NOTE 3. ACQUISITIONS AND RECENT TRANSACTIONS

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

On November 20, 2013, we announced a quarterly distribution in the amount of $0.0550 per share on Class A and Class B common stock. The quarterly distribution of $1.4 million, or $0.0550 per share of Class A and Class B common stock, was paid on December 27, 2013 to all common stockholders of record as of December 10, 2013.

On September 12, 2013, we announced a quarterly distribution in the amount of $0.0525 per share on Class A and Class B common stock. The quarterly distribution of $1.3 million, or $0.0525 per share of Class A and Class B common stock, was paid on October 4, 2013 to all common stockholders of record as of September 26, 2013.

On May 30, 2013, we announced a quarterly distribution in the amount of $0.05 per share on Class A and Class B common stock. The quarterly distribution of $1.2 million, or $0.05 per share of Class A and Class B common stock, was paid on June 28, 2013 to all common stockholders of record as of June 14, 2013.

 

On March 18, 2013, we announced a quarterly distribution in the amount of $0.05 per share on Class A and Class B common stock. The quarterly distribution of $1.2 million, or $0.05 per share of Class A and Class B common stock, was paid on April 1, 2013 to all common stockholders of record as of March 25, 2013.

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 has an estimated fair value of $0.6 million as of the closing date. The estimated fair value of the contingent earn-out consideration was determined using a probability-weighted discounted cash flow model. The fair value measurement includes page view forecasts which represent a Level 3 measurement as discussed in Note 7 of the accompanying consolidated financial statement in Item 8 of this report. The fair value of the contingent earn-out consideration will be reviewed quarterly over the two-year earn-out period based on actual page views as compared to the estimates used in our forecasts. Changes in the fair value of the contingent earn-out consideration will be reflected in our results of operations in future periods as they are identified. We believe that the followers of Twitchy.com, the established relationships and the assembled workforce provide future economic benefits to us, and we have 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 will pay the remaining $0.3 million in cash over three installments within 180 days from the closing date. The first installment of $0.1 million was paid on February 6, 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 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.

 

A summary of our business acquisitions and asset purchases for the year ended December 31, 2013, none of which were material to our consolidated financial 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 (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

The results of operations of the acquisitions are included in our consolidated results of operations from their respective dates of acquisition or LMA date if applicable. 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 fair value include discounted estimated cash flows to be generated by those assets and the expected useful lives based on historical experience, market trends as well as any synergies to be achieved from the acquisition. Acquisitions may include contingent consideration, the fair value of which is estimated on the acquisition date as the present value of the expected contingent payments, determined using weighted probabilities of possible payments. We may obtain an independent third-party appraisal of the estimated fair value of the acquired net assets as of the acquisition date. Property, plant 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 represents the organizational systems and procedures in place to ensure the effective operation of the stations. Costs associated with acquisitions, including consulting and legal fees are expensed as incurred in corporate operating expenses.

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:

 

Description		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:

 

		Broadcast Assets Acquired				Internet Assets Acquired				Net Assets Acquired
		(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

 

Pending Transactions:

On November 13, 2013, we entered into an APA to acquire radio station WOCN-AM, Miami, Florida for $1.2 million in cash and the transmitter site for this station for $1.0 million in cash. The purchase is subject to the approval of the FCC and is expected to close during the year ending December 31, 2014.

Discontinued Operations:

We ceased operating Samaritan Fundraising in December 2011 based on operating results that did not meet our expectations. All employees of this entity were terminated and we have had no material cash flows and we have had no ongoing or further involvement in the operations of this entity. The Consolidated Balance Sheets and Statements of Operations for all prior periods presented have been updated to reflect the operating results and net assets of this entity as a discontinued operation. As of December 31, 2013, assets of discontinued operations consist of net receivables due to us from prior operations. The following table sets forth the components of income (loss) from discontinued operations:

 

		Year Ended December 31,
		2011				2012				2013
		(Dollars in thousands)
Net revenues		$	1,950			$	38			$	10
Operating expenses			2,793				196				72
Operating loss		$	(843	)		$	(158	)		$	(62	)
Impairment of assets used in discontinued operations			(382	)			—				—
Loss from discontinued operations		$	(1,225	)		$	(158	)		$	(62	)
Benefit from income taxes			(484	)			(63	)			(25	)
Loss from discontinued operations, net of tax		$	(741	)		$	95			$	(37	)

During the year ended December 31, 2012, we completed or entered into the following transactions:

Debt

On December 12, 2012, we redeemed $4.0 million of the Terminated 9⁵/₈% Notes for $4.1 million, or at a price equal to 103% of the face value. This transaction resulted in a $0.2 million pre-tax loss on the early retirement of debt, including approximately $17,000 of unamortized discount and $0.1 million of bond issue costs associated with the 9⁵/₈% Notes.

On June 1, 2012, we redeemed $17.5 million of the Terminated 9⁵/ ₈% Notes for $18.0 million, or at a price equal to 103% of the face value. This transaction resulted in a $0.9 million pre-tax loss on the early retirement of debt, including approximately $80,000 of unamortized discount and $0.3 million of bond issue costs associated with the 9⁵/₈% Notes.

On May 21, 2012, we entered into a new Business Loan Agreement, Promissory Note and related loan documents with First California Bank (the “FCB Loan”). The FCB Loan is an unsecured, $10.0 million fixed-term loan with a maturity date of June 15, 2014. At December 31, 2012, $7.5 million was outstanding on the FCB Loan.

On May 21, 2012, we entered into an additional subordinated 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 and restated the original subordinated 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 $12.0 million. At December 31, 2012, $15.0 million was outstanding on all of our Subordinated Debt due to Related Parties, including amounts due Mr. Epperson.

Equity

On March 7, 2012, our Board of Directors authorized and declared a quarterly dividend in the amount of $0.035 per share on Class A and Class B common stock. Quarterly common stock dividends of $0.035 per share, were paid on March 30, 2012, June 29, 2012, September 28, 2012 and December 28, 2012, respectively, to all common stockholders of record. We paid $3.4 million in dividends during 2012. We anticipate paying quarterly common stock dividends in March, June, September and December of each year.

Acquisitions

On December 3, 2012, we began operating radio station WGTK-FM, Greenville, South Carolina under an LMA with the owner. The accompanying Consolidated Statements of Operations reflect the operating results of this entity as of the LMA date. The acquisition of this radio station closed on February 5, 2013.

On November 1, 2012, we began operating radio station WTOH-FM, Columbus, Ohio under an LMA with the owner. The accompanying Consolidated Statements of Operations reflect the operating results of this entity as of the LMA date. The acquisition of this radio station closed on February 15, 2013.

On October 1, 2012, we completed the acquisition of Godvine.com for $4.2 million. Godvine.com is a Christian video website and media platform that increases our online presence and offers significant exposure on Facebook with over 2.8 million Facebook fans. We believe that the addition of Godvine.com makes Salem Web Network the largest online destination for Christian content with an average of 5.8 million unique visits per month.

 

On August 31, 2012, we completed the acquisition of radio station WLCC-AM, Tampa, Florida, for $1.2 million. We began operating the station as of the closing date. 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 August 30, 2012, we acquired SermonSpice.com for $3.0 million. SermonSpice.com is an online provider of church media for local churches and ministries. The acquisition resulted in goodwill of $1.2 million representing the excess value of the business attributable to the organizational systems and procedures already in place to ensure effective operations of the business.

On May 29, 2012, we acquired an FM translator and related construction permits for $0.3 million that will be used in our Detroit broadcast market.

On May 15, 2012, we purchased Churchangel.com and rchurch.com for $0.2 million. These Internet sites are operated under SWN to enhance and build our relationships with local churches and pastors.

On April 10, 2012, we completed the acquisition of radio station WKDL-AM in Warrenton, Virginia for $30,000. We began operating the station as of the closing date. 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 March 16, 2012, we completed the sale of radio station WBZS-AM in Pawtucket, Rhode Island for $0.8 million in cash. The sale resulted in a pre-tax gain of $0.2 million. The accompanying Consolidated Statements of Operations reflect the operating results of this entity through the date of the sale.

On January 13, 2012, we completed the acquisition of radio station KTNO-AM, Dallas, Texas for $2.2 million. We began programming the station pursuant to a TBA with the previous owner on November 1, 2011. 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.

A summary of our business acquisitions and asset purchases for the year ended December 31, 2012, none of which were individually or in aggregate material to our consolidated financial position as of the respective date of acquisition, is as follows:

 

Acquisition Date		Description		Total Consideration
				(Dollars in thousands)
October 1, 2012		Godvine.com (business acquisition)		$	4,200
August 31, 2012		WLCC-AM, Tampa, Florida (business acquisition)			1,150
August 30, 2012		Sermonspice.com (business acquisition)			3,000
May 15, 2012		Churchangel.com and rchurch.com (asset purchase)			165
April 10, 2012		WKDL-AM, Warrenton, Virginia (business acquisition)			30
January 13, 2012		KTNO-AM, Dallas, Texas (business acquisition)			2,150
				$	10,695

The total acquisition consideration was allocated to the net assets acquired as follows:

 

		Broadcast Assets Acquired				Internet Assets Acquired				Net Assets Acquired
		(Dollars in thousands)
Asset
Property and equipment		$	2,235			$	289			$	2,524
Broadcast licenses			1,086				—				1,086
Goodwill			9				2,283				2,292
Customer lists and contracts			—				767				767
Software			—				309				309
Customer relationships			—				927				927
Domain and brand names			—				2,711				2,711
Non-compete			—				106				106
Liabilities
Subscriber liabilities assumed			—				(27	)			(27	)
		$	3,330			$	7,365			$	10,695

 

During the year ended December 31, 2011, we completed or entered into the following transactions:

Debt

On December 12, 2011, we redeemed $12.5 million of the Terminated 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 issue costs associated with the 9⁵/₈% Notes.

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. 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 “ Subordinated Debt due to Related Parties “). The proceeds of the Subordinated Debt due to Related Parties may be used to repurchase a portion of Salem’s outstanding senior secured notes. Outstanding amounts under each subordinated 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 subordinated line of credit must be repaid within three months from the time that such amounts are borrowed. The Subordinated Lines of Credit do not contain any covenants. At December 31, 2011, $9.0 million was outstanding under the Subordinated Debt due to Related Parties.

On November 15, 2011, we completed the Second Amendment to our 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 September 6, 2011, we repurchased $5.0 million of the Terminated 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 issue costs associated with the 9⁵/₈% Notes.

On June 1, 2011, we redeemed $17.5 million of the Terminated 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 issue costs associated with the 9⁵/₈% Notes.

Acquisitions and Dispositions

On December 21, 2011, we completed the acquisition of radio station 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 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 March 28, 2011, we completed the acquisition of the Internet business, WorshipHouseMedia.com, an on-line church media and video ministry website, for $6.0 million in cash. WorshipHouseMedia.com 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 WorshipHouseKids, 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 individually or in aggregate material to our consolidated financial position as of the respective date of acquisition, is as follows:

 

Acquisition Date		Description		Total Consideration
				(Dollars in thousands)
December 21, 2011		KTEK-AM, Houston, Texas (business acquisition)		$	2,601
March 28, 2011		WorshipHouseMedia.com (business acquisition)			6,000
March 14, 2011		WBZS-AM, Pawtucket, Rhode Island (business acquisition)			550
				$	9,151

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