Salem Media Group Inc (SALM) 2002 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Salem Communications fourth quarter and full year 2002 teleconference call.

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At this time I would like to turn the conference call over to Ms. Amanda Larson (ph), manager of investor relations.

Please go ahead.

Thank you, operator.

Welcome, everyone.

Thank you for joining us for our fourth quarter 2002 conference call.

Before I turn the call over to Edward Atsinger, I would like to advise you this conference call may contain forward-looking statements within the meanings of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Statements in this conference call that address results or developments that Salem Communications expects or anticipates that will or may occur in the future are forward-looking statements.

These statements regarding the future plans, events, financial results, prospects or performance of Salem Communications are predictions that involve risks and uncertainties, and actual results may vary materially.

We refer you to Salem's public filings made with the SEC and to the company's press release issued March 5, 2003.

For important risk factors you should consider and evaluate this information.

The forward-looking statements on this call speak only as the date here of and the company undertakes no obligation to update such statements to reflect future events or circumstances.

I now would like to turn the call over to Mr. Edward Atsinger, president and chief executive officer of Salem.

Welcome, everyone.

As usual I'mjoined here by David Evans, our CFO.

Let me start by discussing our fourth quarter 2002 operating results.

On balance we had a good year, however, there were disappointments, principally we were $600,000 short of our revenue guidance and $800,000 short of our BCF guidance.

The positive news is that we did meet our EBITDA guidance of $11.5 million.

Let me talk you through these variances from guidance.

In the area of revenue we had a short fall from guidance of $600,000.

Most of this was at our national division, Salem Radio Network and was due to a combination of some pre-war apprehensions from certain Infinity (ph) advertisers of ours and perhaps more principally as a result of a competitive impact of rollouts of the syndication of Sean Hannity and Bill O'Reilly, which we consider to be one time anomalies.

Hannity was rolled out late in '01 and gained considerable traction in '02, and O'Reilly was rolled out in '02.

But these roll outs now complete we have gradually begun to rebuild lost affiliates and we project by the end of 2003 we will have rebuilt our affiliate base.

Regarding our broadcast operating expenses, we exceeded our guidance by $200,000 due almost entirely to a one-time legal settlement.

Finally, we were able to reduce our corporate overhead by $600,000.

This was primarily due to a reduction of our 2002 senior management bonus accrual.

We believe it's important that senior operating management of any public company be held accountable for operating results, which includes meeting guidance every quarter.

Since we did not meet our fourth quarter BCF guidance, we made the decision to reduce the cash bonuses of certain senior executives including myself.

As a result of this decision, we met our EBITDA guidance for the quarter.

Now let me touch on some of the more positive aspects of our fourth quarter, 2002 performance.

Our fourth quarter same-station results represent continued strong revenue and broadcast cash flow growth rates, especially at our music stations.

Specifically, same station revenue for the quarter 10.8%, the same station broadcast cash flow growing 19.4%.

For our music stations acquired since 2000, same station revenue for the fourth quarter grew 32.5% with same station broadcast cash flow growing 694%.

Q4 broadcast cash flow for our music stations grew from $189,000 to $1.5 million, and our developing music stations are expected to continue to show improved ratings and revenue and cash flow growth.

Some examples of this continued improvement are already clear in the first quarter of 2003.

For the first quarter of 2003, KLTY in Dallas is pacing 15% ahead of our first quarter 2002, and local advertising for the station increased three times faster than the Dallas market as a whole.

Our FISH (ph) station in Atlanta is pacing 20% ahead of 2002, and our Colorado Springs station ranked number two in market revenue, delivering over 12% of total market revenues for January, 2003.

This equated to a January power ratio in Colorado Springs of 2.6.

So we're pleased by this progress and encouraged by the impact it will make throughout 2003, and it reinforces our commitment to our basic strategy of rolling out these clusters.

We're also seeing improvements in Chicago, which as we mentioned on a previous call has proven to be a challenging market for us.

Local spot revenue is pacing approximately 16% over 2002 and we have selectively reduced certain operating costs.

Chicago is beating its 2003 budget and we believe is on the road to recovery.

Our strong same station results demonstrate how well Salem's position to continue to deliver industry leading growth for the next several years.

Of our 89 stations, we currently have four pending acquisitions, 12 in the start-up stage, 20 in an early development stage, 38 in the developed with upside stage, and 15 that we consider to be fully mature.

Our start-up stations incurred losses totaling $1.3 million in the fourth quarter, and $6.1 million for all of 2002.

The elimination of these start-up losses will substantially improve our EBITA for 2003.

The proportion of start-ups in early development stage stations to fully mature stations continues to be higher than any other radio group that we are aware of and will serve as an important growth catalyst for the company for the next several years.

We have completed our national block programming renewals at a rate increase of slightly above 5% for 2003, with an excess of 95% of the contracts renewed.

This will serve as a strong foundation for 2003.

These revenues are essentially guaranteed and are growing in line with industry advertising revenue projections.

Finally, in December we refinanced $100 million of existing high yield debt refinanced $100 million from 9.5% to 7.75%.

This meaningfully reduces our interest expense and will therefore improve our earnings per share.

Now, let me turn the call over to David Evans for a more detailed discussion of our Q4 results and Q1, 2003 guidance.

Thank you, Ed.

I will briefly review our Q4, 2002 results on an actual and same station basis, and also talk about the first quarter of 2003.

Net broadcast revenue for Q4, 2002, increased 10.9% to 40.6 million, and our broadcast cash flow increased 12.7% to 14.2 million.

Our BCF margin improved slightly to 35%, compared to 34.5% a year ago.

We expect this margin number to continue to improve as our station portfolio develops and matures.

On a same station basis, net broadcast revenue at BCF increased 10.8% and 19.4% respectively.

The total increase includes our music stations, which contributed a 32.5% same-station revenue increase, our core talk stations contributed an 8% same station revenue increase.

Looking a little deeper into the talk, same station increases, we saw a 5% increase in our block programming revenue, a 35% increase in national spot advertising revenue, and an 8% increase in local spot revenue.

Our network revenues as a result of the increased competition decreased by 7%.

These same station numbers include 72 of our radio stations, and 88% of our net broadcast revenue.

EBITDA increased 23.7% to 11.45 million in the fourth quarter of '02, compared to 9.3 million last year.

Turning to our outlook for the first quarter of 2003, we achieved same-station revenue growth of 9% for January, and expect to achieve 9% for February.

Based on our most recent pacings, we expect first quarter same station revenue growth in the high single digits.

We're projecting net broadcast revenue between 38.2 and 38.7 million, and broadcast cash flow between 11.5 and 12 million for the quarter.

EBITDA is projected to be between 7.5 and 8 million.

Our Q1 2003 outlook reflects these primary factors -- continued economic uncertainty due to the situation in the Middle East; increased competition faced by Salem Radio network business; the successful renewal of our national block programming contracts and continued growth from our contemporary Christian music radio stations.

Additionally for 2003, we expect corporate expenses of approximately 16 million and we expect in the area of cap-ex, acquisition and improvement-related cap-ex of approximately 7 million, and maintenance cap-ex of approximately 3 million.

Turning to our balance sheet, the sale of WYGY-FM in Cincinnati at the end of September netted 45 million in proceeds.

Our best 30 million was placed in a like kind of exchange account to be available on a tax efficient basis for any acquisitions within a six-month time frame.

To date, we have invested 10 million in the acquisition of Crosswalk (ph) and of two stations in Nashville, leaving 20 million -- 21 million of cash on hand.

We intend to use 9.3 million of this to finance our recently announced Jacksonville acquisitions and the balance will be used to repay debts.

In December, we issued 100 million of seven and three quarter percent senior subordinated notes.

We have used the net proceeds from this offering together with some funds from our bank credit facility to redeem all of our 9.5% seniorsubordinated notes that were due in 2007.

As of December 31, we had net debt of 309 million with 2002 EBITDA of approximately 38.4 million.

This results in an eight to leverage ratio.

This debt includes 142 million of financing for stick acquisitions that made no EBITDA contribution in 2002.

We believe EBITDA will increase substantially as a result of these developing acquisitions, which in turn will reduce this leverage.

Our bank leverage ratio at December 31 was 6.7 versus a compliance covenant of 7.

Our bond leverage ratio was 7.4 as of December 31.

Therefore, operating within the 75 million incurrence basket on top of the incurrence covenants of 7.0.

I point out that this bond ratio does not allow us to include cash balances of 34 million dollars in calculating this ratio.

If we were to use this cash to pay down debt, our bond ratio would be 6.6.

That concludes our prepared remarks.

At this time, we'll open the floor for questions.

Thank you, sir.

The floor is now open for questions.

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Our first question is coming from Drew Marcus (ph) of Deutsche Banc.

Good afternoon, or good morning for your time.

It's actually James Dix stepping in for Drew.

Two questions -- First, in your first quarter guidance it looks like your operating expenses are a little bit higher than what we might have thought, like a 25 million dollar per quarter rate.

It looks like it's going to be more like, you know, between 26 and-a-half and 27 million.

I just want to see if you can give any more specificity as to where the operating expense growth is coming from and if you can give some guidance as to where you think that might be on a normalized basis, you know, in a couple of quarters or for the year, that would be good.

And then also, it looks like your revenue guidance is pretty good for the first quarter.

I was wondering whether you were seeing any signs of early strength in the second quarter, you know, just from shifting of some advertising perhaps from March to April and May, you know, what pacings you were seeing in those months, and you know, how much inventory has been sold out.

I know it's early for months.

Thanks.

Okay, let me start off just talking about Q1.

One point to note is following a comment letter we received from the FCC, we in response to that letter changed our accounting policy with respect to barter transactions.

Previously our policy was to record those at zero value, i.e., recording neither revenue nor expense.

The FCC has asked us to change that policy such that we record barter at the fair value of the product or service we received.

What that effectively does is gross up both revenue and expenses for the value of that barter.

It has no impact on broadcast cash flow or EBITA or earnings per-share.

It simply grosses up revenue and broadcast operating expenses.

The impact of that in Q4 was to gross up revenue expenses by 1.2 million.

You're also seeing the impact of that in Q1 of 2003 of the revenue and expense numbers that we gave in the guidance.

There's approximately $1 million of barter included in both the revenue number and the expense number, and I think that's the principal difference between the numbers that we put out in our guidance and what you currently have in your model.

Okay.

So you're not seeing any real increased expenses over what you otherwise expected?

No.

I think the principal challenge we're facing is in the area of our Salem Radio Network business.

We saw some softness there at the end of the fourth quarter and that's continuing into the first quarter of '03, and that's reflected in our guidance.

And, you know, as we rebuilt that affiliate base, we expect to see that network business gradually and steadily recover during the course of '03.

David, it's Drew Marcus, I want to ask a follow up question?

Sure.

Can you go into on your balance sheet and your debt leverage where you are relative to covenants and, you know, how comfortable you are with the current leverage?

Yes, as I mentioned on our bank leverage ratio which is the - it's always the bank leverage ratio that's tighter in terms of compliance than the bond ratio.

The bank ratio is at 6.7 compared to a covenant of 7, which is obviously a little tight.

You know, we-- as our cash flow in EBITDA grows and our start-up losses decrease, that ratio will steadily and consistently improve during the course of '03.

The bank ratios do ratchet down during the course of '03 from the current seven ratio to a six ratio, and I'd anticipate either doing a new facility or an amendment to the facility at some point in '03, probably sooner rather than later.

And I think that will address any issues that may come up towards the end of the year on those ratios.

Also in theory, there is some non-strategic assets you could sell to help yourself out with the ratios?

Yeah.

We continue to have a couple of radio stations that are not in a strategic format, but I think the most likely course is, you know, continued growth in our operating cash flows.

Is there any feeling that the - when you look at kind of worse case war contingency plans, is there anything in there that makes you nervous relative to your leverage?

Drew, I think we feel pretty good about our leverage.

The bank facility that we have has been in place for quite a while and it's beginning to-- it has been amended a number of times and historically we have had to redo our facilities every four, five years, and we're beginning to run in on the end of that -- we're beginning to get a bit of age on this one.

So I think we feel okay about it.

We continue to be in close contact with all of our banks and we're fairly comfortable where we are.

Obviously, James asked about early strength in second Q, in Q2 for '03. and clearly the uncertainties in the geopolitical situation always do give one concern and we are operating with, you know, with the contingency plans for whatever may develop.

The stocks, you know, overreaction today seems to be based partially on people's concerns on leverage, but as you said, you feel comfortable that with your relationships with the banks and with your assets that you're comfortable there?

Yes.

That is an accurate statement.

Okay, thank you.

Thank you.

Our next question is coming from Paul Sweeney (ph) of Credit Suisse First Boston.

Thanks very much, good afternoon.

Ed, I was wondering if you can talk a little bit about, you know, what happened on the network side, specifically how many affiliates you lost, when did you lose them?

How many have you recovered?

How do you think about the timing of recovering them?

And is there any change to the economics of bringing an affiliate back on board in terms of does it become less profitable, do you have to cut any type of new deal to get these affiliates back?

As I mentioned, Hannity rolled out -- that program was rolled out in '02.

I think it was late - I mean, late '01, and he really gained traction in '02.

O'Reilly came out in -- Westwood 1 brought O'Reilly out in '02.

We probably lost about 60 affiliates for Mike Gallagher's show and about maybe 30 for Medved.

That is a one time event and you recognize that when they roll these new programs out, they take certain day parts -- Hannity is 3-6 Eastern, O'Reilly is 12-2 Eastern.

A lot of stations will tape delay them and play them at different day parts, but most of them will play them when they're released.

So once you have -- you absorb the blow of the new talent coming out, it really - it doesn't appear that it's going to happen again.

I think that is over.

We are beginning to recover some affiliates.

We had a further complication with Michael Medved's program.

He lost his anchor station in Seattle.

He was on -- he was on a Fisher station, KVI, lost that primarily fourth quarter of last year.

There was a no-compete agreement so he had to originate the program from a Salem facility in Seattle until he could begin January 1 with Intercom, and so now he's on with Intercom station, a very good lineup there and we expect and are seeing already a full recovery there.

So I think it was a - it was probably a one off anomaly.

Even if new talent rolled out, they probably would take Hannity and O'Reilly slots as readily as they would any of ours.

So we don't -- we see recovery setting in, Paul, and think that there will be continued weakness, probably first quarter, maybe a little in the second quarter at the national level.

But it should stabilize and we should see the affiliate base go back up.

I think in terms of affiliates, we were something over 1600 affiliates before these new rollouts occurred.

I think we probably dropped to about 1550 today.

We may be a little bit lower, we have recovered some, but we estimate about 1550 affiliates today.

Yeah.

I think on the long form talk product between the Hannity and the O'Reilly issues, we lost about 90 affiliates and year to date we think we've recovered about 15 of those and continue to work on replacing that affiliate base.

Understand when we say 90 affiliates, there is some double counting there.

Yep.

So some of those -- so when we say we're back to 1550, David's numbers are consistent.

It's just that you have to realize in some cases --we lost both Medved and Gallagher at the same station.

Did the -- in terms of again what I think is impacting the stock to some degree today, is that the surprise on the revenue you have been -- historically your business model is more predictable on the revenue than some of the others.

I guess when you gave the guidance last time you obviously talked about mid-teens same station revenue growth, talking about October being plus 14.

So that really suggests that - and then November was similar --so that suggests that December really weakened, and again, if there was a surprising weakness in December, again, was that on the network or was that more on the spot business or -

It was all on the network.

I think, you know, one of the challenges for us and for the rest of radio is advertisers are booking very late.

You know, when we did our call in November, we gave a range.

We were comfortable with that range and, you know, the network numbers, you know, really suffered during the month of December.

Our folks continue to think they could pull it out because they certainly had the -- they had the inventory.

They just couldn't get the rates they were looking for because of the loss of the affiliates.

And it was -- you know, very much a December issue.

Okay.

Last question just on the -- could you just comment on kind of how you're feeling these days about the path, the start-up path of your-- the Fish stations?

I think on balance they lost a little over $5 million of cash flow in '02.

Can you talk about kind of how you view that number as a group in '03?

Is there anything that's changed there?

Yeah, let's let David -- let's try to giveyou some specifics if we can.

On balance we feel pretty good about the continued development of these rollouts.

If you have ten of them, you're going to have six or seven you feel good about.

You're always going to have a couple that are a bit more of a challenge.

We talked last time about Chicago and Milwaukee.

We have had to do a bit of remedial work there and we feel that they're - we know that they're exceeding budget for '03.

We feel pretty good about them.

But let's see if we can pull some specific numbers together here for you.

On the revenue front for the music stations,just kind of zeroing in on Q4, the revenues as we mentioned grew about just over 32%, 32.5%.

So they grew from 5.65 million dollars to 7.5 million Q4 '01 to Q4 '02, so obviously strong growth in revenues.

On the BCF front, a year ago in Q4, those stations contributed 189,000 dollars.

Q4 this year contributed 1.5 million.

So, you know, obviously strong improvement.

We expect that improvement to continue because there remain several of those stations that are either still in that start-up loss stage or have reached break-even, but really aren't making a strong contribution to cash flow at this point.

You know, in terms of those losses, Chicago, it's still operating at a loss, it had a loss of $300,000 in Q4.

We expect that to go away quite rapidly.

And, you know, reach profitability during the course of '03.

Portland in Q4 lost 234,000 dollars.

We also expect that to turn to profitability quite rapidly.

Sacramento lost 112,000.

That will also turn profitable during '03.

So I'd expect to see continued strong growth in those cash flow numbers for the music stations.

Thanks very much.

Next question.

Thank you.

Our next question is coming from John Jacobi (ph) of SunTrust Robinson Humphrey.

Good morning for you.

It just -- I just want to go over and make sure in the release that the 3.2 million dollars is what we're talking about from the network revenue business.

My second question is if you can walk us through on a modeling perspective, how we should expect sort of same station margin improvements.

I think there's still some disappointment in first quarter margin, even netting out sort of the accounting adjustment.

And my third question is on corporate expenses.

They seem to be growing at an 11% plus rate for 2003 on a relatively high number to begin with.

Is there something that's going on in the corporate expense line?

And my last question would be on the ratings, which you're seeing in some of your markets.

It seems like Chicago is still struggling.

Although, you know, obviously Atlanta, Cleveland looked pretty strong.

Yeah.

Let me just comment on your last question first and then I'll ask David to comment on the other questions.

The ratings do continue to do reasonably well.

We're pleased with Dallas, with Atlanta, with Cleveland.

Chicago, as we mentioned in our last call, that signal is probably at 80% of the market signal and so we made a calculation that we probably - we probably can get a 1.5 to 2 share in that market.

So our aspirations have always been somewhat lower in Chicago, primarily because of some of the coverage issues.

To some extent that's true in Sacramento, although we're pleased with the growth in Sacramento which has been solid.

So in terms of ratings, John, we feel pretty good.

In terms of your other questions, I think your first question relates to the table that lists out our BCF margin composition analysis, is that correct?

That is correct.

Yeah.

That other heading consists of our network, it also consists of certain rental income that we obtained either from the rental of towers or subletting of certain of our office space.

Of that 3.2 million, about 2.6, $2.7 million --$2.7 million is from our network business and that's been the -- you know, that number is about 7% down on last year.

So that is the impact of Hannity and O'Reilly on the network business.

I think your next question was in terms of trying to project forward, how our BCF margins will continue to grow.

You know, certainly we expect those margins to continue to improve.

You know, if you look at Q4,'02, of that overall 35% margin, so 14.2 million of BCF on 40.6 million of revenue, you know, clearly, you know, our goal number one is to eliminate those start-up losses as rapidly as possible.

That will happen during the course of '02, of '03 and a number of those stations will, you know, contribute profit.

They won't just reach break even.

They'll move to profit.

So if I were to look at the BCF margin composition analysis table, you know, I think the first thing I'd try to do is lay out the impact of eliminating start-up losses.

You know, I think I would then look and say, okay, what kind of revenue increases is Salem projecting.

And expense increase -- Q1, I think we're at 9% revenue for January.

We expect the same for February.

And depending on what happens in March, we'll be somewhere in the high single digits.

The expense growth rate will be lower than that.

So you'll also see the impact of operating leverage on the profitable radio stations.

I think those are the two things that I would look at in trying to project out the quarters.

Does that answer your question?

It gives us an idea.

I'm just trying to figure out as the inflection point starts to develop throughout the year.

But it's - so it's -- you know, if revenues grow 8% on a same-station basis, what do you expect your expenses to grow on a percentage?

I think at a station we're doing 8% on revenue, we would be looking for 4.5, 5, 5.5% expense growth on a station like that.

Okay.

And then if you could just answer the corporate expense question, and then I'll let others get a turn.

In terms of corporate expenses, we have always centralized more functions of corporate than most of our general market station -- companies.

All of our national block programming is handled out of corporate.

Much of our engineering is centralized out of corporate, and many of our accounting functions, all accounts payable, all financial reporting is done corporately.

So we operate a little differently, our model is a little different.

And we will always show a higher percentage of corporate expenses than our general market counterparts.

I don't think that corporate expenses are growing disproportionately but we certainly are looking at it, John.

Some of your comments during the last year has stimulated a revisit to our corporate overhead and we're sensitive to it, and we're trying to operate that as efficiently as we can.

Okay, thank you.

Thank you.

Our next question is coming from Bishop Sheen (ph) of Wachovia Securities.

Good afternoon, David and Ed.

How are you?

Good.

A question back to the balance sheet, David.

The press release you put out, and I think I know why, but I just want to go through it, shows 450 million of debt.

I believe that that reflected both the old 9.5s before they were tendered away and then the new seven quarters price?

That's correct.

We issued the new bonds on, I think, December the 22nd, December the 23rd.

We placed the proceeds of the new bonds, we placed that money in escrow.

Right.

The trustee of the old bonds and those old bonds were redeemed on January 23rd.

So as of December 31, we had 107 million dollars in trust to redeem the old bonds and we had two bonds in issuance on December 31.

Right.

Well, without -- somehow maybe mine didn't have the footnote, that would have been helpful.

But let's -- I think it would be -- help my clarity if we could just pro forma, David, go through the broad stroke on the balance sheet in terms of your bank facility revolver term and then the 100 of the 7.75 and then I think 150 phase of the 9s, correct?

It's pro forma.

So after the old bonds were redeemed on January 23rd we had 150 million dollars of 9% bonds.

Right.

Due 2011.

We had 100 million of 7.75% bonds due 2010.

And we had 93 million dollars of bank credit facility for a total of 343 million.

We then had 34 million dollars of cash of which 21 million was in our lifetime exchange account and the remaining 13 was in various operating accounts for a net debt balance of 309 million.

Right.

That all makes sense.

Can you -- looking forward in '03, any big capital events?

You have four attending stations.

I'm wondering capital obligations that you will be spending on cash and any other capital in-flow that I'm not aware of, stations sold or tax refunds or what have you?

Yeah.

We've projected total cap-ex for '03 of 10 million. 3 million of that is maintenance-related, 7 million is on various improvements and/or upgrades that we're currently working on.

In terms of the only acquisition that is pending is the acquisition of four stations in Jacksonville for a purchase price of 9.3 million.

We will in addition to that probably spend 700,000 dollars on cap-ex because we need to build out our own studio.

That 700,000 is included in the 10 million of cap-ex guidance.

Okay.

Any other big capital in flow that you're waiting to receive?

Either on stations sold or -

I do -- from another radio company.

They have leased space on one of our towers, on a long-term lease.

And they will be paying us an up-front lease payment that covers the entire term, of somewhere between 1.5 and 2 million dollars.

Will you run that through the income statement or the balance sheet?

No.

We'll book that as deferred revenue on receipt of the cash and book it to income over the 60-year life of the lease.

Okay.

Very good.

And that's it.

Just the four acquisitions pending that you have announced.

That's correct.

And that takes care of all your forward acquisitions for calendar '03.

You expect those to close in calendar '03?

We expect them to close in the next 90 days.

Very good.

Thank you.

Thank you.

Our next question is coming from Vincent Vickers (ph) of J.P. Morgan.

Good afternoon.

Most of my questions have been answered but I had a question on your network business.

Could you refresh our memory again as to how the cancellation policy works on your network business?

So when new talent comes on like O'Reilly or Hannity, can your station or your affiliates drop your programs immediately or are they locked in for a certain period of time?

Most of the contracts call for a 90-day notice, that's pretty standard in the network business.

So that they -- you know, they can get out pretty quickly.

Some of them are shorter.

I think most of ours are 90 days.

Okay.

Is there any new talent in the pipeline that is causing you any concern or that would compete in terms of the genre of programming you offer?

We're not aware of any that we're concerned about, that has been talked about.

Remember the other problem is that there are only so many day parts and that when the day parts are taken, it makes it a little difficult for new talent to come in unless they're very, very good but we're not aware of any.

Okay.

A housekeeping question for David.

David, in your first quarter guidance, how many stations are in same station?

Every station except for the country station we acquired in Hawaii in August '02.

The two Nashville stations that we acquired in December '02.

And the F.M., the Fish in Portland that we acquired in May '02.

So as of January 1, 81 of 85 stations will be in same station.

Great.

Thank you.

Thank you.

Our next question is coming from David Bank (ph) of RBC.

Thanks, guys.

Good afternoon or morning.

Hi, David.

I have two sort of questions to follow up on stuff that's been touched already.

The first one is I just want to understand as the -- as the credit facility covenant ratchets down, Dave, can you remind me, ratchets down from 7 or is it 6.5?

Ratchets down a quarter turn, a quarter during '03.

Okay.

From 7 December 31, '02 to 6 at December 31 '03.

Got it.

Second question is, I'm -- I hope I'm not trying to squeeze something out of you that --because I think this question has been touched on before, but I'm just trying to get a sense of the operating leverage in first quarter guidance.

And I get half the picture from the guidance on 9% same station growth for revenue.

Is it okay to ask what do you think you guys will grow same-station BCF on that 9% revenue growth?

I don't have a number in front of me on that.

For the stations, I would say the expense growth is probably going to be around about 6%.

Okay.

The difficulty is on network business Q1 guidance is probably for a 5 to 10% revenue decline in our network business.

Right.

But because most of -- you know, almost all of the costs in that business are fixed.

I think we only pay a 5% sales commission on the network front.

Right.

That revenue decline is really against what is very much a fixed cost base, and, you know, I think that is the -- I know that's the key factor that I think is causing concern in the Q1 guidance we have given is the impacts we're seeing on our network business.

If you were to carve that out and just look at the stations on their own, I think you'll continue to see operating leverage in that -- in the station business.

But it's muted by the challenges we're facing on the network fronts.

Okay.

Well, even just for the stations then I guess I'm really sorry to be a pain about this.

That's okay.

So given that we have the expense growth of 6%, if we had -- you know, as ballpark if we knew what sort of same station expenses were last year and same station revenues were last year, we could sort of do the math.

But we don't have either of those data points.

I guess -- and if those aren't in front of you and, you know, it's sort of hard to get at, even a ballpark I think, you know, is it a one-times turn, a two-times turn, a less than a one times turn that sort of idea?

In terms of BCF, you know, concerns have been ratio from revenue growth during the quarter.

I loathe to -- you know, I'd rather calculate the numbers specifically than give you a number that I can -- I might be guessing a little bit.

Okay.

So but I certainly think that operating leverage will continue.

Okay.

So can we do that off line then after the call?

Or are you going to come back to us in the conference call?

The heat is on.

The heat is on poor Dave.

You know, I don't think it's something I want to tackle off line.

I think it's something that if I'm going to say something, everyone needs to hear it.

Right.

Keep going with other questions and let me see how much further I can go with this while still feeling comfortable.

That's actually it for me.

Thank you.

Our next question is coming from Jim Goss (ph) of Barrington Research.

Okay.

A couple of things.

One, could you clarify if the accounting change with regard to revenues is in all of the numbers right now or if we're going to get a restatement for some of the prior year figures?

By quarter.

And also the guidance of high single digit growth in the fourth quarter revenues after 9% for January, 9% for February, suggests it would be at or slightly less than that for March.

I'm wondering if you could talk about whether or not you've seen any change in the tone of business as the war talk has heated up and whether that's impacting you very currently and in a more immediate basis.

Then I might have a couple of others.

With regard to your last question, we don't -- we're not suggesting necessarily that we see anything fundamentally changing in March, but the fact of the matter is, there is lack -- there isn't a lot of visibility and we've learned in the current environment that you have to be cautious.

Right now it looks okay and we're -- we're very comfortable with the high single digit estimate.

But if something develops in the middle of this month in terms of the Middle East, we can't say that it wouldn't have an impact.

We don't see anything at this point.

Okay.

That's mainly what I wanted to get to.

With regard to the accounting changes, I'll have to let David ask.

Again, that I can't say that they're insignificant in terms of -

Yeah, on the accounting change, what you're going to see is we will file our 10-K in the next two weeks.

The 10-K will -- you know include restated numbers for changing the accounting policy.

Then in all future Qs and future press releases, we will fully restate the prior year numbers to reflect the barter change in accounting policy.

Just so that you know the quarter by quarter impact, for 2002 as a whole, we had 4.6 million dollars of barter revenue and barter operating expenses.

By quarter, that was 900,000, 1.4, 1.2, 1.1.

So I think that should allow you to update your models to -- to have all of those barter numbers properly reflected.

Okay.

Then the 9% or the high single digit guidance is again it's not a material event, but it would relate to the adjusted figure for the year -

Yeah.

We had the guidance that includes barter, both in revenue and broadcast operating expenses.

Then finally on the cap-ex, I know you indicate about 10 million cap-ex for the year.

And you were breaking it down between maintenance and revenue producing.

I'm wondering if -- if you go beyond this year is that going to be the sort of trends you have, and what sort of items do you put in the revenue-producing category?

I would expect the maintenance number probably stays pretty steady, year on year.

The acquisition improvement right now really relates to improvements.

We have half a dozen potential signal upgrades that we're working on.

They -- you know, I don't think we're in a position to talk specifically about any of them because they still require various FCC approval, local approvals, et cetera.

But if we're able to get in a particular market a -- you know, a substantial signal upgrade, you know, that's clearly going to give us the opportunity to increase revenues, increase broadcast cash flow, and, you know, we would expect to incur some cap-ex to make that happen.

So when you look at the 7 million dollar improvement related number it principally relates to some signal upgrade opportunities that we're working on.

Okay.

Thank you.

Thank you.

Our next question is coming from Ross Makerman (ph) of Makerman Brothers.

How are you, David?

Quick question.

Could you give us some feel on -- regarding the table, the 20 stations which you describe as zero to 29% in broadcast cash flow margins and the 38 between 30 and 49, how quickly you see those 58 stations sort of moving up the ladder?

It's submitting here, Ross and we'll look at this.

Repeat the two categories again.

It's a 50% margin stations --how quickly do we expect them to reach maturity.

Yeah.

I mean, are we a year or two away on each of those categories or, four to five year type of time horizon?

Generally speaking, from start-up to full maturity, we normally think in terms of four to five years.

So it basically would depend upon the acquisition date of each of the stations.

You'd have to go back and it's all matter of public record and look at the date that we acquired them.

And then build in a four to five year time line for most of them, particularly the music stations take four to five to get to full maturity.

The teaching talk stations may be a little bit sooner because you pre-sell -- the block programming is all pre-sold and in place the day you go on the air in terms of the national business, you have to develop some local.

But I'd use the four to five year time frame and I would just go back and would plug in the acquisition dates for each of those stations.

Okay.

And second question is you said I believe on the 12 stations, the six stations of less than negative cash flow, I think you said for the year they lost -- a little over 6 million in broadcast cash flow.

What's your expectation for that loss for '03?

How much will that loss drop to?

We're trying to pull together here -- just bear with us, Ross.

We're trying to pull together some of the answers that David threw at us here.

David is asking in terms of the 6 million dollar loss for the start-ups what that impact is going to be in '03.

We expect them obviously as David mentioned we expect them to be cash flow positive to turn cash flow positive in '03.

Yeah.

I think that 6 million dollar number, there will continue to be some losses in Q1 and Q2.

When I look at the second half of the year, I think we'll continue to have some modest losses in Hawaii and some modest losses in Milwaukee.

That 6 million dollar number should reduce to -- I'd say somewhere between 1 and 2 million dollars.

For the year as a whole?

For the year as a whole.

But there will be certain of those stations that contribute a profit that will offset that remaining 1 to 2 million of losses.

Overall, as a package those --those 12 stations will be on or around break even for '03.

Okay.

Some of them having a profit for the year, and some of them having a loss for the year, but overall as a package, I think they'll reach break even.

Just one final question.

You threw out a number I believe hen you were talking about your net debt of 310 million.

You threw out a statement to the effect that about 142 million of that related to your stick acquisitions.

Did that 142 basically refer to the purchase cost of those roughly 32 stations and I'm just taking the less than zero and the zero to 29% cash flow margin stations?

Basically, to calculate 245 that 142 million number, we took the 12 stations in the BCF margin composition analysis, they're losing money.

We added up what the purchase price was.

Okay.

So the 142 strictly relates to the 12 stations?

Yeah.

Okay.

Thank you.

Once again to ask a question, please dial the numbers one followed by four on your touch tone phone at this time.

Our next question is coming from Bobby Melnick (ph) of Terrier (ph) Partners.

Actually Ross just asked the identical question.

So it's covered.

Thank you.

Thank you.

Our next question is coming from James Marsh (ph) of SG Cowen.

Hi, gentlemen.

Two quick questions.

One for Ed, one for David.

Ed, I was wondering if you can clarify what you meant by recovering affiliates?

It's where you lost an affiliate to Hannity and they were coming back because they like the terms better or you're replacing a lost affiliate with another one?

David, I was wondering if you can give us a quick update on the effective tax rate for 2003 and 2004 for the effective cash position.

James, there's churning in the network business.

You have some that come and some that go.

For the most part we recovered new affiliates to replace those that we lost.

Usually in terms of Hannity and O'Reilly, stations are going to stick with them for a couple of years at the very least and give them a chance to be successful.

So I don't think we've recovered any that we lost.

I think we've found new affiliates to replace those that lost.

Understood.

Thanks.

We'll turn it back over to management for any closing comments.

David, there was a second part to that question.

Yeah.

On the tax rate, we added a note on our earnings press release that gives the split for 2002 of our income tax provision between cash taxes and deferred taxes.

So for 2002 as a whole, we're anticipating -- well, you know, we have the cash taxes of 293,000 dollars that relates to I think principally three states where we are cash taxpaying.

I think I'd expect that number for '03 to be around about the same.

I don't see it changing that much.

On a federal basis, we have operating losses carried forward.

We continue to have a favorable tax benefit from the tax amortization of our FCC licenses.

That don't have to be amortized for book purposes.

You know, I think it will be at least several years before we are taxpayers on a federal basis.

Yes, do you have any closing comments?

Yeah.

Just to reply to David Banks question about what we might expect in terms of a same station BCF increase, I think I mentioned that same station revenue would grow in the high single digits.

That same station broadcast operating expenses would grow inform the -- would grow in the 5 to 6% area.

I think the impact on same-station BCF, this is excluding the network, where on the network front we're expecting a revenue decline that for a cash flow decline if I just look solely at the radio stations, I think the -- my best estimate of same-station BCF guidance number would be a 12% same-station BCF increase on our radio stations.

So high single digits same-station revenue, mid single digits, same-station BCF --same-station operating expenses and approximately 12% same-station BCF increase.

Okay?

Any other final comments, Ed?

I think that that concludes our information.

Thank you for joining the call.

And we look forward to having you join us next time we do our earnings call.

Thank you.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines.