United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period ended March 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________ to _________
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 (I.R.S. Employer
incorporation or organization) Identification No.)
73 Kercheval Avenue
Grosse Pointe Farms, Michigan 48236
(Address of principal executive offices) (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. Yes X No
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 April 30, 2002 was
14,558,398 and 1,888,296, respectively.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31,
2002 and December 31, 2001 3
Condensed consolidated statements of income --
Three months ended March 31, 2002 and 2001 5
Condensed consolidated statements of cash
flows--Three months ended March 31, 2002 and 2001 6
Notes to unaudited condensed consolidated
financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Saga Communications, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 16,236 $ 11,843
Accounts receivable, net 16,321 19,185
Prepaid expenses 3,343 2,811
Other current assets 2,231 1,680
--------- ---------
Total current assets 38,131 35,519
Property and equipment 112,313 110,172
Less accumulated depreciation (56,348) (55,003)
--------- ---------
Net property and equipment 55,965 55,169
Other assets:
Broadcast licenses, net 86,835 86,835
Goodwill, net 20,929 20,929
Other intangibles 993 1,118
Deferred costs and investments, net 3,383 3,151
--------- ---------
Total other assets 112,140 112,033
--------- ---------
$ 206,236 $ 202,721
========= =========
See notes to unaudited condensed consolidated financial statements.
3
Saga Communications, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 874 $ 944
Other current liabilities 10,187 10,217
Current portion of long-term debt 275 275
--------- ---------
Total current liabilities 11,336 11,436
Deferred income taxes 10,811 9,990
Long-term debt 105,124 105,226
Other 1,010 1,007
STOCKHOLDERS' EQUITY:
Common stock 166 166
Additional paid-in capital 43,771 43,185
Note receivable from principal stockholder -- (171)
Retained earnings 36,282 34,483
Accumulated other comprehensive income (62) (340)
Treasury stock (2,160) (2,198)
Unearned compensation on restricted stock (42) (63)
--------- ---------
Total stockholders' equity 77,955 75,062
--------- ---------
$ 206,236 $ 202,721
========= =========
Note: The balance sheet at December 31, 2001 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.
4
Saga Communications, Inc.
Condensed Consolidated Statements of Income
(in thousands except per share data)
Unaudited
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- -------
Net operating revenue $ 23,928 $22,793
Operating expenses:
Programming and technical 6,401 6,060
Selling 5,872 5,902
Station general and administrative 4,360 3,976
Corporate general and administrative 1,292 1,356
Depreciation 1,441 1,383
Amortization 125 993
-------- -------
Operating profit 4,437 3,123
Other (income) expenses:
Interest expense 1,341 1,803
Other (7) 358
-------- -------
Income before income tax 3,103 962
Income tax provision 1,303 428
-------- -------
Net income $ 1,800 $ 534
======== =======
Earnings per share (basic and diluted) $ .11 $ .03
======== =======
Weighted average common shares 16,413 16,354
======== =======
Weighted average common and common equivalent
shares 16,835 16,655
======== =======
See notes to unaudited condensed consolidated financial statements.
5
Saga Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
Unaudited
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash provided by operating activities $ 6,546 $ 3,560
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,243) (1,769)
Proceeds from sale of assets 20 3
Increase in intangibles and other assets (335) (3,639)
Acquisition of stations -- (12,207)
-------- --------
Net cash used in investing activities (2,558) (17,612)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 11,250
Payments on long-term debt (102) (103)
Net proceeds from exercise of stock options 507 304
Purchase of shares held in treasury -- (491)
-------- --------
Net cash provided by financing activities 405 10,960
Net increase (decrease) in cash and cash equivalents 4,393 (3,092)
Cash and cash equivalents, beginning of period 11,843 8,670
-------- --------
Cash and cash equivalents, end of period $ 16,236 $ 5,578
======== ========
See notes to unaudited condensed consolidated financial statements.
6
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In our opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Saga Communications, Inc.
Annual Report (Form 10-K) for the year ended December 31, 2001.
2. RECLASSIFICATION
Certain amounts previously reported in the 2001 financial statements have been
reclassified to conform to the 2002 presentation.
3. ADOPTION OF ACCOUNTING POLICIES
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 ("Statement 141"), Business Combinations,
and No. 142 ("Statement 142"), Goodwill and Other Intangible Assets. The
requirements of Statement 141 are effective for any business combination after
June 30, 2001. Statement 141 eliminates the pooling-of-interests method of
accounting for business combinations and changes the criteria to recognize
intangible assets apart from goodwill. We have historically used the purchase
method to account for all business combinations and therefore, the adoption of
Statement 141 did not have a material impact on our financial position, cash
flows or results of operations.
Under Statement 142, goodwill and intangible assets deemed to have indefinite
lives are no longer amortized and are subject to annual (or more frequent if
impairment indicators arise) impairment tests. Separable intangible assets that
have finite lives will continue to be amortized over their useful lives. The
amortization provisions of Statement 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the amortization provisions of Statement 142 are
effective upon adoption.
7
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
3. ADOPTION OF ACCOUNTING POLICIES (CONTINUED)
We adopted Statement 142 on January 1, 2002. Reported income and earnings per
share adjusted to exclude broadcast license and goodwill amortization is as
follows:
ADJUSTED NET INCOME FOR ADOPTION OF STATEMENT 142 FOR THE THREE
(UNAUDITED) MONTHS ENDED
(IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31,
2002 2001
--------- ---------
Reported net income $ 1,800 $ 534
Add back: amortization of goodwill, net of tax provision
of $133 -- 167
Add back: amortization of broadcast licenses, net of tax
provision of $230 -- 289
--------- ---------
Adjusted net income $ 1,800 $ 990
========= =========
Basic and diluted earnings per share:
Reported net income per share $ .11 $ .03
Add back: amortization of goodwill, net of taxes -- .01
Add back: amortization of broadcast licenses, net of tax -- .02
--------- ---------
Adjusted net income per share $ .11 $ .06
========= =========
During the first quarter of 2002, we completed the required transitional
impairment test prescribed by Statement 142 for our broadcast licenses (which we
have deemed as indefinite lived since the licenses are expected to generate cash
flows indefinitely). The results of these tests indicate that there is no
impairment for these intangibles as of January 1, 2002.
During the second quarter of 2002, we will test goodwill for impairment as
prescribed in Statement 142. We have not yet determined the effect, if any, of
these impairment tests. However, any impairment as a result of this test would
be reflected as a cumulative effect of a change in accounting principle in the
first quarter of 2002.
We have recorded amortizable intangible assets at March 31, 2002 as follows:
GROSS
CARRYING ACCUMULATED
AMOUNT AMORTIZATION
------ ------------
Non-competition agreements $4,315 $3,835
Favorable lease agreements $4,804 $4,291
------ ------
Total amortizable intangible assets at
March 31, 2002 $9,119 $8,126
====== ======
Aggregate amortization expense for these amortizable intangible assets for the
three months ended March 31, 2002 was $125,000.
8
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
3. ADOPTION OF ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 2002 we adopted Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 provides a
consistent method to value long-lived assets to be disposed of and broadens the
presentation of discontinued operations to include more disposal transactions.
The adoption of Statement 144 did not have a material effect on our financial
position, cash flows or results of operations.
4. INCOME TAXES
Our effective tax rate is higher than the federal statutory rate as a result of
certain non-deductible depreciation and amortization expenses and the inclusion
of state taxes in the income tax amount.
5. TOTAL COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
THREE MONTHS
ENDED
TOTAL COMPREHENSIVE INCOME CONSISTS OF: MARCH 31,
2002 2001
------ ----
Net income $1,800 $534
Accumulated other comprehensive income:
Change in fair value of derivative
instruments, net of tax 278 --
------ ----
Total comprehensive income $2,078 $534
====== ====
Accumulated Other Comprehensive Income is comprised solely of the changes in the
fair value of derivatives at March 31, 2002 and December 31, 2001.
9
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
6. ACQUISITIONS
On February 1, 2001, we acquired two FM and two AM radio stations (WCVQ-FM,
WZZP-FM, WDXN-AM and WJMR-AM) serving the Clarksville, Tennessee / Hopkinsville,
Kentucky market for approximately $6,700,000.
On February 1, 2001, we acquired an FM radio station (WVVR-FM) serving the
Clarksville, Tennessee / Hopkinsville, Kentucky market for approximately
$7,000,000, including approximately $1,000,000 of our Class A Common Stock. The
radio station was owned by a company in which a member of our Board of Directors
had a 35% beneficial ownership interest. The purchase price was determined on an
arm's length basis. We also obtained an opinion from an independent appraiser
that the purchase price was fair from a financial point of view.
On April 1, 2001, we acquired an AM and FM radio station (WHAI-FM and WHMQ-AM)
serving the Greenfield, Massachusetts market for approximately $2,200,000.
On July 1, 2001, we acquired two FM radio stations (KMIT-FM and KUQL-FM) serving
the Mitchell, South Dakota market for approximately $4,050,000. This transaction
has been accounted for in accordance with Statement 141 as summarized in Note 3.
The effect of applying Statement 141 is immaterial to the accompanying financial
statements.
The 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 date. The excess of
consideration paid over the estimated fair value of the net assets acquired has
been recorded as broadcast licenses.
The consolidated statements of income 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 broadcast
licenses. The following condensed balance sheet represents the estimated fair
value assigned to the related assets and liabilities of the 2001 acquisitions at
their respective acquisition dates.
10
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
6. ACQUISITIONS (CONTINUED)
SAGA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET OF 2001 ACQUISITIONS
(IN THOUSANDS)
ASSETS ACQUIRED:
Current assets $ 684
Property and equipment 4,737
Other assets:
Broadcast licenses 14,941
Excess of cost over fair value of assets acquired 113
Other intangibles, deferred costs and investments 227
-------
Total other assets 15,281
-------
Total assets acquired 20,702
-------
LIABILITIES ASSUMED:
Current liabilities 471
Deferred income taxes 245
-------
Total liabilities assumed 716
-------
Net assets acquired $19,986
=======
The following unaudited pro forma results of our operations for the three months
ended March 31, 2002 and 2001 assume the 2001 acquisitions occurred as of
January 1, 2001. 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.
11
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
6. ACQUISITIONS (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS:
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- -------
CONSOLIDATED RESULTS OF OPERATIONS: (In thousands except
per share data)
Net operating revenue $ 23,928 $23,543
Station operating expense 16,633 16,670
-------- -------
Station operating income 7,295 6,873
Corporate general and administrative 1,292 1,356
Depreciation 1,441 1,445
Amortization 125 1,037
-------- -------
Operating profit 4,437 3,035
Interest expense 1,341 1,857
Other (7) 358
Income taxes 1,303 369
-------- -------
Net income $ 1,800 $ 451
======== =======
Basic earnings per share $ .11 $ .03
======== =======
Diluted earnings per share $ .11 $ .03
======== =======
THREE MONTHS ENDED
MARCH 31,
RADIO BROADCASTING SEGMENT 2002 2001
-------- -------
(In thousands)
Net operating revenue $21,173 $21,073
Station operating expense 14,477 14,605
------- -------
Station operating income 6,696 6,468
Corporate general and administrative -- --
Depreciation 1,038 1,000
Amortization 119 887
------- -------
Operating profit $ 5,539 $ 4,581
======= =======
12
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
6. ACQUISITIONS (CONTINUED)
THREE MONTHS ENDED
MARCH 31,
TELEVISION BROADCASTING SEGMENT 2002 2001
(In thousands)
Net operating revenue $2,755 $ 2,470
Station operating expense 2,156 2,065
------ -------
Station operating income 599 405
Corporate general and administrative -- --
Depreciation 354 403
Amortization 6 98
------ -------
Operating profit (loss) $ 239 $ (96)
====== =======
7. SEGMENT INFORMATION
Our operations are aligned into two business segments: Radio and Television.
These business segments are consistent with our management of these businesses
and our financial reporting structure.
The Radio segment includes all 57 of our radio stations and three radio
information networks. The Television segment consists of 7 television stations.
The Radio and Television segments both derive their revenue from the sale of
commercial broadcast inventory.
The category "Corporate and Other" represents the income and expense not
allocated to reportable segments.
We evaluate performance of our operating entities based on operating profit
(loss) before corporate general and administrative, depreciation and
amortization ("station operating income"). We believe that station operating
income is useful because it provides a meaningful comparison of operating
performance between companies in the broadcasting industry and serves as an
indicator of the market value of a group of stations. Station operating income
is generally recognized by the broadcasting industry as a measure of performance
and is used by analysts who report on the performance of broadcasting groups.
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 generally accepted accounting
principles, and should be viewed as a supplement to and not a substitute for the
results of operations presented on the basis of generally accepted accounting
principles.
13
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
7. SEGMENT INFORMATION (CONTINUED)
THREE MONTHS ENDED CORPORATE
MARCH 31, 2002: RADIO TELEVISION AND OTHER CONSOLIDATED
-------- ------- --------- -----------
Net operating revenue $ 21,173 $ 2,755 -- $ 23,928
Station operating
expense 14,477 2,156 -- 16,633
-------- ------- -------- --------
Station operating
income 6,696 599 -- 7,295
Corporate general and
administrative -- -- $ 1,292 1,292
Depreciation 1,038 354 49 1,441
Amortization 119 6 -- 125
-------- ------- -------- --------
Operating profit (loss) $ 5,539 $ 239 $ (1,341) $ 4,437
======== ======= ======== ========
Total assets $158,387 $26,412 $ 21,437 $206,236
======== ======= ======== ========
THREE MONTHS ENDED CORPORATE
MARCH 31, 2001: RADIO TELEVISION AND OTHER CONSOLIDATED
----- ---------- --------- ------------
Net operating revenue $ 20,323 $ 2,470 -- $ 22,793
Station operating
expense 13,873 2,065 -- 15,938
-------- -------- -------- --------
Station operating
income 6,450 405 -- 6,855
Corporate general and
administrative -- -- $ 1,356 1,356
Depreciation 938 403 42 1,383
Amortization 843 98 52 993
-------- -------- -------- --------
Operating profit (loss) $ 4,669 $ (96) $ (1,450) $ 3,123
======== ======== ======== ========
Total assets $151,416 $ 26,210 $ 15,005 $192,631
======== ======== ======== ========
14
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
8. SUBSEQUENT EVENTS
On April 4, 2002, we entered into an agreement to purchase WKBK-AM and WXOD-FM
in Keene, New Hampshire for approximately $2,625,000. The acquisition, which is
subject to the approval of the Federal Communications Commission, is expected to
close during the third quarter of 2002.
On May 1, 2002, we acquired the assets of WKNE-AM/FM in Keene, New Hampshire and
WKVT-AM/FM in Brattleboro, Vermont for approximately $9,075,000. The acquisition
is subject to the final approval of the Federal Communications Commission.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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.
GENERAL
Our financial results are dependent on a number of factors, the most
significant of which is the 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 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, relative efficiency of radio and/or broadcasting compared to
other advertising media, signal strength and government regulation and policies.
The primary operating expenses involved in owning and operating radio stations
are employee salaries, depreciation, programming expenses, solicitation of
advertising, and promotion expenses. In addition to these expenses, owning and
operating television stations involves the cost of acquiring certain syndicated
programming.
During the years ended December 31, 2001 and 2000 and the three month
periods ended March 31, 2002 and 2001, our Columbus, Ohio and Milwaukee,
Wisconsin stations were the only operating locations representing more than 15%
of our station operating income (i.e., net operating revenue less station
operating expense). For the years ended December 31, 2001 and 2000, Columbus
accounted for an aggregate of 15% and 16%, respectively, and Milwaukee accounted
for an aggregate of 23% and 22%, respectively, of station operating income. For
the three months ended March 31, 2002 and 2001, Columbus accounted for an
aggregate of 15% and Milwaukee accounted for an aggregate of 20% and 24%,
respectively, of station operating income. While radio revenues in each of the
Columbus and Milwaukee markets have remained relatively stable historically, an
adverse change in these radio markets or in the relative market position of
these locations could have a significant impact on our operating results as a
whole.
Because audience ratings in the local market are crucial to a station's
financial success, we endeavor to develop strong listener/viewer loyalty. 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.
16
The number of advertisements that can be broadcast without jeopardizing
listening/viewing levels (and the resulting ratings) is limited in part by the
format of a particular radio station and, in the case of television stations, by
restrictions imposed by the terms of certain network affiliation and syndication
agreements. Our stations strive to maximize revenue by constantly managing the
number of commercials available for sale and adjusting prices based upon local
market conditions. In the broadcasting industry, stations often utilize trade
(or barter) agreements to generate advertising time sales in exchange for goods
or services used or useful in the operation of the stations, instead of for
cash. We minimize our use of trade agreements and historically have sold over
95% of our advertising time for cash.
Most advertising contracts are short-term, and generally run only for a
few weeks. Most of our revenue is generated from local advertising, which is
sold primarily by each station's sales staff. For the three months ended March
31, 2002 and 2001, approximately 81% and 82%, respectively, of our gross 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 stations.
Our revenue varies throughout the year. Advertising expenditures, our
primary source of revenue, generally have been lowest during the winter months,
which comprise the first quarter.
As of March 31, 2002 we owned and/or operated fifty-seven radio stations,
four TV stations, three LPTV stations and three radio information networks. As a
result of acquisitions, as of March 31, 2001 we owned and/or operated
fifty-three radio stations, four TV stations, two LPTV stations, and three radio
information networks.
Since January 1, 2001, we have acquired the following stations serving the
markets indicated:
- February 1, 2001: two FM and two AM radio stations (WCVQ-FM,
WZZP-FM, WDXN-AM, and WJMR-AM) serving the Clarksville, Tennessee
/ Hopkinsville, Kentucky market for approximately $6,700,000.
- February 1, 2001: one FM radio station (WVVR-FM) serving the
Clarksville, Tennessee / Hopkinsville, Kentucky market for
approximately $7,000,000, including approximately $1,000,000 of
the Company's Class A Common Stock.
- April 1, 2001: an AM and FM radio station (WHAI-AM and WHMQ-FM)
serving the Greenfield, Massachusetts market for approximately
$2,200,000.
- July 1, 2001: two FM radio stations (KMIT-FM and KUQL-FM) serving
the Mitchell, South Dakota market for approximately $4,050,000.
17
On February 15, 2002, we entered into an agreement to purchase the assets
of WKNE-AM/FM in Keene, New Hampshire and WKVT-AM/FM in Brattleboro, Vermont for
approximately $9,075,000. The acquisition closed during the second quarter of
2002.
On April 4, 2002, we entered into an agreement to purchase WKBK-AM and
WXOD-FM in Keene, New Hampshire for approximately $2,625,000. The acquisition,
which is subject to the approval of the Federal Communications Commission, is
expected to close during the third quarter of 2002.
For additional information with respect to these acquisitions, see
"Liquidity and Capital Resources" below.
We actively seek and explore opportunities for expansion through the
acquisition of additional broadcast properties. We review acquisition
opportunities on an ongoing basis.
The following tables summarize our results of operations for the three
months ended March 31, 2002 and 2001. The as-reported percentages reflect our
historical financial results and include the results of operations for stations
that we did not own for the entire comparable period. The same station
percentages reflect the results of operations for stations that we owned for the
entire comparable period.
CONSOLIDATED RESULTS OF OPERATIONS
(In thousands of dollars)
Three Months Ended As-Reported Same Station
March 31, % Increase % Increase
2002 2001 (Decrease) (Decrease)
---- ---- ---------- ----------
Net operating revenue $23,928 $22,793 4.98% 1.02%
Station operating expense * 16,633 15,938 4.36% (.91%)
------- -------
Station operating income 7,295 6,855 6.42% 5.41%
Corporate G&A 1,292 1,356 (4.72%) N/A
Depreciation 1,441 1,383 4.19% (3.94%)
Amortization 125 993 (87.41%) (87.79%)
------- -------
Operating profit 4,437 3,123 42.07% 40.70%
Interest expense 1,341 1,803 (25.62%)
Other (income) expense (7) 358 (101.96%)
Income taxes 1,303 428 204.44%
------- -------
Net income $ 1,800 $ 534 237.08%
======= =======
Earnings per share (basic and diluted) $ .11 $ .03 266.67%
======= =======
18
RADIO BROADCASTING SEGMENT
(In thousands of dollars)
Three Months Ended As-Reported Same Station
March 31, % Increase % Increase
2002 2001 (Decrease) (Decrease)
---- ---- ---------- ----------
Net operating revenue $21,173 $20,323 4.18% (0.28%)
Station operating expense * 14,477 13,873 4.35% (1.72%)
------- -------
Station operating income 6,696 6,450 3.81% 2.73%
Depreciation 1,038 938 10.66% (1.22%)
Amortization 119 843 (85.88%) (86.22%)
------- -------
Operating profit $ 5,539 $ 4,669 18.63% 18.14%
TELEVISION BROADCASTING SEGMENT
(In thousands of dollars)
Three Months Ended As-Reported Same Station
March 31, % Increase % Increase
2002 2001 (Decrease) (Decrease)
---- ---- ---------- ----------
Net operating revenue $ 2,755 $ 2,470 11.54% 11.54%
Station operating expense * 2,156 2,065 4.41% 4.41%
------- -------
Station operating income 599 405 47.90% 47.90%
Depreciation 354 403 (12.16%) (12.16%)
Amortization 6 98 (93.88%) (93.88%)
------- -------
Operating profit (loss) $ 239 $ (96) N/A N/A
* Programming, technical, selling and station general and administrative
expenses.
19
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
For the three months ended March 31, 2002, net operating revenue was
$23,928,000 compared with $22,793,000 for the three months ended March 31, 2001,
an increase of $1,135,000 or 5%. Approximately $906,000 or 80% of the increase
was attributable to revenue generated by stations that we did not own or operate
for the comparable period in 2001. Net operating revenue generated by stations
that we owned and operated for the entire comparable period ("same station")
increased by approximately 1% ($229,000). This increase was primarily the result
of an increase in revenue in our television segment, which was primarily
attributable to an increase in advertising rates in the television local
marketplace.
Station operating expense (i.e., programming, technical, selling and
station general and administrative expenses) increased by $695,000 or 4% to
$16,633,000 for the three months ended March 31, 2002, compared with $15,938,000
for the three months ended March 31, 2001. Of the total increase, approximately
$836,000 or 120% was the result of the impact of the operation of stations that
we did not own or operate for the comparable period in 2001. Station operating
expense decreased by approximately $141,000 or 1% on a same station basis.
Operating profit increased by $1,314,000 or 42% to $4,437,000 for the
three months ended March 31, 2002, compared with $3,123,000 for the three months
ended March 31, 2001. The increase was primarily the result of the $1,135,000
increase in net operating revenue offset by the $695,000 increase in station
operating expense, and an $868,000 or 87% decrease in amortization expense that
was principally the result of the non-amortization provisions of the adoption of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
We generated net income in the amount of approximately $1,800,000 ($0.11
per share on a diluted basis) during the three months ended March 31, 2002,
compared with net income of $534,000 ($0.03 per share on a diluted basis) for
the three months ended March 31, 2001, an increase of approximately $1,266,000.
The increase in net income was principally the result of the $1,314,000 increase
in operating profit, a $462,000 decrease in interest expense and a $365,000
decrease in other expense, offset by an $875,000 increase in income taxes. The
decrease in interest expense was principally the result of marginally lower
interest rates over the prior period. Other expense of $358,000 in 2001 was
primarily attributable to marking to market our swap agreements.
20
OUTLOOK
The following statements are forward-looking statements and should be read
in conjunction with "Forward-Looking Statements" below.
Based on the economic and market conditions as of May 1, 2002, for the
quarter ending June 30, 2002 we anticipate net operating revenue of
approximately $29,500,000, station operating expense of approximately
$18,600,000, station operating income of approximately $10,900,000, operating
profit of approximately $7,600,000, and net income of approximately $3,500,000
or $.21 per share on a fully diluted basis.
Based on the economic and market conditions as of May 1, 2002, for the
year ending December 31, 2002 we anticipate net operating revenue of
approximately $109,700,000, station operating expense of approximately
$70,200,000, station operating income of approximately $39,500,000, operating
profit of approximately $27,300,000, and net income of approximately $11,900,000
or $.71 per share on a fully diluted basis.
FORWARD-LOOKING STATEMENTS
Statements contained in this Form 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
2002 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward Looking Statements; Risk Factors"
in our Form 10-K for the year ended December 31, 2001.
21
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, we had $105,399,000 of long-term debt (including the
current portion thereof) outstanding and approximately $95,000,000 of unused
borrowing capacity under our Credit Agreement.
Our Credit Agreement has three financing facilities (the "Facilities"): a
$105,000,000 senior secured term loan (the "Term Loan"), a $75,000,000 senior
secured acquisition loan facility (the "Acquisition Facility"), and a
$20,000,000 senior secured revolving credit facility (the "Revolving Facility").
The Facilities mature September 30, 2008. Our indebtedness under the Facilities
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.
As of March 31, 2002 we had $105,000,000 outstanding under the Term Loan.
The Acquisition Facility may be used for permitted acquisitions and to pay
related transaction expenses. The Revolving Facility may be used for general
corporate purposes, including working capital, capital expenditures, permitted
acquisitions (to the extent that the Acquisition Facility has been fully
utilized and limited to $10,000,000) and permitted stock buybacks. On March 28,
2003, the Acquisition Facility will convert to a five and a half year term loan.
The Term Loan is required to be reduced quarterly in amounts ranging from 3.125%
to 7.5% of the initial commitment commencing on March 31, 2003. The outstanding
amount of the Acquisition Facility is required to be reduced quarterly in
amounts ranging from 3.125% to 7.5% commencing on March 31, 2003. Any
outstanding amount under the Revolving Facility will be due on the maturity date
of September 30, 2008. In addition, the Facilities may be further reduced by
specified percentages of Excess Cash Flow (as defined in the Credit Agreement)
based on leverage ratios.
Interest rates under the Facilities are payable, at our option, at
alternatives equal to LIBOR plus 1.25% to 2.0% or the Agent bank's base rate
plus .25% to 1.0%. The spread over LIBOR and the base rate vary from time to
time, depending upon our financial leverage. We also pay quarterly commitment
fees of 0.375% to 0.625% per annum on the aggregate unused portion of the
Acquisition and Revolving Facilities.
The Credit Agreement contains a number of financial covenants which, among
other things, require us to maintain specified financial ratios and impose
certain limitations on us with respect to investments, additional indebtedness,
dividends, distributions, guarantees, liens and encumbrances.
We use interest rate swap agreements to reduce our risk of rising interest
rates. Our swap agreements are used to convert the variable Eurodollar interest
rate of a portion of our bank borrowings to a fixed interest rate.
22
At March 31, 2002, we had four interest rate swap agreements with the
following terms:
- Notional amount of $13,125,000. We pay 4.11% calculated on the
notional amount. We receive LIBOR (2.0475% at March 31, 2002)
calculated on the notional amount of $13,125,000. This agreement
expires in March 2003.
- Notional amount of $13,125,000. We pay 4.11% calculated on the
notional amount. We receive LIBOR (2.0475% at March 31, 2002)
calculated on the notional amount of $13,125,000. This agreement
expires in March 2003.
- Notional amount of $6,875,000 through March 2003, then notional
amount increases to $20,000,000. We pay 3.67% calculated on the
notional amount. We receive LIBOR (2.0475% at March 31, 2002)
calculated on the notional amount of $13,125,000 ($20,000,000
after March 2003). This agreement expires in September 2003.
- Notional amount of $6,875,000 through March 2003, then notional
amount increases to $20,000,000. We pay 3.67% calculated on the
notional amount. We receive LIBOR (2.0475% at March 31, 2002)
calculated on the notional amount of $13,125,000 ($20,000,000
after March 2003). This agreement expires in September 2003.
Net receipts or payments under the agreements are recognized as an
adjustment to interest expense. Approximately $205,000 in additional interest
expense was recognized as a result of these interest rate swap agreements for
the three months ended March 31, 2002. An aggregate increase in interest expense
of approximately $350,000 has been recognized since the inception of the
agreements. The fair value of these swap agreements at March 31, 2002 was
approximately ($93,000), which has been recorded as a liability in our balance
sheet.
During the three months ended March 31, 2002 and 2001, we had net cash
flows from operating activities of $6,546,000 and $3,560,000, 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. 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.
On May 1, 2002 we acquired an AM and FM radio station (WKNE-AM/FM) serving
the Keene, New Hampshire market, and an AM and FM radio station (WKVT-AM/FM)
serving the Brattleboro, Vermont market for approximately $9,075,000. We
financed this acquisition through funds generated from operations. This
acquisition is subject to the final approval of the Federal Communications
Commission.
23
Additionally, in April 2002 we entered into an agreement to acquire an AM
and FM radio station (WKBK-AM and WXOD-FM) serving the Keene, New Hampshire
market for approximately $2,625,000. This acquisition is subject to the approval
of the Federal Communications Commission and is expected to close during the
third quarter of 2002.
We continue to actively seek and explore opportunities for expansion
through the acquisition of additional broadcast properties.
In September 2000, we modified our Stock Buy-Back Program so that we may
purchase up to $6,000,000 of our Class A Common Stock. From the inception of the
Stock Buy-Back program in 1998 through March 31, 2002, we have repurchased
326,627 shares of our Class A Common Stock for approximately $4,814,000.
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.
Our capital expenditures, exclusive of acquisitions, for the three months
ended March 31, 2002 were approximately $2,243,000 ($1,769,000 in 2001). We
anticipate capital expenditures in 2002 to be approximately $7,500,000, 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. The following tables
reflect a summary of our contractual cash obligations and other commercial
commitments as of December 31, 2001:
Payments Due By Period
(In thousands)
-----------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS AND LESS THAN 1 1 TO 3 4 TO 5 AFTER 5
OTHER COMMERCIAL COMMITMENTS: TOTAL YEAR YEARS YEARS YEARS
- ----------------------------- ----- ---- ----- ----- -----
Long Term Debt $105,501 $ 275 $26,476 $34,125 $44,625
Operating Leases 4,582 1,424 1,480 471 1,207
Acquisition Commitments 9,075 9,075 -- -- --
TV Syndicated Programming 533 210 250 73 --
Employment Agreements 17,588 5,483 5,512 2,859 3,734
Other Operating Contracts 7,062 3,016 3,066 955 25
-------- ------- ------- ------- -------
Total Contractual Cash Obligations $144,341 $19,483 $36,784 $38,483 $49,591
======== ======= ======= ======= =======
There have been no material changes to the above contracts/commitments
during the three months ended March 31, 2002. We anticipate that the above
contractual cash obligations will be financed through funds generated from
operations or additional borrowings under the Credit Agreement, or a combination
thereof.
24
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. Our critical accounting policies are
described in Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations - Critical Accounting Policies in our annual report on
Form 10-K for the year ended December 31, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141 ("Statement 141"), Business
Combinations, and No. 142 ("Statement 142"), Goodwill and Other Intangible
Assets. The requirements of Statement 141 are effective for any business
combination after June 30, 2001. Statement 141 eliminates the
pooling-of-interests method of accounting for business combinations and changes
the criteria to recognize intangible assets apart from goodwill. We have
historically used the purchase method to account for all business combinations
and therefore, the adoption of Statement 141 did not have a material impact on
our financial position, cash flows or results of operations.
Under Statement 142, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized and are subject to annual (or more
frequent if impairment indicators arise) impairment tests. Separable intangible
assets that have finite lives will continue to be amortized over their useful
lives. The amortization provisions of Statement 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the amortization provisions of
Statement 142 are effective upon adoption. We adopted Statement 142 on January
1, 2002.
During the first quarter of 2002, we completed the required transitional
impairment test prescribed by Statement 142 for our broadcast licenses (which we
have deemed as indefinite lived since the licenses are expected to generate cash
flows indefinitely). The results of these tests indicate that there is no
impairment for these intangibles as of January 1, 2002.
During the second quarter of 2002, we will test goodwill for impairment as
prescribed in Statement 142. We have not yet determined the effect, if any, of
these impairment tests. However, any impairment as a result of this test would
be reflected as a cumulative effect of a change in accounting principle in the
first quarter of 2002.
25
Effective January 1, 2002 we adopted Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 provides a
consistent method to value long-lived assets to be disposed of and broadens the
presentation of discontinued operations to include more disposal transactions.
The adoption of Statement 144 did not have a material effect on our financial
position, cash flows or results of operations.
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.
26
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
27
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 14, 2002 /s/ Samuel D. Bush
----------------------------------------
Samuel D. Bush
Vice President, Chief Financial
Officer, and Treasurer
(Principal Financial Officer)
Date: May 14, 2002 /s/ Catherine A. Bobinski
----------------------------------------
Catherine A. Bobinski
Vice President, Corporate Controller
and Chief Accounting Officer
(Principal Accounting Officer)
28