UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
   
(Mark One)þ 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2009
or
  For the Quarterly Period ended March 31, 2008
or
o
 TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          
For the transition period fromto
Commission file number 1-11588
Saga Communications, Inc.
(Exact name of registrant as specified in its charter)
   
Delaware 38-3042953
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
incorporation or organization)Identification No.)
   
73 Kercheval Avenue
Grosse Pointe Farms, Michigan
48236
(Address of principal executive offices) 48236
(Zip Code)
(313) 886-7070

(Registrant’s telephone number, including area code)
     
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo.
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yeso Noo.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):
Large accelerated fileroAccelerated filerþNon-accelerated filer  o
(Do not check if a smaller reporting company)		Smaller reporting company Reporting Companyo
(Do not check if a smaller reporting company)
     
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).
Yeso Noþ
     
The number of shares of the registrant’s Class A Common Stock, $.01 par value, and Class B Common Stock, $.01 par value, outstanding as of May 2, 20084, 2009 was 17,570,1773,664,552 and 2,390,338,599,614, respectively.
 

 

INDEX
INDEX
     
  Page
 
PART I.
FINANCIAL INFORMATION  3 
Item 1.
Financial Statements (Unaudited)  3 
Condensed consolidated balance sheets — March 31, 20082009 and December 31, 20072008
  3 
Condensed consolidated statements of incomeoperations — Three months ended March 31, 20082009 and 20072008
  4 
Condensed consolidated statements of cash flows — Three—Three months ended March 31, 20082009 and 20072008
  5 
Notes to unaudited condensed consolidated financial statements
  6 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations  1713 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk  2622 
Item 4.
Controls and Procedures  2622 
PART II OTHER INFORMATION
  22 
PART IIItem 1. Legal Proceedings
OTHER INFORMATION  2722 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds  2722 
Item 6. Exhibits
Exhibits  2722 
Signatures
  2823 
 Ex-4(d) Amendment Number 1 to the Credit AgreementEX-31.1 Section 302 Certification of CEO.
 Ex-4(e) Amendment Number 2 to the Credit AgreementEX-31.2 Section 302 Certification of CFO.
 Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32EX-32 Section 906 Certification of CEO and CFO& CFO.


2

PART I — FINANCIAL INFORMATION
Item 1.
Item 1.Financial Statements
Financial Statements
SAGA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
         
  March 31,
  December 31,
 
  2008  2007 
  (Unaudited)  (Note) 
  (In thousands) 
 
Assets
        
Current assets:        
Cash and cash equivalents $7,702  $13,343 
Accounts receivable, net  20,611   23,449 
Prepaid expenses and other current assets  4,802   4,590 
         
Total current assets  33,115   41,382 
Property and equipment  155,503   153,504 
Less accumulated depreciation  79,145   77,287 
         
Net property and equipment  76,358   76,217 
Other assets:        
Broadcast licenses, net  167,203   163,102 
Goodwill, net  54,968   49,661 
Other intangibles, deferred costs and investments, net  6,811   7,282 
         
Total other assets  228,982   220,045 
         
  $338,455  $337,644 
         
Liabilities and stockholders’ equity
        
Current liabilities:        
Accounts payable $1,339  $3,017 
Payroll and payroll taxes  5,789   7,722 
Other accrued expenses  3,862   4,848 
Barter transactions  2,226   1,720 
Current portion of long-term debt  1,061   — 
         
Total current liabilities  14,277   17,307 
Deferred income taxes  37,231   36,829 
Long-term debt  133,350   129,911 
Other liabilities  4,429   4,521 
Stockholders’ equity
        
Common stock  214   213 
Additional paid-in capital  51,034   50,600 
Retained earnings  113,047   112,137 
Treasury stock  (15,127)  (13,874)
         
Total stockholders’ equity  149,168   149,076 
         
  $338,455  $337,644 
         
         
  March 31,  December 31, 
  2009  2008 
  (Unaudited)  (Note) 
  (In thousands) 
Assets
        
Current assets:        
Cash and cash equivalents $8,020  $6,992 
Accounts receivable, net  16,346   20,091 
Prepaid expenses and other current assets  3,434   5,072 
Barter transactions  1,804   1,532 
Deferred income taxes  1,118   1,114 
       
Total current assets  30,722   34,801 
Property and equipment  158,804   157,829 
Less accumulated depreciation  86,594   84,446 
       
Net property and equipment  72,210   73,383 
Other assets:        
Broadcast licenses, net  107,673   107,673 
Other intangibles, deferred costs and investments, net  6,242   5,603 
       
Total other assets  113,915   113,276 
       
  $216,847  $221,460 
       
         
Liabilities and stockholders’ equity
        
Current liabilities:        
Accounts payable $1,374  $1,447 
Payroll and payroll taxes  5,430   7,326 
Other accrued expenses  3,181   3,804 
Barter transactions  2,083   1,786 
Current portion of long-term debt  2,350   1,061 
       
Total current liabilities  14,418   15,424 
Deferred income taxes  3,083   3,294 
Long-term debt  131,061   134,350 
Other liabilities  3,052   3,295 
Stockholders’ equity
        
Common stock  53   53 
Additional paid-in capital  48,292   51,951 
Retained earnings  45,283   45,645 
Treasury stock  (28,395)  (32,552)
       
Total stockholders’ equity  65,233   65,097 
       
  $216,847  $221,460 
       
Note: The balance sheet at December 31, 20072008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
See notes to unaudited condensed consolidated financial statements.

3

SAGA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
         
  Three Months Ended 
  March 31, 
  2009  2008 
  (Unaudited) 
  (In thousands, except per share data) 
Net operating revenue $26,124  $31,532 
Station operating expenses  23,940   25,421 
Corporate general and administrative  2,067   2,552 
       
Operating income  117   3,559 
Other expenses, net:        
Interest expense  773   1,995 
Other (income) expense, net  (4)  20 
       
Income (loss) before income tax  (652)  1,544 
Income tax provision (benefit)  (290)  634 
       
Net income (loss) $(362) $910 
       
Earnings (loss) per share        
Basic $(.09) $.18 
       
Diluted $(.09) $.18 
       
Weighted average common shares  4,161   5,020 
       
Weighted average common and common equivalent shares  4,161   5,022 
       
See notes to unaudited condensed consolidated financial statements.


34

SAGA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMECASH FLOWS
         
  Three Months Ended
 
  March 31, 
  2008  2007 
  (Unaudited) 
  (In thousands, except
 
  per share data) 
 
Net operating revenue $31,532  $31,883 
Station operating expenses  25,421   25,995 
Corporate general and administrative  2,552   2,316 
         
Operating income  3,559   3,572 
Other expenses, net:        
Interest expense  1,995   2,297 
Other expense, net  20   35 
         
Income before income tax  1,544   1,240 
Income tax provision  634   500 
         
Net income $910  $740 
         
Earnings per share        
Basic $.05  $.04 
         
Diluted $.05  $.04 
         
Weighted average common shares  20,078   20,221 
         
Weighted average common and common equivalent shares  20,087   20,242 
         
         
  Three Months Ended 
  March 31, 
  2009  2008 
  (Unaudited) 
  (In thousands) 
Cash flows from operating activities:
        
Cash provided by operating activities $5,053  $4,042 
Cash flows from investing activities:
        
Acquisition of property and equipment  (1,065)  (2,046)
Acquisition of stations  —   (10,729)
Other investing activities  27   33 
       
Net cash used in investing activities  (1,038)  (12,742)
Cash flows from financing activities:
        
Payments on long-term debt  (2,000)  (1,000)
Proceeds from long-term debt  —   5,500 
Payments for debt issuance costs  (967)  — 
Purchase of shares held in treasury  (20)  (1,399)
Other financing activities  —   (42)
       
Net cash (used in) provided by financing activities  (2,987)  3,059 
       
Net increase (decrease) in cash and cash equivalents  1,028   (5,641)
Cash and cash equivalents, beginning of period  6,992   13,343 
       
Cash and cash equivalents, end of period $8,020  $7,702 
       
See notes to unaudited condensed consolidated financial statements.


4

SAGA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
         
  Three Months Ended
 
  March 31, 
  2008  2007 
  (Unaudited) 
  (In thousands) 
 
Cash flows from operating activities:
        
Cash provided by operating activities $4,042  $4,268 
Cash flows from investing activities:
        
Acquisition of property and equipment  (2,046)  (2,414)
Increase in intangibles and other assets  —   (2,018)
Acquisition of stations  (10,729)  (925)
Other investing activities  33   10 
         
Net cash used in investing activities  (12,742)  (5,347)
Cash flows from financing activities:
        
Proceeds from long-term debt  5,500   — 
Payments on long-term debt  (1,000)  (2,000)
Purchase of shares held in treasury  (1,399)  (126)
Other financing activities  (42)  — 
         
Net cash provided by (used in) financing activities  3,059   (2,126)
Net decrease in cash and cash equivalents  (5,641)  (3,205)
Cash and cash equivalents, beginning of period  13,343   10,799 
         
Cash and cash equivalents, end of period $7,702  $7,594 
         
See notes to unaudited condensed consolidated financial statements.


5

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
     
1.  Summary of Significant Accounting Policies
Basis of Presentation
     
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions toForm 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements.
     
In our opinion, the accompanying financial statements include all adjustments of a normal, recurring nature considered necessary for a fair presentation of our financial position as of March 31, 20082009 and the results of operations for the three months ended March 31, 20082009 and 2007.2008. Results of operations for the three months ended March 31, 20082009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.2009.
     
For further information, refer to the consolidated financial statements and footnotes thereto included in the Saga Communications, Inc. Annual Report onForm 10-K for the year ended December 31, 2007.2008.
     
Income TaxesEarnings Per Share Information and Reverse Stock Split
     On January 27, 2009 the Company declared a one-for-four reverse stock split of its Class A and Class B Common Stock, effective January 28, 2009. The reverse stock split reduced the Company’s issued and outstanding shares of common stock from approximately 14,425,104 shares of Class A Common Stock and 2,402,338 shares of Class B Common Stock to approximately 3,606,932 and 600,585 shares, respectively.
Our effective tax rate is higher than     All 2008 share and per share information in the federal statutory rateaccompanying financial statements has been restated retroactively to reflect the reverse stock split. The common stock and additional paid-in capital accounts at December 31, 2008 reflect the retroactive capitalization of the 2009 reverse stock split.
     Approximately 3,500 incremental shares were not included in the diluted loss per share calculation for the three months ended March 31, 2009 as the shares were antidilutive since the Company reported a net loss for the quarter.
     The number of stock options outstanding that had an antidilutive effect on our earnings per share calculation was 450,000 and 670,000 for the three months ended March 31, 2009 and 2008, respectively. The actual effect of these shares, if any, on the diluted earnings per share calculation will vary significantly depending on the fluctuation in the stock price.
Change in Accounting Estimate
     In the second quarter of 2008, the Company reviewed the estimated useful lives of its television analog equipment. This review was performed because of the Federal Communications Commission’s (“FCC”) mandatory requirement that all television stations convert from analog to digital spectrum by February 2009. As a result of certain non-deductiblethis review, the Company’s depreciation rate of its analog equipment was increased to reflect the estimated period during which these assets will remain in service. In accordance with FASB 154,“Accounting Changes and amortization expensesError Corrections,”this change of estimated useful lives is deemed as a change in accounting estimate and has been accounted for prospectively, effective April 1, 2008. The effect of this change in estimate was to decrease net income approximately $201,000, and decrease basic and diluted earnings per share by $.05 for the inclusion of state taxes in the income tax amount.three months ended March 31, 2009.

6

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
     
Revenue Recognition
     
Revenue from the sale of commercial broadcast time to advertisers is recognized when commercials are broadcast. Revenue is reported net of advertising agency commissions. Agency commissions, when applicable, are based on a stated percentage applied to gross billing. All revenue is recognized in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Topic 13,“Revenue Recognition Revised and Updated.”
     Income Taxes
     Our effective tax rate is higher than the federal statutory rate as a result of the inclusion of state taxes in the income tax amount.
Time Brokerage Agreements
     
We have entered into Time Brokerage Agreements (“TBAs”) or Local Marketing Agreements (“LMA’s”) in certain markets. In a typical TBA/LMA, the Federal Communications Commission (“FCC”)FCC licensee of a station makes available, for a fee, blocks of air time on its station to another party that supplies programming to be broadcast during that air time and sells their own commercial advertising announcements during the time periods specified. We account for TBA’s/LMA’s under Statement of Financial Accounting Standards (“SFAS”) No. 13,“Accounting for Leases”and related interpretations. Revenue and expenses related to TBA’s/LMA’s are included in the accompanying unaudited Condensed Consolidated Statements of Income.Operations.
     
Nonmonetary Asset Exchanges
     
In 2006, the FCC granted to Sprint Nextel Corporation (“Nextel”) the right to reclaim from broadcasters in each market across the country the 1.9 GHz spectrum to use for an emergency communications system. In order to reclaim this signal, Nextel must replace all analog equipment currently using this spectrum with digital equipment. All broadcasters have agreed to use the digital substitute that Nextel will provide. The exchange of equipment will be completed on a market by market basis. As the equipment is exchanged and put into service in each of our markets we have and expect to continue to record gains to the extent that the fair market value of the equipment we receive exceeds the book value of the analog equipment we exchange. No marketsThere were transitionedno asset exchanges during the first quarter of 2008three months ended March 31, 2009 or 2007. All markets must be transitioned to digital by February 2009.


6

2008.
SAGA COMMUNICATIONS, INC.
2. Recent Accounting Pronouncements
     
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)In April 2008, the Financial Accounting Standards Board (“FASB”) issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). The FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under other accounting principles generally accepted in the United States of America. The guidance for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. Certain disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. We adopted FSP FAS 142-3 effective January 1, 2009, which did not have a material impact on our consolidated financial position, results of operations and cash flows.
     
2.  Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), ““Business Combinations”Combinations(“” (“SFAS 141R”), which changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effect of the business combination. We adopted SFAS 141R is effective prospectively for fiscal years beginning after December 15, 2008 (as of January 1, 2009, for the Company). SFAS 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.
In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 151”(“SFAS 160”), which establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. We dodid not currently expect the adoption of SFAS 160 to have a material impact on our consolidated financial position, results of operations and cash flows.

7

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
     
In February 2007,On January 1, 2009, we adopted the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS 159”), which allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The provisions of SFAS 159 were effective as of January 1, 2008. We did not elect the fair value option under this standard upon adoption.
In September 2006, the FASB issued SFAS No. 157, ““Fair Value Measurements”(“ (“SFAS 157”) which defines, related to nonfinancial assets and liabilities on a prospective basis. SFAS 157 establishes the authoritative definition of fair value, establishessets out a framework for measuring fair value and expands the required disclosures about fair value measurements. Companies were required to apply the recognition and disclosure provision of SFAS 157 for financial assets and financial liabilities effectivemeasurement. On January 1, 2008. In February 2008, the FASB issued FSPFAS 157-2 that delayed by one year, the effective date of SFAS 157 for the majority of nonfinancial assets and nonfinancial liabilities. Wewe adopted the provisions of SFAS 157 effective January 1, 2008 for certainrelated to financial assets which were not included in FSPFAS 157-2, which did not haveand liabilities as well as other assets and liabilities carried at fair value on a material impact or effect on our consolidated financial position, results of operations and cash flows. We do not expect therecurring basis. The adoption of the deferred portionprovisions of SFAS 157 todid not have a material impact on our consolidated financial position, results of operations and cash flows.
In September 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF IssueNo. 06-4,“Accounting for Deferred Compensation3. Intangible Assets and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”(“EITFNo. 06-4”). EITFNo. 06-4 requires that for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods, an employer should recognize a liability for future benefits in accordance with SFAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. We adopted EITFNo. 06-4 effective January 1, 2008, which did not have a material impact or effect on our consolidated financial position, results of operations and cash flows.


7

SAGA COMMUNICATIONS, INC.
Goodwill
     
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
3.  Intangible Assets and Goodwill
Under SFAS No. 142,“Accounting for Goodwill and Other Intangible Assets,” (“(“SFAS 142”) goodwill and intangible assets deemed to have indefinite lives are not amortized and are subject to impairment tests which are conducted annually, or more frequentfrequently if impairment indicators arise.
     
We consider FCC broadcast licenses to have indefinite lives. Factors that we considered in evaluating that the radio and television FCC licenses are indefinite-lived intangible assets under SFAS 142 include the following:
 • The radio and television broadcasting licenses may be renewed indefinitely at little cost.
 
 • The radio and television broadcasting licenses are essential to our business, and we intend to renew our licenses indefinitely.
 
 • We have never been denied the renewal of a FCC broadcast license.
 
 • We do not believe that there will be any compelling challenge to the renewal of our broadcast licenses.
 
 • We do not believe that the technology used in broadcasting will be replaced by another technology in the foreseeable future.
     
Based on the above, we believe cash flows from our radio and television licenses are expected to continue indefinitely. If actual market conditions are less favorable than those estimated by the Company or if economic conditions continue to deteriorate, the fair value of the Company’s broadcast licenses could decline and the Company may be required to recognize impairment charges in future periods. Such a charge could have a material effect on the consolidated financial statements.
     
Separate intangible assets that have finite lives are amortized over their useful lives using the straight-line method. Favorable lease agreements are amortized over the lives of the leases. Other intangibles are amortized over one to eleven years.
4. Common Stock and Treasury Stock
4.  Common Stock and Treasury Stock
     
The following summarizes information relating to the number of shares of our common stock issued in connection with stock transactions through March 31, 2008:2009:
         
  Common Stock Issued 
  Class A  Class B 
  (Shares in thousands) 
Balance, January 1, 2008  4,744   598 
Exercised options  5   — 
Conversion of shares  1   (1)
Issuance of restricted stock  23   3 
Forfeiture of restricted stock  (3)  — 
       
Balance, December 31, 2008  4,770   600 
Conversion of shares  1   (1)
Forfeiture of restricted stock  (1)  — 
       
Balance, March 31, 2009  4,770   599 
       
     
         
  Common Stock Issued 
  Class A  Class B 
  (Shares in thousands) 
 
Balance, January 1, 2007  18,892   2,396 
Exercised options  43   — 
Conversion of shares  8   (8)
Issuance of restricted stock  36   5 
Forfeiture of restricted stock  (2)  — 
         
Balance, December 31, 2007  18,977   2,393 
Exercised options  19   — 
Conversion of shares  3   (3)
         
Balance, March 31, 2008  18,999   2,390 
         
We have a Stock Buy-Back Program (the “Buy-Back Program”) to allow us to purchase up to $60,000,000 of our Class A Common Stock. From its inception in 1998 through March 31, 2008,2009, we have repurchased 2,146,3231,382,085 shares of our Class A Common Stock for approximately $27,651,000.$45,482,000. The terms of the Credit Agreement, as amended on March 9, 2009, restrict our ability to repurchase our Class A Common Stock.


8

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
5. Acquisitions
     
5.  Acquisitions
We actively seek and explore opportunities for expansion through the acquisition of additional broadcast properties. The unaudited condensed consolidated statements of incomeoperations include the operating results of the acquired stations from their respective dates of acquisition. All acquisitions were accounted for as purchases and, accordingly, the total costs were allocated to the acquired assets and assumed liabilities based on their estimated fair values as of the acquisition dates. The excess of the consideration paid over the estimated fair value of net assets acquired have been recorded as goodwill, which is deductible for tax purposes.
     
2008 Acquisitions
     On September 5, 2008, in connection with a city of license change for WJZK(FM), we exchanged $242,000 in cash and a tower, antenna, and transmitter with a fair market value (which approximates cost) of approximately $1,591,000, with another radio station for a broadcast license.
On January 21, 2004, we entered into agreements to acquire an FM radio station(WOXL-FM) serving the Asheville, North Carolina market. On November 1, 2002 we began providing programming under aSub-Time Brokerage Agreement toWOXL-FM, and on January 31, 2008 we closed on the acquisition for approximately $9,463,000 of which approximately $9,354,000 was paid in 2008 and $109,000 was paid in prior years. Since WOXL was operated under a TBA and we recognized the related interest expense, there is no pro forma effect of this acquisition.
     
On January 31, 2008, we paid $1,350,000 in connection with the 2006 acquisition of one FM radio station(WTMT-FM) serving the Tazewell, Tennessee market for approximately $4,186,000, we paid the seller $1,350,000, which had been recorded as a note payable at December 31, 2007. We relocated the tower to Weaverville, North Carolina (serving the Asheville, North Carolina market) and started broadcasting in Asheville on June 8, 2007.
market.
2007 Acquisitions6. Stock-Based Compensation
     
On November 1, 2007, we acquired an FM radio station(WCLZ-FM) serving the Portland, Maine market for approximately $3,555,000.
On August 31, 2007, we acquired two radio stations(WKRT-AM andWIII-FM licensed to Cortland, New York, and an FM translator station that rebroadcasts WIII) serving the Ithaca, New York market for approximately $3,843,000. Due to FCC ownership rules we were not permitted to ownWKRT-AM and as part of the transaction we donatedWKRT-AM to a non-profit organization.
On January 2, 2007 we acquired one FM radio station(WCNR-FM) serving the Charlottesville, Virginia market for $3,330,000. On September 1, 2006 we began providing programming under an LMA toWCNR-FM. We funded this acquisition on December 31, 2006.
On January 16, 2007, we agreed to pay $50,000 to cancel a clause in our 2003 purchase agreement ofWSNI-FM in the Winchendon, Massachusetts market that would have required us to pay the seller an additional $500,000 if within five years of closing we obtained approval from the FCC for a city of license change.
On January 2, 2007, in connection with the 2003 acquisition of one FM radio station(WJZA-FM) serving the Columbus, Ohio market, we paid an additional $850,000 to the seller upon obtaining approval from the FCC for a city of license change.


9

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed Consolidated Balance Sheet of 2008 and 2007 Acquisitions
The following unaudited condensed consolidated balance sheets represent the estimated fair value assigned to the related assets and liabilities of the 2008 and 2007 acquisitions at their respective acquisition dates. We paid approximately $10,729,000 and $925,000 in connection with acquisitions during the three months ended March 31, 2008 and 2007, respectively.
Saga Communications, Inc.
Condensed Consolidated Balance Sheet of 2008 and 2007 Acquisitions
         
  Acquisitions in 
  2008  2007 
  (In thousands) 
 
Assets Acquired:
        
Current assets $—  $130 
Property and equipment  56   931 
Other assets:        
Broadcast licenses-Radio segment  5,450   12,210 
Goodwill-Radio segment  5,307   834 
Other intangibles, deferred costs and investments  —   46 
         
Total other assets  10,757   13,090 
         
Total assets acquired  10,813   14,151 
         
Liabilities Assumed:
        
Current liabilities  84   3,853 
         
Total liabilities assumed  84   3,853 
         
Net assets acquired $10,729  $10,298 
         


10

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pro Forma Results of Operations for Acquisitions and Dispositions (Unaudited)
The following unaudited pro forma results of our operations for the three months ended March 31, 2008 and 2007 assume the 2008 and 2007 acquisitions occurred as of January 1, 2007. The pro forma results give effect to certain adjustments, including depreciation, amortization of intangible assets, increased interest expense on acquisition debt and related income tax effects. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the combinations been in effect on the dates indicated or which may occur in the future.
         
  Three Months Ended
 
  March 31, 
  2008  2007 
  (In thousands, except per share data) 
 
Consolidated Results of Operations:
        
Net operating revenue $31,532  $32,193 
Station operating expense  25,421   26,284 
Corporate general and administrative  2,552   2,316 
         
Operating income  3,559   3,593 
Interest expense  1,995   2,297 
Other expense (income), net  20   35 
Income taxes  634   509 
         
Net income $910  $752 
         
Basic earnings per share $.05  $.04 
         
Diluted earnings per share $.05  $.04 
         
         
  Three Months Ended
 
  March 31, 
  2008  2007 
  (In thousands) 
 
Radio Broadcasting Segment
        
Net operating revenue $27,381  $28,203 
Station operating expense  21,913   22,802 
         
Operating income $5,468  $5,401 
         
         
  Three Months Ended
 
  March 31, 
  2008  2007 
 
Television Broadcasting Segment
        
Net operating revenue $4,151  $3,990 
Station operating expense  3,508   3,482 
         
Operating income $643  $508 
         


11

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Reconciliation of pro forma segment operating income to pro forma consolidated operating income:
                 
        Corporate
    
  Radio  Television  and Other  Consolidated 
  (In thousands) 
 
Three Months Ended March 31, 2008:
                
Net operating revenue $27,381  $4,151  $—  $31,532 
Station operating expense  21,913   3,508   —   25,421 
Corporate general and administrative  —   —   2,552   2,552 
                 
Operating income (loss) $5,468  $643  $(2,552) $3,559 
                 
                 
        Corporate
    
  Radio  Television  and Other  Consolidated 
  (In thousands) 
 
Three Months Ended March 31, 2007:
                
Net operating revenue $28,203  $3,990  $—  $32,193 
Station operating expense  22,802   3,482   —   26,284 
Corporate general and administrative  —   —   2,316   2,316 
                 
Operating income (loss) $5,401  $508  $(2,316) $3,593 
                 
6.  Stock Based Compensation
The Company accounts for stock-based awards under the provisions of SFAS No. 123R,“Share-Based Payment” (“SFAS 123R”). Compensation expense of approximately $253,000 and $197,000 was recognized for the three months ended March 31, 2008 and 2007, respectively, and is included in corporate general and administrative expenses in our results of operations. The associated future income tax benefit recognized for the three months ended March 31, 2008 and 2007 were approximately $104,000 and $81,000, respectively.
Employee Stock Purchase Plan
We have an employee stock purchase plan (ESPP) for all eligible employees. Each quarter, an eligible employee may elect to withhold up to 10 percent of his or her compensation, up to a maximum of $5,000, to purchase shares of our stock at a price equal to 85% of the fair value of the stock as of the last day of such quarter. The ESPP will terminate on the earlier of the issuance of 1,562,500 shares pursuant to the ESPP or December 31, 2008. Approximately 8,275 and 6,228 shares were purchased under the ESPP during the three months ended March 31, 2008 and 2007, respectively. Our ESPP is deemed compensatory under the provisions of FAS 123R.
2005 Incentive Compensation Plan
     
On May 9, 2005, our stockholders approved the 2005 Incentive Compensation Plan (the “2005 Plan”) which replacesreplaced our 2003 Stock Option Plan (the “2003 Plan”) as to future grants. The 2005 Plan extends through March 2015 and allows for the granting of restricted stock, restricted stock units, incentive stock options, nonqualified stock options, and performance awards to officers and a selected number of employees.


12

     
SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2003 Stock Option PlanStock-Based Compensation
     
In 2003, we adopted the 2003 Plan, upon expiration of our 1992 Stock Option Plan (the “1992 Plan”) in December 2002, pursuant to which our key employees, including directors who are employees, were eligible to receive grants of options to purchase our Class A Common Stock or Class B Common Stock. With the approval of the 2005 Plan, the 2003 Plan was terminated as to future grants, therefore the shares availableThe Company accounts for future grantsstock-based awards under the 2003 Plan are no longer available.provisions of SFAS No. 123R,“Share-Based Payment”(“SFAS 123R”). Compensation expense of approximately $202,000 and $253,000 was recognized for the three months ended March 31, 2009 and 2008, respectively, and is included in corporate general and administrative expenses in our results of operations. The associated future income tax benefit recognized for the three months ended March 31, 2009 and 2008 was approximately $90,000 and $104,000, respectively.
     
The following summarizes the stock option transactions for the 2005 and 2003 Plans and the 1992 PlansStock Option Plan (the “1992 Plan”) for the three months ended March 31, 2008:2009:
                 
          Weighted Average    
          Remaining  Aggregate 
  Number of  Weighted Average  Contractual Term  Intrinsic 
  Options  Exercise Price  (Years)  Value 
Outstanding at January 1, 2009  450,059  $54.11   4.7  $— 
Granted  —   —         
Exercised  —   —         
Expired  —   —         
Forfeited  (2,516)  40.92         
             
Outstanding at March 31, 2009  447,543  $54.18   4.4  $— 
             
Exercisable at March 31, 2009  366,013  $57.43   3.8  $— 
             

9

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
     
                 
        Weighted Average
    
        Remaining
  Aggregate
 
  Number of
  Weighted Average
  Contractual Term
  Intrinsic
 
  Options  Exercise Price  (Years)  Value 
 
Outstanding at December 31, 2007  2,682,752  $12.81   4.4  $— 
Granted  —   —         
Exercised  —   —         
Forfeited  —   —         
                 
Outstanding at March 31, 2008  2,682,752  $12.81   4.1  $— 
                 
Exercisable at March 31, 2008  2,132,834  $13.50   3.1  $— 
                 
The following summarizes the non-vested stock option transactions for the 2005, 2003 and 1992 Plans for the three months ended March 31, 2008:2009:
         
      Weighted Average 
  Number of  Grant Date Fair 
  Options  Value 
Non-vested at January 1, 2009  126,325  $20.13 
Granted  —   — 
Vested  (42,279)  20.87 
Forfeited/canceled  (2,516)  20.27 
       
Non-vested at March 31, 2009  81,530  $19.74 
       
     
         
     Weighted Average
 
     Grant Date Fair
 
  Number of Options  Value 
 
Non-vested at December 31, 2007  738,263  $5.09 
Granted  —   — 
Vested  (188,345)  5.23 
Forfeited/canceled  —   — 
         
Non-vested at March 31, 2008  549,918  $5.04 
         
We calculated the fair value of the each option award on the date of grant using the Black-Scholes option pricing model. The following assumptions were used for each respective period:
         
  2007
  2006
 
  Grants  Grants 
 
Weighted average grant date fair value per share $4.82  $4.49 
Expected volatility  36.50%  37.19%
Expected term of options (years)  7.9   7.8 
Risk-free interest rate  4.76%  4.27%
Dividend yield  0%  0%
The estimated expected volatility, expected term of options and estimated annual forfeiture rate was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.


13

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following summarizes the restricted stock transactions for the three months ended March 31, 2008:2009:
         
      Weighted 
      Average 
      Grant Date 
  Shares  Fair Value 
Outstanding at January 1, 2009  53,649  $32.60 
Granted  —   — 
Vested  (14,356)  35.82 
Forfeited  (1,185)  31.98 
       
Non-vested and outstanding at March 31, 2009  38,108  $31.40 
       
     
         
     Weighted
 
     Average
 
     Grant Date
 
  Shares  Fair Value 
 
Outstanding at December 31, 2007  164,072  $10.24 
Granted  —   — 
Vested  (41,843)  10.55 
Forfeited  —   — 
         
Non-vested and outstanding at March 31, 2008  122,229  $10.13 
         
For the three months ended March 31, 20082009 and 2007,2008, we had approximately $113,000$126,000 and $89,000,$113,000, respectively, of total compensation expense related to restricted stock-based compensation arrangements.
     
1997 Non-Employee Director Stock Option Plan
     
In 1997, we adopted the 1997 Non-Employee Director Stock Option Plan (the “Directors Plan”) pursuant to which our directors who are not our employees were eligible to receive options. Options granted under the Directors Plan were non-qualified stock options, were immediately vested and become exercisable at the written election of the director. The options expire on the earlier of (i) 10 years from the date of grant or (ii) the March 16th following the calendar year in which they first become exercisable. This plan expired on May 12, 2007.
     
Effective January 1, 2007, each director who is not an employee shall receivereceives cash for his or her services as a director.
     
The following summarizes the stock option transactions for the Directors Plan for the three months ended March 31, 2008:2009:
                        
   Weighted
 Aggregate
  Weighted Aggregate 
 Number of
 Average Price
 Intrinsic
  Number of Average Price Intrinsic 
 Options per Share Value  Options per Share Value 
Outstanding at December 31, 2007  23,080  $0.009  $135,726 
Outstanding at January 1, 2009 1,036 $0.035 $6,802 
Granted  —   —      — — 
Exercised  (18,945)  0.009      — — 
              
Outstanding and exercisable at March 31, 2008  4,135  $0.009  $23,120 
Outstanding and exercisable at March 31, 2009 1,036 $0.035 $3,911 
              


1410

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
7. Long-Term Debt
     
7.  Long-Term Debt
Long termLong-term debt consisted of the following:
        
 March 31,
 December 31,
         
 2008 2007  March 31, December 31, 
 (In thousands)  2009 2008 
 (In thousands) 
Credit Agreement:         
Reducing revolver facility $133,350  $128,850  $132,350 $134,350 
Secured debt of affiliate  1,061   1,061  1,061 1,061 
          
  134,411   129,911  133,411 135,411 
Amounts payable within one year  1,061   —  2,350 1,061 
          
 $133,350  $129,911  $131,061 $134,350 
          
     
Our Credit Agreement is a $193,750,000$150,000,000 reducing revolving line of credit maturing on July 29, 2012. On March 31, 2008,September 30, 2009, the Revolving Commitments (as defined in the Credit Agreement) werewill be permanently reduced by $6,250,000$1,250,000 and will continue to be permanently reduced at the end of each calendar quarter thereafter in amounts ranging from 3.125%4.375% to 12.5% of the original total Revolving Commitments that were in effect on March 31, 2008.of $200,000,000. In addition, the Revolving Commitments shall be further reduced by specified percentages of Excess Cash Flow (as defined in the Credit Agreement) based on leverage ratios. Any outstanding balance under the Credit Agreement will be due on the maturity date of July 29, 2012.
     On March 9, 2009, we amended our Credit Agreement to (i) exclude certain items from the definition of Fixed Charges effective December 31, 2008, (ii) increase the minimum Fixed Charge Coverage ratio effective December 31, 2008, (iii) increase the maximum Leverage Ratio effective December 31, 2008, (iv) reduce the Revolving Commitments to $150,000,000, (v) revise the interest rates and commitment fees and (vi) impose certain other limitations on the Company with respect to restricted payments, acquisitions and stock purchases. In addition, we agreed to pay each lender a fee. The lender fee plus amendment costs were approximately $1 million, which were capitalized as deferred financing costs and will be amortized over the remaining life of the Credit Agreement.
Our indebtedness under the Credit Agreement is secured by a first priority lien on substantially all of our assets and of our subsidiaries, by a pledge of our subsidiaries’ stock and by a guarantee of our subsidiaries. We have approximately $60,400,000$17,650,000 of unused borrowing capacity under the Credit Agreement at March 31, 2008.2009.
     
The Credit Agreement contains a number of financial covenants (all of which we were in compliance with at March 31, 2008)2009) that, among other things, requires us to maintain specified financial ratios and impose certain limitations on us with respect to (i) the incurrence of additional indebtedness; (ii) acquisitions, except under specified conditions; (iii) the incurrence of additional liens, except those relating to capital leases and purchase money indebtedness; (iv) the disposition of assets; (v) the payment of cash dividends; (vi) repurchases of our Class A Common Stock; and (vi)(vii) mergers, changes in business and management, investments and transactions with affiliates. The financial covenants become more restrictive over the life of the Credit Agreement. The Credit Agreement allows
     Approximately $1,061,000 of secured debt of affiliate was refinanced in April 2009 for the paymenta term of dividends provided certain requirements are met.one year.


1511

SAGA COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
8. Segment Information
     
8.  Segment Information
We evaluate the operating performance of our markets individually. For purposes of business segment reporting, we have aligned operations with similar characteristics into two business segments: Radio and Television.
     
The Radio segment includes twenty-three markets, which includes all ninety-one of our radio stations and five radio information networks. The Television segment includes three markets and consists of five television stations and four low power television (“LPTV”) stations. The Radio and Television segments derive their revenue from the sale of commercial broadcast inventory. The category “Corporate general and administrative” represents the income and expense not allocated to reportable segments.
                                
     Corporate
    Corporate   
 Radio Television and Other Consolidated  Radio Television and Other Consolidated 
 (In thousands)  (In thousands) 
Three Months Ended March 31, 2008:
                
Three Months Ended March 31, 2009:
 
Net operating revenue $27,381  $4,151  $—  $31,532  $22,697 $3,427 $— $26,124 
Station operating expense  21,913   3,508   —   25,421  20,317 3,623 — 23,940 
Corporate general and administrative  —   —   2,552   2,552  — — 2,067 2,067 
                  
Operating income (loss) $5,468  $643  $(2,552) $3,559  $2,380 $(196) $(2,067) $117 
                  
Depreciation and amortization $1,562  $395  $53  $2,010  $1,531 $666 $61 $2,258 
                  
Total assets $294,777  $31,582  $12,096  $338,455  $172,280 $29,587 $14,980 $216,847 
                  
                                
     Corporate
    Corporate   
 Radio Television and Other Consolidated  Radio Television and Other Consolidated 
 (In thousands)  (In thousands) 
Three Months Ended March 31, 2007:
                
Three Months Ended March 31, 2008:
 
Net operating revenue $27,893  $3,990  $—  $31,883  $27,381 $4,151 $— $31,532 
Station operating expense  22,513   3,482   —   25,995  21,913 3,508 — 25,421 
Corporate general and administrative  —   —   2,316   2,316  — — 2,552 2,552 
                  
Operating income (loss) $5,380  $508  $(2,316) $3,572  $5,468 $643 $(2,552) $3,559 
                  
Depreciation and amortization $1,506  $389  $47  $1,942  $1,562 $395 $53 $2,010 
                  
Total assets $272,197  $31,401  $14,966  $318,564  $294,777 $31,582 $12,096 $338,455 
                  


1612

Item 2.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Results of Operations
     
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto of Saga Communications, Inc. and its subsidiaries contained elsewhere herein and the audited financial statements and Management Discussion and Analysis contained in our Annual Report onForm 10-K for the year ended December 31, 2007.2008. The following discussion is presented on both a consolidated and segment basis. Corporate general and administrative expenses, interest expense, other (income) expense, and income tax expense (benefit) are managed on a consolidated basis and are therefore, reflected only in our discussion of consolidated results.
     
Our discussion of the results of operations of our operating segments focuses on their operating income because we manage our operating segments primarily on their operating income. We evaluate the operating performance of our markets individually. For purposes of business segment reporting, we have aligned operations with similar characteristics into two business segments: Radio and Television. The Radio segment includes twenty-three markets, which includes all ninety-one of our radio stations and five radio information networks. The Television segment includes three markets and consists of five television stations and four LPTV stations.
General
     
We are a broadcast company primarily engaged in acquiring, developing and operating radio and television stations. We actively seek and explore opportunities for expansion through the acquisition of additional broadcast properties. We review acquisition opportunities on an ongoing basis.
For additional information with respect to acquisitions, see “Liquidity and Capital Resources” below.
Radio Segment
     
Our radio segment’s primary source of revenue is from the sale of advertising for broadcast on our stations. Depending on the format of a particular radio station, there are a predetermined number of advertisements available to be broadcast each hour.
     
Most advertising contracts are short-term, and generally run only for a few weeks. MostThe majority of our revenue is generated from local advertising, which is sold primarily by each radio markets’ sales staff. For the three months ended March 31, 2009 and 2008, approximately 88% and 2007, approximately 86% and 87%, respectively, of our gross radio segmentsegment’s gross revenue was from local advertising. To generate national advertising sales, we engage an independent advertising sales representative firmfirms that specializesspecialize in national sales for each of our broadcast markets.
     
Our revenue varies throughout the year. Advertising expenditures, our primary source of revenue, generally have been lowest during the winter months, which include the first quarter of each year. The downturn in the U.S. economy has had a significant adverse effect on our revenue for the first quarter of 2009, and our revenue for the first half of 2009 is continuing to trend downward.
     In 2008 we had a considerable increase in revenue due to political advertising. Since 2009 is not an election year, we expect political revenue to significantly decline in 2009.
Our net operating revenue, station operating expense and operating income varies from market to market based upon the market’s rank or size which is based upon population and the available radio advertising revenue in that particular market.
     
Our financial results are dependent on a number of factors, the most significant of which is our ability to generate advertising revenue through rates charged to advertisers. The rates a station is able to charge are, in large part, based on a station’s ability to attract audiences in the demographic groups targeted by its advertisers. In a number of our markets this is measured by periodic reports generated by independent national rating services. In the remainder of our markets it is measured by the results advertisers obtain through the actual running of an advertising schedule. Advertisers measure these results based on increased demand for their goods or servicesand/or actual revenues generated from such demand. Various factors affect the rate a station can charge, including the general strength of the local and national economies, population growth, ability to provide popular programming, local market competition, target marketing capability of radio compared to other advertising media and signal strength. Because reaching a large and demographically attractive audience is crucial to a station’s financial success, we endeavor to develop strong listener loyalty.


1713

When we acquireand/or begin to operate a station or group of stations we generally increase programming and advertising and promotion expenses to increase our share of our target demographic audience. Our strategy sometimes requires levels of spending commensurate with the revenue levels we plan on achieving in two to five years. During periods of economic downturns, or when the level of advertising spending is flat or down across the industry, this strategy may result in the appearance that our cost of operations are increasing at a faster rate than our growth in revenues, until such time as we achieve our targeted levels of revenue for the acquired station or group of stations.
     
The number of advertisements that can be broadcast without jeopardizing listening levels (and the resulting ratings) is limited in part by the format of a particular radio station. Our stations strive to maximize revenue by constantly managing the number of commercials available for sale and adjusting prices based upon local market conditions and ratings. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of the day, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year. Any change in our revenue, with the exception of those instances where stations are acquired or sold, is generally the result of inventory sell out ratios and pricing adjustments, which are made to ensure that the station efficiently utilizes available inventory.
     
Our radio stations employ a variety of programming formats. We periodically perform market research, including music evaluations, focus groups and strategic vulnerability studies. Our stations also employ audience promotions to further develop and secure a loyal following. We believe that the diversification of formats on our radio stations helps to insulate us from the effects of changes in musical tastes of the public on any particular format.
     
The primary operating expenses involved in owning and operating radio stations are employee salaries including commissions, depreciation, programming expenses, and advertising and promotion expenses.
     
Similar to the fluctuations in the current general economic climate, radio revenue growth has been declining or stagnant over the last several years primarily in major markets that are dependent on national advertising. We believe that this decline in major market radio advertising revenue is the result of a lack of pricing discipline by radio operators and new technologies and media (such as the Internet, satellite radio, and MP3 players.)players). These new technologies and media are gaining advertising share against radio and other traditional media. Conversely, radio revenue in the small to mid markets has been trending upward in recent months.
     
We have begun several initiatives to offset the declines.declines in revenue. We are continuing to expand our interactive initiative to provide a seamless audio experience across numerous platforms to connect with our listeners where and when they want, and are adding online components including streaming our stations over the internetInternet and on-demand options. We are seeing solid development potential in this area and believe that revenues from our interactive initiatives will continue to increase.
     
We also continue the rollout of HD RadiotmRadio™. HD Radio utilizes digital technology that provides improved sound quality over standard analog broadcasts and also allows for the delivery of additional channels of diversified programming or data streams in each radio market. It is unclear what impact HD Radio will have on the industry and our revenue as the availability of HD receivers, particularly in automobiles, is not widely available.
     In response to the declining trend in revenue caused by the global economic crisis, we have continued to evaluate and reduce operating expenses. We have made reductions in our workforce, implemented a companywide 5% salary decrease, renegotiated and/or eliminated certain contracts, and are continuing to evaluate every area of our operations for additional savings in expenses. Given the current economic environment, we anticipate these reductions to decrease our operating expenses by at least 5%.
During the three months ended March 31, 20082009 and 20072008 and the years ended December 31, 20072008 and 2006,2007, our Columbus, Ohio; Manchester, New Hampshire; Milwaukee, Wisconsin; and Norfolk, Virginia markets, when combined, represented approximately 78%30%, 88%32%, 60%30% and 64%32%, respectively, of our consolidated net operating income.revenue. An adverse change in any of these radio markets or our relative market position in those markets could have a significant impact on our operating results as a whole.

14

     
A significant decline in the total available radio advertising dollars in the Columbus, Ohio and Norfolk, Virginiaour major markets has resulted in a significant decline in our net operating revenue for the three months ended March 31, 20082009 as compared to the corresponding period of 2007, of 23% and 18%, respectively and2008. This decline in net operating revenue has directly affected the related operating income inof our radio stations atin these markets. Additionally, we are experiencing ratings softness in


18

these markets which has also affected revenue. We do not expect any significant improvements in the Columbus and Norfolk marketsrevenue until there are considerable improvements in the foreseeable future.economy.
     
The following tables describe the percentage of our consolidated net operating incomerevenue represented by each of these markets:
        
 Percentage of
  
 Consolidated
 Percentage of
 Operating
 Consolidated
 Income for
 Operating
 the Three
 Income for
                
 Months
 the Years
 Percentage of Consolidated Percentage of Consolidated 
 Ended
 Ended
 Net Operating Revenue for Net Operating Revenue 
 March 31, December 31, the Three Months Ended for the Years Ended 
 2008 2007 2007 2006 March 31, December 31, 
 2009 2008 2008 2007 
Market:
         
Columbus, Ohio  2% 13%  7% 10%  7%  6%  6%  7%
Manchester, New Hampshire 27% 19% 15% 14%  5%  7%  6%  6%
Milwaukee, Wisconsin 47% 48% 31% 30%  14%  14%  14%  14%
Norfolk, Virginia  2%  8%  7% 10%  4%  5%  4%  5%
     
We use certain financial measures that are not calculated in accordance with generally accepted accounting principles in the United States of America (GAAP) to assess our financial performance. For example, we evaluate the performance of our markets based on “station operating income” (operating income plus corporate general and administrative expenses, depreciation and amortization). Station operating income is generally recognized by the broadcasting industry as a measure of performance, is used by analysts who report on the performance of the broadcasting industry and it serves as an indicator of the market value of a group of stations. In addition, we use it to evaluate individual stations, market-level performance, overall operations and as a primary measure for incentive based compensation of executives and other members of management. Station operating income is not necessarily indicative of amounts that may be available to us for debt service requirements, other commitments, reinvestment or other discretionary uses. Station operating income is not a measure of liquidity or of performance in accordance with GAAP, and should be viewed as a supplement to, and not a substitute for our results of operations presented on a GAAP basis.
     
During the three months ended March 31, 20082009 and 20072008 and the years ended December 31, 20072008 and 2006,2007, the radio stations in our four largest markets when combined, represented approximately 36%, 38%, 44%,37% and 40% and 45%, respectively, of our consolidated station operating income. The following tables describe the percentage of our consolidated station operating income represented by each of these markets:
                 
  Percentage of Consolidated  Percentage of Consolidated 
  Station Operating Income (*)  Station Operating Income(*) 
  for the Three Months Ended  for the Years Ended 
  March 31,  December 31, 
  2009  2008  2008  2007 
Market:
                
Columbus, Ohio  5%  2%  4%  6%
Manchester, New Hampshire  10%  12%  11%  10%
Milwaukee, Wisconsin  25%  22%  20%  20%
Norfolk, Virginia  (4)%  2%  2%  4%
         
  Percentage of
  
  Consolidated
 Percentage of
  Station
 Consolidated
  Operating
 Station
  Income (*)
 Operating
  for the Three
 Income (*)
  Months
 for the Years
  Ended
 Ended
  March 31, December 31,
  2008 2007 2007 2006
 
Market:
        
Columbus, Ohio  2%  7%  6%  8%
Manchester, New Hampshire 12%  9% 10%  9%
Milwaukee, Wisconsin 22% 23% 20% 21%
Norfolk, Virginia  2%  5%  4%  7%
 
*Operating income (excluding non-cash impairment charge) plus corporate general and administrative expenses, depreciation and amortizationamortization.


1915

Television Segment
     
Our television segment’s primary source of revenue is from the sale of advertising for broadcast on our stations. The number of advertisements available for broadcast on our television stations is limited by network affiliation and syndicated programming agreements and, with respect to children’s programs, federal regulation. Our television stations’ local market managers determine only the number of advertisements to be broadcast in locally produced programs only, which are primarily news programming and occasionally local sports or information shows.
     
Our net operating revenue, station operating expense and operating income vary from market to market based upon the market’s rank or size, which is based upon population, available television advertising revenue in that particular market, and the popularity of programming being broadcast.
     
Our financial results are dependent on a number of factors, the most significant of which is our ability to generate advertising revenue through rates charged to advertisers. The rates a station is able to charge are, in large part, based on a station’s ability to attract audiences in the demographic groups targeted by its advertisers, as measured principally by periodic reports by independent national rating services. Various factors affect the ratesrate a station can charge, including the general strength of the local and national economies, population growth, ability to provide popular programming through locally produced news, sports and weather and as a result of syndication and network affiliation agreements, local market competition, the ability of television broadcasting to reach a mass appeal market compared to other advertising media, and signal strength including cable/satellite coverage, and government regulation and policies.
     For the period commencing on January 1, 2009, we generally elected “retransmission consent” in notifying the Multichannel Video Programming Distributors (MVPDs) that carry our television programming in our television markets. We have been in negotiations with the MVPDs as to the terms of the carriage of our television stations and the compensation we receive for granting such carriage rights. These negotiations resulted in agreements that will provide approximately $600,000 in revenue in 2009.
When we acquireand/or begin operating a station or group of stations we generally increase programming expenses including local news, sports and weather programming, new syndicated programming, and advertising and promotion expenses to increase our viewership. Our strategy sometimes requires levels of spending commensurate with the revenue levels we plan on achieving in two to five years. During periods of economic downturns, or when the level of advertising spending is flat or down across the industry, this strategy may result in the appearance that our cost of operations are increasing at a faster rate than our growth in revenues, until such time as we achieve our targeted levels of revenue for the acquired/operated station or group of stations.
     
Our stations strive to maximize revenue by constantly adjusting prices for our commercial spots based upon local market conditions, demand for advertising and ratings. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of the day, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year. Any change in our revenue, with the exception of those instances where stations are acquired or sold, is generally the result of pricing adjustments, which are made to ensure that the station efficiently utilizes available inventory.
     
Because audience ratings in the local market are crucial to a station’s financial success, we endeavor to develop strong viewer loyalty by providing locally produced news, weather and sports programming. We believe that this emphasis on the local market provides us with the viewer loyalty we are trying to achieve.
     
Most of our revenue is generated from local advertising, which is sold primarily by each television markets’ sales staff. For the three months ended March 31, 2009 and 2008, approximately 83% and 2007, approximately 82% and 83%, respectively, of our television segment’s gross television revenue was from local advertising. To generate national advertising sales, we engage independent advertising sales representatives that specialize in national sales for each of our television markets.
     
Our revenue varies throughout the year. Advertising expenditures, our primary source of revenue, generally have been lowest during the winter months, which include the first quarter of each year. The downturn in the U.S. economy has had a significant adverse effect on our revenue for the first quarter of 2009, and our revenue for the first half of 2009 is continuing to trend downward.

16

     In 2008 we had a considerable increase in revenue due to political advertising. Since 2009 is not an election year, we expect political revenue to significantly decline in 2009.
     
The primary operating expenses involved in owning and operating television stations are employee salaries including commissions, depreciation, programming expenses, including news production and the cost of acquiring certain syndicated programming, and advertising and promotion expenses.


20

Our television market in Joplin, Missouri represented approximately 16%, 12%, 9%14% and 9%, respectively, of our consolidated operating income (excluding non-cash impairment charge) for the three months ended March 31, 2008 and 2007 and the years ended December 31, 20072008 and 2006.
2007. As a result of the depressed economy in the first quarter of 2009, our consolidated operating income for the Joplin market is not meaningful for the three months ended March 31, 2009.
Three Months Ended March 31, 20082009 Compared to Three Months Ended March 31, 20072008
     
Results of Operations
     
The following tables summarize our results of operations for the three months ended March 31, 20082009 and 2007.
2008.
Consolidated Results of Operations
                 
  Three Months Ended
       
  March 31,  $ Increase
  % Increase
 
  2008  2007  (Decrease)  (Decrease) 
  (In thousands, except percentages and per share information) 
 
Net operating revenue $31,532  $31,883  $(351)  (1.1)%
Station operating expense  25,421   25,995   (574)  (2.2)%
Corporate G&A  2,552   2,316   236   10.2%
                 
Operating income  3,559   3,572   (13)  (.4)%
Interest expense  1,995   2,297   (302)  (13.1)%
Other expense (income), net  20   35   (15)  N/M 
Income taxes  634   500   134   26.8%
                 
Net income $910  $740  $170   23.0%
                 
Earnings per share (basic and diluted) $.05  $.04  $.01   25.0%
                 
                 
  Three Months Ended       
  March 31,  $ Increase  % Increase 
  2009  2008  (Decrease)  (Decrease) 
  (In thousands, except percentages and per share information) 
Net operating revenue $26,124  $31,532  $(5,408)  (17.2)%
Station operating expense  23,940   25,421   (1,481)  (5.8)%
Corporate G&A  2,067   2,552   (485)  (19.0)%
             
Operating income  117   3,559   (3,442)  (96.7)%
Interest expense  773   1,995   (1,222)  (61.3)%
Other expense (income), net  (4)  20   (24)  N/M 
Income taxes  (290)  634   (924)  (145.7)%
             
Net income (loss) $(362) $910  $(1,272)  (139.8)%
             
Earnings (loss) per share (basic and diluted) $(.09) $.18  $(.27)  (150.0)%
             
Radio Broadcasting Segment
                 
  Three Months Ended
       
  March 31,  $ Increase
  % Increase
 
  2008  2007  (Decrease)  (Decrease) 
  (In thousands, except percentages) 
 
Net operating revenue $27,381  $27,893  $(512)  (1.8)%
Station operating expense  21,913   22,513   (600)  (2.7)%
                 
Operating income $5,468  $5,380  $88   1.6%
                 
                 
  Three Months Ended       
  March 31,  $ Increase  % Increase 
  2009  2008  (Decrease)  (Decrease) 
  (In thousands, except percentages)
Net operating revenue $22,697  $27,381  $(4,684)  (17.1)%
Station operating expense  20,317   21,913   (1,596)  (7.3)%
             
Operating income $2,380  $5,468  $(3,088)  (56.5)%
             
Television Broadcasting Segment
                 
  Three Months Ended       
  March 31,  $ Increase  % Increase 
  2009  2008  (Decrease)  (Decrease) 
  (In thousands, except percentages)
Net operating revenue $3,427  $4,151  $(724)  (17.4)%
Station operating expense  3,623   3,508   115   3.3%
             
Operating income (loss) $(196) $643  $(839)  (130.5)%
             
                 
  Three Months Ended
       
  March 31,  $ Increase
  % Increase
 
  2008  2007  (Decrease)  (Decrease) 
  (In thousands, except percentages) 
 
Net operating revenue $4,151  $3,990  $161   4.0%
Station operating expense  3,508   3,482   26   0.8%
                 
Operating income $643  $508  $135   26.6%
                 
 
N/M = Not Meaningful
N/M = Not Meaningful


2117

     
Reconciliation of segment operating income (loss) to consolidated operating income:
                 
          Corporate    
  Radio  Television  and Other  Consolidated 
  (In thousands) 
Three Months Ended March 31, 2009:
                
Net operating revenue $22,697  $3,427  $—  $26,124 
Station operating expense  20,317   3,623   —   23,940 
Corporate general and administrative  —   —   2,067   2,067 
             
Operating income (loss) $2,380  $(196) $(2,067) $117 
             
                 
          Corporate    
  Radio  Television  and Other  Consolidated 
  (In thousands) 
Three Months Ended March 31, 2008:
                
Net operating revenue $27,381  $4,151  $—  $31,532 
Station operating expense  21,913   3,508   —   25,421 
Corporate general and administrative  —   —   2,552   2,552 
             
Operating income (loss) $5,468  $643  $(2,552) $3,559 
             
Consolidated
     
                 
        Corporate
    
  Radio  Television  and Other  Consolidated 
  (In thousands) 
 
Three Months Ended March 31, 2008:
                
Net operating revenue $27,381  $4,151  $—  $31,532 
Station operating expense  21,913   3,508   —   25,421 
Corporate general and administrative  —   —   2,552   2,552 
                 
Operating income (loss) $5,468  $643  $(2,552) $3,559 
                 
                 
        Corporate
    
  Radio  Television  and Other  Consolidated 
  (In thousands) 
 
Three Months Ended March 31, 2007:
                
Net operating revenue $27,893  $3,990  $—  $31,883 
Station operating expense  22,513   3,482   —   25,995 
Corporate general and administrative  —   —   2,316   2,316 
                 
Operating income (loss) $5,380  $508  $(2,316) $3,572 
                 
Consolidated
For the three months ended March 31, 2008,2009, consolidated net operating revenue was $31,532,000$26,124,000 compared with $31,883,000$31,532,000 for the three months ended March 31, 2007,2008, a decline of approximately $351,000$5,408,000 or 1%17%. We had a decrease of approximately $650,000$5,592,000 in net operating revenue generated by stations that we owned or operated for the comparable period in 20072008 (“same station”), and an increase in net operating revenue of approximately $299,000$184,000 attributable to stations we did not own and operate for the entire comparable period. Although sameSame station gross national revenue and same station gross local revenue decreased approximately $1,398,000 and $4,408,000, respectively. Same station gross political revenue increaseddecreased approximately $150,000$613,000. The decrease in both gross local and $600,000, respectively,national revenue was primarily the result of revenue downturns in all of our markets. The most considerable declines were in our Des Moines, IA (21%), Manchester, NH (37%), Milwaukee, WI (20%), Norfolk, VA (37%), and Victoria, TX (24%) markets. Our revenue has been directly affected by the recent and ongoing economic conditions. There has been an overall decline in advertising revenue as a result of the slowdown in the current quarter,economy and advertising spending in general. We expect this increase was offset by atrend will continue throughout 2009. The decrease in gross local revenue of approximately $1,400,000. The increase in political revenue was directly attributable to advertising in the prior year for the 2008 presidential, race’s early primaries and congressional, senatorial and local races as well. We expect political revenue for 2008 to continue to trend upward for the year. The decrease in local revenue was primarily the result of the significant declines in gross local revenue of our radio stations in the Norfolk (18%) and Columbus (23%) markets. These declines are attributable to the significant declines in radio advertising spending in these specific markets. We do not expect any significant improvements in these markets in the foreseeable future.races.
     
Station operating expense was $23,940,000 for the three months ended March 31, 2009, compared with $25,421,000 for the three months ended March 31, 2008, compared with $25,995,000 for the three months ended March 31, 2007, a decrease of approximately $574,000$1,481,000 or 2%6%. Approximately $802,000Same station operating expense decreased $1,626,000 from the prior year quarter. The decrease in same station operating expense was a result of the decrease was attributable to stations we owned and operated fordecline in net operating revenue as well as expense reductions implemented in the entire comparable period,quarter. These reductions were partially offset by an increaseincreased depreciation expense as a result of $228,000a change in estimated useful lives of television analog equipment. Station operating expense increased approximately $145,000 from those stations that we did not own or operate for the comparable period in 2007. The decrease in same station operating expense was the direct result of the expense reductions in our radio segment we began instituting in 2007 as a result of declines in revenue, particularly in programming and advertising and promotions. We also had a decline in selling and commission expense directly attributable to the decrease in revenue.2008.
     
Operating income for the three months ended March 31, 20082009 was $3,559,000$117,000 compared to $3,572,000$3,559,000 for the three months ended March 31, 2007,2008, a decrease of approximately $13,000, or less than 1%.$3,442,000. The decrease was the result of lower stationthe significant decline in net operating expenserevenue described in detail above, partially offset by reduced net operating revenuea $485,000 or 19% decrease in corporate general and a $236,000 or 10% increaseadministrative charges. The decrease in corporate general and administrative charges was primarily attributable to an increasereductions in officers’ life insurancecompensation related costs of $253,000 and overall expense of $115,000, an increase in stock based compensation expense of $80,000 and an increase in interactive media related expenses of $70,000. The increase in officer’s life insurance expense was attributable toreductions, including a decline in the cash surrender value of the lifeaudit fees, interactive fees, and travel expenses.


2218

insurance policies. The increase in stock based compensation was the result of stock options and restricted stock granted in May of 2007 for which there was no expense in the first quarter of 2007.
We generatedreported a net incomeloss of approximately $910,000$362,000 ($.05.09 per share on a fully diluted basis) during the three months ended March 31, 2008,2009, compared with $740,000to net income of $910,000 ($.04.18 per share on a fully diluted basis) for the three months ended March 31, 2007, an increase2008, a decrease of approximately $170,000 or 23%.$1,272,000. The increasedecrease was primarily the result of reduceda decline in operating income of $3,442,000, offset by decreases in interest expense of $302,000, offset by higherand income tax expense of $134,000.$1,222,000 and $924,000, respectively. The decrease in interest expense was attributable to an average reduction in market interest rates of 0.85%approximately 3.6%. We expect interest expense to increase in the second quarter as a result of the amendment to our debt agreement on March 9, 2009. The increasedecrease in income tax expense was directly attributable to operating performance.
     
Radio Segment
     
For the three months ended March 31, 2008,2009, net operating revenue of the radio segment was $27,381,000$22,697,000 compared with $27,893,000$27,381,000 for the three months ended March 31, 2007,2008, which represents a decrease of $512,000$4,684,000 or 2%17%. During 2008the current quarter we had an increase in net operating revenue of approximately $299,000$184,000 that was attributable to stations we did not own and operate for the entire comparable period. We had a decrease of approximately $811,000$4,868,000 in net operating revenue generated by radio stations that we owned or operated for the comparable period in 20072008 (“same station”). The decrease in sameSame station gross national revenue was primarily attributable toand same station gross local revenue decreases ofdecreased approximately $1,320,000, partially offset by an increase in same$1,192,000 and $3,964,000, respectively. Same station gross political revenue of $400,000.decreased approximately $426,000 in the current quarter as compared to the prior year period. The decrease in both gross local and national revenue was primarily the result of the significant declinesrevenue downturns in gross local revenueall of our radio stationsmarkets. The most considerable declines were in our Des Moines, IA (21%), Manchester, NH (37%), Milwaukee, WI (20%), and Norfolk, VA (37%) markets. Our revenue has been directly affected by the recent and ongoing economic conditions. There has been an overall decline in advertising revenue as a result of the slowdown in the Norfolk (18%)economy and Columbus (23%) markets. These declines are attributable to the significant declines in radio advertising spending in these specific markets.general. We do not expect any significant improvementsthis trend will continue throughout 2009. The decrease in these markets in the foreseeable future. The increase ingross political revenue was directly attributable to advertising in the prior year for the 2008 presidential, race’s early primaries and congressional, senatorial and local races as well. We expect political revenue for 2008 to continue to trend upward for the year.races.
     
Station operating expense for the radio segment was $20,317,000 for the three months ended March 31, 2009, compared with $21,913,000 for the three months ended March 31, 2008, compared with $22,513,000 for the three months ended March 31, 2007, a decreasedecline of approximately $600,000$1,596,000 or 3%7%. Same station operating expense decreased $1,741,000 from the prior year quarter. The decrease resulted from a decrease of $828,000 in same station operating expense offset by an increase of $228,000 from the operation of radio stations that we did not own or operate for the comparable period in 2007. The decrease in radio same station operating expense was thea direct result of the decline in net operating revenue as well as expense reductions in our radio segment we began instituting in 2007 as a result of declines in revenue, particularly in programming and advertising and promotions. We also had a decline in selling and commission expense directly attributable to the decrease in revenue.
Operating incomeimplemented in the radio segment forquarter. During the three months ended March 31, 2008 was $5,468,000 compared to $5,380,000 for the three months ended March 31, 2007,current quarter we had an increase in station operating expense of approximately $88,000 or 2%. The increase was$145,000 attributable to stations we did not own and operate for the entire comparable period.
     Operating income in the radio segment decreased $3,088,000 or 56%, to $2,380,000 for the three months ended March 31, 2009, from $5,468,000 for the three months ended March 31, 2008. The decrease was primarily the result of lower same station net operating revenue as described in detail above.
Television Segment
     
For the three months ended March 31, 2008,2009, net operating revenue of our television segment was $4,151,000$3,427,000 compared with $3,990,000$4,151,000 for the three months ended March 31, 2007, an increase2008, a decrease of $161,000$724,000 or 4%17%. The improvement in net operatingGross national revenue was attributable to an increase inand gross local revenue decreased $206,000 and $444,000, respectively. Gross political revenue of $179,000decreased $187,000 in the current quarter as compared to the prior year period. All of our television markets have been directly affected by the recent and ongoing economic conditions. There has been an overall decline in advertising revenue as a result of the slowdown in the economy and advertising spending in general. We expect this trend will continue throughout 2009. The increasedecrease in gross political revenue was directly attributable to advertising in the prior year for the 2008 presidential, race’s early primaries and congressional, senatorial and local races as well. We expect political revenue for 2008 to continue to trend upward for the year.races.
     
Station operating expense in the television segment for the three months ended March 31, 20082009 was $3,508,000,$3,623,000, compared with $3,482,000$3,508,000 for the three months ended March 31, 2007,2008, an increase of approximately $26,000$115,000 or 1%3%. Station operating expense decreased $156,000 as a result of cost reductions and declines in net operating revenue. However, this decrease was offset by an increase in depreciation expense in the current quarter as a result of a change in the estimated useful life of television analog equipment.
     
Operating incomeloss in the television segment for the three months ended March 31, 20082009 was $643,000$196,000 compared to $508,000operating income of $643,000 for the three months ended March 31, 2007, an increase2008, a decrease of approximately $135,000 or 27%.$839,000. The increasedecrease was primarily the result of higher political revenue.the declines in net operating revenue and an increase in depreciation expense, as discussed above.


2319

Forward-Looking Statements
     
Statements contained in thisForm 10-Q that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as “believes,” “anticipates,” “estimates,” “plans”, “expects,” and similar expressions are intended to identify forward-looking statements. These statements are made as of the date of this report or as otherwise indicated, based on current expectations. We undertake no obligation to update this information. A number of important factors could cause our actual results for 20082009 and beyond to differ materially from those expressed in any forward-looking statements made by or on our behalf. Forward-looking statements are not guarantees of future performance as they involve a number of risks, uncertainties and assumptions that may prove to be incorrect and that may cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks, uncertainties and assumptions that may affect our performance include our financial leverage and debt service requirements, dependence on key personnel, dependence on key stations, U.S. and local economic conditions, our ability to successfully integrate acquired stations, regulatory requirements, new technologies, natural disasters and terrorist attacks. We cannot be sure that we will be able to anticipate or respond timely to changes in any of these factors, which could adversely affect the operating results in one or more fiscal quarters. Results of operations in any past period should not be considered, in and of itself, indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of our stock.
     
For a more complete description of the prominent risks and uncertainties inherent in our business, see “Forward Looking“Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007.
2008.
Liquidity and Capital Resources
     
Debt Arrangements and Debt Service Requirements
     
As of March 31, 2008,2009, we had $134,411,000$133,411,000 of long-term debt (including the current portion thereof) outstanding and approximately $60,400,000$17,650,000 of unused borrowing capacity under our Credit Agreement.
     
The Credit Agreement is a $193,750,000$150,000,000 reducing revolving line of credit maturing on July 29, 2012. Our indebtedness under the Credit Agreement is secured by a first priority lien on substantially all of our assets and of our subsidiaries, by a pledge of our subsidiaries’ stock and by a guarantee of our subsidiaries.
The Credit Agreement may be used for general corporate purposes, including working capital and capital expenditures, permitted acquisition and related transaction expenses and permitted stock buybacks.expenditures.
     On March 9, 2009, we amended our Credit Agreement to (i) exclude certain items from the definition of Fixed Charges effective December 31, 2008, (ii) increase the minimum Fixed Charge Coverage ratio effective December 31, 2008, (iii) increase the maximum Leverage Ratio effective December 31, 2008, (iv) reduce the Revolving Commitments (as defined into $150,000,000, (v) revise the Credit Agreement)interest rates and commitment fees and (vi) impose certain other limitations on the Company with respect to restricted payments, acquisitions and stock purchases. In addition, we agreed to pay each lender a fee. The lender fee plus amendment costs were approximately $1 million.
     On September 30, 2009, the Revolving Commitments will be permanently reduced by $6,250,000$1,250,000 and will continue to be permanently reduced at the end of each calendar quarter thereafter in amounts ranging from 3.125%4.375% to 12.5% of the original total Revolving Commitments that was in effect on March 31, 2008.of $200,000,000. In addition, the Revolving Commitments shall be further reduced by specified percentages of Excess Cash Flow (as defined in the Credit Agreement) based on leverage ratios. Any outstanding balance under the Credit Agreement will be due on the maturity date of July 29, 2012.

20

     
The Credit Agreement contains a number of financial covenants (all of which we were in compliance with at March 31, 2008)2009) that, among other things, requires us to maintain specified financial ratios and impose certain limitations on us with respect to (i) the incurrence of additional indebtedness; (ii)indebtedness, acquisitions, except under specified conditions; (iii) the incurrence of additional liens, except those relating to capital leases and purchase money indebtedness; (iv) the disposition of assets; (v)assets, the payment of cash dividends; and (vi)dividends, repurchases of our Class A Common Stock, mergers, changes in business and management, investments and transactions with affiliates. The financial covenants become more restrictive over the life of the Credit Agreement. The Credit Agreement allows for the payment of dividends provided certain requirements are met.
     
Sources and Uses of Cash
     
During the three months ended March 31, 20082009 and 2007,2008, we had net cash flows from operating activities of $4,042,000$5,053,000 and $4,268,000,$4,042,000, respectively. We believe that cash flow from operations will be sufficient to meet quarterly debt service requirements for interest and scheduled payments of principal under the Credit Agreement.


24

However, if such cash flow is not sufficient we may be required to sell additional equity securities, refinance our obligations or dispose of one or more of our properties in order to make such scheduled payments. There can be no assurance that we would be able to effect any such transactions on favorable terms, if at all.
     
We continue to actively seek and explore opportunities for expansion through the acquisition of additional broadcast properties.
In January 2008, our board of directors authorized an increase to our Stock Buy-Back Program so that we may purchase a total of $60,000,000 of our Class A Common Stock. From the inception of the Stock Buy-Back program in 1998 through March 31, 2008,2009, we have repurchased 2,146,3231,382,085 shares of our Class A Common Stock for approximately $27,651,000.$45,482,000. Approximately 239,1135,700 shares were repurchasedretained for payment of withholding taxes related to the vesting of restricted stock during the three months ended March 31, 20082009 for $1,399,000.$20,000.
     
We anticipate that any future acquisitions of radio and television stations and purchases of Class A Common Stock under the Stock Buy-Back Program will be financed through funds generated from operations, borrowings under the Credit Agreement, additional debt or equity financing, or a combination thereof. However, there can be no assurances that any such financing will be available on acceptable terms, it at all.
Our capital expenditures, exclusive of acquisitions, for the three months ended March 31, 20082009 were approximately $2,046,000$1,065,000 ($2,414,0002,046,000 in 2007)2008). We anticipate capital expenditures in 20082009 to be approximately $9,000,000,$3,500,000, which we expect to finance through funds generated from operations or additional borrowings under the Credit Agreement.
     
Summary Disclosures About Contractual Obligations and Commercial Commitments
     
We have future cash obligations under various types of contracts under the terms of our Credit Agreement, operating leases, programming contracts, employment agreements, and other operating contracts. For additional information concerning our future cash obligations see Item“Item 7. “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operation — Summary Disclosures About Contractual Obligations and Commercial Commitments” in our annual reportAnnual Report onForm 10-K for the year ended December 31, 2007.2008.
     
There have been no material changes to such contracts/commitments during the three months ended March 31, 2008.2009. On March 9, 2009, we amended our Credit Agreement; however, there were no material changes to our cash obligations. See “Debt Arrangements and Debt Service Requirements” above for additional information regarding the amendment to the Credit Agreement.
     We anticipate that the aboveour contractual cash obligations will be financed through funds generated from operations or additional borrowingsrefinance our obligations under the Credit Agreement, or a combination thereof.
Critical Accounting Policies and Estimates
     
Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require us to make estimates, judgments and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures and contingencies. We evaluate estimates used in preparation of our financial statements on a continual basis. There have been no significant changes to our critical accounting policies that are described in Item 7. “Managements“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our annual reportAnnual Report onForm 10-K for the year ended December 31, 2007.
2008.
Inflation
     
The impact of inflation on our operations has not been significant to date. There can be no assurance that a high rate of inflation in the future would not have an adverse effect on our operations.


2521

Item 3.Quantitative and Qualitative Disclosures about Market Risk
Item 3.Quantitative and Qualitative Disclosures about Market Risk
     
Refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk and Risk Management Policies” in our Annual Report onForm 10-K for the year ended December 31, 20072008 for a complete discussion of our market risk. There have been no material changes to the market risk information included in our 20072008 Annual Report onForm 10-K.
Item 4.Controls and Procedures
     
Item 4.Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to cause the material information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2008,2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.


26

PART II — OTHER INFORMATION
Item 1.Legal Proceedings
     We currently and from time to time are involved in litigation incidental to the conduct of our business. We are not a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on our financial position, cash flows or results of operations.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
     
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes our repurchases of our Class A Common Stock during the three months ended March 31, 2008.2009. All shares repurchased during the quarter were repurchased in block purchases, open market transactions on the New York Stock Exchange and 16,129 shares were from the retention of shares for the payment of withholding taxes related to the vesting of restricted stock.
                 
          Total Number of  Approximate Dollar 
          Shares Purchased  Value of Shares 
  Total Number      as Part of Publicly  that May Yet be 
  of Shares  Average Price  Announced  Purchased Under the 
Period Purchased  Paid per Share  Program  Program(a) 
January 1 — January 31, 2009  —  $—   —  $14,538,204 
February 1 — February 28, 2009  —  $—   —  $14,538,204 
March 1 — March 31, 2009  5,682  $3.50   5,682  $14,518,317 
             
Total  5,682  $3.50   5,682  $14,518,317 
             
                 
        Total Number of
  Approximate Dollar
 
        Shares Purchased
  Value of Shares
 
  Total Number
     as Part of Publicly
  that May Yet be
 
  of Shares
  Average Price
  Announced
  Purchased Under the
 
Period
 Purchased  Paid per Share  Program  Program(a) 
 
January 1 — January 31, 2008  2,319  $5.888   2,319  $33,734,570 
February 1 — February 29, 2008  78,137  $5.980   78,137  $33,267,295 
March 1 — March 31, 2008  158,657  $5.788   158,657  $32,348,987 
                 
Total  239,113  $5.852   239,113  $32,348,987 
                 
 
(a)On August 7, 1998 our Board of Directors approved a Stock Buy-Back Program of up to $2,000,000 of our Class A Common Stock. Since August 1998, the Board of Directors has authorized several increases to the Stock Buy-Back Program, the most recent occurring in January 2008, which increased the total amount authorized for repurchase of our Class A Common Stock to $60,000,000.
Item 6.Exhibits
Item 6.Exhibits
4(d)Amendment No. 1, dated as of May 24, 2005, under the Credit Agreement, dated as of July 29, 2003, among the Company, the Lenders party thereto, Union Bank of California, N.A., as Syndication Agent, Fleet National Bank, as Documentation Agent, and The Bank of New York, as Administrative Agent.
4(e)Amendment No. 2, dated as of May 16, 2006 under the Credit Agreement, dated as of July 29, 2003, between the Company, the Lenders party thereto, Bank of America, N.A., as Documentation Agent, and The Bank of New York, as Administrative Agent.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to RulesRule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934,Act1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Rule 13-14(b) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


2722

SIGNATURES
     
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
   
 SAGA COMMUNICATIONS, INC
Date: May 11, 2009 /s/ SAMUEL D. BUSH   
 Samuel D. Bush SAGA COMMUNICATIONS, INC
Senior Vice President, Chief Financial Officer and
Treasurer (Principal Financial Officer)
   
Date: May 12, 200811, 2009 /s/ CATHERINE A. BOBINSKI   
/s/  SAMUEL D. BUSH

Samuel D. Bush
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)
 Catherine A. Bobinski  
Date: May 12, 2008
/s/  CATHERINE A. BOBINSKI

Catherine A. Bobinski
Vice President, Corporate Controller and Chief
Chief Accounting Officer
(Principal (Principal Accounting Officer)


2823