NOTE 3. SIGNIFICANT TRANSACTIONS

On December 21, 2011, we completed the acquisition of KTEK-AM in Houston, Texas for $2.6 million, which includes $1.0 million of cash and $1.6 million netted against the unpaid portion of our note receivable. We began operating the station on March 5, 2010, pursuant to a long-term Time Brokerage Agreement (“TBA”). The accompanying Consolidated Statements of Operations reflect the operating results of this entity as of the TBA date. The accompanying Consolidated Balance Sheets reflect the net assets of this entity as of the closing date. We previously sold the assets of KTEK-AM on March 28, 2008 for $7.8 million, which included $4.5 million in cash and $3.3 million in notes receivable of which we collected $1.8 million. Our 2011 purchase was partially funded by the unpaid portion of the note of $1.5 million.

On December 12, 2011, we redeemed $12.5 million of our 9⁵/₈% Notes for $12.9 million, or at a price equal to 103% of the face value. This transaction resulted in a $0.8 million pre-tax loss on the early retirement of debt, including approximately $62,000 of unamortized discount and $0.3 million of bond issues costs associated with the 9⁵/₈% Notes.

On November 15, 2011, we completed the Second Amendment to our Senior Credit Facility, which is a revolving credit facility (“Revolver”) entered on December 1, 2009, to among other things: (1) extend the maturity date from December 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 on our leverage ratio, (3) allow us to borrow and repay unsecured indebtedness provided certain conditions are met and (4) include step-downs related to our leverage ratio covenant. We incurred $0.5 million in fees to complete this amendment, which are being amortized over the remaining term of the credit agreement. The applicable interest rate relating to the amended credit agreement is LIBOR plus a spread of 3.0% per annum or the Base Rate (as defined in the credit agreement) plus a spread of 1.25% per annum, which is adjusted based on our leverage ratio.

On November 17, 2011, Salem entered into lines of credit with Edward G. Atsinger III, Chief Executive Officer and director of Salem, and Stuart W. Epperson, Chairman of Salem’s board of directors (the “Affiliate Lenders”). Pursuant to the related agreements, Mr. Epperson has committed to provide an unsecured revolving line of credit to Salem in a principal amount of up to $3 million,

and Mr. Atsinger has committed to provide an unsecured revolving line of credit in a principal amount of up to $6 million (together, the “Affiliate Lines of Credit ”). The proceeds of the Affiliate Lines of Credit may be used to repurchase a portion of Salem’s outstanding senior secured notes. Outstanding amounts under each Affiliate Line of Credit will bear interest at a rate equal to the lesser of (1) 5% per annum and (2) the maximum rate permitted for subordinated debt under the Credit Agreement referred to above plus 2% per annum. Interest is payable at the time of any repayment of principal. In addition, outstanding amounts under each Affiliate Line of Credit must be repaid within three months from the time that such amounts are borrowed. The Affiliate Lines of Credit do not contain any covenants. At December 31, 2011, $9.0 million was outstanding under the Affiliate Lines of Credit.

On September 6, 2011, we repurchased $5.0 million of our 9⁵/₈% Notes due 2016 for $5.1 million, or at a price equal to 102⁷/₈% of the face value. This transaction resulted in a $0.3 million pre-tax loss on the early retirement of debt, including approximately $26,000 of unamortized discount and $0.1 million of bond issues costs associated with the 9⁵/₈% Notes.

On June 1, 2011, we redeemed $17.5 million of our 9⁵/₈% Notes for $18.0 million, or at a price equal to 103% of the face value. This transaction resulted in a $1.1 million pre-tax loss on the early retirement of debt, including $0.1 million of unamortized discount and $0.5 million of bond issues costs associated with the 9⁵/₈% Notes.

On March 28, 2011, we completed the acquisition of the Internet business, WorshipHouse Media, an on-line church media and video ministry website, for $6.0 million in cash. WorshipHouse Media offers users worship and small group resources, including movie illustrations, song tracks, worship backgrounds, small group video curriculum and worship software, to churches that may face budget, time and in-house talent constraints. The site also includes WorshipHouse Kids, which offers similar products designed to meet the needs of children’s ministry media in the church. The accompanying Consolidated Balance Sheets and Consolidated Statements of Operations reflect the operating results and net assets of this entity as of the acquisition date. The acquisition resulted in goodwill of $2.1 million representing the excess value of the business as a result of the integrated business model and services already established that provide future economic benefit to us.

On March 14, 2011, we completed the acquisition of radio station WDDZ-AM, Pawtucket, Rhode Island, for $0.6 million in cash. We began operating the station as WBZS-AM upon the close of the transaction. The accompanying Consolidated Balance Sheets and Consolidated Statements of Operations reflect the operating results and net assets of this entity as of the acquisition date. On January 5, 2012, we entered into an APA to sell this radio station for $0.8 million.

On March 1, 2011, we sold radio station WAMD-AM in Aberdeen, Maryland resulting in a pre-tax loss of $0.2 million that was previously recognized upon entering into the agreement in September 2010.

On February 25, 2011, we sold radio station KXMX-AM in Los Angeles, California for $12.0 million, which was comprised of $11.0 million in cash and a $1.0 million promissory note. The $1.0 million promissory note has a three-year term, bearing interest at 7% compounded annually, due on February 25, 2016. The sale resulted in a pre-tax gain of $2.1 million.

On January 6, 2011, we sold radio station KKMO-AM in Seattle, Washington for $2.7 million in cash resulting in a pre-tax gain of $2.4 million.

On January 3, 2011, we began programming radio station KVCE-AM, Highland Park, Texas pursuant to a long-term TBA.

A summary of our business acquisitions for the year ended December 31, 2011, none of which were material to our consolidated financial position as of the respective date of acquisition, is as follows:

 

Acquisition Date		Description		Total Cost
				(Dollars in thousands)
December 21, 2011		KTEK-AM, Alvin Texas		$	2,601
March 28, 2011		WorshipHouse Media			6,000
March 14, 2011		WBZS-AM, Pawtucket, Rhode Island			550
				$	9,151

Under the acquisition method of accounting as specified in FASB ASC Topic 805, 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. We obtained an independent third-party appraisal of the estimated fair value of the acquired net assets as of the acquisition date for the transactions noted. Property, plant and equipment are recorded at the estimated fair value and depreciated on a straight-line basis over their estimated useful lives as described in Note 1- Summary of our Significant Accounting Policies. Intangible assets are also recorded at their estimated fair value and amortized using the straight-line method over their estimated useful lives as described in Note 1- Summary of our Significant Accounting Policies. The total acquisition consideration was allocated to the net assets acquired as follows:

 

		Net Broadcast Assets Acquired				Net Internet Assets Acquired				Net Assets Acquired
										(Dollars in thousands)
Asset
Property and equipment		$	1,018			$	8			$	1,026
Broadcast licenses			2,130				—				2,130
Goodwill			3				2,143				2,146
Customer lists and contracts			—				80				80
Domain and brand names			—				457				457
Internally developed software			—				311				311
Customer relationships			—				2,451				2,451
Other amortizable intangible assets			—				550				550
		$	3,151			$	6,000			$	9,151

Pending Transactions:

On October 17, 2011, we entered an agreement acquire KTNO-AM, Dallas, Texas for $2.2 million. We began programming the station pursuant to a Time Brokerage Agreement with the current owner on November 1, 2011. The transaction closed on January 13, 2012.

Discontinued Operations

In December 2011, we ceased operating Samaritan Fundraising based on operating results that did not meet our expectations. As of December 31, 2011, we have terminated all employees of this entity. The entity was eliminated from our ongoing operations and we will have no ongoing involvement in the operation. The Consolidated Balance Sheets and Statements of Operations for all periods presented are reclassified to reflect the operating results and net assets of this entity as a discontinued operation.

On July 31, 2008, we entered into an asset purchase agreement to sell radio station WRFD-AM in Columbus, Ohio for $4.0 million. As a result of the sale, we were to exit the Columbus, Ohio market. The Consolidated Balance Sheets and Statements of Operations for all periods presented are reclassified as of the date of the asset purchase agreement to reflect the operating results and net assets of this market as a discontinued operation through December 2009. The sale was expected to close in the fourth quarter of 2009. On December 30, 2009, the buyer of the radio station advised us that they would not be able to meet the terms of the asset purchase agreement. Because of the buyer terminating the agreement, we have reclassified the accompanying Consolidated Balance Sheets and Statements of Operations for all periods presented to reflect the operating results and net assets of this market in continuing operations. In January 2010, we collected a $0.2 million termination fee from the buyer pursuant to the asset purchase agreement.

The following table sets forth the components of income (loss) from discontinued operations as reclassified, net of tax, for the years ending:

 

		Year Ended December 31,
		2009				2010				2011
		(Dollars in thousands)
Net revenues		$	(3	)		$	464			$	1,950
Operating expenses			193				536				2,793
Operating loss		$	(196	)		$	(72	)		$	(843	)
Impairment of assets used in discontinued operations			—				—				(382	)
Loss on sale of radio station assets			(11	)			—				—
Loss from discontinued operations		$	(207	)		$	(72	)		$	(1,225	)
Benefit from income taxes			(124	)			(28	)			(484	)
Loss from discontinued operations, net of tax		$	(83	)		$	(44	)		$	(741	)

 

A summary of our business acquisitions and asset purchases for the year ended December 31, 2010, none of which were material to our consolidated financial position as of the respective date of acquisition, is as follows:

 

Acquisition Date		Description		Total Cost
				(Dollars in thousands)
February 12, 2010		HotAir.com (business acquisition)		$	2,000
June 8, 2010		GodTube.com (business acquisition)			2,500
August 3, 2010		WWRC-AM, Washington, D.C. (business acquisition)			3,090
September 1, 2010		Samaritan Fundraising (business acquisition)			800
Various		Purchase of various Internet domain names (asset purchases)			170
				$	8,560

Under the acquisition method of accounting as specified in FASB ASC Topic 805, 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. We obtained an independent third-party appraisal of the estimated fair value of the acquired net assets as of the acquisition date for the transactions noted. Property, plant and equipment are recorded at the estimated fair value and depreciated on a straight-line basis over their estimated useful lives as described in Note 1- Summary of our Significant Accounting Policies. Intangible assets are also recorded at their estimated fair value and amortized using the straight-line method over their estimated useful lives as described in Note 1- Summary of our Significant Accounting Policies. The total acquisition consideration was allocated to the net assets acquired as follows:

 

		Net Broadcast Assets Acquired				Net Internet Assets Acquired				Net Assets Acquired
										(Dollars in thousands)
Asset
Property and equipment		$	71				88			$	159
Broadcast licenses			2,948				—				2,948
Goodwill			4				720				724
Customer lists and contracts			—				1,834				1,834
Domain and brand names			—				2,097				2,097
Affiliate agreements			—				450				450
Other amortizable intangible assets			67				281				348
Liabilities
Contingent consideration arrangement			—				(200	)			(200	)
		$	3,090				5,270			$	8,360

On December 1, 2010, we redeemed $12.5 million of the 9⁵/₈% Notes for $12.9 million, or at a price equal to 103% of the face value. This transaction resulted in a $0.8 million pre-tax loss on the early retirement of debt, including $0.1 million of unamortized discount and $0.3 million of bond issues costs associated with the 9⁵/₈% Notes.

On November 1, 2010, we amended our Revolver to allow us to use borrowings under the Revolver, subject to the “Available Amount” as defined by the terms of the Credit Agreement, to redeem applicable portions of the 9⁵/₈% Notes. The calculation of the “Available Amount” also pertains to the payment of dividends when the leverage ratio is above 5.0 to 1. Additionally, we increased the total capacity of the Revolver from $30.0 million to $40.0 million.

On September 28, 2010, we received approximately $1.0 million as compensation for loss of our property rights under an Eminent Domain Petition from the Dallas Independent School District. We reduced the proceeds by the net book value of our property, which was not directly associated with the operations of radio station, KSKY-AM, Dallas, Texas, resulting in a pre-tax gain of $0.3 million. The property rights related to our back-up transmitter site. We do not expect the loss of these property rights to negatively affect our operations.

On September 1, 2010, we acquired Samaritan Fundraising, a web-based fundraising products company, for $0.6 million in cash plus $0.2 million contingent consideration payable in the future based on achieving certain revenue and profit goals as specified in the APA. The accompanying Consolidated Balance Sheets and Statements of Operations reflect the operating results and net assets of this entity as of the acquisition date. The acquisition resulted in goodwill of $0.3 million representing the excess value of the business as a result of the integrated business model and services already established that provide future economic benefit to us. As discussed above, we ceased operating this entity on December 31, 2011. The Consolidated Balance Sheets and Statements of Operations for all periods presented are reclassified to reflect the operating results and net assets of this entity as a discontinued operation.

 

On August 3, 2010, we completed the acquisition of WWRC-AM in Washington, D.C. for $3.1 million. We had begun operating the station under a local marketing agreement (“LMA”) effective May 15, 2010. The accompanying Consolidated Statements of Operations reflect the operating results of this entity as of the LMA date. The accompanying Consolidated Balance Sheets reflect the net assets of this entity as of the closing date.

On June 1, 2010, we redeemed $17.5 million of the 9⁵/₈% Notes for $18.0 million, or at a price equal to 103% of the face value. This transaction resulted in a $1.1 million pre-tax loss on the early retirement of debt, including $0.1 million of unamortized discount and $0.4 million of bond issues costs associated with the 9⁵/₈% Notes.

On June 8, 2010, we completed the acquisition of tangle.com and GodTube.com, Christian content and community websites, for $2.5 million. We ceased using the tangle.com name shortly after completing the acquisition having identified all acquired content under the GodTube.com brand. The accompanying Consolidated Balance Sheets and Statements of Operations reflect the operating results and net assets of these entities as of the acquisition date. The acquisition resulted in goodwill of $0.3 million representing the excess value of the business as a result of the integrated business model and services already established that provide future economic benefit to us.

On February 12, 2010, we completed the acquisition of HotAir.com, a website blog featuring news, analysis and commentary, for $2.0 million. The accompanying Consolidated Balance Sheets and Statements of Operations reflect the operating results and net assets of this entity as of the acquisition date. The acquisition resulted in goodwill of $0.2 million representing the excess value of the business as a result of the integrated business model and services already established that provide future economic benefit to us.

During the year ended December 31, 2009, we completed the following business acquisitions and asset purchases, none of which were material in aggregate or individually to our consolidated financial position as of the date of acquisition:

 

Acquisition Date		Description		Net Broadcast Assets Acquired
				(Dollars in thousands)
March 31, 2009		WAMD-AM, Aberdeen, Maryland (business acquisition)		$	227
March 31, 2009		License upgrade for WNYM-AM New York, NY (asset purchase)			2,498
July 24, 2009		WZAB-AM, Miami, Florida (business acquisition)			1,020
				$	3,745

Under the acquisition method of accounting, in accordance with FASB ASC Topic 805, 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. We obtained an independent third-party appraisal of the estimated fair value of the acquired net assets from Bond & Pecaro as of the acquisition date for each of the transactions noted.

The estimated fair value of the total acquisition consideration was allocated to the total assets acquired as follows:

 

		Total Broadcast Assets Acquired
		(Dollars in thousands)
Asset
Property and equipment		$	213
FCC License			5,166
		$	5,379

On December 1, 2009, we entered into the Revolver and issued $300 million of 9⁵/₈% Notes at a discount for $298.1 million resulting in an effective yield of 9.75%. The revolver includes a $5 million subfacility for standby letters of credit, a subfacility for swingline loans of up to $5 million and an optional $10 million incremental facility under which we may increase the commitments available, subject to the terms and conditions of the credit agreement relating to the Revolver (the “Credit Agreement”). The net proceeds from the 9⁵/₈% Notes of $291.7 million, borrowings under our Revolver of $15.0 million and cash on hand were used to repay and terminate Salem Holding’s then existing credit facilities which included the Term Loan B and Term Loan C and to repurchase all of the outstanding 7 ³/4% Notes due 2010.

On July 24, 2009, we completed the purchase of radio station WZAB-AM in Miami, Florida for $1.0 million. The accompanying Consolidated Statements of Operations reflect the operating results of this radio station as of the acquisition date. The business combination is not material in the aggregate or individually to our financial position as of the date of acquisition.

 

In accordance with FASB ASC Topic 805 “Business Combinations,” effective as of January 1, 2009, any excess of fair value of the acquired net assets over the acquisition consideration shall be recognized as a gain on a bargain purchase. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued. We underwent such a reassessment, and as a result, have recorded a gain on the bargain purchase of WZAB-AM in Miami, Florida, of $1.6 million. We have completed the measurement period and have not obtained information about facts and circumstances that existed as of the acquisition date that would have affected the amounts recognized for assets acquired and liabilities assumed. We believe that the gain on bargain purchase resulted from various factors that may have impacted the acquisition price of WZAB-AM, including, without limitation, that the previous owner of the license for WZAB-AM did not have the technical facilities from which to broadcast.

On June 1, 2009, we completed the sale of radio station KPXI-FM in Tyler-Longview, Texas for $0.4 million that resulted in a pre-tax loss of $1.6 million. The operating results of KPXI-FM are excluded from the Consolidated Statements of Operations as of the date of the sale.

On April 9, 2009, SIC purchased $1.0 million of Salem Holding’s 7 ³/4% Notes for $0.3 million. Salem Holding agreed to cancel the outstanding promissory note in exchange for the cancellation by SIC of the 7  ³/4% Notes. On a consolidated basis, the transaction resulted in a $0.7 million pre-tax gain on the early retirement of debt.

On March 31, 2009, we completed the purchase of radio station WAMD-AM in Aberdeen, Maryland for $2.7 million. The acquisition was made to accommodate the day time signal upgrade of WNYM-AM, New York, NY. Approximately $2.5 million of the purchase price was allocated to this upgrade. The purchase price was paid into an escrow account on July 18, 2008. The accompanying Consolidated Statements of Operations includes the operating results of this radio station as of the acquisition date. In accordance with FASB ASC Topic 805 “Business Combinations,” expenses associated with this business combination were expensed as of the January 2009 effective date. The business combination is not material in the aggregate or individually to our financial position as of the date of acquisition.

On February 2, 2009, we received reimbursement from the Port of Seattle of approximately $1.7 million of costs associated with a tower relocation project. The tower relocation began in 2001 as a result of the Port’s use of eminent domain in which the existing tower land was seized.