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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period for __________ to __________
Commission file number 1-11588
SAGA COMMUNICATIONS, INC.
_____________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 38-3042953
________________________________________ ______________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
73 Kercheval Avenue
Grosse Pointe Farms, Michigan 48236
________________________________________ ______________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 886-7070
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
________________________________________ ______________________________
Class A Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No___.
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Aggregate market value of the Class A Common Stock and the Class B Common
Stock (assuming conversion thereof into Class A Common Stock) held by
nonaffiliates of the registrant, computed on the basis of $19.875 per share (the
closing price of the Class A Common Stock on March 16, 1998 on the American
Stock Exchange): $176,543,504.
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 16,
1998 was 8,947,256 and 1,208,510, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 1998 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission on or before April 30, 1998) is
incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
The Company acquired an FM radio station (KAZR-FM) serving the Des Moines,
Iowa market on March 14, 1997. The purchase price was approximately $2,700,000.
The Company began operating the radio station under the terms of a local market
agreement on August 1, 1996, which remained in effect until such closing.
The Company acquired an FM radio station (KLTI-FM) serving the Des Moines,
Iowa market on April 17, 1997. The purchase price was approximately $3,200,000.
The Company began operating the radio station under the terms of a local market
agreement on January 1, 1997, which remained in effect until such closing.
The Company acquired two AM and two FM radio stations (WTAX-AM, WDBR-FM,
WVAX-AM, and WYXY-FM) serving the Springfield, Illinois market on May 5, 1997.
The purchase price was approximately $6,000,000. The Company began operating the
radio stations under the terms of a local market agreement on July 1, 1996,
which remained in effect until such closing.
The Company acquired two FM radio stations (WFMR-FM and WPNT-FM) serving
the Milwaukee, Wisconsin market on May 9, 1997. The purchase price was
approximately $5,000,000.
The Company acquired an FM radio station (WQLL-FM) serving the Manchester,
New Hampshire market on November 18, 1997. The purchase price was approximately
$3,400,000. The Company began operating the radio station under the terms of a
local market agreement on July 1, 1997, which remained in effect until such
closing.
The Company acquired the assets of a regional and state news and sports
information network (The Illinois Radio Network) serving more than 45 radio
stations throughout the state of Illinois, on November 25, 1997. The purchase
price was approximately $1,750,000.
On January 14, 1998 the Company signed a letter of intent to purchase a
regional and state news and sports information network (The Michigan Radio
Network) serving more than 55 radio stations throughout the state of Michigan
with an acquisition cost of up to $1,535,000, subject to certain adjustments.
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.
BUSINESS
The Company is a broadcast company whose business is primarily devoted to
acquiring, developing and operating radio and television stations. The Company
currently owns and operates one television station, one state radio network, and
twenty-four FM and thirteen AM radio stations serving twelve markets primarily
in the Midwest and along the Eastern Seaboard, including Columbus, Ohio;
Norfolk, Virginia; and Milwaukee, Wisconsin.
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The Company's television station KOAM-TV, serving the Joplin,
Missouri/Pittsburg, Kansas market, which ranked as market 146 by number of
television households, is one of four television stations in the market. The
station is a CBS affiliate and the number one rated television station, by
number of viewers, in the market. (All of the above information was derived from
Investing in Television Market Report 1997, based on A.C. Nielson ratings and
data.)
The following table sets forth certain information about the Company's
current radio stations and their markets:
1997
MARKET TARGET
RANKING DEMOGRAPHICS
BY RADIO RANKING (BY TARGET
STATION MARKET(a) REVENUE(b) STATION FORMAT LISTENERS)(c) DEMOGRAPHICS
- ------- --------- ---------- -------------- ------------- ------------
FM:
WSNY Columbus, OH 28 Adult Contemporary N/S Women 25-54
WKLH Milwaukee, WI 31 Classic Hits 1 Men 25-54
WLZR Milwaukee, WI 31 Album Oriented Rock 1 Men 18-34
WPNT Milwaukee, WI 31 Modern Adult Contemporary 4 Women 25-34
WFMR Milwaukee, WI 31 Classical 7 Adults 45+
WNOR Norfolk, VA 39 Album Oriented Rock 2(d) Men 18-34
WAFX Norfolk, VA 39 Classic Hits 3 Men 25-49
KSTZ Des Moines, IA 67 Hot Adult Contemporary 1 Women 18-34
KIOA Des Moines, IA 67 Oldies 2 Adults 35-54
KAZR Des Moines, IA 67 Album Oriented Rock 1 Men 18-34
KLTI Des Moines, IA 67 Soft Adult Contemporary 5(e) Women 35-54
WMGX Portland, ME 82 Hot Adult Contemporary 1 Women 25-54
WYNZ Portland, ME 82 Oldies 5 Adults 35-54
WPOR Portland, ME 82 Country 1(d,e) Adults 35+
WAQY Springfield, MA 85 Album Oriented Rock 1(d) Men 18-49
WYMG Springfield, IL 139 Classic Rock 2 Men 18-49
WQQL Springfield, IL 139 Oldies 6 Adults 25-54
WDBR Springfield, IL 139 Contemporary Hits 1 Women 18-34
WYXY Springfield, IL 139 Country 6 Adults 25-49
WZID Manchester, NH 140 Adult Contemporary 1 Adults 25-54
WQLL Manchester, NH 140 Oldies 4 Adults 25-54
WLRW Champaign, IL 165 Hot Adult Contemporary 1(e) Women 18-49
WIXY Champaign, IL 165 Country 1 Adults 25-54
WNAX Sioux City IA 232 Oldies 2 Men 35-54
AM:
WVKO Columbus, OH 28 Gospel N/S Adults 35+
WJYI Milwaukee, WI 31 Contemporary Christian N/R Adults 18+
WNOR Norfolk, VA 39 Album Oriented Rock 2(d) Men 18-34
KRNT Des Moines, IA 67 Nostalgia/Sports 5 Adults 35+
KXTK Des Moines, IA 67 Talk/Sports 14 Adults 35+
WGAN Portland, ME 82 News/Talk 1(e) Adults 35+
WZAN Portland, ME 82 News/Talk 7(e) Men 35-54
WPOR Portland, ME 82 Country 1(d) Adults 35+
WAQY Springfield, MA 85 Album Oriented Rock 1(d) Men 18-49
WTAX Springfield, IL 139 News/Talk 3 Adults 35+
WVAX Springfield, IL 139 News/Talk N/R Adults 35+
WFEA Manchester, NH 140 Nostalgia/Talk 3 Adults 35+
WNAX Yankton, SD N/A Full Service/Country 1 Adults 35+
- ----------
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The following refers to the table on the previous page about the Company's
current radio stations and their markets:
(a) Actual city of license may differ from metro market actually served.
(b) Derived from Investing in Radio 1997 Market Report.
(c) Information derived from most recent available Arbitron Radio Market
Report except for Columbus, for which information was derived from
Investing in Radio 1997 Market Report.
(d) AM and FM stations are simulcast. Accordingly, ranking information
pertains to the combined stations.
(e) Tied for position.
N/A Information currently not available.
N/R Station does not appear in Arbitron Radio Market Report.
N/S Non Subscriber - Station does not currently subscribe to Arbitron Radio
Market Report.
COMPANY STRATEGY
The Company's strategy is to operate top billing radio and television
stations in mid-sized markets. The Company prefers to operate in mid-sized
markets, which it defines as markets ranked (by market revenues) from 20 to 200
out of the markets summarized by Investing in Radio Market Report and Investing
in Television Market Report. The Company owns and/or operates at least one of
the top four billing stations in each of its radio markets for which independent
data exists. Twenty three of the 24 FM stations and 12 of the 13 AM stations
owned and/or operated by the Company subscribe to independent listener rating
services.
Based on the most recent information available, 11 of the 24 FM radio
stations and 4 of the 13 AM radio stations owned and/or operated by the Company
were ranked number one (by number of listeners), and its television station was
ranked number one (by number of viewers), in their target demographic markets.
Programming and marketing are key components in the Company's strategy to
achieve top ratings in both its radio and television operations. In many of the
Company's markets, the three or four most highly rated stations (radio and/or
television) receive a disproportionately high share of the market's advertising
revenues. As a result, a station's revenue is dependent upon its ability to
maximize its number of listeners/viewers within an advertiser's given
demographic parameters. In certain cases it is the practice of the Company to
use attributes other than specific market listener data for sales activities. In
those markets where sufficient alternative data is available, the Company does
not subscribe to an independent listener rating service.
The Company's radio stations employ a variety of programming formats,
including but not limited to Classic Hits, Adult Contemporary, Album Oriented
Rock, and Country. 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 Company's television station is a CBS affiliate. In addition to
securing network programming, the Company also carefully selects available
syndicated programming to maximize viewership. The Company also develops local
programming, including a strong local news franchise.
In operating its stations, the Company concentrates on the development of
strong decentralized local management, which is responsible for the day-to-day
operations of the station and is compensated based on the station's financial
performance, as well as other performance factors that are deemed to effect the
long-term ability of the stations to achieve financial performance objectives.
Corporate management is responsible for long-range planning, establishing
policies and procedures, resource allocation and monitoring the activities of
the stations.
The Company continues to actively seek and explore opportunities for
expansion through the acquisition of additional broadcast properties. With
passage of the Telecommunications Act of 1996 (the "Telecommunications Act")
(see "Federal Regulation of Radio and Television Broadcasting"), a company is
now able to own as many as 8 radio stations in a single market. Another
significant provision of the Telecommunications Act was the lifting of the
limitations on the number of radio stations one organization can own in total.
The Company seeks to acquire reasonably priced broadcast properties with
significant growth potential that are located in markets with well-established
and relatively stable economies. The Company often focuses on local economies
supported by a strong presence of state or federal government or one or more
major universities. Future acquisitions will be subject to the availability of
financing and compliance with the Communications Act of 1934 (the
"Communications Act") and Federal Communications Commission ("FCC") rules.
Although the Company reviews acquisition opportunities on an ongoing basis, it
has no other present understandings, agreements or arrangements to acquire or
sell any radio or television stations, other than those discussed herein.
ADVERTISING SALES
Virtually all of the Company's revenue is generated from the sale of
advertising for broadcast on its stations. Depending on the format of a
particular radio station, there are a predetermined number of advertisements
broadcast each hour. In the case of the Company's television station, the number
of advertisements broadcast may be limited by certain network affiliation and
syndication agreements and, with respect to programs designed for children,
federal regulation. The Company determines the number of advertisements
broadcast hourly that can maximize a station's available revenue dollars without
jeopardizing listening/viewing levels. While there may be shifts from time to
time in the number of advertisements broadcast during a particular time of the
day, the total number of advertisements broadcast on a particular station
generally does not vary significantly from year to year. Any change in the
Company's revenue, with the exception of those instances where stations are
acquired or sold, is generally the result of pricing adjustments which are made
to ensure that the station efficiently utilizes available inventory.
Advertising rates charged by radio and television stations are generally
based primarily on a station's ability to attract audiences in the demographic
groups targeted by advertisers (as measured by rating service surveys
quantifying the number of listeners/viewers tuned to the station at various
times); the number of stations in the market competing for the same demographic
group; the supply of and demand for radio advertising time; and other
qualitative factors, including rates charged by competing radio stations within
a given market. Radio rates are generally highest during morning and afternoon
drive-time hours, while television advertising rates are generally higher during
prime time evening viewing periods. Most advertising contracts are short-term,
generally running for only a few weeks, providing broadcasters the ability to
modify advertising rates as dictated by such variables as changes in station
ownership within a market, changes in listener/viewer ratings and changes in the
business climate within a particular market, any of which may have a significant
impact on the available advertising time on a particular station.
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Approximately 81% of the Company's revenue in fiscal 1997 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 1997 was approximately $13,791,000 or 19%.
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, coupons and billboard
advertising, also compete with the Company's stations for advertising revenues.
The radio and television broadcasting industries are also subject to
competition from new media technologies that may be developed or introduced,
such as the delivery of audio programming by cable television systems or direct
reception from satellites. Although the Company recognizes that technological
advances within the broadcast industry can be significant, it is not aware of
any such advances or developments that it has not already implemented that would
have an effect on its competitive position within its markets. The Company
cannot predict the effect, if any, that any such new technologies may have on
the broadcasting industry taken as a whole.
EMPLOYEES
As of December 31, 1997, the Company had approximately 520 full-time
employees and 227 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.
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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. On April 12,1996, the FCC revised its rules to conform to new section
309(k) of the Communications Act which governs the license renewal process of
the Communications Act. Comparative hearings between incumbent licensees and
mutually-exclusive applicants for new stations were eliminated with respect to
renewal applications filed after May 1, 1995. Under the new "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. The Communications Act makes the standard for
filing petitions to deny renewal applications conform to the statutory renewal
standards. Thus, 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
new "two-step" renewal process. Under the Communications Act, if a broadcast
station fails to transmit signals for any consecutive 12-month period, the FCC
license expires at the end of that period.
The Company owns television station KOAM-TV, channel 7, serving the
Joplin, Missouri/Pittsburg, Kansas market, operating at a power of 316,000 watts
(visual), and 61,600 watts (aural). The expiration date of the stations FCC
authorization is June 1, 1998. An application for renewal of license is pending
at the FCC.
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The following table sets forth the market and broadcast power of each of the
Company's radio stations and the date on which each such station's FCC license
expires:
Expiration
Date of FCC
Station Market(1) Power (Watts)(2) Authorization
- ------- --------- ---------------- -------------
FM:
WSNY Columbus, OH 50,000 October 1, 2004
WKLH Milwaukee, WI 50,000 December 1, 2004
WLZR Milwaukee, WI 50,000 December 1, 2004
WFMR Milwaukee, WI 6,000 December 1, 2004
WPNT Milwaukee, WI 6,000 December 1, 2004
WNOR Norfolk, VA 50,000 October 1, 2003(3)
WAFX Norfolk, VA 100,000 October 1, 2003(3)
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
WAQY Springfield, MA 50,000 April 1, 1998(4)
WMGX Portland, ME 50,000 April 1, 1998(4)
WYNZ Portland, ME 25,000 April 1, 1998(4)
WPOR Portland, ME 50,000 April 1, 1998(4)
WYMG Springfield, IL 50,000 December 1, 2004
WQQL Springfield, IL 50,000 December 1, 2004
WDBR Springfield, IL 50,000 December 1, 2004(3)
WYXY Lincoln, IL 25,000 December 1, 2004(3)
WZID Manchester, NH 50,000 April 1, 1998(4)
WQLL Manchester, NH 6,000 April 1, 1998(4)
WLRW Champaign, IL 50,000 December 1, 2004
WIXY Champaign, IL 25,000 December 1, 2004
WNAX Yankton, SD 100,000 April 1, 2005
AM:
WVKO Columbus, OH 1,000 October 1, 2004
WJYI Milwaukee, WI 1,000 December 1, 2004
WNOR Norfolk, VA 1,000 October 1, 2003(3)
KRNT Des Moines, IA 5,000 February 1, 2005
KXTK Des Moines, IA 10,000 February 1, 2005
WAQY Springfield, MA 2,500(5) April 1, 1998(4)
WGAN Portland, ME 5,000 April 1, 1998(4)
WZAN Portland, ME 5,000 April 1, 1998(4)
WPOR Portland, ME 1,000 April 1, 1998(4)
WTAX Springfield, IL 1,000 December 1, 2004(3)
WVAX Lincoln, IL 1,000(5) December 1, 2004(3)
WFEA Manchester, NH 5,000 April 1, 1998(4)
WNAX Yankton, SD 5,000 April 1, 2005
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The following information pertains to the table on the previous page that sets
forth the market and broadcast power of each of the Company's radio stations and
the date on which each such station's FCC license expires:
(1) Some stations are licensed to a different community located within the
market that they serve.
(2) Some stations are licensed to operate with a combination of effective
radiated power and antenna height which may be different from, but provide
equivalent coverage to, the power shown. WVKO(AM) and KXTK(AM) operate
with lower power at night than the power shown.
(3) License renewed subject to EEO reporting conditions. The Company has
sought reconsideration of the FCC's action.
(4) Timely-filed application for renewal of license of this station is pending
before the FCC, which extends the licensee's authority to operate the
station.
(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.
The Communications Act and FCC rules also generally prohibit or restrict
the common ownership, operation or control of a radio broadcast station and a
television broadcast station serving the same geographic market, and of a radio
broadcast station and a daily newspaper serving the same geographic market.
Additionally, the Communications Act and FCC rules also generally prohibit or
restrict the common ownership, operation or control of a television broadcast
station and a radio broadcast station serving the same geographic market, of a
television broadcast station and a daily newspaper serving the same geographic
market, and of a television broadcast station and a cable television system
serving the same geographic market. Under these rules, absent waivers, the
Company would not be permitted to acquire any newspaper or television broadcast
station (other than low power television) in a geographic market in which it now
owns any radio broadcast properties, or to acquire any newspaper, television
broadcast station, radio broadcast station, or
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cable television system in a geographic market in which it now owns any
television broadcast station. The FCC's rules provide for the liberal grant of
waiver of the rule prohibiting ownership of radio and television stations in the
same geographic market in the top 25 television markets if certain conditions
are satisfied. Under the Communications Act, the FCC is directed to extend its
waiver policy (one-to-a-market policy) to any of the top 50 television markets.
The Communications Act also requires the FCC to conduct a rule-making to
determine whether to retain, modify, or eliminate limits on the number of
television stations an entity may own, operate, control or have a cognizable
interest in, within the same television market. In November 1996, the FCC
adopted a Further Notice of Proposed Rule Making to implement this section of
the Communications Act. The FCC revised its rules to permit a television station
to affiliate with two or more major networks of television broadcast stations
under certain conditions. (Major existing networks are still subject to the
FCC's dual network ban).
The Company is permitted to own an unlimited number of radio stations on a
nationwide basis (subject to local ownership restrictions described below), and
an unlimited number of television stations on a nationwide basis so long as the
ownership of the stations would not result in an aggregate national audience
reach (i.e., the total number of television households in the Arbitron Area of
Dominant Influence (ADI) markets in which the relevant stations are located
divided by the total national television households as measured by ADI data at
the time of a grant, transfer or assignment of a license) of 35%. On March 12,
1998,the Commission initiated its biennial review of broadcast ownership rules
to review (a) the UHF Television Discount which attributes 50% of television
households in a local television market to the audience reach of a UHF
television station for purposes of calculating whether a television station
owner complies with the 35% national audience reach cap; (b) the Daily
Newspaper/Broadcast Cross-Ownership Rule which prohibits common ownership of a
broadcast station and daily newspaper in the same locale; (c) the
Cable/Television Cross-Ownership Rule which effectively prohibits common
ownership of a broadcast television station and cable system in the same market;
(d) the Experimental Broadcast Station Multiple Ownership Rule which limits the
number of experimental broadcast stations that can be licensed to or controlled
by a person; (e) the National Television Ownership Rule which eliminates a
numerical limit on the number of television stations a party may own nationally
and increases the national "audience reach" cap of television station ownership
from 25% to 35% of television households nationally; (f) the Local Radio
Ownership Rule which allows a party to own up to 8 commercial radio stations in
a market depending on the number of commercial radio stations in the market; (g)
the Dual Network Rule which in effect permits an entity to maintain two or more
broadcast networks unless such dual or multiple networks are composed of (1) two
or more of the four major networks (ABC, CBS, Fox, NBC), or (2) any of the four
major networks and one of the two emerging networks (WBTN, UPN). The Commission
also reviewed and restated its approach to granting conditional waivers of
broadcast ownership rules that are under active consideration by the Commission
in a rulemaking or inquiry proceeding.
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Under the Communications Act, the Company is permitted to own radio
stations (without regard to the audience shares of the stations) based upon the
number of radio stations in the relevant radio market as follows:
Number of Stations Number of Stations
In Radio Market Company Can Own
- ------------------ ------------------
14 or Fewer Total of 5 stations, not more than 3 in the same service
(AM or FM) except the Company cannot own more than 50%
of the stations in the market.
15-29 Total of 6 stations, not more than 4 in the same service
(AM or FM).
30-44 Total of 7 stations, not more than 4 in the same service
(AM or FM).
45 or More Total of 8 stations, not more than 5 in the same service
(AM or FM).
Notwithstanding the limitations described above, new rules to be
promulgated under the Communications Act also will permit the Company to own,
operate, control or have a cognizable interest in additional radio broadcast
stations if the FCC determines that such ownership, operation, control or
cognizable interest will result in an increase in the number of radio stations
in operation. No firm date has been established for initiation of this
proceeding.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding broadcast licenses, the interests of officers,
directors and those who, directly or indirectly, have the right to vote 5% or
more of the corporation's stock (or 10% or more of such stock in the case of
insurance companies, mutual funds, bank trust departments and certain other
passive investors that are holding stock for investment purposes only) are
generally attributable, as are positions of an officer or director of a
corporate parent of a broadcast licensee. Currently, only two of the Company's
officers and directors have an attributable interest in any company applying for
or licensed to operate broadcast stations other than the Company.
On November 5, 1996, the FCC released another further notice of proposed
rulemaking proposing to liberalize the national television ownership limits, to
relax or to eliminate the prohibition of ownership of two or more television
stations with overlapping grade B contours to grade A, and to eliminate the
radio-television cross-ownership rule and apply existing radio Local Market
Agreement (LMA) guidelines (as discussed below) to television stations. The
Company cannot predict whether any of these proposals will ultimately be adopted
by the FCC.
On March 12, 1992, the FCC initiated an inquiry and rulemaking proceeding
in which it solicited comment on whether it should alter its ownership
attribution rules by (a) raising the basic benchmark for attributing ownership
in a corporate licensee from 5% to 10% of the licensee's voting stock; (b)
increasing the attribution benchmark for "passive investors" in corporate
licensees from 10% to 20% of the licensee's voting stock; (c) broadening the
class of investors eligible for "passive investor" status to include Small
Business and Minority Enterprise Small Business Investment Companies; and (d)
exempting certain widely-held limited partnership interests from attribution
where each individual interest represents an insignificant percentage of total
partnership
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equity. On January 12, 1995, the FCC released a Further Notice of Proposed
Rulemaking wherein it sought to undertake a thorough review of its attribution
rules. The FCC incorporated by reference those comments filed in response to its
earlier Notice of Inquiry and asked for updated information on all of the issues
raised therein. The FCC also sought comments on the following additional
issues:(a) the relevance of its attribution rules as applied to other
communications services (such as cable, multi-point distribution systems,
personal communications services, and specialized mobile radio); (b) the
relevance of other agencies' attribution benchmarks; (c) whether non-voting
stock should be attributed in certain circumstances; (d) how to treat limited
liability companies for attribution purposes; (e) whether to eliminate its
cross-interest policy; and (f) whether certain business interrelationships (such
as debt-holders) warrant attribution. On November 5, 1996, the FCC adopted
another Further Notice of Proposed Rule Making to inquire into these matters.
The Company cannot predict whether any of these proposals will ultimately be
adopted by the FCC.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to
serve the "public interest". Since the late 1970s, the FCC gradually has relaxed
or eliminated many of the more formalized procedures it developed to promote the
broadcast of certain types of programming responsive to the needs of a station's
community of license. However, licensees continue to be required to present
programming that is responsive to community problems, needs and interests and to
maintain certain records demonstrating such responsiveness. Complaints from
listeners concerning a station's programming often will be considered by the FCC
when it evaluates renewal applications of a licensee, although such complaints
may be filed at any time and generally may be considered by the FCC at any time.
Stations also must follow various rules promulgated under the Communications Act
that regulate, among other things, political advertising, sponsorship
identification, the advertisement of contests and lotteries, obscene and
indecent broadcasts, and technical operations, including limits on radio
frequency radiation. In addition, licensees must develop and implement
affirmative action programs designed to promote equal employment opportunities,
and must submit reports to the FCC with respect to these matters on an annual
basis and in connection with a renewal application. 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 programming specifically designed to
serve such needs). Licensees are required to publicize the availability of this
programming and to file annually a report with the FCC on these programs and
related matters. On January 1, 1998, a new FCC rule became effective which
requires television stations to provide closed captioning for certain video
programming according to a schedule that gradually increases the amount of video
programming that must be provided with captions.
Failure to observe these or other rules and policies can result in the
imposition of various sanctions, including monetary forfeitures, the grant of
"short" (less than the full eight-year) renewal terms or, for particularly
egregious violations, the denial of a license renewal application or the
revocation of a license.
LOCAL MARKET AGREEMENTS. A number of radio stations, including the
Company's stations, have entered into what have commonly been referred to as
"Local Market Agreements", or "LMAs". While these agreements may take varying
forms, under a typical LMA, separately owned and licensed radio stations agree
to enter into cooperative arrangements of varying sorts, subject to compliance
with the requirements of antitrust laws and with the FCC's rules and policies.
Under these types of arrangements, separately-owned stations agree to function
cooperatively in terms of programming, advertising sales, etc., subject to the
licensee of each station maintaining independent control over the programming
and station operations of its own station. One typical type of LMA is
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a programming agreement among two separately-owned radio stations serving a
common service area, whereby the licensee of one station purchases substantial
portions of the broadcast day on the other licensee's station, subject to
ultimate editorial and other controls being exercised by the latter licensee,
and sells advertising time during such program segments. Such arrangements are
an extension of the concept of "time brokerage" agreements, under which a
licensee of a station sells blocks of time on its station to an entity or
entities which purchase the blocks of time and which sell their own commercial
advertising announcements during the time periods in question.
In the past, the FCC has determined that issues of joint advertising sales
should be left to antitrust enforcement and has specifically revised its
so-called "cross-interest" policy to exempt time brokerage arrangements from the
scope of its applicability. Furthermore, the staff of the FCC's Mass Media
Bureau has held that such agreements are not contrary to the Communications Act
provided that the licensee of the station from which time is being purchased by
another entity maintains complete responsibility for and control over operations
of its broadcast station and assures compliance with applicable FCC rules and
policies.
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 which it could not own under the local ownership rules of
the FCC's multiple ownership rules. The FCC's rules also prohibit a broadcast
licensee from simulcasting more than 25% of its programming on another station
in the same broadcast service (i.e., AM-AM or FM-FM) whether it owns the
stations or through a time brokerage or LMA arrangement, where the brokered and
brokering stations serve substantially the same geographic area.
OTHER RECENT CHANGES. On March 12,1998, 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. On another front, on December
24, 1996, the FCC adopted a Report and Order establishing digital television
("DTV") (formerly advanced television or "ATV") standards. On February 17,1998
the FCC adopted a Memorandum Opinion and Order on Reconsideration of the Fifth
Report and Order that affirmed the FCC's service rules for the conversion by
all U.S. broadcasters to DTV, including build-out construction schedules, NTSC
(current system) and DTV channel simulcasting, and the return of analog
channels to the government by 2006. As a result, the Company's television
station is required to convert its operations from NTSC channel 7 to DTV
channel 30 by May 1, 2002, and to cease broadcasting on NTSC channel 7 in 2006,
and return channel 7 to the government. Also on February 17, 1998 the FCC
adopted a Memorandum Opinion and Order on Reconsideration of the Sixth Report
and Order that affirmed the FCC's DTV channel assignments and other technical
rules and policies. The FCC has not yet decided how the law requiring the
carriage of television signals on local cable television systems should apply
to DTV signals. The FCC is also considering proposals to charge broadcast
licensees an annual fee in connection with the broadcaster's offering of
ancillary or supplementary services on DTV spectrum for which a subscription
fee is required.
PROPOSED CHANGES. The FCC has under consideration, and may in the future
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could, directly or indirectly, affect the operation and
ownership of the Company and its broadcast properties. Such matters include a
pending proceeding to revise the FCC's equal employment opportunity
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requirements for broadcast stations and a proposal to streamline some of the
Commission's regulatory processes. 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. Congress has enacted the Balanced Budget Act of 1997 that authorizes
the FCC to use auctions for the allocation of radio broadcast spectrum
frequencies for commercial use. The implementation of this law could require the
Company to bid for the use of certain frequencies. Proposals are pending in
Congress to repeal the FCC's ban restricting broadcasters from owning newspapers
in the same market. Additionally, the FCC is considering the creation of a new
class of low power radio broadcast stations which could result in a new
nationwide low power FM service. 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.
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
Name Age Position
---- --- --------
Edward K. Christian 53 President, Chief
Executive Officer and
Chairman; Director
Steven J. Goldstein 41 Executive Vice
President and Group
Program Director
Samuel D. Bush 40 Vice President,
Chief Financial Officer
and Treasurer
Catherine A. Bobinski 38 Corporate Controller
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.
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Ms. Bobinski has been Corporate Controller since September 1991. Ms.
Bobinski is a certified public accountant.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Grosse Pointe Farms,
Michigan. The types of properties required to support each of the Company's
stations include offices, studios, transmitter sites and antenna sites. A
station's studios are generally housed with its offices in downtown or business
districts. The transmitter sites and antenna sites are generally located so as
to provide maximum market coverage.
The studios and offices of nine of the Company's twelve station locations,
as well as its corporate headquarters in Michigan, are located in facilities
owned by the Company. The remaining studios and offices are located in leased
facilities with lease terms that expire in 2 to 7 years. The Company owns or
leases its transmitter and antenna sites, with lease terms that expire in 1 to
91 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
(a) A Special Meeting of Stockholders was held on December 16, 1997.
(b) Not applicable
(c) At the Special Meeting of Stockholders, the stockholders voted on
the following matters:
(1) The proposal to ratify the adoption of an amendment to the
Restated Certificate of Incorporation to increase the
authorized Class A Common Stock from 15,000,000 shares to
35,000,000 shares and the authorized Class B Common Stock from
1,500,000 shares to 3,500,000 shares was approved with
18,314,584 votes cast for, 940,251 votes cast against, 10,391
abstentions and 0 broker non-votes.
(2) The proposal to ratify the adoption of an amendment to the
1992 Stock Option Plan to increase the number of shares of
Class A and Class B Common Stock that may be issued pursuant
to the Plan by 682,031 and 150,000, respectively, was approved
with 18,534,563 votes cast for, 589,178 votes cast against,
13,493 abstentions and 127,992 broker non-votes.
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(d) Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On April 1, 1997 the Company consummated a five-for-four split of its
Class A and Class B Common Stock, effective April 1, 1997, resulting in
additional shares being issued of approximately 1,772,000 and 242,000,
respectively, for holders of record on March 17, 1997.
On April 30, 1996 the Company consummated a five-for-four split of its
Class A and Class B Common Stock, resulting in additional shares being issued of
approximately 1,417,000 and 193,000, respectively, for holders of record on
April 17, 1996.
On July 31, 1995 the Company consummated a five-for-four split of its
Class A and Class B Common Stock, resulting in additional shares being issued of
approximately 1,130,000 and 155,000, respectively, for holders of record on July
17, 1995.
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
---- ---- ---
1996:
First Quarter $13.76 $10.16
Second Quarter $17.50 $13.68
Third Quarter $19.90 $14.60
Fourth Quarter $18.40 $15.30
1997:
First Quarter $18.70 $15.20
Second Quarter $20.25 $16.63
Third Quarter $24.63 $18.13
Fourth Quarter $25.00 $18.75
As of March 16, 1998, there were approximately 160 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,
-------------------------------------------------------
1997(1)(5) 1996(1)(4) 1995(1) 1994(1)(3) 1993(1)(2)
------- ------- ------- ------- -------
(in thousands except per share amounts)
OPERATING DATA:
Net Operating Revenue $66,258 $56,240 $49,699 $44,380 $34,604
Station Operating Expense (excluding
depreciation, amortization, corporate
general and administrative) 43,796 36,629 32,436 28,878 23,075
-------------------------------------------------------
Station Operating Income (excluding
depreciation, amortization, corporate
general and administrative) 22,462 19,611 17,263 15,502 11,529
Depreciation and amortization 5,872 5,508 6,551 5,781 4,753
Corporate General and Administrative 3,953 3,299 2,816 2,639 2,334
-------------------------------------------------------
Operating Profit 12,637 10,804 7,896 7,082 4,442
Interest Expense 4,769 3,814 3,319 2,867 2,707
Net Income $ 4,492 $ 3,935 $ 2,678 $ 2,306 $ 757
Basic earnings per share(6) $ .44 $ .39 $ .27 $ .23 $ .08
Cash Dividends Declared per common
share -- -- -- -- --
Weighted Average Common Shares 10,110 10,059 10,030 10,026 9,422
Diluted earnings per share(6) $ .44 $ .38 $ .26 $ .23 $ .08
Weighted Average Common Shares and
Common Equivalents 10,311 10,253 10,151 10,113 9,422
OTHER DATA:
After-tax cash flow(7) $11,083 $10,143 $ 9,564 $ 8,052 $ 5,331
After-tax cash flow per share-basic $ 1.10 $ 1.01 $ .95 $ .80 $ .57
After-tax cash flow per share-diluted $ 1.07 $ .99 $ .94 $ .80 $ .57
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DECEMBER 31,
-------------------------------------------------------
1997(5) 1996(4) 1995 1994(3) 1993(2)
------- ------- ------- ------- -------
(in thousands)
BALANCE SHEET DATA:
Working Capital $ 1,587 $10,997 $ 3,582 $ 3,828 $ 2,564
Net Fixed Assets 34,028 29,704 26,403 28,640 18,438
Net Intangible Assets 60,886 48,636 34,399 35,923 29,214
Total Assets 112,433 96,415 74,944 78,170 57,647
Long-term Debt Excluding Current Portion 53,466 52,355 32,131 39,969 24,191
Equity 38,255 33,113 28,882 26,328 24,023
- ----------
(1) All periods presented include the weighted average shares from public
offerings and common equivalents related to certain stock options. In
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 KIOA and KXTK, acquired in June, 1993; WYNZ and
WZAN, acquired in July, 1993; WQQL, acquired in November, 1993; and the
results of a local market agreement for WAFX which began in November,
1993.
(3) Reflects the results of WLZR and WJYI, acquired in April, 1994; WAFX,
acquired in April 1994; and KOAM TV, acquired October, 1994.
(4) Reflects the results of WNAX AM/FM, acquired in June, 1996; WPOR AM/FM,
acquired in June 1996; the results of a local market agreement for WDBR,
WYXY, WTAX, and WVAX which began in July, 1996; and the results of a local
market agreement for KAZR which began in August, 1996.
(5) Reflects the results of KAZR, acquired in March, 1997, KLTI, acquired in
April, 1997 and the results of a local market agreement for KLTI which
began in January, 1997; WDBR, WYXY, WTAX, and WVAX acquired in May, 1997,
WFMR and WPNT, acquired in May, 1997;WQLL acquired in November, 1997 and
the results of a local market agreement for WQLL which began in July,
1997; and the Illinois Radio Network acquired in November, 1997.
(6) The earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No.
128, "Earnings Per Share". For further discussion of earnings per share
and the impact of Statement No. 128, see the notes to the consolidated
financial statements.
(7) Defined as net income plus depreciation, amortization (excluding film
rights), loss on the sale of assets, and deferred taxes.
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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 the "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, 1997, 1996 and 1995, 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, 1997, 1996 and 1995, Columbus accounted for an aggregate of
24%, 22%, and 30%, respectively, and Milwaukee accounted for an aggregate of
24%, 23%, and 22%, 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. During 1996, a negative change
occurred in the relative market revenue share of the Company's Columbus
stations. As a result, the Columbus stations operating income decreased 17% from
approximately $5,111,000 for the year ended December 31, 1995, to $4,258,000 for
the comparable period in 1996. The Columbus stations operating income increased
29% to approximately $5,488,000 in 1997. As disclosed in previous filings, the
Company believed the 1996 decrease to be temporary in nature and not
representative of a trend affecting either the Columbus market or the Company as
a whole.
Because audience ratings in the local market are crucial to a station's
financial success, the Company endeavors to develop strong listener/viewer
loyalty. The Company believes that the diversification of formats on its radio
stations helps the Company to insulate itself from the effects of changes in
musical tastes of the public on any particular format.
The number of advertisements that can be broadcast without jeopardizing
listening/viewing levels (and the resulting ratings) is limited in part by the
format of a particular radio station and, in the case of television stations, by
restrictions imposed by the terms of certain network affiliation and syndication
agreements. The Company's stations strive to maximize revenue by constantly
managing the number of commercials available for sale and adjusting prices based
upon local market conditions. In the broadcasting industry, stations often
utilize trade (or barter) agreements to generate advertising time sales in
exchange for goods or services used or useful in the operation of the stations,
instead of for cash. The Company minimizes its use of trade agreements and
historically has sold over 95% of its advertising time for cash.
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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 1997, approximately
81% 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, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, the Company's net operating revenue
was $66,258,000 compared with $56,240,000 for the year ended December 31, 1996,
an increase of $10,018,000 or 18%. Approximately $3,390,000 or 34% of the
increase was attributable to stations owned and operated by the Company for at
least two years, representing a 6.5% increase in comparable station/comparable
period net operating revenue. The overall increase in comparable
station/comparable period revenue was primarily the result of increased
advertising rates at a majority of the Company's stations. In the Company's
Columbus, Ohio market there was a 16% ($1,419,000) increase in net revenue over
1996 reported levels, a reversal of the decreases in the market in 1996.
Improvements were noted in most of the Company's markets on a comparable
station/comparable period basis. The Company did, however, experience a decline
in the Norfolk, Virginia market, where there was a 12% ($805,000) decrease in
net revenue, and in the Champaign, Illinois market where there was a 6%
($209,000) decrease in net revenue. The balance of the increase in net operating
revenue of approximately $6,620,000 was attributable to revenue generated by
stations which were not owned or operated by the Company for the entire
comparable period in 1996.
The decrease in revenue in the Norfolk and Champaign markets was primarily
the result of aggressive pricing efforts by certain competing stations within
the respective markets. The Company believes the competitive pressure which
negatively impacted its revenue growth in these markets to be temporary in
nature, and expects 1998 revenue to approximate the 1997 levels and does not
anticipate that such effects on revenue will persist beyond 1998.
Station operating expense (i.e., programming, technical, selling, and
station general and administrative expenses) increased by $7,167,000 or 20% to
$43,796,000 for the year ended December 31, 1997, compared with $36,629,000 for
the year ended December 31, 1996. Of the total increase, approximately
$5,618,000 or 78% was the result of the impact of the operation of stations
which were not owned or operated by the Company for the entire comparable period
in 1996. The remaining balance of the increase in station operating expense of
$1,549,000 represents a total increase in station operating expense of 5% for
the year ended December 31, 1997 compared to the year ended December 31, 1996 on
a comparable station/comparable period basis.
Operating profit for the year ended December 31, 1997 was $12,637,000
compared to $10,804,000 for the year ended December 31, 1996, an increase of
$1,833,000 or 17%. The improvement was primarily the result of the $10,018,000
increase in net operating revenue, offset by the $7,167,000 increase in station
operating expense, a $364,000 or 6.6% increase in depreciation and amortization,
and a $654,000 or 19.8% increase in corporate general and administrative
charges. The increase in depreciation and amortization charges was principally
the result of the recent acquisitions. The increase in corporate general and
administrative charges was primarily attributable to deferred compensation
charges of $210,000 relating to an accrued bonus to the Company's principal
stockholder and approximately $50,000 pertaining to option grants primarily to
local station management. The remaining increase in corporate general and
administrative expenses of approximately $394,000 represents additional costs
due to the growth of the Company as a result of the Company's recent
acquisitions or an increase of approximately 12% in ordinary recurring expenses.
20
21
The Company generated net income in the amount of approximately $4,492,000
($0.44 per share) during the year ended December 31, 1997 compared with
$3,935,000 ($0.39 per share) for the year ended December 31, 1996, an increase
of approximately $557,000 or 14%. The increase in net income was principally the
result of the $1,833,000 improvement in operating profit, offset by a $955,000
increase in interest costs resulting primarily from an increase in borrowed
funds to finance the Company's 1997 acquisitions and a $322,000 increase in
income taxes directly associated with the improved operating performance of the
Company.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, the Company's net operating revenue
was $56,240,000 compared with $49,699,000 for the year ended December 31, 1995,
an increase of $6,541,000 or 13%. Approximately $2,532,000 or 39% of the
increase 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. Improvements were noted in each market on a
comparable station/comparable period basis, with the exception of the Company's
Columbus, Ohio market, where there was a 7.8% ($737,000) decrease in net
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. The balance of the increase in net operating revenue of
approximately $4,009,000 was primarily the result of the impact of stations the
Company acquired and/or began operating during 1996.
The decrease in revenue in the Columbus stations was primarily the result
of aggressive competitive pricing efforts by certain competing stations within
the Columbus market. Although the stations' combined revenue was below 1995
levels, WSNY-FM remained the top billing station in the Columbus market, based
on information available from an independent market revenue reporting service.
The Company believes the competitive pressure which negatively impacted its
revenue growth in this market to be temporary in nature and does not anticipate
that such effects on revenue will persist beyond 1996. During the quarterly
reporting period for the three months ended December 31, 1996, the net revenue
from the Columbus stations increased slightly (1.3%) over the comparable period
in 1995.
Station operating expense (i.e., programming, technical, selling, and
station general and administrative expenses) increased by $4,193,000 or 13% to
$36,629,000 for the year ended December 31, 1996, compared with $32,436,000 for
the year ended December 31, 1995. Of the total increase, approximately
$3,440,000 or 82% was the result of the impact of the operation of stations the
Company acquired and/or began operating during 1996. The remaining balance of
the increase in station operating expense of $753,000 represents a total
increase in station operating expense of 2.3% for the year ended December 31,
1996 compared to the year ended December 31, 1995 on a comparable
station/comparable period basis.
Operating profit for the year ended December 31, 1996 was $10,804,000
compared to $7,896,000 for the year ended December 31, 1995, an increase of
$2,908,000 or 37%. The improvement was primarily the result of the $6,541,000
increase in net operating revenue and a $1,043,000 decrease in depreciation and
amortization, offset by the $4,193,000 increase in station operating expense,
and a $483,000 or 17% increase in corporate general and administrative charges.
The decrease in depreciation and amortization charges was primarily the result
of assets in the Company's New England markets becoming fully depreciated. The
increase in corporate general and administrative expenses was the result of
approximately $280,000 of non-recurring charges associated with certain employee
benefit related matters, and approximately $100,000 pertaining to option grants
primarily to local station management. The remaining increase in corporate
general and administrative expenses of approximately $103,000 represents an
increase of approximately 4% in ordinary recurring expenses.
The Company generated net income in the amount of approximately $3,935,000
($0.38 per share) during the year ended December 31, 1996 compared with
$2,678,000 ($0.26 per share) for the year
21
22
ended December 31, 1995, an increase of approximately $1,257,000 or 47%. The
increase in net income was principally the result of the $2,908,000 improvement
in operating profit, offset by a $918,000 increase in income taxes directly
associated with the improved operating performance of the Company, a $495,000
increase in interest costs resulting primarily from an increase in borrowed
funds to finance the Company's 1996 acquisitions, and a $221,000 gain on the
sale of assets recorded in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's policy is generally to repay its long-term debt with excess
cash on hand to reduce its financing costs. As of December 31, 1997, the Company
had $61,605,000 of long-term debt (including the current portion thereof)
outstanding and approximately $47,250,000 of unused borrowing capacity under the
Revolving Loan (as defined below).
The Company has a credit agreement (the "Credit Agreement") with The First
National Bank of Boston; The Bank of New York; Fleet Bank, N.A.; Mellon Bank,
N.A.; and Union Bank of California, N.A. (collectively, the "Lenders"), with two
facilities (the "Facilities"): a $54,000,000 senior secured term loan (the "Term
Loan") and a $56,000,000 senior secured reducing revolving/term loan facility
(the "Revolving Loan"). The Facilities mature June 30, 2003. 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 Revolving Loan has a total commitment of $56,000,000, of which
$51,000,000 may be used for permitted acquisitions and related transaction
expenses and $5,000,000 may be used for working capital needs and stand-by
letters of credit. On June 30, 1998 the Revolving Loan will convert to a five
year term loan. The outstanding amount of the Term Loan is required to be
reduced quarterly in amounts ranging from 2.5% to 5% of the initial commitment
and the outstanding amount of the Revolving Loan is required to be reduced
quarterly in amounts ranging from 1.25% to 5% of the initial commitment. In
addition, the Facilities may be further reduced by specified percentages of
Excess Cash Flow (as defined in the Credit Agreement) based on leverage ratios.
Interest rates under the Facilities are payable, at the Company's option,
at alternatives equal to LIBOR plus 1.125% to 1.75% or the prime rate plus 0% to
.5%. The spread over LIBOR and the prime rate vary from time to time, depending
upon the Company's financial leverage. The Company also pays quarterly
commitment fees equal to 1/2% per annum on the aggregate unused portion of the
Revolving Loan.
The Credit Agreement contains a number of financial covenants which, among
other things, require the Company to maintain specified financial ratios and
impose certain limitations on the Company with respect to investments,
additional indebtedness, dividends, distributions, guarantees, liens and
encumbrances.
At December 31, 1997, the Company had an interest rate swap agreement with
a total notional amount of $32,000,000 that it uses to convert the variable
Eurodollar interest rate of a portion of its bank borrowings to a fixed interest
rate. The swap agreement was entered into to reduce the risk to the Company of
rising interest rates. In accordance with the terms of the swap agreement, dated
November 21, 1995, the Company pays 6.15% calculated on a $32,000,000 notional
amount. The Company receives LIBOR (5.9375% at December 31, 1997) calculated on
a notional amount of $32,000,000. Net receipts or payments under the agreement
are recognized as an adjustment to interest expense. The swap agreement expires
in December 1999. As the LIBOR increases, interest payments received and the
market value of the swap position increase. Approximately $154,000 in additional
interest expense was recognized as a result of the interest rate swap agreement
for the year ended December 31, 1997 and an aggregate amount of $354,000 in
additional interest expense has been recognized since the inception of the
agreement.
During the years ended December 31, 1997, 1996 and 1995, the Company had
net cash flows from operating activities of $11,659,000, $7,679,000, and
$9,483,000, respectively. The Company believes
22
23
that cash flow from operations will be sufficient to meet quarterly debt service
requirements for interest and scheduled payments of principal under the Credit
Agreement. If such cash flow is not sufficient to meet such debt service
requirements, the Company may be required to sell additional equity securities,
refinance its obligations or dispose of one or more of its properties in order
to make such scheduled payments. There can be no assurance that the Company
would be able to effect any such transactions on favorable terms.
On June 11, 1996, the Company acquired an AM and FM radio station serving
the Yankton, South Dakota market for approximately $7,000,000. On June 18, 1996,
the Company acquired an AM and FM radio station serving the Portland, Maine
market for approximately $10,000,000. The acquisitions were financed by
borrowings under the Company's Term Loan.
On March 14, 1997, the Company acquired an FM radio station (KAZR-FM)
serving the Des Moines, Iowa market for approximately $2,700,000. The Company
began operating the radio station under the terms of a local market agreement on
August 1, 1996, which remained in effect until such closing.
On April 17, 1997, the Company acquired an FM radio station (KLTI-FM)
serving the Des Moines, Iowa market for approximately $3,200,000. The Company
began operating the radio station under the terms of a local market agreement on
January 1, 1997, which remained in effect until such closing.
On May 5, 1997, the Company acquired two AM and two FM radio stations
(WTAX-AM, WDBR-FM, WVAX-AM, and WYXY-FM) serving the Springfield, Illinois
market for approximately $6,000,000. The Company began operating the radio
stations under the terms of a local market agreement on July 1, 1996, which
remained in effect until such closing.
On May 9, 1997, the Company acquired two FM radio stations (WFMR-FM and
WPNT-FM) serving the Milwaukee, Wisconsin market for approximately $5,000,000.
On November 18, 1997, the Company acquired an FM radio station (WQLL-FM)
serving the Manchester, New Hampshire market for approximately $3,400,000. The
Company began operating the radio station under the terms of a local market
agreement on July 1, 1997, which remained in effect until such closing.
On November 25,1997, the Company acquired a regional and state news and
sports information network (The Illinois Radio Network) for approximately
$1,750,000.
The 1997 acquisitions were financed through funds generated from
operations and additional borrowings of $11,250,000 under the Revolving Loan.
On January 14, 1998 the Company signed a letter of intent to purchase a
regional and state news and sports information network (The Michigan Radio
Network) with an acquisition cost of up to $1,535,000, subject to certain
adjustments, of which a maximum of $682,000 would be payable in shares of the
Company's Class A Common Stock, and a maximum of $853,000 would be payable in
cash.
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 Revolving Loan, 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, 1997
were approximately $2,758,000 ($2,107,000 in 1996). The Company anticipates
capital expenditures in 1998 to be approximately $3,000,000, which it expects to
finance through funds generated from operations or additional borrowings under
the revolving loan.
23
24
IMPACT OF THE YEAR 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at approximately $300,000 which includes the cost of
new software and hardware most of which will be capitalized. The project is
estimated to be completed not later than December 31, 1998, which is prior to
any anticipated impact on its operating systems. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
INFLATION
The impact of inflation on the Company's operations has not been
significant to date. There can be no assurance that a high rate of inflation in
the future would not have an adverse effect on the Company's operations.
FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-K that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. In addition, when used
in this Form 10-K, words such as "believes," "anticipates," "expects," and
similar expressions are intended to identify forward looking statements. The
Company cautions that a number of important factors could cause the Company's
actual results for 1998 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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
24
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements attached hereto are filed as part of this annual
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" and "Compensation of Directors and Officers -
Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998 are hereby
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
"Compensation of Directors and Officers" in the Company's Proxy Statement
for the 1998 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 30, 1998 is hereby incorporated by
reference herein. Such incorporation by reference shall not be deemed to
specifically incorporate by reference the information referred to in Item
402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 30, 1998 is
hereby incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Transactions" in the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or before April 30, 1998 is hereby incorporated by reference
herein.
25
26
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) Credit Agreement dated as of May 12, 1994 between the Company and
The First National Bank of Boston, as Agent for the lenders(4)***
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10(a) Employment Agreement of Edward K. Christian dated April 8, 1997****
10(b) Saga Communications, Inc. 1992 Stock Option, as amended
10(c) Summary of Executive Insured Medical Reimbursement Plan(10(2))*
10(d) Saga Communications, Inc. 1997 Non-Employee Director Stock Option
Plan*****
OTHER MATERIAL AGREEMENTS
10(e)(1) Promissory Note of Edward K. Christian dated December 10,
1992(10(l)(a))*
10(e)(2) Amendment to Promissory Note of Edward K. Christian dated December
23, 1995******
10(f) Pledge Agreement of Edward K. Christian dated December 10,
1992(10(l)(b))*
(21) Subsidiaries(22)*
(23) Consent of Ernst & Young LLP
27.1 Financial Data Schedule - December 31, 1997
26
27
27.2 Financial Data Schedule - December 31, 1996
27.3 Financial Data Schedule - September 30, 1997
27.4 Financial Data Schedule - September 30, 1996
27.5 Financial Data Schedule - June 30, 1996
* 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, 1994 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, 1995.
(b) Reports on Form 8-K
None
27
28
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, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Saga
Communications, Inc. and subsidiaries at December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
February 13, 1998
29
SAGA COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31,
1997 1996
--------------------
ASSETS
Current assets:
Cash and temporary investments $ 2,209 $ 4,339
Accounts receivable, less allowance
of $514 ($319 in 1996) 12,833 11,629
Prepaid expenses 1,269 1,100
Barter transactions 748 733
Deferred taxes 460 274
--------------------
Total current assets 17,519 18,075
Net property and equipment 34,028 29,704
Other assets:
Favorable lease agreements, net of accumulated
amortization of $3,557 ($3,367 in 1996) 836 976
Excess of cost over fair value of assets acquired,
net of accumulated amortization of $6,916
($6,232 in 1996) 20,276 20,047
Broadcast licenses, net of accumulated
amortization of $1,614 ($840 in 1996) 35,495 20,906
Other intangibles and deferred costs, net of
accumulated amortization of $6,533 ($5,516 in
1996) 4,279 6,707
--------------------
Total other assets 60,886 48,636
--------------------
$112,433 $ 96,415
====================
See accompanying notes.
2
30
SAGA COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31,
1997 1996
--------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,001 $ 1,008
Accrued expenses:
Payroll and payroll taxes 3,679 2,545
Other 2,380 1,259
Barter transactions 733 867
Current portion of long-term debt 8,139 1,399
--------------------
Total current liabilities 15,932 7,078
Deferred income taxes 4,297 3,408
Long-term debt 53,466 52,355
Broadcast program rights 273 461
Deferred compensation 210 --
Stockholders' equity:
Preferred stock, 1,500 shares authorized, none
issued and outstanding -- --
Common stock:
Class A common stock, $.01 par value, 35,000
shares authorized, 8,947 issued and
outstanding (8,860 in 1996) 89 88
Class B common stock, $.01 par value, 3,500
shares authorized, 1,208 issued and
outstanding 12 12
Additional paid in capital 36,513 35,864
Note receivable from principal stockholder (790) (790)
Retained earnings (accumulated deficit) 2,431 (2,061)
--------------------
Total stockholders' equity 38,255 33,113
--------------------
$112,433 $96,415
====================
See accompanying notes.
3
31
SAGA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
YEARS ENDED DECEMBER 31,
1997 1996 1995
--------------------------------
Net operating revenue $ 66,258 $ 56,240 $ 49,699
Station operating expense:
Programming and technical 15,234 13,055 11,114
Selling 18,605 15,197 14,255
Station general and administrative 9,957 8,377 7,067
--------------------------------
Total station operating expense 43,796 36,629 32,436
--------------------------------
Station operating income before corporate
general and administrative, depreciation
and amortization 22,462 19,611 17,263
Corporate general and administrative 3,953 3,299 2,816
Depreciation 3,207 3,277 4,221
Amortization 2,665 2,231 2,330
--------------------------------
Operating profit 12,637 10,804 7,896
Other expenses:
Interest expense 4,769 3,814 3,319
Loss (gain) on the sale of assets 16 17 (221)
--------------------------------
Income before income tax 7,852 6,973 4,798
Income tax provision:
Current 2,657 2,355 1,564
Deferred 703 683 556
--------------------------------
3,360 3,038 2,120
--------------------------------
Net income $ 4,492 $ 3,935 $ 2,678
================================
Basic earnings per share $ .44 $ .39 $ .27
================================
Weighted average common shares 10,110 10,059 10,030
================================
Diluted earnings per share $ .44 $ .38 $ .26
================================
Weighted average common and common
equivalent shares 10,311 10,253 10,151
================================
See accompanying notes.
4
32
SAGA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
NOTE
RECEIVABLE RETAINED
CLASS A CLASS B ADDITIONAL FROM EARNINGS
COMMON COMMON PAID-IN PRINCIPAL (ACCUMULATED TOTAL
STOCK STOCK CAPITAL STOCKHOLDER DEFICIT) EQUITY
-------------------------------------------------------------------------
Balance at December 31, 1994 $ 45 $ 6 $ 35,593 $ (691) $ (8,625) $ 26,328
Net costs from common stock offering (122) (122)
Net proceeds from exercised options 55 55
Five-for-four stock split 11 2 (13) --
Accrued interest (57) (57)
Net income 2,678 2,678
-------------------------------------------------------------------------
Balance at December 31, 1995 56 8 35,526 (748) (5,960) 28,882
Net proceeds from exercised options 338 338
Five-for-four stock splits 32 4 (36) --
Accrued interest (42) (42)
Net income 3,935 3,935
-------------------------------------------------------------------------
Balance at December 31, 1996 88 12 35,864 (790) (2,061) 33,113
Net proceeds from exercised options 1 649 650
Net income 4,492 4,492
-------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 89 $ 12 $ 36,513 $ (790) $ 2,431 $ 38,255
=========================================================================
See accompanying notes.
5
33
SAGA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1997 1996 1995
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,492 $ 3,935 $ 2,678
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,872 5,508 6,551
Barter revenue, net of barter expenses (181) (81) (109)
Broadcast program rights amortization 237 256 248
Increase in deferred taxes 703 683 556
Loss (gain) on sale of assets 15 17 (221)
Changes in assets and liabilities:
Decrease (increase) in receivables and
prepaids (1,337) (2,889) 317
Payments for broadcast program rights (235) (253) (257)
Increase (decrease) in accounts payable,
accrued expenses, and other liabilities 2,093 503 (280)
----------------------------------
Total adjustments 7,167 3,744 6,805
----------------------------------
Net cash provided by operating activities 11,659 7,679 9,483
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,758) (2,107) (2,325)
Increase in intangibles and other assets (502) (4,796) (123)
Acquisition of stations (18,595) (16,956) --
Proceeds from sale of assets 324 701 675
----------------------------------
Net cash used in investing activities (21,531) (23,158) (1,773)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 11,250 19,348 --
Payments on long-term debt (3,899) (2,898) (6,703)
Net proceeds (costs) from common stock offering -- -- (122)
Net proceeds from exercise of stock options 391 147 41
----------------------------------
Net cash provided by (used in) financing activities 7,742 16,597 (6,784)
----------------------------------
Net increase (decrease) in cash and temporary
investments (2,130) 1,118 926
Cash and temporary investments, beginning of year 4,339 3,221 2,295
----------------------------------
Cash and temporary investments, end of year $ 2,209 $ 4,339 $ 3,221
==================================
See accompanying notes.
6
34
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Saga Communications, Inc. is a broadcasting company which currently owns
thirty-seven radio stations, a television station, and a state radio network,
serving twelve markets throughout the Midwest and along the Eastern Seaboard
including Columbus, Ohio; Milwaukee, Wisconsin; and Norfolk, Virginia.
BASIS OF PRESENTATION
On April 1, 1997 the Company consummated a five-for-four split of its Class A
and Class B Common Stock, resulting in additional shares being issued of
1,772,000 and 242,000, respectively, for holders of record on March 17, 1997.
On April 30, 1996 the Company consummated a five-for-four split of its Class A
and Class B Common Stock, resulting in additional shares being issued of
1,417,000 and 193,000, respectively, for holders of record on April 17, 1996.
On July 31, 1995 the Company consummated a five-for-four split of its Class A
and Class B Common Stock, resulting in additional shares being issued of
1,130,000 and 155,000, respectively, for holders of record on July 17, 1995.
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
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
7
35
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share". Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------
(In thousands)
Numerator:
Net income available to common stockholders $ 4,492 $ 3,935 $ 2,678
=============================
Denominator:
Denominator for basic earnings per share -
weighted average shares 10,110 10,059 10,030
Effect of dilutive securities:
Employee stock options 201 194 121
-----------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 10,311 10,253 10,151
=============================
Basic earnings per share $ .44 $ .39 $ .27
=============================
Diluted earnings per share $ .44 $ .38 $ .26
=============================
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.
8
36
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Other assets are amortized using the straight-line method. Favorable lease
agreements are amortized over the lives of the leases. The excess of cost over
fair value of identifiable assets acquired and broadcast licenses are amortized
over forty years. Other intangibles are amortized over five to forty years.
The excess of cost over the fair value of net assets acquired (or goodwill) is
reviewed if the facts and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as determined based on
the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of goodwill would be reduced
by the estimated shortfall of discounted cash flows. To date, no such reductions
in goodwill have been recorded.
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.
BROADCAST PROGRAM RIGHTS
The Company records the capitalized costs of broadcast program rights when the
license period begins and the programs are available for use. Amortization of
the program rights is recorded using the straight-line method over the license
period or based on the number of showings. Amortization of broadcast program
rights is included in station operating expense. Unamortized broadcast program
rights are classified as current or non-current based on estimated usage in
future years.
REVENUE RECOGNITION POLICY
Revenue is recognized as commercials are broadcast.
FINANCIAL INSTRUMENTS
The Company's financial instruments are comprised of cash and temporary
investments and long-term debt. The carrying value of long-term debt
approximates fair value as it carries interest rates that either fluctuate with
prime or have been reset at the prevailing market rate at December 31, 1997.
9
37
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS (CONTINUED)
The Company has an interest rate swap agreement which is its only derivative.
See Note 3.
The Company enters into interest-rate swap agreements to modify the interest
characteristics of its outstanding debt. Each interest rate swap agreement is
designated with all or a portion of the principal balance and term of a specific
debt obligation. These agreements involve the exchange of amounts based on a
fixed interest rate for amounts based on variable interest rates over the life
of the agreement without an exchange of the notional amount upon which the
payments are based. The differential to be paid or received as interest rates
change is accrued and recognized as an adjustment of the interest expense
related to the debt (the accrual accounting method). The related amount payable
to or receivable from counterparties is included in other liabilities or assets.
The fair values of the swap agreements are not recognized in the financial
statements. Gains and losses on terminations of interest-rate swap agreements
are deferred as an 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).
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
1997 1996
----------------------
(IN THOUSANDS)
Land and land improvements $ 7,442 $ 7,049
Buildings 10,120 9,219
Towers and antennae 12,706 10,456
Equipment 34,323 30,961
Furniture, fixtures and leasehold improvements 4,619 4,168
Vehicles 1,312 1,178
----------------------
70,522 63,031
Accumulated depreciation (36,494) (33,327)
----------------------
Net property and equipment $ 34,028 $ 29,704
======================
10
38
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT
Long-term debt consists of the following: DECEMBER 31,
1997 1996
-------------------
(IN THOUSANDS)
Senior secured term loan facility (total commitment of
$51,784,000) secured by all assets of the Company and
subsidiary stock and guarantees. Interest at a
Eurodollar rate (5.9063% at December 31, 1997) plus a
margin ranging from 1.125% to 1.75%. All interest is due
quarterly. The maximum commitment under the facility
reduces by 15% in 1998, 15% in 1999, 17.5% in 2000, 20%
in 2001, 20% in 2002, and 10% in 2003, based on the
original commitment of $53,112,000. In addition, the
Senior secured term loan facility may be further reduced
by specified percentages of Excess Cash Flow (as defined
in the Credit Agreement) based on leverage ratios. The
facility matures on June 30, 2003. $ 51,784 $ 53,112
Senior secured reducing revolving term loan facility
(total commitment of $56,000,000) secured by all assets
of the Company and subsidiary stock and guarantees.
Interest at a Eurodollar rate (5.9063% at December 31,
1997) plus a margin ranging from 1.125% to 1.75%. All
interest is due quarterly. The loan agreement requires a
commitment fee of -1/2% per annum on the daily average
amount of the available revolving credit commitment. The
maximum commitment under the facility reduces by 15% in
1998, 20% in 1999, 20% in 2000, 20% in 2001, 20% in 2002
and 5% in 2003 based on the original commitment of
$56,000,000. On June 30, 1998 the facility will convert
to a five year term loan. The facility matures on June
30, 2003. 8,750 --
Subordinated promissory note. Payments are due monthly
including interest at 10%. The note matures in 2004. 507 539
Other, primarily covenants not to compete. 564 103
-------------------
61,605 53,754
Amounts due within one year 8,139 1,399
-------------------
$ 53,466 $ 52,355
===================
11
39
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt are as follows:
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
1998 $ 8,139
1999 8,148
2000 9,483
2001 10,811
2002 16,765
Thereafter 8,259
--------
$ 61,605
========
Interest rates under the senior secured term and revolving term loan facilities
are payable at the Company's option, at alternatives equal to LIBOR plus 1.125%
to 1.75% or the prime rate plus 0% to 0.5%. The spread over LIBOR and the prime
rate vary from time to time, depending upon the Company's financial leverage.
The senior secured term and revolving term loans contain a number of covenants
(all of which the Company was in compliance with at December 31, 1997) 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
40
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
At December 31, 1997, the Company had an interest rate swap agreement with a
total notional amount of $32,000,000 that it used to convert the variable
Eurodollar interest rate of a portion of its bank borrowings to a fixed interest
rate. The swap agreement was entered into to reduce the risk to the Company of
rising interest rates. In accordance with the terms of the swap agreement, the
Company pays 6.15% calculated on the $32,000,000 notional amount. The Company
receives LIBOR (5.9375% at December 31, 1997) calculated on a notional amount of
$32,000,000. Net payments under the agreement are recognized as an adjustment to
interest expense. The swap agreement expires in December, 1999. As the LIBOR
increases, interest payments received and the market value of the swap position
increase. The fair value of the swap agreement at December 31, 1997 was
($70,769), 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.
4. SUPPLEMENTAL CASH FLOW INFORMATION
For the purposes of the statements of cash flows, cash includes temporary
investments with maturities of three months or less.
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------
(IN THOUSANDS)
Cash paid during the period for:
Interest $4,484 $4,181 $3,377
Income taxes 2,235 2,261 1,430
Non-cash transactions:
Barter revenue $1,993 $1,842 $2,062
Barter expense 1,812 1,761 1,953
Acquisition of property and equipment 3 45 113
13
41
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 radio broadcasting
companies, liabilities were assumed as follows:
YEAR ENDED DECEMBER 31,
1997 1996 1995
---------------------------------------
(IN THOUSANDS)
Fair value of assets acquired $ 19,249 $ 17,098 $ --
Cash paid (18,595) (16,956) --
---------------------------------------
Liabilities assumed $ 654 $ 142 $ --
=======================================
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,
1997 1996
----------------------
(IN THOUSANDS)
Deferred tax liabilities:
Property and equipment $3,240 $2,674
Intangible assets 1,057 734
----------------------
Total deferred tax liabilities 4,297 3,408
Deferred tax assets:
Allowance for doubtful accounts 175 108
Compensation 285 166
----------------------
Total deferred tax assets 460 274
----------------------
Net deferred tax liabilities $3,837 $3,134
======================
14
42
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------------
(IN THOUSANDS)
Current:
Federal $1,972 $1,677 $1,156
State 685 678 408
--------------------------------------
Total current 2,657 2,355 1,564
Deferred:
Federal 703 683 556
--------------------------------------
$3,360 $3,038 $2,120
======================================
The reconciliation of income tax at the U. S. federal statutory tax rates to
income tax expense is as follows:
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------------
(IN THOUSANDS)
Tax at U.S. statutory rates $2,670 $2,371 $1,631
State taxes, net of federal benefit 452 447 269
Amortization of excess of cost over fair
value of assets acquired 189 186 186
Other, net 49 34 34
--------------------------------------
$3,360 $3,038 $2,120
======================================
15
43
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, 1997, 1,569,503 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 Corporation's Class A
Common Stock equal to the amount of the retainer divided by the fair market
value of the Corporation'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 shall be $.01 per share. At December 31, 1997, 100,000 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, 1998 a
total of 1,572 shares were issued under the Directors Plan in lieu of their
directors' retainer for the year ended December 31, 1997.
16
44
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
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, 1997, 1996 and 1995, was $246,000, $203,000 and $101,000,
respectively. Total Directors fees recognized in the income statement for stock
based compensation awards for the year ended December 31, 1997 was $33,000.
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123 (Statement 123), "Accounting for
Stock-Based Compensation." This standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of the Company's stock options were estimated as of the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
5.75%, 6.4% and 6.4%; a dividend yield of 0%; expected volatility of 29%, 27.9%
and 28.5%; 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 1997, 1996 and 1995, was approximately $10.22, $12.59 and
$8.24, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
17
45
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
For purposes of the pro forma disclosures required under Statement 123, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information is as follows:
1997 1996 1995
--------------------------------------
(In thousands except per share data)
Pro forma net income $4,460 $3,917 $2,674
======================================
Pro forma earnings per share:
Basic $ .44 $ .39 $ .27
======================================
Diluted $ .43 $ .38 $ .26
======================================
The following summarizes the stock option transactions for the three years ended
December 31, 1997.
WEIGHTED
NUMBER AVERAGE
OF EXERCISE PRICE PRICE PER
OPTIONS PER SHARE SHARE
--------------------------------------------
Options outstanding at December 31, 1994 512,109 $ .005 to $ 7.81 $ 5.59
Granted 43,357 2.71 2.71
Exercised (7,812) 5.31 5.31
Forfeited (27,343) 5.300 to 7.81 6.14
--------------------------------------------
Options outstanding at December 31, 1995 520,311 .005 to 7.81 5.32
Granted 46,750 5.300 to 11.39 7.58
Exercised (35,078) .005 to 7.81 4.21
Forfeited (4,388) 2.710 to 7.81 5.32
--------------------------------------------
Options outstanding at December 31, 1996 527,595 .005 to 11.39 5.60
Granted 22,500 14.50 14.50
Exercised (86,826) .005 to 11.39 4.51
Forfeited (11,389) 5.300 to 11.39 7.61
--------------------------------------------
Options outstanding at December 31, 1997 451,880 $ 2.710 to $ 14.50 $ 6.20
============================================
18
46
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
Options exercisable at December 31:
1997 297,881
1996 267,105
1995 203,984
Available for grant at December 31:
1997 1,117,623
1996 296,688
1995 339,063
Stock options outstanding at December 31, 1997 are summarized as follows:
WEIGHTED AVERAGE
EXERCISE OPTIONS OPTIONS REMAINING
PRICE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE
- ----------------------------------------------------------------
$ 2.714 39,057 15,623 7.2
$ 5.304 292,952 229,835 5.4
$ 7.808 82,371 49,423 6.2
$ 11.392 15,000 3,000 8.2
$ 14.500 22,500 -- 9.3
----------------------------------------------
451,880 297,881 6.0
==============================================
Weighted Average
Exercise Price $ 6.197 $ 5.645
==========================
19
47
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
STATION ACQUISITIONS
The Company acquired an FM radio station (KAZR-FM) serving the Des Moines, Iowa
market on March 14, 1997. The purchase price was approximately $2,700,000. The
Company began operating the radio station under the terms of a local market
agreement on August 1, 1996, which remained in effect until such closing.
The Company acquired an FM radio station (KLTI-FM) serving the Des Moines, Iowa
market on April 17, 1997. The purchase price was approximately $3,200,000. The
Company began operating the radio station under the terms of a local market
agreement on January 1, 1997, which remained in effect until the acquisition.
The Company acquired two AM and two FM radio stations (WTAX-AM, WDBR-FM,
WVAX-AM, and WYXY-FM) serving the Springfield, Illinois market on May 5, 1997.
The purchase price was approximately $6,000,000. The Company began operating the
radio stations under the terms of a local market agreement on July 1, 1996,
which remained in effect until the acquisition.
The Company acquired two FM radio stations (WFMR-FM and WPNT-FM) serving the
Milwaukee, Wisconsin market on May 9, 1997. The purchase price was approximately
$5,000,000.
The Company acquired an FM radio station (WQLL-FM) serving the Manchester, New
Hampshire market on November 18, 1997. The purchase price was approximately
$3,400,000. The Company began operating the radio station under the terms of a
local market agreement on July 1, 1997, which remained in effect until the
acquisition.
The Company acquired the assets of a regional and state news and sports
information network (The Illinois Radio Network) serving more than 45 radio
stations throughout the state of Illinois, on November 25, 1997. The purchase
price was approximately $1,750,000.
The Company acquired two radio stations (WNAX AM/FM) in Yankton, South Dakota on
June 11, 1996 and two radio stations (WPOR AM/FM) in Portland, Maine on June 18,
1996. The purchase prices of these acquisitions were approximately $7,000,000
and $10,000,000, respectively.
20
48
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
STATION ACQUISITIONS (CONTINUED)
All acquisitions have been accounted for as purchases and, accordingly, the
total costs were allocated to the acquired assets and assumed liabilities based
on their estimated fair values as of the acquisition dates. The excess of the
consideration paid over the estimated fair value of net assets acquired has been
recorded as broadcast licenses, other intangibles, and goodwill. The
consolidated statements of income include the operating results of the acquired
businesses from their respective dates of acquisition or operation under the
terms of local market agreements.
The following unaudited pro forma results of operations of the Company for the
years ended December 31, 1997 and 1996 assume the 1997 and 1996 acquisitions
occurred as of the beginning of the immediately preceding year. The pro forma
results give effect to certain adjustments, including depreciation, amortization
of intangible assets, increased interest expense on acquisition debt and related
income tax effects. The pro forma results have been prepared for comparative
purposes only and do not purport to indicate the results of operations which
would actually have occurred had the combinations been in effect on the dates
indicated, or which may occur in the future.
1997 1996 1995
---------------------------
(In thousands except per share data)
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS:
Net operating revenue $68,060 $64,206 $55,163
Net income $ 4,298 $ 3,192 $ 2,863
===========================
Basic earnings per share $ .43 $ .32 $ .29
===========================
Diluted earnings per share $ .42 $ .31 $ .28
===========================
8. 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.
21
49
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. NOTE RECEIVABLE FROM PRINCIPAL STOCKHOLDER
The loan from the Company to the principal stockholder is on a non-recourse
basis and bears interest at a rate per annum equal to the lowest rate necessary
to avoid the imputation of income for federal income tax purposes, with the
principal and interest due and payable in a single payment on December 31, 2002.
The note is secured by the Class B Common Stock currently owned by the principal
stockholder.
During 1997, the Company entered into a five year employment agreement with the
principal stockholder. As part of the agreement, if the principal stockholder
remains an employee of the Company for the term of the agreement, the Company
will pay him an amount in cash equal to the unpaid balance of the note plus such
amount as is necessary to enable the principal stockholder or his estate to pay
all related federal and state income tax liabilities. At December 31, 1997 the
Company recorded approximately $210,000 in compensation expense related to the
agreement.
10. WARRANTS EXERCISED
In connection with its initial public offering in December 1992, the Company
issued Class A Common Stock and warrants to purchase Class A Common Stock at the
rate of 2/5 of a warrant with each share of Class A Common Stock. Each warrant
entitled its holder to purchase one share of Class A Common Stock for $7.68 on
or before June 18, 1995. At the closing of the offering, the Company acquired
for $669,600, warrants from a stockholder identical to those offered to the
public on substantially the same terms as offered to the public. On June 16,
1995, the Company exercised 1,589,164 (the amount exercised by the public) of
the 1,595,000 total warrants with the stockholder. Thus, the exercise of the
warrants did not have a dilutive effect on the shares of the Company's stock
outstanding.
22
50
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
23
51
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK (CONTINUED)
Other Provisions. Each share of Class B Common Stock is convertible, at the
option of its holder, into one share of Class A Common Stock at any time. One
share of Class B Common Stock converts automatically into one share of Class A
Common Stock upon its sale or other transfer to a party unaffiliated with the
principal stockholder or, in the event of a transfer to an affiliated party,
upon the death of the transferor.
12. COMMITMENTS AND CONTINGENCY
Leases
The Company leases certain land, buildings and equipment under noncancellable
operating leases. Rent expense for the year ended December 31, 1997 was
$1,191,000 ($977,000 and $911,000 for the years ended December 31, 1996 and
1995, respectively). Minimum annual rental commitments under noncancellable
operating leases consisted of the following at December 31, 1997:
OPERATING
LEASES
-------
(In thousands)
1998 1,142
1999 755
2000 449
2001 333
2002 295
Thereafter 434
-------
$ 3,408
=======
24
52
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, 1997:
BROADCAST
PROGRAM
RIGHTS
--------------
(In thousands)
1998 206
1999 184
2000 89
-----
$ 479
Amounts due within one year (included in
accounts payable) 206
-----
$ 273
=====
Principal Stockholder 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, 1997 the stockholders
average compensation was approximately $591,000.
13. SUBSEQUENT EVENT
On January 14, 1998 the Company signed a letter of intent to purchase a regional
and state news and sports information network (The Michigan Radio Network) for
approximately $1,535,000, subject to certain adjustments, of which a maximum of
$682,000 would be payable in shares of the Company's Class A Common Stock, and a
maximum of $853,000 would be payable in cash. The transaction is subject to
certain conditions, including the completion of a definitive asset purchase
agreement, and is expected to close during the second quarter of 1998.
25
53
SAGA COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share".
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
(In thousands, except per share data)
Net operating revenue $ 13,515 $ 10,955 $ 17,508 $ 14,003 $ 17,091 $ 15,021 $ 18,144 $ 16,261
Station operating
expense:
Programming and
technical 3,668 2,872 3,686 2,944 3,928 3,583 3,952 3,656
Selling 3,798 3,094 5,132 3,922 4,317 3,750 5,358 4,431
Station general and
administrative 2,541 1,897 2,414 1,887 2,486 2,223 2,516 2,370
---------------------------------------------------------------------------------------------
Total station operating
expense: 10,007 7,863 11,232 8,753 10,731 9,556 11,826 10,457
---------------------------------------------------------------------------------------------
Station operating
income before
corporate
general and
administrative,
depreciation and
amortization 3,508 3,092 6,276 5,250 6,360 5,465 6,318 5,804
Corporate general and
administrative 807 748 1,074 892 959 994 1,113 665
Depreciation and
amortization 1,282 1,269 1,450 1,303 1,520 1,450 1,620 1,486
---------------------------------------------------------------------------------------------
Operating profit 1,419 1,075 3,752 3,055 3,881 3,021 3,585 3,653
Other expenses:
Interest expense 1,211 733 1,172 780 1,325 1,154 1,061 1,147
Loss (gain) on the sale
of assets 6 3 1 17 -- (3) 9 --
---------------------------------------------------------------------------------------------
Income before income
tax 202 339 2,579 2,258 2,556 1,870 2,515 2,506
Income tax provision 88 145 1,087 965 1,077 800 1,108 1,128
---------------------------------------------------------------------------------------------
Net income $ 114 $ 194 $ 1,492 $ 1,293 $ 1,479 $ 1,070 $ 1,407 $ 1,378
=============================================================================================
Basic earnings per
share $ .01 $ .02 $ .15 $ .13 $ .15 $ .11 $ .14 $ .14
=============================================================================================
Weighted average
common shares 10,069 10,034 10,069 10,065 10,143 10,067 10,156 10,069
=============================================================================================
Diluted earnings per
share $ .01 $ .02 $ .15 $ .13 $ .14 $ .10 $ .14 $ .13
=============================================================================================
Weighted average
common and common
equivalents
outstanding 10,273 10,191 10,285 10,246 10,329 10,259 10,344 10,268
=============================================================================================
26
54
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, 1997
Allowance for doubtful accounts $ 319 $ 549 $ 354(1) $ 514
====== ====== ====== ======
Accumulated amortization -
Favorable lease agreement $3,367 $ 190 $3,557
====== ====== ======
Accumulated amortization - Excess
of cost over fair value of assets
purchased $6,232 $ 684 $6,916
====== ====== ======
Accumulated amortization -
Broadcast license $ 840 $ 774 $1,614
====== ====== ======
Accumulated amortization - Other
intangibles $5,516 $1,017 $6,533
====== ====== ======
Year Ended December 31, 1996
Allowance for doubtful accounts $ 295 $ 365 $ 341(1) $ 319
====== ====== ====== ======
Accumulated amortization -
Favorable lease agreement $3,056 $ 311 $3,367
====== ====== ======
Accumulated amortization - Excess
of cost over fair value of assets
purchased $5,575 $ 657 $6,232
====== ====== ======
Accumulated amortization -
Broadcast license $ 422 $ 418 $ 840
====== ====== ======
Accumulated amortization - Other
intangibles $4,671 $ 845 $5,516
====== ====== ======
Year Ended December 31, 1995
Allowance for doubtful accounts $ 274 $ 534 $ 513(1) $ 295
====== ====== ====== ======
Accumulated amortization -
Favorable lease agreement $2,716 $ 389 $ 49(2) $3,056
====== ====== ====== ======
Accumulated amortization - Excess
of cost over fair value of assets
purchased $4,918 $ 657 $5,575
====== ====== ======
Accumulated amortization -
Broadcast license $ 148 $ 225 $ 49(2) $ 422
====== ====== ====== ======
Accumulated amortization - Other
intangibles $3,612 $1,059 $4,671
====== ====== ======
(1) Write-off of uncollectible accounts, net of recoveries.
(2) Represents the reclass of accumulated amortization of favorable lease.
55
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 27, 1998.
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 27, 1998.
Signatures
/s/ Edward K. Christian President, Chief Executive
Edward K. Christian Officer, and Chairman of the Board
/s/ Samuel D. Bush Vice President, Chief Financial
Samuel D. Bush Officer and Treasurer
/s/ Catherine Bobinski Corporate Controller and
Catherine Bobinski Chief Accounting Officer
/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
28