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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, 1999
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 38-3042953
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
73 KERCHEVAL AVENUE
GROSSE POINTE FARMS, MICHIGAN 48236
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(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
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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 $18.00 per share (the
closing price of the Class A Common Stock on March 15, 2000 on the American
Stock Exchange): $262,324,296.
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 15,
2000 was 14,590,241 and 1,888,296, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2000 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission on or before April 30, 2000) is
incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On January 1, 1999, the Company acquired an AM and FM radio station
(KAFE-FM and KPUG-AM), serving the Bellingham, Washington market for
approximately $6,350,000.
On January 14, 1999, the Company acquired a regional and state farm
information network (The Michigan Farm Radio Network) for approximately
$1,660,000, approximately $1,036,000 of which was paid in the Company's Class A
Common Stock.
On April 1, 1999, the Company acquired KAVU-TV (an ABC affiliate), a low
power Univision affiliate (KUNU-LPTV) and a low power construction permit
(KVTX-LPTV) serving the Victoria, Texas market for approximately $10,700,000,
approximately $1,840,000 of which was paid in the Company's Class A Common
Stock. The Company also assumed an existing Local Marketing Agreement for
KVCT-TV (a Fox affiliate).
On May 1, 1999, the Company acquired an AM radio station (KIXT-AM) serving
the Bellingham, Washington market for approximately $1,000,000.
On July 1, 1999, the Company acquired WXVT-TV (a CBS affiliate) serving
the Greenville, Mississippi market for approximately $5,200,000, approximately
$600,000 of which was paid in the Company's Class A Common Stock.
In March 2000, the Company entered into an agreement to acquire an AM and
FM radio station (WHMP-AM/FM) serving the Northhampton, Massachusetts market for
approximately $12,000,000. The acquisition is subject to the approval of the
Federal Communications Commission ("FCC") and is expected to close during the
third quarter of 2000.
In March 2000, the Company also entered into an agreement to acquire an FM
radio station (WKIO-FM) serving the Champaign-Urbana, Illinois market for
approximately $7,000,000. The acquisition is subject to the approval of the FCC
and is expected to close during the third quarter of 2000.
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.
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BUSINESS
The Company is a broadcast company whose business is primarily devoted to
acquiring, developing and operating radio and television stations. As of March
15, 2000 the Company owned and/or operated five television stations serving
three markets, three state radio networks, and twenty-eight FM and seventeen 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 following table sets forth certain information about the Company's
television stations and their markets as of February 29, 2000:
1999
MARKET FALL 1999
RANKING BY STATION RANKING
NUMBER OF TV (BY
STATION MARKET (a) HOUSEHOLDS (b) STATION AFFILIATE # OF VIEWERS) (b)
- ------- ---------- -------------- ----------------- -----------------
KOAM Joplin, MO - Pittsburg, KS 147 CBS 1
WXVT Greenwood - Greenville, MS 181 CBS 2
KAVU Victoria, TX 204 ABC 1
KVCT (c) Victoria, TX 204 FOX 2
KUNU-LP (d) Victoria, TX 204 Univision 3
KVTX-LP (d) Victoria, TX 204 N/A N/R
(a) Actual city of license may differ from metro market actually served.
(b) Derived from Investing in Television Market Report 1999, based on A.C.
Nielson ratings and data.
(c) Station operated under the terms of a local marketing agreement ("LMA").
(d) Stations are simulcast.
N/R Station does not appear in Television Market Report 1999.
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The following table sets forth certain information about the Company's radio
stations and their markets as of February 29, 2000:
1999 Fall 1999
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 1 Women 25-54
WKLH Milwaukee, WI 34 Classic Hits 2 Men 25-49
WLZR Milwaukee, WI 34 Album Oriented Rock 1 Men 18-34
WJMR Milwaukee, WI 34 R&B Oldies 11 Adults 35-49
WFMR Milwaukee, WI 34 Classical 7 Adults 45+
WNOR Norfolk, VA 46 Album Oriented Rock 1 Men 18-34
WAFX Norfolk, VA 46 Classic Hits 2 Men 25-49
KSTZ Des Moines, IA 72 Hot Adult Contemporary 2(e) Women 18-34
KIOA Des Moines, IA 72 Oldies 2 Adults 35-54
KAZR Des Moines, IA 72 Album Oriented Rock 1 Men 18-34
KLTI Des Moines, IA 72 Soft Adult Contemporary 2(e) Women 35-54
WMGX Portland, ME 90 Hot Adult Contemporary 2 Women 25-54
WYNZ Portland, ME 90 Oldies 4(e) Adults 35-54
WPOR Portland, ME 90 Country 1 Adults 35+
WAQY Springfield, MA 97 Classic Rock 1(d) Men 25-54
WZID Manchester, NH 108 Adult Contemporary 1 Adults 25-54
WQLL Manchester, NH 108 Oldies 4 Adults 35-54
WYMG Springfield, IL 152 Classic Hits 1(e) Men 25-54
WQQL Springfield, IL 152 Oldies 6 Adults 35-54
WDBR Springfield, IL 152 Contemporary Hits 1 Women 18-34
WYXY Springfield, IL 152 Country 7(e) Adults 25-49
WLRW Champaign, IL 164 Hot Adult Contemporary 2(e) Women 18-49
WIXY Champaign, IL 164 Country 1 Adults 25-54
KCLH Sioux City IA 217 Classic Hits 3 Men 25-49
KISM Bellingham, WA N/A Rock 3 Men 25-49
KAFE Bellingham, WA N/A Adult Contemporary 1 Women 25-54
KICD Spencer, IA N/A Country N/R Adults 35+
KLLT Spencer, IA N/A Adult Contemporary N/R Adults 25-54
AM:
WVKO Columbus, OH 29 Gospel 14(e) Adults 35+
WJYI Milwaukee, WI 34 Contemporary Christian N/A Adults 18+
WJOI Norfolk, VA 46 Nostalgia N/A Adults 35+
KRNT Des Moines, IA 72 Nostalgia/Sports 3 Adults 35+
KXTK Des Moines, IA 72 Talk/Sports 15(e) Adults 35+
WGAN Portland, ME 90 News/Talk 2 Adults 35+
WZAN Portland, ME 90 News/Talk 3(e) Men 35-54
WBAE Portland, ME 90 Nostalgia N/A Adults 35+
WPNT Springfield, MA 97 Classic Rock 1(d) Men 25-54
WFEA Manchester, NH 108 Nostalgia 4 Adults 35+
WTAX Springfield, IL 152 News/Talk 2(e) Adults 35+
WLLM Springfield, IL 152 News/Talk/Nostalgia N/R Adults 35+
WNAX Yankton, SD 217 Full Service/Country 2 Adults 35+
KGMI Bellingham, WA N/A News/Talk 1 Adults 35+
KPUG Bellingham, WA N/A Talk/Sports N/R Adults 35+
KIXT Bellingham, WA N/A Country 6 Adults 35+
KICD Spencer, IA N/A News/Talk/Nostalgia N/R Adults 35+
(footnotes on next page)
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(a) Actual city of license may differ from metro market actually served.
(b) Derived from Investing in Radio 1999 Market Report.
(c) Information derived from most recent available Arbitron Radio Market Report
except for Bellingham. The Bellingham information was derived from
Investing in Radio 1999 Market Report, and the 1999 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.
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 from 20 to 200 out of the markets
summarized by Investing in Radio Market Report and Investing in Television
Market Report. As of March 15, 2000, 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.
Based on the most recent information available, 11 of the 28 FM radio
stations and 2 of the 17 AM radio stations owned and/or operated by the Company
were ranked number one (by number of listeners), and 2 of the 6 television
stations owned and/or operated by the Company were 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.
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The television stations that the Company owns and/or operates are
comprised of two CBS affiliates, one ABC affiliate, one Fox affiliate and one
Univision affiliate (additional low power television station is currently
simulcasting this 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.
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 stations, 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.
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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 1999 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 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 1999 was approximately $18,475,000 or 18% of the Company's
revenue.
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, direct
reception from satellites, and streaming of audio on the internet. 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 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.
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EMPLOYEES
As of December 31, 1999, the Company had approximately 646 full-time
employees and 258 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.
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 its "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.
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The following table sets forth the market and broadcast power of each of the
Company's broadcast stations and the date on which each such station's FCC
license expires:
EXPIRATION DATE OF
STATION MARKET(1) POWER (WATTS)(2) FCC 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
WJMR 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 Des Moines, IA 100,000 February 1, 2005
WMGX Portland, ME 50,000 April 1, 2006
WYNZ Portland, ME 25,000 April 1, 2006
WPOR Portland, ME 50,000 April 1, 2006
WAQY Springfield, MA 50,000 April 1, 2006
WZID Manchester, NH 50,000 April 1, 2006
WQLL Manchester, NH 6,000 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
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
KICD Spencer, IA 100,000 February 1, 2005
KLLT Spencer, IA 25,000 February 1, 2005
AM:
WVKO Columbus, OH 1,000 October 1, 2004
WJYI Milwaukee, WI 1,000 December 1, 2004
WJOI 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
WGAN Portland, ME 5,000 April 1, 2006
WZAN Portland, ME 5,000 April 1, 2006
WBAE Portland, ME 1,000 April 1, 2006
WPNT Springfield, MA 2,500(5) April 1, 2006
WFEA Manchester, NH 5,000 April 1, 2006
WTAX Springfield, IL 1,000 December 1, 2004
WLLM Lincoln, IL 1,000(5) December 1, 2004
WNAX Yankton, SD 5,000 April 1, 2005
KGMI Bellingham, WA 5,000 February 1, 2006
KPUG Bellingham, WA 10,000 February 1, 2006
KIXT Bellingham, WA 1,000(5) February 1, 2006
KICD Spencer, IA 1,000 February 1, 2005
(footnotes on next page)
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EXPIRATION DATE OF
STATION MARKET(1) POWER (WATTS)(2) FCC AUTHORIZATION
TV/CHANNEL:
KOAM (Ch 7) Joplin, MO/Pittsburg, KS 316,000 (vis), 61,600 (aur) June 1, 2006
KAVU (Ch 25) Victoria, TX 2,140,000(vis), 214,000(aur) August 1, 2006
KVCT(3) (Ch 19) Victoria, TX 155,000(vis), 15,500(aur) August 1, 2006
KUNU-LP(4) (Ch 21) Victoria, TX 1,000 (vis) August 1, 2006
KVTX-LP(4) (Ch 59) Victoria, TX 1,000 (vis) August 1, 2006
WXVT (Ch 15) Greenville, MS 2,746,000(vis), 549,000(aur) June 1, 2005
(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 ("ERP") and antenna height which may be different from, but
provide equivalent coverage to, the power shown. The ERP of television
stations is expressed in terms of visual ("vis") and aural ("aur")
components. WVKO(AM), KXTK(AM), KPUG(AM), KGMI(AM), and KIXT(AM) operate
with lower power at night than the power shown.
(3) The Company programs this station pursuant to a local marketing agreement
with the licensee of KVCT, Surtsey Productions, Inc.
(4) KUNU-LP and KVTX-LP are "low power" television stations that operate as
"secondary" stations; i.e., if they conflict with the operations of a "full
power" television station, the low power station must change their
facilities or terminate operations.
(5) Operates daytime only or with greatly reduced power at night.
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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.
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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 daily newspaper serving the same geographic market, and of a
television broadcast station and a cable television system serving the same
geographic market. The FCC adopted new rules which became effective November 16,
1999, that permit the ownership of up to two television stations by the same
entity if (a) at least eight independently owned and operated full-power
commercial and noncommercial TV stations would remain post-merger in the
Designated Market Area ("DMA") in which the communities of license of the TV
stations in question are located, and (b) the two merging stations are not both
among the top four-ranked stations in the market as measured by audience share.
The FCC established criteria for obtaining a waiver of the rules to permit the
ownership of two television stations in the same DMA that would not otherwise
comply with the FCC's rules. Under certain circumstances, a television station
may merge with a "failed" or "failing" station or an "unbuilt" station if strict
criteria are satisfied. Additionally, the FCC now permits a party to own up to
two television stations (if permitted under the modified TV duopoly rule) and up
to six radio stations (if permitted under the local radio ownership rules), or
one television station and up to seven radio stations, in any market where at
least 20 independently owned media voices remain in the market after the
combination is effected ("Qualifying Market"). The FCC will permit the common
ownership of up to two television stations and four radio stations in any market
where at least 10 independently owned media voices remain after the combination
is effected. The FCC will permit the common ownership of up to two television
stations and one radio station notwithstanding the number of voices in the
market. The FCC also adopted rules that make television time brokerage
agreements or LMA's count as if the brokered station were owned by the brokering
station in making a determination of compliance with the FCC's multiple
ownership rules. LMA's entered into before November 5, 1996, are grandfathered
for approximately five years until 2004. LMA's entered into on or after November
5, 1996, must be terminated by August 6, 2001. Under the FCC's rules, as
recently revised, absent waivers, the Company would not be permitted to acquire
any newspaper in a geographic market in which it now owns any radio broadcast
properties, or to acquire any newspaper or cable television system in a
geographic market in which it now owns any television broadcast station. The
Company would not be permitted to acquire a television broadcast station (other
than low power television) in a non-Qualifying Market in which it now owns any
television properties. The 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). The
Company is permitted to own 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%.
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:
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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 may permit the Company to own,
operate, control or have a cognizable 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 20% 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. In new rules adopted in August 1999
the FCC increased the benchmark for passive investors from 10% to 20%.
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 August 6, 1999, the FCC concluded a proceeding initiated March 12,
1992, in which it revised its ownership attribution rules. In its "Report and
Order", the FCC (a) declined to raise the basic benchmark for attributing
ownership in a corporate licensee from 5% to 10% of the licensee's voting stock;
(b) increased the attribution benchmark for "passive investors" in corporate
licensees from 10% to 20% of the licensee's voting stock; (c) declined to
broaden the class of investors eligible for "passive investor" status to include
Small Business and Minority Enterprise Small Business Investment Companies; and
(d) declined to exempt certain widely-held limited partnership interests from
attribution where each individual interest represents an insignificant
percentage of total partnership equity; (e) decided to apply to limited
liability companies and registered limited liability partnerships the same
attribution rules that the FCC applies to limited partnerships; (f) declined to
change its attribution rules as applied to other communications services (such
as cable, multi-point distribution systems, personal communications services,
and specialized mobile radio); (g) declined to apply other agencies' attribution
benchmarks; (h) created a new equity/debt plus ("EDP") rule that attributes the
other media interests of an otherwise passive investor if the investor is (1) a
"major-market program supplier" that supplies over 15% of a station's total
weekly broadcast programming hours, or (2) a same-market media entity subject to
the FCC's multiple ownership rules (including broadcasters, cable operators and
newspapers) so that its interest in a licensee or other media entity in that
market will be attributed if that interest, aggregating both debt and equity
holdings, exceeds 33% of the total asset value (equity plus debt) of the
licensee or media entity; and (i) eliminated those components of the cross
interest policy not specifically dealt with in the EDP rule.
-12-
13
Notwithstanding the FCC's multiple ownership rules, the Antitrust Division
of the United States Department of Justice and the Federal Trade Commission have
the authority to examine proposed transactions for compliance with antitrust
statutes and guidelines. The Antitrust Division has become more active recently
in reviewing proposed acquisitions, has issued "civil investigative demands" and
has obtained consent decrees requiring the divestiture of stations in a
particular market based on antitrust concerns. The FCC has also increased its
scrutiny of some proposed acquisitions and mergers on antitrust grounds and has
initiated a policy of placing a "note" soliciting public comment on
concentration of control issues based on advertising revenue shares or other
criteria, on the public notice announcing the acceptance of assignment and
transfer applications.
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 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.
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LOCAL MARKETING AGREEMENTS. A number of radio and television stations,
including the Company's stations, have entered into what have commonly been
referred to as "Local Marketing Agreements", or "LMA's". While these agreements
may take varying forms, under a typical LMA, separately owned and licensed radio
or television 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, and other matters, 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 between two separately-owned radio or television 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. 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 station from which time is
being purchased by another entity maintains complete responsibility for and
control over operations of its station and assures compliance with applicable
FCC rules and policies. As described above, the FCC conducted a review of its
rules, and as a result, adopted rules that permit, under certain circumstances,
the ownership of two or more television stations in a Qualifying Market, and
requires the termination of certain non-complying existing television LMA's. The
Company currently has a television LMA in the Victoria, Texas, market. Even
though the Victoria market is not a Qualifying Market such that the duopoly
would otherwise be permissible, the Company believes that the LMA is
"grandfathered" under the FCC's newly-announced rules and need not be terminated
earlier than 2004. However, if the FCC should review the LMA and come to a
different conclusion, the Company could be required to terminate the LMA with
the other television station by August 6, 2001. See "Ownership Matters".
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 to purchase more than 15% of the broadcast time, on a weekly basis, of
another local station that 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.
-14-
15
OTHER FCC REQUIREMENTS
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 has promulgated 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 (NTSC) channels
to the government by 2006. The FCC has attempted to provide DTV coverage areas
that are comparable to the NTSC service areas. DTV licensees may use their DTV
channels for a multiplicity of services such as high-definition television
broadcasts, multiple standard definition television broadcasts, data, audio, and
other services so long as the licensee provides at least one free video channel
equal in quality to the current NTSC technical standard. As a general principal,
the Company's television stations are required to convert their operations to
DTV by May 1, 2002, and to cease broadcasting on the NTSC channels by December
31, 2006, and return the NTSC channels to the government. Under the Balanced
Budget Act, the FCC is authorized to extend the December 31, 2006, deadline if,
(1) one or more television stations affiliated with ABC, CBS, NBC, or Fox in a
market are not broadcasting in DTV, and the FCC determines that such stations
have "exercised due diligence" in attempting to convert to DTV; or (2) less than
85% of the television households in the station's market subscribe to a
multichannel video service that carries at least one DTV channel from each of
the local stations in that market, and less than 85% of the television
households in the market can receive DTV signals off the air using either
set-top converters for NTSC broadcasts or a new DTV set. KOAM-TV will convert
its NTSC operations on Channel 7 to DTV Channel 30. KAVU-TV will convert its
NTSC operations on Channel 25 to DTV Channel 15. WXVT will convert its NTSC
operations on Channel 15 to DTV Channel 17. 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.
-15-
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LOW POWER AND CLASS A TELEVISION STATIONS. Congress, in the Community
Broadcasters Protection Act of 1999, authorized the FCC to create a new class of
commercial television station. Currently, the service areas of low power
television ("LPTV") stations are not protected. LPTV stations can be required to
terminate their operations if they cause interference to full power stations.
LPTV stations meeting certain criteria were permitted to certify to the FCC
their eligibility to be reclassified as "Class A Television Stations" whose
signal contours would be protected against interference from other stations.
Stations deemed "Class A Stations" by the FCC would thus be protected from
interference. The Company owns two operating LPTV stations, KUNU-LP and KVTX-LP,
Victoria, Texas. Although neither KUNU-LP nor KVTX-LP automatically qualify
under the FCC's established criteria for Class A Status, the Company requested
the FCC to confer such status upon KUNU-LP on the grounds that KUNU-LP offers a
unique foreign-language television service to its viewing area. The Company
cannot predict whether the FCC will grant the Company's request. The FCC, in its
actions creating DTV, also provided for recovery of a portion of the existing TV
spectrum so that it can be reallocated to new uses. The FCC provided for the
immediate recovery of channels 60-69 and recovery of channels 52-59 at the end
of the DTV transition period. Existing NTSC stations including TV translators
and LPTV stations and a few DTV stations will be allowed to operate on these
channels during the DTV transition. At the end of the transition, all of the
NTSC stations will have to cease operation and DTV stations on channels 52-59
will be relocated to new channels in the DTV core spectrum (channels 2-50).
KVTX-LP operates on channel 59, which will be displaced by DTV operations and
may have to terminate operations. The Company also holds a construction permit
for a third LPTV station, K64EQ, Victoria, Texas, channel 64, which has not been
constructed. Unless a lower channel can be found for K64EQ, it will not be
constructed.
The Cable Television Consumer Protection and Competition Act of 1992,
among other matters, requires cable television system operators to carry the
signals of local commercial and non-commercial television stations and certain
low power television stations. Cable television operators and other
multi-channel video programming distributors may not carry broadcast signals
without, in certain circumstances, obtaining the transmitting station's consent.
A local television broadcaster must make a choice every three years whether to
proceed under the "must-carry" rules or waive the right to
mandatory-uncompensated coverage and negotiate a grant of retransmission consent
in exchange for consideration from the cable system operator. Whether such
must-carry rights will extend to the new DTV signals to be broadcast by the
Company's stations is a matter still under consideration by the FCC in a rule
making proceeding started in 1998. The Company's television stations are
dependent on carriage by cable systems; thus, if the FCC decides that cable
systems need not carry DTV signals, there could be an adverse effect on the
Company's operations.
In April 1988, the U. S. Court of Appeals for the D. C. Circuit
invalidated on constitutional grounds the FCC's Equal Employment Opportunity
("EEO") regulations. In February 2000, the FCC adopted revised EEO rules that
require broadcast licensees and cable entities, including multichannel video
programming distributors, to widely disseminate information about job openings
to ensure that all qualified applicants, including minorities and women, are
able to compete for job openings in the broadcast and cable industries. The
rules prescribe specific tasks that must be performed by the FCC's regulatees
and require the maintenance of records. The rules require the filing of annual
employment reports describing the racial and gender characteristics of the
Company's employees at each of its stations. Periodically, broadcasters and
cable entities must certify their compliance with the EEO regulations. All
broadcasters must annually place in their public files an EEO report detailing
their outreach efforts during the preceding year and the results of those
efforts. Television stations and every radio station with more than ten
full-time employees must file a copy of their EEO reports with the FCC midway
through their license terms. Stations will be required to file a copy of their
EEO public file reports with their applications for renewal of license. Since
the FCC did not establish a clear test for compliance with the new rules, the
Company cannot predict what, if any, action the FCC may take against any of the
Company's stations if the FCC finds the Company's efforts to comply with this
new rule to be inadequate.
-16-
17
LOW POWER FM RADIO. In January 2000 the FCC adopted new rules that create
a new "low power radio service" ("LPFM"). The FCC will authorize the
construction and operation of two new classes of noncommercial educational FM
stations, LP100 (up to 100 watts effective radiated power ("ERP") with antenna
height above average terrain ("HAAT") at up to 30 meters (100 feet) which is
calculated to produce a service area radius of approximately 3.5 miles, and LP10
(up to 10 watts ERP and up to 30 meters HAAT) with a service area radius of
approximately 1 to 2 miles. The FCC will not permit any broadcaster or other
media entity subject to the FCC's ownership rules to control or hold an
attributable interest in an LPFM station or enter into related operating
agreements with an LPFM licensee. Thus, absent a waiver, the Company could not
own or program an LPFM station. LPFM stations will be allocated throughout the
FM broadcast band, i.e., 88 to 108 MHz, although they must operate with a
noncommercial format. The FCC has established allocation rules that require FM
stations to be separated by specified distances to other stations on the same
frequency, and stations on frequencies on the first, second and third channels
adjacent to the center frequency. In order to allot a significant number of LPFM
stations, the FCC will ignore the distances of LPFM stations to the third
adjacent channels of other stations. The National Association of Broadcasters
has warned the FCC that this action will result in destructive interference to
commercial broadcasters, and has stated that it will appeal the FCC's decision
adopting the rules. The Company cannot predict what, if any, adverse effect
future LPFM stations may have on its FM stations.
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. 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.
On November 1, 1999, the FCC released a Notice of Proposed Rule Making
that is the initial step in its plan to authorize digital audio broadcasting
systems ("DAB"). If implemented, the FCC's proposal would permit the Company's
radio stations to offer digital audio broadcasts on their existing frequencies.
The Company cannot predict when the FCC will act, what standard the FCC may
adopt, or its impact on the operations of the Company's stations. Presumably,
the Company's stations would be required to purchase and install new equipment
so that the stations could transmit digital signals in addition to their current
analog signals.
-17-
18
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 at the FCC's headquarters 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 the 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 FCC'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 two CBS-affiliated television stations, and has an LMA with a
Fox-affiliated television station.
Congress, the courts and the FCC have recently taken actions that may lead
to the provision of video services by telephone companies. The 1996
Telecommunications Act has lifted previous restrictions on a local telephone
company providing video programming directly to customers within the telephone
company's service areas. The law now permits a telephone company to distribute
video services either under the rules applicable to cable television systems or
as operators of so-called "wireless cable" systems as common carriers or under
new FCC rules regulating "open video systems" subject to common carrier
regulations. The Company cannot predict what effect these services may have on
the Company. Likewise, 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.
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EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Edward K. Christian 55 President, Chief Executive Officer
and Chairman; Director
Steven J. Goldstein 43 Executive Vice President and
Group Program Director
Samuel D. Bush 42 Vice President, Chief Financial
Officer and Treasurer
Catherine A. Bobinski 40 Vice President, Chief Accounting
Officer and Corporate Controller
Warren Lada 45 Vice President, Operations
Marcia K. Lobaito 51 Vice President,
Corporate Secretary, and
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 Chief Accounting
Officer 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.
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20
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 56% 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, 1999 the Company's long-term debt (including the current
portion thereof) was approximately $85,774,000. 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 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, 1999, 1998 and 1997 the Company's
Columbus, Ohio stations accounted for an aggregate of 15%, 22% and 24%,
respectively, and the Company's Milwaukee, Wisconsin stations accounted for an
aggregate of 22%, 24% and 24%, 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."
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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.
As of December 31, 1999 the studios and offices of sixteen of the
Company's twenty-one operating 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 2 to 6 years. The Company owns or leases its transmitter and antenna
sites, with lease terms that expire in 1 to 89 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.
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 15, 1999 the Company consummated a five-for-four split of its
Class A and Class B Common Stock, resulting in additional shares being issued of
2,918,000 and 378,000, respectively, for holders of record on November 30, 1999.
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.
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
- ---------------------------- ----------- ------------
1998:
First Quarter $13.60 $12.24
Second Quarter $15.12 $11.20
Third Quarter $14.60 $11.60
Fourth Quarter $16.60 $11.70
1999:
First Quarter $16.70 $13.70
Second Quarter $16.20 $14.25
Third Quarter $19.30 $15.10
Fourth Quarter $22.10 $16.45
As of March 15, 2000, there were approximately 157 holders of record of
the Company's Class A Common Stock, and one holder of the Company's Class B
Common Stock.
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.
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ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1999(1)(2) 1998(1)(3) 1997(1)(4) 1996(1)(5) 1995(1)
---------- ---------- ---------- ---------- -------
(In thousands except per share amounts)
OPERATING DATA:
Net Operating Revenue $90,020 $75,871 $66,258 $56,240 $49,699
Station Operating Expense (excluding
depreciation, amortization, corporate general
and administrative) 56,552 48,544 43,796 36,629 32,436
-------------------------------------------------------
Station Operating Income (excluding depreciation,
amortization, corporate general and
administrative) 33,468 27,327 22,462 19,611 17,263
Depreciation and Amortization 8,022 6,420 5,872 5,508 6,551
Corporate General and Administrative 5,095 4,497 3,953 3,299 2,816
-------------------------------------------------------
Operating Profit 20,351 16,410 12,637 10,804 7,896
Interest Expense 5,988 4,609 4,769 3,814 3,319
Net Income $ 8,552 $ 6,351 $ 4,492 $ 3,935 $ 2,678
Basic Earnings Per Share $ .52 $ .40 $ .28 $ .25 $ .17
Cash Dividends Declared Per Common Share -- -- -- -- --
Weighted Average Common Shares 16,315 15,896 15,796 15,716 15,671
Diluted Earnings Per Share $ .51 $ .39 $ .28 $ .25 $ .17
Weighted Average Common Shares and Common
Equivalents 16,665 16,238 16,110 16,020 15,860
OTHER DATA:
After-Tax Cash Flow (6) $17,585 $14,328 $11,083 $10,143 $ 9,564
After-Tax Cash Flow Per Share-Basic $ 1.08 $ .90 $ .70 $ .65 $ .61
After-Tax Cash Flow Per Share-Diluted $ 1.06 $ .88 $ .69 $ .63 $ .60
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DECEMBER 31,
--------------------------------------------------------------------------------
1999(1)(2) 1998(1)(3) 1997(1)(4) 1996(1)(5) 1995(1)
---------- ----------- ---------- ---------- ---------
(In thousands)
BALANCE SHEET DATA:
Working Capital $ 22,756 $ 15,255 $ 1,587 $ 10,997 $ 3,582
Net Fixed Assets 44,455 35,564 34,028 29,704 26,403
Net Other Assets 84,901 70,505 60,886 48,636 34,399
Total Assets 162,496 130,013 112,433 96,415 74,944
Long-term Debt Excluding Current
Portion 85,379 70,725 53,466 52,355 32,131
Equity 59,102 44,723 38,255 33,113 28,882
- ---------------------------------------------------
(1) All periods presented include the weighted average shares and common
equivalents related to certain stock options. In December 1999, 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 KAFE and KPUG, acquired in January 1999;
Michigan Farm Radio Network, acquired in January 1999; KAVU and KUNU,
acquired in April 1999 and the results of a local marketing agreement
for KVCT which began in April 1999; KIXT, acquired in May 1999; WXVT,
acquired in July 1999.
(3) Reflects the results of Michigan Radio Network, acquired in March, 1998;
and KGMI and KISM, acquired in December, 1998.
(4) Reflects the results of KAZR, acquired in March, 1997; KLTI, acquired in
April, 1997 and the results of a local marketing agreement for KLTI
which began in January, 1997; WDBR, WYXY, WTAX, and WLLM acquired in
May, 1997; WFMR and WJMR, acquired in May, 1997; WQLL acquired in
November, 1997, and the results of a local marketing agreement for WQLL
which began in July, 1997; and the Illinois Radio Network acquired in
November, 1997.
(5) Reflects the results of WNAX and KCLH, acquired in June, 1996; WPOR and
WBAE, acquired in June 1996; the results of a local marketing agreement
for WDBR, WYXY, WTAX, and WLLM which began in July, 1996; and the
results of a local marketing agreement for KAZR which began in August,
1996.
(6) Defined as net income plus depreciation, amortization (excluding film
rights), other expense, and deferred taxes.
-24-
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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, 1999, 1998, and 1997, 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, 1999, 1998 and 1997, Columbus accounted for an aggregate of
15%, 22% and 24%, respectively, and Milwaukee accounted for an aggregate of 22%,
24%, and 24%, 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. A decrease in revenue and station
operating income has been experienced at the FM station in the Company's
Columbus, Ohio market, the effect of which is discussed below.
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.
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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 1999, approximately
82% of the Company's gross revenue was from local 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, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1999, the Company's net operating revenue
was $90,020,000 compared with $75,871,000 for the year ended December 31, 1998,
an increase of $14,149,000 or 19%. Approximately $10,088,000 or 71% of the
increase was attributable to revenue generated by stations which were not owned
or operated by the Company for the entire comparable period in 1998. The balance
of the increase in net operating revenue of approximately $4,061,000 was
attributable to stations owned and operated by the Company for at least two
years, representing a 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. Improvements were noted in most of the Company's markets
on a comparable station/comparable period basis.
The net increase in net operating revenue in stations owned and operated
by the Company for the entire comparable period was reflective of an overall
increase of 7% or $4,325,000 in the Company's markets excluding Columbus, Ohio.
The overall increase in markets other than Columbus, Ohio was offset by a
$264,000 or 2% decrease in net operating revenue in the Columbus market, all of
which pertained to the first nine months of 1999. The fourth quarter of 1999 had
a slight increase in revenue of $60,000 over the fourth quarter of 1998. The
decrease in revenue in the Columbus market was primarily due to competitive
pressures in the market which resulted in a short-term decline in the station's
listener ratings. While these competitive pressures created challenges, it is
believed that the decline in ratings was only temporary in nature and has not
persisted beyond the third quarter of 1999.
Station operating expense (i.e., programming, technical, selling, and
station general and administrative expenses) increased by $8,008,000 or 17% to
$56,552,000 for the year ended December 31, 1999, compared with $48,544,000 for
the year ended December 31, 1998. Of the total increase, approximately
$6,859,000 or 86% 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 1998. The remaining balance of the increase in station operating expense of
$1,149,000 represents a total increase in station operating expense of 2% for
the year ended December 31, 1999 compared to the year ended December 31, 1998 on
a comparable station/comparable period basis.
The net increase in station operating expense in stations owned and
operated by the Company for the entire comparable period was reflective of an
increase of 1% or $536,000 in the Company's markets excluding Columbus, Ohio.
The overall increase included a $613,000 or 12% increase in station operating
expense in the Columbus market. The increase in station operating expense in the
Columbus market was primarily due to competitive pressures in the market. In an
effort to protect the station's franchise with its target audience, additional
non-budgeted monies were spent on market research, advertising and promotion.
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Operating profit for the year ended December 31, 1999 was $20,351,000
compared to $16,410,000 for the year ended December 31, 1998, an increase of
$3,941,000 or 24%. The improvement was the result of the $14,149,000 increase in
net operating revenue, offset by the $8,008,000 increase in station operating
expense, a $1,602,000 or 25% increase in depreciation and amortization, and a
$598,000 or 13% 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
$75,000 relating to an accrued bonus to the Company's principal stockholder, an
increase of approximately $30,000 pertaining to a discretionary contribution to
the 401(k) plan of the Company, and an increase of approximately $133,000 in
employee benefit related matters. The remaining increase in corporate general
and administrative expenses of approximately $360,000 represents additional
costs due to the growth of the Company as a result of the Company's recent
acquisitions.
The Company generated net income in the amount of approximately $8,552,000
($0.51 per share on a fully diluted basis) during the year ended December 31,
1999 compared with $6,351,000 ($0.39 per share on a fully diluted basis) for the
year ended December 31, 1998, an increase of approximately $2,201,000 or 35%.
The increase in net income was the result of the $3,941,000 improvement in
operating profit and a $301,000 decrease in other expense, offset by a
$1,379,000 increase in interest expense and a $662,000 increase in income tax
expense. The decrease in other expense was principally the result of
non-recurring income of $500,000 resulting from an agreement to downgrade an FCC
license at one of the Company's stations, offset by a $240,000 increase in the
loss of an unconsolidated affiliate. The increase in interest expense was
principally the result of the Company's additional borrowings to finance
acquisitions. The increase in income tax expense was directly associated with
the improved operating performance of the Company.
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 1997. 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.
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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 and an increase
of approximately 5% in ordinary recurring expenses.
The Company generated net income in the amount of approximately $6,351,000
($0.39 per share on a fully diluted basis) during the year ended December 31,
1998 compared with $4,492,000 ($0.28 per share on a fully diluted basis) 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 $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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $85,774,000 of long-term debt
(including the current portion thereof) outstanding and approximately
$65,500,000 of unused borrowing capacity under the Credit Agreement (as
described below).
The Company's credit agreement (the "Credit Agreement") has 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 on 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 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 amounts of the Term
Loan and the Acquisition Facility are required to be reduced quarterly in
amounts ranging from 2.5% to 7.5% of the initial commitment 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.
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Interest rates under the Facilities are payable, at the Company's option,
at alternatives equal to Eurodollar plus 1.0% to 1.75% or the Agent bank's base
rate plus 0% to .75%. The spread over Eurodollar 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.
The Company had an interest rate swap agreement with a total notional
amount of $32,000,000 that expired in December 1999 that the Company used to
convert the variable Eurodollar interest rate of a portion of its bank
borrowings to a fixed interest rate. In accordance with the terms of the swap
agreement the Company paid 6.15% calculated on a $32,000,000 notional amount.
The Company received LIBOR (5.09625% at the termination date) calculated on a
notional amount of $32,000,000. Net receipts or payments under the agreement
were recognized as an adjustment to interest expense. Approximately $281,000 in
additional interest expense was recognized as a result of this interest rate
swap agreement for the year ended December 31, 1999 and an aggregate amount of
$788,000 in additional interest expense had been recognized since the inception
of the agreement.
On September 30, 1999, the Company entered into two interest rate swap
agreements with a total notional amount of $24,500,000. Coincident with these
agreements, the Company also sold two interest rate caps under the same terms
with a fixed price of 6.0%. The swap agreements are used to convert the variable
Eurodollar interest rate of a portion of its bank borrowings to a fixed interest
rate. In accordance with the terms of the swap agreements, the Company pays
5.685% calculated on a $24,500,000 notional amount. The Company receives LIBOR
(6.18375% at December 31, 1999) calculated on a notional amount of $24,500,000.
The interest rate cap agreements requires that if on any reset date LIBOR is
greater than 6.00% the Company will pay the difference between 6.00% and the
LIBOR rate at the reset date calculated on the notional amount of $24,500,000.
As a result of this combination, the Company will pay a rate of 5.685% with
benefits up to 6%. Should LIBOR increase above 6.00%, the Company will pay LIBOR
less a 31.5 basis point benefit. Net receipts or payments under the agreements
are recognized as an adjustment to interest expense. These agreements expire in
September 2001. Approximately $11,000 in additional interest expense was
recognized as a result of the interest rate swap and cap agreements for the year
ended December 31, 1999.
During the years ended December 31, 1999, 1998 and 1997, the Company had
net cash flows from operating activities of $16,481,000, $12,927,000, and
$11,659,000, 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.
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The following acquisitions in 1999 were financed through funds generated
from operations, issuance of the Company's Class A Common Stock and additional
borrowings of $14,500,000 under the Credit Agreement:
* On January 1, 1999, the Company acquired an AM and FM radio station
(KAFE-FM and KPUG-AM) serving the Bellingham, Washington market for
approximately $6,350,000.
* On January 14, 1999, the Company acquired a regional and state farm
information network (The Michigan Farm Radio Network) for
approximately $1,660,000, approximately $1,036,000 of which was paid
in the Company's Class A Common Stock.
* On April 1, 1999, the Company acquired KAVU-TV (an ABC affiliate), a
low power Univision affiliate (KUNU-LPTV) and a low power construction
permit (KVTX-LPTV) serving the Victoria, Texas market for
approximately $10,700,000, approximately $1,840,000 of which was paid
in the Company's Class A Common Stock. The Company also assumed an
existing Local Marketing Agreement for KVCT-TV (a Fox affiliate).
* On May 1, 1999, the Company acquired an AM radio station (KIXT-AM)
serving the Bellingham, Washington market for approximately
$1,000,000.
* On July 1, 1999, the Company acquired WXVT-TV (a CBS affiliate)
serving the Greenville, Mississippi market for approximately
$5,200,000, approximately $600,000 of which was paid in the Company's
Class A Common Stock.
* During 1999 the Company converted a $1,540,000 non interest bearing
loan to equity in Finn Midill, ehf., an Icelandic corporation which
owns six FM radio stations serving Reykjavik, Iceland. As of December
31, 1999 the Company has loaned an additional $1,333,000 to Finn
Midill for working capital needs. See Notes to Consolidated Financial
Statements.
The following acquisitions and investment in 1998 were financed through
funds generated from operations and additional borrowings of $12,287,000 under
the Term Loan:
* 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 was subject to certain
adjustments based on operating performance levels that resulted in an
additional acquisition amount of $403,000 paid in May 1999, of which
approximately $304,000 was paid 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. 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 had loaned an
additional $1,540,000 to Finn Midill, ehf. for working capital needs,
this loan was 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.
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In March 2000, the Company entered into an agreement to acquire an AM and
FM radio station (WHMP-AM/FM) serving the Northhampton, Massachusetts market for
approximately $12,000,000. The acquisition is subject to FCC approval and is
expected to close during the third quarter of 2000.
In March 2000, the Company also entered into an agreement to acquire an FM
radio station (WKIO-FM) serving the Champaign-Urbana, Illinois market for
approximately $7,000,000. The acquisition is subject to FCC approval and is
expected to close during the third quarter of 2000.
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, 1999
were approximately $5,177,000 ($3,003,000 in 1998). The Company anticipates
capital expenditures in 2000 to be approximately $4,500,000, which it expects to
finance through funds generated from operations or additional borrowings under
the Credit Agreement.
In March 2000, the Company modified its Stock Buy-Back Program pursuant to
which the Company may purchase up to $4,000,000 of its Class A Common Stock.
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 and cap agreements, the effects of interest
rate changes are limited. If market interest rates averaged 1% more in 1999 than
they did during 1998, the Company's interest expense, after considering the
effect of its interest rate swap and cap agreements, would increase and income
before taxes would decrease by $484,000 ($296,000 in 1998). 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 Company is not aware of any material problems resulting from Year 2000
issues, either with its internal systems, or the products and services of third
parties.
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.
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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 2000 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 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.
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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 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 2000 are hereby
incorporated by reference herein. See also "Business-Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
"Compensation of Directors and Officers" in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 2000 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 2000 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 30, 2000 is
hereby incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Transactions" in the Company's Proxy Statement for the 2000
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or before April 30, 2000 is hereby incorporated by reference
herein.
-33-
34
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 ****
-34-
35
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 ******
10(e)(3) Loan Agreement and Promissory Note of Edward K. Christian
dated May 5, 1999
(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-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.
****** Exhibit indicated in parenthesis of the Company's Form 10-K
for the year ended December 31, 1998 incorporated by reference
herein.
(b) REPORTS ON FORM 8-K
None
-35-
36
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 24, 2000.
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 24, 2000.
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 A. 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
-36-
37
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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedule listed in the index at item
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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 17, 2000
38
Saga Communications, Inc.
Consolidated Balance Sheets
(in thousands)
DECEMBER 31,
1999 1998
-----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,342 $ 6,664
Accounts receivable, less allowance of $573
($496 in 1998) 18,121 14,445
Prepaid expenses 1,642 1,461
Barter transactions 811 819
Deferred taxes 1,224 555
-----------------------------------
Total current assets 33,140 23,944
Net property and equipment 44,455 35,564
Other assets:
Favorable lease agreements, net of accumulated amortization of
$3,934 ($3,738 in 1998) 613 604
Excess of cost over fair value of assets acquired, net of
accumulated amortization of $8,289 ($7,572 in 1998)
20,508 19,765
Broadcast licenses, net of accumulated amortization of $3,984
($2,586 in 1998) 53,360 41,190
Other intangibles, deferred costs and investments, net of
accumulated amortization of $8,603 ($7,506 in 1998) 10,420 8,946
-----------------------------------
Total other assets 84,901 70,505
-----------------------------------
$162,496 $130,013
===================================
See accompanying notes.
2
39
Saga Communications, Inc.
Consolidated Balance Sheets
(in thousands)
DECEMBER 31,
1999 1998
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 1,417 $ 1,871
Accrued expenses:
Payroll and payroll taxes 4,664 3,721
Other 2,867 1,964
Barter transactions 1,041 952
Current portion of long-term debt 395 181
-----------------------------------
Total current liabilities 10,384 8,689
Deferred income taxes 6,811 5,401
Long-term debt 85,379 70,725
Broadcast program rights 602 295
Other 218 180
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, 14,590
issued and outstanding (14,096 in 1998) 146 113
Class B common stock, $.01 par value, 3,500 shares authorized,
1,888 issued and outstanding 19 15
Additional paid in capital 42,273 37,355
Note receivable from principal stockholder (486) (648)
Retained earnings 17,268 8,755
Accumulated other comprehensive income 33 31
Treasury stock (8 shares in 1999 and 66 in 1998, at cost) (151) (898)
-----------------------------------
Total stockholders' equity 59,102 44,723
-----------------------------------
$162,496 $130,013
===================================
See accompanying notes.
3
40
Saga Communications, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
YEARS ENDED DECEMBER 31,
1999 1998 1997
-----------------------------------------------------
Net operating revenue $90,020 $75,871 $66,258
Station operating expense:
Programming and technical 20,305 16,900 15,234
Selling 23,378 20,675 18,605
Station general and administrative 12,869 10,969 9,957
-----------------------------------------------------
Total station operating expense 56,552 48,544 43,796
-----------------------------------------------------
Station operating income before corporate general and
administrative, depreciation and amortization 33,468 27,327 22,462
Corporate general and administrative 5,095 4,497 3,953
Depreciation 4,614 3,597 3,207
Amortization 3,408 2,823 2,665
-----------------------------------------------------
Operating profit 20,351 16,410 12,637
Other expenses:
Interest expense 5,988 4,609 4,769
Other 269 570 16
-----------------------------------------------------
Income before income tax 14,094 11,231 7,852
Income tax provision:
Current 4,800 3,893 2,657
Deferred 742 987 703
-----------------------------------------------------
5,542 4,880 3,360
-----------------------------------------------------
Net income $ 8,552 $ 6,351 $ 4,492
=====================================================
Basic earnings per share $ .52 $ .40 $ .28
=====================================================
Weighted average common shares 16,315 15,896 15,796
=====================================================
Diluted earnings per share $ .51 $ .39 $ .28
=====================================================
Weighted average common and common equivalent shares 16,665 16,238 16,110
=====================================================
See accompanying notes.
4
41
Saga Communications, Inc.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998, and 1997
(in thousands)
NOTE ACCUMULATED
RECEIVABLE RETAINED OTHER TOTAL
CLASS A CLASS B ADDITIONAL FROM EARNINGS COMPRE- STOCK-
COMMON COMMON PAID-IN PRINCIPAL TREASURY (ACCUMULATED HENSIVE HOLDERS'
STOCK STOCK CAPITAL STOCKHOLDER STOCK DEFICIT) INCOME EQUITY
--------------------------------------------------------------------------------------
Balance at January 1, 1997 $ 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
-------------------------------------------------------------------------------------
Balance at December 31, 1997 89 12 36,513 (790) -- 2,431 -- 38,255
Comprehensive income
Net income 6,351 6,351
Foreign currency translation
adjustment 31 31
-------
Total 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
Comprehensive income
Net income 8,552 8,552
Foreign currency translation
adjustment 2 2
-------
Total comprehensive income 8,554
Net proceeds from exercised options 2 2,237 (354) 1,885
Five-for-four stock splits 29 4 (35) (2)
Accrued interest (25) (25)
Note forgiveness 187 187
Station acquisitions 2 2,675 1,040 (4) 3,713
Employee stock purchase plan 6 61 67
-------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 146 $ 19 $ 42,273 $ (486) $ (151) $ 17,268 $ 33 $59,102
=====================================================================================
See accompanying notes.
5
42
Saga Communications, Inc.
Consolidated Statements of Cash Flows
(in thousands)
YEARS ENDED DECEMBER 31,
1999 1998 1997
-----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,552 $ 6,351 $ 4,492
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 8,022 6,420 5,872
Barter revenue, net of barter expenses (53) 56 (181)
Broadcast program rights amortization 386 212 237
Increase in deferred taxes 742 987 703
Loss (gain) on sale of assets (485) 26 15
Equity in loss of unconsolidated affiliate 800 560 --
Foreign currency transaction gain -- (19) --
Note forgiveness 187 187 --
Changes in assets and liabilities:
Increase in receivables and prepaids (2,346) (2,045) (1,337)
Payments for broadcast program rights (398) (214) (235)
Increase in accounts payable, accrued expenses,
and other liabilities 1,074 406 2,093
-----------------------------------------------------
Total adjustments 7,929 6,576 7,167
-----------------------------------------------------
Net cash provided by operating activities 16,481 12,927 11,659
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (5,177) (3,003) (2,758)
Increase in other intangibles and other assets (2,323) (4,120) (502)
Acquisition of stations (20,870) (10,160) (18,595)
Proceeds from sale of assets 619 5 324
-----------------------------------------------------
Net cash used in investing activities (27,751) (17,278) (21,531)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 14,500 12,287 11,250
Payments on long-term debt (231) (2,986) (3,899)
Purchase of shares held in treasury - (898) --
Net proceeds from exercise of stock options 1,681 404 391
Fractional shares - five for four stock split (2) (1) --
-----------------------------------------------------
Net cash provided by financing activities 15,948 8,806 7,742
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,678 4,455 (2,130)
Cash and cash equivalents, beginning of year 6,664 2,209 4,339
-----------------------------------------------------
Cash and cash equivalents, end of year $ 11,342 $ 6,664 $ 2,209
=====================================================
See accompanying notes.
6
43
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, 1999 the Company owned or
operated forty-two radio stations, six television stations, two state radio
networks and 1 farm radio network, serving fifteen 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 December 15, 1999 the Company consummated a five-for-four split of its Class
A and Class B Common Stock, resulting in additional shares being issued of
2,918,000 and 378,000, respectively, for holders of record on November 30, 1999.
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.
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. All significant
inter-company balances and transactions have been eliminated in consolidation.
The Company accounts for its investment in the Iceland radio stations as an
equity investment, as its majority ownership is temporary under the rules of
Statement of Financial Accounting Standards No. 94, "Consolidation of All
Majority-Owned Subsidiaries."
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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.
7
44
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain amounts previously reported in the 1998 financial statements have been
reclassified to conform to the 1999 presentation.
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 Company periodically assesses the recoverability of the cost of its
intangible assets based on a review of projected undiscounted cash flows of the
related station. If this review indicates that goodwill will not be recoverable,
the Company's carrying value of long-term assets, including goodwill, would be
reduced by the estimated shortfall of discounted cash flows using an interest
rate commensurate with the risk involved. To date, no such reductions in
goodwill have been recorded.
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.
FINANCIAL INSTRUMENTS
The Company's financial instruments are comprised of cash and cash equivalents
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, 1999.
The Company has two interest rate swap and cap agreements which are its only
derivatives. See Note 3.
8
45
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS (CONTINUED)
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 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 in 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 from 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. During 1999 and 1998 the Company had acquired 20,308 shares at an
average price of $17.43 per share and 65,540 shares at an average price of
$13.70 per share, respectively. During 1999 the Company issued 67,779 shares of
Treasury Stock in connection with its acquisitions of broadcast properties and
its employee stock purchase plan. See Note 13.
REVENUE RECOGNITION POLICY
Revenue is recognized as commercials are broadcast.
9
46
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,
1999 1998 1997
----------------- ---------------- -----------------
(In thousands)
Numerator:
Net income available to common stockholders $ 8,552 $ 6,351 $ 4,492
================= ================ =================
Denominator:
Denominator for basic earnings per share-weighted average
shares 16,315 15,896 15,796
Effect of dilutive securities:
Stock options 350 342 314
----------------- ---------------- -----------------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 16,665 16,238 16,110
================= ================ =================
Basic earnings per share $ .52 $ .40 $ .28
================= ================ =================
Diluted earnings per share $ .51 $ .39 $ .28
================= ================ =================
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 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 has recently been amended by SFAS
No. 137 which defers the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. The Company does not expect this statement to
have a material effect on the results of its operations and its financial
position.
The Company adopted Statement of Position ("SOP") 98-5 "Reporting on the Costs
of Start-Up Activities" effective January 1, 1999. The adoption of this SOP did
not have a significant effect on its results of operations or financial
position.
10
47
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
1999 1998
------------------------------
(In thousands)
Land and land improvements $ 8,355 $ 7,850
Buildings 13,479 10,979
Towers and antennae 15,936 13,121
Equipment 43,886 37,237
Furniture, fixtures and leasehold improvements 5,590 4,913
Vehicles 1,745 1,506
------------------------------
88,991 75,606
Accumulated depreciation (44,536) (40,042)
------------------------------
Net property and equipment $ 44,455 $ 35,564
==============================
3. LONG-TERM DEBT
Long-term debt consists of the following: DECEMBER 31,
1999 1998
-------------------------------
(In thousands)
Senior secured term loan facility $70,000 $70,000
Senior secured acquisition loan facility 10,250 --
Senior secured revolving term loan facility 4,250 --
Subordinated promissory note. Payments are due monthly
including interest at 10%. The note matures in 2004. 401 470
Other, primarily covenants not to compete. 873 436
-------------------------------
85,774 70,906
Amounts due within one year 395 181
-------------------------------
$85,379 $70,725
===============================
Future maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, (In thousands)
------------------------
2000 $ 395
2001 8,403
2002 12,310
2003 14,226
2004 16,095
Thereafter 34,345
-------------------
$85,774
===================
11
48
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
3. LONG-TERM DEBT (CONTINUED)
The senior secured term loan facility has a total commitment of $70,000,000,
while the senior secured acquisition loan facility has a total commitment of
$60,000,000. Each is secured by all assets of the Company and subsidiary stock
and guarantees. Interest on amounts outstanding is at a Eurodollar rate (6.5625%
at December 31, 1999) plus a margin ranging from 1.0% to 1.75%. All interest is
due quarterly. The maximum commitment and amounts outstanding under the term and
acquisition facilities reduce 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 and $60,000,000, respectively. In addition, each facility may be
further reduced by specified percentages of Excess Cash Flow (as defined in the
Credit Agreement) based on leverage ratios. The loan agreement also requires a
commitment fee of 0.375% to 0.5% per annum on the daily average amount of the
available acquisition facility. Both the term facility and the acquisition
facility mature on June 30, 2006.
The senior secured revolving term loan facility has a total commitment of
$20,000,000 and is secured by all assets of the Company and subsidiary stock and
guarantees. Interest on amounts outstanding is at a Eurodollar rate (6.125% at
December 31, 1999) plus a margin ranging from 1.0% to 1.75%. All interest is due
quarterly. In addition, the revolving term facility may be further reduced by
specified percentages of Excess Cash Flow (as defined in the Credit Agreement)
based on leverage ratios. The loan agreement also requires a commitment fee of
0.375% to 0.5% per annum on the daily average amount of the available revolving
term loan facility. This facility matures on June 30, 2006.
Interest rates under the term, acquisition and revolving facilities are payable,
at the Company's option, at alternatives equal to a Eurodollar rate plus 1.0% to
1.75% or the Agent bank's base rate plus 0% to 0.75%. The spread over the
Eurodollar rate 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, 1999) 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.
12
49
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
3. LONG-TERM DEBT (CONTINUED)
At December 31, 1999, the Company had two interest rate swap agreements with a
total notional amount of $24,500,000. Coincident with these agreements, the
Company also had two interest rate caps under the same terms with a fixed price
of 6%. The swap agreements are used to convert the variable Eurodollar interest
rate of a portion of its bank borrowings to a fixed interest rate. The swap
agreements were entered into to reduce the risk to the Company of rising
interest rates. In accordance with the terms of the swap agreements, the Company
pays 5.685% calculated on the $24,500,000 notional amount. The Company receives
LIBOR (6.18375% at December 31, 1999) calculated on the notional amount of
$24,500,000. The interest rate cap agreements requires that if on any reset date
LIBOR is greater than 6.00% the Company will pay the difference between 6.00%
and the LIBOR rate at the reset date calculated on the notional amount of
$24,500,000. As a result of this combination, the Company will pay a rate of
5.685% with benefits up to 6%. Should LIBOR increase above 6.00%, the Company
will pay LIBOR less a 31.5 basis point benefit. Net receipts or payments under
the agreements are recognized as an adjustment to interest expense. The swap and
interest rate cap agreements expire in September 2001. The fair value of the
swap and interest rate cap agreements at December 31, 1999 was approximately
$94,000, 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.
During 1998 the Company had a swap agreement under which the Company paid 6.15%
on a notional amount of $32,000,000. The Company received LIBOR (5.25125% at
December 31, 1998) calculated on a notional amount of $32,000,000. The swap
agreement expired in December, 1999. The fair value of the swap agreement at
December 31, 1998 was approximately ($360,000).
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,
1999 1998 1997
----------------------------------------------------
(In thousands)
Cash paid during the period for:
Interest $5,837 $4,930 $4,484
Income taxes 3,553 4,124 2,235
Non-cash transactions:
Barter revenue $2,205 $1,835 $1,993
Barter expense 2,152 1,891 1,812
Acquisition of property and equipment 85 18 3
13
50
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
4. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
In conjunction with the acquisition of the net assets of broadcasting companies,
liabilities were assumed as follows:
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------------------------------------------
(In thousands)
Fair value of assets acquired $26,010 $10,770 $19,249
Cash paid (20,870) (10,160) (18,595)
Issuance of restricted stock (3,713) -- --
----------------------------------------------
Liabilities assumed $ 1,427 $ 610 $ 654
==============================================
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,
1999 1998
----------------------------------
(In thousands)
Deferred tax liabilities:
Property and equipment $4,633 $4,038
Intangible assets 2,468 1,653
----------------------------------
Total deferred tax liabilities 7,101 5,691
Deferred tax assets:
Allowance for doubtful accounts 195 169
Compensation 439 386
State tax loss carryforward 880 880
----------------------------------
1,514 1,435
Less: valuation allowance -- (590)
----------------------------------
Total net deferred tax assets 1,514 845
----------------------------------
Net deferred tax liabilities $5,587 $4,846
==================================
14
51
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
5. INCOME TAXES (CONTINUED)
At December 31, 1999, the Company has state tax loss carryforwards, which will
expire from 2002 to 2014. The valuation allowance for net deferred tax assets
decreased by $590,000 in 1999. SFAS No. 109 requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
The significant components of the provision for income taxes are as follows:
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------------------------------------------------
(In thousands)
Current:
Federal $3,701 $2,920 $1,972
State 1,099 973 685
----------------------------------------------------
Total current 4,800 3,893 2,657
Total deferred 742 987 703
----------------------------------------------------
$5,542 $4,880 $3,360
====================================================
In addition, the Company realized tax benefits as a result of stock option
exercises for the difference between compensation expense for financial
statement and income tax purposes. These tax benefits were credited to
additional paid-in capital in the amounts of $831,200, $228,500 and $128,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
The reconciliation of income tax at the U. S. federal statutory tax rates to
income tax expense is as follows:
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------------------------------=-----------------
(In thousands)
Tax at U.S. statutory rates $4,792 $3,819 $2,670
State taxes, net of federal benefit 872 642 452
Amortization of excess of cost over fair value of
assets acquired 187 188 189
Other, net 281 231 49
Reduction of valuation allowance on state tax loss
carryforwards (590) -- --
----------------------------------=-----------------
$5,542 $4,880 $3,360
====================================================
15
52
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
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, 1999, approximately 912,000 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, 1999, 150,756 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 of grant. The options may be exercised for a period
of 10 years from the date of grant of the option. On January 31, 2000 a total of
3,048 shares were issued under the Directors Plan in lieu of their directors'
retainer for the year ended December 31, 1999.
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, 1999, 1998 and 1997 were $143,000, $196,000 and $246,000,
respectively. Total Directors fees recognized in the income statement for stock
based compensation awards for the years ended December 31, 1999, 1998 and 1997
were $62,000, $50,000 and $33,000, respectively.
16
53
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCK OPTION PLANS (CONTINUED)
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("Statement 123"), "Accounting for
Stock-Based Compensation." Statement 123 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 1999, 1998, and 1997, respectively: risk-free interest rates of
6.4%, 4.7% and 5.75%, a dividend yield of 0%; expected volatility of 27.9%,
28.9% and 29%, 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 1999, 1998 and 1997 was approximately $7.17, $5.53
and $6.54, 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.
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:
1999 1998 1997
------------------------------------------------
(In thousands except per share data)
Pro forma net income $7,848 $5,710 $4,460
================================================
Pro forma earnings per share:
Basic $ .48 $ .36 $ .28
================================================
Diluted $ .47 $ .35 $ .28
================================================
17
54
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCK OPTION PLANS (CONTINUED)
The following summarizes the Plan stock option transactions for the three years
ended December 31, 1999.
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE PRICE
OPTIONS PER SHARE PER SHARE
--------------------------------------------------------
Options outstanding at January 1, 1997 824,371 $ .003 To $ 7.29 $ 3.58
Granted 35,156 9.28 9.28
Exercised (135,666) .003 To 7.29 2.89
Forfeited (17,798) 3.390 To 7.29 4.87
--------------------------------------------------------
Options outstanding at December 31, 1997 706,063 1.740 To 9.28 3.97
Granted 675,998 13.20 13.20
Exercised (96,745) 3.390 To 5.00 3.69
Forfeited (29,738) 1.740 To 13.20 7.64
--------------------------------------------------------
Options outstanding at December 31, 1998 1,255,578 1.740 To 9.28 8.87
Granted 187,572 15.90 15.90
Exercised (299,706) 1.740 To 9.28 3.76
Forfeited -- --
--------------------------------------------------------
Options outstanding at December 31, 1999 1,143,444 $ 1.740 To $ 15.90 $11.37
========================================================
The following summarizes the Directors Plan stock option transactions for the
year ended December 31, 1999.
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE PRICE
OPTIONS PER SHARE PER SHARE
--------------------------------------------------------
Options outstanding at January 1, 1998 -- --
Granted 2,452 $ .006 $ .006
Exercised 0 --
Forfeited 0 --
--------------------------------------------------------
Options outstanding at December 31, 1998 2,452 .006 .006
Granted 3,042 .008 .008
Exercised 0 --
Forfeited 0 --
========================================================
Options outstanding at December 31, 1999 5,494 $ .006 To $ .008 $ .007
========================================================
18
55
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCK OPTION PLANS (CONTINUED)
The following summarizes stock options exercisable and available for the three
years ended December 31, 1999:
THE THE DIRECTORS
PLAN PLAN
-------------------------------------
Options exercisable at December 31:
1999 384,227 5,494
1998 479,590 2,452
1997 465,439 --
Available for grant at December 31:
1999 912,457 150,756
1998 1,100,029 153,798
1997 1,746,287 156,250
Stock options outstanding in the Plan at December 31, 1999 are summarized as
follows:
WEIGHTED AVERAGE
EXERCISE OPTIONS OPTIONS REMAINING CONTRACTUAL
PRICE OUTSTANDING EXERCISABLE LIFE
- --------------------------------------------------------------------------------------------
$ 1.74 37,827 28,065 5.2
$ 3.40 156,360 149,719 3.9
$ 5.00 52,595 52,595 4.2
$ 7.29 15,622 9,373 6.2
$ 9.28 28,904 11,562 7.3
$13.20 664,564 132,913 8.2
$15.90 187,572 -- 9.2
----------------------------------------------------------------------
1,143,444 384,227 7.4
======================================================================
Weighted Average
Exercise Price $ 11.37 $ 7.16
=======================================
19
56
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
6. STOCK OPTION PLANS (CONTINUED)
Stock options outstanding in the Directors Plan at December 31, 1999 are
summarized as follows:
WEIGHTED AVERAGE
EXERCISE OPTIONS OPTIONS REMAINING CONTRACTUAL
PRICE OUTSTANDING EXERCISABLE LIFE
- --------------------------------------------------------------------------------------------
$ 0.006 2,452 2,452 8.1
$ 0.008 3,042 3,042 9.1
----------------------------------------------------------------------
5,494 5,494 8.6
======================================================================
Weighted Average
Exercise Price $0.007 $0.007
===========================================
7. EMPLOYEE BENEFIT PLANS
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 this plan. The 401(k) Plan also allows for a
discretionary contribution by the Company. Total expense under the 401(k) Plan
was approximately $170,000 and $140,000 in 1999 and 1998, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In 1999 the Company's stockholders approved the Employee Stock Purchase Plan
("ESPP") under which 1,250,000 shares of the Company's Class A Common Stock
could be sold to the Company's employees. The ESPP was effective July 1, 1999.
Each quarter, an eligible employee may elect to withhold up to 10 percent of his
or her compensation to purchase shares of the Company's stock at a price equal
to 85 percent of the fair value of the stock as of the last day of such quarter.
The ESPP will terminate on the earlier of the issuance of 1,250,000 shares
pursuant to the ESPP or December 31, 2008. There were 3,309 shares issued under
the ESPP in 1999. Compensation expense recognized related to the ESPP for the
year ended December 31, 1999 was approximately $10,000.
20
57
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFERRED COMPENSATION PLAN
In 1999 the Company established a Nonqualified Deferred Compensation Plan which
allows officers and certain management employees to annually elect to defer a
portion of their compensation, on a pre-tax basis, until their retirement. The
retirement benefit to be provided is based on the amount of compensation
deferred and any earnings thereon. Deferred compensation expense was
approximately $101,000 in 1999. The Company has invested in company-owned life
insurance policies to assist in funding these programs. The cash surrender
values of these policies are in a rabbi trust (a funding vehicle that segregates
assets to be used to pay deferred compensation) and are recorded as assets of
the Company.
8. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
ACQUISITIONS
On January 1, 1999, the Company acquired an AM and FM radio station (KAFE-FM and
KPUG-AM) serving the Bellingham, Washington market for approximately $6,350,000.
On January 14, 1999, the Company acquired a regional and state farm information
network (The Michigan Farm Radio Network) for approximately $1,660,000,
approximately $1,036,000 of which was paid in the Company's Class A Common
Stock.
On April 1, 1999, the Company acquired KAVU-TV (an ABC affiliate), a low power
Univision affiliate (KUNU-LPTV) and a low power construction permit (KVTX-LPTV)
serving the Victoria, Texas market for approximately $10,700,000, approximately
$1,840,000 of which was paid in the Company's Class A Common Stock. The Company
also assumed an existing Local Marketing Agreement for KVCT-TV (a Fox
affiliate).
On May 1, 1999, the Company acquired an AM radio station (KIXT-AM) serving the
Bellingham, Washington market for approximately $1,000,000.
On July 1, 1999, the Company acquired WXVT-TV (a CBS affiliate) serving the
Greenville, Mississippi market for approximately $5,200,000, approximately
$600,000 of which was paid in the Company's Class A Common Stock.
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 was subject to certain adjustments based on operating performance
levels that resulted in an additional acquisition amount of $403,000 paid in May
1999, of which approximately $304,000 was paid in shares of the Company's Class
A Common Stock.
21
58
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
8. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
ACQUISITIONS (CONTINUED)
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.
All acquisitions have been accounted for as purchases and, accordingly, the
total costs were allocated to the acquired assets, including broadcast licenses
and other intangibles, 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 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 marketing agreements.
The following unaudited pro forma results of operations of the Company for the
years ended December 31, 1999 and 1998 assume the acquisitions occurred as of
January 1, 1998. 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.
1999 1998
-------------- --------------
(In thousands except per
share data)
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS:
Net operating revenue $92,103 $86,962
Net income $ 8,375 $ 6,239
Basic earnings per share $ .51 $ .39
Diluted earnings per share $ .50 $ .38
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
59
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
10. NOTES RECEIVABLE FROM PRINCIPAL STOCKHOLDER
On May 5, 1999 the Company entered into a loan agreement whereby the Company
loaned its principal stockholder $125,000. The loan bears interest at the rate
of 7% per annum. Payments of principal and interest under the loan are payable
in two consecutive annual installments commencing in May 2000.
Included in Stockholders' Equity is a loan from the Company to the principal
stockholder that bears interest at a rate per annum equal to the lowest rate
necessary to avoid the imputation of income for federal income tax purposes. As
part of a five year employment agreement with the principal stockholder, 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
$314,000, $326,000 and $210,000 in 1999, 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
60
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 years ended December 31, 1999, 1998 and
1997 were $1,332,000, $1,353,000 and $1,191,000, respectively. Minimum annual
rental commitments under noncancellable operating leases consisted of the
following at December 31, 1999:
OPERATING
LEASES
----------------
(In thousands)
2000 $ 997
2001 831
2002 745
2003 462
2004 189
Thereafter 582
-------
$ 3,806
=======
24
61
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, 1999:
BROADCAST
PROGRAM
RIGHTS
-------------------
(In thousands)
2000 $ 424
2001 194
2002 128
2003 106
2004 104
Thereafter 70
------------
$1,026
Amounts due within one year (included in accounts payable) 424
------------
$ 602
============
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, 1999 the stockholder's
average compensation for the preceding three years was approximately $661,000.
ACQUISITIONS
On November 10, 1999, the Company entered into an agreement to acquire two FM
and one AM radio station (KICD-AM/FM and KLLT-FM) serving the Spencer, Iowa
market for approximately $6,400,000. The Company closed this transaction in
January 2000.
25
62
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
13. SUBSEQUENT EVENTS (UNAUDITED)
In March 2000, the Company entered into an agreement to acquire an AM and FM
radio station (WHMP-AM/FM) serving the Northhampton, Massachusetts market for
approximately $12,000,000. The acquisition is subject to the approval of the
Federal Communications Commission and is expected to close during the third
quarter of 2000.
In March 2000, the Company also entered into an agreement to acquire an FM radio
station (WKIO-FM) serving the Champaign-Urbana, Illinois market for
approximately $7,000,000. The acquisition is subject to the approval of the
Federal Communications Commission Company and is expected to close during the
third quarter of 2000.
In March 2000, the Company modified its Stock Buy-Back Program pursuant to which
the Company may purchase up to $4,000,000 of its Class A Common Stock.
26
63
Saga Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
(In thousands, except per share data)
Net operating revenue $ 18,267 $ 15,620 $ 23,459 $ 20,159 $ 23,882 $ 19,941 $ 24,412 $ 20,151
Station operating expense:
Programming and
technical 4,671 4,019 4,843 4,129 5,399 4,342 5,392 4,410
Selling 4,978 4,447 6,411 5,810 5,434 4,796 6,555 5,622
Station general and
administrative 3,085 2,736 3,177 2,807 3,290 2,687 3,317 2,739
-------------------------------------------------------------------------------------------
Total station operating
expense 12,734 11,202 14,431 12,746 14,123 11,825 15,264 12,771
-------------------------------------------------------------------------------------------
Station operating
income before
corporate general
and administrative,
depreciation and
amortization 5,533 4,418 9,028 7,413 9,759 8,116 9,148 7,380
Corporate general and
administrative 1,167 1,017 1,471 1,244 1,128 1,017 1,329 1,219
Depreciation and
amortization 1,803 1,628 1,959 1,539 2,138 1,633 2,122 1,620
-------------------------------------------------------------------------------------------
Operating profit 2,563 1,773 5,598 4,630 6,493 5,466 5,697 4,541
Other expenses:
Interest expense 1,377 1,140 1,451 1,143 1,566 1,159 1,594 1,167
Other 214 11 (320) 82 198 252 177 225
-------------------------------------------------------------------------------------------
Income before income tax 972 622 4,467 3,405 4,729 4,055 3,926 3,149
Income tax provision 416 266 1,876 1,491 1,983 1,663 1,267 1,460
-------------------------------------------------------------------------------------------
Net income $ 556 $ 356 $ 2,591 $ 1,914 $ 2,746 $ 2,392 $ 2,659 $ 1,689
===========================================================================================
Basic earnings per share $ .03 $ .02 $ .16 $ .12 $ .17 $ .15 $ .16 $ .11
===========================================================================================
Weighted average common
shares 16,080 15,869 16,313 15,888 16,403 15,889 16,460 15,940
===========================================================================================
Diluted earnings per share $ .03 $ .02 $ .16 $ .12 $ .16 $ .15 $ .16 $ .10
===========================================================================================
Weighted average common
and common equivalents
outstanding 16,429 16,200 16,628 16,225 16,766 16,224 16,856 16,324
===========================================================================================
27
64
SAGA COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Allowance for doubtful accounts $496 $519 $442 (1) $573
=============== ============== =============== ===============
Year Ended December 31, 1998
Allowance for doubtful accounts $514 $441 $459 (1) $496
=============== ============== =============== ===============
Year Ended December 31, 1997
Allowance for doubtful accounts $319 $549 $354 (1) $514
=============== ============== =============== ===============
Year Ended December 31, 1996
Allowance for doubtful accounts $295 $365 $341 (1) $319
=============== ============== =============== ===============
(1) Write-off of uncollectible accounts, net of recoveries.