NOTE 4. ACQUISITIONS AND RECENT TRANSACTIONS

 

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

 

Debt

 

 

 

 

Equity

 

On September 9, 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 September 30, 2016 to all Class A and Class B common stockholders of record as of September 19, 2016.

 

 

Related Party Transactions

 

On May 25, 2016, we entered into an APA to acquire an FM Translator in Lake City, Florida for $65,000 in cash from Delmarva Educational Association Corporation, a related party entity which Nancy A. Epperson the wife of the Chairman of the Board, and Stuart W. Epperson, Jr., the son of the

Chairman of the Board, serve as directors. The translator will be used by our WBZW-AM radio station in Orlando, Florida. The transaction closed on October 12, 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 Delmarva Educational Association Corporation, a related party entity which Nancy A. Epperson the wife of the Chairman of the Board, and Stuart W. Epperson, Jr., the son of the Chairman of the Board, serve as directors. This translator will be used by our WTWD-AM radio station in Tampa, Florida. The transaction closed on October 19, 2016.

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 located in Brighton, Colorado that is used to operate radio station KNUS-AM in our Denver, Colorado market. 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 closed 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 the applicable windows of the FCC AM R. 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 listening audience by providing enhanced coverage and reach of our existing AM broadcasts.

 

Our broadcast acquisitions include the following:

 

Acquisitions – Digital Media

 

On September 13, 2016, we acquired Mike Turner’s line of investment products, including TurnerTrends.com, other domain names and related assets for $0.4 million in cash and the assumption of $0.1 million in deferred subscription liabilities. Under terms of the APA, we may pay up to an additional $0.1 million in contingent earn-out consideration payable upon the achievement of specific net revenue targets within twelve months from the closing date. Turner’s investment products offer stock trading advisory newsletters to individual subscribers. We recorded goodwill of approximately $7,200 associated with the expected synergies to be realized upon combining the operations of Turner’s line of investment products into our digital media platform with Eagle Financial Publications and from brand loyalty from its existing subscriber base that is not a separately identifiable intangible asset.

 

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 non-individualized 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. During the nine month period ending September 30, 2016, we have paid $0.9 million in installments. 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.

 

Throughout the nine-month period ending September 30, 2016, we acquired domain names and other assets associated within our digital media operating segment for approximately $3,000 in cash.

 

Acquisitions – Publishing

 

On August 1, 2016, we acquired the assets of Hillcrest Media Group, Inc. (“Hillcrest”), for $3.5 million and the assumption of $1.1 million in deferred revenue liabilities. We paid $3.3 million in cash upon close with the remaining $0.2 million due within 90 days upon the finalization of deferred revenue obligations. Hillcrest provides self-publishing services for general market authors and will be operated within our existing Xulon Press business. We recorded goodwill of approximately $0.9 million associated with the expected synergies to be realized upon combining the operations of Hillcrest into our existing publishing platform and brand loyalty from its existing subscriber base that is not a separately identifiable intangible asset.

 

 

A summary of our business acquisitions and asset purchases during the nine month period ended September 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)
September 13, 2016		Mike Turner’s investment products and domain names (business acquisition)		$	416
August 1, 2016		Hillcrest Media Group, Inc. (business acquisition)			3,515
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 other assets (asset purchases)			6
				$	8,755

 

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.

 

We believe that these valuations and analysis provide appropriate estimates of the fair value for the net assets acquired as of the acquisition date. These initial valuations are subject to refinement during the measurement period, which may be up to one year from the acquisition date. During this measurement period we may retroactively record adjustments to the net assets acquired based on additional information obtained for items that existed as of the acquisition date. Upon the conclusion of the measurement period any adjustments are reflected in our consolidated statements of operations. We have not to date recorded adjustments to our estimated fair values used in our acquisition consideration during or after the measurement period.

 

 

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 nine month period ending September 30, 2016:

 

Description		Total Consideration
		(Dollars in thousands)
Cash payments made upon closing		$	7,189
Deferred payments			1,566
Total purchase price consideration		$	8,755

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
Trade accounts receivable, net of allowances of $42		$	—		$	—		$	166		$	166
Property and equipment			13			405			186			604
Broadcast licenses			705			—			—			705
Goodwill			—			237			924			1,161
Domain and brand names			—			1,129			2,121			3,250
Customer lists and contracts			—			3,101			526			3,627
Non-compete agreements			—			289			716			1,005
Liabilities
Deferred revenue			—			(642)			(1,121)			(1,763)
		$	718		$	4,519		$	3,518		$	8,755

 

Divestitures

 

On September 1, 2016, we received $0.7 million in cash associated with a land easement granted in our South Carolina market.

 

 

Pending Transactions

 

On July 21, 2016, we entered into an APA to acquire radio station KXFN-AM in St. Louis, Missouri for $0.2 million. The transaction closed on October 20, 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.

 

FM Translators or FM Translator Construction permits purchase agreements pending as of the period end September 30, 2016 include the following:

 

Date APA Entered

Permit or ID

Authorized Site - Current

Purchase Price

Escrow Deposits

Date Closed

Market

(Dollars in thousands)

5/18/2016

W267BW

Palm Coast, Florida* Related Party

$

65

$

-

10/19/2016

Tampa, Florida

5/25/2016

W224BU

Lake City, Florida Related Party

65

-

10/12/2016

Orlando, Florida

6/2/2016

W284BO

Lake Placid, Florida

35

4

-

Orlando, Florida

6/15/2016

W267BW

Sebring, Florida

77

15

11/7/2016

Miami, Florida

7/25/2016

K296AL

Crested Butte, Colorado

39

8

-

Colorado Springs, Colorado

7/25/2016

K283CA

Festus, Missouri *

40

8

-

St. Louis, Missouri

7/26/2016

W263BS

Rhinelander, Wisconsin

50

25

-

Minneapolis, Minnesota

7/26/2016

K294CP

Roseburg, Oregon *

45

9

-

Portland, Oregon

7/26/2016

W279BK

Carbondale, Pennsylvania

75

15

-

Pittsburgh, Pennsylvania

7/26/2016

W283BR

Dansville, New York

75

15

-

New York, New York

7/26/2016

K228FC

Kingsville, Texas *

50

10

-

Houston, Texas

7/26/2016

K245AR

Little Fish Lake Valley, California

44

20

-

Sacramento, California

7/26/2016

K276FZ

Eaglemount, Washington *

40

8

-

Portland, Oregon

7/27/2016

W256CO

Angola, Indiana *

50

15

10/20/2016

Cleveland, Ohio

7/27/2016

W249CQ

Cofax, Indiana *

45

14

10/20/2016

St. Louis, Missouri

7/27/2016

W263CS

Battle Creek, Michigan *

50

15

10/20/2016

Cleveland, Ohio

7/27/2016

W227BT

Port St Lucie, Florida

100

10

-

Tampa, Florida

W298AM

Aurora, Florida

-

Tampa, Florida

7/28/2016

K239CD

Lahaina, Hawaii *

110

11

-

Honolulu, Hawaii

K241BZ

Kihei, Hawaii

-

Honolulu, Hawaii

8/25/2016

K278BH

Astoria, Oregon

33

6

-

Seattle, Washington

9/22/2016

K260CG

Mojave Valley, Arizona*

20

2

-

Phoenix, Arizona