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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period ended June 30, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________ to _________
Commission file number 1-11588
Saga Communications, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3042953
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
73 Kercheval Avenue
Grosse Pointe Farms, Michigan 48236
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(313) 886-7070
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
The number of shares of the registrant's Class A Common Stock, $.01 par value,
and Class B Common Stock, $.01 par value, outstanding as of July 31, 2002 was
18,459,599 and 2,360,370, respectively.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 2003
and December 31, 2002 3
Condensed consolidated statements of income--Three
and six months ended June 30, 2003 and 2002 5
Condensed consolidated statements of cash flows--Six
months ended June 30, 2003 and 2002 6
Notes to unaudited condensed consolidated financial
statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Saga Communications, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
JUNE 30, DECEMBER 31,
2003 2002
-------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 5,743 $ 5,874
Accounts receivable, net 21,345 21,355
Prepaid expenses 1,890 2,102
Other current assets 2,231 2,117
-------------------------------------------
Total current assets 31,209 31,448
Property and equipment 124,507 120,974
Less accumulated depreciation (63,798) (60,813)
-------------------------------------------
Net property and equipment 60,709 60,161
Other assets:
Broadcast licenses, net 113,139 102,699
Goodwill, net 27,348 26,892
Other intangibles, deferred costs and
investments, net 5,409 5,122
-------------------------------------------
Total other assets 145,896 134,713
-------------------------------------------
$237,814 $226,322
===========================================
See notes to unaudited condensed consolidated financial statements.
3
Saga Communications, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
JUNE 30, DECEMBER 31,
2003 2002
--------------------------------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,402 $ 1,265
Other current liabilities 10,254 11,358
Current portion of long-term debt 98 13,308
--------------------------------------------
Total current liabilities 11,754 25,931
Deferred income taxes 15,718 14,064
Long-term debt 109,391 91,920
Other 1,469 1,348
STOCKHOLDERS' EQUITY:
Common stock 209 209
Additional paid-in capital 45,785 45,649
Retained earnings 54,271 48,393
Accumulated other comprehensive income (loss) (171) (464)
Treasury stock (612) (728)
--------------------------------------------
Total stockholders' equity 99,482 93,059
--------------------------------------------
$237,814 $226,322
============================================
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
See notes to unaudited condensed consolidated financial statements.
4
Saga Communications, Inc.
Condensed Consolidated Statements of Income
(in thousands except per share data)
Unaudited
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------
Net operating revenue $31,790 $29,763 $57,931 $53,691
Operating expenses:
Programming and technical 7,029 6,363 14,203 12,764
Selling 8,349 8,008 14,801 13,880
Station general and administrative 5,119 4,493 10,306 8,853
Corporate general and administrative 1,896 1,542 3,141 2,834
Depreciation 1,671 1,534 3,390 2,975
Amortization 120 125 210 250
--------------------------------------------------------
Operating profit 7,606 7,698 11,880 12,135
Other (income) expense:
Interest expense 1,157 1,367 2,692 2,708
Other (357) 10 (365) 3
--------------------------------------------------------
Income before income tax 6,806 6,321 9,553 9,424
Income tax provision 2,577 2,656 3,675 3,959
--------------------------------------------------------
Net income $ 4,229 $ 3,665 $ 5,878 $ 5,465
========================================================
Earnings per share:
Basic $.20 $.18 $.28 $.27
========================================================
Diluted $.20 $.17 $.28 $.26
========================================================
Weighted average common shares 20,815 20,585 20,810 20,550
========================================================
Weighted average common and common equivalent shares
21,354 21,250 21,309 21,152
========================================================
See notes to unaudited condensed consolidated financial statements.
5
Saga Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
Unaudited
SIX MONTHS ENDED
JUNE 30,
2003 2002
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash provided by operating activities $ 9,966 $ 10,250
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (4,203) (3,417)
Proceeds from sale of assets 306 21
Increase in intangibles and other assets (777) (701)
Acquisition of stations (9,139) (9,070)
-------------------------------------
Net cash used in investing activities (13,813) (13,167)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 8,500 -
Payments on long-term debt (4,859) (225)
Net proceeds from exercise of stock options 75 1,052
-------------------------------------
Net cash provided by financing activities 3,716 827
-------------------------------------
Net decrease in cash and cash equivalents (131) (2,090)
Cash and cash equivalents, beginning of period 5,874 11,843
-------------------------------------
Cash and cash equivalents, end of period $ 5,743 $ 9,753
=====================================
See notes to unaudited condensed consolidated financial statements.
6
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for annual financial statements. In our opinion,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six months
ended June 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Saga Communications, Inc. Annual Report (Form 10-K) for the year ended December
31, 2002.
RECLASSIFICATION
Certain amounts previously reported in the 2002 financial statements have been
reclassified to conform to the 2003 presentation.
STOCK SPLIT
On June 15, 2002 we consummated a five-for-four split of our Class A and Class B
Common Stock, resulting in additional shares being issued of approximately
3,685,000 and 472,000, respectively, for holders of record on May 31, 2002. All
share and per share information in the accompanying financial statements has
been restated retroactively to reflect the split.
INCOME TAXES
Our effective tax rate is higher than the federal statutory rate as a result of
certain non-deductible depreciation and amortization expenses and the inclusion
of state taxes in the income tax amount.
TIME BROKERAGE AGREEMENTS
We have entered into Time Brokerage Agreements ("TBAs") in certain markets. In a
typical TBA, the Federal Communications Commission ("FCC") licensee of a station
makes available, for a fee, blocks of air time on its station to another party
that supplies programming to be broadcast during that air time and sells their
own commercial advertising announcements during the time periods specified. We
account for TBAs under SFAS 13, "Accounting for Leases" and related
interpretations. Revenue and expenses related to TBAs are included in the
accompanying Consolidated Statements of Income.
7
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related interpretations, in accounting for
our employee and non-employee director stock options. Under APB 25, when the
exercise price of our employee stock options equals or exceeds the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
For purposes of the required pro forma disclosures required for stock-based
compensation, the estimated fair value of the options is amortized to expense
over the options' vesting period. Pro forma net income and pro forma earnings
per share as if the stock-based awards had been accounted for using the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" is as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 2003 2002 2003 2002
--------------------------------------------------------
Net income as reported $ 4,229 $ 3,665 $ 5,878 $ 5,465
Add back: stock based compensation
cost, net of tax 12 9 25 22
Less: pro forma stock based
Compensation cost determined under
fair value method, net of tax (606) (424) (978) (763)
--------------------------------------------------------
Pro forma net income $ 3,635 $ 3,250 $ 4,925 $ 4,724
Pro forma earnings per share:
Basic $.17 $.16 $.24 $.23
========================================================
Diluted $.17 $.15 $.23 $.22
========================================================
The fair value of our stock options were estimated as of the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for the current years grants: risk-free interest rate of 3.39%; a
dividend yield of 0%; expected volatility of 32.2%; and a weighted average
expected life of the options of 7 years.
8
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
2. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, we adopted SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition, construction,
development, and/or the normal operation of a long lived asset. The adoption of
SFAS 143 did not materially impact our financial position or results of
operations.
On January 1, 2003 we adopted SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities" which addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity." The adoption of SFAS 146 did not materially
impact our financial position or results of operations.
On January 1, 2003 we adopted the initial recognition provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 45 ("FIN 45"), entitled
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." We adopted the disclosure
requirements of FIN 45 in 2002. This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. This interpretation
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The adoption of Interpretation No. 45 did not materially
impact our financial position, cash flows or results of operations. See Note 4
for a guarantee that we entered into on March 7, 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FIN 46
entitled "Consolidation of Variable Interest Entities." This interpretation
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. In general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. The Interpretation also requires disclosures about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. The consolidation requirements
of Interpretation 46 apply immediately to variable interest entities created
after January 31, 2003 and existing variable interest entities in the first
fiscal year or interim period beginning after June 15, 2003. We have not yet
determined what the effect, if any, this interpretation will have on our
financial statements for the provisions impacting variable interest entities
created prior to February 1, 2003.
9
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
3. TOTAL COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
TOTAL COMPREHENSIVE INCOME ------------------------------------------------------
CONSISTS OF: 2003 2002 2003 2002
------------------------------------------------------
(In thousands)
Net income $ 4,229 $ 3,665 $ 5,878 $ 5,465
Accumulated other comprehensive income (loss):
Change in fair value of derivative instruments, net
of taxes 158 (376) 293 (98)
------------------------------------------------------
Total comprehensive income $ 4,387 $ 3,289 $ 6,171 $ 5,367
======================================================
Accumulated Other Comprehensive Income is comprised solely of the changes in the
fair value of derivatives at June 30, 2003 and June 30, 2002.
4. ACQUISITIONS AND DISPOSITIONS
We actively seek and explore opportunities for expansion through the acquisition
of additional broadcast properties. This activity is part of our strategy to be
the leading broadcaster in the markets where we own properties.
PENDING ACQUISITIONS, SHARED SERVICES AND DIVESTITURES
On May 27, 2003 we entered into an agreement to acquire two FM radio stations
(WJZA-FM Lancaster, Ohio and WJZK-FM Richwood, Ohio) serving the Columbus, Ohio
market for approximately $13,000,000. This transaction, subject to the approval
of the Federal Communications Commission, is expected to close during the third
quarter 2003.
On March 7, 2003 we entered into an agreement of understanding with Surtsey
Productions, Inc. ("Surtsey"), whereby we have guaranteed up to $1,250,000 of
the debt that Surtsey will incur in closing on the acquisition of a construction
permit for KFJX-TV station in Pittsburg, Kansas. Under the FCC's ownership
rules, we are prohibited from owning this station. In consideration for our
guarantee, Surtsey has entered into various agreements with us relating to the
station, including a Shared Services Agreement, Technical Services Agreement,
Agreement for the Sale of Commercial Time and Broker Agreement. Surtsey is a
multi-media company that is 100% owned by the daughter of Edward K. Christian,
our principal stockholder, President and CEO.
10
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
4. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
2003 ACQUISITIONS AND DISPOSITIONS
On March 11, 2003, we acquired an AM radio station (WOXL-AM) serving the
Asheville, North Carolina market for approximately $350,000.
On March 28, 2003, we acquired an FM radio station (WODB-FM) serving the
Columbus, Ohio market for approximately $10,000,000. We began operating this
station under the terms of a TBA on January 1, 2003. In conjunction with this
transaction we sold our AM radio station (WVKO-AM) serving the Columbus, Ohio
market for approximately $1,000,000. We recognized a gain on the disposal of
this station of approximately $325,000.
On April 1, 2003, we acquired an FM radio station (WINQ-FM) in the Winchendon,
Massachusetts market for approximately $420,000 plus an additional $500,000 if
within five years of closing we obtain approval from the FCC for a city of
license change. The radio station was owned by a company in which a member of
our Board of Directors has a 26% beneficial ownership interest, which was
disclosed to our Board prior to its approval of the transaction. The interested
director did not participate in voting on this transaction when it came before
the board. The purchase price was determined on an arm's length basis. We began
operating this station under the terms of a TBA on February 1, 2003,
simulcasting WKBK-AM in Keene, New Hampshire.
On April 1, 2003 we sold an AM radio station (WLLM-AM) serving the Lincoln,
Illinois market for approximately $275,000.
2002 ACQUISITIONS AND TIME BROKERAGE AGREEMENTS
On May 1, 2002, we acquired two FM and two AM radio stations (WKBK-AM, WKNE-FM
and WKVT-AM/FM) serving the Keene, New Hampshire and Brattleboro, Vermont
markets, respectively, for approximately $9,400,000.
On July 1, 2002, we acquired an FM and AM radio station (WOQL-FM and WZBK-AM)
serving the Keene, New Hampshire market, for approximately $2,740,000.
On November 1, 2002, we acquired an AM and FM radio station (WJQY-AM and
WJOI-FM) serving the Springfield, Tennessee market for approximately $1,525,000.
On November 1, 2002, we entered into a time brokerage agreement and a sub-time
brokerage agreement for WISE-AM and WOXL-FM, respectively, serving the
Asheville, North Carolina market.
11
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
4. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
2002 ACQUISITIONS AND TIME BROKERAGE AGREEMENTS (CONTINUED)
On November 1, 2002, we acquired three FM radio stations (KDEZ-FM, KDXY-FM and
KJBX-FM) serving the Jonesboro, Arkansas market for approximately $12,745,000,
including approximately $2,245,000 of our Class A common stock.
The consolidated statements of income include the operating results of the
acquired stations from their respective dates of acquisition. All acquisitions
were accounted for as purchases and, accordingly, the total costs were allocated
to the acquired assets and assumed liabilities based on their estimated fair
values as of the acquisition dates. The excess of the consideration paid over
the estimated fair value of net assets acquired have been recorded as goodwill.
These allocations are preliminary and may change once final valuations are
completed. The following condensed balance sheets represent the estimated fair
value assigned to the related assets and liabilities of the 2003 and 2002
acquisitions at their respective acquisition dates.
SAGA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET OF 2003 AND 2002 ACQUISITIONS
(IN THOUSANDS)
ACQUISITIONS IN
2003 2002
-----------------------------------
ASSETS ACQUIRED:
Current assets $ (103) $ 901
Property and equipment (37) 4,113
Other assets:
Broadcast licenses-Radio segment 10,441 15,864
Goodwill-Radio segment 149 6,123
Other intangibles, deferred costs and investments (202) -
-----------------------------------
Total other assets 10,388 21,987
-----------------------------------
Total assets acquired 10,248 27,001
-----------------------------------
LIABILITIES ASSUMED:
Current liabilities 488 612
Long term debt 621 -
-----------------------------------
Total liabilities assumed 1,109 612
-----------------------------------
Net assets acquired $ 9,139 $ 26,389
===================================
12
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
4. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The following unaudited pro forma results of our operations for the three and
six months ended June 30, 2003 and 2002 assume the 2003 and 2002 acquisitions
and dispositions occurred as of January 1, 2002. 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.
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS 2003 2002 2003 2002
--------------------------------------------------------
(In thousands except per share data)
Net operating revenue $31,790 $31,096 $57,931 $56,478
Station operating expense 20,497 19,971 39,310 37,712
--------------------------------------------------------
Station operating income 11,293 11,125 18,621 18,766
Corporate general and administrative 1,896 1,615 3,141 2,932
Depreciation 1,671 1,594 3,390 3,118
Amortization 120 125 210 250
--------------------------------------------------------
Operating profit 7,606 7,791 11,880 12,466
Interest expense 1,157 1,439 2,692 2,804
Other (357) 10 (365) 3
Income tax provision 2,577 2,665 3,675 4,058
--------------------------------------------------------
Net income $ 4,229 $ 3,677 $ 5,878 $ 5,601
========================================================
Basic earnings per share $.20 $.18 $.28 $.27
========================================================
Diluted earnings per share $.20 $.17 $.28 $.26
========================================================
13
\
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
4. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
RADIO BROADCASTING SEGMENT 2003 2002 2003 2002
--------------------------------------------------------
(In thousands)
Net operating revenue $28,675 $28,091 $52,200 $50,718
Station operating expense 18,077 17,561 34,606 33,146
--------------------------------------------------------
Station operating income 10,598 10,530 17,594 17,572
Corporate general and administrative - - - -
Depreciation 1,234 1,190 2,515 2,311
Amortization 117 119 203 238
--------------------------------------------------------
Operating profit $ 9,247 $ 9,221 $14,876 $15,023
========================================================
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
TELEVISION BROADCASTING SEGMENT 2003 2002 2003 2002
--------------------------------------------------------
(In thousands)
Net operating revenue $3,115 $3,005 $5,731 $5,760
Station operating expense 2,420 2,410 4,704 4,566
--------------------------------------------------------
Station operating income 695 595 1,027 1,194
Corporate general and administrative - - - -
Depreciation 388 354 776 708
Amortization 3 6 7 12
--------------------------------------------------------
Operating profit $ 304 $ 235 $ 244 $ 474
========================================================
5. SEGMENT INFORMATION
We evaluate the operating performance of our stations individually. For purposes
of business segment reporting, we have aligned operations with similar
characteristics into two business segments: Radio and Television.
The Radio segment includes all seventy-one of our radio stations and three radio
information networks. The Television segment consists of four television
stations and three low power television ("LPTV") stations. The Radio and
Television segments derive their revenue from the sale of commercial broadcast
inventory. The category "Corporate and Other" represents the income and expense
not allocated to reportable segments.
14
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
5. SEGMENT INFORMATION (CONTINUED)
We evaluate performance of our operating entities based on station operating
income before corporate general and administrative, depreciation and
amortization ("station operating income"). We believe that station operating
income is useful because it provides a meaningful comparison of operating
performance between companies in the broadcasting industry and serves as an
indicator of the market value of a group of stations. Station operating income
is generally recognized by the broadcasting industry as a measure of performance
and is used by analysts who report on the performance of broadcasting groups.
Station operating income is not necessarily indicative of amounts that may be
available to us for debt service requirements, other commitments, reinvestment
or other discretionary uses. Station operating income is not a measure of
liquidity or of performance in accordance with accounting principles generally
accepted in the United States, and should be viewed as a supplement to and not a
substitute for the results of operations presented on the basis of accounting
principles generally accepted in the United States.
THREE MONTHS ENDED CORPORATE AND
JUNE 30, 2003: RADIO TELEVISION OTHER CONSOLIDATED
---------------------------------------------------------------------------
(In thousands)
Net operating revenue $ 28,675 $ 3,115 - $ 31,790
Station operating expense
18,077 2,420 - 20,497
---------------------------------------------------------------------------
Station operating income
10,598 695 - 11,293
Corporate general and
administrative - - $ 1,896 1,896
Depreciation 1,234 388 49 1,671
Amortization 117 3 - 120
---------------------------------------------------------------------------
Operating profit (loss) $ 9,247 $ 304 $(1,945) $ 7,606
===========================================================================
THREE MONTHS ENDED CORPORATE AND
JUNE 30, 2002: RADIO TELEVISION OTHER CONSOLIDATED
---------------------------------------------------------------------------
(In thousands)
Net operating revenue $ 26,758 $ 3,005 - $ 29,763
Station operating expense
16,454 2,410 - 18,864
---------------------------------------------------------------------------
Station operating income
10,304 595 - 10,899
Corporate general and
administrative - - $ 1,542 1,542
Depreciation 1,130 354 50 1,534
Amortization 119 6 - 125
---------------------------------------------------------------------------
Operating profit (loss) $ 9,055 $ 235 $ (1,592) $ 7,698
===========================================================================
15
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
5. SEGMENT INFORMATION (CONTINUED)
SIX MONTHS ENDED CORPORATE AND
JUNE 30, 2003: RADIO TELEVISION OTHER CONSOLIDATED
---------------------------------------------------------------------------
(In thousands)
Net operating revenue $ 52,200 $ 5,731 - $ 57,931
Station operating expense
34,606 4,704 - 39,310
---------------------------------------------------------------------------
Station operating income
17,594 1,027 - 18,621
Corporate general and
administrative - - $ 3,141 3,141
Depreciation 2,515 776 99 3,390
Amortization 203 7 - 210
---------------------------------------------------------------------------
Operating profit (loss) $ 14,876 $ 244 $ (3,240) $ 11,880
===========================================================================
Total assets $ 199,103 $ 27,693 $ 11,018 $ 237,814
===========================================================================
SIX MONTHS ENDED CORPORATE AND
JUNE 30, 2002: RADIO TELEVISION OTHER CONSOLIDATED
---------------------------------------------------------------------------
(In thousands)
Net operating revenue $ 47,931 $ 5,760 - $ 53,691
Station operating expense
30,931 4,566 - 35,497
---------------------------------------------------------------------------
Station operating income
17,000 1,194 - 18,194
Corporate general and
administrative - - $ 2,834 2,834
Depreciation 2,168 708 99 2,975
Amortization 238 12 - 250
---------------------------------------------------------------------------
Operating profit (loss) $ 14,594 $ 474 $(2,933) $ 12,135
===========================================================================
Total assets $ 170,503 $ 26,486 $14,044 $211,033
===========================================================================
16
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
6. SUBSEQUENT EVENT
On July 29, 2003, we entered into a new credit agreement (the "Credit
Agreement") with a group of banks, to refinance our outstanding debt under the
credit agreement in place at June 30, 2003 (the "Old Credit Agreement"). Our
current financing facility (the "Facility") under the Credit Agreement is a
$200,000,000 reducing revolving line of credit (the "Reducing Revolver"). The
Reducing Revolver matures July 29, 2010. Our indebtedness under the Facility is
secured by a first priority lien on substantially all of our assets and of our
subsidiaries, by a pledge of our subsidiaries' stock and by a guarantee of our
subsidiaries. We have approximately $90,900,000 of unused borrowing capacity
under the Facility.
We expect to incur a write-off of unamortized debt issuance costs relating to
the Old Credit Agreement of approximately $1,300,000, pre-tax, due to this
refinancing during the quarter ended September 30, 2003.
The Reducing Revolver was used to refinance our Old Credit Agreement. The unused
portion of the Reducing Revolver may be used for general corporate purposes,
including working capital, capital expenditures, permitted acquisitions and
related transaction expenses and permitted stock buybacks. On March 31, 2006,
the Revolving Commitments (as defined in the Credit Agreement) will be
permanently reduced quarterly in amounts ranging from 3.125% to 12.5% of the
total Revolving Commitments in effect on March 31, 2006. Any outstanding balance
under the Reducing Revolver will be due on the maturity date of July 29, 2010.
In addition, the Revolving Commitments shall be further reduced by specified
percentages of Excess Cash Flow (as defined in the Credit Agreement) based on
leverage ratios. At June 30, 2003 we have classified our current and non-current
portion of long-term debt in accordance with the new Credit Agreement.
Interest rates under the Facility are payable, at our option, at alternatives
equal to LIBOR plus 1.375% to 2.0% or the Agent bank's base rate plus 0.125% to
0.75%. The spread over LIBOR and the base rate vary from time to time, depending
upon our financial leverage. We also pay quarterly commitment fees of 0.375% to
0.625% per annum on the unused portion of the Facility.
The Credit Agreement contains a number of financial covenants (all of which we
were in compliance with at June 30, 2003) which, among other things, require us
to maintain specified financial ratios and impose certain limitation on us with
respect to investments, additional indebtedness, dividends, distributions,
guarantees, liens and encumbrances.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto of Saga
Communications, Inc. and its subsidiaries contained elsewhere herein.
GENERAL
Our financial results are dependent on a number of factors, the most
significant of which is the ability to generate advertising revenue through
rates charged to advertisers. The rates a station is able to charge are, in
large part, based on a station's ability to attract audiences in the demographic
groups targeted by its advertisers, as measured principally by periodic reports
by independent national rating services. Various factors affect the rate a
station can charge, including the general strength of the local and national
economies, population growth, ability to provide popular programming, local
market competition, relative efficiency of radio and/or television broadcasting
compared to other advertising media, signal strength and government regulation
and policies. The primary operating expenses involved in owning and operating
radio stations are employee salaries, depreciation, programming expenses,
solicitation of advertising, and promotion expenses. In addition to these
expenses, owning and operating television stations involves the cost of
acquiring certain syndicated programming.
We evaluate performance of our operating entities based on station
operating income before corporate general and administrative, depreciation and
amortization ("station operating income"). We believe that station operating
income is useful because it provides a meaningful comparison of operating
performance between companies in the broadcasting industry and serves as an
indicator of the market value of a group of stations. Station operating income
is generally recognized by the broadcasting industry as a measure of performance
and is used by analysts who report on the performance of broadcasting groups.
Station operating income is not necessarily indicative of amounts that may be
available to us for debt service requirements, other commitments, reinvestment,
or other discretionary uses. Station operating income is not a measure of
liquidity or of performance in accordance with generally accepted accounting
principles, and should be viewed as a supplement to and not a substitute for the
results of operations presented on the basis of accounting principles generally
accepted in the United States.
18
During the years ended December 31, 2002 and 2001 and the six month
periods ended June 30, 2003 and 2002, our Columbus, Ohio and Milwaukee,
Wisconsin stations were the only operating locations representing more than 15%
of our station operating income (i.e., net operating revenue less station
operating expense). For the years ended December 31, 2002 and 2001, Columbus
accounted for an aggregate of 14% and 15%, respectively, and Milwaukee accounted
for an aggregate of 22% and 23%, respectively, of station operating income. For
the six months ended June 30, 2003 and 2002, Columbus accounted for an aggregate
of 14% and 15%, respectively, and Milwaukee accounted for an aggregate of 23%
and 23%, respectively, of station operating income. While radio revenues in each
of the Columbus and Milwaukee markets have remained relatively stable
historically, an adverse change in these radio markets or in the relative market
position of these locations could have a significant impact on our operating
results as a whole.
Because audience ratings in the local market are crucial to a station's
financial success, we endeavor to develop strong listener/viewer loyalty. We
believe that the diversification of formats on our radio stations helps to
insulate us from the effects of changes in musical tastes of the public on any
particular format.
The number of advertisements that can be broadcast without jeopardizing
listening/viewing levels (and the resulting ratings) is limited in part by the
format of a particular radio station and, in the case of television stations, by
restrictions imposed by the terms of certain network affiliation and syndication
agreements. Our stations strive to maximize revenue by constantly managing the
number of commercials available for sale and adjusting prices based upon local
market conditions. In the broadcasting industry, stations often utilize trade
(or barter) agreements to generate advertising time sales in exchange for goods
or services used or useful in the operation of the stations, instead of for
cash. We minimize our use of trade agreements and historically have sold over
95% of our advertising time for cash.
Most advertising contracts are short-term, and generally run only for a
few weeks. Most of our revenue is generated from local advertising, which is
sold primarily by each station's sales staff. For the six months ended June 30,
2003 and 2002, approximately 79% and 80%, respectively, of our gross revenue was
from local advertising. To generate national advertising sales, we engage
independent advertising sales representatives that specialize in national sales
for each of our stations.
Our revenue varies throughout the year. Advertising expenditures, our
primary source of revenue, generally have been lowest during the winter months,
which comprise the first quarter.
As a result of acquisitions, as of June 30, 2003 we owned and/or operated
seventy-one radio stations, four TV stations, two LPTV stations, and three radio
information networks. As of June 30, 2002 we owned and/or operated sixty-one
radio stations, four TV stations, three LPTV stations and three radio
information networks.
19
From January 1, 2002 to June 30, 2003, we have acquired/disposed of the
following stations or entered into Time Brokerage Agreements ("TBAs") for
stations serving the markets indicated:
o May 1, 2002: we acquired an AM and FM radio stations (WKBK-AM,
WKNE-FM) serving the Keene, New Hampshire market, and an Am and
FM radio station (WKVT-AM/FM) serving the Brattleboro, Vermont
market, for approximately $9,400,000.
o July 1, 2002: we acquired an AM and FM radio station (WZBK-AM and
WOQL-FM) serving the Keene, New Hampshire market for
approximately $2,740,000.
o November 1, 2002: we acquired three FM radio stations (KDEZ-FM,
KDXY-FM and KJBX-FM) serving the Jonesboro, Arkansas market for
approximately $12,745,000 including approximately $2,245,000 of
our Class A common stock.
o November 1, 2002: we entered into a TBA and a sub-TBA for WISE-AM
and WOXL-FM, respectively, serving the Asheville, North Carolina
market.
o November 1, 2002: we acquired an AM and FM radio station (WJQY-AM
and WJOI-FM) serving the Springfield, Tennessee market for
approximately $1,525,000.
o March 11, 2003: we acquired one AM radio station (WOXL-AM)
serving the Asheville, North Carolina market for approximately
$350,000.
o March 28, 2003: we acquired one FM radio station (WODB-FM)
serving the Columbus, Ohio market for approximately $10,000,000.
In conjunction with this transaction we sold one of our AM radio
stations (WVKO-AM) serving the Columbus, Ohio market for
approximately $1,000,000.
o On April 1, 2003: we acquired one FM radio station (WINQ-FM)
serving the Winchendon, Massachusetts market for approximately
$400,000 plus an additional $500,000 if within five years of
closing we obtain approval from the FCC for a city of license
change.
o On April 1, 2003: we sold an AM radio station (WLLM-AM) serving
the Lincoln, Illinois market for approximately $275,000.
For additional information with respect to these acquisitions and
dispositions, see "Liquidity and Capital Resources" below.
We actively seek and explore opportunities for expansion through the
acquisition of additional broadcast properties. We review acquisition
opportunities on an ongoing basis.
20
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
The following tables summarize our results of operations for the three
months ended June 30, 2003 and 2002. The as-reported percentages reflect our
historical financial results and include the results of operations for stations
that we did not own for the entire comparable period. The same station
percentages reflect the results of operations for stations that we owned for the
entire comparable period.
CONSOLIDATED RESULTS OF OPERATIONS
(In thousands of dollars)
Three Months Ended As-Reported Same Station
June 30, % Increase % Increase
2003 2002 (Decrease) (Decrease)
--------------------------------------------------------------------
Net operating revenue $31,790 $29,763 6.81% .26%
Station operating expense * 20,497 18,864 8.66% (.82%)
------------------------------
Station operating income 11,293 10,899 3.62% 2.13%
Corporate G&A 1,896 1,542 22.96% N/A
Depreciation 1,671 1,534 8.93% 3.61%
Amortization 120 125 (4.00%) (28.00%)
------------------------------
Operating profit 7,606 7,698 (1.20%) (1.94%)
Interest expense 1,157 1,367 (15.36%)
Other (income)expense (357) 10 N/A
Income taxes 2,577 2,656 (2.97%)
------------------------------
Net income $ 4,229 $ 3,665 15.39%
==============================
Basic earnings per share $.20 $.18 14.11%
==============================
Diluted earnings per share $.20 $.17 14.83%
==============================
RADIO BROADCASTING SEGMENT
(In thousands of dollars)
Three Months Ended As-Reported Same Station
June 30, % Increase % Increase
2003 2002 (Decrease) (Decrease)
--------------------------------------------------------------------
Net operating revenue $28,675 $26,758 7.16% (.13%)
Station operating expense * 18,077 16,454 9.86% (1.01%)
------------------------------
Station operating income 10,598 10,304 2.85% 1.26%
Depreciation 1,234 1,130 9.20% 1.97%
Amortization 117 119 (1.68%) (26.89%)
------------------------------
Operating profit $ 9,247 $ 9,055 2.12% 1.55%
21
TELEVISION BROADCASTING SEGMENT
(In thousands of dollars)
Three Months Ended As-Reported Same Station
June 30, % Increase % Increase
2002 2002 (Decrease) (Decrease)
--------------------------------------------------------------------
Net operating revenue $3,115 $3,005 3.66% 3.66%
Station operating expense * 2,420 2,410 .41% .41%
------------------------------
Station operating income 695 595 16.81% 16.81%
Depreciation 388 354 9.60% 9.60%
Amortization 3 6 (50.00%) (50.00%)
------------------------------
Operating profit $ 304 $ 235 29.36% 29.36%
* Programming, technical, selling and station general and administrative
expenses.
For the three months ended June 30, 2003, net operating revenue was
$31,790,000 compared with $29,763,000 for the three months ended June 30, 2002,
an increase of $2,027,000 or 7%. Approximately $1,951,000 or 96% of the increase
was attributable to revenue generated by stations that we did not own or operate
for the comparable period in 2002. Net operating revenue generated by stations
that we owned and operated for the entire comparable period ("same station")
increased by approximately .3% ($76,000). This increase was primarily the result
of an increase in local revenue in our television segment while revenue in the
radio segment remained relatively flat.
Station operating expense (i.e., programming, technical, selling and
station general and administrative expenses) increased by $1,633,000 or 9% to
$20,497,000 for the three months ended June 30, 2003, compared with $18,864,000
for the three months ended June 30, 2002. Of the total increase, approximately
$1,785,000 or 109% was the result of the impact of the operation of stations
that we did not own or operate for the comparable period in 2002. Station
operating expense decreased by approximately $152,000 or 1% on a same station
basis.
Operating profit decreased by $92,000 or 1% to $7,606,000 for the three
months ended June 30, 2003, compared with $7,698,000 for the three months ended
June 30, 2002. The decrease was primarily the result of the $2,027,000 increase
in net operating revenue offset by the $1,633,000 increase in station operating
expense, and a $354,000 or 23% increase in corporate general and administrative
expense and a $137,000 or 9% increase in depreciation expense as a result of
recent acquisitions. The increase in corporate general and administrative
expense was primarily attributable to increases in legal, accounting, consulting
and employee benefit related expenses. Of the increase approximately $150,000 in
additional legal and accounting fees related to a conversion of a number of our
subsidiaries from C-Corporations to Limited Liability Company's ("LLC's") as
part of a state tax saving strategy. We anticipate approximately $150,000 in
state tax savings per year as a result of the reorganization. The balance of the
increases in legal, consulting and employee benefit related expenses are
primarily the result of recent acquisitions.
22
We generated net income in the amount of approximately $4,229,000 ($0.20
per share on a diluted basis) during the three months ended June 30, 2003,
compared with net income of $3,665,000 ($0.17 per share on a diluted basis) for
the three months ended June 30, 2002, an increase of approximately $564,000. The
increase in net income was principally the result of the $92,000 decrease in
operating profit, offset by a $210,000 decrease in interest expense, $367,000
decrease in other expense, and a $79,000 decrease in income taxes. The decrease
in interest expense was the result of lower interest rates over the prior
period. The decrease in other expense was primarily the result of the gains
recognized on the sale of two of our AM radio stations in the Columbus, Ohio and
Springfield, Illinois markets.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE, 30, 2002
The following tables summarize our results of operations for the six
months ended June 30, 2003 and 2002. The as-reported percentages reflect our
historical financial results and include the results of operations for stations
that we did not own for the entire comparable period. The same station
percentages reflect the results of operations for stations that we owned for the
entire comparable period.
CONSOLIDATED RESULTS OF OPERATIONS
(In thousands of dollars) Six Months Ended As-Reported Same Station
June 30, % Increase % Increase
2003 2002 (Decrease) (Decrease)
--------------------------------------------------------------------
Net operating revenue $57,931 $53,691 7.90% .97%
Station operating expense * 39,310 35,497 10.74% .85%
------------------------------
Station operating income 18,621 18,194 2.35% 1.19%
Corporate G&A 3,141 2,834 10.83% N/A
Depreciation 3,390 2,975 13.95% 7.86%
Amortization 210 250 (16.00%) (28.00%)
------------------------------
Operating profit 11,880 12,135 (2.10%) (2.15%)
Interest expense 2,692 2,708 (.59%)
Other (income)expense (365) 3 N/A
Income taxes 3,675 3,959 (7.17%)
------------------------------
Net income $ 5,878 $ 5,465 7.56%
==============================
Basic earnings per share $.28 $.27 6.21%
==============================
Diluted earnings per share $.28 $.26 6.76%
==============================
RADIO BROADCASTING SEGMENT
(In thousands of dollars) Six Months Ended As-Reported Same Station
June 30, % Increase % Increase
2003 2002 (Decrease) (Decrease)
--------------------------------------------------------------------
Net operating revenue $52,200 $47,931 8.91% 1.14%
Station operating expense * 34,606 30,931 11.88% .53%
------------------------------
Station operating income 17,594 17,000 3.49% 2.27%
Depreciation 2,515 2,168 16.01% 7.65%
Amortization 203 238 (14.71%) (27.31%)
------------------------------
Operating profit $14,876 $14,594 1.93% 1.95%
23
TELEVISION BROADCASTING SEGMENT
(In thousands of dollars) Six Months Ended As-Reported Same Station
June 30, % Increase % Increase
2003 2002 (Decrease) (Decrease)
--------------------------------------------------------------------
Net operating revenue $5,731 $5,760 (.50%) (.50%)
Station operating expense * 4,704 4,566 3.02% 3.02%
------------------------------
Station operating income 1,027 1,194 (13.99%) (13.99%)
Depreciation 776 708 9.60% 9.60%
Amortization 7 12 (41.67%) (41.67%)
------------------------------
Operating profit $ 244 $ 474 (48.52%) (48.52%)
* Programming, technical, selling and station general and administrative
expenses.
For the six months ended June 30, 2003, net operating revenue was
$57,931,000 compared with $53,691,000 for the six months ended June 30, 2002, an
increase of $4,240,000 or 8%. Approximately $3,728,000 or 88% of the increase
was attributable to revenue generated by stations that we did not own or operate
for the comparable period in 2002. Net operating revenue generated by stations
that we owned and operated for the entire comparable period ("same station")
increased by approximately 1% ($512,000). This increase was primarily the result
of an increase in local revenue in our radio segment.
Station operating expense (i.e., programming, technical, selling and
station general and administrative expenses) increased by $3,813,000 or 11% to
$39,310,000 for the six months ended June 30, 2003, compared with $35,497,000
for the six months ended June 30, 2002. Of the total increase, approximately
$3,515,000 or 92% was the result of the impact of the operation of stations that
we did not own or operate for the comparable period in 2002. Station operating
expense increased by approximately $298,000 or 1% on a same station basis.
Operating profit decreased by $255,000 or 2% to $11,880,000 for the six
months ended June 30, 2003, compared with $12,135,000 for the six months ended
June 30, 2002. The decrease was primarily the result of the $4,240,000 increase
in net operating revenue offset by the $3,813,000 increase in station operating
expense, a $307,000 or 11% increase in corporate general and administrative
expense and a $415,000 or 14% increase in depreciation expense as a result of
recent acquisitions. The increase in corporate general and administrative
expense was primarily attributable to increases in legal, accounting, consulting
and employee benefit related expenses. Of the increase approximately $150,000 in
additional legal and accounting fees related to a conversion of a number of our
subsidiaries from C-Corporations to Limited Liability Company's ("LLC's") as
part of a state tax saving strategy. We anticipate approximately $150,000 in
state tax savings per year as a result of the reorganization. The balance of the
increases legal, consulting and employee benefit related expenses are primarily
the result of recent acquisitions.
24
We generated net income in the amount of approximately $5,878,000 ($0.28
per share on a diluted basis) during the six months ended June 30, 2003,
compared with net income of $5,465,000 ($0.26 per share on a diluted basis) for
the six months ended June 30, 2002, an increase of approximately $413,000. The
increase in net income was principally the result of the $255,000 decrease in
operating profit offset by a $16,000 decrease in interest expense, a $368,000
decrease in other expense, and a $284,000 decrease in income taxes. The decrease
in interest expense was the result of lower interest rates over the prior
period. The decrease in other expense was primarily the result of the gains
recognized on the sale of two of our AM radio stations in the Columbus, Ohio and
Springfield, Illinois markets.
OUTLOOK
The following statements are forward-looking statements and should be read
in conjunction with "Forward-Looking Statements" below.
Based on the economic and market conditions as of August 6, 2003, for the
quarter ending September 30, 2003 we anticipate net operating revenue of
approximately $31,000,000 to $32,000,000, station operating expense of
approximately $19,500,000 to $20,500,000 and station operating income of
approximately $11,500,000 to $12,500,000.
Based on the economic and market conditions as of August 6, 2003, for the
year ending December 31, 2003 we anticipate net revenue and station operating
income on a pro forma basis to be flat to up 2%.
FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. In addition, words such
as "believes," "anticipates," "estimates," "plans", "expects," and similar
expressions are intended to identify forward-looking statements. These
statements are made as of the date of this report or as otherwise indicated,
based on current expectations. We undertake no obligation to update this
information. A number of important factors could cause our actual results for
2003 and beyond to differ materially from those expressed in any forward-looking
statements made by or on our behalf. Forward looking statements are not
guarantees of future performance as they involve a number of risks,
uncertainties and assumptions that may prove to be incorrect and that may cause
our actual results and experiences to differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. The
risks, uncertainties and assumptions that may affect our performance include our
financial leverage and debt service requirements, dependence on key personnel,
dependence on key stations, U.S. and local economic conditions, our ability to
successfully integrate acquired stations, regulatory requirements, new
technologies, natural disasters and terrorist attacks. We cannot be sure that we
will be able to anticipate or respond timely to changes in any of these factors,
which could adversely affect the operating results in one or more fiscal
quarters. Results of operations in any past period should not be considered, in
and of itself, indicative of the results to be expected for future periods.
Fluctuations in operating results may also result in fluctuations in the price
of our stock.
25
For a more complete description of the prominent risks and uncertainties
inherent in our business, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward Looking Statements; Risk Factors"
in our Form 10-K for the year ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, we had $109,946,000 of long-term debt (including the
current portion thereof) outstanding and approximately $20,000,000 of unused
borrowing capacity under the Credit Agreement in place at June 30, 2003 (the
"Old Credit Agreement").
Our Old Credit Agreement had three financing facilities (the
"Facilities"): a $105,000,000 senior secured term loan (the "Term Loan"), a
$8,500,000 senior secured term loan facility (the "Acquisition Facility"), and a
$20,000,000 senior secured revolving credit facility (the "Revolving Facility").
As of June 30, 2003 we had $100,625,000 outstanding under the Term Loan
and $8,146,000 under the Acquisition Facility. The Acquisition Facility was used
for permitted acquisitions and to pay related transaction expenses. On March 28,
2003, the Acquisition Facility converted to a five and a half year term loan.
On July 29, 2003, we entered into a new credit agreement (the "Credit
Agreement") to refinance our outstanding debt under the Old Credit Agreement.
Our current financing facility (the "Facility") is a $200,000,000 reducing
revolving line of credit (the "Reducing Revolver"). The Facility matures July
29, 2010. Our indebtedness under the Facility is secured by a first priority
lien on substantially all of our assets and of our subsidiaries, by a pledge of
our subsidiaries' stock and by a guarantee of our subsidiaries.
The Reducing Revolver may be used for general corporate purposes,
including working capital, capital expenditures, permitted acquisition and
related transaction expenses and permitted stock buybacks. On March 31, 2003,
the Revolving Commitments (as defined in the Credit Agreement) will be
permanently reduced quarterly in amounts ranging from 3.125% to 12.5% of the
total Revolving Commitments in effect on March 31, 2006. Any outstanding balance
under the Reducing Revolver will be due on the maturity date of July 29, 2010.
In addition, the Revolving Commitments shall be further reduced by specified
percentages of Excess Cash Flow (as defined in the New Credit Agreement) based
on leverage ratios. At June 30, 2003 we have classified our current and
non-current portion of long-term debt in accordance with the new Credit
Agreement.
Interest rates under the Facility are payable, at our option, at
alternatives equal to LIBOR plus 1.375% to 2.0% or the Agent bank's base rate
plus 0.125% to 0.75%. The spread over LIBOR and the base rate vary from time to
time, depending upon our financial leverage. We also pay quarterly commitment
fees of 0.375% to 0.625% per annum on the unused portion of the Facility.
26
The Credit Agreement contains a number of financial covenants (all of
which we were in compliance with at June 30, 2003) which, among other things,
require us to maintain specified financial ratios and impose certain limitations
on us with respect to investments, additional indebtedness, dividends,
distributions, guarantees, liens and encumbrances.
We use interest rate swap agreements to reduce our risk of rising interest
rates. Our swap agreements are used to convert the variable Eurodollar interest
rate of a portion of our bank borrowings to a fixed interest rate.
At June 30, 2003, we had two separate interest rate swap agreements, each
with the following terms:
o Notional amount of $20,000,000. We pay 3.67% calculated on the
notional amount. We receive LIBOR (1.100% at June 30, 2003)
calculated on the notional amount of $20,000,000. This agreement
expires in September 2003.
The fair value of these swap agreements at June 30, 2003 was approximately
($260,000), which has been recorded as a liability in our balance sheet.
Net receipts or payments under the agreements are recognized as an
adjustment to interest expense. Approximately $496,000 in additional interest
expense was recognized as a result of these interest rate swap agreements for
the six months ended June 30, 2003. An aggregate increase in interest expense of
approximately $1,476,000 has been recognized since the inception of the
agreements.
During the six months ended June 30, 2003 and 2002, we had net cash flows
from operating activities of $9,966,000 and $10,250,000, respectively. We
believe that cash flow from operations will be sufficient to meet quarterly debt
service requirements for interest and scheduled payments of principal under the
Credit Agreement. However, if such cash flow is not sufficient we may be
required to sell additional equity securities, refinance our obligations or
dispose of one or more of our properties in order to make such scheduled
payments. There can be no assurance that we would be able to effect any such
transactions on favorable terms, if at all.
On March 11, 2003 we acquired an AM radio station (WOXL-AM) serving the
Asheville, North Carolina market for approximately $350,000. We financed this
acquisition through funds generated from operations.
On March 28, 2003 we acquired an FM radio station (WODB-FM) serving the
Columbus, Ohio market for approximately $10,000,000. In conjunction with this
transaction we sold our AM radio station (WVKO-AM) serving the Columbus, Ohio
market for approximately $1,000,000. We financed this acquisition through
borrowings under the Credit Agreement of $8,500,000 and through funds generated
from operations.
On April 1, 2003, we acquired an FM radio station (WINQ-FM) serving the
Winchendon, Massachusetts market for approximately $420,000. We financed this
acquisition through funds generated from operations.
27
We continue to actively seek and explore opportunities for expansion
through the acquisition of additional broadcast properties.
In September 2002, we modified our Stock Buy-Back Program so that we may
purchase up to $10,000,000 of our Class A Common Stock. From the inception of
the Stock Buy-Back program in 1998 through June 30, 2003, we have repurchased
409,065 shares of our Class A Common Stock for approximately $4,832,000.
We anticipate that any future acquisitions of radio and television
stations and purchases of Class A Common Stock under the Stock Buy-Back Program
will be financed through funds generated from operations, borrowings under the
Credit Agreement, additional debt or equity financing, or a combination thereof.
However, there can be no assurances that any such financing will be available.
Our capital expenditures, exclusive of acquisitions, for the six months
ended June 30, 2003 were approximately $4,203,000 ($3,417,000 in 2002). We
anticipate capital expenditures in 2003 to be approximately $8,500,000, which we
expect to finance through funds generated from operations or additional
borrowings under the Credit Agreement.
SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We have future cash obligations under various types of contracts under the
terms of our Credit Agreement, operating leases, programming contracts,
employment agreements, and other operating contracts. For additional information
concerning our future cash obligations see "Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operation-Summary Disclosures
About Contractual Obligations and Commercial Commitments" in our Annual Report
on Form 10-K for the year ended December 31, 2002.
There have been no material changes to such contracts/commitments during
the six months ended June 30, 2003. We anticipate that the above contractual
cash obligations will be financed through funds generated from operations or
additional borrowings under the Credit Agreement, or a combination thereof.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States, which
require us to make estimates, judgments and assumptions that affect the reported
amounts of certain assets, liabilities, revenues, expenses and related
disclosures and contingencies. We evaluate estimates used in preparation of our
financial statements on a continual basis. Our critical accounting policies are
described in "Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations -Critical Accounting Policies" in our Annual Report on
Form 10-K for the year ended December 31, 2002.
28
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, we adopted SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition, construction,
development, and/or the normal operation of a long lived asset. The adoption of
SFAS 143 did not materially impact our financial position or results of
operations.
On January 1, 2003 we adopted SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." The adoption of SFAS 146 did not
materially impact our financial position or results of operations.
On January 1, 2003 we adopted the initial recognition provisions of
Financial Accounting Standards Board ("FASB") Interpretation No. 45 ("FIN 45"),
entitled "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". We adopted the
disclosure requirements of FIN 45 in 2002. This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. This interpretation
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The adoption of Interpretation No. 45 did not materially
impact our financial position, cash flows or results of operations. See Note 4
for a guarantee that we entered into on March 7, 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FIN 46 entitled "Consolidation of Variable Interest Entities." This
interpretation requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. The Interpretation also requires
disclosures about variable interest entities that the company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003 and existing variable interest
entities in the first fiscal year or interim period beginning after June 15,
2003. We have not yet determined what the effect, if any, this interpretation
will have on our financial statements for the provisions impacting variable
interest entities created prior to February 1, 2002.
INFLATION
The impact of inflation on our operations has not been significant to
date. There can be no assurance that a high rate of inflation in the future
would not have an adverse effect on our operations.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to "Item 7A. Quantitative and Qualitative Disclosures about Market Risk"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Market Risk and Risk Management Policies" in our Annual
Report on Form 10-K for the year ended December 31, 2002 for a complete
discussion of our market risk. There have been no material changes to the market
risk information included in our 2002 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Our principal executive and financial officers have concluded, based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q, that our disclosure controls and procedures under Rule 13a-14 of the
Securities Exchange Act of 1934 are effective to ensure that information we are
required to disclose in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and include controls and procedures designed to
ensure that information we are required to disclose in such reports is
accumulated and communicated to management, including our principal executive
and financial officers, as appropriate to allow timely decisions regarding
required disclosure.
Subsequent to our evaluation, there were no significant changes in
internal controls or other factors that could significantly affect these
internal controls.
30
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 12, 2003.
(b) Not applicable
(c) At the Annual Meeting of Stockholders, the stockholders voted on
the following matters:
(1) The seven nominees for election as directors for the ensuing
year, and until their successors are elected and qualified,
received the following votes:
Name For Withheld
---- --- --------
Brian W. Brady* 16,441,640 801,697
Jonathan Firestone* 16,441,640 801,697
Edward K. Christian 17,260,909 2,342,798
Donald Alt 18,799,444 804,263
Kristin Allen 18,824,092 779,615
Gary Stevens 18,865,648 738,059
Robert Maccini 18,822,148 781,559
-------------------------------------------------------
* Elected by the holders of Class A Common Stock.
(2) The proposal to ratify the selection by the Board of
Directors of Ernst & Young LLP as independent auditors to
audit our consolidated financial statements for the fiscal
year ending December 31, 2003 was approved with 39,996,950
votes cast for, 849,389 votes cast against, 698 abstentions
and 0 broker non-votes.
(3) The proposal to ratify the adoption by the Board of
Directors of the 2003 Employee Stock Option Plan was
approved with 34,969,389 votes cast for, 5,269,783 votes
cast against, 11,195 abstentions and 596,670 broker
non-votes.
(d) Not applicable.
31
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(b) Credit Agreement dated as of July 29, 2003 between the Company
and Union Bank of California, as Syndication Agent, Fleet
National Bank as Documentation Agent and The Bank of New York as
Administrative Agent.
31.1 Certification of Chief Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 and Rule 13-14(b) of the Securities Exchange Act, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 and Rule 13-14(b) of the Securities Exchange Act, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
Financial
Statements
Date Items Reported Filed
------- ----------------------------------------- ----------
4/29/03 Item 9 - Regulation FD Disclosure None
Item 12 - Results of Operations and
Financial Condition
5/27/03 Item 9 - Regulation FD Disclosure None
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAGA COMMUNICATIONS, INC.
Date: August 14, 2003 /s/ Samuel D. Bush
---------------------------------------
Samuel D. Bush
Senior Vice President, Chief Financial
Officer, and Treasurer
(Principal Financial Officer)
Date: August 14, 2003 /s/ Catherine A. Bobinski
---------------------------------------
Catherine A. Bobinski
Vice President, Corporate Controller and
Chief Accounting Officer
(Principal Accounting Officer)
33
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
4(b) Credit Agreement dated as of July 29, 2003 between the Company
and Union Bank of California, as Syndication Agent, Fleet
National Bank as Documentation Agent and The Bank of New York as
Administrative Agent.
31.1 Certification of Chief Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 and Rule 13-14(b) of the Securities Exchange Act, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 and Rule 13-14(b) of the Securities Exchange Act, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.