1 3,862 11.0 Digital Downloads 5,927 21.0 7,963 22.7 e-commerce 1,529 5.4 1,348 3.8 Other 388 1.4 460 1.3 Net digital media revenue $28,166 100.0% $35,156 100.0% We continue to acquire or build websites that drive viewers to our content. During 2013, we acquired Christnotes.org and GodUpdates.org, as well asrecognized a full year of revenue from our 2012 acquisitions of Godvine.com and SermonSpice.com. The revenue growth reflects a higher demand for digitaladvertisements, including web banners and e-mail sponsorships. Digital advertising revenue, net of agency commissions, increased $4.6 million due to a higher volume of sales. Excluding the $1.2 million of politicalrevenue recognized in 2012, digital advertising revenue increased $3.4 million. Increases in digital streaming revenue of $0.5 million reflect an increase in volume of streaming content from our Christian content websites. Increases in digital download revenues of $2.0 million reflect increases in the number of downloads from our Church product websites that offersdownloads and service platforms tailored for pastors and other educators. Publishing Revenue Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Publishing Revenue $13,373 $13,234 $(139) (1.0)% 5.8% 5.6% 63Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source. Year Ended December 31, 2012 2013 (Dollars in thousands) Book Sales $3,306 24.7% $3,664 27.7%Self-Publishing Fees 3,781 28.3 4,297 32.5 Print Magazine Subscription 2,663 19.9 2,308 17.4 Print Magazine Advertising 2,181 16.3 2,172 16.4 Other 1,442 10.8 793 6.0 $13,373 100.0% $13,234 100.0% Xulon Press generated a $0.4 million increase in books sales due to a higher volume of books sold and a $0.5 million increase in publishing fees basedon an increase in the number of authors utilizing these services. Print magazine revenue remained challenged with at $0.4 million decline in subscriptionrevenue due to a lower number of subscribers and lower distribution levels. Broadcast Operating Expenses Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Broadcast Operating Expenses $126,514 $129,857 $3,343 2.6% 55.2% 54.8%Same Station Broadcast Operating Expenses $126,244 $127,965 $1,721 1.4% Broadcast operating expense reflect increases of $2.7 million in personnel related costs including sales based commissions, $0.5 million in productionand programming expenses, $0.4 million in promotional and event expenses, $0.3 million in bad debt expense associated with higher revenues, $0.3 millionin professional services, $0.2 million in facility related expenses due to the addition of the Greenville, South Carolina market and rent escalations based onchanges in the Consumer Price Index, and $0.1 million in music license fees. These increases were offset by declines of $1.0 million in advertising expensesand $0.1 million decline in travel and entertainment expenses. The increase in broadcast operating expenses on a same-station basis reflects these items net ofthe impact of start-up costs associated with format changes and station launches. Digital Media Operating Expenses Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Digital Media Operating Expenses $22,848 $25,741 $2,893 12.7% 10.0% 10.9% Digital media operating expenses reflect higher variable expenses associated with higher revenues, including increases of $1.5 million in personnelrelated costs including sales-based commissions, $0.9 million in royalties, $0.4 million in streaming and hosting expense, $0.1 million in bad debt expenseassociated with higher revenues and $0.1 million in professional services. These increases were partially offset by a $0.3 million decline in discretionaryadvertising expenses. The decline in discretionary advertising expenses is due to the nature and timing of various campaigns and events. Publishing Operating Expenses Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Publishing Operating Expenses $13,339 $14,280 $941 7.1% 5.8% 6.0% Publishing operating expenses reflect a $0.5 million increase in personnel related costs including commissions associated with higher revenues fromXulon Press and a $0.5 million increase in bad debt expense, also associated with higher revenues from Xulon Press. Unallocated Corporate Expenses Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Unallocated Corporate Expenses $14,396 $16,081 $1,685 11.7% 6.3% 6.8% 64Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax and treasury that are not specific toany one of our operating segments. The increase over the same period of the prior year includes $0.3 million in stock-based compensation expense based onrestricted share awards granted in 2013 that vested immediately, $0.5 million in personnel related costs, $0.2 million in travel and entertainment expense,$0.2 million in facility related costs, $0.2 million in computer software and maintenance, $0.1 million in acquisition related costs and legal fees, $0.1 millionin professional related services and $0.1 million in repair and maintenance expenses. While these increases in shared general and administrative services areconsistent with our acquisition related growth and development, we continue to seek cost effective ways to reduce our overhead costs and expenses. Depreciation Expense Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Depreciation Expense $12,343 $12,448 $105 0.9% 5.4% 5.3% Depreciation expense increased slightly due to acquisition activity during 2013. Amortization Expense Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Amortization Expense $2,304 $2,814 $510 22.1% 1.0% 1.2% Amortization expense increased due to the intangible assets recognized in the latter part of 2012 from our purchases of Godvine.com, SermonSpice.comand Churchangel.com. The intangible assets include advertising agreements, customer lists and domain names with useful lives that range between one andfive years. Impairment of Indefinite-Lived Long-Term Assets Other than Goodwill Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Impairment of Indefinite-Lived Long-Term AssetsOther than Goodwill $88 $1,006 $918 1,043.2% —% 0.4% Due to actual operating results that did not meet or exceed the expectations and assumptions used in our prior estimates of fair value, we performed aninterim valuation of our mastheads as of June 30, 2013. Based on our reductions in projected revenue growth and an increase in the discount rate from 8.5%to 9.0%, we determined that the carrying value of the mastheads were less than their estimated fair value. We recorded an impairment charge of $0.3 millionassociated with the mastheads. During our annual testing, we recorded an additional $0.7 million impairment charge based on further reductions in theprojected revenue growth and an increase in the discount rate from 9.0% to 9.5%. These impairments were driven by declines in revenue associated with ourprint magazines and are a trend in the industry as a whole that are not unique to our operations. Impairment of Goodwill Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Impairment of Goodwill $— $438 $438 100.0% —% 0.2% Based on the impairments recognized to the value of our mastheads, we could not conclude that it was more likely than not that goodwill associated withour magazine publishing unit was not impaired. We obtained an independent fair value of our magazine publishing unit as of June 2013. Based on thisvaluation, we determined that the carrying value of the goodwill was less than the implied value of goodwill as of that date and we recorded an impairmentcharge of $0.4 million. Based on the subsequent impairment of the fair value of mastheads, the carrying value of goodwill associated with our magazinepublishing unit was not at risk of impairment as of our annual testing period. There were no indications of impairment present during the period endingDecember 31, 2013. 65Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Impairment of Long-Lived Assets Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Impairment of Long-Lived Assets $6,808 $— $(6,808) (100.0)% 3.0% —% Based on changes in management’s planned usage, we classified land in Covina, California as held for sale as of June 2012. We evaluated the land forimpairment in accordance with guidance for impairment of long-lived assets held for sale. We determined that the carrying value of the land exceeded theestimated fair value less costs to sell. We recorded an impairment charge of $5.6 million associated with the land based on our estimated sale price. InDecember 2012, after several purchase offers for the land were terminated, we obtained a third party valuation for the land. Based on the fair value determinedby the third-party, we recorded an additional impairment charge of $1.2 million associated with the land. There were no indications of impairment presentduring the period ending December 31, 2014 and it is our intent to continue to pursue the sale of this land. (Gain) loss on the Sale or Disposal of Assets Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue (Gain) Loss on the Sale or Disposal of Assets $49 $(264) $(313) (638.8)% —% (0.1)% The net gain on the sale or disposal of assets for the year ended December 31, 2013 includes a $0.4 million pre-tax gain on the partial sale of land in ourCleveland market and $0.1 million of insurance proceeds for damages at one of our stations offset by various fixed asset and equipment disposals. The netloss on disposal of assets for the same period of the prior year, includes a $0.2 million pre-tax gain on the sale of WBZS-AM in Pawtucket, Rhode Island and a$0.6 million gain from insurance proceeds for repairs of storm damage in our New York market, partially offset by various fixed asset and equipmentdisposals including an additional loss associated with the write-off of a receivable from a prior station sale. Other Income (Expense) Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Interest Income $106 $68 $(38) (35.8)% —% —%Interest Expense (24,911) (16,892) 8,019 (32.2)% (10.9)% (7.1)%Change in the Fair Value of Interest Rate Swaps — 3,177 3,177 100.0% —% 1.3%Loss on Early Retirement of Long-Term Debt (1,088) (27,795) (26,707) 2,454.7% (0.5)% (11.7)%Net Miscellaneous Income and (Expenses) 79 18 (61) (77.2)% —% —% Interest income represents earnings on excess cash. Interest expense reflects a decrease of $8.0 million due to the lower cost of capital under our TermLoan B as compared to our Terminated 95/8% Notes which were primarily repurchased in March 2013 in the Tender Offer. The change in the fair value ofinterest rate swaps reflect the mark-to-market fair value adjustment of the interest rate swap agreement that we entered into on March 28, 2013. The loss on early retirement of long-term debt for the year ended December 31, 2013 includes the unamortized discount associated with the two $4.0million repayments of our Term Loan B, $26.9 million from the repurchase and redemption of $212.6 million of the then outstanding Terminated 95/8%Notes, and $0.9 million associated with the termination of our then existing credit facilities in conjunction with the Term Loan B and Revolver entered intoon March 14, 2013. Loss on early retirement of debt of $1.1 million for the year ended December 31, 2012 represents the redemptions at a price equal to103% of the face value and open market repurchases in each period of principal amounts of the Terminated 95/8% Notes. Net miscellaneous income and expenses relates to royalty income from our real estate properties. Provision For (Benefit From) Income Taxes Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Provision For (Benefit From) Income Taxes $153 $(4,192) $(4,345) (2,839.9)% 0.1% (1.8)% 66Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In accordance with FASB ASC Topic 740 “Income Taxes,” our benefit from income taxes was $4.2 million for the year ended December 31, 2013compared to a tax provision of $0.2 million for the same period of the prior year. Provision for income taxes as a percentage of income before income taxes(that is, the effective tax rate) was 60.8% for the year ended December 31, 2013 compared to 3.3% for the same period of the prior year. The effective tax ratefor 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 taxpurposes, and changes in the valuation allowance from the utilization of certain state net operating loss carryforwards. Loss from Discontinued Operations, Net of Tax Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Loss from Discontinued Operations, Net of Tax $(95) $(37) $58 (61.1)% —% —% The loss from discontinued operations for the years ended December 31, 2012 and 2013 reflect expenses associated with facilities previously occupiedby Samaritan Fundraising, which ceased operations in December 2011. Net Income (Loss) Year Ended December 31, 2012 2013 Change $ Change % 2012 2013 (Dollars in thousands) % of Total Net Revenue Net Income (Loss) $4,428 $(2,736) $(7,164) (161.8)% 1.9% (1.2)% The decrease in net income reflects the increase of a $26.7 million loss on early retirement of long-term debt and a $3.7 million increase in operatingexpenses offset by the favorable impact of a $7.7 million increase in total revenue, a $8.0 million decrease in interest expense, a $3.2 million benefit from thechange in the fair value of our interest rate swap and a $4.4 million decrease in income tax expense. NON-GAAP FINANCIAL MEASURES Regulation G and Item 10(e) of Regulation S-K define and prescribe the conditions under which certain non-GAAP financial information may bepresented. We closely monitor EBITDA, Adjusted EBITDA, Station Operating Income (“SOI”), Digital media operating income, publishing operatingincome, and free cash flow, all of which are non-GAAP financial measures. We believe that these non-GAAP financial measures provide useful informationabout our core operating results and thus are appropriate to enhance the overall understanding of our financial performance. These non-GAAP measures areintended to provide management and investors a more complete understanding of our underlying operational results, trends and performance. Managementuses these non-GAAP financial measures to evaluate financial results, develop budgets, manage expenditures, and determine employee compensation. Ourpresentation of this additional information should not be considered as a substitute for or superior to the most directly comparable financial measures asreported in accordance with GAAP. The performance of a radio broadcasting company is customarily measured by the ability of its stations to generate SOI. We define SOI as net broadcastrevenue less broadcast operating expenses. Accordingly, changes in net broadcast revenue and broadcast operating expenses, as explained above, have adirect 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 nota 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, whenconsidered in conjunction with operating income (the most directly comparable GAAP financial measure to SOI), because it is generally recognized by theradio broadcasting industry as a tool in measuring performance and in applying valuation methodologies for companies in the media, entertainment andcommunications industries. SOI is commonly used by investors and analysts who report on the industry to provide comparisons between broadcastinggroups. We use SOI as one of the key measures of operating efficiency and profitability, including our internal reviews associated with impairment analysis ofour indefinite-lived intangible assets. SOI does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cashactivity in accordance with GAAP and our income statement presents our financial performance prepared in accordance with GAAP. Our definition of SOI isnot necessarily comparable to similarly titled measures reported by other companies. 67Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Same station operating results include those stations that we own or operate in the same format on the first and last day of each quarter as well as thecorresponding quarter of the prior year. Same station results for a full calendar year are calculated as the sum of the same station-results for each of the fourquarters of that year. Same station results for our annual report are calculated as the sum of the same station-results for each of the four quarters of that year.We use same station results, a non-GAAP financial measure, both in presenting our results to stockholders and the investment community, and in our internalevaluation and management of the business. Our presentation of same station results are not intended to be considered in isolation or as a substitute for thefinancial information prepared and presented in accordance with GAAP. Our definition of same station operating results is not necessarily comparable tosimilarly 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 revenueminus digital media operating expenses. Publishing operating income is defined as net publishing revenue minus publishing operating expenses. Digitalmedia operating income and publishing operating income are not measures of performance in accordance with GAAP. Our presentations of these non-GAAPperformance measures are not to be considered a substitute for or superior to our operating results reported in accordance with GAAP. We believe that DigitalMedia Operating Income and Publishing Media Operating Income are useful non-GAAP financial measure to investors, when considered in conjunction withoperating income (the most directly comparable GAAP financial measure), because they are comparable to those used to measure performance of ourbroadcasting entities. We use this analysis as one of the key measures of operating efficiency, profitability and in our internal review. This measurement doesnot purport to represent cash provided by operating activities. Our statement of cash flows presents our cash activity in accordance with GAAP and ourincome statement presents our financial performance in accordance with GAAP. Our definitions of digital media operating income and publishing operatingincome are not necessarily comparable to similarly titled measures reported by other companies. We define EBITDA as net income before interest, taxes, depreciation, amortization and change in fair value of interest rate swaps. We define AdjustedEBITDA as EBITDA before gains or losses on the disposal of assets, changes in the estimated fair value of contingent earn-out consideration and non-cashcompensation expense. EBITDA and Adjusted EBITDA are commonly used by the broadcast and media industry as important measures of performance andare used by investors and analysts who report on the industry to provide meaningful comparisons between broadcasters. EBITDA and Adjusted EBITDA arenot 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 ourresults of operations and financial condition presented in accordance with GAAP. Our definitions of EBITDA and Adjusted EBITDA are not necessarilycomparable to similarly titled measures reported by other companies. We define free cash flow as Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, less cash paid for interest. Weconsider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by ouroperations after capital expenditures and cash paid for income taxes and interest. A limitation of free cash flow as a measure of financial performance is that itdoes not represent the total increase or decrease in our cash balance for the period. We use free cash flow, a non-GAAP financial measure, both in presentingour results to stockholders and the investment community, and in our internal evaluation and management of the business. Our presentation of free cash flowis not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Our definitionof free cash flow is not necessarily comparable to similarly titled measures reported by other companies. The table below shows select non-GAAP performance indicators that we believe provide useful information to management and investors. We use thesenon-GAAP measures to evaluate financial results, develop budgets, manage expenditures, and determine employee compensation. Our presentation of thisadditional information is not to be considered as a substitute for or superior to net income or loss as reported in accordance with GAAP. Year Ending December 31, Non-GAAP Financial Measures 2013 2014 (Dollars in thousands) Station Operating Income $58,687 $54,359 Digital Media Operating Income 9,415 10,630 Publishing Operating Income (loss) (1,046) 608 EBITDA 21,981 47,715 Adjusted EBITDA 52,842 50,746 Free Cash Flow 25,318 26,608 68Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The following table provides a reconciliation of these non-GAAP financial measures to net income (loss) as presented in our consolidated financialstatements for the years ending December 31, 2013 and 2014: Year Ending December 31, 2013 2014 (Dollars in thousands) Reconciliation of Station Operating Income, Digital Media Operating Income and Publishing Operating Income toNet Operating Income from Continuing Operations Station Operating Income $58,687 $54,359 Digital Media Operating Income 9,415 10,630 Publishing Operating Income (loss) (1,046) 608 Less: Unallocated corporate expenses (16,081) (17,092)Change in the estimated fair value of contingent earn-out consideration — (734)Depreciation and amortization (15,262) (18,825)Impairment of indefinite-lived long-term assets other than goodwill (1,006) (34)Impairment goodwill (438) (45)(Gain) loss on disposal of assets 264 (251)Net operating income from continuing operations $34,533 $28,616 Reconciliation of Adjusted EBITDA to EBITDA to Net Income (Loss) Adjusted EBITDA $52,842 $50,746 Less: Stock-based compensation (1,849) (1,576)Loss on early retirement of long-term debt (27,795) (391)Discontinued operations, net of tax (37) — Change in the estimated fair value of contingent earn-out consideration — (734)Impairment of indefinite-lived long-term assets other than goodwill (1,006) (34)Impairment of goodwill (438) (45)(Gain) loss on disposal of assets 264 (251)EBITDA 21,981 47,715 Plus: Interest income 68 45 Less: Depreciation and amortization (15,262) (18,825)Interest expense (16,892) (15,993)Change in fair value of interest rate swap 3,177 (2,702)Provision for (benefit from) income taxes 4,192 (4,765)Net income (loss) $(2,736) $5,475 Reconciliation of Adjusted EBITDA to Free Cash Flow Adjusted EBITDA $52,842 $50,746 Less: Cash paid for interest (16,747) (14,518)Cash paid for taxes (242) (257)Cash paid for capital expenditures, net (1) (10,535) (9,363)Free Cash Flow $25,318 $26,608 (1)Net cash paid for capital expenditures reflects actual cash payments net of amounts reimbursed for tenant improvements allowances. CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have beenprepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on anongoing 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. 69Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Significant areas for which management uses estimates include: (1) asset impairments, including broadcasting licenses, goodwill and other indefinite-lived intangible assets; (2) income tax valuation allowances; (3) uncertain tax positions; (4) allowance for doubtful accounts; (5) inventory reserves; (6)reserves for royalty advances; (7) self-insurance reserves; (8) fair value of equity awards; (9) estimated lives for tangible and intangible assets; (10) fair valuemeasurements; (11) contingency reserves; (12) probabilities associated with the potential for contingent earn-out consideration; and (13) sales returns andallowances. These estimates require the use of judgment as future events and the effect of these events cannot be predicted with certainty. The estimates willchange as new events occur, as more experience is acquired and as more information is obtained. We evaluate and update our assumptions and estimates onan 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 ourconsolidated financial statements. For a more comprehensive list of our accounting policies, see Note 1, Significant Accounting Policies, of theaccompanying consolidated financial statements included in this annual report on Form 10-K. Note 1 contains several other policies which are important tothe preparation of our consolidated financial statements, but do not meet the SEC’s definition of critical accounting policies because they do not involvesubjective or complex judgments. Accounting for acquisitions and upgrades of radio station and other assets 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 theexisting 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 aradio station is allocated to the broadcast license. It is our general policy to retain a third-party appraiser to value radio stations, networks, Internet businessesor publishing properties. The purchase price allocations that assign a fair value to broadcast licenses and other assets are subjective by their nature andrequire careful consideration and judgment. We believe that the allocations represent appropriate estimates of the fair value of the assets acquired. As part ofthe valuation and appraisal process, third-party appraisers prepare reports that assign values to the various asset categories in our financial statements.Management reviews these reports and determines the reasonableness of the assigned values used to record the acquisition of these properties upon the closeof the transaction. We undertake projects from time to time to upgrade our radio station technical facilities and/or FCC broadcast licenses. Our policy is to capitalize costsincurred up to the point where the project is complete, at which time we transfer the costs to the appropriate fixed asset and/or intangible asset categories.When the completion of a project is contingent upon FCC or other regulatory approval, we assess the probable future benefit of the asset at the time that it isrecorded and monitor it through the FCC or other regulatory approval process. In the event the required approval is not considered probable or the project isabandoned, we write-off the capitalized costs of the project. We estimate the economic life of each asset acquired to determine the period of time in which the asset should be depreciated or amortized. Aconsiderable amount of judgment is required in assessing the economic life of each asset. If the financial condition of the assets were to deteriorate theresulting change in life or impairment of the asset could cause a material impact and volatility in our operating results. Accounting for contingent consideration Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of theacquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservableinputs used in the determination of the fair value of the contingent consideration include managements assumptions about the likelihood of payment basedon the established benchmarks and discount rates based on internal rate of return analysis. The fair value measurement includes inputs that are Level 3measurement as discussed in Note 8 to our consolidated financial statements included in this annual report on Form 10-K. Should actual results increase ordecrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to thecontracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in ouroperating results. 70Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Revenue recognition Revenue is recognized as it is earned in accordance with applicable guidelines. We consider amounts to be earned once evidence of an arrangement hasbeen obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured. We account for broadcast revenue from the sale of airtime for programs or spots as the program or advertisement is broadcast. Revenues are reported netof agency commissions, which are calculated as a stated percentage applied to gross billings. Digital revenue is recognized upon delivery of page-views,delivery of impressions as specified in the contract, delivery of the digital newsletter or email, or upon delivery of the advertisement or programming contentvia streaming. Revenues are reported net of agency commissions, which are calculated as a stated percentage applied to gross billings. Revenue from productsales and book sales are recognized upon shipment net of distribution fees and an allowance for sales returns. Revenues from advertisements in our printmagazines are recognized upon delivery of the publication net of agency commissions, which are calculated as a stated percentage applied to gross billings.Subscription revenue from our print magazines and digital newsletters is recognized over the life of the related subscription. Revenue recognition for multiple-deliverables We may enter bundled advertising agreements that include spot advertisements on our radio stations, Internet banner placements, print magazineadvertisements and booth space at specific events, or some combination thereof. The multiple deliverables contained in each agreement are accounted forseparately over their respective delivery period provided that they are separate units of accounting. The selling price used for each deliverable is based onvendor specific objective evidence if available or estimated selling price if vendor specific objective evidence is not available. Objective evidence of fairvalue includes the price charged for each element when it is sold separately. The estimated selling price is the price that we would transact if the deliverablewas sold regularly on a standalone basis. Arrangement consideration is allocated at the inception of each arrangement to all deliverables using the relativeselling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of eachdeliverable’s selling price. Barter transactions We may provide advertising time in exchange for certain products, supplies and services. The terms of the exchanges generally permit for thepreemption of such broadcast time in favor of advertisers who purchase time on regular terms. We include the value of such exchanges in both netbroadcasting revenues and broadcast operating expenses. The value recorded for barter revenues is based upon management’s estimate of the fair value of theproducts, supplies and services received. Advertising time that our radio stations exchange for goods and or services is recorded as barter revenue when the advertisement is broadcast at an amountequal to our estimate fair value of what was received. The value of the goods or services received in such barter transactions is charged to expense as used.Barter advertising revenue included in broadcast revenue for the years ended December 31, 2012, 2013 and 2014 was approximately $5.3 million, $5.6million and $6.0 million, respectively. Barter expenses included in broadcast operating expense for the years ended December 31, 2012, 2013 and 2014 wasapproximately $5.3 million, $4.8 million and $6.0 million. 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 thereceivables, specific customer information and current economic conditions. Past due balances are generally are not written-off until all of our collectionefforts have been unsuccessful, including use of a collections agency. A considerable amount of judgment is required in assessing the likelihood of ultimaterealization 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. 71Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Sales returns We provide for estimated returns for products sold with the right of return, primarily book sales associated with Regnery Publishing and nutritionalproducts 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 arebased 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 establishingestimated 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 ineconomic conditions of the customer and/or its market. Partial self-insurance on employee health plan We provide health insurance benefits to eligible employees under a self-insured plan whereby the company pays actual medical claims subject to certainstop loss limits. We record self-insurance liabilities based on actual claims filed and an estimate of those claims incurred but not reported. Any projection oflosses concerning our liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors such as futureinflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should the actual amount of claims increase ordecrease beyond what was anticipated, we may adjust our future reserves. Our self-insurance liability was $0.5 million and $0.9 million at December 31, 2013and 2014, respectively. Royalty advances to authors Royalties due to book authors are paid in advance and capitalized. Royalties are expensed as the related book revenues are earned or when we determinethat future recovery of the royalty is not likely. We reviewed historical data associated with royalty advances, earnings and recoverability based on actualresults of Regnery Publishing. Historically, the longer the unearned portion of an advance remains outstanding, the less likely it is that we will recover theadvance through the sale of the book. We apply this historical experience to outstanding royalty advances to estimate the likelihood of recovery. A provisionwas established to expense the balance of any unearned advance which we believe is not recoverable. Our analysis also considers other discrete factors, suchas death of an author, any decision to not pursue publication of a title, poor market demand or other relevant factors. Inventory Our inventory on hand consists of published books and wellness products. Inventory is recorded at the lower of cost or market as determined on a First-InFirst-Out (“FIFO”) cost method. Inventory reserves We reviewed historical data associated with book and wellness product inventories held by Regnery Publishing and Eagle Wellness, respectively. Weutilized this historical data associated with sales returns and allowances and royalty reserves, as well as overall economic conditions and product demand, toestimate the fair value of inventory on hand. A provision has been established to expense the balance of unsold inventory for which we believe the cost to beunrecoverable. Accounting for discontinued operations We regularly review underperforming assets to determine if a sale or disposal might be a better way to monetize the assets. When a station, group ofstations, or other asset group is considered for sale or disposal, we review the transaction to determine if or when the entity qualifies as a discontinuedoperation in accordance with the criteria of FASB ASC Topic 205-20 “Discontinued Operations.” In April 2014, the FASB issued authoritative guidance thatraises the threshold for disposals to qualify as discontinued operations. Under the new guidance, a discontinued operation is (1) a component of an entity orgroup of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on anentity's operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date. For our radio stations, we define a cluster as a group of radio stations operating in the same geographic market, sharing the same building, equipment,and managed by a single general manager. The cluster level is the lowest level for which discrete financial information and cash flows are available and thelevel reviewed by management to analyze operating results. General Managers are compensated based on the results of their cluster as a whole, not the resultsof any individual radio stations. We have determined that a radio market qualifies for a discontinued operation when management, having the authority toapprove the action, commits to a plan to sell the asset (disposal group), the sale is probable, and the sale will result in the exit of a particular geographicmarket. 72Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. During the 4th quarter of 2011, based on operating results that did not meet expectations, we ceased operating Samaritan Fundraising as of December 31,2011. Samaritan Fundraising, which was reported in our Digital Media operations, was a web-based fundraising products company operating from a singlefacility in Fairfax, VA, under the control of one general manager. As a result of our decision to close the operations of Samaritan Fundraising, there were nomaterial cash flows associated with this entity and we have no ongoing or further involvement in the operations of this entity. We reported the operatingresults and net assets of this entity as a discontinued operation for all periods presented based on authoritative guidance at that time. We elected to early-adopt the FASB guidance for discontinued operations issued in April 2014. As of December 2014, we decided that we would nolonger produce or distribute TownHall.com magazine. The last issue was delivered in December 2014. Under the new guidance, the ceasing of thispublication does not represent a strategic shift in our operations and does not qualify as a discontinued operation. Goodwill and other indefinite-lived intangible assets We account for goodwill and other indefinite-lived intangible assets in accordance with FASB ASC Topic 350 “Intangibles—Goodwill and Other.”Approximately 71% of our total assets as of December 31, 2014, consist of indefinite-lived intangible assets, such as broadcast licenses, goodwill andmastheads, the value of which depends significantly upon the operating results of our businesses. Broadcast licenses account for approximately 94% of ourindefinite-lived intangible assets. Goodwill and mastheads account for the remaining 6%. 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 andassumptions that are based on experiences and judgment about future operating performance of our markets and business segments. We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment annually or more frequently if events orcircumstances indicate that an asset may be impaired. We complete our annual impairment tests in the fourth quarter of each year. The fair valuemeasurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that marketparticipants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820 “Fair ValueMeasurements and Disclosures” as Level 3 inputs discussed in detail in Note 8 to our Consolidated Financial Statements. In July 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other (Topic 350).” Under ASU 2012-02,we have the option to assess whether it is more likely than not that an indefinite-lived intangible asset is impaired. If it is more likely than not thatimpairment exists, we are required to perform a quantitative analysis to estimate the fair value of the assets. The qualitative assessment requires significantjudgment in considering events and circumstances that may affect the estimated fair value of our indefinite-lived intangible assets and to weigh these eventsand circumstances by what we believe to be the strongest to weakest indicator of potential impairment. We adopted the provisions of ASU 2012-02 as of our2012 annual testing period. ASU 2012-02 provides examples of events and circumstances that could affect the estimated fair value of indefinite-lived intangible assets; however, theexamples are not all-inclusive and are not by themselves indicators of impairment. We considered these events and circumstances, as well as other externaland internal considerations. Our analysis, in order of what we consider to be the strongest to weakest indicators of impairment include: (1) the differencebetween any recent fair value calculations and the carrying value; (2) financial performance, such as station operating income, including performance ascompared to projected results used in prior estimates of fair value; (3) macroeconomic economic conditions, including limitations on accessing capital thatcould affect the discount rates used in prior estimates of fair value; (4) industry and market considerations such as a declines in market-dependent multiplesor metrics, a change in demand, competition, or other economic factors; (5) operating cost factors, such as increases in labor, that could have a negative effecton future expected earnings and cash flows; (6) legal, regulatory, contractual, political, business, or other factors; (7) other relevant entity-specific eventssuch as changes in management or customers; and (8) any changes to the carrying amount of the indefinite-lived intangible asset. 73Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Broadcast licenses In the case of our broadcast radio stations, we would not be able to operate the properties without the related FCC broadcast 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 that are necessary for FCC renewal. Historically, all of our broadcast licenses have been renewed at theend of their respective periods, and we expect all broadcast licenses to be renewed in the future. Accordingly, we consider our broadcast licenses to beindefinite-lived intangible assets. The unit of accounting we use to test broadcast licenses is the cluster level, which we define as a group of radio stations operating in the same geographicmarket, sharing the same building and equipment and managed by a single general manager. The cluster level is the lowest level for which discrete financialinformation and cash flows are available and the level reviewed by management to analyze operating results. We perform a qualitative assessment for each of our broadcast market clusters. We review the significant assumptions and key estimates applicable to ourprior year valuations of the estimated fair value to assess if events and circumstances have occurred that could affect these assumptions and key estimates.The significant assumptions and key estimates used in the fair value estimates assume a hypothetical start-up station with industry specific marketassumptions such as forecasted revenue, operating margins, forecasted growth rates, estimated start-up costs, losses expected to be incurred in the early years,competition within the market, the effective tax rate, future terminal values, a risk-adjusted discount rate, future economic and market conditions, and marketcomparables. We also review internal benchmarks and economic performance for each of our markets to conclude if reasonably reliance can be placed uponthe prior year fair value estimates and assumptions as a starting point to our qualitative analysis. We selected eleven of our market clusters for further testing as we have not performed an independent third party fair value appraisal in the last twoannual testing periods. The table below shows the percentage within a range by which our estimated fair value exceeded the carrying value of ourbroadcasting licenses for these eleven market clusters: Geographic Market Clusters as of December 31, 2014 Tested in current year based on length of time from prior valuation ≤5% >2%-10% >11% to 40% > than 40% Number of accounting units — 3 3 5 Broadcast license carrying value (in thousands) $— $13,408 $20,214 $18,040 The first step of our qualitative assessment is to calculate the excess fair value, or the amount by which our prior year estimated fair value exceeds thecurrent year carrying value. We believe based on our analysis and review, including the financial performance of each market, that a 25% excess fair valuemargin is conservative and reasonable in the qualitative analysis. Markets with an excess fair value of 25% or more are not likely to be impaired. Fifteen ofthe eighteen markets for which a fair value appraisal was obtained in the prior year were subject to further testing. The table below presents the percentagewithin a range by which our prior year start-up income estimated fair value exceeds the current year carrying value of our broadcasting licenses: Geographic Market Clusters as of December 31, 2014 Percentage Range By Which 2013 Estimated Fair Value Exceeds 2014 Carrying Value ≤25% >26%-50% >50% to 75% > than 75% Number of accounting units 15 — — 4 Broadcast license carrying value (in thousands) $255,883 $— $— $45,034 The second step of our qualitative review consists of a review of the financial operating results for each market cluster. Radio stations are often sold onthe basis of a multiple of projected cash flow, or station operating income less station operating expenses (“SOI”). Numerous trade organizations and analystsreview these radio stations sales to track SOI multiples applicable to each transaction. Based on published reports and analysis of market transactions, webelieve industry benchmarks to be in the six to seven times cash flow range. We elected an SOI benchmark of four as a conservative indicator of fair value.Using the SOI multiple to estimate fair value, we determined that three of our remaining market cluster were subject to further testing. The table belowpresents the percentage within a range by which our estimated fair value as a multiple of SOI exceeded the carrying value of our broadcasting licenses forthese market clusters: 74Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Geographic Market Clusters as of December 31, 2014 Percentage Range By Which SOI Estimated Fair Value Exceeds Carrying Value ≤5% >2%-10% >11% to 40% > than 40% Number of accounting units 3 — — — Broadcast license carrying value (in thousands) $33,120 $— $— $— We engaged an independent third-party appraisal and valuation firm to assist us in estimating the fair value of our broadcast licenses that were subject tofurther testing. Bond & Pecaro prepared valuations of the estimated fair value for the testing period ending December 31, 2012 and 2013. Noble FinancialCapital Markets prepared the valuations for the testing period ending December 31, 2014. In each of these years, the estimated fair value was determined using an income approach that measures the expected economic benefits that thebroadcast licenses provide. These future economic benefits are discounted using a discounted cash flow analysis that assumes that the broadcast licenses areheld by hypothetical start-up station. The values yielded by the discounted cash flow analysis represent the portion of the stations value attributable solely tothe broadcast license. The discounted cash flow projection period for years 2012 and 2013 was determined to be ten years; which is typically the time radiostation operators and investors expect to recover their investments as widely used by industry analysts in their forecasts. For 2014, cash flows were developedusing a five year projection period, which represents the typical time required for a new broadcast station to reach normalized operations and profitability.For cash flows beyond the projection period, a terminal value was calculated using the Gordon constant growth model and long-term industry growth rateassumptions based on long-term industry growth and GDP inflation rates. The key estimates and assumptions used in the start-up income valuation for our broadcast licenses were as follows: Broadcast Licenses December 31, 2012 December 31, 2013 December 31, 2014 Risk adjusted discount rate 9.0% 9.0% 8.0%Operating profit margin ranges 5.1% - 35.5% 4.1% - 37.5% (13.9%) - 30.8% Long-term market revenue growth rate ranges 0.3% - 15.0% 1.0% - 2.5% 1.5% - 2.5% The discount rate reflects the weighted average cost of capital (“WACC”) developed based on data from same or similar industry participants andpublicly available market data as of the valuation date. Similar industry participants included those broadcast entities for which 70% or more of theiroperation were comprised of radio broadcasting. The decrease in the WACC for 2014 as compared to 2013 was largely attributable to decreases in the riskfree rate and corporate borrowing interest rates. We performed a sensitivity analysis of certain key assumptions including reducing the long-term revenuegrowth rate and increasing the weighted average cost of capital by 100 basis point to determine that such changes would have no incremental impact to thecarrying value of our broadcast licenses. The table below presents the results of our impairment testing under the income approach for the 2014 annual testing period: Excess FairValue Market Cluster 2014 Estimate Atlanta, GA 33.47%Boston, MA 4.68%Chicago, IL 3.89%Cleveland, OH 42.93%Columbus, OH 84.59%Dallas, TX 16.93%Denver, CO 1230.65%Detroit, MI 25.72%Honolulu, HI 163.90%Houston, TX 1283.46%Louisville, KY 33.17%Miami FL 56.03%Nashville, TN 383.65%New York, NY 644.52%Omaha NE 59.06%Orlando FL 22.86%Philadelphia, PA 134.44%Phoenix, AZ 11.85%Pittsburgh, PA 443.24%Portland, OR 2.13%Sacramento, CA 24.55%San Antonio, TX 284.24%San Diego, CA 44.28%San Francisco, CA 69.34%Seattle, WA 487.01%Tampa, FL 24.40%Washington, D.C. 137.27% 75Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Based on our review and analysis we determined that no impairment charges were necessary to the carrying value of our broadcast licenses as of theannual testing period ending December 31, 2014. Based on prior tests, we determined that no impairments of our broadcast licenses were necessary for yearsending December 31, 2013 and 2012, respectively. Mastheads Mastheads consist of the graphic elements that identify our publications to readers and advertisers. These include customized typeset page headers,section headers, and column graphics as well as other name and identity stylized elements within the body of each publication. We test the value ofmastheads as a single combined publishing entity as our print magazines operate from one shared facility under one general manager with operating resultsand cash flows reported on a combined basis for all publications. This is the lowest level for which discrete financial information and cash flows are availableand the level reviewed by management to analyze operating results. We have regularly performed quantitative reviews of our mastheads based on the low margin by which our estimated fair values have exceeded ourcarrying value and actual operating results that do not meet or exceed our expectations. We engaged an independent third-party appraisal firm to assist us inestimating the fair value of our mastheads using a relief from royalty method, which is a form of the income approach. Bond & Pecaro prepared valuations ofthe estimated fair value for the testing period ending December 31, 2012 and 2013. Noble Financial Capital Markets prepared the valuations for the testingperiod ending December 31, 2014. 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 used is based on observed royalty rates forcomparable assets as of the valuation date. When determining the future cash flow estimates, we must estimate future net sales and a fair market royalty rate atan appropriate discount rate to measure the present value of the anticipated cash flows. The key estimates and assumptions to which are as follows: Mastheads Interim June 30,2012 December 31,2012 Interim June 30,2013 December 31,2013 December 31,2014 Risk adjusted discount rate 8.5% 8.5% 9.0% 9.5% 8.0%Projected revenue growth ranges 1.5% - 2.50% 1.5% - 3.0% 1.0% - 2.8% 1.2% - 2.5% (4.8%) – 1.4% Royalty growth rate 3.0% 3.0% 3.0% 2.0% 3.0% As of our June 2012 interim testing period, the estimated fair value of our mastheads exceeded our carrying value by 1.7%. As of our 2012 annualtesting, we recorded an impairment charge associated with mastheads of $0.1 million driven by a reduction in projected net revenues. For the interim testingperformed as of June 2013, projected revenue growth rates were lowered based on failure of the print magazine segment to achieve the amounts previouslyprojected. Based on these lower actual and projected growth rates. we recorded an impairment of $0.3 million as of June 2013. During our 2013 annualtesting, our royalty rate was lowered to 2.0% from the 3.0% industry standard based on gross margins associated with the segment. Additionally, the discountrate was raised from 9.0% to 9.5% based on risks associated with print magazines. We recorded an additional $0.3 million impairment charge associated withmastheads because of these changes. We performed a sensitivity analysis of certain key assumptions including reducing the long-term revenue growth rateand increasing the weighted average cost of capital by 100 basis point to determine that such changes would have no incremental impact to the carryingvalue of our mastheads. 76Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. During our annual testing for 2014, which coincided with our budget and financial forecasts process for the following year, we decided to ceasepublishing Townhall Magazine as of December 2014 and we may cease other publications in the future. We lowered our projected net revenues for thereductions in the number of publications. Although we expect to realize cost savings with the planned reductions, we do not expect to realize net incomewithin the next twelve months. Based on these revised projections we recorded an impairment loss of $34,000 associated with magazine mastheads. These impairments were driven by reductions in projected net revenues and a reduction in the number of publications produced. The growth of digital-only publications, that are often free to readers or at a significantly reduced cost to readers has hindered the ability of the publishing industry to recover fromthe economic recession that began in 2008. We believe that the impairments are indicative of trends in the publishing industry as a whole and are not uniqueto our company or operations. Goodwill - Broadcast The unit of accounting we use to test broadcast licenses is the cluster level, which we define as a group of radio stations operating in the same geographicmarket, sharing the same building and equipment and managed by a single general manager. Fourteen of our 33 market clusters and our networks havegoodwill associated with them as of our annual testing period ending December 31, 2014 compared to eleven of our 32 markets as of the annual testingperiod ending December 31, 2013. We perform a qualitative assessment to determine if events and circumstances have occurred that indicate it is more likely than not that the fair value ofthe assets in each of our market clusters are less than their carrying values. We review the significant inputs used in our prior year fair value estimates todetermine if any changes to those inputs should be made. We estimate fair value using a market and income approach and compare. We compare theestimated fair value of each market cluster to its carrying value, including goodwill. Under the market approach, we apply a multiple of four to each marketclusters’ station operating income (“SOI”) to estimate the fair value. We believe that an SOI benchmark of four is a conservative indicator of fair value asdescribed above. Under the income approach, we utilize a discounted cash flow method to calculate the estimated fair value of the accounting unit. Thediscounted cash flow method incorporates the cumulative present value of the net after-tax cash flows projected for each market assuming that it is ahypothetical start-up station. If the carrying amount, including goodwill, exceeds the estimated fair value of the market cluster, an indication exists that theamount of goodwill attributed to that market cluster may be impaired. When we have indication of impairment, we engage an independent third-partyappraisal and valuation firm to assist us with determining the enterprise value. Bond & Pecaro prepared valuations of the estimated fair value for the testingperiods ending December 31, 2012 and 2013. Noble Financial Capital Markets prepared the valuations for the testing period ending December 31, 2014. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up. We performeda sensitivity analysis of certain key assumptions including reducing the long-term revenue growth rate and increasing the weighted average cost of capital by100 basis point to determine that such changes would have no incremental impact to the carrying value of goodwill associated with our broadcast entities. The key estimates and assumptions used for our enterprise valuations are as follows: December 31, 2012 December 31, 2013 December 31, 2014 Enterprise Valuations Broadcast Markets Broadcast Markets Broadcast Markets Risk adjusted discount rate 9.0% 9.0% 8.0%Operating profit margin ranges 16.9% - 49.2% 11.9% - 44.7% 8.4% - 46.1% Long-term revenue market growth rate ranges 1.0% - 3.5% 1.0% - 2.5% 1.0% - 5.0% Based on our review and analysis we determined that no impairment charges were necessary to the carrying value of our broadcast goodwill as of theannual testing period ending December 31, 2014. Based on prior tests, we determined that no impairments of our broadcast goodwill were necessary for yearsending December 31, 2012 and 2011, respectively. The estimated fair value of our networks exceeded the carrying value by 64%, 63%, and 113.0% for eachof the annual testing periods ending December 31, 2014, 2013 and 2012, respectively. The tables below present the percentage within a range by which theestimated fair value exceeded the carrying value of each of our market clusters, including goodwill: 77Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Broadcast Market Clusters as of December 31, 2014 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 5 — 2 7 Carrying value including goodwill (in thousands) $81,507 $— $27,636 $254,645 Broadcast Market Clusters as of December 31, 2013 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <1% >10% to 20% >20% to 50% > than 50% Number of accounting units 4 1 3 3 Carrying value including goodwill (in thousands) $28,952 $17,978 $45,375 $45,152 Broadcast Market Clusters as of December 31, 2012 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 2 1 1 5 Carrying value including goodwill (in thousands) $18,836 $1,423 $10,506 $132,645 Goodwill – Digital Media The unit of accounting we use to test goodwill in our digital media segment is the entity level, which includes Salem Web Network, Townhall.com,Eagle Financial Publications and Eagle Wellness. The financial statements for Salem Web Network reflect the operating results and cash flows for all of ourInternet sites and our church product sites exclusive of Townhall.com. The financial statements for Townhall.com reflect the operating results for each of ourconservative opinion sites. Eagle Wellness includes only the results of the e-commerce site for nutritional products. We perform a qualitative assessment to determine if events and circumstances have occurred that indicate it is more likely than not that the fair value ofthe assets in each of our digital media entities are less than their carrying values. We review the significant inputs used in our prior year fair value estimates todetermine if any changes to those inputs should be made. We estimate fair value using a market and income approach and compare. We compare theestimated fair value of each entity to its carrying value, including goodwill. Under the market approach, we apply a multiple of four to each entities operatingincome to estimate the fair value. We believe that a multiple of four is a conservative indicator of fair value as described above. Under the income approach,we utilize a discounted cash flow method to calculate the estimated fair value of the accounting unit. The discounted cash flow method incorporates thecumulative present value of the net after-tax cash flows projected for each unit assuming that it is a hypothetical start-up station. If the carrying amount, including goodwill, exceeds the estimated fair value of the entity, an indication exists that the amount of goodwill attributed tothat entity may be impaired. When we have indication of impairment, we engage an independent third-party appraisal and valuation firm to assist us withdetermining the enterprise value. Bond & Pecaro prepared valuations of the estimated fair value for the testing period ending December 31, 2012 and 2013.Noble Financial Capital Markets prepared the valuations for the testing period ending December 31, 2014. We performed a sensitivity analysis of certain key assumptions including reducing the long-term revenue growth rate and increasing the weightedaverage cost of capital by 100 basis point to determine that such changes would have no incremental impact to the carrying value of goodwill associatedwith our digital media entities. 78Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The key estimates and assumptions used in the start-up income valuation of our digital media entities for each testing period are as follows: Enterprise Valuation December 31, 2012 December 31, 2013 December 31, 2014 Risk adjusted discount rate 13.5% 13.5% 8.0%Operating profit margin ranges 21.2% - 22.0% 21.2% - 22.0% (7.4%) - 34.9% Long-term revenue market growth rate ranges 3.0% 3.0% 2.50% Based on our review and analysis we determined that no impairment charges were necessary to the carrying value of our digital media goodwill as of theannual testing periods ending December 31, 2014, December 31, 2013, and December 31, 2012, respectively. The table below presents the percentage within a range by which the estimated fair value exceeded the carrying value of our accounting units, includinggoodwill. Digital Media Entities as of December 31, 2014 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 1 1 1 1 Carrying value including goodwill (in thousands) $4,649 $6,118 $385 $26,101 Digital Media Entities as of December 31, 2013 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 1 - 1 - Carrying value including goodwill (in thousands) $27,456 $- $2,984 $- Digital Media Entities as of December 31, 2012 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units - - 2 - Carrying value including goodwill (in thousands) $- $- $28,722 $- Goodwill – Publishing The unit of accounting we use to test goodwill in our publishing segment is the entity level, which includes Salem Publishing, Eagle Regnery, andXulon Press. Salem Publishing is our printing entity that produces our print magazines from a stand-alone facility, under one general manager, with operatingresults and cash flows of all publications reported on a combined basis. Eagle Regnery is our book publishing entity based in Washington DC, with a stand-alone facility under one general manager, with operating results and cash flows of reported at the entity level. Xulon Press also operates from a stand-alonefacility in Orlando, Florida under one general manager who is responsible for the separately stated operating results and cash flows. Each of these entities hasgoodwill associated with them as of our annual testing period. We have regularly performed quantitative reviews of goodwill associated with our print magazine entity based on the low margin by which our estimatedfair values exceed our carrying value including goodwill and actual operating results that have not met our expectations. We engage an independent third-party appraisal firm to assist us with estimating the enterprise value of our entities. Bond & Pecaro prepared valuations of the estimated fair value for the testing period ending December 31, 2012 and 2013. Noble Financial CapitalMarkets prepared the valuations for the testing period ending December 31, 2014. The enterprise valuation assumes that the subject assets are installed aspart of an operating business rather than as a hypothetical start-up. The key estimates and assumptions used for our enterprise valuations are as follows: 79Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Enterprise Valuation InterimJune 30, 2012 December 31,2012 InterimJune 30, 2013 December 31,2013 December 31,2014 Risk adjusted discount rate 8.5% 8.5% 9.0% 9.5% 8.0%Operating margin ranges 1.4% - 7.5% 0.5% - 7.0% 0.9% - 6.0% (0.5%) – 6.0% 2.4% - 5.9% Long-term revenue market growth rateranges 1.5% 1.5% 1.0% 0.5% 1.5% Based on our review and analysis of the enterprise estimated fair value, we recorded a $0.4 million impairment charge associated with the printmagazine goodwill as of the June 2013 interim testing period. This impairment was driven by lower projected profit margins based on the failure of the printmagazine segment to achieve the amounts previously projected. Additionally, the discount rate was raised from 9.0% to 9.5% based on risks associated withprint magazines. The decline in revenues from print magazines is prevalent throughout the industry and is not unique to our operations. No goodwillimpairment charges were necessary as of the annual testing period ended December 31, 2013. Based on the impairment recognized to the value of our mastheads in 2014, we could not conclude that it was more likely than not that goodwillassociated with our magazine publishing unit was not impaired. We obtained an independent fair value of our magazine publishing unit as of December2014. Based on this valuation, we determined that the carrying value of the goodwill was less than the implied value of goodwill as of that date and werecorded an impairment charge of $45,000. The table below presents the percentage within a range by which the estimated fair value exceeded the carrying value of our accounting units, includinggoodwill. Publishing Accounting units as of December 31, 2014 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 2 - - 1 Carrying value including goodwill (in thousands) $3,417 $- $- $2,314 Publishing Accounting units as of December 31, 2013 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 1 - 1 - Carrying value including goodwill (in thousands) $1,251 $- $2,123 $- Publishing Accounting units as of December 31, 2012 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units - - - 2 Carrying value including goodwill (in thousands) $- $- $- $2,103 We believe that we have made reasonable estimates and assumptions to calculate the estimated fair value of our indefinite-lived intangible assets,however, these estimates and assumptions could be materially different from actual results. If actual market conditions are less favorable than those projectedby 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 belowthe amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material. 80Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Income taxes and uncertain tax positions We account for income taxes in accordance with FASB ASC Topic 740 “Income Taxes.” Deferred income taxes are determined based on the differencebetween the consolidated financial statement and income tax bases of assets and liabilities using enacted tax rates in effect in the years in which thedifferences are expected to reverse. Our evaluation was performed for tax years that remain subject to examination by major tax jurisdictions, which rangefrom 2010 through 2013. Upon the adoption of the provisions on January 1, 2007, we had $3.0 million in liabilities related to uncertain tax positions, including $0.9 millionrecognized under FASB ASC Topic 450 “Contingencies” and carried forward from prior years and $2.1 million recognized upon adoption of the taxprovision changes as a reduction to retained earnings. Included in the $2.1 million accrual was $0.1 million in related interest, net of federal income taxbenefits. During 2013, we recognized a net decrease of $0.4 million in liabilities and at December 31, 2013, had $0.9 million in liabilities for unrecognizedtax benefits. Included in this liability amount were $0.01 million accrued for the related interest, net of federal income tax benefits and $0.02 million for therelated penalties recorded in income tax expense on our consolidated financial statements included in this annual report on Form 10-K. During 2014, werecognized a net decrease of $0.4 million in liabilities and at December 31, 2014, had $0.5 million in liabilities for unrecognized tax benefits. Included inthis liability amount were $0.01 million accrued for the related interest, net of federal income tax benefits and $0.02 million for the related penalties recordedin income tax expense on our consolidated financial statements included in this annual report on Form 10-K . Management expects an additional reductionof $0.4 million in the reserve over the next twelve months due to statute expirations. A summary of the changes in the gross amount of unrecognized tax benefits is as follows: December 31, 2014 (Dollars in thousands) Balance at January 1, 2014 $916 Additions based on tax positions related to the current year — Additions based on tax positions related to prior years — Reductions related to tax positions of prior years — Decrease due to statute expirations (405)Related interest and penalties, net of federal tax benefits (3)Balance as of December 31, 2014 $508 Valuation allowance (deferred taxes) For financial reporting purposes, we recorded a valuation allowance of $3.0 million as of December 31, 2014 to offset a portion of the deferred tax assetsrelated to the state net operating loss carryforwards. We regularly review our financial forecasts in an effort to determine our ability to utilize the netoperating loss carryforwards for tax purposes. Accordingly, the valuation allowance is adjusted periodically based on our estimate of the benefit thecompany will receive from such carryforwards. Fair value accounting FASB ASC Topic 820 “Fair Value Measurements and Disclosures” established a single definition of fair value in generally accepted accountingprinciples and expanded disclosure requirements about fair value measurements. The provision applies to other accounting pronouncements that require orpermit fair value measurements. We adopted the fair value provisions for financial assets and financial liabilities effective January 1, 2008. The adoption hada material impact on our consolidated financial position, results of operations or cash flows. We adopted fair value provisions for nonfinancial assets andnonfinancial liabilities effective January 1, 2009. This includes applying the fair value concept to (i) nonfinancial assets and liabilities initially measured atfair value in business combinations; (ii) reporting units or nonfinancial assets and liabilities measured at fair value in conjunction with goodwill impairmenttesting; (iii) other nonfinancial assets measured at fair value in conjunction with impairment assessments; and (iv) asset retirement obligations initiallymeasured at fair value. The adoption of the fair value provisions of FASB ASC Topic 820 to nonfinancial assets and nonfinancial liabilities did not have amaterial impact on our consolidated financial position, results of operations or cash flows. The fair value provisions include guidance on how to estimate the fair value of assets and liabilities in the current economic environment andreemphasizes 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 thevolume 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 andwe may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. 81Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricingobservability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market, and thecharacteristics specific to the transaction. Financial instruments with readily available active quoted prices or for which fair value can be measured fromactively 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 utilizedin 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 levelcorresponding 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 FASBASC 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 atthe 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. Ifthe 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 theassumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in thecircumstances (which might include the reporting entity’s own data). As of December 31, 2014, the carrying value of cash and cash equivalents, trade accounts receivables, accounts payable, accrued expenses and accruedinterest approximates fair value due to the short-term nature of such instruments. The carrying value of other long-term liabilities approximates fair value asthe related interest rates approximate rates currently available to the company. The following table summarizes the fair value of our financial assets that aremeasured at fair value: December 31, 2014 Total Fair Value and Carrying Value on Fair Value Measurement Category Balance Sheet Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $33 $33 $— $— Trade accounts receivable, net 34,781 34,781 — — Fair value of interest rate swap 475 — 475 — Liabilities: Accounts payable 2,964 2,964 — — Accrued expenses including estimated fair value of contingent earn-outconsideration (see Note 4) 12,704 11,129 — 1,575 Accrued interest 48 48 — — Long term liabilities including estimated fair value of contingent earn-outconsideration (see Note 4) 4,123 2,413 — 1,710 Long-term debt 277,505 277,505 — — Long-term debt and debt covenant compliance Our classification of outstanding borrowings on our Term Loan B as long-term debt on our balance sheet is based on our assessment that, under the termsof our Credit Agreement and after considering our projected operating results and cash flows for the coming year, no principal payments are required to bemade. The Term Loan B has a term of seven years, maturing in March 2020. We are required to make principal payments of $750,000 per quarter, whichbegan on September 30, 2013. Prepayments may be made against the outstanding balance of our Term Loan B. Each repayment of the Term Loan B isapplied ratably to each of the next four principal installments thereof in the direct order of maturity and thereafter to the remaining principal balance inreverse order of maturity. Our projections of operating results and cash flows for the coming year are estimates dependent upon a number of factors including but not limited todevelopments in the markets in which we are operating in and varying economic and political factors. Accordingly, these projections are inherently uncertainand our actual results could differ from these estimates. 82Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Stock-based compensation We account for stock-based compensation under the provisions of FASB ASC Topic 718 “Compensation—Stock Compensation.” We record equityawards with stock-based compensation measured at the fair value of the award as of the grant date. We determine the fair value of our options using theBlack-Scholes option-pricing model that requires the input of highly subjective assumptions, including the expected stock price volatility and expected termof the options granted. The exercise price for options is equal to the closing market price of Salem Media Group common stock as of the date of grant. We usethe 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 stock options, or upon vesting or forfeiture of restricted stock awards, deferred tax assets for options and restricted stock awardswith 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. Recent accounting pronouncements Changes to accounting principles are established by the FASB in the form of accounting standards updates (“ASU’s”) to the FASB’s AccountingStandards Codification. We consider the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to be not applicable toour financial position or results of operations. In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entities Ability to Continue as a Going Concern, which requiresmanagement to assess a company’s ability to continue as a going concern and to provide related footnote disclosures. The new standard providesmanagement with specific guidance on the assessments and related disclosures as well as provides a longer look-forward period as one year from the financialstatement issuance date. The new standard is effective for the annual period ending after December 15, 2016, with early adoption permitted. The adoption ofthis ASU is not expected to have a material impact 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, which requires an entity to recognize the amount of revenue towhich it expects to be entitled for the transfer of promised goods or services to customers. The new standard is effective as of the first interim period withinannual reporting periods beginning on or after December 15, 2016, and will replace most existing revenue recognition guidance in U.S. GAAP. Earlyadoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect thatASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have wedetermined the effect of this ASU on our financial position, results of operations, cash flows, or presentation thereof. In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting DiscontinuedOperations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 limits the requirement to report discontinued operations to disposals ofcomponents of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendmentsalso require expanded disclosures concerning discontinued operations and disclosures of certain financial results attributable to a disposal of a significantcomponent of an entity that does not qualify for discontinued operations reporting. These amendments are effective prospectively for reporting periodsbeginning on or after December 15, 2014, with early adoption permitted. The adoption of this ASU is not expected to have a material impact on our financialposition, results of operations, cash flows, or presentation thereof. In July 2013, the FASB issued ASU 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss,or a Tax Credit Carryforward Exists, an amendment to FASB ASC Topic 740, Income Taxes, (“FASB ASU 2013-11”). This update clarifies that anunrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset fora net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain taxposition is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reportingdate under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred taxasset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferredtax assets. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospectiveapplication is permitted. The adoption of this ASU did not have a material impact on our financial position, results of operations, cash flows, or presentationthereof. 83Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark InterestRate for Hedge Accounting Purposes, an amendment to FASB ASC Topic 815, Derivatives and Hedging ("FASB ASC Topic 815"). The update permits theuse of the Fed Funds Effective Swap Rate to be used as a US benchmark interest rate for hedge accounting purposes under FASB ASC Topic 815, in additionto the interest rates on direct Treasury obligations of the US government (“UST”) and the London Interbank Offered Rate (“LIBOR”). The update alsoremoves the restriction on using different benchmark rates for similar hedges. This ASU is effective prospectively for qualifying new or redesignated hedgingrelationships entered into on or after July 17, 2013. The adoption of this ASU did not have a material impact on our financial position, results of operations,cash flows, or presentation thereof. In February 2013, the FASB issued ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount ofthe Obligation is Fixed at the Reporting Date, an amendment to FASB ASC Topic 405, Liabilities (“FASB ASC Topic 405”). The update requires an entity tomeasure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed as of the reporting date as thesum of the obligation the entity agreed to pay among its co-obligors and any additional amount the entity expects to pay on behalf of its co-obligors. ThisASU is effective for annual and interim periods beginning after December 15, 2013 and is required to be applied retrospectively to all prior periods presentedfor those obligations that existed upon adoption of the ASU. The adoption of this ASU did not have a material impact on our financial position, results ofoperations, cash flows, or presentation thereof. LIQUIDITY AND CAPITAL RESOURCES While our focus continues to be on deleveraging the company, we have completed several strategic acquisitions including Twitchy.com in December2013 and Eagle Publishing in January 2014. These acquisitions each contain contingent earn-out considerations based on future operating results. Webelieve that these contingent earn-out considerations provide some degree of protection with regard to cash outflows should the acquisitions not meetexpectations. We have historically financed acquisitions through borrowings, including borrowings under credit facilities and, to a lesser extent, fromoperating cash flow and from proceeds on selected asset dispositions. We expect to fund future acquisitions from cash on hand, borrowings under our creditfacilities, operating cash flow and possibly through the sale of income-producing assets or proceeds from debt and equity offerings. We have historicallyfunded, and will continue to fund, expenditures for operations, administrative expenses, capital expenditures and debt service required by our credit facilitiesand the notes from operating cash flow, borrowings under the Revolver and, if necessary, proceeds from the sale of selected assets or radio stations. We undertake projects from time to time to upgrade our radio station technical facilities and/or FCC broadcast licenses, expand our digital media andpublishing offerings, improve our facilities and update our computer infrastructures. The nature and timing of these upgrades and expenditures can bedelayed or scaled back at the discretion of management. Based on our current projections, we expect to incur capital expenditures of $10.5 million during thetwelve months ending December 31, 2015. We have paid total cash distributions of $6.2 million and $5.2 million, for the year ending December 31, 2014 and 2013, respectively, on our Class Aand Class B common stock. The actual declaration of dividends and distributions, as well as the establishment of per share amounts, dates of record, andpayment dates are subject to final determination by our Board of Directors and dependent upon future earnings, cash flows, financial requirements, and otherfactors. In September 2013, our Board of Directors elected to review distributions on a quarterly basis, rather than an annual basis. Based on the number ofshares of Class A and Class B common stock currently outstanding, and the currently approved distribution amount, we expect to pay total annualdistributions of approximately $6.6 million in 2015. The current policy of the Board of Directors is to review each of these factors on a quarterly basis todetermine the appropriate amount, if any, to allocate toward a cash distribution with the general principle of using approximately 20% of free cash flow. Freecash flow is a non-GAAP financial measure defined in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operationsincluded with this annual report on Form 10-K. Our sole source of cash available for making any future distributions is our operating cash flow, subject to our Term Loan B and Revolver, which containcovenants that restrict the payment of dividends and distributions unless certain specified conditions are satisfied. 84Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Cash Flows Cash and cash equivalents decreased to $33,000 as of December 31, 2014 compared to $0.1 million as of the same period of the prior year. Workingcapital decreased $4.6 million to $14.6 million as of December 31, 2014, compared to $19.2 million for the same period of the prior year. During the twelvemonths ending December 31, 2014, the balances outstanding under our consolidated debt agreements ranged from $277.8 to $294.7 million. These balanceswere ordinary and customary based on our operating and investing cash needs during this time. The following events impacted our liquidity and capital resources during the year ended December 31, 2014: Operating Cash Flows: ·Our net income from continuing operations increased $8.2 million to net income of $5.5 million from a net loss of $2.7 million for the sameperiod of the prior year; ·Our net income from continuing operations reflected a $0.4 million loss on the early retirement of debt; and ·Our Days Sales Outstanding improved to 65 days as of December 31, 2014 compared to 74 days as of the same period of the prior year. Investing Cash Flows: ·Capital expenditures decreased $0.5 million to $10.1 million for 2014 from $10.6 million for 2013;and ·We paid cash of $12.7 million for acquisitions, an increase of $5.2 million as compared to $7.5 million cash paid for acquisitions in the sameperiod of the prior year. Financing Cash Flows: ·We repaid $15.3 million of principal outstanding on the Term Loan B; and ·We paid cash distributions of $6.2 million, on our Class A and Class B common stock, as compared to $5.2 million the same period of the prioryear. Term Loan B and Revolving Credit Facility On March 14, 2013, we entered into a senior secured credit facility, consisting of the Term Loan B of $300.0 million and Revolver. The Term Loan Bwas issued at a discount for total net proceeds of $298.5 million. The discount is being amortized to non-cash interest expense over the life of the loan usingthe effective interest method. For each of the twelve months ended December 31, 2013 and 2014, approximately $0.2 million, respectively, of the discounthas been recognized as interest expense including approximately $0.3 million of bank loan fees. The Term Loan B has a term of seven years, maturing in March 2020. During this term, the principal amount may be increased by up to an additional$60.0 million, subject to the terms and conditions of the credit agreement. We are required to make principal payments of $750,000 per quarter which beganon September 30, 2013 for the Term Loan B. Prepayments may be made against the outstanding balance of our Term Loan B. Each repayment of theoutstanding Term Loan B is applied ratably to each of the next four principal installments thereof in the direct order of maturity and thereafter to theremaining principal balance in reverse order of maturity. We have made prepayments on our Term Loan B, including interest through the date of the as follows: Date Principal Paid Unamortized Discount (Dollars in Thousands) December 31, 2014 $4,000 $16 November 28, 2014 4,000 15 September 29, 2014 5,000 18 March 31, 2014 2,250 8 December 30, 2013 750 3 September 30, 2013 4,000 16 June 28, 2013 4,000 14 85Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Revolver has a term of five years, maturing in March 2018. We report outstanding balances on our Revolver as short-term based on use of theRevolver to fund ordinary and customary operating cash needs with repayments made frequently. We believe that the borrowing capacity under our TermLoan B and Revolver allows us to meet our ongoing operating requirements, fund capital expenditures and satisfy our debt service requirements for at leastthe next twelve months. Borrowings under the Term Loan B may be made at LIBOR (subject to a floor of 1.00%) plus a spread of 3.50% or Wells Fargo’s base rate plus a spreadof 2.50%. Borrowings under the Revolver may be made at LIBOR or Wells Fargo’s base rate plus a spread determined by reference to our leverage ratio, as setforth in the pricing grid below. If an event of default occurs under the credit agreement, the applicable interest rate may increase by 2.00% per annum. AtDecember 31, 2014, the blended interest rate on amounts outstanding under the Term Loan B and Revolver was 5.05%. Revolver Pricing Pricing Level Consolidated Leverage Ratio Base Rate Loans LIBOR Loans 1 Less than 3.00 to 1.00 1.250% 2.250%2 Greater than or equal to 3.00 to 1.00 but less than 4.00 to 1.00 1.500% 2.500%3 Greater than or equal to 4.00 to 1.00 but less than 5.00 to 1.00 1.750% 2.750%4 Greater than or equal to 5.00 to 1.00 but less than 6.00 to 1.00 2.000% 3.000%5 Greater than or equal to 6.00 to 1.00 2.500% 3.500% The obligations under the credit agreement and the related loan documents are secured by liens on substantially all of the assets of Salem and itssubsidiaries, other than certain exceptions set forth in the Security Agreement, dated as of March 14, 2013, among Salem, the subsidiary guarantors partythereto, and Wells Fargo Bank, National Association, as Administrative Agent (the “Security Agreement”) and such other related loan documents. With respect to financial covenants, the credit agreement includes a minimum interest coverage ratio, which started at 1.50 to 1.0 and steps up to 2.50 to1.0 by 2016 and a maximum leverage ratio, which started at 6.75 to 1.0 and steps down to 5.75 to 1.0 by 2017. The credit agreement also includes othernegative covenants that are customary for credit facilities of this type, including covenants that, subject to exceptions described in the credit agreement,restrict the ability of Salem and its subsidiary guarantors: (i) to incur additional indebtedness; (ii) to make investments; (iii) to make distributions, loans ortransfers 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; or (vii) tomerge or consolidate with, or dispose of all or substantially all assets to, a third party. As of December 31, 2014, our leverage ratio was 5.45 to 1 compared toour compliance covenant of 6.50 and our interest coverage ratio was 3.24 compared to our compliance ratio of 2.0. We were in compliance with our debtcovenants under the credit facility at December 31, 2014. Terminated Senior Secured Second Lien Notes On December 1, 2009, we issued $300.0 million principal amount of our Terminated 95/8% Notes at a discount for $298.1 million resulting in aneffective yield of 9.75%. Interest was due and payable on June 15 and December 15 of each year, commencing June 15, 2010 until maturity. We were notrequired to make principal payments on the Terminated 95/8% Notes, which were due in full in December 2016. The Terminated 95/8% Notes wereguaranteed by all of our existing domestic restricted subsidiaries. Upon issuance, we were required to pay $28.9 million per year in interest on the thenoutstanding Terminated 95/8% Notes. As of December 31, 2012, accrued interest on the Terminated 95/8% Notes was $0.9 million. The discount was beingamortized to interest expense over the term of the Terminated 95/8% Notes based on the effective interest method. For the twelve months ended December 31,2013, $37,000 of the discount, respectively, was recognized as interest expense including approximately $0.3 million of bank loan fees. On March 14, 2013, we tendered for $212.6 million in aggregate principal amount of the Terminated 95/8% Notes for an aggregate purchase price of$240.3 million, or at a price equal to 110.65% of the face value of the Terminated 95/8% Notes in the Tender Offer. We paid $22.7 million for this repurchaseresulting in a $26.9 million pre-tax loss on the early retirement of long-term debt, which included approximately $0.8 million of unamortized discount and$2.9 million of bond issue costs associated with the Terminated 95/8% Notes. We issued a notice of redemption to redeem any of the Terminated 95/8% Notesthat remained outstanding after the expiration date of the Tender Offer. On June 3, 2013, we redeemed the remaining $0.9 million of the outstandingTerminated 95/8% Notes to satisfy and discharge Salem’s obligations under the indenture for the Terminated 95/8% Notes. The carrying value of theTerminated 95/8% Notes was $212.6 million at December 31, 2012. There are no outstanding Terminated 95/8% Notes as of the effectiveness of theredemption. 86Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Information regarding repurchases and redemptions of the Terminated 95/8% Notes is as follows: Date PrincipalRedeemed/Repurchased PremiumPaid UnamortizedDiscount Bond IssueCosts (Dollars in thousands) June 3, 2013 $903 $27 $3 $- March 14, 2013 212,597 22,650 837 2,867 December 12, 2012 4,000 120 17 57 June 1, 2012 17,500 525 80 287 December 12, 2011 12,500 375 62 337 September 6, 2011 5,000 144 26 135 June 1, 2011 17,500 525 93 472 December 1, 2010 12,500 375 70 334 June 1, 2010 17,500 525 105 417 Terminated Senior Credit Facility On December 1, 2009, we entered into a Revolver (“Terminated Revolver”). We amended the Terminated Revolver on November 1, 2010 to increase theborrowing capacity from $30 million to $40 million. The amendment allowed us to use borrowings under the Revolver, subject to the “Available Amount” asdefined by the terms of the credit agreement, to redeem applicable portions of the Terminated 95/8% Notes. The calculation of the “Available Amount” alsopertained to the payment of dividends when the leverage ratio was above 5.0 to 1. On November 15, 2011, we completed the Second Amendment of the Terminated Revolver to, among other things, (1) extend the maturity date fromDecember 1, 2012 to December 1, 2014, (2) change the interest rate applicable to LIBOR or the Wells Fargo base rate plus a spread to be determined based onour leverage ratio, (3) allow us to borrow and repay unsecured indebtedness provided certain conditions are met and (4) include step-downs related to ourleverage ratio covenant. We incurred $0.5 million in fees to complete this amendment, which were being amortized over the remaining term of the agreement.The applicable interest rate relating to the amended credit agreement was LIBOR plus a spread of 3.00% per annum or the Base Rate plus a spread of 1.25%per annum, which was adjustable based on our leverage ratio. If an event of default occurred, the interest rate could be increased by 2.00% per annum. Detailsof the change in our rate based on our leverage ratio were as follows: Consolidated Leverage Ratio Base Rate Eurodollar RateLoans Applicable FeeRate Less than 3.25 to 1.00 0.75% 2.25% 0.40%Greater than or equal to 3.25 to 1.00 but less than 4.50 to 1.00 0.75% 2.50% 0.50%Greater than or equal to 4.50 to 1.00 but less than 6.00 to 1.00 1.25% 3.00% 0.60%Greater than or equal to 6.00 to 1.00 2.25% 3.50% 0.75% The Terminated Revolver included a $5 million subfacility for standby letters of credit and a subfacility for swingline loans of up to $5 million, subjectto the terms and conditions of the credit agreement relating to the Terminated Revolver. In addition to interest charges outlined above, we paid acommitment fee on the unused balance based on the Applicable Fee Rate in the above table. The Terminated Revolver was terminated on March 14, 2013 upon entry into our current senior secured credit facility. This termination resulted in a $0.9million pre-tax loss on the early retirement of long-term debt related to unamortized credit facility fees. There was no outstanding balance on the TerminatedRevolver as of the termination date. Terminated Subordinated Credit Facility with First California Bank On May 21, 2012, we entered into a Business Loan Agreement, Promissory Note and related loan documents with First California Bank (the “FCBLoan”). The FCB Loan was an unsecured, $10.0 million fixed-term loan with a maturity date of June 15, 2014. The interest rate for the FCB Loan (“InterestRate”) was variable and was equal to the greater of: (a) 4.250% or (b) the Wall Street Journal Prime Rate as published in The Wall Street Journal and reportedby FCB plus 1%. We were required to repay the FCB Loan as follows: (a) twenty-three (23) consecutive monthly interest payments based upon the then-current principalbalance outstanding at the then-current Interest Rate commencing on September 15, 2012; (b) seven (7) quarterly consecutive principal payments of $1.25million each commencing on September 15, 2012; and (c) one (1) final principal and interest payment on June 15, 2014 of all outstanding and unpaidinterest and principal as of such maturity date. The FCB Loan could be prepaid at any time subject to a minimum interest charge of fifty dollars ($50). If anevent of default occurred on the FCB Loan, the Interest Rate could have been increased by 5.00% per annum. 87Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The FCB loan was terminated on March 14, 2013 upon entry into our current senior secured credit facility. This termination resulted in a $33,000 pre-taxloss on the early retirement of long-term debt for unamortized credit facility fees. There was no outstanding balance on the FCB Loan as of the terminationdate. Terminated Subordinated Debt due to Related Parties On November 17, 2011, we entered into subordinated lines of credit “Terminated Subordinated Debt due Related Parties” with Edward G. Atsinger III,Chief Executive Officer and director of Salem, and Stuart W. Epperson, Chairman of Salem’s Board of Directors. Pursuant to the related agreements, Mr.Epperson committed to provide an unsecured revolving line of credit to Salem in a principal amount of up to $3 million, and Mr. Atsinger committed toprovide an unsecured revolving line of credit in a principal amount of up to $6 million. On May 21, 2012, we also entered into a subordinated line of creditwith Roland S. Hinz, a Salem board member. Mr. Hinz committed to provide an unsecured revolving line of credit in a principal amount of up to $6 million.On September 12, 2012, we amended and restated the original subordinated line of credit with Mr. Hinz to increase the unsecured revolving line of credit by$6 million for a total line of credit of up to $12 million. The proceeds of the Terminated Subordinated Debt due to Related Parties could be used to repurchase a portion of the Terminated 95/8% Notes.Outstanding amounts under each subordinated line of credit bore interest at a rate equal to the lesser of (1) 5% per annum and (2) the maximum rate permittedfor subordinated debt under the Terminated Revolver referred to above plus 2% per annum. Interest was payable at the time of any repayment of principal. Inaddition, outstanding amounts under each subordinated line of credit were required to be repaid within three (3) months from the time that such amounts wereborrowed, with the exception of the subordinated line of credit with Mr. Hinz, which was to be repaid within six (6) months from the time that such amountswere borrowed. The Terminated Subordinated Debt due to Related Parties did not contain any covenants. On March 14, 2013, we repaid these lines of creditupon entry into our current senior secured credit facility. On April 3, 2013, we provided written notice to Messrs. Atsinger, Epperson and Hinz electing toterminate the Terminated Subordinated Debt due to Related Parties and related agreements effective as of May 3, 2013. There were no outstanding balanceson the Terminated Subordinated Debt due to Related Parties as of the termination date. Summary of long-term debt obligations Long-term debt consisted of the following: As of December 31, 2013 As of December 31, 2014 (Dollars in thousands) Term Loan B $289,939 $274,933 Revolver — 1,784 Capital leases and other loans 854 788 290,793 277,505 Less current portion (3,121) (1,898) $287,672 $275,607 In addition to the outstanding amounts listed above, we also have interest payments related to our long-term debt as follows as of December 31, 2014:·Outstanding borrowings of $276.0 million under the Term Loan B with interest payments due at LIBOR (subject to a floor of 1.00%) plus3.50% or prime rate plus 2.50%; and·Outstanding borrowings of $1.8 million under the Revolver, with interest payments due at LIBOR plus 3.00% or at prime rate plus 2.00%. 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 arenot 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 usefullives 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 incurred significant impairment losses in prior years with regard to our indefinite-lived intangibleassets. During the current year, we recognized we recognized impairment losses of $79,000 related to mastheads and goodwill within our publishing segment.These impairments were driven by a reduction in projected net revenues resulting from ongoing operating results that have not met expectations. Theimpairment was indicative of trends in the publishing industry as a whole and is not unique to our company or operations. 88Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 inmeasuring fair value including assumptions about risk. If actual future results are less favorable than the assumptions and estimates we used, we are subject tofuture impairment charges, the amount of which may be material. Given the current economic environment and uncertainties that can negatively impact ourbusiness, there can be no assurance that our estimates and assumptions made for the purpose of our indefinite-lived intangible fair value estimates will proveto be accurate. The impairment charges we have recognized are non-cash in nature and did not violate covenants on our then-existing credit facilities, or on our currentRevolver and Term Loan B. However, the potential for future impairment charges can be viewed as a negative factor with regard to forecasted futureperformance and cash flows. We believe that we have adequately considered the economic downturn in our valuation models and do not believe that thenon-cash impairments in and of themselves are a liquidity risk. OFF-BALANCE SHEET ARRANGEMENTS At December 31, 2013 and 2014, Salem did not have any relationships with unconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. As such, Salem is not materially exposed to any financing, liquidity, market or credit risk that could arise ifSalem had engaged in such relationships. CONTRACTUAL OBLIGATIONS We enter into various agreements in the normal course of business that contain minimum guarantees. The typical minimum guarantee is tied to futurerevenue amounts that exceed the contractual level. Accordingly, the estimated fair value of these arrangements is zero. We undertake projects from time totime to upgrade our radio station technical facilities and/or FCC broadcast licenses, expand our Internet offerings, improve our facilities and update ourcomputer infrastructures. We expect to incur capital expenditures of approximately $10.5 million throughout the twelve months ending December 31, 2015;the nature and timing of these upgrades and expenditures can be delayed or scaled back at the discretion of management. The following table summarizes our aggregate contractual obligations at December 31, 2014, and the estimated timing and effect that such obligationsare expected to have on our liquidity and cash flow in future periods. Payments Due by Period Contractual Less than 1-3 3-5 More Than 5 Obligations Total One year years years years (Dollars in thousands) Long-term debt, including current portion $276,717 $1,784 $6,000 $6,000 $262,933 Interest payments on long-term debt (1) 40,734 12,518 25,018 3,174 24 Capital lease obligations and other loans 788 114 220 208 246 Operating leases 72,450 9,577 15,795 12,436 34,642 Deferred cash payments 3,435 935 2,500 — — Contingent earn-out consideration(2) 6,679 3,612 3,067 — — Talent (3) 5,966 2,908 3,040 18 — Other Contracts (4) 5,100 5,100 — — — Total contractual cash obligations $411,869 $36,548 $55,640 $21,836 $297,845 (1)Interest payments on long-term debt are based on the outstanding debt and respective interest rates with interest rates on variable-rate debt heldconstant through maturity at the December 31, 2014 rates. Interest ultimately paid on these obligations will differ based on changes in interestrates for variable-rate debt, as well as any potential repayments or future refinancing. See Note 7 to the accompanying consolidated financialstatements included in this annual report on Form 10-K for further details. 89Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (2)Maximum amount of contingent earn-out consideration payable over two years associated with our acquisition of Twitchy.com on December 10,2013 and Eagle Publishing on January 10, 2014. See Note 3 to the accompanying consolidated financial statements included in this annualreport on Form 10-K for further details. (3)Talent agreements are typically one to three years in length with various renewal dates. The liability shown is based on agreements in effect as ofDecember 31, 2014. Future payments will vary as the agreements are renewed. (4)Other contracts consist of purchase commitments, including APA’s as of December 31, 2014. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 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 therelated risk. In accordance with our risk management strategy, we 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 asa cash flow hedging instrument shall be reported as a component of other comprehensive income (outside earnings) and reclassified into earnings in the sameperiod or periods during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, shall berecognized currently in earnings. 90Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS PAGEReport of Independent Registered Public Accounting Firm92 Consolidated Balance Sheets as of December 31, 2013 and 201493 Consolidated Statements of Operations for the years ended December 31, 2012, 2013 and 2014 94 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2013 and 201496 Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014 97 Notes to Consolidated Financial Statements99 91Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and StockholdersSalem Media Group, Inc. We have audited the accompanying consolidated balance sheets of Salem Media Group, Inc. and subsidiaries (collectively, the “Company”) as of December31, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period endedDecember 31, 2014. Our audits also included the financial statement schedule of the Company listed in Item 15(a). These consolidated financial statementsand financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidatedfinancial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, inconformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal controlover financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2015 expressed an unqualified opinion on the effectivenessof the Company’s internal control over financial reporting. /s/ SingerLewak LLP Los Angeles, CaliforniaMarch 13, 2015 92Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SALEM MEDIA GROUP, INC.CONSOLIDATED BALANCE SHEETS(Dollars in thousands, except share and per share data) December 31, 2013 2014 ASSETS Current assets: Cash and cash equivalents $65 $33 Trade accounts receivable (net of allowances of $10,809 in 2013 and $12,727 in 2014) 37,627 34,781 Other receivables 720 3,546 Inventories (net of reserves of $1,227 in 2014) — 572 Prepaid expenses 4,049 5,580 Deferred income taxes 6,876 8,153 Assets held for sale 1,700 1,700 Assets of discontinued operations 8 — Total current assets 51,045 54,365 Notes receivable (net of allowance of $548 in 2013 and $539 in 2014) 1,866 228 Fair value of interest rate swap 3,177 475 Property and equipment (net of accumulated depreciation of $145,215 in 2013 and $155,495 in 2014) 98,928 99,227 Broadcast licenses 381,836 385,726 Goodwill 22,374 24,684 Other indefinite-lived intangible assets 868 833 Amortizable intangible assets (net of accumulated amortization of $27,933 in 2013 and $34,130 in 2014) 8,793 12,395 Deferred financing costs 4,130 3,166 Other assets 2,096 2,060 Total assets $575,113 $583,159 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $3,960 $2,964 Accrued expenses 7,888 12,704 Accrued compensation and related expenses 6,913 8,777 Accrued interest 37 48 Deferred revenue 9,721 13,205 Income tax payable 142 154 Current portion of long-term debt and capital lease obligations 3,121 1,898 Total current liabilities 31,782 39,750 Long-term debt and capital lease obligations, less current portion 287,672 275,607 Deferred income taxes 43,457 49,109 Deferred revenue 9,965 10,576 Other liabilities 452 4,123 Total liabilities 373,328 379,165 Commitments and contingencies (Note 10) Stockholders’ Equity: Class A common stock, $0.01 par value; authorized 80,000,000 shares; 21,803,303 and 22,082,140 issued and19,485,653 and 19,764,490 outstanding at December 31, 2013 and 2014, respectively 218 221 Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding atDecember 31, 2013 and 2014, respectively 56 56 Additional paid-in capital 237,579 240,493 Accumulated deficit (2,062) (2,770)Treasury stock, at cost (2,317,650 shares at December 31, 2013 and 2014) (34,006) (34,006)Total stockholders’ equity 201,785 203,994 Total liabilities and stockholders’ equity $575,113 $583,159 See accompanying notes 93Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SALEM MEDIA GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Dollars in thousands, except share and per share data) Year Ended December 31, 2012 2013 2014 Net broadcast revenue $187,640 $188,544 $192,923 Net digital media revenue 28,166 35,156 46,862 Net publishing revenue 13,373 13,234 26,751 Total net revenue 229,179 236,934 266,536 Operating expenses: Broadcast operating expenses, exclusive of depreciation and amortization shown below(including $1,357, $1,428 and $1,454 for the years ended December 31, 2012, 2013 and2014, respectively, paid to related parties) 126,514 129,857 138,564 Digital media operating expenses, exclusive of depreciation and amortization shown below 22,848 25,741 36,232 Publishing operating expenses exclusive of depreciation and amortization shown below 13,339 14,280 26,143 Unallocated corporate expenses, exclusive of depreciation and amortization shown below(including $386, $239 and $274 for the years ended December 31, 2012, 2013 and 2014,respectively, paid to related parties) 14,396 16,081 17,092 Depreciation 12,343 12,448 12,629 Amortization 2,304 2,814 6,196 Change in the estimated fair value of contingent earn-out consideration — — 734 Impairment of indefinite-lived long-term assets other than goodwill 88 1,006 34 Impairment of goodwill — 438 45 Impairment of long-lived assets 6,808 — — (Gain) loss on the sale or disposal of assets 49 (264) 251 Total operating expenses 198,689 202,401 237,920 Operating income from continuing operations 30,490 34,533 28,616 Other income (expense): Interest income 106 68 45 Interest expense (including $427, $154 and $0 for the years ended December 31, 2012, 2013and 2014, respectively, due to related parties) (24,911) (16,892) (15,993)Change in the fair value of interest rate swap — 3,177 (2,702)Loss on early retirement of long-term debt (1,088) (27,795) (391)Net miscellaneous income and (expenses) 79 18 665 Income (loss) from continuing operations before income taxes 4,676 (6,891) 10,240 Provision for (benefit from) income taxes 153 (4,192) 4,765 Income (loss) from continuing operations 4,523 (2,699) 5,475 Loss from discontinued operations, net of tax (95) (37) — Net income (loss) $4,428 $(2,736) $5,475 See accompanying notes 94Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SALEM MEDIA GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)(Dollars in thousands, except share and per share data) Year Ended December 31, 2012 2013 2014 Basic earnings (loss) per share data: Earnings (loss) per share from continuing operations $0.18 $(0.11) $0.21 Earnings (loss) per share from discontinued operations — — — Basic earnings (loss) per share $0.18 $(0.11) $0.21 Diluted earnings (loss) per share data: Earnings (loss) per share from continuing operations $0.18 $(0.11) $0.21 Earnings (loss) from discontinued operations — — — Diluted earnings (loss) per share $0.18 $(0.11) $0.21 Distributions per share $0.14 $0.21 $0.24 Basic weighted average shares outstanding 24,577,605 24,938,075 25,336,809 Diluted weighted average shares outstanding 24,986,966 24,938,075 26,081,175 See accompanying notes 95Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SALEM MEDIA GROUP, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(Dollars in thousands, except share data) Class A Class B Additional Retained Common Stock Common Stock Paid-In Earnings Treasury Shares Amount Shares Amount Capital (Accumulated Deficit) Stock Total Stockholders' equity, December 31, 2011 21,051,305 210 5,553,696 56 231,972 4,816 (34,006) 203,048 Stock-based compensation — — — — 1,368 — — 1,368 Options exercised 261,205 3 — — 406 — — 409 Tax benefit related to stock options exercised — — — — 228 — — 228 Cash distributions — — — — — (3,412) — (3,412)Net income — — — — — 4,428 — 4,428 Stockholders' equity, December 31, 2012 21,312,510 213 5,553,696 56 233,974 5,832 (34,006) 206,069 Stock-based compensation — — — — 1,849 — — 1,849 Lapse of restricted shares 79,810 — — — — — — — Options exercised 410,983 5 — — 1,417 — — 1,422 Tax benefit related to stock options exercised — — — — 339 — — 339 Cash distributions — — — — — (5,158) — (5,158)Net loss — — — — — (2,736) — (2,736)Stockholders' equity, December 31, 2013 21,803,303 218 5,553,696 56 237,579 (2,062) (34,006) 201,785 Stock-based compensation — — — — 1,576 — — 1,576 Options exercised 278,837 3 — — 1,218 — — 1,221 Tax benefit related to stock options exercised — — — — 120 — — 120 Cash distributions — — — — — (6,183) — (6,183)Net income — — — — — 5,475 — 5,475 Stockholders' equity, December 31, 2014 22,082,140 221 5,553,696 56 240,493 (2,770) (34,006) 203,994 96Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SALEM MEDIA GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands) Year Ended December 31, 2012 2013 2014 OPERATING ACTIVITIES Income (loss) from continuing operations $4,523 $(2,699) $5,475 Adjustments to reconcile income (loss) from continuing operations to net cash provided bycontinuing operating activities: Non-cash stock-based compensation 1,368 1,849 1,576 Tax benefit related to stock options exercised 228 339 120 Depreciation and amortization 14,647 15,262 18,825 Amortization of bond issue costs and bank loan fees 1,291 853 643 Amortization and accretion of financing items 179 194 187 Accretion of acquisition-related deferred payments and contingent consideration — — 576 Provision for bad debts 2,554 3,456 3,026 Deferred income taxes (329) (4,764) 4,375 Impairment of indefinite-lived long-term assets other than goodwill 88 1,006 34 Impairment of goodwill — 438 45 Impairment of long-lived assets 6,808 — — Change in the fair value of interest rate swaps — (3,177) 2,702 Change in the estimated fair value of contingent earn-out consideration — — 734 (Gain) loss on the sale or disposal of assets 49 (264) 251 Loss on early retirement of debt 1,088 27,795 391 Changes in operating assets and liabilities: Accounts receivable (2,556) (3,049) 4,756 Prepaid expenses and other current assets 118 (50) 210 Accounts payable and accrued expenses 3,291 (4,733) 4,041 Deferred revenue (2,240) (3,688) (4,929)Other liabilities — — (1,125)Income taxes payable (30) (33) 12 Net cash provided by continuing operating activities 31,077 28,735 41,925 INVESTING ACTIVITIES Capital expenditures (8,549) (10,639) (10,074)Deposits (release) of cash held in escrow pursuant to acquisition and sale activity (725) 81 (65)Purchases of broadcast assets and radio stations (3,330) (5,500) (6,195)Purchases of Internet businesses and assets (7,365) (1,977) (3,713)Purchases of publishing businesses and assets — — (2,774)Proceeds from the sale of assets 907 477 1,370 Restricted cash 110 — — Other (114) (179) (283)Net cash used in investing activities of continuing operations (19,066) (17,737) (21,734)FINANCING ACTIVITIES Payments to redeem Terminated 95/8% Notes (21,500) (213,500) — Payments of bond premium in connection with early redemptions and repurchases of theTerminated 95/8% Notes (645) (22,677) — Proceeds from borrowings under Term Loan B — 298,500 — Payments under Term Loan B — (8,750) (15,250)Proceeds from borrowings under Revolver — 30,961 56,510 Payments under Revolver — (30,961) (54,726)Payments of costs related to bank credit facility (149) (4,394) (13)Proceeds from borrowings under terminated credit facilities and subordinated debt 154,169 46,747 — Payments under terminated credit facilities and subordinated debt (144,669) (87,220) — Proceeds from Terminated Subordinated Debt due to Related Parties 27,000 — — Payments to Terminated Subordinated Debt due to Related Parties (21,000) (15,000) — Payments of contingent earn-out consideration — — (300)Payment of seller financed note — (2,000) — Proceeds from exercise of stock options 409 1,422 1,221 Payment of cash distribution on common stock (3,412) (5,158) (6,183) See accompanying notes 97Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SALEM MEDIA GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(Dollars in thousands) Year Ended December 31, 2012 2013 2014 Payments on capital lease obligations (125) (122) (130) Book overdraft (1,775) 876 (1,352) Net cash used in financing activities (11,697) (11,276) (20,223)CASH FLOWS FROM DISCONTINUED OPERATIONS Operating cash flows (1) (37) — Total cash outflows from discontinued operations (1) (37) — Net increase (decrease) in cash and cash equivalents 313 (315) (32) Cash and cash equivalents at beginning of period 67 380 65 Cash and cash equivalents at end of period $380 $65 $33 Supplemental disclosures of cash flow information: Cash paid during the period for: Cash paid for interest net of capitalized interest (including $322, $296 and $0 for the yearsended December 31, 2012, 2013 and 2014, respectively, paid to related parties) $23,448 $16,747 $14,518 Cash paid for income taxes $220 $242 $257 Other supplemental disclosures of cash flow information: Trade revenue $5,270 $5,917 $6,227 Trade expense $5,309 $4,897 $6,052 Non-cash investing and financing activities: Present value of advertising credit payable $— $2,427 $— Seller financed note due directly to seller of station assets $— $2,000 $— Estimated present value of contingent earn-out consideration $— $616 $2,047 Deferred payments due 2014 under asset purchase agreement $— $300 $600 Present value of deferred cash payments (due 2015) $— $— $893 Present value of deferred cash payments (due 2016) $— $— $2,289 Assets acquired under capital leases $27 $118 $64 See accompanying notes 98Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SALEM MEDIA GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements of Salem Media Group, Inc. (“Salem” “we,” “us,” “our” or the “company”) include the companyand its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Description of Business Salem is a diversified multi-media company with integrated operations including radio broadcasting, digital media, and publishing. Our programming isintended for audiences interested in Christian and family-themed content and conservative news talk. Our foundational business is the ownership and operation of radio stations in large metropolitan markets. We also own and operate Salem RadioNetwork® (“SRN”), SRN News Network (“SNN”), Salem Music Network (“SMN”), Solid Gospel Network (“SGN”), Salem Media Representatives (“SMR”)and Vista Media Representatives (“VMR”). SRN, SNN, SMN and SGN are networks that develop, produce and syndicate a broad range of programmingspecifically targeted to Christian and family-themed talk stations, music stations and general News Talk stations throughout the United States, includingSalem owned and operated stations. SMR a national advertising sales firm with offices in 11 U.S. cities, specializes in placing national advertising onreligious and other commercial radio stations. As of December 2014, we merged Vista Media Representatives (“VMR”), our national advertising sales firmestablished for non-Christian format stations, into SMR as our SMR and VMR sales teams consistently pursue advertising for all station formats. Web based and digital content has been a significant growth area for Salem and continues to be a focus of future development. Salem Web Network™(“SWN”) and our other web based businesses provide Christian and conservative-themed content, audio and video streaming, and other resources digitallythrough the web. SWN’s web portals include Christian content websites: OnePlace.com, Christianity.com, Crosswalk.com®, GodVine.com, Jesus.org andBibleStudyTools.com. Our conservative opinion websites, collectively known as Townhall Media, include Townhall.com™, HotAir.com, Twitchy.com,HumanEvents.com and RedState.com. We also issue digital newsletters, including Eagle Financial Publications, that provide market analysis and investmentadvice for individual subscribers from financial commentators. Church product websites including WorshipHouseMedia.com, SermonSpice.com, andChurchStaffing.com offer downloads and service platforms to pastors and other educators. Our web content is accessible through all of our radio stationwebsites that feature content of interest to local listeners throughout the United States. E-commerce sites include Salem Consumer Products (”SCP”), an e-commerce business that sells books, DVD’s and editorial content developed by ouron-air personalities, Eagle Wellness, an online site offering complimentary health advice and sales of nutritional products. Our acquisition of Regnery Publishing on January 10, 2014, represented a major shift in our publishing operating segment. Regnery Publishing is apublisher of conservative books that was founded in 1947. Regnery has published dozens of bestselling books by leading conservative authors andpersonalities, including Ann Coulter, Newt Gingrich, Michelle Malkin, David Limbaugh, Ed Klein, Laura Ingraham, Mark Steyn and Dinesh D'Souza. Our publishing operating segment also includes Salem Publishing™ and Xulon Press. Salem Publishing™ produces and distributes numerous Christianand conservative opinion print magazines, including: Homecoming® The Magazine, YouthWorker Journal™, Singing News®, FaithTalk Magazine™, andPreaching Magazine™. Through December 2014, we also printed and produced Townhall Magazine™. Xulon Press™ is a print-on-demand self-publishingservice for Christian authors. Cash and Cash Equivalents We consider all highly liquid debt instruments, purchased with an initial maturity of three-months or less, to be cash equivalents. The carrying value ofour cash equivalents approximated fair value at each balance sheet date. 99Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Restricted Cash Restricted cash includes amounts that are contractually restricted in connection with a security agreement between the company and Traveler’sInsurance. Trade Accounts Receivable Trade accounts receivable represent receivables from customers for the sale of advertising, block program time, sponsorships and events, product sales,royalties, video and graphic downloads, subscriptions, book sales and author fees. Our receivables are recorded as invoiced and represent claims that will besettled in cash. The carrying value of our receivables, net of the allowance for doubtful accounts and estimated sales returns, represents their estimated netrealizable value. 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 thereceivables, specific customer information and current economic conditions. Past due balances are generally are not written-off until all of our collectionefforts have been unsuccessful, including use of a collections agency. A considerable amount of judgment is required in assessing the likelihood of ultimaterealization 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. Sales Returns We provide for estimated returns for products sold with the right of return, primarily book sales associated with Regnery Publishing and nutritionalproducts 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 arebased 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 establishingestimated 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 ineconomic conditions of the customer and/or its market. Revenue Recognition Revenue is recognized as it is earned in accordance with applicable guidelines. We consider amounts to be earned once evidence of an arrangement hasbeen obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured. We account for broadcast revenue from the sale of airtime for programs or spots as the program or advertisement is broadcast. Revenues are reported netof agency commissions, which are calculated as a stated percentage applied to gross billings. Digital revenue is recognized upon delivery of page-views,delivery of impressions as specified in the contract, delivery of the digital newsletter or email, or upon delivery of the advertisement or programming contentvia streaming. Revenues are reported net of agency commissions, which are calculated as a stated percentage applied to gross billings. Revenue from productsales and book sales are recognized upon shipment net of distribution fees and an allowance for sales returns. Revenues from advertisements in our printmagazines are recognized upon delivery of the publication net of agency commissions, which are calculated as a stated percentage applied to gross billings.Subscription revenue from our print magazines and digital newsletters is recognized over the life of the related subscription. 100Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Multiple-Deliverables We may enter bundled advertising agreements that include spot advertisements on our radio stations, digital banner placements, print magazineadvertisements and sponsorship promotions such as booth space at a station event, or some combination thereof. The multiple deliverables contained ineach agreement are accounted for separately over their respective delivery period provided that they are separate units of accounting. The selling priceused for each deliverable is based on vendor specific objective evidence if available or estimated selling price if vendor specific objective evidence isnot available. Objective evidence of fair value includes the price charged for each element when it is sold separately. The estimated selling price is theprice that we would transact if the deliverable was sold regularly on a standalone basis. Arrangement consideration is allocated at the inception of eacharrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangementproportionally to each deliverable on the basis of each deliverable’s selling price. Barter Transactions We may provide advertising time in exchange for certain products, supplies and services. The terms of the exchanges generally permit for thepreemption of such broadcast time in favor of advertisers who purchase time on regular terms. We include the value of such exchanges in both netbroadcasting revenues and broadcast operating expenses. The value recorded for barter revenues is based upon management’s estimate of the fair value of theproducts, supplies and services received. Advertising time that our radio stations exchange for goods and or services is recorded as barter revenue when the advertisement is broadcast at an amountequal to our estimate fair value of what was received. The value of the goods or services received in such barter transactions is charged to expense as used.Barter advertising revenue included in broadcast revenue for the years ended December 31, 2012, 2013 and 2014 was approximately $5.3 million, $5.6million and $6.0 million, respectively. Barter expenses included in broadcast operating expense for the years ended December 31, 2012, 2013 and 2014 wasapproximately $5.3 million, $4.8 million and $6.0 million. Accounting for Stock-Based Compensation We account for stock-based compensation under the provisions of FASB ASC Topic 718 “Compensation—Stock Compensation.” We record equityawards with stock-based compensation measured at the fair value of the award as of the grant date. We determine the fair value of our options using theBlack-Scholes option-pricing model that requires the input of highly subjective assumptions, including the expected stock price volatility and expected termof the options granted. The exercise price for options is equal to the closing market price of Salem Media Group common stock as of the date of grant. We use the straight-line attribution method to recognize share-based compensation costs over the service period of the award. Upon exercise,cancellation, forfeiture, or expiration of stock options, or upon vesting or forfeiture of restricted stock awards, deferred tax assets for options and restrictedstock 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. Tocalculate the excess tax benefits available as of the date of adoption for use in offsetting future tax shortfalls, we followed the alternative transition methoddiscussed in the FASB ASC Topic 718. Accounting for Acquisitions and Upgrades of Radio Station and Other Assets 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 theexisting 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 aradio station is allocated to the broadcast license. We may retain a third-party appraiser to estimate the fair value of these radio stations and networks assets.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 ourfinancial statements. The estimated fair value assigned to the FCC license and other assets are subjective in nature and require careful consideration andjudgment. Management reviews the third party reports for reasonableness of the assigned values. We believe that these valuations and analysis provideappropriate estimates of the fair value for net assets acquired. Property and equipment are recorded at their estimated fair value and depreciated on a straight-line basis over their estimated useful lives. Finite-livedintangible assets are recorded at their estimated fair value and amortized on a straight-line basis over their estimated useful lives. Goodwill, which representsthe organizational systems and procedures in place to ensure the effective operation of the entity, may also be recorded and tested for impairment. Costsassociated with acquisitions, such as consulting and legal fees, are expensed as incurred in corporate operating expenses. 101Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We undertake projects from time to time to upgrade our radio station technical facilities and/or FCC broadcast licenses. Our policy is to capitalize costsincurred up to the point where the project is complete, at which time we transfer the costs to the appropriate fixed asset and/or intangible asset categories.When the completion of a project is contingent upon FCC or other regulatory approval, we assess the probable future benefit of the asset at the time that it isrecorded and monitor it through the FCC or other regulatory approval process. In the event the required approval is not considered probable or the project isabandoned, we write-off the capitalized costs of the project. Accounting for Acquisitions We account for business acquisitions in accordance with the acquisition method of accounting as specified in FASB ASC Topic 805 BusinessCombinations. The total acquisition consideration is allocated to assets acquired and liabilities assumed based on their estimated fair values as of the date ofthe transaction. Estimates of the fair value include discounted estimated cash flows to be generated by the assets and their expected useful lives based onhistorical experience, market trends and any synergies believed to be achieved from the acquisition. Acquisitions may include contingent consideration, thefair value of which is estimated as of the acquisition date as the present value of the expected contingent payments as determined using weightedprobabilities 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. Aspart of the valuation and appraisal process, the third-party appraiser prepares a report assigning estimated fair values to the various asset categories in ourfinancial statements. These fair value estimates are subjective in nature and require careful consideration and judgment. Management reviews the third partyreports for reasonableness of the assigned values. We believe that these valuations and analysis provide appropriate estimates of the fair value for net assetsacquired. Property and equipment are recorded at the estimated fair value and depreciated on a straight-line basis over their estimated useful lives. Finite-livedintangible assets are recorded at their estimated fair value and amortized on a straight-line basis over their estimated useful lives. Goodwill, which representsthe organizational systems and procedures in place to ensure the effective operation of the entity, may also be recorded and tested for impairment. Costsassociated with acquisitions, such as consulting and legal fees, are expensed as incurred in corporate operating expenses. Accounting for Contingent Consideration Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of theacquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservableinputs used in the determination of the fair value of the contingent consideration include managements assumptions about the likelihood of payment basedon the established benchmarks and discount rates based on internal rate of return analysis. The fair value measurement includes inputs that are Level 3measurement as discussed in Note 8 to our consolidated financial statements included in this annual report on Form 10-K. Should actual results increase ordecrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to thecontracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in ouroperating results. Accounting for Discontinued Operations We regularly review underperforming assets to determine if a sale or disposal might be a better way to monetize the assets. When a station, group ofstations, or other asset group is considered for sale or disposal, we review the transaction to determine if or when the entity qualifies as a discontinuedoperation in accordance with the criteria of FASB ASC Topic 205-20 “Discontinued Operations.” In April 2014, the FASB issued authoritative guidancewhich raises the threshold for disposals to qualify as discontinued operations. Under the new guidance, a discontinued operation is (1) a component of anentity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect onan entity's operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date. For our radio stations, we define a cluster as a group of radio stations operating in the same geographic market, sharing the same building, equipment,and managed by a single general manager. The cluster level is the lowest level for which discrete financial information and cash flows are available and thelevel reviewed by management to analyze operating results. General Managers are compensated based on the results of their cluster as a whole, not the resultsof any individual radio stations. We have determined that a radio market qualifies for a discontinued operation when management, having the authority toapprove the action, commits to a plan to sell the asset (disposal group), the sale is probable, and the sale will result in the exit of a particular geographicmarket. 102Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. During the 4th quarter of 2011, based on operating results that did not meet expectations, we ceased operating Samaritan Fundraising as of December 31,2011. Samaritan Fundraising, was reported in our Digital Media operations, was a web-based fundraising products company operating from a single facilityin Fairfax, VA, under the control of one general manager. As a result of our decision to close operations, there were no material cash flows associated with thisentity and we have no ongoing or further involvement in the operations of this entity. We reported the operating results and net assets of this entity as adiscontinued operation for all periods presented based on authoritative guidance at that time. We elected to early-adopt the FASB guidance for discontinued operations issued in April 2014. As of December 2014, we determined that we will nolonger produce or distribute TownHall.com magazine. The last issue was delivered in December 2014. Under the new guidance, the ceasing of thispublication does not represent a strategic shift in our operations and does not qualify as a discontinued operation. The markets and entities that we have accounted for as a discontinued operation are explained in more fully in “Note 4 – Acquisitions and RecentTransactions.” Accounting for Property and Equipment Property and equipment are recorded at cost less accumulated depreciation. Cost represents the historical cost of acquiring the asset, including the costsnecessarily incurred to bring it to the condition and location necessary for its intended use. For assets constructed for our own use, such as towers andbuildings that are discrete projects for which costs are separately accumulated and for which construction takes considerable time, we record capitalizedinterest. The amount capitalized is the cost that could have been avoided had the asset not been constructed and is based on the average accumulatedexpenditures incurred over the capitalization period at the weighted average rate applicable to our outstanding variable rate debt. We capitalized interest of$0.1 million and $0.2 million during the years ended December 31, 2013 and 2014, respectively. Repair and maintenance costs are charged to expense asincurred. Improvements are capitalized when they extend the life of the asset or enhance the quality or ability of the asset to benefit operations. Depreciationis computed using the straight-line method over estimated useful lives as follows: Category LifeBuildings 40 yearsOffice furnishings and equipment 5-10 yearsAntennae, towers and transmitting equipment 10-20 yearsStudio and production equipment 7-10 yearsComputer software and website development costs 3 yearsRecord and tape libraries 3 yearsAutomobiles 5 yearsLeasehold improvements Lesser of 15 years or life of lease The carrying value of property and equipment is evaluated periodically in relation to the operating performance and anticipated future cash flows of theunderlying radio stations and business units for indicators of impairment. When indicators of impairment are present, and the cash flows estimated to begenerated from these assets is less than the carrying value, an adjustment to reduce the carrying value to the fair market value of the assets is recorded. Based on changes in management’s planned usage, we classified land in Covina, California as held for sale as of June 2012. We evaluated the land forimpairment in accordance with guidance for impairment of long-lived assets held for sale. We determined that the carrying value of the land exceeded theestimated fair value less costs to sell. We recorded an impairment charge of $5.6 million associated with the land based on our estimated sale price. InDecember 2012, after several purchase offers for the land were terminated, we obtained a third party valuation for the land. Based on the fair value determinedby the third-party, we recorded an additional impairment charge of $1.2 million associated with the land. There were no indications of impairment present during the periods ending December 31, 2013 and 2014 and it is our intent to continue to pursue thesale of this land. 103Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The table below presents the fair value measurements used to value this asset. Fair Value Measurements Using: (Dollars in thousands) Description As of December31, 2014 Quoted prices inactive markets(Level 1) Significant OtherObservableInputs (Level 2) SignificantUnobservableInputs (Level 3) Total Gains(Losses) Long-Lived Asset Held for Sale $1,700 $1,700 $- Accounting for Internally Developed Software and Website Development Costs We capitalize costs incurred during the application development stage related to the development of internal-use software as specified in FASB ASCTopic 350-40 “Internal-Use Software.” Capitalized costs are generally amortized over the estimated useful life of three years. Costs incurred related to theconceptual design and maintenance of internal-use software are expensed as incurred. Website development activities include planning, design anddevelopment of graphics and content for new websites and operation of existing sites. Costs incurred that involve providing additional functions and featuresto the website are capitalized. Costs associated with website planning, maintenance, content development and training are expensed as incurred. Capitalizedcosts are generally amortized over the estimated useful life of three years. We capitalized $2.3 million, $1.5 million and $3.9 million during the years endedDecember 31, 2012, 2013 and 2014, respectively, related to internally developed software and website development costs. Amortization expense of amountscapitalized was $2.1 million, $2.3 million and $2.4 million for the years ended December 31, 2012, 2013 and 2014, respectively. Accounting for Advertising and Promotional Cost Costs of media advertising and associated production costs are expensed as incurred and amounted to approximately $10.5 million, $10.0 million and$10.2 million for each of the years ending December 31, 2012, 2013, and 2014, respectively. Accounting for Amortizable Intangible Assets Intangible assets are recorded at cost less accumulated amortization. Typically, intangible assets are acquired in conjunction with the acquisition ofradio stations, Internet businesses and publishing entities. These intangibles are amortized using the straight-line method over the following estimated usefullives: Category LifeCustomer lists and contracts Lesser of 5 years or life of contractFavorable and assigned leases Life of the leaseDomain and brand names 5 to 7 yearsInternally developed software 3 to 5 yearsCustomer relationships 1 to 3 yearsOther amortizable intangible assets 5 to 10 years The carrying value of our amortizable intangible assets are evaluated periodically in relation to the operating performance and anticipated future cashflows of the underlying radio stations and businesses for indicators of impairment. In accordance with FASB ASC Topic 360 “Property, Plant andEquipment,” when indicators of impairment are present and the undiscounted cash flows estimated to be generated from these assets are less than the carryingamounts of these assets, an adjustment to reduce the carrying value to the fair market value of these assets is recorded, if necessary. No adjustments to thecarrying amounts of our amortizable intangible assets were necessary during the years ended December 31, 2012, 2013 or 2014. Goodwill and Other Indefinite-Lived Intangible Assets Approximately 71% of our total assets as of December 31, 2014 consist of indefinite-lived intangible assets, such as broadcast licenses, goodwill andmastheads, 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 tooperate the properties without the related FCC license for each property. Broadcast licenses are renewed with the FCC every eight years for a nominal costthat is expensed as incurred. We continually monitor our stations’ compliance with the various regulatory requirements. Historically, all of our broadcastlicenses 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 – Goodwilland Other. Broadcast licenses account for approximately 94% of our indefinite-lived intangible assets. Goodwill and magazine mastheads account for theremaining 6%. We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently ifevents or circumstances indicate that an asset may be impaired. 104Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 andassumptions that are based on past experiences and judgment about future operating performance of our markets and business segments. If actual futureresults are less favorable than the assumptions and estimates we used, we are subject to future impairment charges, the amount of which may be material. Thefair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimatesthat market participants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820Fair Value Measurements and Disclosures as Level 3 inputs discussed in detail in Note 8 to our consolidated financial statements included in this annualreport on Form 10-K. Gain or Loss on the Sale or Disposal of Assets We record gains or losses on the sale or disposal of assets equal to the proceeds, if any, as compared to the net book value. Exchange transactions areaccounted for in accordance with FASB ASC Topic 845 “Non-Monetary Transactions.” For the year ended December 31, 2012, we recorded a $0.2 millionpre-tax gain on the sale of WBZS-AM in Pawtucket, Rhode Island and a $0.6 million gain from insurance proceeds for repairs of storm damage in our NewYork market , partially offset by various fixed asset and equipment disposals including an additional loss associated with the write-off of a receivable from aprior station sale. For the year ended December 31, 2013, we recorded a $0.4 million pre-tax gain on the partial sale of land in our Cleveland market and $0.1million of insurance proceeds for damages at one of our stations offset by various fixed asset and equipment disposals. For the year ended December 31,2014, we recorded a $0.3 million pre-tax loss which included a $0.2 million loss associated with the write-off of a receivable from a prior station sale, a $0.2million loss from the sale of land and building in our Miami market, a $0.1 million loss due to the relocation of our office and studio facility in our SanFrancisco market offset by $0.1 million of insurance proceeds from a claim associated with one of our markets as well as other various fixed asset andequipment disposals. Leases We lease various facilities including broadcast tower and transmitter sites. When we enter a lease agreement, we review the terms to determine theappropriate classification of the lease as a capital lease or operating lease based on the factors listed in FASB ASC Topic 840 “Leases.” Our current leaseterms generally range from one to twenty-five years with rent expense recorded on a straight-line basis for financial reporting purposes. We also subleasetowers that we own under various agreements with other broadcasters. Subleases generally cover a sixty-year term, over which time we recognize rentalincome on a straight-line basis. Deferred rent revenue was $4.5 million and $4.4 million at December 31, 2013 and 2014, respectively. Leasehold Improvements We may elect to construct or otherwise invest in leasehold improvements to properties. We capitalize the cost of the improvements that are thenamortized over the shorter of the useful life of the improvement or the remaining lease term. Deferred Financing Costs Deferred financing costs consist of bank loan fees incurred upon entering our Term Loan B and Revolver as of September 30, 2013. The costs are beingamortized over the seven year term of the Term Loan B and the five year term of the Revolver as an adjustment to interest expense. During the year endedDecember 31, 2014, approximately $0.3 million of bank loan fees were written off in conjunction with the early retirement of the Term Loan B. Deferredfinancing costs were $4.1 million and $3.2 million at December 31, 2013 and 2014, respectively. 105Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Partial Self-Insurance on Employee Health Plan We provide health insurance benefits to eligible employees under a self-insured plan whereby the company pays actual medical claims subject to certainstop loss limits. We record self-insurance liabilities based on actual claims filed and an estimate of those claims incurred but not reported. Any projection oflosses concerning our liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors such as futureinflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should the actual amount of claims increase ordecrease beyond what was anticipated, we may adjust our future reserves. Our self-insurance liability was $0.5 million and $0.9 million at December 31, 2013and 2014, respectively. Local Programming and Marketing Agreement Fees We may enter into a Local Marketing Agreement (“LMA”) or Time Brokerage Agreement (“TBA”) in connection with acquisitions of radio stations thatare pending FCC regulatory approval of transfer of the broadcast licenses. Under the terms of these agreements, we make specified periodic payments to theowner in exchange for the right to program and sell advertising for a specified portion of the station’s inventory of broadcast time. We record revenues andexpenses associated with the portion of the station’s inventory of broadcast time it manages. Nevertheless, as the holder of the FCC license, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station. We alsoenter into LMA’s in connection with dispositions of radio stations. In such cases, we may receive periodic payments in exchange for allowing the buyer toprogram and sell advertising for a portion of the station’s inventory of broadcast time. 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 therelated risk. In accordance with our risk management strategy, we may use derivative instruments only for the purpose of managing risk associated with anasset, liability, committed transaction, or probable forecasted transaction that is identified by management. Our use of derivative instruments may result inshort-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 acash flow hedging instrument shall be reported as a component of other comprehensive income (outside earnings) and reclassified into earnings in the sameperiod or periods during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, shall berecognized currently in earnings. On March 27, 2013, we entered into an interest rate swap agreement with Wells Fargo Bank, N.A. that began on March 28, 2014 with a notional principalamount of $150.0 million. The agreement was entered to offset risks associated with the variable interest rate on our Term Loan B. Payments on the swap aredue on a quarterly basis with a LIBOR floor of 0.625%. The swap expires on March 28, 2019 at a fixed rate of 1.645%. The interest rate swap agreement wasnot designated as a cash flow hedge, and as a result, all changes in the fair value are recognized in the current period statement of operations rather thanthrough other comprehensive income. We recorded an asset of $0.5 million as of December 31, 2014, representing the change in the fair value of the interestrate swap agreement. The swap was valued based on observable inputs for similar assets and liabilities and other observable inputs for interest rates and yieldcurves, which are classified within Level 2 inputs in the fair value hierarchy described below and in Note 8 to our consolidated financial statements includedin this annual report on Form 10-K. Fair Value Accounting FASB ASC Topic 820 Fair Value Measurements and Disclosures established a single definition of fair value in generally accepted accounting principlesand expanded disclosure requirements about fair value measurements. The provision applies to other accounting pronouncements that require or permit fairvalue measurements. We adopted the fair value provisions for financial assets and financial liabilities effective January 1, 2008. The adoption had a materialimpact on our consolidated financial position, results of operations or cash flows. We adopted fair value provisions for nonfinancial assets and nonfinancialliabilities effective January 1, 2009. This includes applying the fair value concept to (i) nonfinancial assets and liabilities initially measured at fair value inbusiness 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 atfair value. The adoption of the fair value provisions of FASB ASC Topic 820 to nonfinancial assets and nonfinancial liabilities did not have a materialimpact on our consolidated financial position, results of operations or cash flows. 106Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The fair value provisions include guidance on how to estimate the fair value of assets and liabilities in the current economic environment andreemphasizes 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 thevolume 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 andwe 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. Pricingobservability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market, and thecharacteristics specific to the transaction. Financial instruments with readily available active quoted prices or for which fair value can be measured fromactively 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 utilizedin 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 levelcorresponding 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 FASBASC 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 atthe 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. Ifthe 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 theassumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in thecircumstances (which might include the reporting entity’s own data). As of December 31, 2014, the carrying value of cash and cash equivalents, trade accounts receivables, accounts payable, accrued expenses and accruedinterest approximates fair value due to the short-term nature of such instruments. The carrying value of other long-term liabilities approximates fair value asthe related interest rates approximate rates currently available to the company. The following table summarizes the fair value of our financial assets andliabilities that are measured at fair value: December 31, 2014 Total Fair Value and Fair Value Measurement Category Carrying Value on Balance Sheet Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $33 $33 $— $— Trade accounts receivable, net 34,781 34,781 — — Fair value of interest rate swap 475 — 475 — Liabilities: Accounts payable 2,964 2,964 — — Accrued expenses including estimated fair value of contingent earn-outconsideration 12,704 11,129 — 1,575 Accrued interest 48 48 — — Long term liabilities including estimated fair value of contingent earn-outconsideration 4,123 2,413 — 1,710 Long-term debt 277,505 277,505 — — 107Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Long-term Debt and Debt Covenant Compliance Our classification of outstanding borrowings on our Term Loan B as long-term debt on our balance sheet is based on our assessment that, under the termsof our Credit Agreement and after considering our projected operating results and cash flows for the coming year, no principal payments are required to bemade. The Term Loan B has a term of seven years, maturing in March 2020. We are required to make principal payments of $750,000 per quarter, whichbegan on September 30, 2013. Prepayments may be made against the outstanding balance of our Term Loan B. Each repayment of the Term Loan B isapplied ratably to each of the next four principal installments thereof in the direct order of maturity and thereafter to the remaining principal balance inreverse order of maturity. Our projections of operating results and cash flows for the coming year are estimates dependent upon a number of factors including but not limited todevelopments in the markets in which we are operating in and varying economic and political factors. Accordingly, these projections are inherently uncertainand our actual results could differ from these estimates. Income Taxes and Uncertain Tax Positions We account for income taxes in accordance with FASB ASC Topic 740 “Income Taxes.” Deferred income taxes are determined based on the differencebetween the consolidated financial statement and income tax bases of assets and liabilities using enacted tax rates in effect in the years in which thedifferences are expected to reverse. Our evaluation was performed for tax years that remain subject to examination by major tax jurisdictions, which rangefrom 2010 through 2013. Upon the adoption of the provisions on January 1, 2007, we had $3.0 million in liabilities related to uncertain tax positions, including $0.9 millionrecognized under FASB ASC Topic 450 “Contingencies” and carried forward from prior years and $2.1 million recognized upon adoption of the taxprovision changes as a reduction to retained earnings. Included in the $2.1 million accrual was $0.1 million in related interest, net of federal income taxbenefits. During 2014, we recognized a net decrease of $0.4 million in liabilities and at December 31, 2014, had $0.5 million in liabilities for unrecognizedtax benefits. Included in this liability amount is $3,000 of accrued interest, net of federal income tax benefits and the related penalties recorded in income taxexpense on our consolidated financial statements included in this annual report on Form 10-K . Management expects an additional reduction of $0.4 millionin the reserve over the next twelve months due to statute expirations. A summary of the changes in the gross amount of unrecognized tax benefits is as follows: December 31, 2014 (Dollars in thousands) Balance at January 1, 2014 $916 Additions based on tax positions related to the current year — Additions based on tax positions related to prior years — Reductions related to tax positions of prior years — Decrease due to statute expirations (405)Related interest and penalties, net of federal tax benefits (3)Balance as of December 31, 2014 $508 Valuation Allowance (deferred taxes) For financial reporting purposes, we recorded a valuation allowance of $3.0 million as of December 31, 2014 to offset a portion of the deferred tax assetsrelated to the state net operating loss carryforwards. We regularly review our financial forecasts in an effort to determine our ability to utilize the netoperating loss carryforwards for tax purposes. Accordingly, the valuation allowance is adjusted periodically based on our estimate of the benefit thecompany will receive from such carryforwards. 108Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Royalty Advances to Authors Royalties due to book authors are paid in advance and capitalized. Royalties are expensed as the related book revenues are earned or when we determinethat future recovery of the royalty is not likely. We reviewed historical data associated with royalty advances, earnings and recoverability based on actualresults of Regnery Publishing. Historically, the longer the unearned portion of an advance remains outstanding, the less likely it is that we will recover theadvance through the sale of the book. We apply this historical experience to outstanding royalty advances to estimate the likelihood of recovery. A provisionwas established to expense the balance of any unearned advance which we believe is not recoverable. Our analysis also considers other discrete factors, suchas death of an author, any decision to not pursue publication of a title, poor market demand or other relevant factors. Inventory Our inventory on hand consists of published books and wellness products. Inventory is recorded at the lower of cost or market as determined on a First-InFirst-Out (“FIFO”) cost method. Inventory Reserves We reviewed historical data associated with book and wellness product inventories held by Regnery Publishing and Eagle Wellness, respectively. Weutilized this historical data associated with sales returns and allowances and royalty reserves, as well as overall economic conditions and product demand, toestimate the fair value of inventory on hand. A provision has been established to expense the balance of unsold inventory for which we believe the cost to beunrecoverable. 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 duringthe period. Diluted net earnings per share is computed using the weighted average number of shares of Class A and Class B common stock outstanding duringthe period plus the dilutive effects of stock options. Options to purchase 1,927,099, 2,162,067 and 1,816,204 shares of Class A common stock were outstanding at December 31, 2012, 2013 and 2014,respectively. Diluted weighted average shares outstanding exclude outstanding stock options whose exercise price is in excess of the average price of thecompany’s stock price. These options are excluded from the respective computations of diluted net income or loss per share because their effect would beanti-dilutive. The number of anti-dilutive shares as of December 31, 2012, 2013 and 2014 was 480,825, nil and 589,437, respectively. The following table sets forth the shares used to compute basic and diluted net earnings per share for the periods indicated: Year Ended December 31, 2012 2013 2014 Weighted average shares 24,577,605 24,938,075 25,336,809 Effect of dilutive securities - stock options 409,361 — 744,366 Weighted average shares adjusted for dilutive securities 24,986,966 24,938,075 26,081,175 Segments We have two reportable segments, radio broadcasting and digital media. Digital media (formerly “Internet and e-commerce”) became a reportablesegment as of the first quarter of 2011 upon the realization of organic and acquisition related revenue growth. Our acquisition of Eagle Publishing on January10, 2014, which included Regnery Publishing, Eagle Financial Publications, Eagle Wellness, Human Events and Red State, resulted in operational changesin our business and a realignment of our operating segments. We have three operating segments: (1) Broadcast, (2) Digital Media, and (3) Publishing. Wechanged the composition of our operating segments to reflect management’s view of the operating results for each segment. Our operating segments reflect how our chief operating decision makers, which we define as a collective group of senior executives, assesses theperformance of each operating segment and determines the appropriate allocations of resources to each segment. Our operating segments do not all meet thequantitative thresholds to qualify as reportable segments; however, we have elected to disclose the results of these non-reportable operating segments as webelieve this information is useful to readers of our financial statements. We continue to review our operating segment classifications to align with operationalchanges in our business and may make future changes as necessary. 109Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We measure and evaluate results of our operating segments based on income and expenses that do not include allocations of costs related to corporatefunctions, such as accounting and finance, human resources, legal, tax and treasury; nor do they include costs such as amortization, depreciation, taxes orinterest expense. Changes to our operating segments did not impact the reporting units used to test non-amortizable assets for impairment. All prior periodspresented have been updated to reflect the new composition of our operating segments. We present our segment operating results in Note 16 to our consolidated financial statements included in this annual report on Form 10-K. Variable Interest Entities We account for entities qualifying as variable interest entities (“VIEs”) in accordance with Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) Topic 810, Consolidation which requires VIEs to be consolidated by the primary beneficiary. The primary beneficiary is theentity that holds the majority of the beneficial interests in the VIE. A VIE is an entity for which the primary beneficiary’s interest in the entity can changewith variations in factors other than the amount of investment in the entity. We may enter into Local Marketing Agreements (“LMAs”) contemporaneously with entering an Asset Purchase Agreement (“APA”) to acquire or sell aradio station. We may also enter into Time Brokerage Agreements (“TBAs”). Typically, both LMAs and TBAs are contractual agreements under which thestation owner/licensee makes airtime available to a programmer/licensee in exchange for a fee and reimbursement of certain expenses. LMAs and TBAs aresubject to compliance with the antitrust laws and the communications laws, including the requirement that the licensee must maintain independent controlover the station and, in particular, its personnel, programming, and finances. The FCC has held that such agreements do not violate the communications lawsas long as the licensee of the station receiving programming from another station maintains ultimate responsibility for, and control over, station operationsand 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 eachtransaction. As of December 31, 2014 we did not consolidate any entities with which we entered into LMAs or TBAs under the guidance in FASB ASC Topic810. Concentrations of Business Risks We derive a substantial part of our total revenues from the sale of advertising. For the years ended December 31, 2012, 2013 and 2014, 41.3%, 40.8% and40.2% of our total revenues, respectively, were generated from the sale of broadcast advertising. We are particularly dependent on revenue from stations inthe Los Angeles and Dallas markets, which generated 16.1% and 23.5% for the year ended December 31, 2012, 15.1% and 25.4% for the year endedDecember 31, 2013 and 14.3% and 23.9% for the year ended December 31, 2014. Because substantial portions of our revenues are derived from localadvertisers in these key markets, our ability to generate revenues in those markets could be adversely affected by local or regional economic downturns. Concentrations of Credit Risks Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents; trade accounts receivable andderivative instruments. We place our cash and cash equivalents with high quality financial institutions. Such balances may be in excess of FDIC insuredlimits. To manage the related credit exposure, we continually monitor the credit worthiness of the financial institutions where we have deposits.Concentrations of credit risk with respect to trade accounts receivable are limited due to the wide variety of customers and markets in which we provideservices, as well as the dispersion of our operations across many geographic areas. We perform ongoing credit evaluations of our customers, but generally donot require collateral to support customer receivables. We establish an allowance for doubtful accounts based on various factors including the credit risk ofspecific customers, age of receivables outstanding, historical trends, economic conditions and other information. Historically, our bad debt expense has beenwithin management’s expectations. 110Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas for which management usesestimates include: (1) asset impairments, including broadcasting licenses, goodwill and other indefinite-lived intangible assets; (2) income tax valuationallowances; (3) uncertain tax positions; (4) allowance for doubtful accounts; (5) inventory reserves; (6) reserves for royalty advances; (7) self-insurancereserves; (8) fair value of equity awards; (9) estimated lives for tangible and intangible assets; (10) fair value measurements; (11) contingency reserves; (12)probabilities associated with the potential for contingent earn-out consideration; and (13) sales returns and allowances. These estimates require the use ofjudgment as future events and the effect of these events cannot be predicted with certainty. The estimates will change as new events occur, as moreexperience is acquired and as more information is obtained. We evaluate and update our assumptions and estimates on an ongoing basis and we may consultoutside 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 reclassificationsinclude: (1) the separation of our non-broadcast operating segment into two operating segments as of the first quarter of 2011, (2) the reporting ofdiscontinued operations, and (3) the change in composition of our operating segments based on our acquisition of Eagle Publishing during 2014 to conformto how our chief operating decision makers, who we define as a collective group of senior executives, assesses the performance of each operating segment anddetermines the appropriate allocations of resources to each segment. Recent Accounting Pronouncements Changes to accounting principles are established by the FASB in the form of accounting standards updates (“ASU’s”) to the FASB’s AccountingStandards Codification. We consider the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to be not applicable toour financial position or results of operations. In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entities Ability to Continue as a Going Concern, which requiresmanagement to assess a company’s ability to continue as a going concern and to provide related footnote disclosures. The new standard providesmanagement with specific guidance on the assessments and related disclosures as well as provides a longer look-forward period as one year from the financialstatement issuance date. The new standard is effective for the annual period ending after December 15, 2016, with early adoption permitted. The adoption ofthis ASU is not expected to have a material impact 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, which requires an entity to recognize the amount of revenue towhich it expects to be entitled for the transfer of promised goods or services to customers. The new standard is effective as of the first interim period withinannual reporting periods beginning on or after December 15, 2016, and will replace most existing revenue recognition guidance in U.S. GAAP. Earlyadoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect thatASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have wedetermined the effect of this ASU on our financial position, results of operations, cash flows, or presentation thereof. In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting DiscontinuedOperations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 limits the requirement to report discontinued operations to disposals ofcomponents of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendmentsalso require expanded disclosures concerning discontinued operations and disclosures of certain financial results attributable to a disposal of a significantcomponent of an entity that does not qualify for discontinued operations reporting. These amendments are effective prospectively for reporting periodsbeginning on or after December 15, 2014, with early adoption permitted. The adoption of this ASU is not expected to have a material impact on our financialposition, results of operations, cash flows, or presentation thereof. 111Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In July 2013, the FASB issued ASU 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss,or a Tax Credit Carryforward Exists, an amendment to FASB ASC Topic 740, Income Taxes, (“FASB ASU 2013-11”). This update clarifies that anunrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset fora net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain taxposition is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reportingdate under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred taxasset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferredtax assets. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospectiveapplication is permitted. The adoption of this ASU did not have a material impact on our financial position, results of operations, cash flows, or presentationthereof. In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark InterestRate for Hedge Accounting Purposes, an amendment to FASB ASC Topic 815, Derivatives and Hedging ("FASB ASC Topic 815"). The update permits theuse of the Fed Funds Effective Swap Rate to be used as a US benchmark interest rate for hedge accounting purposes under FASB ASC Topic 815, in additionto the interest rates on direct Treasury obligations of the US government (“UST”) and the London Interbank Offered Rate (“LIBOR”). The update alsoremoves the restriction on using different benchmark rates for similar hedges. This ASU is effective prospectively for qualifying new or redesignated hedgingrelationships entered into on or after July 17, 2013. The adoption of this ASU did not have a material impact on our financial position, results of operations,cash flows, or presentation thereof. In February 2013, the FASB issued ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount ofthe Obligation is Fixed at the Reporting Date, an amendment to FASB ASC Topic 405, Liabilities (“FASB ASC Topic 405”). The update requires an entity tomeasure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed as of the reporting date as thesum of the obligation the entity agreed to pay among its co-obligors and any additional amount the entity expects to pay on behalf of its co-obligors. ThisASU is effective for annual and interim periods beginning after December 15, 2013 and is required to be applied retrospectively to all prior periods presentedfor those obligations that existed upon adoption of the ASU. The adoption of this ASU did not have a material impact on our financial position, results ofoperations, cash flows, or presentation thereof. NOTE 2. IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS Goodwill and indefinite-lived intangible assets We account for goodwill and other indefinite-lived intangible assets in accordance with FASB ASC Topic 350 “Intangibles—Goodwill and Other.”Approximately 71% of our total assets as of December 31, 2014, consist of indefinite-lived intangible assets, such as broadcast licenses, goodwill andmastheads, the value of which depends significantly upon the operating results of our businesses. Broadcast licenses account for approximately 94% of ourindefinite-lived intangible assets. Goodwill and mastheads account for the remaining 6%. 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 andassumptions that are based on experiences and judgment about future operating performance of our markets and business segments. We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment annually or more frequently if events orcircumstances indicate that an asset may be impaired. We complete our annual impairment tests in the fourth quarter of each year. The fair valuemeasurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that marketparticipants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820 “Fair ValueMeasurements and Disclosures” as Level 3 inputs discussed in detail in Note 8 to our Consolidated Financial Statements. In July 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other (Topic 350).” Under ASU 2012-02,we have the option to assess whether it is more likely than not that an indefinite-lived intangible asset is impaired. If it is more likely than not thatimpairment exists, we are required to perform a quantitative analysis to estimate the fair value of the assets. The qualitative assessment requires significantjudgment in considering events and circumstances that may affect the estimated fair value of our indefinite-lived intangible assets and to weigh these eventsand circumstances by what we believe to be the strongest to weakest indicator of potential impairment. We adopted the provisions of ASU 2012-02 as of our2012 annual testing period. 112Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ASU 2012-02 provides examples of events and circumstances that could affect the estimated fair value of indefinite-lived intangible assets; however, theexamples are not all-inclusive and are not by themselves indicators of impairment. We considered these events and circumstances, as well as other externaland internal considerations. Our analysis, in order of what we consider to be the strongest to weakest indicators of impairment include: (1) the differencebetween any recent fair value calculations and the carrying value; (2) financial performance, such as station operating income, including performance ascompared to projected results used in prior estimates of fair value; (3) macroeconomic economic conditions, including limitations on accessing capital thatcould affect the discount rates used in prior estimates of fair value; (4) industry and market considerations such as a declines in market-dependent multiplesor metrics, a change in demand, competition, or other economic factors; (5) operating cost factors, such as increases in labor, that could have a negative effecton future expected earnings and cash flows; (6) legal, regulatory, contractual, political, business, or other factors; (7) other relevant entity-specific eventssuch as changes in management or customers; and (8) any changes to the carrying amount of the indefinite-lived intangible asset. Broadcast licenses In the case of our broadcast radio stations, we would not be able to operate the properties without the related FCC broadcast 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 that are necessary for FCC renewal. Historically, all of our broadcast licenses have been renewed at theend of their respective periods, and we expect all broadcast licenses to be renewed in the future. Accordingly, we consider our broadcast licenses to beindefinite-lived intangible assets. The unit of accounting we use to test broadcast licenses is the cluster level, which we define as a group of radio stations operating in the same geographicmarket, sharing the same building and equipment and managed by a single general manager. The cluster level is the lowest level for which discrete financialinformation and cash flows are available and the level reviewed by management to analyze operating results. We perform a qualitative assessment for each of our broadcast market clusters. We review the significant assumptions and key estimates applicable to ourprior year valuations of the estimated fair value to assess if events and circumstances have occurred that could affect these assumptions and key estimates.The significant assumptions and key estimates used in the fair value estimates assume a hypothetical start-up station with industry specific marketassumptions such as forecasted revenue, operating margins, forecasted growth rates, estimated start-up costs, losses expected to be incurred in the early years,competition within the market, the effective tax rate, future terminal values, a risk-adjusted discount rate, future economic and market conditions, and marketcomparables. We also review internal benchmarks and economic performance for each of our markets to conclude if reasonably reliance can be placed uponthe prior year fair value estimates and assumptions as a starting point to our qualitative analysis. We selected eleven of our market clusters for further testing as we have not performed an independent third party fair value appraisal in the last twoannual testing periods. The table below shows the percentage within a range by which our estimated fair value exceeded the carrying value of ourbroadcasting licenses for these eleven market clusters: Geographic Market Clusters as of December 31, 2014 Tested in current year based on length of time from prior valuation ≤5% >2%-10% >11% to 40% > than 40% Number of accounting units — 3 3 5 Broadcast license carrying value (in thousands) $— $13,408 $20,214 $18,040 113Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The first step of our qualitative assessment is to calculate the excess fair value, or the amount by which our prior year estimated fair value exceeds thecurrent year carrying value. We believe based on our analysis and review, including the financial performance of each market, that a 25% excess fair valuemargin is conservative and reasonable in the qualitative analysis. Markets with an excess fair value of 25% or more are not likely to be impaired. Fifteen ofthe eighteen markets for which a fair value appraisal was obtained in the prior year were subject to further testing. The table below presents the percentagewithin a range by which our prior year start-up income estimated fair value exceeds the current year carrying value of our broadcasting licenses: Geographic Market Clusters as of December 31, 2014 Percentage Range By Which 2013 Estimated Fair Value Exceeds 2014 Carrying Value ≤25% >26%-50% >50% to 75% > than 75% Number of accounting units 15 — — 4 Broadcast license carrying value (in thousands) $255,883 $— $— $45,034 The second step of our qualitative review consists of a review of the financial operating results for each market cluster. Radio stations are often sold onthe basis of a multiple of projected cash flow, or station operating income less station operating expenses (“SOI”). Numerous trade organizations and analystsreview these radio stations sales to track SOI multiples applicable to each transaction. Based on published reports and analysis of market transactions, webelieve industry benchmarks to be in the six to seven times cash flow range. We elected an SOI benchmark of four as a conservative indicator of fair value.Using the SOI multiple to estimate fair value, we determined that three of our remaining market cluster were subject to further testing. The table belowpresents the percentage within a range by which our estimated fair value as a multiple of SOI exceeded the carrying value of our broadcasting licenses forthese market clusters: Geographic Market Clusters as of December 31, 2014 Percentage Range By Which SOI Estimated Fair Value Exceeds Carrying Value ≤5% >2%-10% >11% to 40% > than 40% Number of accounting units 3 — — — Broadcast license carrying value (in thousands) $33,120 $— $— $— We engaged an independent third-party appraisal and valuation firm to assist us in estimating the fair value of our broadcast licenses that were subject tofurther testing. Bond & Pecaro prepared valuations of the estimated fair value for the testing period ending December 31, 2012 and 2013. Noble FinancialCapital Markets prepared the valuations for the testing period ending December 31, 2014. In each of these years, the estimated fair value was determined using an income approach that measures the expected economic benefits that thebroadcast licenses provide. These future economic benefits are discounted using a discounted cash flow analysis that assumes that the broadcast licenses areheld by hypothetical start-up station. The values yielded by the discounted cash flow analysis represent the portion of the stations value attributable solely tothe broadcast license. The discounted cash flow projection period for years 2012 and 2013 was determined to be ten years; which is typically the time radiostation operators and investors expect to recover their investments as widely used by industry analysts in their forecasts. For 2014, cash flows were developedusing a five year projection period, which represents the typical time required for a new broadcast station to reach normalized operations and profitability.For cash flows beyond the projection period, a terminal value was calculated using the Gordon constant growth model and long-term industry growth rateassumptions based on long-term industry growth and GDP inflation rates. The key estimates and assumptions used in the start-up income valuation for our broadcast licenses were as follows: Broadcast Licenses December 31, 2012 December 31, 2013 December 31, 2014Risk adjusted discount rate 9.0% 9.0% 8.0%Operating profit margin ranges 5.1% - 35.5% 4.1% - 37.5% (13.9%) - 30.8%Long-term market revenue growth rate ranges 0.3% - 15.0% 1.0% - 2.5% 1.5% - 2.5% The discount rate reflects the weighted average cost of capital (“WACC”) developed based on data from same or similar industry participants andpublicly available market data as of the valuation date. Similar industry participants included those broadcast entities for which 70% or more of theiroperation were comprised of radio broadcasting. The decrease in the WACC for 2014 as compared to 2013 was largely attributable to decreases in the riskfree rate and corporate borrowing interest rates. We performed a sensitivity analysis of certain key assumptions including reducing the long-term revenuegrowth rate and increasing the weighted average cost of capital by 100 basis point to determine that such changes would have no incremental impact to thecarrying value of our broadcast licenses. 114Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The table below presents the results of our impairment testing under the income approach for the 2014 annual testing period: Excess Fair Value Market Cluster 2014 Estimate Atlanta, GA 33.47%Boston, MA 4.68%Chicago, IL 3.89%Cleveland, OH 42.93%Columbus, OH 84.59%Dallas, TX 16.93%Denver, CO 1230.65%Detroit, MI 25.72%Honolulu, HI 163.90%Houston, TX 1283.46%Louisville, KY 33.17%Miami FL 56.03%Nashville, TN 383.65%New York, NY 644.52%Omaha NE 59.06%Orlando FL 22.86%Philadelphia, PA 134.44%Phoenix, AZ 11.85%Pittsburgh, PA 443.24%Portland, OR 2.13%Sacramento, CA 24.55%San Antonio, TX 284.24%San Diego, CA 44.28%San Francisco, CA 69.34%Seattle, WA 487.01%Tampa, FL 24.40%Washington, D.C. 137.27% Based on our review and analysis we determined that no impairment charges were necessary to the carrying value of our broadcast licenses as of theannual testing period ending December 31, 2014. Based on prior tests, we determined that no impairments of our broadcast licenses were necessary for yearsending December 31, 2013 and 2012, respectively. Mastheads Mastheads consist of the graphic elements that identify our publications to readers and advertisers. These include customized typeset page headers,section headers, and column graphics as well as other name and identity stylized elements within the body of each publication. We test the value ofmastheads as a single combined publishing entity as our print magazines operate from one shared facility under one general manager with operating resultsand cash flows reported on a combined basis for all publications. This is the lowest level for which discrete financial information and cash flows are availableand the level reviewed by management to analyze operating results. We have regularly performed quantitative reviews of our mastheads based on the low margin by which our estimated fair values have exceeded ourcarrying value and actual operating results that do not meet or exceed our expectations. We engaged an independent third-party appraisal firm to assist us inestimating the fair value of our mastheads using a relief from royalty method, which is a form of the income approach. Bond & Pecaro prepared valuations ofthe estimated fair value for the testing period ending December 31, 2012 and 2013. Noble Financial Capital Markets prepared the valuations for the testingperiod ending December 31, 2014. 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 used is based on observed royalty rates forcomparable assets as of the valuation date. When determining the future cash flow estimates, we must estimate future net sales and a fair market royalty rate atan appropriate discount rate to measure the present value of the anticipated cash flows. The key estimates and assumptions to which are as follows: 115Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Mastheads Interim June 30, 2012 December 31, 2012 Interim June 30, 2013 December 31, 2013 December 31, 2014Risk adjusted discount rate 8.5% 8.5% 9.0% 9.5% 8.0%Projected revenue growth ranges 1.5% - 2.50% 1.5% - 3.0% 1.0% - 2.8% 1.2% - 2.5% (4.8%) – 1.4%Royalty growth rate 3.0% 3.0% 3.0% 2.0% 3.0% As of our June 2012 interim testing period, the estimated fair value of our mastheads exceeded our carrying value by 1.7%. As of our 2012 annualtesting, we recorded an impairment charge associated with mastheads of $0.1 million driven by a reduction in projected net revenues. For the interim testingperformed as of June 2013, projected revenue growth rates were lowered based on failure of the print magazine segment to achieve the amounts previouslyprojected. Based on these lower actual and projected growth rates. we recorded an impairment of $0.3 million as of June 2013. During our 2013 annualtesting, our royalty rate was lowered to 2.0% from the 3.0% industry standard based on gross margins associated with the segment. Additionally, the discountrate was raised from 9.0% to 9.5% based on risks associated with print magazines. We recorded an additional $0.3 million impairment charge associated withmastheads because of these changes. We performed a sensitivity analysis of certain key assumptions including reducing the long-term revenue growth rateand increasing the weighted average cost of capital by 100 basis point to determine that such changes would have no incremental impact to the carryingvalue of our mastheads. During our annual testing for 2014, which coincided with our budget and financial forecasts process for the following year, we decided to ceasepublishing Townhall Magazine as of December 2014 and we may cease other publications in the future. We lowered our projected net revenues for thereductions in the number of publications. Although we expect to realize cost savings with the planned reductions, we do not expect to realize net incomewithin the next twelve months. Based on these revised projections we recorded an impairment loss of $34,000 associated with magazine mastheads. These impairments were driven by reductions in projected net revenues and a reduction in the number of publications produced. The growth of digital-only publications, that are often free to readers or at a significantly reduced cost to readers has hindered the ability of the publishing industry to recover fromthe economic recession that began in 2008. We believe that the impairments are indicative of trends in the publishing industry as a whole and are not uniqueto our company or operations. Goodwill - Broadcast The unit of accounting we use to test broadcast licenses is the cluster level, which we define as a group of radio stations operating in the same geographicmarket, sharing the same building and equipment and managed by a single general manager. Fourteen of our 33 market clusters and our networks havegoodwill associated with them as of our annual testing period ending December 31, 2014 compared to eleven of our 32 markets as of the annual testingperiod ending December 31, 2013. We perform a qualitative assessment to determine if events and circumstances have occurred that indicate it is more likely than not that the fair value ofthe assets in each of our market clusters are less than their carrying values. We review the significant inputs used in our prior year fair value estimates todetermine if any changes to those inputs should be made. We estimate fair value using a market and income approach and compare. We compare theestimated fair value of each market cluster to its carrying value, including goodwill. Under the market approach, we apply a multiple of four to each marketclusters’ station operating income (“SOI”) to estimate the fair value. We believe that an SOI benchmark of four is a conservative indicator of fair value asdescribed above. Under the income approach, we utilize a discounted cash flow method to calculate the estimated fair value of the accounting unit. Thediscounted cash flow method incorporates the cumulative present value of the net after-tax cash flows projected for each market assuming that it is ahypothetical start-up station. If the carrying amount, including goodwill, exceeds the estimated fair value of the market cluster, an indication exists that theamount of goodwill attributed to that market cluster may be impaired. When we have indication of impairment, we engage an independent third-partyappraisal and valuation firm to assist us with determining the enterprise value. Bond & Pecaro prepared valuations of the estimated fair value for the testingperiods ending December 31, 2012 and 2013. Noble Financial Capital Markets prepared the valuations for the testing period ending December 31, 2014. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up. We performeda sensitivity analysis of certain key assumptions including reducing the long-term revenue growth rate and increasing the weighted average cost of capital by100 basis point to determine that such changes would have no incremental impact to the carrying value of goodwill associated with our broadcast entities. 116Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The key estimates and assumptions used for our enterprise valuations are as follows: December 31, 2012 December 31, 2013 December 31, 2014Enterprise Valuations Broadcast Markets Broadcast Markets Broadcast Markets Risk adjusted discount rate 9.0% 9.0% 8.0% Operating profit margin ranges 16.9% - 49.2% 11.9% - 44.7% 8.4% - 46.1% Long-term revenue market growth rate ranges 1.0% - 3.5% 1.0% - 2.5% 1.0% - 5.0% Based on our review and analysis we determined that no impairment charges were necessary to the carrying value of our broadcast goodwill as of theannual testing period ending December 31, 2014. Based on prior tests, we determined that no impairments of our broadcast goodwill were necessary for yearsending December 31, 2012 and 2011, respectively. The estimated fair value of our networks exceeded the carrying value by 64%, 63%, and 113.0% for eachof the annual testing periods ending December 31, 2014, 2013 and 2012, respectively. The tables below present the percentage within a range by which theestimated fair value exceeded the carrying value of each of our market clusters, including goodwill: Broadcast Market Clusters as of December 31, 2014 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value IncludingGoodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 5 — 2 7 Carrying value including goodwill (in thousands) $81,507 $— $27,636 $254,645 Broadcast Market Clusters as of December 31, 2013 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value IncludingGoodwill <1% >10% to 20% >20% to 50% > than 50% Number of accounting units 4 1 3 3 Carrying value including goodwill (in thousands) $28,952 $17,978 $45,375 $45,152 Broadcast Market Clusters as of December 31, 2012 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value IncludingGoodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 2 1 1 5 Carrying value including goodwill (in thousands) $18,836 $1,423 $10,506 $132,645 Goodwill – Digital Media The unit of accounting we use to test goodwill in our digital media segment is the entity level, which includes Salem Web Network, Townhall.com,Eagle Financial Publications and Eagle Wellness. The financial statements for Salem Web Network reflect the operating results and cash flows for all of ourInternet sites and our church product sites exclusive of Townhall.com. The financial statements for Townhall.com reflect the operating results for each of ourconservative opinion sites. Eagle Wellness includes only the results of the e-commerce site for nutritional products. We perform a qualitative assessment to determine if events and circumstances have occurred that indicate it is more likely than not that the fair value ofthe assets in each of our digital media entities are less than their carrying values. We review the significant inputs used in our prior year fair value estimates todetermine if any changes to those inputs should be made. We estimate fair value using a market and income approach and compare. We compare theestimated fair value of each entity to its carrying value, including goodwill. Under the market approach, we apply a multiple of four to each entities operatingincome to estimate the fair value. We believe that a multiple of four is a conservative indicator of fair value as described above. Under the income approach,we utilize a discounted cash flow method to calculate the estimated fair value of the accounting unit. The discounted cash flow method incorporates thecumulative present value of the net after-tax cash flows projected for each unit assuming that it is a hypothetical start-up station. 117Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. If the carrying amount, including goodwill, exceeds the estimated fair value of the entity, an indication exists that the amount of goodwill attributed tothat entity may be impaired. When we have indication of impairment, we engage an independent third-party appraisal and valuation firm to assist us withdetermining the enterprise value. Bond & Pecaro prepared valuations of the estimated fair value for the testing period ending December 31, 2012 and 2013.Noble Financial Capital Markets prepared the valuations for the testing period ending December 31, 2014. We performed a sensitivity analysis of certain key assumptions including reducing the long-term revenue growth rate and increasing the weightedaverage cost of capital by 100 basis point to determine that such changes would have no incremental impact to the carrying value of goodwill associatedwith our digital media entities. The key estimates and assumptions used in the start-up income valuation of our digital media entities for each testing period are as follows: Enterprise Valuation December 31, 2012 December 31, 2013 December 31, 2014Risk adjusted discount rate 13.5% 13.5% 8.0%Operating profit margin ranges 21.2% - 22.0% 21.2% - 22.0% (7.4%) - 34.9%Long-term revenue market growth rate ranges 3.0% 3.0% 2.50% Based on our review and analysis we determined that no impairment charges were necessary to the carrying value of our digital media goodwill as of theannual testing periods ending December 31, 2014, December 31, 2013, and December 31, 2012, respectively. The table below presents the percentage within a range by which the estimated fair value exceeded the carrying value of our accounting units, includinggoodwill. Digital Media Entities as of December 31, 2014 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value IncludingGoodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 1 1 1 1 Carrying value including goodwill (in thousands) $4,649 $6,118 $385 $26,101 Digital Media Entities as of December 31, 2013 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value IncludingGoodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 1 - 1 - Carrying value including goodwill (in thousands) $27,456 $- $2,984 $- Digital Media Entities as of December 31, 2012 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value IncludingGoodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units - - 2 - Carrying value including goodwill (in thousands) $- $- $28,722 $- Goodwill – Publishing The unit of accounting we use to test goodwill in our publishing segment is the entity level, which includes Salem Publishing, Eagle Regnery, andXulon Press. Salem Publishing is our printing entity that produces our print magazines from a stand-alone facility, under one general manager, with operatingresults and cash flows of all publications reported on a combined basis. Eagle Regnery is our book publishing entity based in Washington DC, with a stand-alone facility under one general manager, with operating results and cash flows of reported at the entity level. Xulon Press also operates from a stand-alonefacility in Orlando, Florida under one general manager who is responsible for the separately stated operating results and cash flows. Each of these entities hasgoodwill associated with them as of our annual testing period. 118Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We have regularly performed quantitative reviews of goodwill associated with our print magazine entity based on the low margin by which our estimatedfair values exceed our carrying value including goodwill and actual operating results that have not met our expectations. We engage an independent third-party appraisal firm to assist us with estimating the enterprise value of our entities. Bond & Pecaro prepared valuations of the estimated fair value for the testing period ending December 31, 2012 and 2013. Noble Financial CapitalMarkets prepared the valuations for the testing period ending December 31, 2014. The enterprise valuation assumes that the subject assets are installed aspart of an operating business rather than as a hypothetical start-up. The key estimates and assumptions used for our enterprise valuations are as follows: Enterprise Valuation InterimJune 30, 2012 December 31,2012 InterimJune 30, 2013 December 31, 2013 December 31, 2014Risk adjusted discount rate 8.5% 8.5% 9.0% 9.5% 8.0%Operating margin ranges 1.4% - 7.5% 0.5% - 7.0% 0.9% - 6.0% (0.5%) – 6.0% 2.4% - 5.9%Long-term revenue market growth rate ranges 1.5% 1.5% 1.0% 0.5% 1.5% Based on our review and analysis of the enterprise estimated fair value, we recorded a $0.4 million impairment charge associated with the printmagazine goodwill as of the June 2013 interim testing period. This impairment was driven by lower projected profit margins based on the failure of the printmagazine segment to achieve the amounts previously projected. Additionally, the discount rate was raised from 9.0% to 9.5% based on risks associated withprint magazines. The decline in revenues from print magazines is prevalent throughout the industry and is not unique to our operations. No goodwillimpairment charges were necessary as of the annual testing period ended December 31, 2013. Based on the impairment recognized to the value of our mastheads in 2014, we could not conclude that it was more likely than not that goodwillassociated with our magazine publishing unit was not impaired. We obtained an independent fair value of our magazine publishing unit as of December2014. Based on this valuation, we determined that the carrying value of the goodwill was less than the implied value of goodwill as of that date and werecorded an impairment charge of $45,000. The table below presents the percentage within a range by which the estimated fair value exceeded the carrying value of our accounting units, includinggoodwill. Publishing Accounting units as of December 31, 2014 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 2 - - 1 Carrying value including goodwill (in thousands) $3,417 $- $- $2,314 Publishing Accounting units as of December 31, 2013 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value IncludingGoodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units 1 - 1 - Carrying value including goodwill (in thousands) $1,251 $- $2,123 $- Publishing Accounting units as of December 31, 2012 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value IncludingGoodwill <10% >10% to 20% >20% to 50% > than 50% Number of accounting units - - - 2 Carrying value including goodwill (in thousands) $- $- $- $2,103 119Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We believe that we have made reasonable estimates and assumptions to calculate the estimated fair value of our indefinite-lived intangible assets,however, these estimates and assumptions could be materially different from actual results. If actual market conditions are less favorable than those projectedby 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 belowthe amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material. NOTE 3. ACQUISITIONS AND RECENT TRANSACTIONS During the year ended December 31, 2014, we completed or entered into the following transactions: Debt Throughout the year, we repaid $15.3 million in principal on our current senior secured credit facility, consisting of a term loan of $300.0 million (“TermLoan B”) and paid interest through each repayment date. We recorded a loss on early retirement of debt of $0.1 million related to the unamortized discountand $0.3 million in bank loan fees. Repayments of our Term Loan B were as follows: Date Principal Paid Unamortized Discount (Dollars in Thousands) December 31, 2014 $4,000 $16 November 28, 2014 4,000 15 September 29, 2014 5,000 18 March 31, 2014 2,250 8 120Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Equity During the year ended December 31, 2014, after quarterly review of our earnings, cash flows, financial requirements, and other factors, our Board ofDirectors’ declared equity distributions to all stockholders of record of our Class A and Class B common stock as follows: Announcement Date Record Date Payment Date Amount Per Share Cash Distributed (in thousands) December 2, 2014 December 15, 2014 December 29, 2014 $0.0650 $1,646 September 2, 2014 September 16, 2014 September 30, 2014 $0.0625 1,579 May 27, 2014 June 16, 2014 June 30, 2014 $0.0600 1,514 March 6, 2014 March 17, 2014 March 31, 2014 $0.0575 1,444 The actual declaration of future distributions and the establishment of the per share amount, record dates, and payment dates are subject to finaldetermination by our Board of Directors and dependent upon future earnings, cash flows, financial requirements, and other factors. Acquisition of Eagle Publishing On January 10, 2014, we acquired the entities of Eagle Publishing, including Regnery Publishing, HumanEvents.com, RedState.com, Eagle FinancialPublications and Eagle Wellness. We began operating these entities as of the closing date. The base purchase price was $8.5 million, with $3.5 million paidin cash upon closing, and deferred payments of $2.5 million due January 2015 and $2.5 million due January 2016. We paid an additional $0.4 million ofcosts upon closing associated with liabilities incurred by the seller. On June 6, 2014, we paid $1.5 million of the $2.5 million deferred installment dueJanuary 2015. Based on the early payment, our deferred payment due January 2015 was reduced to $0.9 million. The deferred payments due January 2015and January 2016 were recorded at their present value of $0.9 million and $2.3 million, respectively, with the discount being amortized to non-cash interestexpense over the payment term using the effective interest method. As part of our purchase agreement, we may pay up to an additional $8.5 million of contingent earn-out consideration over the next three years based onthe achievement of certain revenue benchmarks established for calendar years 2014, 2015 and 2016 for each of the Eagle entities. The purchase priceincludes the original estimated fair value of the contingent earn-out consideration recorded at the present value of $2.0 million. The estimated fair value ofthe contingent earn-out consideration was determined using a probability-weighted discounted cash flow model. We determined the fair value of thecontingent consideration obligations by calculating the probability-weighted earn-out payments based on our assessment of the likelihood that thebenchmarks will be achieved. The probability-weighted earn-out payments were then discounted using a discount rate based on an internal rate of returnanalysis using the probability-weighted cash flows. The fair value measurement includes revenue forecasts which are a Level 3 measurement as discussed inNote 8 to our consolidated financial statements included in this annual report on Form 10-K. The fair value of the contingent earn-out consideration isreviewed quarterly over the earn-out period to compare actual revenue earned to the estimated revenue used in our forecasts. As of December 31, 2014, $0.9 million of the actual cash due toward the contingent earn-out consideration earned is recorded in current liabilities. Wemay pay up to an additional $5.9 million over the remaining earn-out period based on the achievement of certain revenue benchmarks. The estimated fairvalue of the contingent earn-out consideration is recorded at the present value of $1.7 million at December 31, 2014. Changes in the estimated fair value ofthe contingent earn-out consideration, up to the total contractual amount, are reflected in our results of operations in the periods in which they are identified.Changes in the fair value of the contingent earn-out consideration may materially impact and cause volatility in our future operating results. Changes in ourestimates for the contingent earn-out consideration are discussed in Note 4 to our consolidated financial statements included in this annual report on Form10-K. The accompanying Consolidated Statements of Operations reflect the operating results of these entities as of the closing date. We believe that strongauthor relationships, assembled creative talent agreements and the loyal readers of Eagle publications, as well as our ability to market and promote theseproducts through our existing media platform, provides future economic benefits to us. We have recorded goodwill of $2.3 million representing the excessvalue of these future economic benefits. 121Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Other Acquisitions On December 23, 2014, we completed the acquisition of the construction permit for WLTE-FM in Pendleton, South Carolina for $0.5 million in cash.The asset acquisition cost is reflected in projects-in-process as of December 2014. The station will operate within our Greenville, South Carolina market. On December 23, 2014, we completed the acquisition of an FM translator in Pickens, South Carolina for $0.2 million in cash. The asset acquisition costis included in projects-in-process as of December 2014. The FM Translator will operate in our Greenville, South Carolina market. On December 22, 2014, we completed the acquisition of an FM translator in Bayshore Gardens, Florida for $0.1 million in cash. The asset acquisitioncost is included in projects-in-process as of December 2014. The FM Translator will operate in our Tampa, Florida market. On November 24, 2014, we completed the acquisition of an FM translator in Travelers Rest, South Carolina for $0.2 million in cash. The assetacquisition cost is included in projects-in-process as of December 2014. The FM Translator will operate in our Greenville, South Carolina market. On October 1, 2014, we completed the acquisition of radio station KXXT-AM in Phoenix, Arizona for $0.6 million in cash. We began operating thestation under an LMA as of June 6, 2014. The accompanying Consolidated Statements of Operations reflect the operating results of this entity as of the LMAdate. We recorded goodwill of $1,400 associated with the excess value of this entity attributable to the audience reach obtained. On May 22, 2014, we completed the acquisition of radio station WOCN-AM, Miami, Florida and the related transmitter site for $2.5 million in cash. Theaccompanying Consolidated Statements of Operations reflect the operating results of this entity as of the closing date. On November 24, 2014, we entered aTime Brokerage Agreement (“TBA”) with a programmer under which we will receive monthly license fees beginning in December 2014 through November2019. Upon acquisition, we recorded goodwill of $12,000 associated with the excess value of this entity attributable to the existing tower site, the relatedtransmitter site and the audience reach obtained. On May 6, 2014, we completed the acquisition of WRTH-FM (formerly WOLT-FM) in Greenville, South Carolina for $1.1 million in cash. We beganoperating this station under an LMA as of February 28, 2014. The accompanying Consolidated Statements of Operations reflect the operating results of thisentity as of the LMA date. We recorded goodwill of $6,400 associated with the excess value of this entity attributable to the existing tower site and theaudience reach obtained. On April 15, 2014, we completed the acquisition of three FM translators for $0.4 million in cash. The asset acquisition cost is reflected in projects-in-process as of December 2014. The FM translators will serve our Orlando, Florida, Tampa, Florida and Omaha, Nebraska markets. On February 7, 2014, we completed the acquisition of radio stations KDIS-FM, Little Rock, Arkansas and KRDY-AM, San Antonio, Texas for $2.0million in cash. We began operating these stations as of the closing date. The accompanying Consolidated Statement of Operations reflects the operatingresults of these entities as of the closing date. We recorded goodwill of $18,000 associated with the excess value of these entities attributable to existingtower sites and the audience reach obtained. Throughout the year ending December 31, 2014, we have acquired domain names associated with our Internet segment for an aggregate amount ofapproximately $0.4 million in cash. A summary of our business acquisitions and asset purchases for the year ended December 31, 2014, none of which were individually or in the aggregatematerial to our Consolidated financial position as of the respective date of acquisition, is as follows: 122Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Acquisition Date Description Total Cost (Dollars in thousands) December 23, 2014 WLTE-FM Pendleton, South Carolina (asset acquisition) $525 December 23, 2014 FM Translator, Pickens, South Carolina (asset acquisition) 185 December 22, 2014 FM Translator, Bayshore Gardens, Florida (asset acquisition) 140 November 24, 2014 FM Translator, Traveler’s Rest, South Carolina (asset acquisition) 200 October 1, 2014 KXXT-AM Phoenix, Arizona (business acquisition) 575 May 22, 2014 WOCN-AM Miami, Florida (business acquisition) 2,450 May 6, 2014 WRTH-FM (formerly WOLT-FM), Greenville, South Carolina (businessacquisition) 1,125 April 15, 2014 FM Translators, Orlando, Florida, Tampa, Florida, Omaha, Nebraska (assetpurchase) 357 February 7, 2014 KDIS-FM, Little Rock Arkansas and KRDY-AM, San Antonio,Texas (business acquisition) 1,984 January 10, 2014 Eagle Publishing (business acquisition) 10,628 Various Purchases of domain names (asset purchases) 487 $18,656 Under the acquisition method of accounting as specified in FASB ASC Topic 805 Business Combinations, the total acquisition consideration isallocated 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 historicalexperience, market trends and any synergies believed to be achieved from the acquisition. Acquisitions may include contingent consideration, the fair valueof which is estimated as of the acquisition date as the present value of the expected contingent payments as determined using a weighted probability of thepayment 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 valuationand 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 forreasonableness of the assigned values. We believe that these valuations and analysis provide appropriate estimates of the fair value for net assets acquired. Property and equipment are recorded at the estimated fair value and depreciated on a straight-line basis over their estimated useful lives. Finite-livedintangible assets are recorded at their estimated fair value and amortized on a straight-line basis over their estimated useful lives. Goodwill, which representsthe organizational systems and procedures in place to ensure the effective operation of the entity, may also be recorded and tested for impairment. Costsassociated with acquisitions, such as consulting and legal fees are expensed as incurred in corporate operating expenses. During the year ended December 31,2014, we incurred $0.5 million of acquisition-related expenses including $0.1 million in third-party valuation fees and $0.1 million in brokerage fees. The total acquisition consideration is equal to the sum of all cash payments, the fair value of any deferred payments and promissory notes, and thepresent value of any contingent earn-out consideration. We estimate the fair value of contingent earn-out consideration using a probability-weighteddiscounted cash flow model. The fair value measurement is based on significant inputs that are not observable in the market and thus represent a Level 3measurement as defined in Note 14 -Fair Value Measurements. The following table summarizes the total acquisition consideration for the year endedDecember 31, 2014: Purchase Price Consideration Total Consideration (Dollars in thousands) Cash payments $12,682 Escrow deposits paid in prior years 1,345 Deferred cash payments made related to prior year acquisition (600)Present value of deferred cash payments (due 2015) 893 Present value of deferred cash payments (due 2016) 2,289 Present value of estimated fair value of contingent earn-out consideration 2,047 Total purchase price consideration $18,656 123Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The total acquisition consideration was allocated to the net assets acquired as follows: Broadcast AssetsAcquired Digital MediaAssetsAcquired PublishingAssetsAcquired Net AssetsAcquired (Dollars in thousands) Assets Property and equipment $2,338 $1,179 $3,929 $7,446 Developed websites — 539 38 577 Broadcast licenses 5,144 — — 5,144 Goodwill 38 2,128 189 2,355 Customer lists and contracts — 2,232 509 2,741 Domain and brand names — 1,921 843 2,764 Subscriber base and lists — 2,446 — 2,446 Author relationships — — 1,682 1,682 Non-compete agreements — 79 66 145 Favorable and assigned leases 20 — — 20 Liabilities Deferred revenue & royalties assumed — (3,779) (2,885) (6,664) $7,540 $6,745 $4,371 $18,656 Pending Transactions On December 10, 2014, we entered into an APA to acquire radio station WDYZ-FM in Orlando, Florida for $1.3 million in cash. The purchase is subjectto the approval of the FCC and is expected to close in the first quarter of 2015. On February 20, 2015, we entered into an APA to acquire radio station WDDZ-AM in Pittsburg, Pennsylvania for $1.0 million in cash. The purchase issubject to the approval of the FCC and is expected to close in the second quarter of 2015. On February 20, 2015, we entered into an APA to acquire radio station WDWD-AM in Atlanta, Georgia for $2.8 million in cash. The purchase is subjectto the approval of the FCC and is expected to close in the second quarter of 2015. Discontinued Operations Based on operating results that did not meet our expectations, we ceased operating Samaritan Fundraising in December 2011. As of December 31, 2011,all employees of this entity were terminated. As a result of our decision to close operations, there have been no material cash flows associated with this entityand we have no ongoing or further involvement in the operations of this entity. The Consolidated Balance Sheets and Statements of Operations for all priorperiods presented were updated to reflect the operating results and net assets of this entity as a discontinued operation. 124Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The following table sets forth the components of the loss from discontinued operations: For the Year Ended December 31, 2012 2013 (Dollars in thousands) Net revenues $38 $10 Operating expenses 196 72 Operating loss $(158) $(62)Impairment of assets used in discontinued operations — — Loss from discontinued operations $(158) $(62)Benefit from income taxes (63) (25)Loss from discontinued operations, net of tax $(95) $(37) During the year ended December 31, 2013, we completed or entered into the following transactions: Debt On December 30, 2013, we repaid $0.8 million in principal on our current senior secured credit facility, consisting of a term loan of $300.0 million(“Term Loan B”). We recorded a $3,000 pre-tax loss on the early retirement of long-term debt related to the unamortized discount. On September 30, 2013, we repaid $4.0 million in principal on our Term Loan B. We recorded a $16,000 pre-tax loss on the early retirement of long-termdebt related to the unamortized discount. On June 28, 2013, we repaid $4.0 million in principal on the Term Loan B. We recorded a $14,000 pre-tax loss on the early retirement of long-term debtrelated to the unamortized discount. On May 3, 2013, we terminated the Subordinated Debt due to Related Parties (as defined below) with Mr. Atsinger, Mr. Epperson and Mr. Hinz. Therewere no early termination penalties and no further amounts owed by Salem as a result of the termination of the Subordinated Debt due to Related Parties. On March 14, 2013, we entered into the Term Loan B and a senior secured revolving credit facility of $25.0 million (“Revolver”). We used the proceedsfrom the Term Loan B and the Revolver to fund the repurchase of our Terminated 95/8% Notes pursuant to a cash tender offer launched on February 25, 2013(“Tender Offer”), and to retire all other outstanding debt and pay related fees. Upon entry into the credit facility, our then existing revolving credit facilities,indebtedness due to First California Bank, and Subordinated Debt due to Related Parties were terminated. As a result of these terminations, we recorded a pre-tax loss on the early retirement of long-term debt of $0.9 million associated with unamortized bank fees and closing costs. On March 14, 2013, we tendered for $212.6 million in aggregate principal amount of the Terminated 95/8% Notes for an aggregate purchase price of$240.3 million, or at a price equal to 110.65% of the face value of the Terminated 95/8% Notes in the Tender Offer. We paid $22.7 million for this repurchaseresulting in a $26.9 million pre-tax loss on the early retirement of long-term debt, which included approximately $0.8 million of unamortized discount and$2.9 million of bond issue costs associated with the Terminated 95/8% Notes. We issued a notice of redemption to redeem any Terminated 95/8% Notes thatremained outstanding after the expiration date of the Tender Offer. On June 3, 2013, we redeemed the remaining $0.9 million of the outstanding Terminated95/8% Notes to satisfy and discharge Salem’s obligations under the indenture for the Terminated 95/8% Notes as of such date. Equity During the year ended December 31, 2013, after reviewing our earnings, cash flows, financial requirements, and other factors, our Board of Directors’declared equity distributions to all stockholders of record of our Class A and Class B common stock as follows: 125Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Announcement Date Record Date Payment Date Amount Per Share Cash Distributed (in thousands) November 20, 2013 December 10, 2013 December 27, 2013 $0.0550 $1,376 September 12, 2013 September 26, 2013 October 4, 2013 $0.0525 1,308 May 30, 2013 June 14, 2013 June 28, 2013 $0.0500 1,240 March 18, 2013 March 25, 2013 April 1, 2013 $0.0500 1,234 The actual declaration of future distributions and the establishment of the per share amount, record dates, and payment dates are subject to finaldetermination by our Board of Directors and dependent upon future earnings, cash flows, financial requirements, and other factors. Acquisitions On December 10, 2013, we acquired Twitchy.com for $0.9 million paid in cash upon close of the transaction and up to $1.2 million in contingent earn-out consideration payable based on the achievement of future page view targets. Twitchy.com is a website featuring selected quotes and current eventscentered on US politics, global news, sports, entertainment, media, and breaking news. The contingent earn-out consideration is payable upon achievementof page view milestones over a two year period and had an estimated fair value of $0.6 million as of the closing date. We believe that the followers ofTwitchy.com, the established relationships and the assembled workforce provide future economic benefits to us, and we recorded goodwill of $0.4 millionrepresenting the excess value of the Twitchy.com business. On December 9, 2013, we acquired the EverythingInspirational.com domain name along with fourteen Facebook pages and various other Christian-themed social media intangible assets for $0.4 million in cash. We paid $0.1 million in cash upon closing and paid the remaining $0.3 million in cash overthree installments during 2014. On September 23, 2013, we entered into an APA to acquire radio stations KDIS-FM, Little Rock, Arkansas and KRDY-AM, San Antonio, Texas for $2.5million in cash, of which $0.5 million related to the KRDY-AM tower site land in San Antonio, Texas. On December 20, 2013, we closed on the landpurchase for $0.5 million in cash. The radio station acquisitions closed on February 7, 2014. On September 11, 2013, we acquired the GodUpdates.org domain and Facebook page for $0.3 million in cash, which we paid to the buyer on October 22,2013. On August 10, 2013, we acquired Christnotes.org for $0.5 million in cash. Christnotes.org is an online bible resource that allows users to search for bibleverses and access commentary from biblical scholars. The acquisition resulted in goodwill of $20,755 representing the excess value of the business to usresulting from the integrated business model and services already established that provide future economic benefits to us due to increased web presence thatdrives viewers to our content. On February 15, 2013, we completed the acquisition of WTOH-FM, Columbus, Ohio, for $4.0 million in cash. We began operating the radio stationunder a LMA with the prior owner on November 1, 2012. The accompanying Consolidated Statements of Operations reflect the operating results of this entityas of the LMA date. On February 5, 2013, we completed the acquisition of WGTK-FM, Greenville, South Carolina, for $5.4 million. The $5.4 million purchase price consistsof $1.0 million in cash due upon close of the transaction, $2.0 million payable in April 2014, and $3.0 million payable in advertising credits to Bob JonesUniversity, a related party of the station’s owner. The advertising credits are payable over ten years resulting in a fair value of $2.4 million. The $0.6 milliondiscount on the advertising credits was recorded as a reduction of the fair value and will be amortized to interest expense over the ten-year term. We beganoperating the radio station under a LMA with the prior owner on December 3, 2012. The accompanying Consolidated Statements of Operations reflect theoperating results of this entity as of the LMA date. We paid the entire balance due on the seller financed note, including accrued interest on September 30,2013. Throughout the year ending December 31, 2013, we have acquired various domain names, including ChristianHeadlines.com, as well as other intangibleassets including applications associated with our Internet segment for an aggregate amount of approximately $0.2 million. 126Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. A summary of our business acquisitions and asset purchases for the year ended December 31, 2013, none of which were material to our consolidatedfinancial position as of the respective date of acquisition, is as follows: Acquisition Date Description Total Consideration (Dollars in thousands) December 10, 2013 Twitchy.com (business acquisition) $1,536 December 9, 2013 EverythingInspirational.com (asset purchases) 400 September 23, 2013 Land, San Antonio, Texas (asset purchase) 500 September 11, 2013 GodUpdates.org (asset purchase) 250 August 10, 2013 Christnotes.org (business acquisition) 500 February 15, 2013 WTOH-FM, Columbus, Ohio (business acquisition) 4,000 February 5, 2013 WGTK-FM, Greenville, South Carolina (business acquisition) 5,427 Various Purchase of various intangible Internet assets (asset purchases) 207 $12,820 Costs associated with these acquisitions, including consulting and legal fees are expensed as incurred in corporate operating expenses. During the yearended December 31, 2013, we incurred $0.2 million of acquisition-related expenses including $0.1 million in brokerage fees. 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 netpresent value of any contingent earn-out consideration. We estimated the fair value of the contingent earn-out consideration using a probability-weighteddiscounted cash flow model. The fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3measurement as defined in Note 7 -Fair Value Measurements. The following table summarizes the total acquisition consideration for the year endingDecember 31, 2013: Purchase Price Consideration Total Consideration (Dollars in thousands) Cash payments $7,477 Early repayment of principal on seller-financed note due 2014 2,000 Deferred cash payments (due 2014) 300 Net present value of deferred advertising credits 2,427 Fair value of contingent earn-out consideration 616 Total purchase price consideration $12,820 The total acquisition consideration was allocated to the net assets acquired as follows: BroadcastAssetsAcquired Digital MediaAssetsAcquired Net AssetsAcquired (Dollars in thousands) Assets Property and equipment $1,752 $355 $2,107 Broadcast licenses 7,429 — 7,429 Goodwill 37 393 430 Customer lists and contracts — 359 359 Domain and brand names ― 1,687 1,687 Software ― 99 99 Favorable and assigned lease 709 — 709 $9,927 $2,893 $12,820 NOTE 4. CONTINGENT EARN-OUT CONSIDERATION Our acquisitions of Twitchy.com and entities of Eagle Publishing included contingent consideration, the fair value of which was estimated on theacquisition date as the present value of the expected future contingent payments which we determined using a probability-weighted discounted cash flowmodel for probabilities of possible future payments. 127Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The unobservable inputs used in determining the fair value of the contingent consideration include assumptions as to the ability of the acquiredbusinesses to meet the targets and discount rates used in the calculation. Should the actual results of the acquired business increase or decrease as comparedto our estimates and assumptions, the fair value of the contingent consideration obligations would increase or decrease, up to the contracted limit, asapplicable. The fair value measurement includes revenue forecasts which are a Level 3 measurement as discussed in Note 8 to our consolidated financialstatements included in this annual report on Form 10-K. Any changes in the estimated fair value of the contingent earn-out consideration, up to thecontractual amounts, are reflected in our results of operations in the periods they are identified. Any changes in the estimated fair value of the contingentearn-out consideration may materially impact and cause volatility in our future operating results. On December 10, 2013, we recorded an estimate of contingent earn-out consideration payable upon achievement of page view milestones over a two-year period related to our acquisition of Twitchy.com. Using a probability-weighted discounted cash flow model, we estimated the fair value of the $1.2million total contingent earn-out consideration at the present value of $0.6 million as of the closing date. We recorded an increase of $0.3 million in the fairvalue of the contingent earn-out consideration associated with our December 2013 acquisition of Twitchy.com. The increase reflects actual page views inexcess of those estimated at the time of our projections. We will continue to review our estimates quarterly over the remaining one-year earn-out period. As ofMarch 13, 2015, we have paid $0.6 million in cash toward the contingent earn-out consideration and may pay up to an additional $0.7 million over theremaining earn-out period based on the achievement of certain page view milestones established in the purchase agreement. The estimated fair value of thecontingent earn-out consideration is recorded at the present value of $0.4 million at December 31, 2014 On January 10, 2014, we recorded an estimate of contingent earn-out consideration payable upon achievement of certain revenue benchmarks over athree-year period related to the acquisition of the Eagle entities. Using a probability-weighted discounted cash flow model, we recorded the estimated fairvalue of the $8.5 million total contingent earn-out consideration at the present value of $2.0 million as of the closing date. We recorded a net increase of $0.4million in the fair value of the contingent earn-out consideration associated with Eagle entities. The net increase reflects actual revenues earned by Eagleentities in excess of those estimated at the time of our projections. We will continue to review our estimates quarterly over the remaining earn-out period oftwo years. As of December 31, 2014, $0.9 million of the actual cash due toward the contingent earn-out consideration earned is recorded in current liabilities.We may pay up to an additional $5.9 million over the remaining earn-out period based on the achievement of certain revenue benchmarks. The estimated fairvalue of the contingent earn-out consideration is recorded at the present value of $1.7 million at December 31, 2014. Any changes in the estimated fair value of the contingent earn-out consideration, up to the contracted amount, will be reflected in our results ofoperations in future periods as they are identified. Changes in the fair value of the contingent earn-out consideration may materially impact and causevolatility in our future operating results. The following table reflects the changes in the present value of our acquisition related contingent earn-out consideration for the twelve months endedDecember 31, 2014: Twelve months ended December 31, 2014 Short-TermAccrued Expenses Long-Term OtherLiabilities Total (dollars in thousands) Beginning Balance as of January 1, 2014 $329 $287 $616 Acquisitions 692 1,355 2,047 Accretion of acquisition-related contingent consideration 68 120 188 Change in the estimated fair value of contingent earn-out consideration 341 393 734 Reclassification of payments due in next12 month to short-term 445 (445) — Payments (300) — (300)Ending Balance as of December 31, 2014 $1,575 $1,710 $3,285 128Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 5. PROPERTY AND EQUIPMENT The following is a summary of the categories of our property and equipment: As of December 31, 2013 2014 (Dollars in thousands) Land $29,748 $29,424 Buildings 24,695 24,898 Office furnishings and equipment 38,794 39,772 Antennae, towers and transmitting equipment 76,454 78,628 Studio and production equipment 29,819 30,202 Computer software and website development costs 21,653 26,593 Record and tape libraries 65 59 Automobiles 1,139 1,205 Leasehold improvements 17,414 19,634 Construction-in-progress 4,362 4,307 $244,143 $254,722 Less accumulated depreciation (145,215) (155,495) $98,928 $99,227 Depreciation expense was approximately $12.6 million, $12.4 million and $12.3 million for the years ended December 31, 2014, 2013, and 2012,respectively, which includes depreciation of $53,000 for each of these years on a radio station tower valued at $0.8 million under a capital lease obligation.Accumulated depreciation associated with the capital lease was $411,000, $344,000 and $291,000 at December 31, 2014, 2013 and 2012, respectively. Based on changes in management’s planned usage, we classified land in Covina, California as held for sale as of June 2012. We evaluated the land forimpairment in accordance with guidance for impairment of long-lived assets held for sale. We determined that the carrying value of the land exceeded theestimated fair value less costs to sell. We recorded an impairment charge of $5.6 million associated with the land based on our estimated sale price. InDecember 2012, after several purchase offers for the land were terminated, we obtained a third party valuation for the land. Based on the fair value determinedby the third-party, we recorded an additional impairment charge of $1.2 million associated with the land. There were no indications of impairment present during the period ending December 31, 2014 and it is our intent to continue to pursue the sale of thisland. The table below presents the fair value measurements used to value this asset. Fair Value Measurements Using: (Dollars in thousands) Description As of December 31, 2014 Quoted prices in active markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Long-Lived Asset Held for Sale $1,700 $1,700 $— NOTE 6. AMORTIZABLE INTANGIBLE ASSETS The following tables provide a summary of our significant classes of amortizable intangible assets: As of December 31, 2014 Accumulated Cost Amortization Net (Dollars in thousands) Customer lists and contracts $19,910 $(16,558) $3,352 Domain and brand names 15,465 (9,722) 5,743 Favorable and assigned leases 2,379 (1,795) 584 Subscriber base and lists 4,302 (2,671) 1,631 Author relationships 2,245 (1,379) 866 Non-compete agreements 888 (669) 219 Other amortizable intangible assets 1,336 (1,336) — $46,525 $(34,130) $12,395 129Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As of December 31, 2013 Accumulated Cost Amortization Net (Dollars in thousands) Customer lists and contracts $17,170 $(13,830) $3,340 Domain and brand names 12,700 (8,124) 4,576 Favorable and assigned leases 2,358 (1,701) 657 Subscriber base and lists 1,856 (1,856) — Author relationships 563 (563) — Non-compete agreements 743 (550) 193 Other amortizable intangible assets 1,336 (1,309) 27 $36,726 $(27,933) $8,793 Based on the amortizable intangible assets as of December 31, 2014, we estimate amortization expense for the next five years to be as follows: Year Ending December 31, Amortization Expense (Dollars in thousands) 2015 $4,858 2016 2,941 2017 1,537 2018 1,318 2019 919 Thereafter 822 Total $12,395 NOTE 7. NOTES PAYABLE AND LONG-TERM DEBT Salem Media Group, Inc. has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several, and anysubsidiaries of Salem Media Group, Inc. other than the subsidiary guarantors are minor. Term Loan B and Revolving Credit Facility On March 14, 2013, we entered into a senior secured credit facility, consisting of the Term Loan B of $300.0 million 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 is being amortized to non-cashinterest expense over the life of the loan using the effective interest method. For each of the twelve months ended December 31, 2013 and 2014,approximately $0.2 million, respectively, of the discount has been recognized as interest expense including approximately $0.3 million of bank loan fees. The Term Loan B has a term of seven years, maturing in March 2020. During this term, the principal amount may be increased by up to an additional$60.0 million, subject to the terms and conditions of the credit agreement. We are required to make principal payments of $750,000 per quarter which beganon September 30, 2013 for the Term Loan B. Prepayments may be made against the outstanding balance of our Term Loan B. Each repayment of theoutstanding Term Loan B is applied ratably to each of the next four principal installments thereof in the direct order of maturity and thereafter to theremaining principal balance in reverse order of maturity. We have made prepayments on our Term Loan B, including interest through the date of the as follows: Date Principal Paid Unamortized Discount (Dollars in Thousands) December 31, 2014 $4,000 $16 November 28, 2014 4,000 15 September 29, 2014 5,000 18 March 31, 2014 2,250 8 December 30, 2013 750 3 September 30, 2013 4,000 16 June 28, 2013 4,000 14 130Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Revolver has a term of five years, maturing in March 2018. We report outstanding balances on our Revolver as short-term based on use of theRevolver to fund ordinary and customary operating cash needs with repayments made frequently. We believe that the borrowing capacity under our TermLoan B and Revolver allows us to meet our ongoing operating requirements, fund capital expenditures and satisfy our debt service requirements for at leastthe next twelve months. Borrowings under the Term Loan B may be made at LIBOR (subject to a floor of 1.00%) plus a spread of 3.50% or Wells Fargo’s base rate plus a spreadof 2.50%. Borrowings under the Revolver may be made at LIBOR or Wells Fargo’s base rate plus a spread determined by reference to our leverage ratio, as setforth in the pricing grid below. If an event of default occurs under the credit agreement, the applicable interest rate may increase by 2.00% per annum. AtDecember 31, 2014, the blended interest rate on amounts outstanding under the Term Loan B and Revolver was 5.05%. Revolver Pricing Pricing Level Consolidated Leverage Ratio Base Rate Loans LIBOR Loans 1 Less than 3.00 to 1.00 1.250% 2.250%2 Greater than or equal to 3.00 to 1.00 but less than 4.00 to 1.00 1.500% 2.500%3 Greater than or equal to 4.00 to 1.00 but less than 5.00 to 1.00 1.750% 2.750%4 Greater than or equal to 5.00 to 1.00 but less than 6.00 to 1.00 2.000% 3.000%5 Greater than or equal to 6.00 to 1.00 2.500% 3.500% The obligations under the credit agreement and the related loan documents are secured by liens on substantially all of the assets of Salem and itssubsidiaries, other than certain exceptions set forth in the Security Agreement, dated as of March 14, 2013, among Salem, the subsidiary guarantors partythereto, and Wells Fargo Bank, National Association, as Administrative Agent (the “Security Agreement”) and such other related loan documents. With respect to financial covenants, the credit agreement includes a minimum interest coverage ratio, which started at 1.50 to 1.0 and steps up to 2.50 to1.0 by 2016 and a maximum leverage ratio, which started at 6.75 to 1.0 and steps down to 5.75 to 1.0 by 2017. The credit agreement also includes othernegative covenants that are customary for credit facilities of this type, including covenants that, subject to exceptions described in the credit agreement,restrict the ability of Salem and its subsidiary guarantors: (i) to incur additional indebtedness; (ii) to make investments; (iii) to make distributions, loans ortransfers 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; or (vii) tomerge or consolidate with, or dispose of all or substantially all assets to, a third party. As of December 31, 2014, our leverage ratio was 5.45 to 1 compared toour compliance covenant of 6.50 and our interest coverage ratio was 3.24 compared to our compliance ratio of 2.0. We were in compliance with our debtcovenants under the credit facility at December 31, 2014. Terminated Senior Secured Second Lien Notes On December 1, 2009, we issued $300.0 million principal amount of our 95/8% Notes Senior Secured Second Lien Notes due 2016 (“Terminated 95/8%Notes”) at a discount for $298.1 million resulting in an effective yield of 9.75%. Interest was due and payable on June 15 and December 15 of each year,commencing June 15, 2010 until maturity. We were not required to make principal payments on the Terminated 95/8% Notes, which were due in full inDecember 2016. The Terminated 95/8% Notes were guaranteed by all of our existing domestic restricted subsidiaries. Upon issuance, we were required to pay$28.9 million per year in interest on the then outstanding Terminated 95/8% Notes. As of December 31, 2012, accrued interest on the Terminated 95/8%Notes was $0.9 million. The discount was being amortized to interest expense over the term of the Terminated 95/8% Notes based on the effective interestmethod. For the twelve months ended December 31, 2013, $37,000 of the discount, respectively, was recognized as interest expense. On March 14, 2013, we tendered for $212.6 million in aggregate principal amount of the Terminated 95/8% Notes for an aggregate purchase price of$240.3 million, or at a price equal to 110.65% of the face value of the Terminated 95/8% Notes in the Tender Offer. We paid $22.7 million for this repurchaseresulting in a $26.9 million pre-tax loss on the early retirement of long-term debt, which included approximately $0.8 million of unamortized discount and$2.9 million of bond issue costs associated with the Terminated 95/8% Notes. We issued a notice of redemption to redeem any of the Terminated 95/8% Notesthat remained outstanding after the expiration date of the Tender Offer. On June 3, 2013, we redeemed the remaining $0.9 million of the outstandingTerminated 95/8% Notes to satisfy and discharge Salem’s obligations under the indenture for the Terminated 95/8% Notes. The carrying value of theTerminated 95/8% Notes was $212.6 million at December 31, 2012. There are no outstanding Terminated 95/8% Notes as of the effectiveness of theredemption. 131Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Information regarding repurchases and redemptions of the Terminated 95/8% Notes is as follows: Date Principal Redeemed /Repurchased Premium Paid Unamortized Discount Bond Issue Costs (Dollars in thousands) June 3, 2013 $903 $27 $3 $- March 14, 2013 212,597 22,650 837 2,867 December 12, 2012 4,000 120 17 57 June 1, 2012 17,500 525 80 287 December 12, 2011 12,500 375 62 337 September 6, 2011 5,000 144 26 135 June 1, 2011 17,500 525 93 472 December 1, 2010 12,500 375 70 334 June 1, 2010 17,500 525 105 417 Terminated Senior Credit Facility On December 1, 2009, we entered into a Revolver (“Terminated Revolver”). We amended the Terminated Revolver on November 1, 2010 to increase theborrowing capacity from $30 million to $40 million. The amendment allowed us to use borrowings under the Revolver, subject to the “Available Amount” asdefined by the terms of the credit agreement, to redeem applicable portions of the Terminated 95/8% Notes. The calculation of the “Available Amount” alsopertained to the payment of dividends when the leverage ratio was above 5.0 to 1. On November 15, 2011, we completed the Second Amendment of the Terminated Revolver to, among other things, (1) extend the maturity date fromDecember 1, 2012 to December 1, 2014, (2) change the interest rate applicable to LIBOR or the Wells Fargo base rate plus a spread to be determined based onour leverage ratio, (3) allow us to borrow and repay unsecured indebtedness provided certain conditions are met and (4) include step-downs related to ourleverage ratio covenant. We incurred $0.5 million in fees to complete this amendment, which were being amortized over the remaining term of the agreement.The applicable interest rate relating to the amended credit agreement was LIBOR plus a spread of 3.00% per annum or the Base Rate plus a spread of 1.25%per annum, which was adjustable based on our leverage ratio. If an event of default occurred, the interest rate could be increased by 2.00% per annum. Detailsof the change in our rate based on our leverage ratio were as follows: Consolidated Leverage Ratio Base Rate Eurodollar Rate Loans Applicable Fee Rate Less than 3.25 to 1.00 0.75% 2.25% 0.40%Greater than or equal to 3.25 to 1.00 but less than 4.50 to 1.00 0.75% 2.50% 0.50%Greater than or equal to 4.50 to 1.00 but less than 6.00 to 1.00 1.25% 3.00% 0.60%Greater than or equal to 6.00 to 1.00 2.25% 3.50% 0.75% The Terminated Revolver included a $5 million subfacility for standby letters of credit and a subfacility for swingline loans of up to $5 million, subjectto the terms and conditions of the credit agreement relating to the Terminated Revolver. In addition to interest charges outlined above, we paid acommitment fee on the unused balance based on the Applicable Fee Rate in the above table. The Terminated Revolver was terminated on March 14, 2013 upon entry into our current senior secured credit facility. This termination resulted in a $0.9million pre-tax loss on the early retirement of long-term debt related to unamortized credit facility fees. There was no outstanding balance on the TerminatedRevolver as of the termination date. Terminated Subordinated Credit Facility with First California Bank On May 21, 2012, we entered into a Business Loan Agreement, Promissory Note and related loan documents with First California Bank (the “FCBLoan”). The FCB Loan was an unsecured, $10.0 million fixed-term loan with a maturity date of June 15, 2014. The interest rate for the FCB Loan (“InterestRate”) was variable and was equal to the greater of: (a) 4.250% or (b) the Wall Street Journal Prime Rate as published in The Wall Street Journal and reportedby FCB plus 1%. We were required to repay the FCB Loan as follows: (a) twenty-three (23) consecutive monthly interest payments based upon the then-current principalbalance outstanding at the then-current Interest Rate commencing on September 15, 2012; (b) seven (7) quarterly consecutive principal payments of $1.25million each commencing on September 15, 2012; and (c) one (1) final principal and interest payment on June 15, 2014 of all outstanding and unpaidinterest and principal as of such maturity date. The FCB Loan could be prepaid at any time subject to a minimum interest charge of fifty dollars ($50). If anevent of default occurred on the FCB Loan, the Interest Rate could have been increased by 5.00% per annum. 132Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The FCB loan was terminated on March 14, 2013 upon entry into our current senior secured credit facility. This termination resulted in a $33,000 pre-taxloss on the early retirement of long-term debt for unamortized credit facility fees. There was no outstanding balance on the FCB Loan as of the terminationdate. Terminated Subordinated Debt due to Related Parties On November 17, 2011, we entered into subordinated lines of credit “Terminated Subordinated Debt due Related Parties” with Edward G. Atsinger III,Chief Executive Officer and director of Salem, and Stuart W. Epperson, Chairman of Salem’s Board of Directors. Pursuant to the related agreements, Mr.Epperson committed to provide an unsecured revolving line of credit to Salem in a principal amount of up to $3 million, and Mr. Atsinger committed toprovide an unsecured revolving line of credit in a principal amount of up to $6 million. On May 21, 2012, we also entered into a subordinated line of creditwith Roland S. Hinz, a Salem board member. Mr. Hinz committed to provide an unsecured revolving line of credit in a principal amount of up to $6 million.On September 12, 2012, we amended and restated the original subordinated line of credit with Mr. Hinz to increase the unsecured revolving line of credit by$6 million for a total line of credit of up to $12 million. The proceeds of the Terminated Subordinated Debt due to Related Parties could be used to repurchase a portion of the Terminated 95/8% Notes.Outstanding amounts under each subordinated line of credit bore interest at a rate equal to the lesser of (1) 5% per annum and (2) the maximum rate permittedfor subordinated debt under the Terminated Revolver referred to above plus 2% per annum. Interest was payable at the time of any repayment of principal. Inaddition, outstanding amounts under each subordinated line of credit were required to be repaid within three (3) months from the time that such amounts wereborrowed, with the exception of the subordinated line of credit with Mr. Hinz, which was to be repaid within six (6) months from the time that such amountswere borrowed. The Terminated Subordinated Debt due to Related Parties did not contain any covenants. On March 14, 2013, we repaid these lines of creditupon entry into our current senior secured credit facility. On April 3, 2013, we provided written notice to Messrs. Atsinger, Epperson and Hinz electing toterminate the Terminated Subordinated Debt due to Related Parties and related agreements effective as of May 3, 2013. There were no outstanding balanceson the Terminated Subordinated Debt due to Related Parties as of the termination date. Summary of long-term debt obligations Long-term debt consisted of the following: As of December 31, 2013 As of December 31, 2014 (Dollars in thousands) Term Loan B $289,939 $274,933 Revolver — 1,784 Capital leases and other loans 854 788 290,793 277,505 Less current portion (3,121) (1,898) $287,672 $275,607 In addition to the outstanding amounts listed above, we also have interest payments related to our long-term debt as follows as of December 31, 2014: ·Outstanding borrowings of $276.0 million under the Term Loan B with interest payments due at LIBOR (subject to a floor of 1.00%) plus3.50% or prime rate plus 2.50%; and ·Outstanding borrowings of $1.8 million under the Revolver, with interest payments due at LIBOR plus 3.00% or at prime rate plus 2.00%. Other Debt We have several capital leases related to office equipment. The obligation recorded at December 31, 2013 and 2014 represents the present value of futurecommitments under the capital lease agreements. 133Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Maturities of Long-Term Debt Principal repayment requirements under all long-term debt agreements outstanding at December 31, 2014 for each of the next five years and thereafterare as follows: Amount For the Twelve Months Ended December 31, (Dollars in thousands) 2015 $1,898 2016 3,106 2017 3,114 2018 3,105 2019 3,103 Thereafter 263,179 $277,505 NOTE 8. FAIR VALUE ACCOUNTING FASB ASC Topic 820 “Fair Value Measurements and Disclosures” established a hierarchal disclosure framework associated with the level of pricingobservability utilized in measuring fair value. This framework defines three levels of inputs to the fair value measurement process and requires that each fairvalue measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The threebroad 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 accessat 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 orindirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of theasset or liability; and•Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about theassumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available inthe circumstances (which might include the reporting entity’s own data). As of December 31, 2013, the carrying value of cash and cash equivalents, trade accounts receivables, accounts payable, accrued expenses and accruedinterest approximates fair value due to the short-term nature of such instruments. The carrying value of other long-term liabilities approximates fair value asthe related interest rates approximate rates currently available to the company. The following table summarizes the fair value of our financial assets that aremeasured at fair value: December 31, 2014 Total Fair Value and Fair Value Measurement Category Carrying Value on Balance Sheet Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $33 $33 $— $— Trade accounts receivable, net 34,781 34,781 — — Fair value of interest rate swap 475 — 475 — Liabilities: Accounts payable 2,964 2,964 — — Accrued expenses including estimated fair value of contingentearn-out consideration (see Note 4) 12,704 11,129 — 1,575 Accrued interest 48 48 — — Long term liabilities including estimated fair value ofcontingent earn-out consideration (see Note 4) 4,123 2,413 — 1,710 Long-term debt 277,505 277,505 — — 134Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 9. INCOME TAXES We account for income taxes in accordance with FASB ASC Topic 740 “Income Taxes.” Deferred income taxes are determined based on the differencebetween the consolidated financial statement and income tax bases of assets and liabilities using enacted tax rates in effect in the years in which thedifferences are expected to reverse. Our evaluation was performed for tax years that remain subject to examination by major tax jurisdictions, which rangefrom 2010 through 2013. The consolidated provision (benefit) for income taxes from continuing operations for Salem consisted of the following: December 31, 2012 2013 2014 (Dollars in thousands) Current: Federal $8 $— $— State 198 193 269 206 193 269 Deferred: Federal 3,649 (1,075) 3,932 State (3,702) (3,310) 564 (53) (4,385) 4,496 Provision for (benefit from) income taxes $153 $(4,192) $4,765 Discontinued operations are reported net of the tax benefit of $(0.02) million in 2013. The consolidated deferred tax asset and liability consisted of the following: December 31, 2013 2014 (Dollars in thousands) Deferred tax assets: Financial statement accruals not currently deductible $6,786 $8,045 Net operating loss, AMT credit and other carryforwards 71,246 72,618 State taxes 90 108 Other 3,322 3,821 Total deferred tax assets 81,444 84,592 Valuation allowance for deferred tax assets (2,868) (2,952)Net deferred tax assets $78,576 $81,640 Deferred tax liabilities: Excess of net book value of property and equipment and software for financial reporting purposes over tax basis $3,840 $3,000 Excess of net book value of intangible assets for financial reporting purposes over tax basis 109,133 118,773 Interest rate swap 1,251 187 Unrecognized tax benefits 933 110 Other — 526 Total deferred tax liabilities 115,157 122,596 Net deferred tax liabilities $(36,581) $(40,956) The following table reconciles the above net deferred tax liabilities to the financial statements: December 31, 2013 2014 (Dollars in thousands) Deferred income tax asset per balance sheet $6,876 $8,153 Deferred income tax liability per balance sheet (43,457) (49,109) $(36,581) $(40,956) 135Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. A reconciliation of the statutory federal income tax rate to the provision for income tax is as follows: Year Ended December 31, 2012 2013 2014 (Dollars in thousands) Statutory federal income tax rate (at 35%) $1,637 $(2,411) $3,584 Effect of state taxes, net of federal (2,278) (2,025) 542 Permanent items 788 270 613 Other, net 6 (26) 26 Provision for income taxes $153 $(4,192) $4,765 At December 31, 2014, we had net operating loss carryforwards for federal income tax purposes of approximately $159.0 million that expire in 2021through 2034 and for state income tax purposes of approximately $972.8 million that expire in years 2019 through 2034. For financial reporting purposes atDecember 31, 2014, we had a valuation allowance of $3.0 million, net of federal benefit, to offset a portion of the deferred tax assets related to state netoperating loss carryforwards that may not be realized. NOTE 10. COMMITMENTS AND CONTINGENCIES The company enters into various agreements in the normal course of business that contain minimum guarantees. These minimum guarantees are oftentied 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 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. The company maintains insurance that may providecoverage for such matters. Consequently, the company is unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact withrespect to these matters. The company believes, at this time, that the final resolution of these matters, individually and in the aggregate, will not have amaterial adverse effect upon the company’s annual consolidated financial position, results of operations or cash flows. Salem leases various land, offices, studios and other equipment under operating leases that generally expire over the next ten to twenty-five years. Themajority of these leases are subject to escalation clauses and may be renewed for successive periods ranging from one to five years on terms similar to currentagreements and except for specified increases in lease payments. Rental expense included in operating expense under all lease agreements was $15.7 million,$16.9 million and $17.9 million in 2012, 2013 and 2014, respectively. Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as ofDecember 31, 2014, are as follows: Related Parties Other Total (Dollars in thousands) 2015 $1,462 $9,577 $11,039 2016 1,386 8,315 9,701 2017 1,064 7,480 8,544 2018 445 6,663 7,108 2019 202 5,773 5,975 Thereafter 3,844 34,642 38,486 $8,403 $72,450 $80,853 NOTE 11. STOCK INCENTIVE PLAN The company has one stock incentive plan. The Amended and Restated 1999 Stock Incentive Plan (the “Plan”) allows the company to grant stockoptions and restricted stock to employees, directors, officers and advisors of the company. A maximum of 5,000,000 shares are authorized under the Plan.Options generally vest over a four-year period and have a maximum term of five years from the vesting date. The Plan provides that vesting may beaccelerated upon the occurrence of certain corporate transactions of the company. The Plan provides that the Board of Directors, or a committee appointed bythe Board, has discretion, subject to certain limits, to modify the terms of outstanding options. We recognize non-cash stock-based compensation expenserelated to the estimated fair value of stock options granted in accordance with FASB ASC Topic 718 Compensation—Stock Compensation. 136Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. During the year ending December 31, 2012, the Board of Directors accelerated the vesting period for two outstanding stock awards issued to twoemployees. This accelerated vesting resulted in additional compensation expense of $0.1 million recognized in the fourth quarter of 2012. During the yearending December 31, 2014, the Board of Directors accelerated the vesting period for three outstanding stock awards issued to an employee. This acceleratedvesting resulted in additional compensation expense of $30,000 recognized in the fourth quarter of 2014. The following table reflects the components ofstock-based compensation expense recognized in the Consolidated Statements of Operations for the years ended December 31, 2012, 2013 and 2014: Year Ended December 31, 2012 2013 2014 (Dollars in thousands) Stock option compensation expense included in corporate expenses $933 $766 $1,025 Restricted stock shares compensation expense included in corporate expenses — 481 — Stock option compensation expense included in broadcast operating expenses 305 302 325 Stock option compensation expense included in Internet operating expenses 111 253 165 Stock option compensation expense included in publishing operating expenses 19 47 61 Total stock-based compensation expense, pre-tax $1,368 $1,849 $1,576 Tax benefit (expense) from stock-based compensation expense (579) (740) (630)Total stock-based compensation expense, net of tax $789 $1,109 $946 Stock option and restricted stock grants The Plan allows the company to grant stock options and shares of restricted stock to employees, directors, officers and advisors of the company. Forgrants of stock options, the option exercise price is set at the closing price of the company’s common stock on the date of grant, and the related number ofshares underlying the stock option is fixed at that point in time. The Plan also provides for grants of restricted stock. Eligible employees may receive stockoptions annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. In addition,certain management and professional level employees typically receive a stock option grant upon commencement of employment. The Plan does not allowkey employees and directors (restricted persons) to exercise options during pre-defined blackout periods. Employees may participate in plans establishedpursuant to Rule 10b5-1 under the Exchange Act that allow them to exercise options according to pre-established criteria. We use the Black-Scholes valuation model to estimate the grant date fair value of stock options and restricted stock. The expected volatility reflects theconsideration of the historical volatility of our stock as determined by the closing price over a six to ten year term that is generally commensurate with theexpected term of the award. Expected dividends reflect the quarterly distributions authorized and declared on our Class A and Class B common stock as ofthe grant date. The expected term of the awards are based on evaluations of historical and expected future employee exercise behavior. The risk-free interestrates 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 usehistorical data to estimate future forfeiture rates to apply against the gross amount of compensation expense determined using the valuation model. The weighted-average assumptions used to estimate the fair value of the stock options and restricted stock awards using the Black-Scholes valuationmodel were as follows for the years ended December 31, 2012, 2013 and 2014: Year Ended December 31, 2012 2013 2014 Expected volatility 102.37% 100.78% 74.98%Expected dividends 5.07% 2.05% 2.70%Expected term (in years) 8.2 6.6 7.8 Risk-free interest rate 1.66% 1.06% 2.27% Stock option information with respect to the company’s stock-based equity plans during the three years ended December 31, 2014 is as follows (Dollarsin thousands, except weighted average exercise price and weighted average grant date fair value): 137Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Options Shares Weighted Average Exercise Price Weighted Average Grant Date Fair Value Weighted Average Remaining ContractualTerm Aggregate Intrinsic Value Outstanding at January 1, 2012 1,640,392 $5.01 $4.07 5.2 years $584 Granted 626,000 2.74 1.51 1,704 Exercised (261,205) 1.57 1.28 910 Forfeited or expired (78,088) 14.06 8.03 10,824 Outstanding at December 31, 2012 1,927,099 $4.37 $3.45 5.4 years $3,899 Exercisable at December 31, 2012 707,024 6.58 5.41 2.9 years 1,004 Expected to Vest 1,158,461 $3.09 $2.32 6.8 years $2,749 Outstanding at January 1, 2013 1,927,099 $4.37 $3.45 5.4 years $3,899 Granted 735,750 6.93 4.90 1,303 Exercised (410,983) 3.46 2.47 1,883 Forfeited or expired (89,799) 12.30 7.43 72 Outstanding at December 31, 2013 2,162,067 $5.09 $3.57 5.5 years $8,491 Exercisable at December 31, 2013 514,751 6.29 4.52 2.7 years 1,919 Expected to Vest 1,564,128 $4.71 $3.28 6.4 years $6,240 Outstanding at January 1, 2014 2,162,067 $5.09 $3.57 5.5 years $8,491 Granted 25,000 8.40 4.73 — Exercised (278,837) 4.38 3.43 1,260 Forfeited or expired (92,026) 12.25 7.89 43 Outstanding at December 31, 2014 1,816,204 $4.88 $3.39 4.8 years $5,718 Exercisable at December 31, 2014 663,417 5.32 3.90 3.0 years 2,015 Expected to Vest 1,094,574 $4.62 $3.10 5.9 years $3,515 The aggregate intrinsic value represents the difference between the company’s closing stock price on December 31, 2014 of $7.82 and the optionexercise 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 ofoptions vested during the years ended December 31, 2012, 2013 and 2014 was $1.2 million, $0.8 million and $1.9 million, respectively. Non-employee directors of the company have been awarded restricted stock grants that vest one year from the date of issuance. During the twelve monthsended December 31, 2013, the company granted restricted stock awards to certain members of management. These restricted stock awards vestedimmediately, but contained transfer restrictions under which they could not be sold, pledged, transferred or assigned until the three-month anniversary fromthe grant date. The restricted stock awards were independent of option grants and were granted at no cost to the recipient other than applicable taxes owed bythe recipient. The awards were considered issued and outstanding from the date of grant. The fair values of shares of restricted stock awards are determined based on the closing price of the company common stock on the grant dates. Therewere no restricted stock awards outstanding during the year ending December 31, 2012. Information regarding the company’s restricted stock during the yearended December 31, 2013 is as follows: Restricted Stock Shares Weighted Average Grant Date Fair Value Non-Vested at January 1, 2013 — $— Granted 79,810 6.02 Lapsed (79,810) 6.02 Forfeited — — Non-Vested at December 31, 2013 — $— As of December 31, 2014, there was $1.0 million of total unrecognized compensation cost related to non-vested awards of stock options. This cost isexpected to be recognized over a weighted-average period of 1.48 years. 138Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Additional information regarding options outstanding as of December 31, 2014, is as follows: Weighted Average Contractual Life Weighted Weighted Range of Remaining Average Exercisable Average Exercise Prices Options (Years) Exercise Price Options Exercise Price $ 0.36 - $ 3.00 887,704 5.0 $1.62 259,204 $2.17 $ 3.01 - $ 6.00 156,625 2.9 4.20 145,775 5.17 $ 6.01 - $ 9.00 697,125 5.5 4.90 183,688 6.93 $ 9.01 - $ 12.00 45,450 0.7 8.63 45,450 11.80 $ 12.01 - $ 15.00 29,300 0.4 8.75 29,300 13.88 $ 0.36 - $ 15.00 1,816,204 4.8 $3.39 663,417 $5.32 NOTE 12. RELATED PARTY TRANSACTIONS Our board of directors has adopted a written policy for review, approval and monitoring of transactions between the company and its related parties.Related parties include our directors, executive officers, nominees to become a director, any person beneficially owning more than 5% of any class of ourstock, immediate family members of any of the foregoing, and any entity in which any of the foregoing persons is employed or is a general partner orprincipal or in which the person has a 10% or greater beneficial ownership interest. The policy covers material transactions in which a related party had, hasor will have a direct or indirect interest. Leases with Principal Stockholders A trust controlled by the Chief Executive Officer of the company, Edward G. Atsinger III, owns real estate on which assets of one radio station arelocated. Salem has entered into a lease agreement with this trust. Rental expense related to this lease included in operating expense for 2012, 2013 and 2014amounted to $165,000, $170,000 and $175,000, respectively. Land and buildings occupied by various Salem radio stations are leased from entities owned by the company’s CEO and its Chairman of the Board.Rental expense under these leases included in operating expense for 2012, 2013 and 2014 amounted to $1.2 million, $1.2 million and $1.3 million,respectively. Terminated Subordinated Debt due to Related Parties On November 17, 2011, we entered into terminated subordinated lines of credit with Edward G. Atsinger III, Chief Executive Officer and director ofSalem, and Stuart W. Epperson, Chairman of Salem’s board of directors. Pursuant to the related agreements, Mr. Epperson had committed to provide anunsecured revolving line of credit to Salem in a principal amount of up to $3 million, and Mr. Atsinger had committed to provide an unsecured revolvingline of credit in a principal amount of up to $6 million. On May 21, 2012, we entered into a line of credit with Roland S. Hinz, a Salem board member. Mr.Hinz committed to provide an unsecured revolving line of credit in a principal amount of up to $6.0 million. On September 12, 2012, we amended andrestated the original line of credit with Mr. Hinz to increase the unsecured revolving line of credit by $6.0 million for a total line of credit of up to $12.0million (together, the “Terminated Subordinated Debt due to Related Parties”). The proceeds of the Subordinated Debt due to Related Parties may have been used to repurchase a portion of Salem’s then outstanding Terminated95/8% Notes. Outstanding amounts under each subordinated line of credit bore interest at a rate equal to the lesser of (1) 5% per annum and (2) the maximumrate permitted for subordinated debt under the Revolver referred to above plus 2% per annum. Interest was payable at the time of any repayment of principal. In addition, outstanding amounts under each terminated subordinated line of credit were required to be repaid within three (3) months from the time thatsuch amounts are borrowed, with the exception of the subordinated line of credit with Mr. Hinz, which was to be repaid within six (6) months from the timethat such amounts were borrowed. The terminated subordinated lines of credit did not contain any covenants. At December 31, 2011 and 2012, $9.0 millionand $15.0 million, respectively, was outstanding under the Terminated Subordinated Debt due to Related Parties. On March 14, 2013, we repaid these linesof credit upon entry into our current senior secured credit facility. On April 3, 2013, we provided written notice to Messrs. Atsinger, Epperson and Hinzelecting to terminate the Terminated Subordinated Debt due to Related Parties and related agreements effective as of May 3, 2013. There are no outstandingbalances on the Terminated Subordinated Debt due Related Parties as of the repayment date. 139Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Because the transactions with Messrs. Atsinger, Epperson and Hinz described above constitute related party transactions, the Nominating and CorporateGovernance committee (the “Committee”) of Salem’s board of directors approved the entry by Salem into the subordinated lines of credit and any definitivecredit agreements associated therewith. As part of its consideration, the Committee concluded that the terms of the subordinated lines of credit were morefavorable to Salem as compared to terms of lines of credit available from unaffiliated third parties. Additionally, in August 2012, the company obtained afairness opinion from Bond & Pecaro confirming this conclusion. Radio Stations Owned by the Epperson’s Nancy A. Epperson, the wife of the Chairman of the Board, Stuart W. Epperson, currently serves as an officer, director and stockholder of six radiostations in Virginia, five radio stations in North Carolina, and five radio stations in Florida. Chesapeake-Portsmouth Broadcasting Corporation (“Chesapeake-Portsmouth”) is a company controlled by Nancy Epperson, wife of Salem’s Chairman of the Board Stuart W. Epperson and sister of CEO Edward G. AtsingerIII. Chesapeake-Portsmouth owns and operates radio stations WJGR-AM, Jacksonville, Florida, WZNZ-AM, Jacksonville, Florida and WZAZ-AM,Jacksonville, Florida. The markets where these radio stations are located are not currently served by stations owned and operated by the company. Under his employmentagreement, Mr. Epperson is required to offer the company a right of first refusal of opportunities related to the company’s business. Radio Stations Owned by Mr. Hinz Mr. Hinz, a director of the company, through companies or entities controlled by him, operates three radio stations in Southern California. These radiostations are formatted in Christian Teaching and Talk programming in the Spanish language. Truth For Life—Mr. Hinz and, Mr. Riddle and Mrs. Weinberg Truth For Life is a non-profit organization that is a customer of Salem Media Group, Inc. During 2012, 2013 and 2014, the company billed Truth For Lifeapproximately $2.1 million, $2.1 million and $2.2 million, respectively, for airtime on its stations. Mr. Hinz, a director of the company was an active memberof the board of directors of Truth for Life during 2009 and through September 2010. Mr. Riddle, a director of the company, joined the Truth for Life board inOctober 2010 and remains a member of this board. Mrs. Allyson Weinberg is the wife of the company’s former director Dennis M. Weinberg, who did notstand for re-election to the board at the 2013 Annual Meeting of Stockholders. Mrs. Weinberg joined the board of Truth for Life in April 2011 and remains amember of this board. Know the Truth - Mr. Riddle Know the Truth is a non-profit organization that is a customer of Salem Media Group, Inc. During 2012, 2013 and 2014, the company billed Know theTruth approximately $0.4 million, $0.4 million and $0.5 million, respectively, for airtime on its stations. Mr. Riddle, a director of the company, joined theKnow the Truth board in 2010 and remains a member of this board. Split-Dollar Life Insurance The company purchased split-dollar life insurance policies for its Chairman and Chief Executive Officer in 1997. During 2011, the then existing policieswere cancelled and new policies were entered. The company is the owner of the policies and is entitled to recover all of the premiums paid on these policies.The company records an asset based on the lower of the aggregate premiums paid or insurance cash surrender value. The premiums were $193,000, $386,000and $386,000, for each of the years ended December 31, 2012, 2013 and 2014, respectively. As of December 31, 2012, 2013, and 2014 we recorded net assetsof $1.3 million, $1.6 million and $1.9 million, respectively. Benefits above and beyond the cumulative premiums paid will go to the beneficiary trustsestablished by each of the Chairman and Chief Executive Officer. Transportation Services Supplied by Atsinger Aviation From time to time, the company rents aircraft from a company that is owned by Edward G. Atsinger III, Chief Executive Officer and director of Salem. Asapproved by the independent members of the company’s board of directors, the company rents these aircraft on an hourly basis at what the company believesare market rates and uses them for general corporate needs. Total rental expense for these aircraft for 2012, 2013 and 2014 amounted to approximately$386,000, $239,000 and $274,000, respectively. 140Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 13. DEFINED CONTRIBUTION PLAN We maintain a 401(k) defined contribution plan (the “401(k) Plan”), which covers all eligible employees (as defined in the 401(k) Plan). Participants areallowed to make non-forfeitable contributions up to 60% of their annual salary, but may not exceed the annual maximum contribution limitationsestablished by the Internal Revenue Service. The plan previously allowed for a company match of 50% on the first 3% of the amounts contributed by eachparticipant and 25% on the next 3% contributed but does not match participants’ contributions in excess of 6% of their compensation per pay period. Thecompany match was temporarily suspended in July 2008 as part of an extensive cost-reduction program. The company match was reinstated effective January1, 2012 under new terms that allow for a company match of 50% on the first 5% of the amounts contributed by each participant. During the years endingDecember 31, 2012, 2013 and 2014, we contributed and expensed $1.3 million, $1.4 million and $1.7 million, respectively, in the 401(k) Plan. NOTE 14. EQUITY TRANSACTIONS We account for stock-based compensation expense in accordance with FASB ASC Topic 718 Compensation-Stock Compensation. As a result, $1.4million, $1.8 million and $1.6 million of non-cash stock-based compensation expense has been recorded to additional paid-in capital for the year endedDecember 31, 2012, 2013, and 2014, 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, financialrequirements, 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 appropriateamount, if any, to allocate toward a cash distribution with the general principle of using approximately 20% of free cash flow. Free cash flow is a non-GAAPfinancial measure defined in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations included with this annualreport on Form 10-K. The following table shows distributions that have been declared and paid since January 1, 2012: Announcement Date Payment Date Amount Per Share Cash Distributed(in thousands) December 2, 2014 December 29, 2014 $0.0650 $1,646 September 2, 2014 September 30, 2014 $0.0625 1,579 May 27, 2014 June 30, 2014 $0.0600 1,514 March 6, 2014 March 31, 2014 $0.0575 1,444 November 20, 2013 December 27, 2013 $0.0550 1,376 September 12, 2013 October 4, 2013 $0.0525 1,308 May 30, 2013 June 28, 2013 $0.0500 1,240 March 18, 2013 April 1, 2013 $0.0500 1,234 November 29, 2012 December 28, 2012 $0.0350 854 August 30, 2012 September 28, 2012 $0.0350 854 May 31, 2012 June 21, 2012 $0.0350 854 March 7, 2012 March 30, 2012 $0.0350 850 141Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The following table sets forth selected financial results of the company on a quarterly basis. March 31 June 30 September 30 December 31 2013 2014 2013 2014 2013 2014 2013 2014 (Dollars in thousands, except per share data) Total revenue $55,628 $62,344 $60,136 $68,637 $58,476 $69,608 $62,694 $65,947 Operating income 6,582 5,331 9,287 7,491 8,974 8,847 9,690 6,947 Net income (loss) before discontinued operations (18,582) 431 5,205 1,263 5,334 3,743 5,344 38 Net income (loss) $(18,593) $431 $5,201 $1,263 $5,323 $3,743 $5,333 $38 Basic earnings (loss) per share $(0.75) $0.02 $0.20 $0.05 $0.21 $0.14 $0.21 $— Basic earnings (loss) per share from continuing operations $(0.75) $0.02 $0.20 $0.05 $0.21 $0.14 $0.21 $— Diluted earnings (loss) per share $(0.75) $0.02 $0.20 $0.05 $0.21 $0.14 $0.21 $— Diluted earnings (loss) per share from continuing operations $(0.75) $0.02 $0.20 $0.05 $0.21 $0.14 $0.21 $— Weighted average shares outstanding – basic 24,632,431 25,064,982 24,737,131 25,172,696 25,126,858 25,536,397 25,255,881 25,573,162 Weighted average shares outstanding – diluted 24,632,431 25,881,811 25,624,350 25,950,600 25,921,391 26,265,957 26,051,098 26,226,332 NOTE 16. SEGMENT DATA FASB ASC Topic 280 “Segment Reporting” requires companies to provide certain information about their operating segments. We have two reportablesegments, radio broadcasting and digital media. Digital media (formerly “Internet and e-commerce”) became a reportable segment as of the first quarter of2011 upon the realization of organic and acquisition related revenue growth. Our acquisition of Eagle Publishing on January 10, 2014, which includedRegnery Publishing, Eagle Financial Publications, Eagle Wellness, Human Events and Red State, resulted in operational changes in our business and arealignment of our operating segments. We now have three operating segments: (1) Broadcast, (2) Digital Media, and (3) Publishing. We changed the composition of our operating segments to reflect management’s view of the operating results for each segment. Under our newcomposition, digital revenue generated by our broadcast stations is now reported under broadcast operating revenue as the station sales team and generalmanager are responsible for this digital revenue under their bonus and commission structure. Digital revenue from our broadcast stations was previouslyreported as Internet and e-Commerce revenue. E-Book revenue is now reported under Publishing revenue as sales goals and bonuses for Eagle RegneryPublishing are inclusive of sales of E-Books. The sale of e-Books was previously reported as Internet & e-commerce revenue. Additionally, we have allocatedspecific corporate departments, such as engineering, broadcast operations, digital and publishing within their respective operating segments. Corporateexpenses as revised include unallocated expenses, such as accounting and finance, human resources, and other shared functions. 142Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our operating segments reflect how our chief operating decision makers, which we define as a collective group of senior executives, assesses theperformance of each operating segment and determines the appropriate allocations of resources to each segment. Our operating segments do not all meet thequantitative thresholds to qualify as reportable segments; however, we have elected to disclose the results of these non-reportable operating segments as webelieve this information is useful to readers of our financial statements. We continue to review our operating segment classifications to align with operationalchanges 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 tocorporate 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 priorperiods presented have been updated to reflect the new composition of our operating segments. Segment performance, as we define it in accordance with the FASB’s guidance relating to segment reporting, is not necessarily comparable to othersimilarly titled captions of other companies. The table below presents financial information for each operating segment as of December 31, 2014, 2013 and2012 based on the new composition of our operating segments: Broadcast DigitalMedia Publishing Unallocated Corporate Consolidated (Dollars in thousands) Year Ended December 31, 2014 Net revenue $192,923 $46,862 $26,751 $— $266,536 Operating expenses 138,564 36,232 26,143 17,092 218,031 Net operating income (loss) before depreciation, amortization, impairment, change inestimated fair value of contingent earn-out consideration (gain) loss on the sale ordisposal of assets $54,359 $10,630 $608 $(17,092) $48,505 Depreciation 7,923 3,052 529 1,125 12,629 Amortization 98 4,885 1,212 1 6,196 Impairment of indefinite-lived long-term assets other than goodwill — — 34 — 34 Impairment of goodwill — — 45 — 45 Change in estimated fair value of contingent earn-out consideration — 325 409 — 734 (Gain) loss on the sale or disposal of assets 231 25 (5) — 251 Net operating income (loss) from continuing operations $46,107 $2,343 $(1,616) $(18,218) $28,616 Year Ended December 31, 2013 Net revenue $188,544 $35,156 $13,234 $— $236,934 Operating expenses 129,857 25,741 14,280 16,081 185,959 Net operating income (loss) before depreciation, amortization, impairments and(gain) loss on the sale or disposal of assets $58,687 $9,415 $(1,046) $(16,081) $50,975 Depreciation 7,934 2,904 444 1,166 12,448 Amortization 154 2,654 6 — 2,814 Impairment of indefinite-lived long-term assets other than goodwill — — 1,006 — 1,006 Impairment of goodwill — — 438 — 438 (Gain) loss on the sale or disposal of assets (274) — — 10 (264)Net operating income (loss) from continuing operations $50,873 $3,857 $(2,940) $(17,257) $34,533 Year Ended December 31, 2012 Net revenue $187,640 $28,166 $13,373 $— $229,179 Operating expenses 126,514 22,848 13,339 14,396 177,097 Net operating income (loss) before depreciation, amortization, impairment and (gain)loss on the sale or disposal of assets $61,126 $5,318 $34 $(14,396) $52,082 Depreciation 8,274 2,438 423 1,208 12,343 Amortization 105 2,189 8 2 2,304 Impairment of indefinite-lived long-term assets other than goodwill — — 88 — 88 Impairment of long-lived assets 6,808 — — — 6,808 (Gain) loss on the sale or disposal of assets 84 (76) — 41 49 Net operating income (loss) from continuing operations $45,855 $767 $(485) $(15,647) $30,490 143Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Broadcast DigitalMedia Publishing Unallocated Corporate Consolidated (Dollars in thousands) As of December 31, 2014 Inventories, net $— $222 $350 $— $572 Property and equipment, net 81,948 7,111 1,941 8,227 99,227 Broadcast licenses 385,726 — — — 385,726 Goodwill 3,955 19,677 1,044 8 24,684 Other indefinite-lived intangible assets — — 833 — 833 Amortizable intangible assets, net 583 9,884 1,926 2 12,395 As of December 31, 2013 Property and equipment, net $82,457 $6,402 $1,596 $8,473 $98,928 Broadcast licenses 381,836 — — — 381,836 Goodwill 3,917 17,550 899 8 22,374 Other indefinite-lived intangible assets — — 868 — 868 Amortizable intangible assets, net 661 8,119 11 2 8,793 The table below presents financial information for each operating segment as of December 31, 2014, 2013 and 2012 with a comparison of the resultsunder the prior composition of our operating segments as compared to the new composition: Year Ending December 31, 2012 2013 2014 As ReportedOriginal As Updated New As ReportedOriginal As UpdatedNew As updatedOriginal As Reported New (Dollars in Thousands) Revenues by Segment: Net Broadcast Revenue $183,180 $187,640 $183,697 $188,544 $187,815 $192,923 Net Digital Media Revenue 33,474 28,166 40,906 35,156 55,519 46,862 Net Publishing Revenue 12,525 13,373 12,331 13,234 23,202 26,751 Total Net Revenue $229,179 $229,179 $236,934 $236,934 $266,536 $266,536 Operating expenses by segment: Broadcast Operating Expenses $120,772 $126,514 $122,862 $129,857 $130,875 $138,564 Digital Media Operating Expenses 25,145 22,848 28,378 25,741 41,067 36,232 Publishing Operating Expenses 12,288 13,339 13,289 14,280 23,052 26,143 Unallocated Corporate Expenses 18,892 14,396 21,430 16,081 23,037 17,092 $177,097 $177,097 $185,959 $185,959 $218,031 $218,031 Net operating income (loss) before depreciation, amortization,impairments and (gain) loss on the sale or disposal of assets $52,082 $52,082 $50,975 $50,975 $48,505 $48,505 NOTE 17. SUBSEQUENT EVENTS On February 20, 2015, we entered into an APA to acquire radio station WDDZ-AM in Pittsburg, Pennsylvania for $1.0 million in cash. The purchase issubject to the approval of the FCC and is expected to close in the second quarter of 2015. On February 20, 2015, we entered into an APA to acquire radio station WDWD-AM in Atlanta, Georgia for $2.8 million in cash. The purchase is subjectto the approval of the FCC and is expected to close in the second quarter of 2015. On March 5, 2015, we announced a quarterly distribution in the amount of $0.0650 per share on Class A and Class B common stock. The quarterlydistribution will be paid on March 31, 2015 to all Class A and Class B common stockholders of record as of March 17, 2015. Subsequent events reflect all applicable transactions through the date of the filing. 144Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures designed to ensure that information required tobe disclosed in our reports pursuant to the Exchange Act, is recorded accurately, processed, summarized and reported within the time periods specified in theSEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls andprocedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controlsand procedures. As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with theparticipation of senior management, including our Chief Executive Officer and our Chief Financial Officer, of our disclosure controls and procedures, as suchterm is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report. Based on thisevaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at thereasonable assurance level as of the end of the period covered by this report. (b) Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with theparticipation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal controlover financial reporting as of December 31, 2014 based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committeeof Sponsoring Organizations of the Treadway Commission using the 2013 framework. Management has excluded Eagle Publishing from its assessment ofinternal control over financial reporting as of December 31, 2014, because it was acquired by the Company in January 2014. Eagle Publishing is a whollyowned subsidiary whose total assets and net income represent approximately 2% and (32)%, respectively, of the related consolidated financial statementamounts as of and for the year ended December 31, 2014. Based on our evaluation under that framework and applicable Securities and Exchange Commission rules, our management concluded that our internalcontrol over financial reporting was effective as of December 31, 2014. (c) Attestation Report of Registered Public Accounting Firm. The effectiveness of our internal control over financial reporting as of December 31, 2014has been audited by Singer Lewak LLP, an independent registered public accounting firm, as stated in their report which is included herein. (d) Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during our fourthfiscal quarter for 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 145Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and StockholdersSalem Media Group, Inc. We have audited Salem Media Group, Inc. and subsidiaries’ (collectively, the “Company”) internal control over financial reporting as of December 31, 2014,based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission in 2013. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over FinancialReporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. As described in Management’s Annual Report on Internal Control Over Financial Reporting, management has excluded Eagle Publishing from its assessmentof internal control over financial reporting as of December 31, 2014, because it was acquired by the Company in a business combination in January 2014. Wehave also excluded Eagle Publishing from our audit of internal control over financial reporting. Eagle Publishing is a wholly owned subsidiary whose totalassets and net income represent approximately 2% and (32)%, respectively, of the related consolidated financial statement amounts as of and for the yearended December 31, 2014. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal controlover financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteriaestablished in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof the Company as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of thethree years in the period ended December 31, 2014 and our report dated March 13, 2015 expressed an unqualified opinion. /s/ SingerLewak LLPLos Angeles, CaliforniaMarch 13, 2015 146Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 9B. OTHER INFORMATION. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this item is incorporated by reference to our Definitive Proxy Statement under the heading “DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT,” expected to be filed within 120 days of our fiscal year end. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference to our Definitive Proxy Statement under the heading “EXECUTIVECOMPENSATION,” expected to be filed within 120 days of our fiscal year end. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by this item is incorporated by reference to our Definitive Proxy Statement under the heading “SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS” expected to be filed within 120 days of our fiscalyear end. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. The information required by this item relating to “Certain Relationships and Related Party Transactions” is incorporated by reference to our DefinitiveProxy Statement under the heading “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” expected to be filed within 120 days of our fiscal yearend. The information required by this item relating to “Director Independence” is incorporated by reference to our Definitive Proxy Statement under theheading “DIRECTOR INDEPENDENCE” expected to be filed within 120 days of our fiscal year end. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information required by this item is incorporated by reference to our Definitive Proxy Statement under the heading “PRINCIPAL ACCOUNTINGFEES AND SERVICES,” expected to be filed within 120 days of our fiscal year end. 147Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) 1. Financial Statements. The financial statements required to be filed hereunder are included in Item 8. 2. Financial Statement Schedule. The following financial statement schedule for the years ended December 31, 2012, 2013 and 2014 is filed as part of thisreport and should be read in conjunction with the consolidated financial statements. SALEM COMMUNICATIONS CORPORATIONSchedule II – Valuation & Qualifying Accounts (Dollars in thousands) Additions Balance at Charged to Deductions Beginning of Cost and Bad Debt Balance at Description Period Expense Write-offs End of Period Year Ended December 31, 2012 Allowance for Doubtful Accounts 9,300 2,554 (2,928) 8,926 Year Ended December 31, 2013 Allowance for Doubtful Accounts 8,926 3,456 (1,573) 10,809 Year Ended December 31, 2014 Allowance for Doubtful Accounts and Sales Returns 10,809 3,026 (1,108) 12,727 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not requiredunder the related instructions or are inapplicable, and therefore have been omitted. 3. Exhibits. EXHIBIT LIST Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith3.01 Amended and Restated Certificate of Incorporation ofthe Company. 8-K 333-41733-29 04/14/99 3.1 3.02 Certificate of Amendment of Certificate ofIncorporation of the Company 8-K 000-26497 02/23/15 3.1 3.03 Second Amended and Restated Bylaws of theCompany 8-K 000-26497 02/23/15 3.3 4.01 Specimen of Class A common stock certificate. S-1/A 333-76649 DeclaredEffective06/30/99 4.09 148Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith4.02 Indenture, dated as of December 1, 2009, among SalemCommunications Corporation, the subsidiary guarantors party theretoand The Bank of New York Mellon Trust Company, N.A., as Trustee andCollateral Agent. 8-K 000-26497 12/03/09 4.1 4.03 Form of 9.625% Senior Secured Second Lien Notes due 2016 (filed aspart of Exhibit 4.21). 8-K 000-26497 12/03/09 4.2 4.04 Second Lien Security Agreement, dated as of December 1, 2009, amongSalem Communications Corporation, the subsidiary guarantors partythereto and The Bank of New York Mellon Trust Company, N.A., asCollateral Agent. 8-K 000-26497 12/03/09 4.3 4.05 Registration Rights Agreement, dated as of December 1, 2009, amongSalem Communications Corporation, the subsidiary guarantors partythereto and The Bank of New York Mellon Trust Company, N.A., asCollateral Agent and Banc of America Securities LLC, as Representativeof the Initial Purchasers. 8-K 000-26497 12/03/09 4.4 4.06 Third Supplemental Indenture, dated as of November 30, 2009, amongSalem Communications Holding Corporation, the subsidiary guarantorsparty thereto and The Bank of New York Mellon Trust Company, N.A.,as Trustee. 8-K 000-26497 12/03/09 4.5 10.01 Employment Agreement, dated July 1, 2013 between SalemCommunications Holding Corporation and Edward G. Atsinger III. 8-K 000-26497 03/11/13 99.1 149Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.02 Employment Agreement, dated July 1, 2013 between SalemCommunications Holding Corporation and Stuart W. Epperson. 10-Q 000-26497 08/09/13 10.02.07 10.03 Employment Agreement dated January 1, 2014 between SalemCommunications Holding Corporation and Evan D. Masyr. 8-K 000-26497 12/17/13 99.5 10.04 Employment Agreement dated January 1, 2014 between SalemCommunications Holding Corporation and David Santrella. 8-K 000-26497 12/17/13 99.3 10.05 Employment Agreement dated January 1, 2014 between SalemCommunications Holding Corporation and Francis W. Wright. 8-K 000-26497 12/17/13 99.2 10.06 Employment Agreement, effective as of September 15, 2014, betweenSalem Communications Holding Corporation and David A.R. Evans. 8-K 000-26497 09/19/14 99.1 10.07.01 Antenna/tower/studio lease between Common Ground Broadcasting,Inc. (KKMS-AM/Eagan, Minnesota) and Messrs. Atsinger and Eppersonexpiring in 2016. S-4 333-41733-29 01/29/98 10.05.04 10.07.02 Antenna/tower lease (KFAX-FM/Hayward, California) and SalemBroadcasting Company, a partnership consisting of Messrs. Atsingerand Epperson, expiring in 2013. S-4 333-41733-29 01/29/98 10.05.06 10.07.03 Antenna/tower lease between Inspiration Media, Inc. (KGNW-AM/Seattle, Washington) and Messrs. Atsinger and Epperson expiringin 2012. S-4 333-41733-29 01/29/98 10.05.08 150Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.07.04 Antenna/tower lease between Inspiration Media, Inc. (KLFE-AM/Seattle, Washington) and The Atsinger Family Trust and StuartW. Epperson Revocable Living Trust expiring in 2014. S-4 333-41733-29 01/29/98 10.05.09 10.07.05 Antenna/tower/studio lease between Pennsylvania Media Associates,Inc. (WNTP-AM/WFIL-AM/Philadelphia, Pennsylvania) and TheAtsinger Family Trust and Stuart W. Epperson Revocable LivingTrust expiring 2014. S-4 333-41733-29 01/29/98 10.05.11.02 10.07.06 Antenna/tower lease between New Inspiration Broadcasting Co., Inc.:as successor in interest to Radio 1210, Inc. (KPRZ-AM/San Marcos,California) and The Atsinger Family Trust expiring in 2028. S-4 333-41733-29 01/29/98 10.05.12 10.07.07 Antenna/tower lease between Salem Media of Texas, Inc. (KSLR-AM/San Antonio, Texas) and Atsinger Family Trust/Epperson FamilyLimited Partnership expiring 2009. 10-K 000-26497 03/30/00 10.05.13 10.07.08 Antenna/tower lease between Salem Media of Colorado, Inc. (KNUS-AM/Denver-Boulder, Colorado) and Messrs. Atsinger and Eppersonexpiring 2016. S-4 333-41733-29 01/29/98 10.05.15 10.07.09 Antenna/tower lease between Salem Media of Colorado, Inc. andAtsinger Family Trust/Epperson Family Limited Partnership (KRKS-AM/KBJD-AM/Denver, Colorado) expiring 2009. 10-K 000-26497 03/30/00 10.05.16 151Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.07.10 Antenna/tower lease between Salem Media of Oregon, Inc. (KPDQ-AM/FM/Portland, Oregon), and Messrs. Atsinger and Eppersonexpiring 2012. S-4 333-41733-29 01/29/98 10.05.17.02 10.07.11 Antenna/tower lease between Salem Media of Pennsylvania, Inc.(WORD-FM/WPIT-AM/Pittsburgh, Pennsylvania) and The AtsingerFamily Trust and Stuart W. Epperson Revocable Living Trustexpiring 2013. S-4 333-41733-29 01/29/98 10.05.18 10.07.12 Antenna/tower lease between Salem Media of Texas, Inc. (KSLR-AM/San Antonio, Texas) and Epperson-Atsinger 1983 Family Trustexpiring 2017. S-4 333-41733-29 01/29/98 10.05.19 10.07.12.01 Amendment to Lease to Antenna/tower lease between Salem Media ofTexas, Inc. (KSLR-AM/San Antonio, TX) and Epperson-Atsinger1983 Family Trust expiring 2017. 10-K 000-26497 03/17/08 10.06.13.01 10.07.12.02 Second Amendment to Lease to Antenna/tower lease between SalemMedia of Texas, Inc. (KSLR-AM/San Antonio, TX) and Epperson-Atsinger 1983 Family Trust expiring 2017. 10-K 000-26497 03/17/08 10.06.13.02 10.07.13 Antenna/tower lease between South Texas Broadcasting, Inc. (KNTH-AM/Houston-Galveston, Texas) and Atsinger Family Trust and StuartW. Epperson Revocable Living Trust expiring 2015. S-4 333-41733-29 01/29/98 10.05.20 10.07.14 Antenna/tower lease between New Inspiration Broadcasting Co., Inc.successor in interest to Vista Broadcasting, Inc. (KFIA-AM/Sacramento, California) and The Atsinger Family Trust and StuartW. Epperson Revocable Living Trust expiring 2016. S-4 333-41733-29 10/29/98 10.05.21 152Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.07.15 Antenna/tower lease between Inspiration Media of Texas, Inc. (KTEK-AM/Alvin, Texas) and the Atsinger Family Trust and The Stuart W.Epperson Revocable Living Trust expiring 2018. 10-K 000-26497 03/31/99 10.05.23 10.07.16 Studio building lease between Salem Radio Properties, Inc. and ThomasH. Moffit Jr. 10-K 000-26497 03/31/06 10.05.24 10.07.17 Antenna/tower lease between Pennsylvania Media Associates Inc.(WTLN-AM/ Orlando, Florida) and Atsinger Family Trust and Stuart W.Epperson, revocable living trust expiring 2045. 10-K 000-26497 03/16/07 10.05.25 10.07.18 Lease Agreement, dated April 8, 2008, between Inspiration Media, Inc.(KDOW-AM/Palo Alto, CA) and Principal Shareholders expiring 2023. 8-K 000-26497 04/14/08 10.06.20 10.07.19 Lease Agreement, dated April 8, 2008, between New InspirationBroadcasting Company, Inc. (KFAX-AM/San Francisco, CA) andPrincipal Shareholders expiring 2023. 8-K 000-26497 04/14/08 10.06.21 10.07.20 Lease Agreement, dated April 8, 2008, between Inspiration Media, Inc.(KLFE-AM/Seattle, WA) and Principal Shareholders expiring 2023 8-K 000-26497 04/14/08 10.06.22 10.07.21 Lease Agreement, dated April 8, 2008, between South TexasBroadcasting, Inc. (KNTH-AM/Houston, TX) and Principal Shareholdersexpiring 2023. 8-K 000-26497 04/14/08 10.06.23 153Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.07.22 Lease Agreement, dated April 8, 2008, between Salem Media of Oregon,Inc. (KPDQ-AM/Portland, OR) and Principal Shareholders expiring2023. 8-K 000-26497 04/14/08 10.06.24 10.07.23 Lease Agreement, dated April 8, 2008, between Common GroundBroadcasting, Inc. (KPXQ-AM/Glendale, AZ) and PrincipalShareholders expiring 2023. 8-K 000-26497 04/14/08 10.06.25 10.07.24 Lease Agreement, dated April 8, 2008, between Salem Media of Texas,Inc. (KSLR-AM/San Antonio, TX) and Principal Shareholders expiring2023. 8-K 000-26497 04/14/08 10.06.26 10.07.25 Lease Agreement, dated April 8, 2008, between Pennsylvania MediaAssociates, Inc. (WFIL-AM and WNTP-AM/Philadelphia, PA) andPrincipal Shareholders expiring 2023. 8-K 000-26497 04/14/08 10.06.27 10.08.01 Asset Purchase Agreement, dated August 18, 2006, by and betweenCaron Broadcasting, Inc. and Chesapeake-Portsmouth BroadcastingCorporation (WJGR-AM, Jacksonville, Florida, and WZNZ-AM,Jacksonville, Florida). 10-Q 000-26497 11/09/06 10.06.02 10.08.02 Asset Purchase Agreement, dated September 14, 2006, by and betweenCaron Broadcasting, Inc. and Chesapeake-Portsmouth BroadcastingCorporation (WZAZ-AM, Jacksonville, Florida). 10-Q 000-26497 11/09/06 10.06.03 154Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.08.03 Local Programming and Marketing Agreement, dated September 14,2006, by and between Caron Broadcasting, Inc. and Chesapeake-Portsmouth Broadcasting Corporation (WJGR-AM, Jacksonville,Florida, and WZNZ-AM, Jacksonville, Florida). 10-Q 000-26497 11/09/06 10.06.04 10.08.04 Local Programming and Marketing Agreement, dated September 14,2006, by and between Caron Broadcasting, Inc. and Chesapeake-Portsmouth Broadcasting Corporation (WZAZ-AM, Jacksonville,Florida). 10-Q 000-26497 11/09/06 10.06.05 10.09.01 Amended and Restated 1999 Stock Incentive Plan (as amended andrestated through June 3, 2009). 8-K 000-26497 06/09/09 10.08.04.01 10.09.02 Form of stock option grant for Amended and Restated 1999 StockIncentive Plan. 10-K 000-26497 03/16/05 10.08.02 10.09.03 Form of restricted stock option grant for Amended and Restated 1999Stock Incentive Plan. 10-Q 000-26497 11/09/05 10.01 10.10 Management Services Agreement by and among Salem and SalemCommunications Holding Corporation, dated August 25, 2000(incorporated by reference to previously filed exhibit 10.11). 10-Q 000-26497 05/15/01 10.11 10.11 Intercreditor Agreement dated as of December 1, 2009, among SalemCommunications Corporation, the subsidiary guarantors party thereto,Bank of America, N.A., as first lien agent and control agent and theCollateral Agent. 8-K 000-26497 12/03/09 10.1 155Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.12.01 Credit Agreement, dated as of December 1, 2009, by and among SalemCommunications Corporation, as the borrower, Bank of America, N.A.,as Administrative Agent, Swingline Lender, L/C Issuer and a Lender, theother Lenders party thereto, Banc of America Securities LLC, as JointLead Arranger and Sole Book Manager, Barclays Capital and INGCapital LLC, as Joint Lead Arrangers, Barclays Capital, as SyndicationAgent, and ING Capital LLC, as Documentation Agent. 8-K 000-26497 12/03/09 10.2 10.12.02 Amendment No. 1 and Waiver to Credit Agreement dated as ofNovember 1, 2010, among Salem Communications Corporation, Bankof America, N.A., as Administrative Agent, Swing Line Lender and L/CIssuer, and each lender party thereto. 8-K 000-26497 11/14/10 99.2 10.12.03 Second Amendment to the Credit Agreement dated as of November 15,2011 by and between Salem Communications Corporation and WellsFargo Bank, N.A. 8-K 000-26497 11/21/11 10.1 10.13 First Lien Security Agreement, dated as of December 1, 2009, by andamong Salem Communications Corporation, the subsidiary guarantorsparty thereto and Bank of America, N.A., as Administrative Agent. 8-K 000-26497 12/03/09 10.3 156Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.14 Increase Joinder dated as of November 1, 2010 among SalemCommunications Corporation, Wells Fargo Bank, National Association,the Guarantors party thereto, and Bank of America, N.A., asAdministrative Agent. 8-K 000-26497 11/4/10 99.1 10.15 Affiliate Line of Credit, dated as of November 17, 2011 between SalemCommunications Corporation and Edward G. Atsinger III. 10-K 000-26497 03/9/12 10.16 10.16 Affiliate Line of Credit, dated as of November 17, 2011 between SalemCommunications Corporation and Stuart W. Epperson. 10-K 000-26497 03/9/12 10.16 10.17.01 Affiliate Line of Credit dated as of May 1, 2012 between SalemCommunications Corporation and Roland S. Hinz. 10-Q 000-26497 08/09/12 10.19 10.17.02 Amended and Restated Affiliate Line of Credit, dated as of September12, 2012 between Salem Communications Corporation and Roland S.Hinz. 8-K 000-26497 09/17/12 99.1 10.18.01 Business Loan Agreement dated as of May 21, 2012 between SalemCommunications Corp. and First California Bank. 10-Q 000-26497 08/09/12 10.20.01 10.18.02 Promissory Note dated May 21, 2012 between Salem CommunicationsCorporation and First California Bank. 10-Q 000-26497 08/09/12 10.20.02 10.18.03 Subordination Agreement dated as of May 21, 2012 between SalemCommunications Corporation, First California Bank and Wells FargoBank, National Association. 10-Q 000-26497 08/09/12 10.20.03 157Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.18.04 Subordination Agreement dated as of May 21, 2012 between SalemCommunications Corporation, Edward G. Atsinger III and Wells FargoBank, National Association. 10-Q 000-26497 08/09/12 10.20.04 10.18.05 Subordination Agreement dated as of May 21, 2012 between SalemCommunications Corporation, Stuart W. Epperson and Wells FargoBank, National Association. 10-Q 000-26497 08/09/12 10.20.05 10.18.06 Subordination Agreement dated as of May 21, 2012 between SalemCommunications Corporation, Roland Hinz and Wells Fargo Bank,National Association. 10-Q 000-26497 08/09/12 10.20.06 10.18.07 Commercial Guaranty dated May 21, 2012 between SalemCommunications Corporation, Atsinger Family Trust and FirstCalifornia Bank. 10-Q 000-26497 08/09/12 10.20.07 10.18.08 Commercial Guaranty dated May 21, 2012 between SalemCommunications Corporation, Edward G. Atsinger III and FirstCalifornia Bank. 10-Q 000-26497 08/09/12 10.20.08 10.18.09 Commercial Guaranty dated May 21, 2012 between SalemCommunications Corporation, The Stuart W. Epperson RevocableLiving Trust under agreement dated January 14, 1993, as amended andFirst California Bank. 10-Q 000-26497 08/09/12 10.20.09 10.18.10 Commercial Guaranty dated May 21, 2012 between SalemCommunications Corporation, Stuart W. Epperson and First CaliforniaBank. 10-Q 000-26497 08/09/12 10.20.10 158Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith10.19.01 Credit Agreement, dated as of March 14, 2013, by and among SalemCommunications Corporation, as the borrower, Wells Fargo Bank,National Association, as Administrative Agent, Swing Line Lender andL/C Issuer and the other Lenders party thereto, Wells Fargo Securities,LLC, SunTrust Robinson Humphrey, Inc., and Rabobank, N.A., as JointLead Arrangers and Joint Bookrunners, SunTrust Bank, as SyndicationAgent, and Rabobank, N.A. as Documentation Agent. 8-K 000-26497 03/14/13 10.1 10.19.02 Security Agreement, dated as of March 14, 2013, by and among SalemCommunications Corporation, as Borrower and the Guarantors partythereto and Wells Fargo Bank, National Association, as AdministrativeAgent. 8-K 000-26497 03/14/13 10.2 10.20 Separation and General Release Agreement with Frank Wright - - - - X21 Subsidiaries of Salem Communications Corporation. - - - - X23.1 Consent of SingerLewak LLP, Independent Registered PublicAccounting Firm. - - - - X23.2 Consent of Bond & Pecaro, Inc., dated January 8, 2015. - - - - X23.4 Consent of Noble Financial Capital Markets Capital Markets datedMarch 4, 2015. - - - - X 159Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit Number Exhibit Description Form File No. Date of First Filing Exhibit Number Filed Herewith31.1 Certification of Edward G. Atsinger III Pursuant to Rules 13a-14(a)and 15d-14(a) under the Exchange Act. - - - - X31.2 Certification of Evan D. Masyr Pursuant to Rules 13a-14(a) and15d-14(a) under the Exchange Act. - - - - X32.1 Certification of Edward G. Atsinger III Pursuant to 18 U.S.C.Section 1350. - - - - X32.2 Certification of Evan D. Masyr Pursuant to 18 U.S.C. Section 1350. - - - - X101 The following financial information from the Annual Report onForm 10K for the fiscal year ended December 31, 2014, formattedin XBRL (Extensible Business Reporting Language) and furnishedelectronically herewith: (i) the Consolidated Balance Sheets (ii)Consolidated Statements of Operations (iii) the ConsolidatedStatement of Stockholders’ Equity (iv) the ConsolidatedStatements of Cash Flows (v) the Notes to the ConsolidatedFinancial Statements. - - - - X 160Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. SALEM COMMUNICATIONS CORPORATIONMarch 13, 2015 By: /s/ EDWARD G. ATSINGER III Edward G. Atsinger III Chief Executive OfficerMarch 13, 2015 By: /s/ EVAN D. MASYR Evan D. Masyr Executive Vice President and Chief Financial Officer 161Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated. Signature Title Date /s/ EDWARD G. ATSINGER III Chief Executive Officer (Principal Executive Officer) March 13, 2015Edward G. Atsinger III /s/ EVAN D. MASYR Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) March 13, 2015Evan D. Masyr /s/ STUART W. EPPERSON Chairman March 13, 2015Stuart W. Epperson /s/ DAVID DAVENPORT Director March 13, 2015David Davenport /s/ ROLAND S. HINZ Director March 13, 2015Roland S. Hinz /s/ JONATHAN VENVERLOH Director March 13, 2015Jonathan Venverloh /s/ RICHARD A. RIDDLE Director March 13, 2015Richard A. Riddle /s/ JAMES KEET LEWIS Director March 13, 2015James Keet Lewis 162Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT INDEX Exhibit Number Description of Exhibits10.20 Separation and General Release Agreement with Frank Wright21 Subsidiaries of Salem Media Group Incorporated.23.1 Consent of SingerLewak LLP, Independent Registered Public Accounting Firm.23.3 Consent of Bond & Pecaro, Inc. 23.4 Consent of Noble Financial Capital Markets31.1 Certification of Edward G. Atsinger III Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.31.2 Certification of Evan D. Masyr Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.32.1 Certification of Edward G. Atsinger III Pursuant to 18 U.S.C. Section 1350.32.2 Certification of Evan D. Masyr Pursuant to 18 U.S.C. Section 1350.101 The following financial information from the Annual Report on Form 10K for the fiscal year ended December 31, 2014, formatted inXBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets (ii)Consolidated Statements of Operations (iii) the Consolidated Statement of Stockholders’ Equity (iv) the Consolidated Statements ofCash Flows (v) the Notes to the Consolidated Financial Statements. 163 Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 10.20 Separation and General Releasewith ADEA Requirements This Separation and General Release Agreement (“Agreement”) is entered into by and between Francis W. Wright (“Employee”) and Salem CommunicationsHolding Corporation and its parent subsidiaries or affiliated companies (“Employer”). For and in consideration of the promises set forth below, Employee andEmployer agree as follows: 1.After seven (7) days of the execution of this Agreement, Employer will pay Employee severance in the amount of Two Hundred Thirty SevenThousand and Five Hundred Dollars ($237,500) less applicable withholdings, payable in 6 equal consecutive monthly payments, on or before the15th day of each applicable month. Employee shall be entitled to COBRA benefits as set forth in the notice of COBRA rights Employee received atthe time of Employee’s initial employment. Employer further agrees not to contest Employee’s eligibility for unemployment insurance benefits. 2.In exchange for the benefits set forth herein, Employee hereby releases and forever discharges Employer, its parent, and each of its and theirsubsidiaries, affiliates, agents, directors, officers, shareholders, employees, attorneys, successors, and assigns (“Releasees”) from any and all claims,obligations, demands and causes of action of any and every kind that Employee may have, or has ever had, against Releasees, including withoutlimitation, any and all claims arising in contract, tort, and statute for damages, declaratory or injunctive relief, or attorneys’ fees that are in any wayrelated to Employee’s employment by or termination from Employer. This includes, but is not limited to, claims arising under the federal, state orlocal laws prohibiting employment discrimination, including claims under the Age Discrimination in Employment Act (“ADEA”). 3.It is understood and agreed that this is a full and final release applying not only to all claims that are presently known, but also to all claims asdefined in the above paragraph that are presently unknown, undisclosed and unanticipated by Employee. Employee expressly and knowinglywaives any and all rights or benefits that Employee may have in the future under the provisions of California Civil Code Section 1542 which states: A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executingthe release, which if known by him or her must have materially affected his or her settlement with the debtor. 4.In accordance with the Older Workers Benefit Protection Act of 1990, Employee is aware of the following with respect to the Employee’s release ofany claims under ADEA: (a)Employee has the right to consult with an attorney before signing this Agreement; Page 1 of 2Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (b)Employee has twenty-one (21) days to consider this Agreement and Employee’s release of any ADEA claim; and (c)Employee has seven (7) days after signing this Agreement to revoke Employee’s release as to any ADEA claim. 5.This Agreement sets forth the sole and entire agreement between Employer and Employee and supersedes any and all prior agreements, negotiations,and discussions, whether written or oral between the parties with respect to the subject matter covered in this Agreement. 6.The provisions of this Agreement are severable, and if any part of it is found to be invalid, void, or unenforceable, the remaining provisions shallnevertheless continue in full force without being impaired or invalidated in any way. 7.It is understood and agreed that this is a compromise settlement of an existing or potential claim and that the furnishing by Employer of theconsideration for this Agreement shall not be deemed or construed as an admission of liability or wrongdoing. The liability for any and all claims isexpressly denied by Employer. 8.Employee affirms and represents that Employee has carefully read and considered the terms of this Agreement. Employee further affirms thatEmployee is entering into this Agreement freely and voluntarily, that Employee has been given the opportunity, whether exercised or not, to consultan attorney, and that Employee is not acting under any other inducement, or under any coercion, threat or duress. Employee acknowledges thatEmployee fully understands the meaning and legal effect of this Agreement. 9.Employer and Employee agree that the fact and terms of this Agreement shall be confidential and are not to be disclosed to any party except asprovided in the above paragraph. EMPLOYER EMPLOYEESalem Communications Holding Corporation /s/Edward G. Atsinger III /s/Francis W. WrightEdward G. Atsinger III Francis W. Wright Chief Executive Officer 12/31/14 12/25/14Date Date Page 2 of 2Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 21 SUBSIDIARIES OF SALEM MEDIA GROUP, INC.Name State of FormationAir Hot, Inc. DelawareBison Media, Inc. ColoradoCaron Broadcasting, Inc. OhioCommon Ground Broadcasting, Inc. OregonEagle Products, LLC DelawareInspiration Media, Inc. WashingtonInspiration Media of Texas, LLC TexasNew Inspiration Broadcasting Company, Inc. CaliforniaNI Acquisition Corporation CaliforniaPennsylvania Media Associates, Inc. PennsylvaniaReach Satellite Network, Inc. TennesseeSalem Consumer Products, Inc. DelawareSalem Communications Holding Corporation DelawareSalem Media Group, LLC DelawareSalem Media of Colorado, Inc. ColoradoSalem Media of Hawaii, Inc. DelawareSalem Media of Illinois, LLC DelawareSalem Media of Kentucky, Inc. KentuckySalem Media of New York, LLC DelawareSalem Media of Ohio, Inc. OhioSalem Media of Oregon, Inc. OregonSalem Media of Texas, Inc. TexasSalem Media of Virginia, Inc. VirginiaSalem Media Representatives, Inc. TexasSalem Publishing, Inc. TennesseeSalem Radio Network Incorporated DelawareSalem Radio Operations, LLC DelawareSalem Radio Properties, Inc. DelawareSalem Satellite Media, LLC DelawareSalem Web Network, LLC DelawareSCA License Corporation DelawareSCA-Palo Alto, LLC DelawareSouth Texas Broadcasting, Inc. TexasSRN News Network, Inc. TexasSRN Store, Inc. Texas Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement (Nos. 333-40494, 333-113794, 333-125056 and 333-182807) on Form S-8 and inRegistration Statement No. 333-86580 on Form S-3 of Salem Media Group, Inc. and subsidiaries of our reports dated March 13, 2015, relating to our audits ofthe consolidated financial statements, the financial statement schedule and internal control over financial reporting, which appear in this Annual Report onForm 10-K of Salem Media Group, Inc. and subsidiaries for the year ended December 31, 2014. SingerLewak LLP Los Angeles, California March 13, 2015 Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 23.2 [Bond & Pecaro, Inc. letterhead] January 8, 2015 VIA E-MAIL: evanm@salem.cc Mr. Evan D. MasyrSenior Vice President and Chief Financial OfficerSalem Communications Corp.4880 Santa Rosa Road #300Camarillo, CA 93012 Dear Mr. Masyr: Bond & Pecaro, Inc. hereby grants permission to Salem Communications Corp. to use the Bond & Pecaro, Inc. name and data from our work product as ofDecember 31, 2014 in public filings with the Securities and Exchange Commission. I hope that this letter is responsive to your needs at this time. Please do not hesitate to let us know if you need anything additional. Sincerely, /s/ Timothy S. Pecaro Timothy S. Pecaro cc. Jim Brown Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 23.4 [Noble Financial Capital Markets letterhead] March 4, 2015 Mr. Evan D. MasyrExecutive Vice President & Chief Financial OfficerSalem Media Group, Inc.4880 Santa Rosa RoadCamarillo, CA 93012 PERSONAL & CONFIDENTIAL Dear Mr. Masyr: This letter is to confirm that Salem Media Group, Inc. is granted permission to disclose through its annual 10K filing with the Securities and ExchangeCommission (“SEC”) on or about March 10, 2015, the name of “Noble Financial Capital Markets” in reference to Noble’s ASC 350 impairment analysis ofSalem’s goodwill and other intangible assets for its informational purposes only. Noble Financial Capital Markets /s/ Robert W. Campbell Robert W. Campbell Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 31.1 I, Edward G. Atsinger III, certify that: 1.I have reviewed this annual report on Form 10-K of Salem Media Group, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15(d)-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 13, 2015 /s/ EDWARD G. ATSINGER III Edward G. Atsinger III Chief Executive Officer Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 31.2 I, Evan D. Masyr, certify that: 1.I have reviewed this annual report on Form 10-K of Salem Media Group, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15(d)-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 13, 2015 /s/ EVAN D. MASYR Evan D. Masyr Executive Vice President and Chief Financial Officer Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 32.1 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certifies, in his capacity as Chief Executive Officer of Salem Media Group, Inc. (the “Company”), for purposes of 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on his knowledge: ·the Annual Report of the Company on Form 10-K for the period ended December 31, 2014 (the “Report”) fully complies with the requirements ofSection 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and ·the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 13, 2015 By: /s/ EDWARD G. ATSINGER III Edward G. Atsinger III Chief Executive Officer Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 32.2 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certifies, in his capacity as Executive Vice President and Chief Financial Officer of Salem Media Group, Inc. (the “Company”), forpurposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on his knowledge: ·the Annual Report of the Company on Form 10-K for the period ended December 31, 2014 (the “Report”) fully complies with the requirementsof Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and ·the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Dated: March 13, 2015 By: /s/ EVAN D. MASYR Evan D. Masyr Executive Vice President and Chief Financial Officer Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Source: SALEM MEDIA GROUP, INC. /DE/, 10-K, March 13, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

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