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 (“Term Loan 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 discount and $0.3 million in bank loan fees.

 

 

Equity

 

 

The actual declaration of future distributions and the establishment of the per share amount, record dates, and payment dates are subject to final determination by our Board of Directors and dependent upon future earnings, cash flows, financial 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 Financial 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. We paid an additional $0.4 million of costs 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 due January 2015. Based on the early payment, our deferred payment due January 2015 was reduced to $0.9 million. The deferred payments due January 2015 and 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 interest expense 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 on the achievement of certain revenue benchmarks established for calendar years 2014, 2015 and 2016 for each of the Eagle entities. The purchase price includes the original estimated fair value of the contingent earn-out consideration recorded at the present value of $2.0 million. The estimated fair value of the contingent earn-out consideration was determined using a probability-weighted discounted cash flow model. We determined the fair value of the contingent consideration obligations by calculating the probability-weighted earn-out payments based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted earn-out payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement includes revenue forecasts which are a Level 3 measurement as discussed in Note 8 to our consolidated financial statements included in this annual report on Form 10-K. The fair value of the contingent earn-out consideration is reviewed 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. 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 fair value 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 of the 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 our estimates for the contingent earn-out consideration are discussed in Note 4 to our consolidated financial statements included in this annual report on Form 10-K.

 

The accompanying Consolidated Statements of Operations reflect the operating results of these entities as of the closing date. We believe that strong author relationships, assembled creative talent agreements and the loyal readers of Eagle publications, as well as our ability to market and promote these products through our existing media platform, provides future economic benefits to us. 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 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 cost is 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 acquisition 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 asset acquisition 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 the station under an LMA as of June 6, 2014. The accompanying Consolidated Statements of Operations reflect the operating results of this entity as of the LMA date. 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. The accompanying Consolidated Statements of Operations reflect the operating results of this entity as of the closing date. On November 24, 2014, we entered a Time Brokerage Agreement (“TBA”) with a programmer under which we will receive monthly license fees beginning in December 2014 through November 2019. Upon acquisition, we recorded goodwill of $12,000 associated with the excess value of this entity attributable 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 began operating this station under an LMA as of February 28, 2014. The accompanying Consolidated Statements of Operations 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 entity attributable to the existing tower site and the audience 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 $2.0 million in cash. We began operating these stations as of the closing date. The accompanying Consolidated Statement of Operations reflects the operating results of these entities as of the closing date. We recorded goodwill of $18,000 associated with the excess value of these entities attributable to existing tower 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 of approximately $0.4 million in cash.

 

 

Under the acquisition method of accounting as specified in FASB ASC Topic 805 Business Combinations, the total acquisition consideration is allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of the transaction.

 

Estimates of the fair value include discounted estimated cash flows to be generated by the assets and their expected useful lives based on historical experience, market trends and any synergies believed to be achieved from the acquisition. Acquisitions may include contingent consideration, the fair value of which is estimated as of the acquisition date as the present value of the expected contingent payments as determined using a weighted probability of the payment amounts. We may retain a third-party appraiser to estimate the fair value of the acquired net assets as of the acquisition date. As part of the valuation and appraisal process, the third-party appraiser prepares a report assigning estimated fair values to the various asset categories in our financial statements. These fair value estimates are subjective in nature and require careful consideration and judgment. Management reviews the third party reports for reasonableness of the assigned values. We believe that 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-lived intangible assets are recorded at their estimated fair value and amortized on a straight-line basis over their estimated useful lives. Goodwill, which represents the organizational systems and procedures in place to ensure the effective operation of the entity, may also be recorded and tested for impairment. Costs associated with acquisitions, such as consulting and legal fees are expensed as incurred 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 the present value of any contingent earn-out consideration. We estimate the fair value of contingent earn-out consideration using a probability-weighted discounted cash flow model. The fair value measurement is based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in Note 14 -Fair Value Measurements. The following table summarizes the total acquisition consideration for the year ended December 31, 2014:

 

 

 

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 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 is subject 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 subject to 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 entity and we have no ongoing or further involvement in the operations of this entity. The Consolidated Balance Sheets and Statements of Operations for all prior periods presented were updated to reflect the operating results and net assets of this entity as a discontinued operation.

 

 

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-term debt 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 debt related 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. There were 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 proceeds from 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 repurchase resulting 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 that remained outstanding after the expiration date of the Tender Offer. On June 3, 2013, we redeemed the remaining $0.9 million of the outstanding Terminated 9⁵/₈% Notes to satisfy and discharge Salem's obligations under the indenture for the Terminated 9⁵/₈% Notes as of such date.

 

Equity

 

 

The actual declaration of future distributions and the establishment of the per share amount, record dates, and payment dates are subject to final determination by our Board of Directors and dependent upon future earnings, cash flows, financial 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 events centered on US politics, global news, sports, entertainment, media, and breaking news. The contingent earn-out consideration is payable upon achievement of 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 of Twitchy.com, the established relationships and the assembled workforce provide future economic benefits to us, and we recorded goodwill of $0.4 million representing 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 over three 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 $2.5 million 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 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, 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 bible verses and access commentary from biblical scholars. The acquisition resulted in goodwill of $20,755 representing the excess value of the business to us resulting from the integrated business model and services already established that provide future economic benefits to us due to increased web presence that drives 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 station under a LMA with the prior owner on November 1, 2012. The accompanying Consolidated Statements of Operations reflect the operating results of this entity as 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 consists of $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 Jones University, 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 million discount 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 began operating the radio station under a LMA with the prior owner on December 3, 2012. The accompanying Consolidated Statements of Operations reflect the operating 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 intangible assets including applications associated with our Internet segment for an aggregate amount of approximately $0.2 million.

 

 

Costs associated with these acquisitions, including consulting and legal fees are expensed as incurred in corporate operating expenses. During the year ended 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 net present value of any contingent earn-out consideration. We estimated the fair value of the contingent earn-out consideration using a probability-weighted discounted cash flow model. The fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in Note 7 -Fair Value Measurements. The following table summarizes the total acquisition consideration for the year ending December 31, 2013: