NOTE 4. ACQUISITIONS AND RECENT TRANSACTIONS

 

During the six month period ending June 30, 2016, we completed or entered into the following transactions:

 

Debt

 

On June 30, 2016, we paid $1.2 million in principal on our term loan of $300.0 million (“Term Loan B”), of which $0.4 million was an early prepayment of principal, and paid interest due as of that date. We recorded a $1,300 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $3,400 in bank loan fees associated with this principal prepayment.

 

 

Equity

 

On June 2, 2016, we announced a quarterly equity distribution in the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.6 million was paid on June 30, 2016 to all Class A and Class B common stockholders of record as of June 16, 2016.

 

On March 10, 2016, we announced a quarterly equity distribution in the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.7 million was paid on April 5, 2016 to all Class A and Class B common stockholders of record as of March 22, 2016.

 

Related Party Transactions

 

On March 2, 2016, we entered into a related party lease with trusts created for the benefit of Edward G. Atsinger III, Chief Executive Officer, and Stuart W. Epperson, Chairman of the Board. The lease is for real property used to operate radio station KNUS-AM in Denver, Colorado. Our Nominating and Corporate Governance Committee reviewed the lease and lease terms and determined that the terms of the transaction were no less favorable to Salem than those that would be available in a comparable transaction in arm’s length dealings with an unrelated third party.  

 

Acquisitions – Broadcast

 

The FCC permits AM and FM radio stations to operate FM Translators, or low power secondary stations that retransmit the programming of a radio station to portions of the station’s service area that the primary signal does not reach because of distance or terrain barriers. The FCC began an AM Revitalization program, or “AMR,” that included several initiatives intended to benefit AM broadcasters. One of these benefits, intended to promote the use of FM Translators by AM broadcasters, allows an AM station to relocate one FM translator up to 250 miles from its authorized site and operate the translator on any non-reserved band FM channel in the AM station’s market, subject to coverage and interference rules.

 

On January 29, 2016, the FCC opened a one-time only filing window during which only Class C and Class D AM broadcast stations could participate. This window closed on July 28, 2016. A second window opened on July 29, 2016, allowing Class A and Class B AM broadcast stations to participate. The second window will close on October 31, 2016. During these filing windows, qualifying AM licensees may apply for one new FM translator station, in the non-reserved FM band to be used solely to re-broadcast the AM licensee’s AM signal to provide fill-in and/or nighttime service. The FM translator must rebroadcast the related AM station for at least four years, not counting any periods of silence.

 

We entered into several agreements to acquire FM Translators or FM Translators construction permits during this first window. Construction permits provide the station the authority to construct a new FM Translator or make changes in the existing facilities. We believe that securing these FM Translators allows us to increase our audience by providing enhanced coverage and reach of our existing AM broadcasts.

 

Our acquisitions include the following:

 

On June 20, 2016, we closed on the acquisition of an FM Translator used in our Columbus, Ohio market for $0.3 million in cash.

 

On June 10, 2016, we closed on the acquisition of an FM Translator in Amherst, New York for $60,000 in cash. The translator is used in our Pittsburgh, Pennsylvania market.

 

On June 8, 2016, we closed on the acquisition of a construction permit for an FM Translator construction permit in Charlotte, Michigan for $50,000 in cash. The translator will be used in our Detroit, Michigan market and is reflected in projects-in-process at June 30, 2016.

 

On June 3, 2016, we closed on the acquisition of a construction permit for an FM Translator in Atwood, Kentucky for $88,000 in cash. The translator will be used in our Columbus, Ohio market and is reflected in projects-in-process at June 30, 2016.

 

On May 13, 2016, we closed on the acquisition of a construction permit for an FM Translator in Kerrville, Texas for $50,000 in

cash. The translator will be used in our Houston, Texas market and is reflected in projects-in-process at June 30, 2016.

 

On May 2, 2016, we closed on the acquisition of an FM Translator in Lincoln, Maine for $100,000 in cash. The translator is used in our Boston, Massachusetts market.

 

On April 29, 2016, we closed on the acquisition of a construction permit for an FM Translator in Emporia, Kansas for $25,000 in cash. The translator will be relocated to Omaha, Nebraska, for use by our KCRO-AM radio station and is reflected in projects-in-process at June 30, 2016.

 

Acquisitions – Digital Media

 

On April 1, 2016, we acquired the Retirement Watch newsletter and websites for $0.1 million in cash and the assumption of $0.6 million in deferred subscription liabilities. Retirement Watch offers research and strategies associated with retirement planning. We recorded goodwill of approximately $8,600 associated with the expected synergies to be realized upon combining the operations of Retirement Watch into our digital media platform and brand loyalty from its existing subscriber base that is not a separately identifiable intangible asset.

 

On March 8, 2016, we acquired King James Bible mobile applications for $4.0 million, of which $2.7 million was paid in cash upon close and $1.3 million is due in deferred installments within one year from the closing date. The deferred installments were amended on May 17, 2016 to include the $0.3 million that was due upon finalization of banking arrangements with the deferred installments. The amended deferred payments of $1.3 million now consist of  $0.6 million due within 90 days, $0.3 million due within 180 days and two deferred payments of $0.2 million each due 270 and 360 days from the closing date, respectively. As of the date of this filing, we have paid the first installment of $0.6 million. We recorded goodwill of $0.2 million associated with the expected synergies to be realized from combining the operations of these applications into our existing digital media platform. The accompanying condensed consolidated statement of operations reflects the operating results of King James Bible mobile applications as of the closing date within our digital media operating segment.

 

Acquisitions – Publishing

 

Throughout the six month period ending June 30, 2016, we acquired domain names and other assets associated within our publishing operating segment for approximately $6,000 in cash.

 

A summary of our business acquisitions and asset purchases during the six month period ended June 30, 2016, none of which were individually or in the aggregate material to our Condensed Consolidated financial position as of the respective date of acquisition, is as follows:

 

Acquisition Date		Description		Total Cost
				(Dollars in thousands)
June 20, 2016		FM Translator, Columbus, Ohio (asset purchase)		$	345
June 10, 2016		FM Translator, Amherst, New York (asset purchase)			60
June 8, 2016		FM Translator construction permit, Charlotte, Michigan (asset purchase)			50
June 3, 2016		FM Translator construction permit, Atwood, Kentucky (asset purchase)			88
May 13, 2016		FM Translator construction permit, Kerrville, Texas (asset purchase)			50
May 2, 2016		FM Translator, Lincoln, Maine (asset purchase)			100
April 29, 2016		FM Translator construction permit, Emporia, Kansas (asset purchase)			25
April 1, 2016		Retirement Watch (business acquisition)			100
March 8, 2016		King James Bible mobile applications (business acquisition)			4,000
Various		Purchase of domain names and assets for use in publishing business (asset purchases)			6
				$	4,824

 

The operating results of our business acquisitions and asset purchases are included in our condensed consolidated results of operations from their respective closing date or the date that we began operating them under an LMA or TBA. 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 weighted probabilities 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.

 

 

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 estimated 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 six month period ending June 30, 2016:

 

Description		Total Consideration
		(Dollars in thousands)
Cash payments made upon closing		$	3,524
Deferred payments			1,300
Total purchase price consideration		$	4,824

 

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

 

		Net Broadcast			Net Digital Media			Net Publishing			Net Total
		Assets Acquired			Assets Acquired			Assets Acquired			Assets Acquired
		(Dollars in thousands)
Assets
Property and equipment		$	13		$	371		$	—		$	384
Projects in process			213			—						213
Broadcast licenses			492			—			—			492
Goodwill			—			230			—			230
Domain and brand names			—			908			6			914
Customer lists and contracts			—			2,867			—			2,867
Non-compete agreements			—			289			—			289
Liabilities
Deferred revenue			—			(565)			—			(565)
		$	718		$	4,100		$	6		$	4,824

 

Divestitures

 

On June 10, 2016, we received $2.5 million in cash from the National Park Service in exchange for its claim under eminent domain for our tower site in Miami, Florida. We recognized a pre-tax gain of $1.9 million from this sale. We entered into a limited terms of use agreement with the National Park Service to broadcast from the tower site for the next twenty years for a nominal fee.

 

Pending Transaction

 

On June 24, 2016, we entered into an LMA to operate radio station KTRB-AM in San Francisco, California beginning on July 1, 2016. We paid a security deposit of $55,000 in cash on June 27, 2016.

 

On June 15, 2016, we entered into an APA to acquire an FM Translator in Sebring, Florida for $77,000 in cash. This translator will be used by our WKAT-AM radio station in Miami, Florida. The transaction is expected to close in the third quarter of 2016.

 

On June 2, 2016, we entered into an APA to acquire an FM Translator in Lake Placid, Florida for $35,000 in cash. This translator will be used by our WTLN-AM radio station in Orlando, Florida. The transaction is expected to close in the third quarter of 2016.

 

On May 25, 2016, we entered into an APA to acquire an FM Translator in Lake City, Florida for $65,000 in cash from a related party. This translator will be used by our WBZQ-AM radio station in Orlando, Florida. The transaction is expected to close in the third quarter of 2016.

 

On May 18, 2016, we entered into an APA to acquire a construction permit for an FM Translator in Palm Coast, Florida for $65,000 in cash from a related party. This translator will be used by our WTWD-AM radio station in Tampa, Florida. The transaction is expected to close in the third quarter of 2016.

 

We are programming radio station KHTE-FM, Little Rock, Arkansas, under a 36 month TBA that began on April 1, 2015. The TBA is extendable for up to 48 months. We have the option to acquire the station for $1.2 million in cash during the TBA period. The accompanying condensed consolidated statements of operations included in this quarterly report on Form 10-Q reflect the operating results of this entity as of the TBA date.