1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period for __________ 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 incorporation or (I.R.S. Employer Identification
organization) No.)
73 Kercheval Avenue
Grosse Pointe Farms, Michigan 48236
- ------------------------------------------------ -------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 886-7070
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
- ------------------------------------------------ -------------------------------
Class A Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 .
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Aggregate market value of the Class A Common Stock and the Class B Common
Stock (assuming conversion thereof into Class A Common Stock) held by
nonaffiliates of the registrant, computed on the basis of $19.00 per share (the
closing price of the Class A Common Stock on March 18, 1999 on the American
Stock Exchange): $216,215,326.
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 March 18,
1999 was 11,393,087 and 1,510,637, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 1999 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission on or before April 30, 1999) is
incorporated by reference in Part III hereof.
-1-
2
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On March 30, 1998 the Company acquired a regional and state news and
sports information network (The Michigan Radio Network) for approximately
$1,100,000, including approximately $234,000 of the Company's class A common
stock. The acquisition is subject to certain adjustments, based on operating
performance levels, that could result in an additional acquisition amount of
$450,000 payable in shares of the Company's Class A Common Stock.
On June 17, 1998 the Company acquired 50% of the outstanding stock of Finn
Midill, ehf., an Icelandic corporation which owns six FM radio stations serving
Reykjavik, Iceland, for approximately $1,100,000. The investment is accounted
for using the equity method. Additionally, the Company loaned approximately
$570,000 to Finn Midill, ehf. which accrues interest at 7.5% plus an
inflationary index, and is to be repaid in June, 2001. As of December 31, 1998,
the Company has loaned an additional $1,540,000 to Finn Midill, ehf. for working
capital needs; this loan is non-interest bearing.
On December 1, 1998, the Company acquired an AM and FM radio station
(KGMI-AM and KISM-FM) serving the Bellingham, Washington market for
approximately $8,000,000.
On July 7, 1998, the Company entered into an agreement to purchase KAVU-TV
(an ABC affiliate) and a low power Univision affiliate, serving the Victoria,
Texas market for approximately $11,875,000, including approximately $2,000,000
of the Company's Class A common stock. The Company will also assume an existing
Local Marketing Agreement for KVCT-TV (a Fox affiliate). The transaction is
subject to the approval of the Federal Communications Commission and is expected
to close during the second quarter of 1999.
On September 21, 1998, the Company signed a letter of intent to purchase a
regional and state farm information network (The Michigan Farm Radio Network)
for approximately $1,750,000, including approximately $1,125,000 of the
Company's Class A common stock. The Company closed on this transaction in
January, 1999.
On October 22, 1998, the Company entered into an agreement to purchase an
AM and FM radio station (KAFE-FM and KPUG-AM) serving the Bellingham, Washington
market for approximately $6,000,000. The Company closed on this transaction in
January, 1999.
On December 2, 1998, the Company entered into an agreement to purchase an
AM radio station (KBFW-AM) serving the Bellingham, Washington market for
approximately $1,000,000. The transaction is subject to the approval of the
Federal Communications Commission and is expected to close during the second
quarter of 1999.
In February 1999, the Company entered into an agreement to purchase WXVT
TV (a CBS affiliate), serving the Greenville, Mississippi market for
approximately $5,200,000, including approximately $600,000 of the Company's
Class A common stock. The transaction is subject to the approval of the Federal
Communications Commission and is expected to close during the third quarter of
1999.
For additional information with respect to these acquisitions, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
-2-
3
BUSINESS
The Company is a broadcast company whose business is primarily devoted to
acquiring, developing and operating radio and television stations. As of March
18,1999 the Company owned and operated one television station, three state radio
networks, and twenty-six FM and fifteen AM radio stations serving thirteen
markets, including Columbus, Ohio; Norfolk, Virginia; and Milwaukee, Wisconsin.
Additionally, the Company has an equity interest in six FM radio stations
serving Reykjavik, Iceland
The Company's television station KOAM-TV, serving the Joplin,
Missouri/Pittsburg, Kansas market, which ranked as market 146 by number of
television households, is one of four television stations in the market. The
station is a CBS affiliate and the number one rated television station, by
number of viewers, in the market. (All of the above information was derived from
Investing in Television Market Report 1998, based on A.C. Nielson ratings and
data.)
-3-
4
The following table sets forth certain information about the Company's radio
stations and their markets as of March 18, 1999:
1998
Market Target
Ranking Demographics
by Radio Ranking (by Target
Station Market (a) Revenue (b) Station Format listeners) (c) Demographics
- ------- ---------- ----------- -------------- -------------- ------------
FM:
WSNY Columbus, OH 29 Adult Contemporary N/S Women 25-54
WKLH Milwaukee, WI 33 Classic Hits 2 Men 25-49
WLZR Milwaukee, WI 33 Album Oriented Rock 1 Men 18-34
WPNT Milwaukee, WI 33 Modern Adult Contemporary 8 Women 25-34
WFMR Milwaukee, WI 33 Classical 7 Adults 45+
WNOR Norfolk, VA 46 Album Oriented Rock 2(d) Men 18-34
WAFX Norfolk, VA 46 Classic Hits 3 Men 25-49
KSTZ Des Moines, IA 73 Hot Adult Contemporary 1 Women 18-34
KIOA Des Moines, IA 73 Oldies 1 Adults 35-54
KAZR Des Moines, IA 73 Album Oriented Rock 1(e) Men 18-34
KLTI Des Moines, IA 73 Soft Adult Contemporary 6 Women 35-54
WMGX Portland, ME 90 Hot Adult Contemporary 1 Women 25-54
WYNZ Portland, ME 90 Oldies 2 Adults 35-54
WPOR Portland, ME 90 Country 1(d,e) Adults 35+
WAQY Springfield, MA 96 Album Oriented Rock 1(d) Men 18-49
WZID Manchester, NH 108 Adult Contemporary 1 Adults 25-54
WQLL Manchester, NH 108 Oldies 2 Adults 35-54
WYMG Springfield, IL 152 Classic Hits 3 Men 25-54
WQQL Springfield, IL 152 Oldies 1 Adults 35-54
WDBR Springfield, IL 152 Contemporary Hits 1 Women 18-34
WYXY Springfield, IL 152 Country 3(e) Adults 25-49
WLRW Champaign, IL 165 Hot Adult Contemporary 2(e) Women 18-49
WIXY Champaign, IL 165 Country 1 Adults 25-54
KCLH Sioux City IA 215 Classic Hits 4 Men 25-49
KISM Bellingham, WA N/A Rock 1 Men 25-54
KAFE Bellingham, WA N/A Adult Contemporary 1 Women 25-54
AM:
WVKO Columbus, OH 29 Gospel N/S Adults 35+
WJYI Milwaukee, WI 33 Contemporary Christian N/R Adults 18+
WNOR Norfolk, VA 46 Album Oriented Rock 2(d) Men 18-34
KRNT Des Moines, IA 73 Nostalgia/Sports 4 Adults 35+
KXTK Des Moines, IA 73 Talk/Sports 13(e) Adults 35+
WGAN Portland, ME 90 News/Talk 1(e) Adults 35+
WZAN Portland, ME 90 News/Talk 7 Men 35-54
WPOR Portland, ME 90 Country 1(d,e) Adults 35+
WAQY Springfield, MA 96 Album Oriented Rock 1(d) Men 18-49
WFEA Manchester, NH 108 Nostalgia/Talk 4 Adults 35+
WTAX Springfield, IL 152 News/Talk 2 Adults 35+
WVAX Springfield, IL 152 News/Talk N/R Adults 35+
WNAX Yankton, SD N/A Full Service/Country 1 Adults 35+
KGMI Bellingham, WA N/A News/Talk 1 Adults 35+
KPUG Bellingham, WA N/A Talk/Sports 4 Adults 35+
- ------------------
(footnotes on next page)
-4-
5
(a) Actual city of license may differ from metro market actually served.
(b) Derived from Investing in Radio 1998 Market Report.
(c) Information derived from most recent available Arbitron Radio Market
Report except for Columbus and Bellingham. The Columbus and Bellingham
information was derived from Investing in Radio 1998 Market Report, and
the 1998 Willhight Research Audience Measurement Surveys report,
respectively.
(d) AM and FM stations are simulcast. Accordingly, ranking information
pertains to the combined stations.
(e) Tied for position.
N/A Information currently not available.
N/R Station does not appear in Arbitron Radio Market Report.
N/S Non Subscriber - Station does not currently subscribe to Arbitron Radio
Market Report.
COMPANY STRATEGY
The Company's strategy is to operate top billing radio and television
stations in mid-sized markets. The Company prefers to operate in mid-sized
markets, which it defines as markets ranked (by market revenues) from 20 to 200
out of the markets summarized by Investing in Radio Market Report and Investing
in Television Market Report. As of March 18, 1999, the Company owns and/or
operates at least one of the top four billing stations in each of its radio
markets for which independent data exists. Twenty five of the 26 FM stations and
14 of the 15 AM stations owned and/or operated by the Company subscribe to
independent listener rating services.
Based on the most recent information available, 13 of the 26 FM radio
stations and 5 of the 15 AM radio stations owned and/or operated by the Company
were ranked number one (by number of listeners), and its television station was
ranked number one (by number of viewers), in their target demographic markets.
Programming and marketing are key components in the Company's strategy to
achieve top ratings in both its radio and television operations. In many of the
Company's markets, the three or four most highly rated stations (radio and/or
television) receive a disproportionately high share of the market's advertising
revenues. As a result, a station's revenue is dependent upon its ability to
maximize its number of listeners/viewers within an advertiser's given
demographic parameters. In certain cases it is the practice of the Company to
use attributes other than specific market listener data for sales activities. In
those markets where sufficient alternative data is available, the Company does
not subscribe to an independent listener rating service.
The Company's radio stations employ a variety of programming formats,
including but not limited to Classic Hits, Adult Contemporary, Album Oriented
Rock, News/Talk, Country and Classical. The Company regularly performs extensive
market research, including music evaluations, focus groups and strategic
vulnerability studies. The Company's stations also employ audience promotions to
further develop and secure a loyal following.
The Company's television station is a CBS affiliate. In addition to
securing network programming, the Company also carefully selects available
syndicated programming to maximize viewership. The Company also develops local
programming, including a strong local news franchise.
-5-
6
In operating its stations, the Company concentrates on the development of
strong decentralized local management, which is responsible for the day-to-day
operations of the station and is compensated based on the station's financial
performance, as well as other performance factors that are deemed to effect the
long-term ability of the stations to achieve financial performance objectives.
Corporate management is responsible for long-range planning, establishing
policies and procedures, resource allocation and monitoring the activities of
the stations.
The Company continues to actively seek and explore opportunities for
expansion through the acquisition of additional broadcast properties. With
passage of the Telecommunications Act of 1996 (the "Telecommunications Act")
(see "Federal Regulation of Radio and Television Broadcasting"), a company is
now able to own as many as 8 radio stations in a single market. Another
significant provision of the Telecommunications Act was the lifting of the
limitations on the number of radio stations one organization can own in total.
The Company seeks to acquire reasonably priced broadcast properties with
significant growth potential that are located in markets with well-established
and relatively stable economies. The Company often focuses on local economies
supported by a strong presence of state or federal government or one or more
major universities. Future acquisitions will be subject to the availability of
financing and compliance with the Communications Act of 1934 (the
"Communications Act") and Federal Communications Commission ("FCC") rules.
Although the Company reviews acquisition opportunities on an ongoing basis, it
has no other present understandings, agreements or arrangements to acquire or
sell any radio or television stations, other than those discussed herein.
ADVERTISING SALES
Virtually all of the Company's revenue is generated from the sale of
advertising for broadcast on its stations. Depending on the format of a
particular radio station, there are a predetermined number of advertisements
broadcast each hour. In the case of the Company's television station, the number
of advertisements broadcast may be limited by certain network affiliation and
syndication agreements and, with respect to programs designed for children,
federal regulation. The Company determines the number of advertisements
broadcast hourly that can maximize a station's available revenue dollars without
jeopardizing listening/viewing levels. 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 the
Company's 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.
Advertising rates charged by radio and television stations are generally
based primarily on a station's ability to attract audiences in the demographic
groups targeted BY advertisers (as measured by rating service surveys
quantifying the number of listeners/viewers tuned to the station at various
times); the number of stations in the market competing for the same demographic
group; the supply of and demand for radio advertising time; and other
qualitative factors, including rates charged by competing radio stations within
a given market. Radio rates are generally highest during morning and afternoon
drive-time hours, while television advertising rates are generally higher during
prime time evening viewing periods. Most advertising contracts are short-term,
generally running for only a few weeks, providing broadcasters the ability to
modify advertising rates as dictated by such variables as changes in station
ownership within a market, changes in listener/viewer ratings and changes in the
business climate within a particular market, any of which may have a significant
impact on the available advertising time on a particular station.
Approximately 82% of the Company's revenue in fiscal 1998 was generated
from the sale of local advertising. Additional revenue is generated from the
sale of national advertising, network compensation payments, barter and other
miscellaneous transactions. In all its markets, the
-6-
7
Company attempts to maintain a local sales force which is generally larger than
that of its competitors. In its sales efforts, the Company's principal goal is
to develop long-standing customer relationships through frequent direct
contacts, which the Company believes represents a competitive advantage. The
Company also typically provides incentive to its sales staff to seek out new
opportunities resulting in the establishment of new client relationships, as
well as new sources of revenue, not directly associated with the sale of
broadcast time.
Each of the Company's stations also engage national independent sales
representatives to assist it in obtaining national advertising revenues. These
representatives obtain advertising through national advertising agencies and
receive a commission from the Company based on the Company's net revenue from
the advertising obtained. Total gross revenue resulting from national
advertising in fiscal 1998 was approximately $14,711,000 or 17%.
COMPETITION
Although radio and television broadcasting are highly competitive
businesses, such competition is subject to the inherent limitations implied by
the finite number of commercial broadcasting licenses available in each market
(see "Federal Regulation of Radio and Television Broadcasting"). The Company's
stations compete for listeners/viewers and advertising revenues directly with
other radio and/or television stations, as well as other media, within their
markets. The Company's radio and television stations compete for
listeners/viewers primarily on the basis of program content and by employing
on-air talent which appeals to a particular demographic group. By building a
strong listener/viewer base comprised of a specific demographic group in each of
its markets, the Company is able to attract advertisers seeking to reach these
listeners/viewers.
Other media, including broadcast television and/or radio (as applicable),
cable television, newspapers, magazines, direct mail, the internet, coupons and
billboard advertising, also compete with the Company's stations for advertising
revenues.
The radio and television broadcasting industries are also subject to
competition from new media technologies that may be developed or introduced,
such as the delivery of audio programming by cable television systems or direct
reception from satellites. Although the Company recognizes that technological
advances within the broadcast industry can be significant, it is not aware of
any such advances or developments that it has not already implemented that would
have an effect on its competitive position within its markets. The Company
cannot predict the effect, if any, that any such new technologies may have on
the broadcasting industry taken as a whole.
EMPLOYEES
As of December 31, 1998, the Company had approximately 572 full-time
employees and 214 part-time employees, none of whom are represented by unions.
The Company believes that its relations with its employees are good.
The Company employs several high-profile personalities with large loyal
audiences in their respective markets. The Company has entered into employment
and non-competition agreements with its President and with most of its
high-profile on-air personalities, as well as non-competition agreements with
its commissioned sales representatives.
-7-
8
FEDERAL REGULATION OF RADIO AND TELEVISION BROADCASTING
INTRODUCTION. The ownership, operation and sale of radio and television
stations, including those licensed to the Company, are subject to the
jurisdiction of the FCC, which acts under authority granted by the
Communications Act. Among other things, the FCC assigns frequency bands for
broadcasting; determines the particular frequencies, locations and operating
power of stations; issues, renews, revokes and modifies station licenses;
determines whether to approve changes in ownership or control of station
licenses; regulates equipment used by stations; adopts and implements
regulations and policies that directly or indirectly affect the ownership,
operation and employment practices of stations; and has the power to impose
penalties for violations of its rules or the Communications Act.
The following is a brief summary of certain provisions of the
Communications Act and of specific FCC regulations and policies. Reference
should be made to the Communications Act, FCC rules and the public notices and
rulings of the FCC for further information concerning the nature and extent of
federal regulation of broadcast stations.
LICENSE RENEWAL. Radio and television broadcasting licenses are granted
for maximum terms of eight years, and are subject to renewal upon application to
the FCC. Under it's "two-step" renewal process, the FCC must grant a renewal
application if it finds that during the preceding term the licensee has served
the public interest, convenience and necessity, and there have been no serious
violations of the Communications Act or the FCC's rules which, taken together,
would constitute a pattern of abuse. If a renewal applicant fails to meet these
standards, the FCC may either deny its application or grant the application on
such terms and conditions as are appropriate, including renewal for less than
the full 8-year term. In making the determination of whether to renew the
license, the FCC may not consider whether the public interest would be served by
the grant of a license to a person other than the renewal applicant. If the FCC,
after notice and opportunity for a hearing, finds that the licensee has failed
to meet the requirements for renewal and no mitigating factors justify the
imposition of lesser sanctions, the FCC may issue an order denying the renewal
application, and only thereafter may the FCC accept applications for a
construction permit specifying the broadcasting facilities of the former
licensee. Petitions may be filed to deny the renewal applications of any of the
Company's stations, but any such petitions must raise issues that would cause
the FCC to deny a renewal application under the standards adopted in the
"two-step" renewal process. Under the Communications Act, if a broadcast station
fails to transmit signals for any consecutive 12-month period, the FCC license
expires at the end of that period.
The Company owns television station KOAM-TV, channel 7, serving the
Joplin, Missouri/Pittsburg, Kansas market, operating at a power of 316,000 watts
(visual), and 61,600 watts (aural). The expiration date of the stations FCC
authorization is June 1, 2006.
-8-
9
The following table sets forth the market and broadcast power of each of the
Company's radio stations and the date on which each such station's FCC license
expires:
Expiration
Date of FCC
Station Market(1) Power (Watts)(2) Authorization
FM:
WSNY Columbus, OH 50,000 October 1, 2004
WKLH Milwaukee, WI 50,000 December 1, 2004
WLZR Milwaukee, WI 50,000 December 1, 2004
WFMR Milwaukee, WI 6,000 December 1, 2004
WPNT Milwaukee, WI 6,000 December 1, 2004
WNOR Norfolk, VA 50,000 October 1, 2003
WAFX Norfolk, VA 100,000 October 1, 2003
KSTZ Des Moines, IA 100,000 February 1, 2005
KIOA Des Moines, IA 100,000 February 1, 2005
KAZR Des Moines, IA 100,000 February 1, 2005
KLTI-FM Des Moines, IA 100,000 February 1, 2005
WAQY Springfield, MA 50,000 April 1, 2006
WMGX Portland, ME 50,000 April 1, 2006
WYNZ Portland, ME 25,000 April 1, 2006
WPOR Portland, ME 50,000 April 1, 2006
WYMG Springfield, IL 50,000 December 1, 2004
WQQL Springfield, IL 50,000 December 1, 2004
WDBR Springfield, IL 50,000 December 1, 2004
WYXY Lincoln, IL 25,000 December 1, 2004
WZID Manchester, NH 50,000 April 1, 2006
WQLL Manchester, NH 6,000 April 1, 2006
WLRW Champaign, IL 50,000 December 1, 2004
WIXY Champaign, IL 25,000 December 1, 2004
KCLH Yankton, SD 100,000 April 1, 2005
KISM Bellingham, WA 100,000 February 1, 2006
KAFE Bellingham, WA 100,000 February 1, 2006
AM:
WVKO Columbus, OH 1,000 October 1, 2004
WJYI Milwaukee, WI 1,000 December 1, 2004
WNOR Norfolk, VA 1,000 October 1, 2003
KRNT Des Moines, IA 5,000 February 1, 2005
KXTK Des Moines, IA 10,000 February 1, 2005
WAQY Springfield, MA 2,500(3) April 1, 2006
WGAN Portland, ME 5,000 April 1, 2006
WZAN Portland, ME 5,000 April 1, 2006
WPOR Portland, ME 1,000 April 1, 2006
WTAX Springfield, IL 1,000 December 1, 2004
WVAX Lincoln, IL 1,000(3) December 1, 2004
WFEA Manchester, NH 5,000 April 1, 2006
WNAX Yankton, SD 5,000 April 1, 2005
KGMI Bellingham, WA 5,000 February 1, 2006
KPUG Bellingham, WA 10,000 February 1, 2006
- ------------------------
(footnotes on next page)
-9-
10
(1) Some stations are licensed to a different community located within the
market that they serve.
(2) Some stations are licensed to operate with a combination of effective
radiated power and antenna height which may be different from, but
provide equivalent coverage to, the power shown. WVKO(AM), KXTK(AM),
KPUG(AM) and KGMI(AM) operate with lower power at night than the power
shown.
(3) Operates daytime only or with greatly reduced power at night.
- ----------------
OWNERSHIP MATTERS. The Communications Act prohibits the assignment of a
broadcast license or the transfer of control of a broadcast licensee without the
prior approval of the FCC. In determining whether to grant or renew a broadcast
license, the FCC considers a number of factors pertaining to the licensee,
including compliance with the Communications Act's limitations on alien
ownership; compliance with various rules limiting common ownership of broadcast,
cable and newspaper properties; and the "character" and other qualifications of
the licensee and those persons holding "attributable or cognizable" interests
therein.
Under the Communications Act, broadcast licenses may not be granted to any
corporation having more than one-fifth of its issued and outstanding capital
stock owned or voted by aliens (including non-U.S. corporations), foreign
governments or their representatives (collectively, "Aliens"). The
Communications Act also prohibits a corporation, without FCC waiver, from
holding a broadcast license if that corporation is controlled, directly or
indirectly, by another corporation in which more than one-fourth of the issued
and outstanding capital stock is owned or voted by Aliens. The FCC has issued
interpretations of existing law under which these restrictions in modified form
apply to other forms of business organizations, including partnerships. As a
result of these statutory requirements and the FCC's rulings thereunder, the
Company, which serves as a holding company for its various radio station
subsidiaries, cannot have more than 25% of its stock owned or voted by Aliens.
The Communications Act and FCC rules also generally prohibit or restrict
the common ownership, operation or control of a radio broadcast station and a
television broadcast station serving the same geographic market, and of a radio
broadcast station and a daily newspaper serving the same geographic market.
Additionally, the Communications Act and FCC rules also generally prohibit or
restrict the common ownership, operation or control of a television broadcast
station and a radio broadcast station serving the same geographic market, of a
television broadcast station and a daily newspaper serving the same geographic
market, and of a television broadcast station and a cable television system
serving the same geographic market. Under these rules, absent waivers, the
Company would not be permitted to acquire any newspaper or television broadcast
station (other than low power television) in a geographic market in which it now
owns any radio broadcast properties, or to acquire any newspaper, television
broadcast station, radio broadcast station, or cable television system in a
geographic market in which it now owns any television broadcast station. The
FCC's rules provide for the liberal grant of waiver of the rule prohibiting
ownership of radio and television stations in the same geographic market in the
top 25 television markets if certain conditions are satisfied. Under the
Communications Act, the FCC is directed to extend its waiver policy
(one-to-a-market policy) to any of the top 50 television markets. The
Communications Act also requires the FCC to conduct a rule-making to determine
whether to retain, modify, or eliminate limits on the number of television
stations an entity may own, operate, control or have a cognizable interest in,
within the same television market. In November 1996, the FCC adopted a Further
Notice of Proposed Rule Making to implement this section of the Communications
Act. The
-10-
11
FCC revised its rules to permit a television station to affiliate with two or
more major networks of television broadcast stations under certain conditions.
(Major existing networks are still subject to the FCC's dual network ban).
The Company is permitted to own an unlimited number of radio stations on a
nationwide basis (subject to local ownership restrictions described below), and
an unlimited number of television stations on a nationwide basis so long as the
ownership of the stations would not result in an aggregate national audience
reach (i.e., the total number of television households in the Arbitron Area of
Dominant Influence (ADI) markets in which the relevant stations are located
divided by the total national television households as measured by ADI data at
the time of a grant, transfer or assignment of a license) of 35%. On March 12,
1998, the Commission initiated its biennial review of broadcast ownership rules
to review (a) the UHF Television Discount which attributes 50% of television
households in a local television market to the audience reach of a UHF
television station for purposes of calculating whether a television station
owner complies with the 35% national audience reach cap; (b) the Daily
Newspaper/Broadcast Cross-Ownership Rule which prohibits common ownership of a
broadcast station and daily newspaper in the same locale; (c) the
Cable/Television Cross-Ownership Rule which effectively prohibits common
ownership of a broadcast television station and cable system in the same market;
(d) the Experimental Broadcast Station Multiple Ownership Rule which limits the
number of experimental broadcast stations that can be licensed to or controlled
by a person; (e) the National Television Ownership Rule which eliminates a
numerical limit on the number of television stations a party may own nationally
and increases the national "audience reach" cap of television station ownership
from 25% to 35% of television households nationally; (f) the Local Radio
Ownership Rule which allows a party to own up to 8 commercial radio stations in
a market depending on the number of commercial radio stations in the market; (g)
the Dual Network Rule which in effect permits an entity to maintain two or more
broadcast networks unless such dual or multiple networks are composed of (1) two
or more of the four major networks (ABC, CBS, Fox, NBC), or (2) any of the four
major networks and one of the two emerging networks (WBTN, UPN). The FCC has
held an "en banc" hearing on the matter. The Commission also reviewed and
restated its approach to granting conditional waivers of broadcast ownership
rules that are under active consideration by the Commission in a rulemaking or
inquiry proceeding.
Under the Communications Act, the Company is permitted to own radio
stations (without regard to the audience shares of the stations) based upon the
number of radio stations in the relevant radio market as follows:
Number of Stations Number of Stations
In Radio Market Company Can Own
- ------------------ --------------------------------------------------------
14 or Fewer Total of 5 stations, not more than 3 in the same
service (AM or FM) except the Company cannot own more
than 50% of the stations in the market.
15-29 Total of 6 stations, not more than 4 in the same service
(AM or FM).
30-44 Total of 7 stations, not more than 4 in the same service
(AM or FM).
45 or More Total of 8 stations, not more than 5 in the same service
(AM or FM).
Notwithstanding the limitations described above, new rules to be
promulgated under the Communications Act also will permit the Company to own,
operate, control or have a cognizable
-11-
12
interest in additional radio broadcast stations if the FCC determines that such
ownership, operation, control or cognizable interest will result in an increase
in the number of radio stations in operation. No firm date has been established
for initiation of this proceeding.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding broadcast licenses, the interests of officers,
directors and those who, directly or indirectly, have the right to vote 5% or
more of the corporation's stock (or 10% or more of such stock in the case of
insurance companies, mutual funds, bank trust departments and certain other
passive investors that are holding stock for investment purposes only) are
generally attributable, as are positions of an officer or director of a
corporate parent of a broadcast licensee. Currently, only two of the Company's
officers and directors have an attributable interest in any company applying for
or licensed to operate broadcast stations other than the Company.
On November 5, 1996, the FCC released another further notice of proposed
rulemaking proposing to liberalize the national television ownership limits, to
relax or to eliminate the prohibition of ownership of two or more television
stations with overlapping grade B contours to grade A, and to eliminate the
radio-television cross-ownership rule and apply existing radio Local Market
Agreement (LMA) guidelines (as discussed below) to television stations. The FCC
has held an "en banc" hearing on the matter. The Company cannot predict whether
any of these proposals will ultimately be adopted by the FCC.
On March 12, 1992, the FCC initiated an inquiry and rulemaking proceeding
in which it solicited comment on whether it should alter its ownership
attribution rules by (a) raising the basic benchmark for attributing ownership
in a corporate licensee from 5% to 10% of the licensee's voting stock; (b)
increasing the attribution benchmark for "passive investors" in corporate
licensees from 10% to 20% of the licensee's voting stock; (c) broadening the
class of investors eligible for "passive investor" status to include Small
Business and Minority Enterprise Small Business Investment Companies; and (d)
exempting certain widely-held limited partnership interests from attribution
where each individual interest represents an insignificant percentage of total
partnership equity. On January 12, 1995, the FCC released a Further Notice of
Proposed Rulemaking wherein it sought to undertake a thorough review of its
attribution rules. The FCC incorporated by reference those comments filed in
response to its earlier Notice of Inquiry and asked for updated information on
all of the issues raised therein. The FCC also sought comments on the following
additional issues:(a) the relevance of its attribution rules as applied to other
communications services (such as cable, multi-point distribution systems,
personal communications services, and specialized mobile radio); (b) the
relevance of other agencies' attribution benchmarks; (c) whether non-voting
stock should be attributed in certain circumstances; (d) how to treat limited
liability companies for attribution purposes; (e) whether to eliminate its
cross-interest policy; and (f) whether certain business interrelationships (such
as debt-holders) warrant attribution. On November 5, 1996, the FCC adopted
another Further Notice of Proposed Rule Making to inquire into these matters.
The Company cannot predict whether any of these proposals will ultimately be
adopted by the FCC.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to
serve the "public interest". Since the late 1970s, the FCC gradually has relaxed
or eliminated many of the more formalized procedures it developed to promote the
broadcast of certain types of programming responsive to the needs of a station's
community of license. However, licensees continue to be required to present
programming that is responsive to community problems, needs and interests and to
maintain certain records demonstrating such responsiveness. Complaints from
listeners concerning a station's programming often will be considered by the FCC
when it evaluates renewal applications of a licensee, although such complaints
may be filed at any time and generally may be considered by the FCC at any time.
Stations also must follow various rules promulgated under the Communications Act
that regulate, among other things, political advertising, sponsorship
identification, the advertisement of contests and lotteries, obscene and
indecent broadcasts, and
-12-
13
technical operations, including limits on radio frequency radiation. The FCC now
requires the owners of antenna supporting structures (towers) to register them
with the FCC. The Company owns such towers that are subject to the registration
requirements. The Children's Television Act of 1990 and the FCC's rules
promulgated thereunder require television broadcasters to limit the amount of
commercial matter which may be aired in children's programming to 10.5 minutes
per hour on weekends and 12 minutes per hour on weekdays. The Children's
Television Act and the FCC's rules also require each television licensee to
serve, over the term of its license, the educational and informational needs of
children through the licensee's programming (and to present at least three hours
per week of "core" educational programming specifically designed to serve such
needs). Licensees are required to publicize the availability of this programming
and to file annually a report with the FCC on these programs and related
matters. On January 1, 1998, a new FCC rule became effective which requires
television stations to provide closed captioning for certain video programming
according to a schedule that gradually increases the amount of video programming
that must be provided with captions.
Failure to observe these or other rules and policies can result in the
imposition of various sanctions, including monetary forfeitures, the grant of
"short" (less than the full eight-year) renewal terms or, for particularly
egregious violations, the denial of a license renewal application or the
revocation of a license.
LOCAL MARKET AGREEMENTS. A number of radio stations, including the
Company's stations, have entered into what have commonly been referred to as
"Local Market Agreements", or "LMA's". While these agreements may take varying
forms, under a typical LMA, separately owned and licensed radio stations agree
to enter into cooperative arrangements of varying sorts, subject to compliance
with the requirements of antitrust laws and with the FCC's rules and policies.
Under these types of arrangements, separately-owned stations agree to function
cooperatively in terms of programming, advertising sales, etc., subject to the
licensee of each station maintaining independent control over the programming
and station operations of its own station. One typical type of LMA is a
programming agreement among two separately-owned radio stations serving a common
service area, whereby the licensee of one station purchases substantial portions
of the broadcast day on the other licensee's station, subject to ultimate
editorial and other controls being exercised by the latter licensee, and sells
advertising time during such program segments. Such arrangements are an
extension of the concept of "time brokerage" agreements, under which a licensee
of a station sells blocks of time on its station to an entity or entities which
purchase the blocks of time and which sell their own commercial advertising
announcements during the time periods in question.
In the past, the FCC has determined that issues of joint advertising sales
should be left to antitrust enforcement and has specifically revised its
so-called "cross-interest" policy to exempt time brokerage arrangements from the
scope of its applicability. Furthermore, the staff of the FCC's Mass Media
Bureau has held that such agreements are not contrary to the Communications Act
provided that the licensee of the radio station from which time is being
purchased by another entity maintains complete responsibility for and control
over operations of its radio station and assures compliance with applicable FCC
rules and policies. The FCC is conducting a review of its rules which may result
in the adoption of rules that would continue the existing ban on the ownership
of two or more television stations in the same-market, and require the
termination of existing television LMA's. The FCC has approved the Company's
application to purchase a television station that has an LMA with another
same-market television station (the acquisition has not yet been consummated).
If the FCC adopts new rules banning same-market LMA's, the Company could be
required to terminate the LMA with the other television station.
The FCC's rules provide that a station purchasing (brokering) time on
another station serving the same market will be considered to have an
attributable ownership interest in the brokered station for purposes of the
FCC's multiple ownership rules. As a result, under the rules, a broadcast
station will not be permitted to enter into a time brokerage agreement giving it
the right
-13-
14
to purchase more than 15% of the broadcast time, on a weekly basis, of another
local station which it could not own under the local ownership rules of the
FCC's multiple ownership rules. The FCC's rules also prohibit a broadcast
licensee from simulcasting more than 25% of its programming on another station
in the same broadcast service (i.e., AM-AM or FM-FM) whether it owns the
stations or through a time brokerage or LMA arrangement, where the brokered and
brokering stations serve substantially the same geographic area.
The FCC adopted methodology that will be used to send program ratings
information to consumer TV receivers (implementation of "V-Chip" legislation
contained in the Communications Act). The FCC also adopted the TV Parental
Guidelines developed by the Industry Ratings Implementation Group which apply to
all broadcast television programming except for news and sports. As a part of
the legislation, television station licensees are required to attach as an
exhibit to their applications for license renewal a summary of written comments
and suggestions received from the public and maintained by the licensee that
comment on the licensee's programming characterized as violent. The FCC adopted
a Report and Order establishing digital television ("DTV") (formerly advanced
television or "ATV") standards. On February 17,1998 the FCC adopted a Memorandum
Opinion and Order on Reconsideration of the Fifth Report and Order that affirmed
the FCC's service rules for the conversion by all U.S. broadcasters to DTV,
including build-out construction schedules, NTSC (current system) and DTV
channel simulcasting, and the return of analog channels to the government by
2006. As a result, the Company's television station is required to convert its
operations from NTSC channel 7 to DTV channel 30 by May 1, 2002, and to cease
broadcasting on NTSC channel 7 in 2006, and return channel 7 to the government.
Also on February 17, 1998 the FCC adopted a Memorandum Opinion and Order on
Reconsideration of the Sixth Report and Order that affirmed the FCC's DTV
channel assignments and other technical rules and policies. The FCC has not yet
decided how the law requiring the carriage of television signals on local cable
television systems should apply to DTV signals. On November 19, 1998 the FCC
decided to charge television licensees a fee of 5% of gross revenue derived from
the offering of ancillary or supplementary services on DTV spectrum for which a
subscription fee is charged.
PROPOSED CHANGES. The FCC has under consideration, and may in the future
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could, directly or indirectly, affect the operation and
ownership of the Company and its broadcast properties. Such matters include a
pending proceeding to revise the FCC's equal employment opportunity requirements
for broadcast stations, (its previous EEO Rules were found to be
unconstitutional). New application processing rules adopted by the FCC might
require the Company to apply for facilities modifications to its standard
broadcast stations in future "window" periods for filing applications or result
in the stations being "locked in" with their present facilities. On March 3,
1997, the FCC adopted rules for the Digital Audio Radio Satellite Service
("DARS") in the 2310-2360 MHz frequency band. In adopting the rules, the FCC
stated, "although healthy satellite DARS systems are likely to have some adverse
impact on terrestrial radio audience size, revenues and profits, the record does
not demonstrate that licensing satellite DARS would have such a strong adverse
impact that it threatens the provision of local service." Because the DARS
service is novel, the Company cannot predict whether it will have an adverse
impact on its business. The Balanced Budget Act of 1997 authorizes the FCC to
use auctions for the allocation of radio broadcast spectrum frequencies for
commercial use. The implementation of this law could require the Company to bid
for the use of certain frequencies. Proposals are pending in Congress to repeal
the FCC's ban restricting broadcasters from owning newspapers in the same
market. Additionally, the FCC on February 3, 1999 released a Notice of Proposed
Rulemaking in which it proposed the creation of three new classes of low power
FM radio broadcast stations (ranging from 10 watts to 1,000 watts of power -
with 1mV/m coverage area up to 8.8 miles from the transmitter). This could
result in a new nationwide low power FM service. Such stations could compete for
audience and revenue with the Company's stations. Holders of "attributable
interests" in broadcast stations, including the Company, under the proposed
rules, would be excluded from having any ownership interest in such stations.
Under the proposed rules, the Company's FM translator stations might be
-14-
15
required to terminate operations. The Company cannot predict what other changes
might be considered in the future, nor can it judge in advance what impact, if
any, such changes might have on its business.
The FCC on January 13, 1999, released a study and conducted a forum on the
impact of advertising practices on minority-owned and minority-formatted
broadcast stations. The study provided evidence that advertisers often exclude
radio stations serving minority audiences from ad placements and pay them less
than other stations when they are included. On February 22, 1999, a "summit" was
held to continue this initiative where participants considered the advertising
study's recommendations to adopt a Code of Conduct to oppose unfair ad placement
and payment, to encourage diversity in hiring and training and to enforce laws
against unfair business practices. The Company cannot predict at this time
whether the FCC will adopt new rules that would require the placement of part of
an advertiser's budget on minority-owned and minority-formatted broadcast
stations, and if so, whether such rules would have an adverse impact on thee
Company.
The Satellite Home Viewer Act ("SHVA"), a copyright law, prevents
direct-to-home satellite television carriers from retransmitting broadcast
network television signals to consumers unless those consumers (1) are
"unserved" by the over-the-air signals of their local network affiliate
stations, and (2) have not received cable service in the last 90 days. According
to the SHVA, "unserved" means that a consumer cannot receive, using a
conventional outdoor rooftop antenna, a television signal that is strong enough
to provide an adequate television picture. If the Commission's new testing
methods determine that a consumer resides in an "unserved household" and the
court accepts this methodology, the consumer may continue to receive network
programming via satellite. However, federal courts have determined that a
substantial number of satellite subscribers have been receiving CBS and Fox
network programming in violation of the SHVA, and have taken steps to terminate
the retransmission by the satellite carriers. The FCC has said that the majority
of these consumers are not likely to be assisted by the FCC's action and can
expect to have their CBS and Fox network programming terminated. The Company
owns a CBS-affiliated television station, and has entered into an agreement to
purchase a CBS-affiliated television station and in a separate agreement, to
assume an existing LMA for a Fox-affiliated television station.
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
Name Age Position
---- --- --------
Edward K. Christian 54 President, Chief Executive Officer
and Chairman; Director
Steven J. Goldstein 42 Executive Vice President and
Group Program Director
Samuel D. Bush 41 Vice President, Chief Financial
Officer and Treasurer
Catherine A. Bobinski 39 Vice President,
Corporate Controller
Warren Lada 44 Vice President, Operations
Marcia K. Lobaito 50 Vice President,
Corporate Secretary, and
-15-
16
Director of Business Affairs
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. Set forth below is certain information with respect to
the Company's executive officers.
MR. CHRISTIAN has been President, Chief Executive Officer and Chairman
since the Company's inception in 1986.
MR. GOLDSTEIN has been Executive Vice President and Group Program Director
since 1988. Mr. Goldstein has been employed by the Company since its inception
in 1986.
MR. BUSH has been Vice President, Chief Financial Officer and Treasurer
since September 1997. From 1988 to 1997 he held various positions with the Media
Finance Group at AT&T Capital Corporation, most recently as Senior Vice
President.
MS. BOBINSKI has been Vice President since March, 1999 and Corporate
Controller since September 1991. Ms. Bobinski is a certified public accountant.
MR. LADA has been Vice President, Operations since 1997. From 1992 to 1997
he was Regional Vice President of Saga Communications of New England, Inc.
MS. LOBAITO has been Vice President since 1996, and Director of Business
Affairs and Corporate Secretary since its inception in 1986.
FORWARD LOOKING STATEMENTS: RISK FACTORS
Risks and uncertainties inherent in the Company's business are set forth
in detail below. However, this section does not discuss all possible risk and
uncertainties to which the Company is subject, nor can it be assumed necessarily
that there are no other risks and uncertainties which may be more significant to
the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's business is partially dependent upon the performance of
certain key individuals, particularly Edward K. Christian, its President and the
holder of approximately 57% of the combined voting power of the Common Stock.
The Company has entered into long-term employment and non-competition agreements
with Mr. Christian and certain other key personnel. The loss of the services of
Mr. Christian could have a material adverse effect upon the Company. The Company
does not maintain key man life insurance on Mr. Christian's life.
FINANCIAL LEVERAGE AND DEBT SERVICE REQUIREMENTS
At December 31, 1998 the Company's long-term debt (including the current
portion thereof) was approximately $70,906,000.The Company has borrowed and
expects to continue to borrow to finance acquisitions and for other corporate
purposes. Because of the Company's substantial indebtedness, a significant
portion of the Company's cash flow from operations is required for debt service.
Under the terms of the Credit Agreement, commencing March 31, 2001 and
continuing quarterly thereafter, the $70,000,000 commitment under the Term Loan,
and any indebtedness outstanding under the $60,000,000 Acquisition Facility,
will be reduced on a quarterly basis in amounts ranging from 2.5% to 7.5%. The
Company believes that cash flow from operations will be sufficient to meet debt
service requirements for interest and scheduled quarterly payments of principal
under the Credit Agreement. If such cash flow is not sufficient to meet such
debt service requirements, the Company may be required to sell additional equity
securities, refinance its
-16-
17
obligations or dispose of one or more of its properties in order to make such
scheduled payments. There can be no assurance that the Company would be able to
effect any such transactions on favorable terms. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
DEPENDENCE ON KEY STATIONS
For the years ended December 31, 1998, 1997 and 1996 the Company's
Columbus, Ohio stations accounted for an aggregate of 22%, 24% and 22%,
respectively, and the Company's Milwaukee, Wisconsin stations accounted for an
aggregate of 24%, 24% and 23%, respectively, of the Company's station operating
income. While radio revenues in each of the Columbus and Milwaukee markets have
remained relatively stable historically, an adverse change in either radio
market or either location's relative market position could have a significant
impact on the Company's operating results as a whole.
REGULATORY MATTERS
The broadcasting industry is subject to extensive federal regulation
which, among other things, requires approval by the FCC of transfers,
assignments and renewals of broadcasting licenses, and limit the number of
broadcasting properties that the Company may acquire within a specific market.
Federal regulation also restricts alien ownership of capital stock of and
participation in the affairs of licensees. See "Business - Federal Regulation of
Radio and Television Broadcasting".
DEPENDENCE ON LOCAL AND NATIONAL ECONOMIC CONDITIONS
The Company's financial results are dependent primarily on its ability to
generate advertising revenue through rates charged to advertisers. The
advertising rates a station is able to charge is affected by many factors,
including the general strength of the local and national economies.
SUCCESS OF ACQUISITIONS DEPEND ON COMPANY'S ABILITY TO INTEGRATE ACQUIRED
STATIONS
The Company has pursued and intends to continue to pursue acquisitions of
additional radio and television stations. The success of any completed
acquisition will depend on the Company's ability to integrate effectively the
acquired stations into the Company. The process of integrating acquired stations
may involve numerous risks, including difficulties in the assimilation of
operations, the diversion of management's attention from other business
concerns, risk of entering new markets, and the potential loss of key employees
of the acquired stations.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Grosse Pointe Farms,
Michigan. The types of properties required to support each of the Company's
stations include offices, studios, transmitter sites and antenna sites. A
station's studios are generally housed with its offices in downtown or business
districts. The transmitter sites and antenna sites are generally located so as
to provide maximum market coverage.
The studios and offices of eleven of the Company's fourteen station
locations, as well as its corporate headquarters in Michigan, are located in
facilities owned by the Company. The remaining studios and offices are located
in leased facilities with lease terms that expire in 1 to 6 years. The Company
owns or leases its transmitter and antenna sites, with lease terms that expire
in 1 to 90 years. The Company does not anticipate any difficulties in renewing
those leases that expire within the next five years or in leasing other space,
if required.
-17-
18
No one property is material to the Company's overall operations. The
Company believes that its properties are in good condition and suitable for its
operations.
The Company owns substantially all of the equipment used in its
broadcasting business.
The Company's bank indebtedness is secured by a first priority lien on
all of the assets of the Company and its subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management of the Company, there are no material legal
proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On May 29, 1998 the Company consummated a five-for-four split of its
Class A and Class B Common Stock, resulting in additional shares being issued of
approximately 2,240,000 and 302,000, respectively, for holders of record on May
15, 1998.
On April 1, 1997 the Company consummated a five-for-four split of its
Class A and Class B Common Stock, resulting in additional shares being issued of
approximately 1,772,000 and 242,000, respectively, for holders of record on
March 17, 1997.
The Company's Class A Common Stock trades on the American Stock
Exchange; there is no public trading market for the Company's Class B Common
Stock. The following table sets forth the high and low sales prices of the Class
A Common Stock as reported by Tradeline for the calendar quarters indicated:
Year High Low
------------------ ------ ------
1997:
First Quarter $14.96 $12.16
Second Quarter $16.20 $13.30
Third Quarter $19.70 $14.50
Fourth Quarter $20.00 $15.00
1998:
First Quarter $17.00 $15.30
Second Quarter $18.90 $14.00
Third Quarter $18.25 $14.50
Fourth Quarter $20.75 $14.63
As of March 18, 1999, there were approximately 163 holders of record of
the Company's Class A Common Stock, and one holder of the Company's Class B
Common Stock.
-18-
19
The Company has not paid any cash dividends on its Common Stock during
the three most recent fiscal years. The Company intends to retain future
earnings for use in its business and does not anticipate paying any dividends on
shares of its Common Stock in the foreseeable future. The Company is prohibited
by the terms of its bank loan agreement from paying dividends on its Common
Stock without the banks' prior consent. See Item 7. Management's Discussion and
Analysis of Financial Position and Results of Operations - Liquidity and Capital
Resources.
-19-
20
ITEM 6. SELECTED FINANCIAL DATA
Years Ended
December 31,
--------------------------------------------------------------------------
1998(1)(2) 1997(1)(3) 1996(1)(4) 1995(1) 1994(1)(5)
---- ---- ---- ---- ----
(In thousands except per share amounts)
OPERATING DATA:
Net Operating Revenue $75,871 $66,258 $56,240 $49,699 $44,380
Station Operating Expense (excluding
depreciation, amortization, corporate
general and administrative) 48,544 43,796 36,629 32,436 28,878
-----------------------------------------------------------------------
Station Operating Income (excluding
depreciation, amortization, corporate
general and administrative) 27,327 22,462 19,611 17,263 15,502
Depreciation and Amortization 6,420 5,872 5,508 6,551 5,781
Corporate General and Administrative 4,497 3,953 3,299 2,816 2,639
-----------------------------------------------------------------------
Operating Profit 16,410 12,637 10,804 7,896 7,082
Interest Expense 4,609 4,769 3,814 3,319 2,867
Net Income $ 6,351 $ 4,492 $ 3,935 $ 2,678 $ 2,306
Basic Earnings Per Share
Cash Dividends Declared Per Common Share $ .50 $ .36 $ .31 $ .21 $ .18
------- ------- ------- ------- -------
Weighted Average Common Shares 12,717 12,637 12,573 12,537 12,532
Diluted Earnings Per Share $ .49 $ .35 $ .31 $ .21 $ .18
Weighted Average Common Shares and Common
Equivalents 12,990 12,888 12,816 12,688 12,641
OTHER DATA:
After-Tax Cash Flow (6) $14,328 $11,083 $10,143 $ 9,564 $ 8,052
After-Tax Cash Flow Per Share-Basic $ 1.13 $ .88 $ .81 $ .76 $ .64
After-Tax Cash Flow Per Share-Diluted $ 1.10 $ .86 $ .79 $ .75 $ .64
-20-
21
December 31,
------------------------------------------------------------------------
1998(2) 1997(3) 1996(4) 1995 1994(5)
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
Working Capital $ 15,255 $ 1,587 $10,997 $ 3,582 $ 3,828
Net Fixed Assets 35,564 34,028 29,704 26,403 28,640
Net Other Assets 70,505 60,886 48,636 34,399 35,923
Total Assets 130,013 112,433 96,415 74,944 78,170
Long-term Debt Excluding Current
Portion 70,725 53,466 52,355 32,131 39,969
Equity 44,723 38,255 33,113 28,882 26,328
- -----------------------------
(1) All periods presented include the weighted average shares and common
equivalents related to certain stock options. In June 1998, April, 1997,
May, 1996 and July, 1995 the Company consummated a five-for-four split
of its Class A and Class B common stock. All share and per share
information has been restated to reflect the retroactive equivalent
change in the weighted average shares.
(2) Reflects the results of Michigan Radio Network, acquired in March, 1998;
and KGMI and KISM, acquired in December, 1998.
(3) Reflects the results of KAZR, acquired in March, 1997; KLTI, acquired in
April, 1997 and the results of a local market agreement for KLTI which
began in January, 1997; WDBR, WYXY, WTAX, and WVAX acquired in May,
1997; WFMR and WPNT, acquired in May, 1997; WQLL acquired in November,
1997, and the results of a local market agreement for WQLL which began
in July, 1997; and the Illinois Radio Network acquired in November,
1997.
(4) Reflects the results of WNAX AM/FM, acquired in June, 1996; WPOR AM/FM,
acquired in June 1996; the results of a local market agreement for WDBR,
WYXY, WTAX, and WVAX which began in July, 1996; and the results of a
local market agreement for KAZR which began in August, 1996.
(5) Reflects the results of WLZR and WJYI, acquired in April, 1994; WAFX,
acquired in April 1994; and KOAM TV, acquired in October, 1994.
(6) Defined as net income plus depreciation, amortization (excluding film
rights), other expense, and deferred taxes.
-21-
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 6.
Selected Financial Data and the financial statements and notes thereto of Saga
Communications, Inc. and its subsidiaries contained elsewhere herein.
GENERAL
The Company's 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 and amortization, programming expenses,
solicitation of advertising, and promotion expenses. In addition to these
expenses, owning and operating television stations involve the cost of acquiring
certain syndicated programming.
During the years ended December 31, 1998, 1997 and 1996, none of the
Company's operating locations represented more than 15% of the Company's station
operating income (i.e., net operating revenue less station operating expense),
other than the Columbus, Ohio and Milwaukee, Wisconsin stations. For the years
ended December 31, 1998, 1997 and 1996, Columbus accounted for an aggregate of
22%, 24% and 22%, respectively, and Milwaukee accounted for an aggregate of 24%,
24%, and 23%, respectively, of the Company's station operating income. While
radio revenues in each of the Columbus and Milwaukee markets have remained
relatively stable historically, an adverse change in either radio market or
either location's relative market position could have a significant impact on
the Company's operating results as a whole.
Because audience ratings in the local market are crucial to a station's
financial success, the Company endeavors to develop strong listener/viewer
loyalty. The Company believes that the diversification of formats on its radio
stations helps the Company to insulate itself from the effects of changes in
musical tastes of the public on any particular format.
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. The Company's 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. The Company minimizes its use of trade agreements and
historically has sold over 95% of its advertising time for cash.
Most advertising contracts are short-term, and generally run only for a
few weeks. Most of the Company's revenue is generated from local advertising,
which is sold primarily by each station's sales staff. In 1998, approximately
82% of the Company's gross revenue was from local
-22-
23
advertising. To generate national advertising sales, the Company engages an
independent advertising sales representative that specializes in national sales
for each of its stations. See Item 1. Business - Advertising Sales.
The Company's revenue varies throughout the year. Advertising
expenditures, the Company's primary source of revenue, generally have been
lowest during the winter months comprising the first quarter.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998, the Company's net operating revenue
was $75,871,000 compared with $66,258,000 for the year ended December 31, 1997,
an increase of $9,613,000 or 15%. Approximately $5,658,000 or 59% of the
increase was attributable to stations owned and operated by the Company for at
least two years, representing a 9% increase in comparable station/comparable
period net operating revenue. The overall increase in comparable
station/comparable period revenue was primarily the result of increased
advertising rates at a majority of the Company's stations. Improvements were
noted in most of the Company's markets on a comparable station/comparable period
basis. In the Company's Norfolk, Virginia market, there was a 14% ($832,000)
increase in net revenue over 1997 reported levels, and in the Company's
Champaign, Illinois market, there was an 11% ($369,000) increase in net revenue
over 1997 reported levels, a reversal of the decreases in each of these two
markets in 1997. The balance of the increase in net operating revenue of
approximately $3,955,000 was attributable to revenue generated by stations which
were not owned or operated by the Company for the entire comparable period in
1997.
Station operating expense (i.e., programming, technical, selling, and
station general and administrative expenses) increased by $4,748,000 or 11% to
$48,544,000 for the year ended December 31, 1998, compared with $43,796,000 for
the year ended December 31, 1997. Of the total increase, approximately
$2,844,000 or 60% was the result of the impact of the operation of stations
which were not owned or operated by the Company for the entire comparable period
in 1996. The remaining balance of the increase in station operating expense of
$1,904,000 represents a total increase in station operating expense of 4.5% for
the year ended December 31, 1998 compared to the year ended December 31, 1997 on
a comparable station/comparable period basis.
Operating profit for the year ended December 31, 1998 was $16,410,000
compared to $12,637,000 for the year ended December 31, 1997, an increase of
$3,773,000 or 30%. The improvement was the result of the $9,613,000 increase in
net operating revenue, offset by the $4,748,000 increase in station operating
expense, a $548,000 or 9% increase in depreciation and amortization, and a
$544,000 or 14% increase in corporate general and administrative charges. The
increase in depreciation and amortization charges was principally the result of
recent acquisitions. The increase in corporate general and administrative
charges was primarily attributable to an increase in compensation charges of
$140,000 relating to an accrued bonus to the Company's principal stockholder,
approximately $140,000 pertaining to a discretionary contribution to the 401(k)
plan of the Company, and approximately $65,000 in non-recurring employee benefit
related matters. The remaining increase in corporate general and administrative
expenses of approximately $199,000 represents additional costs due to the growth
of the Company as a result of the Company's recent acquisitions or an increase
of approximately 5% in ordinary recurring expenses.
The Company generated net income in the amount of approximately $6,351,000
($0.50 per share) during the year ended December 31, 1998 compared with
$4,492,000 ($0.36 per share) for the year ended December 31, 1997, an increase
of approximately $1,859,000 or 41%. The increase in net income was the result of
the $3,773,000 improvement in operating profit and a $160,000 decrease in
interest expense, offset by a $554,000 increase in other expense and a
-23-
24
$1,520,000 increase in income taxes directly associated with the improved
operating performance of the Company. The decrease in interest expense was
primarily attributable to decreased interest rates. The increase in other
expense was principally the result of the Company's equity in the operating
results of an investment in Reykjavik, Iceland.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, the Company's net operating revenue
was $66,258,000 compared with $56,240,000 for the year ended December 31, 1996,
an increase of $10,018,000 or 18%. Approximately $3,390,000 or 34% of the
increase was attributable to stations owned and operated by the Company for at
least two years, representing a 6.5% increase in comparable station/comparable
period net operating revenue. The overall increase in comparable
station/comparable period revenue was primarily the result of increased
advertising rates at a majority of the Company's stations. In the Company's
Columbus, Ohio market there was a 16% ($1,419,000) increase in net revenue over
1996 reported levels, a reversal of the decreases in the market in 1996.
Improvements were noted in most of the Company's markets on a comparable
station/comparable period basis. The Company did, however, experience a decline
in the Norfolk, Virginia market, where there was a 12% ($805,000) decrease in
net revenue, and in the Champaign, Illinois market where there was a 6%
($209,000) decrease in net revenue. The balance of the increase in net operating
revenue of approximately $6,628,000 was attributable to revenue generated by
stations which were not owned or operated by the Company for the entire
comparable period in 1996.
The decrease in revenue in the Norfolk and Champaign markets was primarily
the result of aggressive pricing efforts by certain competing stations within
the respective markets. The Company believes the competitive pressure which
negatively impacted its revenue growth in these markets to be temporary in
nature, and expects 1998 revenue to approximate the 1997 levels and does not
anticipate that such effects on revenue will persist beyond 1998.
Station operating expense (i.e., programming, technical, selling, and
station general and administrative expenses) increased by $7,167,000 or 20% to
$43,796,000 for the year ended December 31, 1997, compared with $36,629,000 for
the year ended December 31, 1996. Of the total increase, approximately
$5,618,000 or 78% was the result of the impact of the operation of stations
which were not owned or operated by the Company for the entire comparable period
in 1996. The remaining balance of the increase in station operating expense of
$1,549,000 represents a total increase in station operating expense of 5% for
the year ended December 31, 1997 compared to the year ended December 31, 1996 on
a comparable station/comparable period basis.
Operating profit for the year ended December 31, 1997 was $12,637,000
compared to $10,804,000 for the year ended December 31, 1996, an increase of
$1,833,000 or 17%. The improvement was primarily the result of the $10,018,000
increase in net operating revenue, offset by the $7,167,000 increase in station
operating expense, a $364,000 or 6.6% increase in depreciation and amortization,
and a $654,000 or 19.8% increase in corporate general and administrative
charges. The increase in depreciation and amortization charges was principally
the result of the recent acquisitions. The increase in corporate general and
administrative charges was primarily attributable to deferred compensation
charges of $210,000 relating to an accrued bonus to the Company's principal
stockholder and approximately $50,000 pertaining to option grants primarily to
local station management. The remaining increase in corporate general and
administrative expenses of approximately $394,000 represents additional costs
due to the growth of the Company as a result of the Company's recent
acquisitions or an increase of approximately 12% in ordinary recurring expenses.
-24-
25
The Company generated net income in the amount of approximately $4,492,000
($0.36 per share) during the year ended December 31, 1997 compared with
$3,935,000 ($0.31 per share) for the year ended December 31, 1996, an increase
of approximately $557,000 or 14%. The increase in net income was principally the
result of the $1,833,000 improvement in operating profit, offset by a $955,000
increase in interest costs resulting primarily from an increase in borrowed
funds to finance the Company's 1997 acquisitions and a $322,000 increase in
income taxes directly associated with the improved operating performance of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's policy is generally to repay its long-term debt with excess
cash on hand to reduce its financing costs. As of December 31, 1998, the Company
had $70,906,000 of long-term debt (including the current portion thereof)
outstanding and approximately $80,000,000 of unused borrowing capacity under the
Credit Agreement (as defined below).
On December 30, 1998 the Company amended its credit agreement (the "Credit
Agreement") with BankBoston, N.A.; Fleet Bank, N.A.; Summit Bank; The Bank of
New York; Union Bank of California, N.A.; Bank One Indiana, N.A.; Bank of
Scotland; Bank of Montreal; First National Bank of Maryland; Rabobank Nederland;
and Michigan National Bank (collectively, the "Lenders"), to modify the
Company's financing facilities with three facilities (the "Facilities"): a
$70,000,000 senior secured term loan (the "Term Loan"), a $60,000,000 senior
secured acquisition loan facility (the "Acquisition Facility"), and a
$20,000,000 senior secured revolving credit facility (the "Revolving Facility").
The Facilities mature June 30, 2006. The Company's indebtedness under the
Facilities is secured by a first priority lien on substantially all the assets
of the Company and its subsidiaries, by a pledge of its subsidiaries' stock and
by a guarantee of its subsidiaries.
The Term Loan was used to amend the Company's existing credit agreement,
pay related transaction expenses and fund the acquisitions in January, 1999. The
Acquisition Facility may be used for permitted acquisitions. 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 December 30, 2000, the Acquisition Facility will convert to a five
and a half year term loan. The outstanding amount of the Term Loan is required
to be reduced quarterly in amounts ranging from 2.5% to 7.5% of the initial
commitment commencing on March 31, 2001. The outstanding amount of the
Acquisition Facility is required to be reduced quarterly in amounts ranging from
2.5% to 7.5% commencing on March 31, 2001. Any outstanding amount under the
Revolving Facility will be due on the maturity date of June 30, 2006. 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 the Company's option,
at alternatives equal to LIBOR plus 1.0% to 1.75% or the Agent bank's base rate
plus 0% to .75%. The spread over LIBOR and the prime rate vary from time to
time, depending upon the Company's financial leverage. The Company also pays
quarterly commitment fees equal of 0.375% to 0.5% 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 the Company to maintain specified financial ratios and
impose certain limitations on the Company with respect to investments,
additional indebtedness, dividends, distributions, guarantees, liens and
encumbrances.
At December 31, 1998, the Company had an interest rate swap agreement with
a total notional amount of $32,000,000 that it uses to convert the variable
Eurodollar interest rate of a
-25-
26
portion of its bank borrowings to a fixed interest rate. The swap agreement was
entered into to reduce the risk to the Company of rising interest rates. In
accordance with the terms of the swap agreement, dated November 21, 1995, the
Company pays 6.15% calculated on a $32,000,000 notional amount. The Company
receives LIBOR (5.25125% at December 31, 1998) calculated on a notional amount
of $32,000,000. Net receipts or payments under the agreement are recognized as
an adjustment to interest expense. The swap agreement expires in December 1999.
As the LIBOR increases, interest payments received and the market value of the
swap position increase. Approximately $153,000 in additional interest expense
was recognized as a result of the interest rate swap agreement for the year
ended December 31, 1998 and an aggregate amount of $507,000 in additional
interest expense has been recognized since the inception of the agreement.
During the years ended December 31, 1998, 1997 and 1996, the Company had
net cash flows from operating activities of $12,927,000, $11,659,000, and
$7,679,000, respectively. The Company believes 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. If such cash flow is
not sufficient to meet such debt service requirements, the Company may be
required to sell additional equity securities, refinance its obligations or
dispose of one or more of its properties in order to make such scheduled
payments. There can be no assurance that the Company would be able to effect any
such transactions on favorable terms.
On March 14, 1997, the Company acquired an FM radio station (KAZR-FM)
serving the Des Moines, Iowa market for approximately $2,700,000. The Company
began operating the radio station under the terms of a local market agreement on
August 1, 1996, which remained in effect until the acquisition.
On April 17, 1997, the Company acquired an FM radio station (KLTI-FM)
serving the Des Moines, Iowa market for approximately $3,200,000. The Company
began operating the radio station under the terms of a local market agreement on
January 1, 1997, which remained in effect until the acquisition.
On May 5, 1997, the Company acquired two AM and two FM radio stations
(WTAX-AM, WDBR-FM, WVAX-AM, and WYXY-FM) serving the Springfield, Illinois
market for approximately $6,000,000. The Company began operating the radio
stations under the terms of a local market agreement on July 1, 1996, which
remained in effect until the acquisition.
On May 9, 1997, the Company acquired two FM radio stations (WFMR-FM and
WPNT-FM) serving the Milwaukee, Wisconsin market for approximately $5,000,000.
On November 18, 1997, the Company acquired an FM radio station (WQLL-FM)
serving the Manchester, New Hampshire market for approximately $3,400,000. The
Company began operating the radio station under the terms of a local market
agreement on July 1, 1997, which remained in effect until the acquisition.
On November 25,1997, the Company acquired a regional and state news and
sports information network (The Illinois Radio Network) for approximately
$1,750,000.
The 1997 acquisitions were financed through funds generated from
operations and additional borrowings of $11,250,000.
On March 30, 1998 the Company acquired a regional and state news and
sports information network (The Michigan Radio Network) for approximately
$1,100,000 including, approximately $234,000 of the Company's class A common
stock. The acquisition is subject to certain adjustments,, based on operating
performance levels, that could result in an additional acquisition amount of
$450,000 payable in shares of the Company's Class A Common Stock.
-26-
27
On June 17, 1998 the Company acquired 50% of the outstanding stock of Finn
Midill, ehf., an Icelandic corporation which owns six FM radio stations serving
Reykjavik, Iceland, for approximately $1,100,000. The investment is accounted
for using the equity method. Additionally, the Company loaned approximately
$570,000 to Finn Midill, ehf. which accrues interest at 7.5% plus an
inflationary index, and is to be repaid in June, 2001. As of December 31, 1998,
the Company has loaned an additional $1,540,000 to Finn Midill, ehf. for working
capital needs; this loan is non interest bearing.
On December 1, 1998, the Company acquired an AM and FM radio station
(KGMI-AM and KISM-FM) serving the Bellingham, Washington market for
approximately $8,000,000.
The 1998 acquisitions and investment were financed through funds generated
from operations and additional borrowings of $12,287,000 under the Term Loan.
On July 7, 1998, the Company entered into an agreement to purchase KAVU-TV
(an ABC affiliate) and a low power Univision affiliate, serving the Victoria,
Texas market for approximately $11,875,000, including approximately $2,000,000
of the Company's Class A common stock. The Company will also assume an existing
Local Marketing Agreement for KVCT-TV (a Fox affiliate). The transaction is
subject to the approval of the Federal Communications Commission and is expected
to close during the second quarter of 1999.
On September 21, 1998, the Company signed a letter of intent to purchase a
regional and state farm information network (The Michigan Farm Radio Network)
for approximately $1,750,000, including approximately $1,125,000 of the
Company's Class A common stock. The Company closed on this transaction in
January, 1999.
On October 22, 1998, the Company entered into an agreement to purchase an
AM and FM radio station (KAFE-FM and KPUG-AM) serving the Bellingham, Washington
market for approximately $6,000,000. The Company closed on this transaction in
January, 1999.
On December 2, 1998, the Company entered into an agreement to purchase an
AM radio station (KBFW-AM) serving the Bellingham, Washington market for
approximately $1,000,000. The transaction is subject to the approval of the
Federal Communications Commission and is expected to close during the second
quarter of 1999.
In February, 1999 the Company entered into an agreement to purchase WXVT
TV (a CBS affiliate), serving the Greenville, Mississippi market for
approximately $5,200,000, including approximately $600,000 of the Company's
Class A common stock. The transaction is subject to the approval of the Federal
Communications Commission and is expected to close during the third quarter of
1999.
The Company anticipates that the above and any future acquisitions of
radio and television stations 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.
The Company's capital expenditures for the year ended December 31, 1998
were approximately $3,003,000 ($2,758,000 in 1997). The Company anticipates
capital expenditures in 1998 to be approximately $3,000,000, which it expects to
finance through funds generated from operations or additional borrowings under
the Credit Agreement.
-27-
28
MARKET RISK AND RISK MANAGEMENT POLICIES
The Company's earnings are affected by changes in short-term interest
rates as a result of its long-term debt arrangements. However, due to its
purchase of an interest rate swap agreement, the effects of interest rate
changes are limited. If market interest rates averaged 1% more in 1998 than they
did during 1997, the Company's interest expense, after considering the effect of
its interest rate swap agreement, would increase and income before taxes would
decrease by $296,000. These amounts are determined by considering the impact of
the hypothetical interest rates on the Company's borrowing cost, short-term
investment balances, and interest rate swap agreements. This analysis does not
consider the effects of the reduced level of overall economic activity that
could exist in such an environment. Further, in the event of a change of such
magnitude, management would likely take actions to further mitigate its exposure
to the change. However, due to the uncertainty of the specific actions that
would be taken and their possible effects, the sensitivity analysis assumes no
changes in the Company's financial structure.
IMPACT OF THE YEAR 2000
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to produce broadcast signals, process financial transactions, or engage in
similar normal business activities.
Based on recent assessments, the Company has determined that it will be
required to modify or replace portions of its software and certain hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications or replacements of existing
software and certain hardware, Y2K can be mitigated. However, if such
modifications and replacements are not made, or are not timely completed, Y2K
could have a material impact on the operations of the Company.
The Company's plan to resolve Y2K involves the following four phases:
assessment, remediation, testing, and implementation. To date, the Company has
substantially completed its assessment of all systems that could be
significantly affected by Y2K. The assessment indicated that some significant
financial and operational systems could be affected by Y2K, including: i)
accounting and financial reporting systems, ii) broadcast studio equipment and
software necessary to deliver programming, iii) certain computer hardware not
capable of recognizing a four digit code for the applicable year, iv) certain
traffic and billing software, and v) certain local area networks. The assessment
phase will be completed in the first quarter of 1999. The Company is also
assessing the potential external risks associated with Y2K, including Y2K
compliance status of its significant external agents. To date the Company is not
aware of any external agent with a Y2K issue that would materially impact the
Company's result of operations, liquidity or capital resources. However, the
Company has no means of ensuring that external agents will be Y2K compliant. The
inability of external agents to complete their Y2K resolution process in a
timely fashion could materially impact the Company. The effect of non-compliance
by external agents is not determinable.
The Company's remediation phase is to replace or upgrade to Y2K compliant
software and hardware if applicable for related systems based upon its findings
during the assessment phase. The Company anticipates completing this phase no
later than June 30, 1999. The Company's testing and implementation phases will
run concurrently for certain systems. Completion of the testing phase for all
significant systems is expected by September 30, 1999.
-28-
29
The Company will utilize both internal and external resources to replace,
upgrade, test and implement the software and operating equipment for Y2K
modifications. The total Y2K project cost is estimated at approximately
$500,000, which includes the cost of new software and hardware, most of which
will be capitalized. The project is estimated to be completed not later than
September 30, 1999, which is prior to any anticipated impact on its operating
systems. The Company believes that with modifications to existing software and
conversions to new software, Y2K will not pose significant operational problems
for its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, Y2K could have a material impact on the
operations of the Company.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Management of the Company believes it has an effective program in place to
resolve the Y2K issue in a timely manner. As noted above, the Company has not
yet completed all necessary phases of the Y2K program. In the event that the
Company does not complete any additional phases, the Company could experience
disruptions in its operations, including among other things a temporary
inability to process financial transactions, deliver broadcast programming, or
engage in normal operational and business activities. In addition, disruptions
in the economy generally resulting from Y2K issues could also materially
adversely affect the Company. The Company could be subject to litigation for
computer systems failure, equipment shutdown or failure to properly date
business records. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other
actions manual work arounds and adjusting staffing strategies.
INFLATION
The impact of inflation on the Company's 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 the Company's operations.
FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-K 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, when used
in this Form 10-K words such as "believes," "anticipates," "expects," and
similar expressions are intended to identify forward looking statements. The
Company cautions that a number of important factors could cause the Company's
actual results for 1999 and beyond to differ materially from those expressed in
any forward looking statements made by or on behalf of the Company. Forward
looking statements involve a number of risks and uncertainties including, but
not limited to, the Company's financial leverage and debt service requirements,
dependence on key personnel, dependence on key stations, U.S. and local economic
conditions, the successful integration of acquired stations, and regulatory
matters. The
-29-
30
Company cannot assure that it will be able to anticipate or respond timely to
changes in any of the factors listed above, 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 the Company's stock. See "Business -
Forward Looking Statements: Risk Factors".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information appearing under the caption "Market Risk and Risk Management
Policies" in Item 7 is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements attached hereto are filed as part of this annual
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" and "Compensation of Directors and Officers -
Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1999 are hereby
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
"Compensation of Directors and Officers" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998 is hereby
incorporated by reference herein. Such incorporation by reference shall not be
deemed to specifically incorporate by reference the information referred to in
Item 402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 30, 1999 is
hereby incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-30-
31
"Certain Transactions" in the Company's Proxy Statement for the 1999
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or before April 30, 1999 is hereby incorporated by reference
herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements attached hereto pursuant to Item 8
hereof are filed as part of this annual report.
2. FINANCIAL STATEMENT SCHEDULES
II -Valuation and Qualifying Accounts
All other schedules for which provision are made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
3. EXHIBITS
Exhibit No. Description
- ----------- -----------
3(a) Amended and Restated Certificate of Incorporation (3(a))*
3(b) By-laws, as amended (3(b))**
4(a) Plan of Reorganization (2)*
4(b) Second Amended and Restated Credit Agreement dated as of
December 30, 1998 between the Company and BankBoston, as Agent
for the lenders
Executive Compensation Plans and Arrangements
- ---------------------------------------------
10(a)(1) Employment Agreement of Edward K. Christian dated April 8,
1997 ****
10(a)(2) Amendment to Employment Agreement of Edward K. Christian dated
December 8, 1998
10(b) Saga Communications, Inc. 1992 Stock Option, as amended ******
10(c) Summary of Executive Insured Medical Reimbursement Plan
(10(2))*
10(d) Saga Communications, Inc. 1997 Non-Employee Director Stock
Option Plan *****
Other Material Agreements
- -------------------------
10(e)(1) Promissory Note of Edward K. Christian dated December 10, 1992
(10(l)(a))*
10(e)(2) Amendment to Promissory Note of Edward K. Christian dated
December 8, 1998
-31-
32
(21) Subsidiaries (22)*
(23) Consent of Ernst & Young LLP
27 Financial Data Schedule
- ----------------------------------------------
* Exhibit indicated in parenthesis of the Company's Registration
Statement on Form S-1 (File No. 33-47238) incorporated by
reference herein.
** Exhibit indicated in parenthesis of the Company's Form 10-K
for the year ended December 31, 1992 incorporated by reference
herein.
*** Exhibit indicated in parenthesis of the Company's Form 10-K
for the year ended December 31, 1995 incorporated by reference
herein.
**** Exhibit indicated in parenthesis of the Company's Form 10-Q
for the quarter ended March 31, 1997 incorporated by reference
herein.
***** Exhibit indicated in parenthesis of the Company's Form 10-Q
for the quarter ended June 30, 1997 incorporated by reference
herein.
****** Exhibit indicated in parenthesis of the Company's Form 10-K
for the year ended December 31, 1997 incorporated by reference
herein.
(b) Reports on Form 8-K
-------------------
None
-32-
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 29, 1999.
SAGA COMMUNICATIONS, INC.
By: /s/ Edward K. Christian
-------------------------------
Edward K. Christian
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 29, 1999.
Signatures
----------
/s/ Edward K. Christian President, Chief Executive
------------------------------ Officer, and Chairman of the Board
Edward K. Christian
/s/ Samuel D. Bush Vice President, Chief Financial
------------------------------ Officer and Treasurer
Samuel D. Bush
/s/ Catherine A. Bobinski Vice President, Corporate Controller
------------------------------ and Chief Accounting Officer
Catherine Bobinski
/s/ Kristin M. Allen Director
------------------------------
Kristin M. Allen
/s/ Donald J. Alt Director
------------------------------
Donald J. Alt
/s/ Jonathan Firestone Director
------------------------------
Jonathan Firestone
/s/ Joseph P. Misiewicz Director
------------------------------
Joseph P. Misiewicz
/s/ Gary Stevens Director
------------------------------
Gary Stevens
-33-
34
Report of Independent Auditors
The Board of Directors and Stockholders
Saga Communications, Inc.
We have audited the accompanying consolidated balance sheets of Saga
Communications, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule listed in the index at time
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Saga
Communications, Inc. and subsidiaries at December 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
------------------------
Detroit, Michigan
February 12, 1999
35
Saga Communications, Inc.
Consolidated Balance Sheets
(in thousands)
DECEMBER 31,
1998 1997
-------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,664 $ 2,209
Accounts receivable, less allowance of $496
($514 in 1997) 14,445 12,833
Prepaid expenses 1,461 1,269
Barter transactions 819 748
Deferred taxes 555 460
-------------------------
Total current assets 23,944 17,519
Net property and equipment 35,564 34,028
Other assets:
Favorable lease agreements, net of accumulated amortization of
$3,738 ($3,557 in 1997) 604 836
Excess of cost over fair value of assets acquired, net of
accumulated amortization of $7,572 ($6,916 in 1997) 19,765 20,276
Broadcast licenses, net of accumulated amortization of $2,586
($1,614 in 1997) 41,190 35,495
Other intangibles, deferred costs and investments, net of
accumulated amortization of $7,506 ($6,533 in 1997) 8,946 4,279
-------------------------
Total other assets 70,505 60,886
-------------------------
$130,013 $112,433
=========================
See accompanying notes.
2
36
Saga Communications, Inc.
Consolidated Balance Sheets
(in thousands)
DECEMBER 31,
1998 1997
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 1,871 $ 1,001
Accrued expenses:
Payroll and payroll taxes 3,721 3,679
Other 1,964 2,380
Barter transactions 952 733
Current portion of long-term debt 181 8,139
-------------------------
Total current liabilities 8,689 15,932
Deferred income taxes 5,401 4,297
Long-term debt 70,725 53,466
Broadcast program rights 295 273
Other 180 210
Stockholders' equity:
Preferred stock, 1,500 shares authorized, none issued and
outstanding - -
Common stock:
Class A common stock, $.01 par value, 35,000 shares authorized, 11,277
issued and outstanding (8,947 in 1997) 113 89
Class B common stock, $.01 par value, 3,500 shares authorized, 1,510
issued and outstanding (1,208 in 1997) 15 12
Additional paid in capital 37,355 36,513
Note receivable from principal stockholder (648) (790)
Retained earnings 8,755 2,431
Accumulated other comprehensive income 31 -
Treasury stock (52 shares in 1998 at cost) (898) -
--------------------------
Total stockholders' equity 44,723 38,255
--------------------------
$130,013 $112,433
==========================
See accompanying notes.
3
37
Saga Communications, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------------------------------------
Net operating revenue $75,871 $66,258 $56,240
Station operating expense:
Programming and technical 16,900 15,234 13,055
Selling 20,675 18,605 15,197
Station general and administrative 10,969 9,957 8,377
------------------------------------------
Total station operating expense 48,544 43,796 36,629
------------------------------------------
Station operating income before corporate general and
administrative, depreciation and amortization 27,327 22,462 19,611
Corporate general and administrative 4,497 3,953 3,299
Depreciation 3,597 3,207 3,277
Amortization 2,823 2,665 2,231
------------------------------------------
Operating profit 16,410 12,637 10,804
Other expenses:
Interest expense 4,609 4,769 3,814
Other 570 16 17
------------------------------------------
Income before income tax 11,231 7,852 6,973
Income tax provision:
Current 3,893 2,657 2,355
Deferred 987 703 683
------------------------------------------
4,880 3,360 3,038
------------------------------------------
Net income $ 6,351 $ 4,492 $ 3,935
==========================================
Basic earnings per share $ .50 $ .36 $ .31
==========================================
Weighted average common shares 12,717 12,637 12,573
==========================================
Diluted earnings per share $ .49 $ .35 $ .31
==========================================
Weighted average common and common equivalent shares
12,990 12,888 12,816
==========================================
See accompanying notes.
4
38
Saga Communications, Inc.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
(in thousands)
NOTE ACCUMULATED
RECEIVABLE RETAINED OTHER
CLASS A CLASS B ADDITIONAL FROM EARNINGS COMPRE- COMPRE-
COMMON COMMON PAID-IN PRINCIPAL TREASURY (ACCUMULATED HENSIVE HENSIVE TOTAL
STOCK STOCK CAPITAL STOCKHOLDER STOCK DEFICIT) INCOME INCOME EQUITY
---------------------------------------------------------------------------------------------
Balance at January 1, 1996 $ 56 $ 8 $35,526 $(748) $ - $(5,960) $ - $28,882
Net proceeds from exercised
options 338 338
Five-for-four stock splits 32 4 (36) -
Accrued interest (42) (42)
Net income and comprehensive
income 3,935 - $3,935 3,935
---------------------------------------------------------------------------- ====== -------
Balance at December 31, 1996 88 12 35,864 (790) - (2,061) - 33,113
Net proceeds from exercised
options 1 649 650
Net income and comprehensive
income 4,492 4,492 4,492
---------------------------------------------------------------------------- ====== -------
Balance at December 31, 1997 89 12 36,513 (790) - 2,431 - 38,255
Comprehensive income
Net income 6,351 6,351 6,351
Foreign currency translation
adjustment 31 31 31
------
Comprehensive income $6,382
======
Net proceeds from exercised
options 1 608 609
Five-for-four stock splits 23 3 (27) (1)
Accrued interest (45) (45)
Note forgiveness 187 187
Station acquisition 234 234
Purchase of shares held in
treasury (898) (898)
---------------------------------------------------------------------------- -------
BALANCE AT DECEMBER 31, 1998 $113 $15 $37,355 $(648) $(898) $ 8,755 $31 $44,723
============================================================================ =======
See accompanying notes.
5
39
Saga Communications, Inc.
Consolidated Statements of Cash Flows
(in thousands)
YEARS ENDED DECEMBER 31,
1998 1997 1996
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,351 $ 4,492 $ 3,935
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,420 5,872 5,508
Barter revenue, net of barter expenses 56 (181) (81)
Broadcast program rights amortization 212 237 256
Increase in deferred taxes 987 703 683
Loss on sale of assets 26 15 17
Equity in loss of unconsolidated affiliate 560 - -
Foreign currency transaction gain (19) - -
Note forgiveness 187 - -
Changes in assets and liabilities:
Increase in receivables and prepaids (2,045) (1,337) (2,889)
Payments for broadcast program rights (214) (235) (253)
Increase in accounts payable, accrued expenses,
and other liabilities 406 2,093 503
-------------------------------------------
Total adjustments 6,576 7,167 3,744
-------------------------------------------
Net cash provided by operating activities 12,927 11,659 7,679
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (3,003) (2,758) (2,107)
Increase in other intangibles and other assets (4,120) (502) (4,796)
Acquisition of stations (10,160) (18,595) (16,956)
Proceeds from sale of assets 5 324 701
-------------------------------------------
Net cash used in investing activities (17,278) (21,531) (23,158)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 12,287 11,250 19,348
Payments on long-term debt (2,986) (3,899) (2,898)
Purchase of shares held in treasury (898) - -
Net proceeds from exercise of stock options 404 391 147
Fractional shares - five for four stock split (1) - -
-------------------------------------------
Net cash provided by financing activities 8,806 7,742 16,597
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,455 (2,130) 1,118
Cash and cash equivalents, beginning of year 2,209 4,339 3,221
-------------------------------------------
Cash and cash equivalents, end of year $ 6,664 $ 2,209 $ 4,339
===========================================
See accompanying notes.
6
40
Saga Communications, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Saga Communications, Inc. is a broadcasting company operating one reportable
business segment, whose business is devoted to acquiring, developing and
operating broadcast properties. As of December 31, 1998 the Company owned
thirty-nine radio stations, a television station, and two state radio networks,
serving fourteen markets throughout the United States including Columbus, Ohio;
Milwaukee, Wisconsin; and Norfolk, Virginia. The Company also has an equity
interest in 6 FM radio stations serving Reykjavik, Iceland.
BASIS OF PRESENTATION
On May 29, 1998 the Company consummated a five-for-four split of its Class A and
Class B Common Stock, resulting in additional shares being issued of 2,240,000
and 302,000, respectively, for holders of record on May 15, 1998.
On April 1, 1997 the Company consummated a five-for-four split of its Class A
and Class B Common Stock, resulting in additional shares being issued of
1,772,000 and 242,000, respectively, for holders of record on March 17, 1997.
On April 30, 1996 the Company consummated a five-for-four split of its Class A
and Class B Common Stock, resulting in additional shares being issued of
1,417,000 and 193,000, respectively, for holders of record on April 17, 1996.
All share and per share information in the accompanying financial statements has
been restated retroactively to reflect the splits.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Saga
Communications, Inc. and its wholly-owned subsidiaries. Investments in 50
percent-owned affiliates are accounted for on the equity method. All significant
inter-company balances and transactions have been eliminated in consolidation.
INVESTMENTS
On June 17, 1998 the Company acquired 50% of the outstanding stock of Finn
Midill, ehf., an Icelandic corporation which owns six FM radio stations serving
Reykjavik, Iceland, for approximately $1,100,000. The investment is accounted
for using the equity method. The Company's equity in the operating results of
Finn Midill, ehf. is reported in other expenses as a loss of approximately
$560,000. Additionally, the Company loaned approximately $570,000 to Finn
Midill, ehf. which accrues interest at 7.5% plus an inflationary index, and is
to be repaid in June, 2001. As of December 31, 1998, the Company has loaned an
additional $1,540,000 to Finn Midill, ehf. for working capital needs; this loan
is non-interest bearing.
7
41
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using the
straight-line method over five to thirty-one and one-half years.
INTANGIBLE ASSETS
Other assets are amortized using the straight-line method. Favorable lease
agreements are amortized over the lives of the leases. The excess of cost over
fair value of identifiable assets acquired and broadcast licenses are amortized
over forty years. Other intangibles are amortized over five to forty years.
The excess of cost over the fair value of net assets acquired (or goodwill) is
reviewed if the facts and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as determined based on
the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of goodwill would be reduced
by the estimated shortfall of discounted cash flows. To date, no such reductions
in goodwill have been recorded.
FINANCIAL INSTRUMENTS
The Company's financial instruments are comprised of cash and temporary
investments and long-term debt. The carrying value of long-term debt
approximates fair value as it carries interest rates that either fluctuate with
prime or have been reset at the prevailing market rate at December 31, 1998.
The Company has an interest rate swap agreement which is its only derivative.
See Note 3.
The Company enters into interest-rate swap agreements to modify the interest
characteristics of its outstanding debt. Each interest rate swap agreement is
designated with all or a portion of the principal balance and term of a specific
debt obligation. These agreements involve the exchange of amounts based on a
fixed interest rate for amounts based on variable interest rates over the life
of the agreement without an exchange of the notional amount upon which the
payments are based. The differential to be paid or received as interest rates
change is accrued and recognized as an adjustment of the interest expense
related to the debt (the accrual accounting method). The related amount payable
to or receivable from counterparties is included in other liabilities or assets.
The fair values of the swap agreements are not recognized in the financial
statements. Gains and losses on terminations of interest-rate swap agreements
are deferred as an
8
42
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS (CONTINUED)
adjustment to interest expense related to the debt over the remaining term of
the original contract life of the terminated swap agreement. In the event of the
early extinguishment of a designated debt obligation, any realized or unrealized
gain or loss from the swap would be recognized in income coincident with the
extinguishment. Any swap agreements that are not designated with outstanding
debt or notional amounts (or durations) of interest-rate swap agreements in
excess of the principal amounts (or maturities) of the underlying debt
obligations are recorded as an asset or liability at fair value, with changes in
fair value recorded in other income or expense (the fair value method).
FOREIGN CURRENCY TRANSLATION
The initial investment Finn Midill, ehf. is translated into U.S. dollars at the
current exchange rate. Resulting translation adjustments are reflected as a
separate component of stockholders' equity. Transaction gains and losses that
arise form exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of operations as
incurred.
TREASURY STOCK
On August 10, 1998 the Company implemented a Stock Buy-Back Program (the
"Buy-Back Program") pursuant to which the Company may purchase up to $2,000,000
of its Class A Common Stock. The Company's repurchases of shares of Common Stock
are recorded as "Treasury Stock" and result in a reduction of "Stockholders'
Equity." As of December 31, 1998 the Company had purchased 52,432 shares at an
average price of $17.13 per share.
BROADCAST PROGRAM RIGHTS
The Company records the capitalized costs of broadcast program rights when the
license period begins and the programs are available for use. Amortization of
the program rights is recorded using the straight-line method over the license
period or based on the number of showings. Amortization of broadcast program
rights is included in station operating expense. Unamortized broadcast program
rights are classified as current or non-current based on estimated usage in
future years.
REVENUE RECOGNITION POLICY
Revenue is recognized as commercials are broadcast.
9
43
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BARTER TRANSACTIONS
The Company trades air time for goods and services used principally for
promotional, sales and other business activities. An asset and a liability are
recorded at the fair market value of goods or services received. Barter revenue
is recorded when commercials are broadcast, and barter expense is recorded when
goods or services are received or used.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------------------------------------
(In thousands)
Numerator:
Net income available to common stockholders $ 6,351 $ 4,492 $ 3,935
========================================
Denominator:
Denominator for basic earnings per share -weighted average
shares 12,717 12,637 12,573
Effect of dilutive securities:
Employee stock options 273 251 243
----------------------------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 12,990 12,888 12,816
========================================
Basic earnings per share $ .50 $ .36 $ .31
========================================
Diluted earnings per share $ .49 $ .35 $ .31
========================================
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
such instruments at fair value. The statement is effective for fiscal quarters
of fiscal years beginning after June 15, 1999 and is not expected to have a
material effect on the results of operations and financial position of the
Company.
10
44
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The Company expects to adopt Statement of Position "SOP" 98-5 "Reporting on the
Costs of Start-Up Activities" effective January 1, 1999. The Company does not
anticipate that the adoption of this SOP will have a significant effect on its
results of operations or financial position.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
1998 1997
-------------------------
(In thousands)
Land and land improvements $ 7,850 $ 7,442
Buildings 10,979 10,120
Towers and antennae 13,121 12,706
Equipment 37,237 34,323
Furniture, fixtures and leasehold improvements 4,913 4,619
Vehicles 1,506 1,312
-------------------------
75,606 70,522
Accumulated depreciation (40,042) (36,494)
-------------------------
Net property and equipment $ 35,564 $ 34,028
=========================
11
45
3. LONG-TERM DEBT
Long-term debt consists of the following: DECEMBER 31,
1998 1997
-----------------------
(In thousands)
Senior secured term loan facility (total commitment of $70,000,000) secured by
all assets of the Company and subsidiary stock and guarantees. Interest at a
Eurodollar rate (5.625% at December 31, 1998) plus a margin ranging from
1.0% to 1.75%. All interest is due quarterly. The maximum commitment under
the term facility reduces by 10% in 2001, 15% in 2002, 17.5% in 2003, 20% in
2004, 22.5% in 2005, and 15% in 2006, based on the original commitment of
$70,000,000. In addition, the term facility may be further reduced by
specified percentages of Excess Cash Flow (as defined in the Credit
Agreement) based on leverage ratios. The term facility matures on June 30,
2006. $70,000 $60,534
Subordinated promissory note. Payments are due monthly including interest at 10%.
The note matures in 2004. 470 507
Other, primarily covenants not to compete. 436 564
-----------------------
70,906 61,605
Amounts due within one year 181 8,139
-----------------------
$70,725 $53,466
=======================
Future maturities of long-term debt are as follows:
Year ending
December 31, (In thousands)
------------
1999 $ 181
2000 188
2001 7,196
2002 10,693
2003 12,353
Thereafter 40,295
--------
$70,906
========
12
46
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
3. LONG-TERM DEBT (CONTINUED)
The Company also has available a senior secured acquisition loan facility (total
commitment of $60,000,000), and a senior secured revolving term loan facility
(total commitment of $20,000,000), secured by all assets of the Company and
subsidiary stock and guarantees. The maximum commitment under the acquisition
facility reduces by 10% in 2001, 15% in 2002, 17.5% in 2003, 20% in 2004, 22.5%
in 2005, and 15% in 2006, based on the original commitment of $60,000,000 and
matures on June 30, 2006. The revolving facility matures on June 30, 2006. All
interest on these facilities are due quarterly. The loan agreement requires a
commitment fee of 0.375% to 0.5% per annum on the daily average amount of the
available acquisition and revolving facility commitments.
Interest rates under the term, acquisition and revolving facilities are payable
at the Company's option, at alternatives equal to LIBOR plus 1.0% to 1.75% or
the Agent bank's base rate plus 0% to 0.75%. The spread over LIBOR and the base
rate vary from time to time, depending upon the Company's financial leverage.
The term, acquisition and revolving facilities contain a number of covenants
(all of which the Company was in compliance with at December 31, 1998) that,
among other things, require the Company to maintain specified financial ratios
and impose certain limitations on the Company 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; and (vi) mergers, changes in business and
management, investments and transactions with affiliates. The loan agreement
prohibits the payment of dividends without the banks' prior consent.
At December 31, 1998, the Company had an interest rate swap agreement with a
total notional amount of $32,000,000 that it used to convert the variable
Eurodollar interest rate of a portion of its bank borrowings to a fixed interest
rate. The swap agreement was entered into to reduce the risk to the Company of
rising interest rates. In accordance with the terms of the swap agreement, the
Company pays 6.15% calculated on the $32,000,000 notional amount. The Company
receives LIBOR (5.25125% at December 31, 1998) calculated on a notional amount
of $32,000,000. Net payments under the agreement are recognized as an adjustment
to interest expense. The swap agreement expires in December, 1999. As the LIBOR
increases, interest payments received and the market value of the swap position
increase. The fair value of the swap agreement at December 31, 1998 was
($359,884), estimated using discounted cash flows analyses, based on a discount
rate equivalent to a U.S. Treasury security with a comparable remaining maturity
plus a 50 basis point spread for credit risk and other factors.
13
47
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
4. SUPPLEMENTAL CASH FLOW INFORMATION
For the purposes of the statements of cash flows, cash and cash equivalents
include temporary investments with maturities of three months or less.
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------------------------------------
(In thousands)
Cash paid during the period for:
Interest $4,930 $4,484 $4,181
Income taxes 4,124 2,235 2,261
Non-cash transactions:
Barter revenue $1,835 $1,993 $1,842
Barter expense 1,891 1,812 1,761
Acquisition of property and equipment 18 3 45
In conjunction with the acquisition of the net assets of broadcasting companies,
liabilities were assumed as follows:
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------------------------------------
(In thousands)
Fair value of assets acquired $ 10,770 $ 19,249 $ 17,098
Cash paid (10,160) (18,595) (16,956)
----------------------------------------
Liabilities assumed $ 610 $ 654 $ 142
========================================
14
48
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31,
1998 1997
----------------------
(In thousands)
Deferred tax liabilities:
Property and equipment $3,748 $3,240
Intangible assets 1,653 1,057
----------------------
Total deferred tax liabilities 5,401 4,297
Deferred tax assets:
Allowance for doubtful accounts 169 175
Compensation 386 285
----------------------
Total deferred tax assets 555 460
----------------------
Net deferred tax liabilities $4,846 $3,837
======================
The significant components of the provision for income taxes are as follows:
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------------------------------------
(In thousands)
Current:
Federal $2,920 $1,972 $1,677
State 973 685 678
----------------------------------------
Total current 3,893 2,657 2,355
Deferred:
Federal 987 703 683
----------------------------------------
$4,880 $3,360 $3,038
========================================
15
49
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
5. INCOME TAXES (CONTINUED)
The reconciliation of income tax at the U. S. federal statutory tax rates to
income tax expense is as follows:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------------------------------------
(In thousands)
Tax at U.S. statutory rates $3,819 $2,670 $2,371
State taxes, net of federal benefit 642 452 447
Amortization of excess of cost over fair value of
assets acquired 188 189 186
Other, net 231 49 34
---------------------------------------
$4,880 $3,360 $3,038
=======================================
6. STOCK OPTION PLANS
In 1992, the Company adopted the 1992 Stock Option Plan (the "Plan") pursuant to
which key employees of the Company, including directors who are employees, are
eligible to receive grants of options to purchase Class A Common Stock or Class
B Common Stock. At December 31, 1998, 880,021 shares of Common Stock are
reserved for issuance under the Plan. Options granted under the Plan may be
either incentive stock options (within the meaning of Section 422A of the
Internal Revenue Code of 1986) or non-qualified options. Incentive stock options
granted under the Plan may be for terms not exceeding ten years from the date of
grant, except in the case of incentive stock options granted to persons owning
more than 10% of the total combined voting power of all classes of stock of the
Company, which may be granted for terms not exceeding five years. These options
may not be granted at a price which is less than 100% of the fair market value
of shares at the time of grant (110% in the case of persons owning more than 10%
of the combined voting power of all classes of stock of the Company). In the
case of non-qualified stock options granted pursuant to the Plan, the terms and
price shall be determined by the Compensation Committee.
In 1997, the Company adopted the 1997 Non-Employee Director Stock Option Plan
(the "Directors Plan") pursuant to which directors of the Company who are not
employees of the Company, are eligible to receive options under the Directors
Plan. Under the terms of the Directors Plan, on the last business day of January
of each year during the term of the Directors Plan, in lieu of their directors'
retainer for the previous year, each eligible director shall automatically be
granted an option to purchase that number of shares of the Company's Class A
Common Stock equal to the amount of the retainer divided by the fair market
value of the Company's Common Stock on the last trading day of the December
immediately preceding the date of grant less $.01 per share. The option exercise
price is $.01 per share. At December 31, 1998, 123,037 shares of common stock
are reserved for issuance under the Directors Plan. Options granted under the
Directors Plan are non-qualified stock options and shall be immediately vested
and exercisable on the date
16
50
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCK OPTION PLANS (CONTINUED)
of grant. The options may be exercised for a period of 10 years from the date of
grant of the option. On January 31, 1999 a total of 2,435 shares were issued
under the Directors Plan in lieu of their directors' retainer for the year ended
December 31, 1998.
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations, in accounting
for its employee and non-employee director stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Total compensation costs recognized in the income
statement for stock based compensation awards to employees for the years ended
December 31, 1998, 1997 and 1996, was $196,000, $246,000 and $203,000,
respectively. Total Directors fees recognized in the income statement for stock
based compensation awards for the years ended December 31, 1998 and 1997 was
$50,000 and $33,000, respectively.
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123 ("Statement 123"), "Accounting
for Stock-Based Compensation." This standard defines a fair value based method
of accounting for an employee stock option or similar equity instrument.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of the Company's stock options were estimated as of the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997, and 1996, respectively: risk-free interest rates of
4.7%, 5.75% and 6.4%, a dividend yield of 0%; expected volatility of 28.9%, 29%
and 27.9%, and a weighted average expected life of the options of 7 years. Under
these assumptions, the weighted average fair value of an option to purchase one
share granted in 1998, 1997 and 1996, was approximately $6.91, $8.18 and $10.07,
respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
17
51
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCK OPTION PLANS (CONTINUED)
For purposes of the pro forma disclosures required under Statement 123, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information is as follows:
1998 1997 1996
-------------------------------------
(In thousands except per share data)
Pro forma net income $5,710 $4,460 $ 3,917
=====================================
Pro forma earnings per share:
Basic $ .45 $ .35 $ .31
=====================================
Diluted $ .44 $ .35 $ .31
=====================================
The following summarizes the Plan stock option transactions for the three years
ended December 31, 1998.
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE PRICE
OPTIONS PER SHARE PER SHARE
---------------------------------------------
Options outstanding at January 1, 1996 650,390 $ .004 To $ 6.25 $ 4.26
Granted 58,438 4.240 To 9.11 6.06
Exercised (43,847) .004 To 6.25 3.37
Forfeited (5,485) 2.170 To 6.25 4.26
------------------------------------------
Options outstanding at December 31, 1996 659,496 .004 To 9.11 4.48
Granted 28,125 11.60 11.60
Exercised (108,533) .004 To 9.11 3.61
Forfeited (14,238) 4.240 To 9.11 6.09
------------------------------------------
Options outstanding at December 31, 1997 564,850 2.170 To 11.60 4.96
Granted 540,798 16.50 16.50
Exercised (77,396) 4.240 To 6.25 4.61
Forfeited (23,790) 2.170 To 16.50 9.55
------------------------------------------
Options outstanding at December 31, 1998 1,004,462 $2.170 To $16.50 $11.09
==========================================
18
52
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCK OPTION PLANS (CONTINUED)
The following summarizes the Directors Plan stock option transactions for the
year ended December 31, 1998.
EXERCISE
PRICE WEIGHTED
NUMBER OF PER AVERAGE
OPTIONS SHARE PRICE PER SHARE
---------------------------------------
Options outstanding at December 31, 1997 - - -
Granted 1,963 $.008 $.008
Exercised 0 - -
Forfeited 0 - -
---------------------------------
Options outstanding at December 31, 1998 1,963 $.008 $.008
==================================
The following summarizes stock options exercisable and available for the three
years ended December 31, 1998:
THE THE DIRECTORS
PLAN PLAN
----------------------------
Options exercisable at December 31:
1998 383,672 1,963
1997 372,351 -
1996 333,881 -
Available for grant at December 31:
1998 880,021 123,037
1997 1,397,029 125,000
1996 370,877 -
19
53
6. STOCK OPTION PLANS (CONTINUED)
Stock options outstanding in the Plan at December 31, 1998 are summarized as
follows:
Weighted Average
Exercise Options Options Remaining
Price Outstanding Exercisable Contractual Life
------------------------------------------------------------
$ 2.17 44,910 29,289 6.2
$ 4.24 299,236 272,952 4.5
$ 6.25 83,723 68,307 5.2
$ 9.11 17,811 7,499 7.2
$11.60 27,125 5,625 8.3
$16.50 531,657 - 9.2
----------------------------------------------
1,004,462 383,672 7.2
===============================================
Weighted Average
Exercise Price $ 11.09 $ 4.65
=========================
Stock options outstanding in the Directors Plan at December 31, 1998 are
summarized as follows:
Weighted Average
Exercise Options Options Remaining
Price Outstanding Exercisable Contractual Life
------------------------------------------------------------
$0.008 1,963 1,963 9.1
-------------------------------------------
1,963 1,963 9.1
===========================================
Weighted Average
Exercise Price $0.008 $0.008
=====================
7. 401(k) PLAN
The Company has a defined contribution pension plan ("401(k) Plan") that covers
substantially all employees. Employees can elect to have a portion of their
wages withheld and contributed to the plan. The 401(k) Plan also allows for a
discretionary contribution by the Company. Total expense under the 401(k) Plan
was approximately $140,000 in 1998.
20
54
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
8. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
ACQUISITIONS
On March 30, 1998, the Company acquired a regional and state news and sports
information network (The Michigan Radio Network) for approximately $1,100,000,
including approximately $234,000 of the Company's Class A common stock. The
acquisition is subject to certain adjustments based on operating performance
levels that could result in an additional acquisition amount of $450,000 payable
in cash and shares of the Company's Class A common stock.
On December 1, 1998, the Company acquired an AM and FM radio station (KGMI-AM
and KISM-FM) serving the Bellingham, Washington market for approximately
$8,000,000.
The Company acquired an FM radio station (KAZR-FM) serving the Des Moines, Iowa
market on March 14, 1997. The purchase price was approximately $2,700,000. The
Company began operating the radio station under the terms of a local market
agreement on August 1, 1996, which remained in effect until the acquisition.
The Company acquired an FM radio station (KLTI-FM) serving the Des Moines, Iowa
market on April 17, 1997. The purchase price was approximately $3,200,000. The
Company began operating the radio station under the terms of a local market
agreement on January 1, 1997, which remained in effect until the acquisition.
The Company acquired two AM and two FM radio stations (WTAX-AM, WDBR-FM,
WVAX-AM, and WYXY-FM) serving the Springfield, Illinois market on May 5, 1997.
The purchase price was approximately $6,000,000. The Company began operating the
radio stations under the terms of a local market agreement on July 1, 1996,
which remained in effect until the acquisition.
The Company acquired two FM radio stations (WFMR-FM and WPNT-FM) serving the
Milwaukee, Wisconsin market on May 9, 1997. The purchase price was approximately
$5,000,000.
The Company acquired an FM radio station (WQLL-FM) serving the Manchester, New
Hampshire market on November 18, 1997. The purchase price was approximately
$3,400,000. The Company began operating the radio station under the terms of a
local market agreement on July 1, 1997, which remained in effect until the
acquisition.
The Company acquired the assets of a regional and state news and sports
information network (The Illinois Radio Network) serving more than 45 radio
stations throughout the state of Illinois, on November 25, 1997. The purchase
price was approximately $1,750,000.
21
55
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
8. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
ACQUISITIONS (CONTINUED)
All acquisitions have been 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 has been
recorded as broadcast licenses, other intangibles, and goodwill. The
consolidated statements of income include the operating results of the acquired
businesses from their respective dates of acquisition or operation under the
terms of local market agreements.
The following unaudited pro forma results of operations of the Company for the
years ended December 31, 1998 and 1997 assume the acquisitions occurred as of
the beginning of the immediately preceding year. 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.
1998 1997
---------------------
(In thousands except per
share data)
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS:
Net operating revenue $78,728 $71,371
Net income $ 6,323 $ 4,241
=====================
Basic earnings per share $ .50 $ .34
=====================
Diluted earnings per share $ .49 $ .33
=====================
9. CONCENTRATION OF CREDIT RISK
The Company sells advertising to local and national companies throughout the
United States. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company maintains an allowance
for doubtful accounts at a level which management believes is sufficient to
cover potential credit losses.
22
56
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
10. NOTE RECEIVABLE FROM PRINCIPAL STOCKHOLDER
The loan from the Company to the principal stockholder bears interest at a rate
per annum equal to the lowest rate necessary to avoid the imputation of income
for federal income tax purposes. During 1998, the pledge agreement to secure the
loan from the Company was terminated.
During 1998, the Company amended the five year employment agreement with the
principal stockholder. As part of the amendment, the Company will forgive 20% of
the note balance ratably over five years, and pay him an amount in cash equal to
such amount as is necessary to enable the principal stockholder or his estate to
pay all related federal and state income tax liabilities. The Company recorded
compensation expense of approximately $326,000 and $210,000, in 1998 and 1997,
respectively, relative to the agreement.
11. COMMON STOCK
Dividends. Stockholders are entitled to receive such dividends as may be
declared by the Company's Board of Directors out of funds legally available for
such purpose. No dividend may be declared or paid in cash or property on any
share of any class of Common Stock, however, unless simultaneously the same
dividend is declared or paid on each share of the other class of common stock.
In the case of any stock dividend, holders of Class A Common Stock are entitled
to receive the same percentage dividend (payable in shares of Class A Common
Stock) as the holders of Class B Common Stock receive (payable in shares of
Class B Common Stock). The payment of dividends is prohibited by the terms of
the Company's bank loan agreement, without the banks' prior consent.
Voting Rights. Holders of shares of Common Stock vote as a single class on all
matters submitted to a vote of the stockholders, with each share of Class A
Common Stock entitled to one vote and each share of Class B Common Stock
entitled to ten votes, except (i) in the election for directors, (ii) with
respect to any "going private" transaction between the Company and the principal
stockholder, and (iii) as otherwise provided by law.
In the election of directors, the holders of Class A Common Stock, voting as a
separate class, are entitled to elect two of the Company's directors. The
holders of the Common Stock, voting as a single class with each share of Class A
Common Stock entitled to one vote and each share of Class B Common Stock
entitled to ten votes, are entitled to elect the remaining directors. The Board
of Directors consists of six members. Holders of Common Stock are not entitled
to cumulative votes in the election of directors.
23
57
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
11. COMMON STOCK (CONTINUED)
The holders of the Common Stock vote as a single class with respect to any
proposed "going private" transaction with the principal stockholder, with each
share of each class of Common Stock entitled to one vote per share.
Under Delaware law, the affirmative vote of the holders of a majority of the
outstanding shares of any class of common stock is required to approve, among
other things, a change in the designations, preferences and limitations of the
shares of such class of common stock.
Liquidation Rights. Upon liquidation, dissolution, or winding-up of the Company,
the holders of Class A Common Stock are entitled to share ratably with the
holders of Class B Common Stock in all assets available for distribution after
payment in full of creditors.
Other Provisions. Each share of Class B Common Stock is convertible, at the
option of its holder, into one share of Class A Common Stock at any time. One
share of Class B Common Stock converts automatically into one share of Class A
Common Stock upon its sale or other transfer to a party unaffiliated with the
principal stockholder or, in the event of a transfer to an affiliated party,
upon the death of the transferor.
12. COMMITMENTS AND CONTINGENCY
LEASES
The Company leases certain land, buildings and equipment under noncancellable
operating leases. Rent expense for the year ended December 31, 1998 was
$1,353,000 ($1,191,000 and $977,000 for the years ended December 31, 1997 and
1996, respectively). Minimum annual rental commitments under noncancellable
operating leases consisted of the following at December 31, 1998:
OPERATING
LEASES
---------
(In thousands)
1999 $1,071
2000 561
2001 412
2002 382
2003 207
Thereafter 270
------
$2,903
======
24
58
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
12. COMMITMENTS AND CONTINGENCY (CONTINUED)
BROADCAST PROGRAM RIGHTS
The Company has entered into contracts for broadcast program rights that expire
at various dates during the next five years. The aggregate minimum payments
relating to these commitments consisted of the following at December 31, 1998:
BROADCAST
PROGRAM
RIGHTS
---------
(In thousands)
1999 $214
2000 169
2001 76
2002 50
----
$509
Amounts due within one year (included in accounts payable) 214
----
$295
====
PRINCIPAL STOCKHOLDER EMPLOYMENT AGREEMENT
In April, 1997 the Company entered into a five year employment agreement with
its principal stockholder which provides that, upon the consummation of a sale
or transfer of control of the Company, the principal stockholder's employment
will be terminated and the Company will pay the principal stockholder an amount
equal to five times the average of his total annual compensation for the
preceding three years, plus an additional amount as is necessary for applicable
income taxes related to the payment. At December 31, 1998 the stockholders
average compensation was approximately $615,000.
ACQUISITIONS
On July 7, 1998, the Company entered into an agreement to purchase KAVU-TV (an
ABC affiliate) and a low power Univision affiliate, serving the Victoria, Texas
market for approximately $11,875,000, including approximately $2,000,000 of the
Company's Class A common stock. The Company will also assume an existing Local
Marketing Agreement for KVCT-TV (a Fox affiliate). The transaction is subject to
the approval of the Federal Communications Commission and is expected to close
during the second quarter of 1999.
25
59
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
12. COMMITMENTS AND CONTINGENCY (CONTINUED)
ACQUISITIONS (CONTINUED)
On September 21, 1998, the Company signed a letter of intent to purchase a
regional and state farm information network (The Michigan Farm Radio Network)
for approximately $1,750,000, including approximately $1,125,000 of the
Company's Class A common stock. The Company closed on the transaction in
January, 1999.
On October 22, 1998, the Company entered into an agreement to purchase an AM and
FM radio station (KAFE-FM and KPUG-AM) serving the Bellingham, Washington market
for approximately $6,000,000. The Company closed on the transaction in January,
1999.
On December 2, 1998, the Company entered into an agreement to purchase an AM
radio station (KBFW-AM) serving the Bellingham, Washington market for
approximately $1,000,000. The transaction is subject to the approval of the
Federal Communications Commission and is expected to close during the second
quarter of 1999.
13. SUBSEQUENT EVENT
In February, 1999 the Company entered into an agreement to purchase WXVT TV (a
CBS affiliate), serving the Greenville, Mississippi market for approximately
$5,200,000 including approximately $600,000 of the Company's Class A common
stock. The transaction is subject to the approval of the Federal Communications
Commission and is expected to close during the third quarter of 1999.
26
60
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997 1998 1997
(In thousands, except per share data)
Net operating revenue $15,620 $13,515 $20,159 $17,508 $19,941 $17,091 $20,151 $18,144
Station operating expense:
Programming and
technical 4,019 3,668 4,129 3,686 4,342 3,928 4,410 3,952
Selling 4,447 3,798 5,810 5,132 4,796 4,317 5,622 5,358
Station general and
administrative 2,736 2,541 2,807 2,414 2,687 2,486 2,739 2,516
---------------------------------------------------------------------------------------
Total station operating
expense 11,202 10,007 12,746 11,232 11,825 10,731 12,771 11,826
---------------------------------------------------------------------------------------
Station operating
income before
corporate general
and administrative,
depreciation and
amortization 4,418 3,508 7,413 6,276 8,116 6,360 7,380 6,318
Corporate general and
administrative 1,017 807 1,244 1,074 1,017 959 1,219 1,113
Depreciation and
amortization 1,628 1,282 1,539 1,450 1,633 1,520 1,620 1,620
---------------------------------------------------------------------------------------
Operating profit 1,773 1,419 4,630 3,752 5,466 3,881 4,541 3,585
Other expenses:
Interest expense 1,140 1,211 1,143 1,172 1,159 1,325 1,167 1,061
Other 11 6 82 1 252 - 225 9
---------------------------------------------------------------------------------------
Income before income tax 622 202 3,405 2,579 4,055 2,556 3,149 2,515
Income tax provision 266 88 1,491 1,087 1,663 1,077 1,460 1,108
---------------------------------------------------------------------------------------
Net income $ 356 $ 114 $ 1,914 $ 1,492 $ 2,392 $ 1,479 $ 1,689 $ 1,407
=======================================================================================
Basic earnings per share
$ .03 $ .01 $ .15 $ .12 $ .19 $ .12 $ .13 $ .11
=======================================================================================
Weighted average common
shares 12,695 12,586 12,710 12,586 12,711 12,678 12,752 12,695
=======================================================================================
Diluted earnings per share
$ .03 $ .01 $ .15 $ .12 $ .18 $ .11 $ .13 $ .11
=======================================================================================
Weighted average common
and common equivalents
outstanding 12,960 12,841 12,980 12,856 12,979 12,911 13,059 12,930
=======================================================================================
27