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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark one)    
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2017
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:

 

Title of each class   Name of each exchange on which registered
Class A Common Stock, $.01 par value   NYSE American

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨     No þ

 

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 þ     No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     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.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer  þ Non-accelerated filer ¨ Smaller Reporting Company ¨   Emerging growth company ¨
    (Do not check if a smaller
reporting company)
   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨     No þ

 

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 the closing price of the Class A Common Stock on June 30, 2017 on the NYSE American: $229,017,827.

 

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 2, 2018 was 5,042,709 and 898,633, respectively.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the 2018 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year) are incorporated by reference in Part III hereof.

 

 
   

 

 

Saga Communications, Inc.

2017 Form 10-K Annual Report

 

Table of Contents

 

    Page
     
PART I
Item 1. Business 4
Item 1A. Risk Factors 23
Item 1B. Unresolved Staff Comments 27
Item 2. Properties 27
Item 3. Legal Proceedings 27
Item 4. Mine Safety Disclosures 27
 
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28
Item 6. Selected Financial Data 31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 45
Item 8. Financial Statements and Supplementary Data 45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45
Item 9A. Controls and Procedures 45
Item 9B. Other Information 48
 
PART III
Item 10. Directors, Executive Officers and Corporate Governance  
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 48
Item 13. Certain Relationships and Related Transactions, and Director Independence 48
Item 14. Principal Accountant Fees and Services 48
 
PART IV
Item 15. Exhibits and Financial Statement Schedules 49
Signatures   88

 

 2 

 

 

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, words such as “believes,” “expects”, “anticipates,” “guidance,” and similar expressions are intended to identify forward-looking statements. These statements are made as of the date of this report or as otherwise indicated, based on current expectations. We undertake no obligation to update this information. A number of important factors could cause our actual results for 2018 and beyond to differ materially from those expressed in any forward-looking statements made by or on our behalf. Forward-looking statements are not guarantees of future performance as they involve a number of risks, uncertainties and assumptions that may prove to be incorrect and that may cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks, uncertainties and assumptions that may affect our performance, which are described in Item 1A of this report, include our financial leverage and debt service requirements, dependence on key personnel, dependence on key stations, global, U.S. and local economic conditions, our ability to successfully integrate acquired stations, regulatory requirements, new technologies, natural disasters, terrorist attacks, information technology and cybersecurity failures and data security breaches. We cannot be sure that we will be able to anticipate or respond timely to changes in any of these factors, which could adversely affect the operating results in one or more fiscal quarters. Results of operations in any past period should not be considered, in and of itself, indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of our stock.

 

 3 

 

  

PART I

 

Item 1.    Business

 

We are a broadcast company primarily engaged in acquiring, developing and operating broadcast properties. On May 9, 2017 we entered into an agreement to sell our Joplin, Missouri and Victoria, Texas television stations and subsequently closed on this transaction on September 1, 2017. The television stations that were sold constituted our entire television segment. The historical results of operations for the television stations are presented as discontinued operations for all periods presented (see Note 3). As a result of the sale of our television stations and those stations being reported as discontinued operations we only have one reportable segment at December 31, 2017. Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to our continuing operations. As of February 28, 2018, we owned seventy-five FM and thirty-three AM radio stations serving twenty-six markets, including Bellingham, Washington; Columbus, Ohio; Norfolk, Virginia; Milwaukee, Wisconsin; Manchester, New Hampshire; and Des Moines, Iowa.

 

The following table sets forth information about our radio stations and the markets they serve as of February 28, 2018:

 

      2017   2017       
      Market   Market       
      Ranking   Ranking       
      By Radio   By Radio      Target
Station  Market (a)  Revenue (b)   Market (b)   Station Format  Demographics
                  
FM:                   
WKLH  Milwaukee, WI   30    41   Classic Rock  Men 40-64
WHQG  Milwaukee, WI   30    41   Rock  Men 18-49
WJMR  Milwaukee, WI   30    41   Urban Adult Contemporary  Women 25-54
WNRG  Milwaukee, WI   30    41   Contemporary Hits  Adults 18-34
WSNY  Columbus, OH   33    37   Adult Contemporary  Women 25-54
WNND  Columbus, OH   33    37   Classic Hits  Adults 35-64
WNNP  Columbus, OH   33    37   Classic Hits  Adults 35-64
WLVQ  Columbus, OH   33    37   Classic Rock  Men 40-64
WVMX  Columbus, OH   33    37   Hot Adult Contemporary  Women 25-44
WNOR  Norfolk, VA   41    45   Rock  Men 18-49
WAFX  Norfolk, VA   41    45   Classic Rock  Men 35-64
KSTZ  Des Moines, IA   66    71   Hot Adult Contemporary  Women 25-44
KSTZ-HD2  Des Moines, IA   66    71   Country Legends  Adults 45-64
KIOA  Des Moines, IA   66    71   Classic Hits  Adults 45-64
KAZR  Des Moines, IA   66    71   Rock  Men 25-49
KAZR-HD2  Des Moines, IA   66    71   Oldies/Classic Hits  Adults 45+
KMYR  Des Moines, IA   66    71   Soft Adult Contemporary  Women 25-54
KIOA-HD2  Des Moines, IA   66    71   Contemporary Hits  Adults 18-34
WMGX  Portland, ME   74    95   Hot Adult Contemporary  Women 25-44
WYNZ  Portland, ME   74    95   Classic Hits  Adults 45-64
WPOR  Portland, ME   74    95   Country  Adults 25-54
WCLZ  Portland, ME   74    95   Adult Album Alternative  Adults 25-54
WAVF  Charleston, SC   92    78   Adult Contemporary  Adults 25-54
WCKN  Charleston, SC   92    78   Country  Adults 25-54
WMXZ  Charleston, SC   92    78   Hot Adult Contemporary  Women 25-44
WMXZ-HD2  Charleston, SC   92    78   Urban Hits  Adults 18-34
WXST  Charleston, SC   92    78   Urban Adult Contemporary  Adults 25-54
WAQY  Springfield, MA   97    96   Classic Rock  Men 35-54
WLZX  Springfield, MA   97    96   Alternative Rock  Men 18-49
WZID  Manchester, NH   116    198   Adult Contemporary  Women 25-54
WMLL  Manchester, NH   116    198   Classic Hits  Adults 45-64
WZID-HD2  Manchester, NH   116    198   Contemporary Hits  Adults 18-34
WZID-HD3  Manchester, NH   116    198   Classic Country  Adults 45-64
WOXL  Asheville, NC   154    158   Adult Contemporary  Women 25-54
WTMT  Asheville, NC   154    158   Classic Rock  Men 40-64
WTMT-HD2  Asheville, NC   154    158   Classic Hits  Adults 45-64
WTMT-HD3  Asheville, NC   154    158   Country Legends  Adults 45-64
WOXL-HD2  Asheville, NC   154    158   Adult Album Alternative  Adults 25-54
WSIG  Harrisonburg, VA   168    251   Classic Country  Adults 35-64
WQPO  Harrisonburg, VA   168    251   Contemporary Hits  Women 18-34

 

(footnotes follow tables) 

 

 4 

 

 

      2017   2017       
      Market   Market       
      Ranking   Ranking       
      By Radio   By Radio      Target
Station  Market (a)  Revenue (b)   Market (b)   Station Format  Demographics
                  
WQPO-HD3  Harrisonburg, VA   168    251   Classic Rock  Male 40-64
WMQR  Harrisonburg, VA   168    251   Adult Contemporary  Female 25-44
WWRE  Harrisonburg, VA   168    251   Classic Hits  Adults 45-64
WNAX  Yankton, SD   180    258   Country  Adults 25-54
WWWV  Charlottesville, VA   190    206   Classic Rock  Men 40-64
WQMZ  Charlottesville, VA   190    206   Adult Contemporary  Women 25-54
WCNR  Charlottesville, VA   190    206   Adult Album Alternative  Adults 25-54
WCVL  Charlottesville, VA   190    206   Country  Adults 25-54
WLHH  Hilton Head, SC   246    222   Classic Hits  Adults 45-64
WOEZ  Hilton Head, SC   246    222   Adult Contemporary  Women 35-64
WVSC  Hilton Head, SC   246    222   Soft Adult Contemporary  Women 35-64
WVSC-HD2  Hilton Head, SC   246    222   Oldies/Classic Hits  Adults 45-64
KISM  Bellingham, WA   N/A    N/A   Classic Rock  Men 40-64
KAFE  Bellingham, WA   N/A    N/A   Adult Contemporary  Women 25-54
WKVT  Brattleboro, VT   N/A    N/A   Classic Hits  Adults 40-64
WRSY  Brattleboro, VT   N/A    N/A   Adult Album Alternative  Adults 25-54
WQEL  Bucyrus, OH   N/A    N/A   Classic Hits  Adults 40-64
WLRW  Champaign, IL   N/A    N/A   Hot Adult Contemporary  Women 25-44
WREE  Champaign, IL   N/A    N/A   Classic Hits  Adults 40-64
WYXY  Champaign, IL   N/A    N/A   Classic Country  Adults 45-64
WIXY  Champaign, IL   N/A    N/A   Country  Adults 25-54
WIXY-HD2  Champaign, IL   N/A    N/A   Rock  Men 18-49
WIXY-HD3  Champaign, IL   N/A    N/A   Contemporary Hits  Adults 18-34
WLRW-HD2  Champaign, IL   N/A    N/A   Oldies/Classic Hits  Adults 45-64
WCVQ  Clarksville, TN — Hopkinsville, KY   N/A    N/A   Hot Adult Contemporary  Women 25-54
WVVR  Clarksville, TN — Hopkinsville, KY   N/A    N/A   Country  Adults 25-54
WZZP  Clarksville, TN — Hopkinsville, KY   N/A    N/A   Rock  Men 18-49
WRND  Clarksville, TN — Hopkinsville, KY   N/A    N/A   Classic Hits  Adults 40-64
WCVQ-HD2  Clarksville, TN — Hopkinsville, KY   N/A    N/A   Contemporary Christian  Adults 25-54
WCVQ-HD3  Clarksville, TN — Hopkinsville, KY   N/A    N/A   Country Legends  Adults 45-64
WHAI  Greenfield, MA   N/A    N/A   Adult Contemporary  Women 25-54
WPVQ  Greenfield, MA   N/A    N/A   Country  Adults 25-54
WIII  Ithaca, NY   N/A    N/A   Iconic Rock  Men 40-64
WQNY  Ithaca, NY   N/A    N/A   Country  Adults 25-54
WYXL  Ithaca, NY   N/A    N/A   Adult Contemporary  Women 25-54
WYXL-HD2  Ithaca, NY   N/A    N/A   Adult Album Alternative  Adults 25-54
WYXL-HD3  Ithaca, NY   N/A    N/A   Sports  Men 25-64
WFIZ  Ithaca, NY   N/A    N/A   Contemporary Hits  Adults 18-34
WFIZ-HD2  Ithaca, NY   N/A    N/A   Oldies/Classic Hits  Adults 40-64
KEGI  Jonesboro, AR   N/A    N/A   Classic Rock  Men 40-64
KDXY  Jonesboro, AR   N/A    N/A   Country  Adults 25-54
KJBX  Jonesboro, AR   N/A    N/A   Adult Contemporary  Women 25-54
KJBX-HD2  Jonesboro, AR   N/A    N/A   Country Legends  Adults 45-64
KDXY-HD2  Jonesboro, AR   N/A    N/A   Contemporary Hits  Adults 18-34
KDXY-HD3  Jonesboro, AR   N/A    N/A   Sports ESPN  Men 35-64
WKNE  Keene, NH   N/A    N/A   Hot Adult Contemporary  Women 25-54
WSNI  Keene, NH   N/A    N/A   Adult Contemporary  Women 25-44

 

(footnotes follow tables) 

 

 5 

 

 

      2017   2017       
      Market   Market       
      Ranking   Ranking       
      By Radio   By Radio      Target
Station  Market (a)  Revenue (b)   Market (b)   Station Format  Demographics
                  
WINQ  Keene, NH   N/A    N/A   Country  Adults 25-54
WKNE-HD2  Keene, NH   N/A    N/A   Adult Album Alternative  Adults 25-54
WKNE-HD3  Keene, NH   N/A    N/A   Classic Country  Adults 45-64
KMIT  Mitchell, SD   N/A    N/A   Country  Adults 25-54
KMIT-HD2  Mitchell, SD   N/A    N/A   Adult Contemporary  Women 25-54
KMIT-HD3  Mitchell, SD   N/A    N/A   Sports  Men 18-64
KUQL  Mitchell, SD   N/A    N/A   Classic Hits/Oldies  Adults 45-64
WRSI  Northampton, MA   N/A    N/A   Adult Album Alternative  Adults 25-54
WLZX-HD2  Northampton, MA   N/A    N/A   Contemporary Hits  Adults 18-34
KICD  Spencer, IA   N/A    N/A   Country  Adults 25-54
KMRR  Spencer, IA   N/A    N/A   Adult Contemporary  Women 25-54
WYMG  Springfield, IL   N/A    N/A   Classic Rock  Men 25-54
WDBR  Springfield, IL   N/A    N/A   Contemporary Hits  Adults 18-34
WQQL  Springfield, IL   N/A    N/A   Classic Hits/Oldies  Adults 45-64
WLFZ  Springfield, IL   N/A    N/A   Country  Adults 25-54
WDBR-HD2  Springfield, IL   N/A    N/A   Country Legends  Adults 45-64
WDBR-HD3  Springfield, IL   N/A    N/A   Oldies/Classic Hits  Adults 45-64
                    
AM:                   
WJYI  Milwaukee, WI   30    41   Christian  Adults 25-54
WJOI  Norfolk, VA   41    45   Adult Standards  Adults 45-64
KRNT  Des Moines, IA   66    71   Sports  Men 18-64
KPSZ  Des Moines, IA   66    71   Christian  Adults 25-54
WGAN  Portland, ME   74    95   News/Talk  Adults 35-64
WZAN  Portland, ME   74    95   Talk/Sports  Men 18-64
WBAE  Portland, ME   74    95   News/Talk  Adults 35-64
WGIN  Portland, ME   74    95   News/Talk  Adults 35-64
WSPO  Charleston, SC   92    78   Gospel  Adults 25-54
WHNP  Springfield, MA   97    96   News/Talk  Adults 35-64
WFEA  Manchester, NH   116    198   News/Talk  Adults 35-64
WISE  Asheville, NC   154    158   Sports/Talk  Men 18-64
WYSE  Asheville, NC   154    158   Sports/Talk  Men 18-64
WSVA  Harrisonburg, VA   168    251   News/Talk  Adults 35-64
WHBG  Harrisonburg, VA   168    251   Sports ESPN  Men 18-64
WNAX  Yankton, SD   180    258   News/Talk  Adults 35-64
WINA  Charlottesville, VA   190    206   News/Talk  Adults 35-64
WVAX  Charlottesville, VA   190    206   Sports Talk  Men 18-64
KGMI  Bellingham, WA   N/A    N/A   News/Talk  Adults 35-64
KPUG  Bellingham, WA   N/A    N/A   Sports/Talk  Men 18-64
KBAI  Bellingham, WA   N/A    N/A   Classic Hits  Adults 40-64
WKVT  Brattleboro, VT   N/A    N/A   News/Talk  Adults 35-64
WBCO  Bucyrus, OH   N/A    N/A   Classic Country  Adults 45-64
WRND  Clarksville, TN — Hopkinsville, KY   N/A    N/A   Classic Hits  Adults 40-64
WKFN  Clarksville, TN — Hopkinsville, KY   N/A    N/A   Sports/Talk ESPN  Men 18-64
WHMQ  Greenfield, MA   N/A    N/A   News/Talk  Adults 35-64
WNYY  Ithaca, NY   N/A    N/A   Oldies/Classic Hits  Adults 45-64
WHCU  Ithaca, NY   N/A    N/A   News/Talk  Adults 35-64
WKBK  Keene, NH   N/A    N/A   News/Talk  Adults 35-64
WZBK  Keene, NH   N/A    N/A   Sports Talk  Men 18-64
WHMP  Northampton, MA   N/A    N/A   News/Talk  Adults 35-64
KICD  Spencer, IA   N/A    N/A   News/Talk  Adults 35-64
WTAX  Springfield, IL   N/A    N/A   News/Talk  Adults 35-64

 

(footnotes follow tables) 

 

 6 

 

 

 

 

(a) Actual city of license may differ from metropolitan market actually served.
   
(b) Derived from Investing in Radio 2017 Market Report.

 

Strategy

 

Our strategy is to operate top billing radio stations in mid-sized markets, which we define as markets ranked from 20 to 200 out of the markets summarized by Investing in Radio Market Report.

 

Programming and marketing are key components in our strategy to achieve top ratings in our radio operations. In many of our markets, the three or four most highly rated radio stations 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 we use attributes other than specific market listener data for sales activities. In those markets where sufficient alternative data is available, we do not subscribe to an independent listener rating service.

 

The radio stations that we own and/or operate employ a variety of programming formats, including Classic Hits, Adult Hits, Top 40, Country, Country Legends, Mainstream/Hot/Soft Adult Contemporary, Pure Oldies, Classic Rock, and News/Talk. We regularly perform extensive market research, including music evaluations, focus groups and strategic vulnerability studies. Our stations also employ audience promotions to further develop and secure a loyal following.

 

The television stations that we owned and/or operated, prior to their sale, during 2017 were comprised of two CBS affiliates, one ABC affiliate, two Fox affiliates, one Univision affiliate, one NBC affiliate, one Telemundo affiliate and one Cozi TV affiliate. In addition to securing network programming, we carefully selected available syndicated programming to maximize viewership. We also developed local programming, including a strong local news franchise in each of our television markets.

  

We concentrate on the development of strong decentralized local management, which is responsible for the day-to-day operations of the stations we own and/or operate. We compensate local management based on the station’s financial performance, as well as other performance factors that are deemed to affect 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.

 

Under the Telecommunications Act of 1996 (the “Telecommunications Act”), we are permitted to own as many as eight radio stations in a single market. See “Federal Regulation of Radio and Television Broadcasting”. We seek to acquire reasonably priced broadcast properties with significant growth potential that are located in markets with well-established and relatively stable economies. We often focus 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, the terms of our credit facility, and compliance with the Communications Act of 1934 (the “Communications Act”) and Federal Communications Commission (“FCC”) rules.  

 

Advertising Sales  

 

Our primary source of revenue is from the sale of advertising for broadcast on our stations. Depending on the format of a particular radio station, there are a predetermined number of advertisements broadcast each hour. The number of advertisements broadcast on our television stations were limited by certain network affiliation and syndication agreements and, with respect to children’s programs, federal regulation. We determine 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 our 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 based primarily on a station’s ability to attract audiences in the demographic groups targeted by advertisers, the number of stations in the market competing for the same demographic group, the supply of and demand for radio and television advertising time, and other qualitative factors including rates charged by competing radio and television 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. This allows broadcasters the ability to modify advertising rates as dictated by changes in station ownership within a market, changes in listener/viewer ratings and changes in the business climate within a particular market.

 

 7 

 

 

Approximately $124,809,000 or 87% of our gross revenue for the year ended December 31, 2017 (approximately $131,233,000 or 85% in fiscal 2016 and approximately $125,558,000 or 87% in fiscal 2015) was generated from the sale of local advertising for both continuing operations and discontinued operations. Additional revenue is generated from the sale of national advertising, network compensation payments, barter and other miscellaneous transactions. In all of our markets, we attempt to maintain a local sales force that is generally larger than our competitors. The principal goal in our sales efforts is to develop long-standing customer relationships through frequent direct contacts, which we believe represents a competitive advantage. We also typically provide incentives to our 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 our stations also engages independent national sales representatives to assist us in obtaining national advertising revenues. These representatives obtain advertising through national advertising agencies and receive a commission from us based on our net revenue from the advertising obtained. Total gross revenue resulting from national advertising for both continuing operations and discontinued operations in fiscal 2017 was approximately $18,151,000 or 13% of our gross revenue (approximately $23,545,000 or 15% in fiscal 2016 which includes $5,183,000 in national political sales or 3% of gross revenue and approximately $18,368,000 or 13% in fiscal 2015).

  

Competition

 

Both radio and television broadcasting are highly competitive businesses. Our stations compete for listeners/viewers and advertising revenues directly with other radio and/or television stations, as well as other media, within their markets. Our 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 our markets, we are able to attract advertisers seeking to reach these listeners/viewers.

 

Other media, including broadcast television and/or radio (as applicable), cable television, newspapers, magazines, direct mail, the Internet, coupons and billboard advertising, also compete with us for advertising revenues.

 

The radio and television broadcasting industries are also subject to competition from new media technologies, such as the delivery of audio programming by cable and satellite television systems, satellite radio systems, direct reception from satellites, and streaming of audio on the Internet.

 

Seasonality  

 

Our revenue varies throughout the year. Advertising expenditures, our primary source of revenue, is generally lowest in the first quarter.

 

Environmental Compliance  

 

As the owner, lessee or operator of various real properties and facilities, we are subject to various federal, state and local environmental laws and regulations. Historically, compliance with these laws and regulations has not had a material adverse effect on our business. There can be no assurance, however, that compliance with existing or new environmental laws and regulations will not require us to make significant expenditures of funds.

 

Employees  

 

As of December 31, 2017, we had approximately 683 full-time employees and 347 part-time employees, none of whom are represented by unions. We believe that our relations with our employees are good.

 

We employ several high-profile personalities with large loyal audiences in their respective markets. We have entered into employment and non-competition agreements with our President and with most of our on-air personalities, as well as non-competition agreements with our commissioned sales representatives.

 

Available Information  

 

You can find more information about us at our Internet website www.sagacommunications.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports are available free of charge on our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).

 

 8 

 

 

Federal Regulation of Radio and Television Broadcasting  

 

Introduction.   The ownership, operation and sale of radio and television stations, including those licensed to us, 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. For additional information on the impact of FCC regulations and the introduction of new technologies on our operations, see “Forward Looking Statements” and “Risk Factors” contained elsewhere herein.

 

The following is a brief summary of certain provisions of the Communications Act and of specific FCC regulations and policies. Reference should be made to the Communications Act, FCC rules and the public notices and rulings of the FCC for further information concerning the nature and extent of federal regulation of broadcast stations.

 

License Renewal.   Radio and television broadcasting licenses are granted for maximum terms of eight years, and are subject to renewal upon application to the FCC. Under its “two-step” renewal process, the FCC must grant a renewal application if it finds that during the preceding term the licensee has served the public interest, convenience and necessity, and there have been no serious violations of the Communications Act or the FCC’s rules which, taken together, would constitute a pattern of abuse. If a renewal applicant fails to meet these standards, the FCC may either deny its application or grant the application on such terms and conditions as are appropriate, including renewal for less than the full 8-year term. In making the determination of whether to renew the license, the FCC may not consider whether the public interest would be served by the grant of a license to a person other than the renewal applicant. If the FCC, after notice and opportunity for a hearing, finds that the licensee has failed to meet the requirements for renewal and no mitigating factors justify the imposition of lesser sanctions, the FCC may issue an order denying the renewal application, and only thereafter may the FCC accept applications for a construction permit specifying the broadcasting facilities of the former licensee. Petitions may be filed to deny the renewal applications of our stations, but any such petitions must raise issues that would cause the FCC to deny a renewal application under the standards adopted in the “two-step” renewal process. All the Company’s licenses have been renewed for their regular terms. In the future, we intend to timely file renewal applications, as required for the Company’s stations. In January 2018, the FCC designated the renewal applications of two AM radio stations for hearing based on the stations’ records of extended periods of silence during and following their respective license renewal terms. 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, unless the FCC exercises its discretion to extend or reinstate the license “to promote equity and fairness.” The FCC, to date, has rarely exercised such discretion. 

 

 9 

 

 

The following table sets forth the market and broadcast power of each of the broadcast stations that we own or operate with an attributable interest and the date on which each such station’s FCC license expires:

 

      Power   Expiration Date of
Station  Market (1)  (Watts) (2)   FCC Authorization
           
FM:           
WOXL  Asheville, NC   50,000   December 1, 2019
WTMT  Asheville, NC   50,000   December 1, 2019
KISM  Bellingham, WA   100,000   February 1, 2022
KAFE  Bellingham, WA   100,000   February 1, 2022
WRSY  Brattleboro, VT   3,000   April 1, 2022
WKVT  Brattleboro, VT   6,000   April 1, 2022
WQEL  Bucyrus, OH   3,000   October 1, 2020
WLRW  Champaign, IL   50,000   December 1, 2020
WIXY  Champaign, IL   25,000   December 1, 2020
WREE  Champaign, IL   25,000   December 1, 2020
WYXY  Champaign, IL   50,000   December 1, 2020
WAVF  Charleston, SC   100,000   December 1, 2019
WCKN  Charleston, SC   100,000   December 1, 2019
WMXZ  Charleston, SC   50,000   December 1, 2019
WXST  Charleston, SC   100,000   December 1, 2019
WWWV  Charlottesville, VA   50,000   October 1, 2019
WQMZ  Charlottesville, VA   6,000   October 1, 2019
WCNR  Charlottesville, VA   6,000   October 1, 2019
WCVL  Charlottesville, VA   6,000   October 1, 2019
WCVQ  Clarksville, TN/Hopkinsville, KY   100,000   August 1, 2020
WZZP  Clarksville, TN/Hopkinsville, KY   6,000   August 1, 2020
WVVR  Clarksville, TN/Hopkinsville, KY   100,000   August 1, 2020
WRND  Clarksville, TN/Hopkinsville, KY   6,000   August 1, 2020
WSNY  Columbus, OH   50,000   October 1, 2020
WNNP  Columbus, OH   6,000   October 1, 2020
WNND  Columbus, OH   6,000   October 1, 2020
WVMX  Columbus, OH   6,000   October 1, 2020
WLVQ  Columbus, OH   50,000   October 1, 2020
KSTZ  Des Moines, IA   100,000   February 1, 2021
KIOA  Des Moines, IA   100,000   February 1, 2021
KAZR  Des Moines, IA   100,000   February 1, 2021
KMYR  Des Moines, IA   100,000   February 1, 2021
WHAI  Greenfield, MA   3,000   April 1, 2022
WPVQ  Greenfield, MA   3,000   April 1, 2022
WMQR  Harrisonburg, VA   25,000   October 1, 2019
WQPO  Harrisonburg, VA   50,000   October 1, 2019
WSIG  Harrisonburg, VA   25,000   October 1, 2019
WWRE  Harrisonburg, VA   6,000   October 1, 2019
WOEZ  Hilton Head Island, SC   25,000   December 1, 2019
WLHH  Hilton Head Island, SC   25,000   December 1, 2019
WVSC  Hilton Head Island, SC   25,000   December 1, 2019
WYXL  Ithaca, NY   50,000   June 1, 2022
WQNY  Ithaca, NY   50,000   June 1, 2022
WIII  Ithaca, NY   50,000   June 1, 2022
WFIZ  Ithaca, NY   6,000   June 1, 2022

 

(footnotes follow tables) 

 

 10 

 

 

      Power   Expiration Date of
Station  Market (1)  (Watts) (2)   FCC Authorization
           
KEGI  Jonesboro, AR   50,000   June 1, 2020
KDXY  Jonesboro, AR   25,000   June 1, 2020
KJBX  Jonesboro, AR   6,000   June 1, 2020
WKNE  Keene, NH   50,000   April 1, 2022
WSNI  Keene, NH   6,000   April 1, 2022
WINQ  Keene, NH   6,000   April 1, 2022
WZID  Manchester, NH   50,000   April 1, 2022
WMLL  Manchester, NH   6,000   April 1, 2022
WKLH  Milwaukee, WI   50,000   December 1, 2020
WHQG  Milwaukee, WI   50,000   December 1, 2020
WNRG  Milwaukee, WI   6,000   December 1, 2020
WJMR  Milwaukee, WI   6,000   December 1, 2020
KMIT  Mitchell, SD   100,000   April 1, 2021
KUQL  Mitchell, SD   100,000   April 1, 2021
WNOR  Norfolk, VA   50,000   October 1, 2019
WAFX  Norfolk, VA   100,000   October 1, 2019
WRSI  Northampton, MA   3,000   April 1, 2022
WPOR  Portland, ME   50,000   April 1, 2022
WCLZ  Portland, ME   50,000   April 1, 2022
WMGX  Portland, ME   50,000   April 1, 2022
WYNZ  Portland, ME   25,000   April 1, 2022
KICD  Spencer, IA   100,000   February 1, 2021
KMRR  Spencer, IA   25,000   February 1, 2021
WLZX  Springfield, MA   6,000   April 1, 2022
WAQY  Springfield, MA   50,000   April 1, 2022
WYMG  Springfield, IL   50,000   December 1, 2020
WLFZ  Springfield, IL   50,000   December 1, 2020
WDBR  Springfield, IL   50,000   December 1, 2020
WQQL  Springfield, IL   25,000   December 1, 2020
WNAX  Yankton, SD   100,000   April 1, 2021
            
AM:           
WISE  Asheville, NC   5,000   December 1, 2019
WYSE  Asheville, NC   5,000(5)  December 1, 2019
KGMI  Bellingham, WA   5,000   February 1, 2022
KPUG  Bellingham, WA   10,000   February 1, 2022
KBAI  Bellingham, WA   1,000(5)  February 1, 2022
WKVT  Brattleboro, VT   1,000   April 1, 2022
WBCO  Bucyrus, OH   500(5)  October 1, 2020
WSPO  Charleston, SC   5,000   December 1, 2019
WINA  Charlottesville, VA   5,000   October 1, 2019
WVAX  Charlottesville, VA   1,000   October 1, 2019
WRND  Clarksville, TN/Hopkinsville, KY   1,000(5)  August 1, 2020
WKFN  Clarksville, TN   1,000(5)  August 1, 2020
KRNT  Des Moines, IA   5,000   February 1, 2021
KPSZ  Des Moines, IA   10,000   February 1, 2021
WHMQ  Greenfield, MA   1,000   April 1, 2022
WSVA  Harrisonburg, VA   5,000   October 1, 2019
WHBG  Harrisonburg, VA   1,000(5)  October 1, 2019

 

(footnotes follow tables)

 

 11 

 

 

      Power   Expiration Date of
Station  Market (1)  (Watts) (2)   FCC Authorization
           
WHCU  Ithaca, NY   5,000   June 1, 2022
WNYY  Ithaca, NY   5,000   June 1, 2022
WKBK  Keene, NH   5,000   April 1, 2022
WZBK  Keene, NH   1,000(5)  April 1, 2022
WFEA  Manchester, NH   5,000   April 1, 2022
WJYI  Milwaukee, WI   1,000   December 1, 2020
WJOI  Norfolk, VA   1,000   October 1, 2019
WHMP  Northampton, MA   1,000   April 1, 2022
WGAN  Portland, ME   5,000   April 1, 2022
WZAN  Portland, ME   5,000   April 1, 2022
WBAE  Portland, ME   1,000   April 1, 2022
WGIN  Portland, ME   1,000   April 1, 2022
KICD  Spencer, IA   1,000   February 1, 2021
WLZX  Springfield, MA   2,500(5)  April 1, 2022
WTAX  Springfield, IL   1,000   December 1, 2020
WNAX  Yankton, SD   5,000   April 1, 2021

 

(As previously described herein the following television stations were sold on September 1, 2017)

 

TV/Channel:

 

KOAM (DTV Ch 7)  Joplin, MO/Pittsburg, KS   DTV 14,800   June 1, 2022
KFJX (3) (DTV Ch 13)  Joplin, MO/Pittsburg, KS    DTV 5,600   June 1, 2022
KAVU (DTV Ch 15)  Victoria, TX   DTV 900,000   August 1, 2022
KVCT(3) (DTV Ch 11)  Victoria, TX   DTV 11,350   August 1, 2022
KUNU-LD(4) (Digital Ch 28)  Victoria, TX   DTV 15,000   August 1, 2022
KVTX-LP(4) (Digital Ch 45)  Victoria, TX   DTV 15,000   August 1, 2022
KXTS-LD(4) (Digital Ch 19)  Victoria, TX   DTV 15,000   August 1, 2022
KMOL-LD(4) (Digital Ch 17)  Victoria, TX   DTV 15,000   August 1, 2022
KQZY-LP(4)(Digital Ch 33)  Victoria, TX   DTV 4,000   August 2, 2022

 

 

  

(1)Some stations are licensed to a different community located within the market that they serve.

 

(2)Some stations are licensed to operate with a combination of effective radiated power (“ERP”) and antenna height, which may be different from, but provide equivalent coverage to, the power shown. The ERP of our television stations is expressed in terms of visual (“vis”) components. WHBG, WYSE, WISE, KPSZ, KPUG, KGMI, KBAI, WZBK, WBCO, WRND, WKFN, WNYY and WHCU operate with lower power at night than the power shown.

  

(3)We provided services to KFJX pursuant to a shared services agreement with the licensee of KFJX, Surtsey Media, LLC (“Surtsey”).  Until the television sale in 2017 we programmed KVCT pursuant to a time brokerage agreement with Surtsey. See Note 10 of the Notes to Consolidated Financial Statements included with this Form 10-K for additional information on our relationship with Surtsey.

 

(4)KUNU-LD, KXTS-LD, KVTX-LP, KMOL-LD and KQZY-LP are LPTV stations that operated as “secondary” stations (i.e., if they conflict with the operations of a “full power” television station, the LPTV stations must change their facilities or terminate operations).

 

(5)Operates daytime only or with greatly reduced power at night.

 

 12 

 

 

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 25% 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. Although we serve as a holding company for most of our various radio station subsidiaries (where we could not have more than 25% of our stock owned or voted by Aliens), we directly own two radio stations and two FM translators so that we cannot have more than 20% of our stock owned by Aliens.

 

On September 29, 2016, the FCC adopted rules to extend to broadcast licensees the same rules and procedures that common carrier wireless licensees use to seek approval for foreign ownership, with broadcast-specific modifications.

 

The new rules and procedures allow a broadcast licensee to request in a petition for declaratory ruling under Title 47 U.S.C. Section 310(b)(4):

 

  (1) approval of up to and including 100 percent aggregate foreign ownership of its controlling U.S. parent;
  (2) approval for a proposed, controlling foreign investor to increase its equity and/or voting interests in the U.S. parent up to and including 100 percent at some future time without filing a new petition—this applies where the foreign investor would acquire an initial controlling interest of less than 100 percent; and
  (3) approval for a non-controlling foreign investor named in the petition to increase its equity and/or voting interests in the U.S. parent at some future time, up to and including a non-controlling 49.99 percent equity and/or voting interest.

 

The new rules would require the Company to seek specific approval only of foreign individuals or entities with a greater than 5 percent ownership interest (or, in certain situations, an interest greater than 10 percent).

 

The new rules allow broadcast licensees that have foreign ownership rulings to apply those rulings to all radio and television broadcast licenses then held or subsequently proposed to be acquired by the same licensee and its covered subsidiaries and affiliates, regardless of the broadcast service (e.g., AM, FM, or TV) or the geographic area in which the stations are located.

 

The new methodology provides a framework for a publicly traded licensee or controlling U.S. parent to ascertain its foreign ownership using information that is “known or reasonably should be known” to the company in the ordinary course of business.

 

For publicly traded licensees and U.S. parent companies (like the Company), the new rules formalize the current equitable practice of recognizing a licensee’s good faith efforts to comply with Section 310(b) where the non-compliance was due solely to circumstances beyond the licensee’s control that were not known or reasonably foreseeable to the licensee.

 

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. In its 2006 Quadrennial Regulatory Review , released February 4, 2008, the FCC adopted a presumption, in the top 20 Nielsen Designated Market Areas (“DMAs”), that it is not inconsistent with the public interest for one entity to own a daily newspaper and a radio station or, under the following limited circumstances, a daily newspaper and a television station, if (1) the television station is not ranked among the top four stations in the DMA and (2) at least eight independent “major media voices” remain in the DMA. In all other instances, the FCC adopted a presumption that a newspaper/broadcast station combination would not be in the public interest, with two limited exceptions, and emphasized that the FCC is unlikely to approve such transactions. Taking into account these respective presumptions, in determining whether the grant of a transaction that would result in newspaper/broadcast cross-ownership is in the public interest, the FCC will consider the following factors: (1) whether the cross-ownership will increase the amount of local news disseminated through the affected media outlets in the combination; (2) whether each affected media outlet in the combination will exercise its own independent news judgment; (3) the level of concentration in the DMA; and (4) the financial condition of the newspaper or broadcast outlet, and if the newspaper or broadcast station is in financial distress, the proposed owner’s commitment to invest significantly in newsroom operations.

 

 13 

 

 

The FCC established criteria for obtaining a waiver of the rules to permit the ownership of two television stations in the same DMA that would not otherwise comply with the FCC’s rules. Under certain circumstances, a television station may merge with a “failed” or “failing” station or an “unbuilt” station if strict criteria are satisfied. Additionally, the FCC now permits a party to own up to two television stations (if permitted under the modified TV duopoly rule) and up to six radio stations (if permitted under the local radio ownership rules), or one television station and up to seven radio stations, in any market (“Qualifying Market”) where at least 20 independently owned media voices remain in the market after the combination is affected. The FCC will permit the common ownership of up to two television stations and four radio stations in any market where at least 10 independently owned media voices remain after the combination is affected. The FCC will permit the common ownership of up to two television stations (if permitted under the FCC’s local television multiple ownership rule) and one radio station notwithstanding the number of voices in the market. The FCC also adopted rules that make television time brokerage agreements or TBA’s count as if the brokered station were owned by the brokering station in making a determination of compliance with the FCC’s multiple ownership rules. TBA’s entered into before November 5, 1996, are grandfathered until the FCC announces a required termination date. As a result of the FCC’s rules, we would not be permitted to acquire a television broadcast station (other than LPTV) in a non-Qualifying Market in which we owned television properties. The FCC revised its rules to permit a television station to affiliate with two or more major networks of television broadcast stations under certain conditions. (Major existing networks are still subject to the FCC’s dual network ban). For more detailed information, see the discussion of recent FCC action under “Time Brokerage Agreements.”

 

We are permitted to own an unlimited number of radio stations on a nationwide basis (subject to the local ownership restrictions described below). We are permitted to own an unlimited number of television stations on a nationwide basis so long as the ownership of the stations would not result in an aggregate national audience reach (i.e., the total number of television households in the DMAs in which the relevant stations are located divided by the total national television households as measured by DMA data at the time of a grant, transfer or assignment of a license with UHF television stations are attributed with 50 percent of the television households in their DMA market for purposes of making this calculation) of 39%. In September 2016, the FCC voted to eliminate this so-called “UHF discount,” but the decision is subject to petitions for reconsideration. The multiple ownership rules now permit opportunities for newspaper-broadcast combinations, as follows:

 

In markets with three or fewer TV stations, no cross-ownership is permitted among TV, radio and newspapers. A company may obtain a waiver of that ban if it can show that the television station does not serve the area served by the cross-owned property ( i.e., the radio station or the newspaper).

 

In markets with between 4 and 8 TV stations, combinations are limited to one of the following:

 

  (A) A daily newspaper; one TV station; and up to half of the radio station limit for that market ( i.e ., if the radio limit in the market is 6, the company can only own 3) or

 

  (B) A daily newspaper; and up to the radio station limit for that market; ( i.e ., no TV stations) or

 

(C)Two TV stations (if permissible under local TV ownership rule); and up to the radio station limit for that market ( i.e ., no daily newspapers).

 

In markets with nine or more TV stations, the FCC has eliminated the newspaper-broadcast cross-ownership ban and the television-radio cross-ownership ban.

 

Under the rules, the number of radio stations one party may own in a local Nielsen Audio-rated radio market is determined by the number of full-power commercial and noncommercial radio stations in the market as determined by Nielsen Audio and BIA/Kelsey. Radio markets that are not Nielsen Audio rated are determined by analysis of the broadcast coverage contours of the radio stations involved. Numerous parties, including the Company, have sought reconsideration of the multiple ownership rules. In Prometheus Radio v. FCC , Case No. 03-3388 (U.S. Court of Appeals D.C. Circuit), on June 24, 2004, the court remanded the case to the FCC for the FCC to justify or modify its approach to setting numerical limits and for the FCC to reconsider or better explain its decision to repeal the failed station solicitation rule, and lifted a previously-imposed stay on the effect of the revised radio multiple ownership rules. By Further Notice of Proposed Rule Making (2006 Quadrennial Regulatory Review), released July 24, 2006, the FCC solicited comments. The rules adopted in the 2006 Quadrennial Regulatory Review were vacated in part by the Third Circuit Court of Appeals in Prometheus Radio Project v. FCC (652 F. 3d 432 (2011)) because the FCC’s procedures in the rule making proceeding did not satisfy the Administrative Procedure Act. The newspaper-broadcast cross-ownership rule was vacated, but the media ownership rules were affirmed. The FCC had created special benefits for so-called “eligible entities.” Because there was no data attempting to show a connection between the FCC’s eligible entity definition and the goal of increasing ownership of minorities and women under §309(j) of the Telecommunication Act of 1996, the “eligible entity” definition adopted was vacated as arbitrary and capricious. On April 15, 2014, the FCC released its 2014 Quadrennial Regulatory Review which consists of a Further Notice of Proposed Rulemaking (“FNPRM”) and Report and Order(“R&O”) incorporating the record of its 2010 Quadrennial Regulatory Review into the FNPRM. (In the 2010 Quadrennial Regulatory Review, the FCC also sought comment on whether television local news service (“LNS”) agreements and shared service agreements (“SSA”) are substantively equivalent to agreements that are already subject to the FCC’s attribution rules, and are therefore attributable now or should be in the future.) The FNPRM sought comment on whether to eliminate restrictions on newspaper/radio combinations and the radio/television cross-ownership rule in favor of reliance on the local radio rule and the local television rule. The FCC proposed to retain the current local television ownership rule with a minor modification to update the previous analog contour provision in light of the digital transition. The FCC sought comment on whether to retain the prohibition on the cross-ownership of newspapers and television stations, and if so, whether the FCC should reform the restriction to consider waivers for newspaper/television combinations. The FCC proposed to retain the current local radio ownership rule and the dual network rule without modification. In addition, in the R&O , the FCC attributed to the brokering station same-market television joint sales agreements (“JSAs”) that cover more than 15 percent of the weekly advertising time for the brokered station, but this rule was vacated by the U. S. Court of Appeals for the Third Circuit in Prometheus Radio Project v. FCC et al., 824 F 3d 33 (2016). 

 

 14 

 

 

Under the Communications Act, we are permitted to own radio stations (without regard to the audience shares of the stations) based upon the number of full-power radio stations in the relevant radio market as follows:

 

Number of Stations    
In Radio Market   Number of Stations We 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).

 

In its 2014 Quadrennial Review, FCC 17-156, released November 20, 2017, the FCC adopted a new policy effective February 7, 2018, on radio “embedded markets,” i.e., smaller markets, as defined by Nielsen Audio, that are included in a larger parent market. Pending the outcome of a review of the policy, the FCC adopted a presumption that a waiver of the local radio ownership rule as to stations in these markets serves the public interest if the transaction at issue satisfies the two-prong test: (1) a station owner would be required to comply with the numerical ownership limits using the Nielsen Audio Metro methodology in each embedded market; and (2) the station owner would be required to comply with the ownership limits using a contour-overlap methodology in lieu of the Commission’s current parent market analysis.

 

New rules to be promulgated under the Communications Act may permit us 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 rule-making proceeding. New rules could restrict the Company’s ability to acquire additional radio and television stations in some markets and could have required the Company to terminate its arrangements with Surtsey. The Court and FCC proceedings are ongoing and we cannot predict what action, if any, the Court or the FCC may take to further modify its rules. The statements herein are based solely on the FCC’s multiple ownership rules in effect as of the date hereof and do not include any forward-looking statements concerning compliance with any future multiple ownership rules.

 

The FCC generally applies its ownership limits to “attributable” interests held by an individual, corporation, partnership or other association. In the case of corporations holding broadcast licenses, the interests of officers, directors and those who, directly or indirectly, have the right to vote 5% or more of the corporation’s stock (or 20% or more of such stock in the case of certain 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, none of our directors has an attributable interest or interests in companies applying for or licensed to operate broadcast stations other than us.

 

The FCC’s ownership attribution rules (a) apply to limited liability companies and registered limited liability partnerships the same attribution rules that the FCC applies to limited partnerships; and (b) include an equity/debt plus (“EDP”) rule that attributes the other media interests of an otherwise passive investor if the investor is (1) a “major-market program supplier” that supplies over 15% of a station’s total weekly broadcast programming hours, or (2) a same-market media entity subject to the FCC’s multiple ownership rules (including broadcasters, cable operators and newspapers) so that its interest in a licensee or other media entity in that market will be attributed if that interest, aggregating both debt and equity holdings, exceeds 33% of the total asset value (equity plus debt) of the licensee or media entity. We could be prohibited from acquiring a financial interest in stations in markets where application of the EDP rule would result in us having an attributable interest in the stations. In reconsidering its rules, the FCC also eliminated the “single majority shareholder exemption” which provides that minority voting shares in a corporation where one shareholder controls a majority of the voting stock are not attributable; however, in December 2001 the FCC “suspended” the elimination of this exemption until the FCC resolved issues concerning cable television ownership.

 

Proposals are before the FCC whereby the government would take back part of the spectrum allotted for over-the-air television in favor of wireless broadband. The FCC is conducting a proceeding whereby broadcasters could voluntarily participate in a “reverse auction” of their over-the-air broadcast spectrum, otherwise agree to modifications in the spectrum available to them, move from the UHF to the VHF band (with or without compensations), or become subject to restrictions on their usage of the spectrum. The Company filed an application with the FCC seeking to participate in the reverse auction; however, the Company was not a winning bidder in the reverse auction. Therefore, it did not be relinquish any of its spectrum. However, one of the Company’s former television stations will be required to change its operating channel. Some or all of the Company’s costs for that change will be reimbursed by the FCC.

 

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In addition to the FCC’s multiple ownership rules, the Antitrust Division of the United States Department of Justice and the Federal Trade Commission and some state governments have the authority to examine proposed transactions for compliance with antitrust statutes and guidelines. The Antitrust Division has issued “civil investigative demands” and obtained consent decrees requiring the divestiture of stations in a particular market based on antitrust concerns.

 

Programming and Operation.   The Communications Act requires broadcasters to serve the “public interest.” Licensees are required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. Complaints from listeners concerning a station’s programming often will be considered by the FCC when it evaluates renewal applications of a licensee, although such complaints may be filed at any time and generally may be considered by the FCC at any time. Stations also must follow various rules promulgated under the Communications Act that regulate, among other things, political advertising, sponsorship identification, the advertisement of contests and lotteries, obscene and indecent broadcasts, and technical operations, including limits on radio frequency radiation. The FCC now requires the owners of antenna supporting structures (towers) to register them with the FCC. As an owner of such towers, we are subject to the registration requirements. The Children’s Television Act of 1990 and the FCC’s rules promulgated thereunder require television broadcasters to limit the amount of commercial matter which may be aired in children’s programming to 10.5 minutes per hour on weekends and 12 minutes per hour on weekdays. The Children’s Television Act and the FCC’s rules also require each television licensee to serve, over the term of its license, the educational and informational needs of children through the licensee’s programming (and to present at least three hours per week of “core” educational programming specifically designed to serve such needs). Licensees are required to publicize the availability of this programming and to file quarterly a report with the FCC on these programs and related matters. On April 27, 2012, the FCC released a Second Report and Order that requires television stations to post their public files online in a central, FCC-hosted database, rather than maintaining the files locally at their main studios. It did not impose any new reporting obligation on the Company. The FCC did not adopt new disclosure obligations for sponsorship identification and shared services agreements as had been proposed (But see the discussion in “Time Brokerage Agreements” concerning the disclosure of JSAs). On January 29, 2016, the FCC released a Report and Order which expanded to cable operators, direct satellite TV providers, broadcast radio licensees, and satellite radio licensees the requirement that public inspection files be posted to the FCC's online database. The Company’s radio stations are in compliance with these rules.

 

Equal Employment Opportunity Rules.   Equal employment opportunity (EEO) rules and policies for broadcasters prohibit discrimination by broadcasters and multichannel video programming distributors (“MVPDs”). They also require broadcasters to provide notice of job vacancies and to undertake additional outreach measures, such as job fairs and scholarship programs. The rules mandate a “three prong” outreach program; i.e., Prong 1: widely disseminate information concerning each full-time (30 hours or more) job vacancy, except for vacancies filled in exigent circumstances; Prong 2: provide notice of each full-time job vacancy to recruitment organizations that have requested such notice; and Prong 3: complete two (for broadcast employment units with five to ten full-time employees or that are located in smaller markets) or four (for employment units with more than ten full-time employees located in larger markets) longer-term recruitment initiatives within a two-year period. These include, for example, job fairs, scholarship and internship programs, and other community events designed to inform the public as to employment opportunities in broadcasting. The rules mandate extensive record keeping and reporting requirements. The EEO rules are enforced through review at renewal time, at mid-term for larger broadcasters, and through random audits and targeted investigations resulting from information received as to possible violations. The FCC has not yet decided on whether and how to apply the EEO rule to part-time positions. 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.

 

Time Brokerage Agreements.   As is common in the industry, we have entered into what have commonly been referred to as Time Brokerage Agreements (“TBAs”). Such arrangements are an extension of the concept of 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. While these agreements may take varying forms, under a typical TBA, separately owned and licensed radio or television stations agree to enter into cooperative arrangements of varying sorts, subject to compliance with the requirements of antitrust laws and with the FCC’s rules and policies. Under these types of arrangements, separately-owned stations agree to function cooperatively in terms of programming, advertising sales, and other matters, subject to the licensee of each station maintaining independent control over the financing, programming and station operations of its own station. One typical type of TBA is a programming agreement between two separately-owned radio or television stations serving a common service area, whereby the licensee of one station purchases substantial portions of the broadcast day on the other licensee’s station, subject to ultimate editorial and other controls being exercised by the latter licensee, and sells advertising time during such program segments.

 

The FCC’s rules provide that a station purchasing (brokering) time on another station serving the same market will be considered to have an attributable ownership interest in the brokered station for purposes of the FCC’s multiple ownership rules. As a result, under the rules, a broadcast station will not be permitted to enter into a time brokerage agreement giving it the right to purchase more than 15% of the broadcast time, on a weekly basis, of another local station that it could not own under the local ownership rules of the FCC’s multiple ownership rules. The FCC’s rules also prohibit a broadcast licensee from simulcasting more than 25% of its programming on another station in the same broadcast service (i.e., AM-AM or FM-FM) whether it owns the stations or through a TBA arrangement, where the brokered and brokering stations serve substantially the same geographic area.

 

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The FCC’s multiple ownership rules count stations brokered under a JSA toward the brokering station’s permissible ownership totals, as long as (1) the brokering entity owns or has an attributable interest in one or more stations in the local market, and (2) the joint advertising sales amount to more than 15% of the brokered station’s advertising time per week. In December, 2014, the FCC adopted a Notice of Proposed Rulemaking and Report and Order in connection with its 2014 Quadrennial Regulatory Review – Review of the Commission’s Broadcast Ownership Rules and Other Rules Adopted Pursuant to Section 202 of the Telecommunications Act of 1996 (“Report and Order ”). The FCC adopted a new attribution rule for JSAs that applies when: (1) both broadcast television stations are licensed to the same DMA; and (2) the brokering station is authorized to sell more than 15 percent of the weekly advertising time of the brokered station. In these circumstances, the brokering station will have an attributable interest in the brokered station. The rule became effective on June 19, 2014. However, as a result of action by the U. S. Congress in 2015, stations that have a television JSA signed before the release of the Report and Order will have until October 1, 2025, to ensure that the agreement complies with the FCC’s media ownership rules or to come into compliance with the media ownership rules by another means. For example, if the local television ownership rule (47 C.F.R. § 73.3555(b)) prohibits the brokering station from having an attributable interest in more than one broadcast television station in the same DMA, the licensees of the affected stations would either have to terminate the agreement or modify the agreement to ensure that the brokering station is authorized to sell no more than 15 percent of the brokered station’s weekly advertising time, or the licensee of the brokering station would have to take other steps to avoid having an attributable interest in more than one broadcast television station in the market. Licensees that believe application of the attribution rule to their particular circumstances would not serve the public interest may seek a waiver of this rule. Likewise, licensees that believe application of the local television ownership rule would adversely affect competition, diversity, or localism may seek a waiver of that rule. Television JSAs entered into after the release of the Report and Order must comply with the FCC’s media ownership rules at the time they are executed; the compliance period does not apply to any television JSA entered into after the release of the Report and Order. The Report and Order requires that all attributable television JSAs be filed with the FCC, and we have complied with this deadline.

 

Prior to the sale of our television stations, we had a television TBA in the Victoria, Texas, market with Surtsey. On January 31, 2012, we amended the TBA which included an extension of the grandfathered TBA for KVCT-TV and an assignable option with Surtsey for KVCT-TV. Even though the Victoria market is not a Qualifying Market such that the duopoly would otherwise be permissible, as discussed above, we believed that the TBA was “grandfathered” under the FCC’s rules and did not need to be terminated earlier than the date to be established in the ownership review proceeding. See “Ownership Matters” above. This TBA was terminated when we sold our television stations on September 1, 2017.

 

On March 7, 2003 we entered into an agreement of understanding with Surtsey, whereby we have guaranteed up to $1,250,000 of the debt incurred by Surtsey in closing on the acquisition of a construction permit for KFJX-TV, a television station in Pittsburg, Kansas, serving the Joplin, Missouri television market. In consideration for our guarantee, Surtsey entered into various agreements with us relating to the station, including a Shared Services Agreement, Agreement for Use of Ancillary Digital Spectrum and Agreement for the Sale of Commercial Time, which is considered by the FCC to be a JSA. On January 31, 2012, the Company and Surtsey amended these agreements and entered into an agreement which included an assignable option with Surtsey for KFJX-TV. When we sold our television stations on September 1, 2017, the debt we had guaranteed was paid off and the related agreements that we had entered into with Surtsey were terminated.

 

Other FCC Requirements  

 

The “V-Chip.”   The FCC adopted rules requiring every television receiver, 13 inches or larger, sold in the United States since January 2000 to contain a “V-chip” which allows parents to block programs on a standardized rating system. 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.

 

Digital Television.   Under the FCC’s rules all U.S. television broadcasters have been required to convert their operations from NTSC (analog) to digital television (“DTV”). DTV licensees may use their DTV channels for a multiplicity of services such as high-definition television broadcasts, multiple standard definition television broadcasts, data, audio, and other services so long as the licensee provides at least one free video channel equal in quality to the previous NTSC technical standard. Our full-service television stations and Low Power Television (“LPTV”) stations provided DTV service and terminated NTSC operations. We held licenses that authorized KOAM-TV to operate on Channel 7 for DTV and KAVU-TV to operate on Channel 15 for DTV. The FCC’s rules require broadcasters to include Program and System Information Protocol (“PSIP”) information in their digital broadcast signals.

 

Formerly brokered Station KVCT provided DTV service on Channel 11. KFJX-TV, with which KOAM-TV shared certain services, provided DTV services on Channel 13.

 

In October 2003, the FCC adopted rules requiring “plug and play” cable compatibility which would allow consumers to plug their cable directly into their digital TV set without the need for a set-top box. In January 2013, the U.S. Court of Appeals for the D.C. Circuit vacated the rules. The Company cannot predict whether the FCC will adopt other proposals to address this matter. The FCC has adopted rules whereby television licensees are charged a fee of 5% of gross revenue derived from the offering of ancillary or supplementary services on DTV spectrum for which a subscription fee is charged. Licensees and “permittees” of DTV stations were required to file with the FCC a report by December 1 of each year describing such services. None of the Company’s stations offered ancillary or supplementary services on their DTV channels.

 

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White Spaces.   On September 23, 2010, the FCC adopted a Second Memorandum Opinion and Order in ET Docket No. 04-186 that updated the rules for unlicensed wireless devices that can operate in broadcast television spectrum at locations where that spectrum is unused by licensed services. This unused TV spectrum is commonly referred to as television "white spaces." The rules allow for the use of unlicensed TV bands devices in the unused spectrum to provide broadband data and other services for consumers and businesses. It is possible that such operations have the potential for causing interference to broadcast operation, but we cannot yet judge whether such operations will have an adverse impact on the Company’s operations.

 

“Must-Carry” Rules.   The Cable Television Consumer Protection and Competition Act of 1992, among other matters, requires cable television system operators to carry the signals of local commercial and non-commercial television stations and certain LPTV stations. Cable television operators and other MVPDs may not carry broadcast signals without, in certain circumstances, obtaining the transmitting station’s consent. A local television broadcaster must make a choice every three years whether to proceed under the “must-carry” rules or waive the right to mandatory-uncompensated coverage and negotiate a grant of retransmission consent in exchange for consideration from the MVPD. Such must-carry rights extend to the DTV signals broadcast by our stations. For the three-year period commencing on January 1, 2015, we generally elected “retransmission consent” in notifying MVPDs that carry our television programming in our television markets.

 

LPTV and Class A Television Stations.   Currently, the service areas of LPTV stations are not protected. LPTV stations can be required to terminate their operations if they cause interference to full power stations. LPTV stations meeting certain criteria were permitted to certify to the FCC their eligibility to be reclassified as “Class A Television Stations” whose signal contours would be protected against interference from other stations. Stations deemed “Class A Stations” by the FCC would thus be protected from interference. Until September 1, 2017, we owned five LPTV stations, KUNU-LD, KVTX-LP, KXTS-LD, KMOL-LD, and KQZY-LD, Victoria, Texas, all of which operate in the digital mode. None of the stations qualifies under the FCC’s established criteria for Class A status.

 

Low Power FM Radio.   The FCC has created a “low power radio service” on the FM band (“LPFM”) in which the FCC authorizes the construction and operation of noncommercial educational FM stations with up to 100 watts effective radiated power (“ERP”) with antenna height above average terrain (“HAAT”) at up to 30 meters (100 feet). This combination is calculated to produce a service area radius of approximately 3.5 miles. The FCC’s rules will not permit any broadcaster or other media entity subject to the FCC’s ownership rules to control or hold an attributable interest in an LPFM station or enter into related operating agreements with an LPFM licensee. Thus, absent a waiver, we could not own or program an LPFM station. LPFM stations are allocated throughout the FM broadcast band, (i.e., 88.1 to 107.9 MHz), although they must operate with a noncommercial format. The FCC has established allocation rules that require FM stations to be separated by specified distances to other stations on the same frequency, and stations on frequencies on the first, second and third channels adjacent to the center frequency. The FCC has granted construction permits and licenses for LPFM stations. On January 4, 2011, the President signed into law the Local Community Radio Act of 2010 which required the FCC to modify the rules authorizing the operation of LPFM, as proposed in MM Docket No. 99-25.  In an order released December 4, 2012, the FCC modified its rules to implement the new law. The law requires the FCC to comply with its existing minimum distance separation requirements for full-service FM stations, FM translator stations, and FM booster stations that broadcast radio reading services via an analog subcarrier frequency to avoid potential interference by LPFM stations; and when licensing new FM translator stations, FM booster stations, and LPFM stations, to ensure that: (i) licenses are available to FM translator stations, FM booster stations, and LPFM stations; (ii) such decisions are made based on the needs of the local community; and (iii) FM translator stations, FM booster stations, and LPFM stations remain equal in status and secondary to existing and modified full-service FM stations.

 

On January 5, 2012, the FCC released a Report to Congress on the impact that LPFM stations will have on full-service commercial FM stations. The FCC “found no statistically reliable evidence that low-power FM stations have a substantial or consistent economic impact on full-service commercial FM stations,” and that “low-power FM stations generally do not have, and in the future are unlikely to have, a demonstrable economic impact on full-service commercial FM radio stations.” We cannot predict what, if any, impact the new LPFM stations will have on the Company’s full-service stations and FM translators.

 

Digital Audio Radio Satellite Service and Internet Radio.   In adopting its rules for the Digital Audio Radio Satellite Service (“DARS”) in the 2310-2360 MHz frequency band, 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.” The FCC granted two nationwide licenses, one to XM Satellite Radio, which began broadcasting in May 2001, and a second to Sirius Satellite Radio, which began broadcasting in February 2002. The satellite radio systems provide multiple channels of audio programming in exchange for the payment of a subscription fee. The FCC approved the application of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. to transfer control of the licenses and authorizations held by the two companies to one company, which is now known as Sirius XM Radio, Inc. Various companies have introduced devices that permit the reception of audio programming streamed over the Internet on home computers, on portable receivers, such as cell phones, and in automobiles. A number of digital music providers have developed and are offering their product through the Internet. Terrestrial radio operators (including the Company) are also making their product available through the Internet. We cannot predict whether, or the extent to which, such competing reception devices and DARS will have an adverse impact on our business.

 

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Satellite Carriage of Local TV Stations.   The Satellite Home Viewer Improvement Act (“SHVIA”), a copyright law, prevents direct-to-home satellite television carriers from retransmitting broadcast network television signals to consumers unless those consumers (1) are “unserved” by the over-the-air signals of their local network affiliate stations, and (2) have not received cable service in the preceding 90 days. According to the SHVIA, “unserved” means that a consumer cannot receive, using a conventional outdoor rooftop antenna, a television signal that is strong enough to provide an adequate television picture. In December 2001 the U.S. Court of Appeals for the District of Columbia upheld the FCC’s rules for satellite carriage of local television stations which require satellite carriers to carry upon request all local TV broadcast stations in local markets in which the satellite carriers carry at least one TV broadcast station, also known as the “carry one, carry all” rule. In December 2004, Congress passed and the President signed the Satellite Home Viewer Extension and Reauthorization Act of 2004 (“SHVERA”), which again amends the copyright laws and the Communications Act. The SHVIA governs the manner in which satellite carriers offer local broadcast programming to subscribers, but the SHVIA copyright license for satellite carriers was more limited than the statutory copyright license for cable operators. Specifically, for satellite purposes, “local,” though out-of-market (i.e., “significantly viewed”) signals were treated the same as truly “distant” (e.g., hundreds of miles away) signals for purposes of the SHVIA’s statutory copyright licenses. The SHVERA is intended to address this inconsistency by giving satellite carriers the option to offer FCC-determined “significantly viewed” signals to subscribers. In November 2005, the FCC adopted a Report and Order to implement SHVERA to enable satellite carriers to offer FCC-determined “significantly viewed” signals of out-of-market broadcast stations to subscribers subject to certain constraints set forth in SHVERA. The Order includes an updated list of stations currently deemed significantly viewed. On November 23, 2010, the FCC released three orders that implemented the Satellite Television Extension and Localism Act of 2010 (“STELA”). The FCC modified its Significantly Viewed (“SV”) rules to implement Section 203 of the STELA which amends Section 340 of the Communications Act to give satellite carriers the authority to offer out-of-market but SV broadcast television stations as part of their local service to subscribers. Section 203 of the STELA changes the restrictions on subscriber eligibility to receive SV network stations from satellite carriers. The STELA Reauthorization Act of 2014 (“STELAR”) added satellite television carriage to the FCC’s market modification authority, which previously applied only to cable television carriage. STELAR also extended until December 31, 2019, the exemption from retransmission consent requirements. STELAR permits the FCC to add communities to, or delete communities from, a station's local television market for purposes of satellite carriage, following a written request. In the FCC’s 2015 STELAR Market Modification Report and Order implementing Section 102 of the STELAR, the FCC adopted satellite television market modification rules that provide a process for broadcasters, satellite carriers, and county governments to request changes to the boundaries of a particular commercial broadcast television station's local television market to include a new community located in a neighboring local market. The rules enable a broadcast television station to be carried by a satellite carrier in such a new community if the station is shown to have a local relationship to that community.

 

In-Band On-Channel “Hybrid Digital” Radio.   The FCC has adopted rules permitting radio stations to broadcast using in-band, on-channel (IBOC) as the technology that allows AM and FM stations to operate using the IBOC systems developed by iBiquity Digital Corporation. This technology has become commonly known as “hybrid digital” or HD radio. Stations broadcast the same main channel program material in both analog and digital modes. HD radio technology permits “hybrid” operations, the simultaneous transmission of analog and digital signals with a single AM and FM channel. HD radio technology can provide near CD-quality sound on FM channels and FM quality on AM channels. HD radio technology also permits the transmission of up to three additional program streams over the radio stations. At the present time, we are configured to broadcast in HD radio on 57 stations and we continue to convert stations to HD radio on an ongoing basis.

 

Use of FM Translators by AM Stations and Digital Program Streams.   FM translator stations are relatively low power radio stations (maximum ERP: 250 Watts) that rebroadcast the programs of full-power FM stations on a secondary basis, meaning they must terminate or modify their operation if they cause interference to a full-power station. The FCC permits AM stations to be rebroadcast on FM translator stations in order to improve reception of programs broadcast by AM stations. The Company intends to continue to use some of its existing FM translators in connection with some of its AM stations. The Company is using some of its existing FM translators to rebroadcast HD radio program streams generated by some of its FM stations, which is permitted by the FCC. In a Report and Order released October 23, 2015, Revitalization of the AM Service, the FCC announced an opportunity, restricted to AM licensees and permittees, to apply for and receive authorizations to relocate existing FM translator stations within 250 miles for the sole and limited purpose of enhancing their existing service to the public. On January 29, 2016, the FCC opened a one-time only filing window during which only Class C and Class D AM broadcast stations could participate. That window closed on July 28, 2016, and a second window (open to all classes of stations) opened on July 29, 2016, and closed on October 31, 2016. The FM translators so acquired must rebroadcast the related AM station for at least four years, not counting any periods of silence. Some of the Company’s subsidiaries that are AM licensees, acquired FM translators and relocated them to their local markets to pair with its some of their AM broadcast stations. The FCC opened two windows for the filing of applications for construction permits for new FM translators. The first window (limited to Class D and D AM broadcast stations), was open from July 21 to August 2, 2017, and the second window (open to all classes of AM broadcast stations), was open from January 25 to 31, 2018, and have now closed. In the filing windows, qualifying AM licensees could apply for one, and only one, new FM translator station, in the non-reserved FM band to be used solely to re-broadcast the AM licensee’s AM signal to provide fill-in and/or nighttime service on a permanent basis. The Company has filed applications in both windows and has obtained some construction permits as a result. If the Company’s subsidiaries should decide to sell or suspend operations of an AM station with such an FM construction permit or license, the Company would also be required to sell or suspend operations of the FM translator. Where an application for a “new” construction permit is clear of spectrum so it can be granted, the FCC sets a deadline by which a “long-form” application must be filed to acquire the permit. Where an application is mutually exclusive (“MX”) with another proposal, the FCC general affords the applicants an opportunity to resolve the MX situation and obtain a construction permit. Where the parties cannot resolve the MX situation, the FCC makes the application subject to an auction where the highest bidder obtains the permit.

 

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Hart-Scott-Rodino Antitrust Improvements Act of 1976.   The Federal Trade Commission and the Department of Justice, the federal agencies responsible for enforcing the federal antitrust laws, may investigate certain acquisitions. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, an acquisition meeting certain size thresholds requires the parties to file Notification and Report Forms with the Federal Trade Commission and the Department of Justice and to observe specified waiting period requirements before consummating the acquisition. Any decision by the Federal Trade Commission or the Department of Justice to challenge a proposed acquisition could affect our ability to consummate the acquisition or to consummate it on the proposed terms. We cannot predict whether the FCC will adopt rules that would restrict our ability to acquire additional stations.

  

Changes to Application and Assignment Procedures.   In January 2010, the FCC adopted a First Report and Order that gives Native American tribes a priority to obtain broadcast radio licenses in tribal communities. The Order provides an opportunity for tribes to establish new service specifically designed to offer programming that meets the needs of tribal citizens. In addition, the First Report and Order modified the FCC’s radio application and assignment procedures, assisting qualified applicants to more rapidly introduce new radio service to the public. These modifications (1) Prohibit an AM applicant that obtains a construction permit through a dispositive Section 307(b) preference from downgrading the service level that led to the dispositive preference; (2) Requires technical proposals for new or major change AM facilities filed with Form 175 ( i.e ., FCC “short-form” Auction) applications to meet certain minimum technical standards to be eligible for further auction processing; and (3) Gives FCC operating bureaus authority to cap filing window applications. On December 29, 2011, the FCC released its Third Report and Order which limits eligibility for authorizations associated with allotments added to the FM Table of Allotments using the “Tribal Priority” to the tribes whom the Tribal Priority was intended to benefit. In a Public Notice released December 2, 2010 (GN Docket No. 10-244) the FCC sought comment on how it could design, adopt, and implement an additional new preference program in its competitive bidding process for persons or entities that have overcome substantial disadvantage and would be eligible for a bidding credit. In a Notice of Proposed Rulemaking, released October 10, 2014, and in the Quadrennial Regulatory Review NPRM, the FCC also sought comment on a proposal for applicants to be accorded licensing preferences if they could demonstrate that they have overcome “significant social and economic disadvantages.” In its Report and Order; Order on Reconsideration of the First Report and Order; Third Order on Reconsideration of the Second Report and Order; Third Report and Order, released July 21, 2015, the FCC declined to adopt at that time specific bidding preferences for other types of entities, including those that serve unserved/underserved areas or areas with persistent poverty, as well as those that have overcome disadvantages. The FCC further declined to consider any modification of the tribal lands bidding credit because the record did not support revisions to its current policies for the award of this benefit. 

 

Spectrum Auctions and Channel Sharing. Congress passed and the President signed into law the Middle Class Tax Relief and Job Creation Act of 2012, (codified at 47 U.S.C. § 309(j)(8)(G) 47 U.S.C. § 1452) (2012) (“Spectrum Act”). In a Report and Order, released June 2, 2014, in GN Docket 12-268, the FCC adopted rules to implement the Spectrum Act, including rules to implement the auction of broadcast television spectrum for use by other services. The FCC stated its mandate to protect full power and Class A television facilities that already were operating pursuant to a license (or a pending application for a license to cover a construction permit) on February 22, 2012, and to protect facilities in addition to those the statute requires the FCC to protect, based on consideration of the potential impact on the FCC’s flexibility in the repacking process and its auction goals. The FCC concluded that protecting other categories of facilities, including stations and television translator stations, would unduly constrain the FCC’s flexibility in the repacking process and undermine the likelihood of meeting its objectives for the incentive auction. To help preserve the services provided by LPTV and TV translator stations, the FCC will open a special filing window for such stations that are displaced to select a new channel and will amend its rules to expedite the process for displaced stations to relocate. The reverse and forward spectrum auctions were integrated in a series of stages.  Each stage consisted of a reverse auction and a forward auction bidding process, and additional stages as were necessary.  Broadcasters indicated through the pre-auction application process their willingness to relinquish spectrum usage rights at the opening prices.  Based on broadcasters’ collective willingness, the initial spectrum clearing target was set. Then the reverse auction bidding process was run to determine the total amount of incentive payments to broadcasters required to clear that amount of spectrum. The forward auction bidding process followed the reverse auction bidding process.  Full power and Class A station licensees were eligible to participate in the reverse auction. They could bid to voluntarily relinquish the spectrum usage rights associated with station facilities that are eligible for protection in the repacking process. Bidders had the three bid options specified by the Spectrum Act: (1) license relinquishment; (2) reassignment from a UHF to a VHF channel; and (3) channel sharing. UHF-to-VHF bidders could limit their bids to a high (channels 7 to 13) or low (channels 2 to 6) VHF channel. Bidders had the additional option to bid for reassignment from a high VHF channel to a low VHF channel. Potential bidders had to submit certified applications. Between the short-form application filing deadline and the announcement of the results of the reverse auction and the repacking process, all full power and Class A licensees were prohibited from communicating directly or indirectly any reverse or forward auction applicant’s bids or bidding strategies to any other full power or Class A licensee or forward auction applicant. The FCC shares forward auction proceeds with licensees that relinquish rights in the reverse auction as soon as practicable following the successful conclusion of the incentive auction. The FCC will reimburse costs reasonably incurred by television stations that are reassigned to new channels in the repacking process. The FCC will grandfather existing broadcast station combinations that otherwise would no longer comply with the media ownership rules as a result of the reverse auction. The Company timely filed an application to participate in the reverse auction; however, the Company was not a winning bidder in the reverse auction.  Therefore, it did not relinquish any of its spectrum.  However, one of the Company’s former television stations will be required to change its operating channel. Some or all of the Company’s costs for that change will be reimbursed by the FCC. 

 

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The Company pays for the use of music broadcast on its stations by obtaining licenses from organizations called performing rights societies, e.g. Broadcast Music, Inc. (“BMI”), which, in turn pay composers, authors and publishers for their works. A new organization, Global Music Rights, has recently began issuing licenses for the composers, authors and publishers that it represents. Federal law grants a performance right for sound recordings in favor of recording companies and performing artists for non-interactive digital transmissions and Internet radio. As a result, users of music, including the Company, are required to pay royalties for these uses through Sound Exchange, a non-profit performance rights organization. Periodically, bills have been introduced in Congress, that if passed, would have required the Company to pay additional fees to an organization called MusicFirst which would distribute the money to other entities. Efforts continue by certain organizations to persuade Congress to enact a law that would require such payments. We cannot predict whether such a law might be enacted. Should such a law be enacted, it would impose an additional financial burden on the Company, but the extent of the burden would depend on how the fee payment requirement was structured. Periodically, bills have been introduced in Congress that, if adopted, would require the Company to pay additional fees to one or more organizations that would distribute the money to performers or other entities.

 

On January 3, 2013, the FCC released the Sixth Further Notice of Proposed Rulemaking, which sought comment on the requirement that persons with attributable interests in broadcast licensees and other entities filing an FCC Ownership Report provide an “FCC Registration Number” (“FRN”) linked to their social security numbers. Questions had been raised about the security of the FCC’s Registration System where this data would be stored. On January 20, 2016, the FCC released its Report and Order, Second Report and Order and Order on Reconsideration that implemented a Restricted Use FRN (RUFRN) that individuals may use solely for the purpose of broadcast ownership report filings. The FCC stated its belief that the RUFRN would allow for sufficient unique identification of individuals listed on broadcast ownership reports without necessitating the disclosure to the FCC of individuals’ full Social Security Numbers (SSNs). The FCC eliminated the availability of the Special Use FRN (SUFRN) for broadcast station ownership reports, except in very limited circumstances. On January 4, 2017, the FCC’s Media Bureau issued an Order or Reconsideration denying petitions for reconsideration of the requirement. On February 2, 2017, the FCC set aside the Order on Reconsideration and returned the petitions for reconsideration to pending status to be considered by the full FCC. The FCC is also seeking comment on whether to expand the biennial ownership reporting requirement to include interests, entities and individuals that are not attributable because of (a) the single majority shareholder exemption and (b) the exemption for interests held in eligible entities pursuant to the higher EDP threshold. The Company has utilized the single majority shareholder exemption in reporting ownership interests in the Company. The Company cannot predict whether these proposals will be adopted, and if so, whether information provided by those persons with a reportable attributable interest in the Company will be secure.  

 

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 us and the operation and ownership of our broadcast properties. Application processing rules adopted by the FCC might require us to apply for facilities modifications to our standard broadcast stations in future “window” periods for filing applications or result in the stations being “locked in” with their present facilities. The FCC is authorized to use auctions for the allocation of radio broadcast spectrum frequencies for commercial use. The implementation of this law could require us to bid for the use of certain frequencies.

 

 21 

 

 

Executive Officers

 

Our current executive officers are:

 

Name   Age   Position
         
Edward K. Christian   73   President, Chief Executive Officer and Chairman; Director
Warren S. Lada   63   Chief Operating Officer
Samuel D. Bush   60   Senior Vice President, Treasurer and Chief Financial Officer
Marcia K. Lobaito   69   Senior Vice President, Corporate Secretary, and Director of Business Affairs
Catherine A. Bobinski   58   Senior Vice President/Finance, Chief Accounting Officer and Corporate Controller

 

Officers are elected annually by our Board of Directors and serve at the discretion of the Board. Set forth below is information with respect to our executive officers.

 

Mr. Christian has been President, Chief Executive Officer and Chairman since our inception in 1986.

 

Mr. Lada has been Chief Operating Officer since March 2016. He was Executive Vice President, Operations from 2012 to 2016. He was Senior Vice President, Operations from 2000 to 2012 and Vice President, Operations from 1997 to 2000. From 1992 to 1997 he was Regional Vice President of our subsidiary, Saga Communications of New England, Inc.

 

Mr. Bush has been Senior Vice President since 2002 and Chief Financial Officer and Treasurer since September 1997. He was Vice President from 1997 to 2002. From 1988 to 1997 he held various positions with the Media Finance Group at AT&T Capital Corporation, including senior vice president.

 

Ms. Lobaito has been Senior Vice President since 2005, Director of Business Affairs and Corporate Secretary since our inception in 1986 and Vice President from 1996 to 2005.

 

Ms. Bobinski has been Senior Vice President/Finance since March 2012 and Chief Accounting Officer and Corporate Controller since September 1991. She was Vice President from March 1999 to March 2012. Ms. Bobinski is a certified public accountant.

 

 22 

 

 

Item 1A. Risk Factors

 

The more prominent risks and uncertainties inherent in our business are described in more detail below. However, these are not the only risks and uncertainties we face. Our business may face additional risks and uncertainties that are unknown to us at this time.

 

Global Economic Conditions and Uncertainties May Continue to Affect our Business

 

We derive revenues from the sale of advertising and expenditures by advertisers tend to be cyclical and are reflective of economic conditions. Periods of a slowing economy, recession or economic uncertainty may be accompanied by a decrease in advertising. The global economic downturn that began in 2008 caused a decline in advertising and marketing by our customers, which had an adverse effect on our revenue, profit margins and cash flows. Global economic conditions have been slow to recover and remain uncertain. There can be no assurance that any of the recent economic improvements will be broad based and sustainable, or that they will enhance conditions in markets relevant to us. If economic conditions do not continue to improve, economic uncertainty increases or economic conditions deteriorate again; global economic conditions may once again adversely impact our business. Due to the continued uncertain pace of economic growth, we cannot predict future revenue trends. Further, there can be no assurance that we will not experience future adverse effects that may be material to our cash flows, competitive position, financial condition, results of operations, or our ability to access capital.

 

The volatility in global financial markets may also limit our ability to access the capital markets at a time when we would like, or need, to do so, which could have an impact on our flexibility to react to changing economic and business conditions. Accordingly, if the economy does not fully recover or worsens, our business, results of operations and financial condition could be materially and adversely affected.

 

We Have Substantial Indebtedness and Debt Service Requirements

 

At December 31, 2017 our long-term debt was approximately $25,000,000. We have borrowed and expect to continue to borrow to finance acquisitions and for other corporate purposes. Because of our indebtedness, a portion of our cash flow from operations is required for debt service. Our leverage could make us vulnerable to an increase in interest rates, a downturn in our operating performance, or a decline in general economic conditions. The credit facility is subject to mandatory prepayment requirements, including but not limited to, certain sales of assets, certain insurance proceeds, certain debt issuances and certain sales of equity. Any outstanding balance under the credit facility will be due on the maturity date of August 18, 2020. We believe that cash flows from operations will be sufficient to meet our debt service requirements for interest and scheduled payments of principal under the credit facility. However, if such cash flow is not sufficient, we may be required to sell additional equity securities, refinance our obligations or dispose of one or more of our properties in order to make such scheduled payments. We cannot be sure that we would be able to affect any such transactions on favorable terms, if at all.

 

Our Debt Covenants Restrict our Financial and Operational Flexibility

 

Our credit facility contains a number of financial covenants which, among other things, require us to maintain specified financial ratios and impose certain limitations on us with respect to investments, additional indebtedness, dividends, distributions, guarantees, liens and encumbrances. Our ability to meet these financial ratios can be affected by operating performance or other events beyond our control, and we cannot assure you that we will meet those ratios. Certain events of default under our credit facility could allow the lenders to declare all amounts outstanding to be immediately due and payable and, therefore, could have a material adverse effect on our business. We have pledged substantially all of our assets (excluding our FCC licenses and certain other assets) in support of the credit facility and each of our subsidiaries has guaranteed the credit facility and has pledged substantially all of their assets (excluding their FCC licenses and certain other assets) in support of the credit facility.

 

We Depend on Key Personnel

 

Our business is partially dependent upon the performance of certain key individuals, particularly Edward K. Christian, our President and CEO. Although we have entered into employment and non-competition agreements with Mr. Christian, which terminate on March 31, 2021, and certain other key personnel, including on-air personalities, we cannot be sure that such key personnel will remain with us. We can give no assurance that all or any of these employees will remain with us or will retain their audiences. Many of our key employees are at-will employees who are under no legal obligation to remain with us. Our competitors may choose to extend offers to any of these individuals on terms which we may be unwilling to meet. In addition, any or all of our key employees may decide to leave for a variety of personal or other reasons beyond our control. Furthermore, the popularity and audience loyalty of our key on-air personalities is highly sensitive to rapidly changing public tastes. A loss of such popularity or audience loyalty is beyond our control and could limit our ability to generate revenues.

 

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We Depend on Key Stations

 

Historically our top six markets when combined represented 46%, 48% and 46% of our net operating revenue for the years ended December 31, 2017, 2016 and 2015, respectively. Accordingly, we may have greater exposure to adverse events or conditions that affect the economy in any of these markets, which could have a material adverse effect on our revenue, results of operations and financial condition.

 

Local and National Economic Conditions May Affect our Advertising Revenue

 

Our financial results are dependent primarily on our ability to generate advertising revenue through rates charged to advertisers. The advertising rates a station is able to charge are affected by many factors, including the general strength of the local and national economies. Generally, advertising declines during periods of economic recession or downturns in the economy. Our revenue has been and is likely to be adversely affected during such periods, whether they occur on a national level or in the geographic markets in which we operate. During such periods we may also be required to reduce our advertising rates in order to attract available advertisers. Such a decline in advertising rates could also have a material adverse effect on our revenue, results of operations and financial condition.

 

Our Stations Must Compete for Advertising Revenues in Their Respective Markets

 

Radio broadcasting is a highly competitive business. Our stations compete for listeners/viewers and advertising revenues within their respective markets directly with other radio stations, as well as with other media, such as broadcast radio (as applicable), cable television and/or radio, satellite television and/or satellite radio systems, newspapers, magazines, direct mail, the Internet, coupons and billboard advertising. Audience ratings and market shares are subject to change, and any change in a particular market could have a material adverse effect on the revenue of our stations located in that market. While we already compete in some of our markets with other stations with similar programming formats, if another radio station in a market were to convert its programming format to a format similar to one of our stations, if a new station were to adopt a comparable format or if an existing competitor were to strengthen its operations, our stations could experience a reduction in ratings and/or advertising revenue and could incur increased promotional and other expenses. Other radio broadcasting companies may enter into the markets in which we operate or may operate in the future. These companies may be larger and have more financial resources than we have. We cannot assure you that any of our stations will be able to maintain or increase their current audience ratings and advertising revenues.  

 

Our Success Depends on our Ability to Identify, Consummate and Integrate Acquired Stations

 

As part of our strategy, we have pursued and may continue to pursue acquisitions of additional radio stations, subject to the terms of our credit facility. Broadcasting is a rapidly consolidating industry, with many companies seeking to consummate acquisitions and increase their market share. In this environment, we compete and will continue to compete with many other buyers for the acquisition of radio stations. Some of those competitors may be able to outbid us for acquisitions because they have greater financial resources. As a result of these and other factors, our ability to identify and consummate future acquisitions is uncertain.

  

Our consummation of all future acquisitions is subject to various conditions, including FCC and other regulatory approvals. The FCC must approve any transfer of control or assignment of broadcast licenses. In addition, acquisitions may encounter intense scrutiny under federal and state antitrust laws. Our future acquisitions may be subject to notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and to a waiting period and possible review by the Department of Justice and the Federal Trade Commission. Any delays, injunctions, conditions or modifications by any of these federal agencies could have a negative effect on us and result in the abandonment of all or part of attractive acquisition opportunities. We cannot predict whether we will be successful in identifying future acquisition opportunities or what the consequences will be of any acquisitions.

 

Certain of our acquisitions may prove unprofitable and fail to generate anticipated cash flows. In addition, the success of any completed acquisition will depend on our ability to effectively integrate the acquired stations. The process of integrating acquired stations may involve numerous risks, including difficulties in the assimilation of operations, the diversion of management’s attention from other business concerns, risk of entering new markets, and the potential loss of key employees of the acquired stations.

 

Future Impairment of our FCC Broadcasting Licenses Could Affect our Operating Results

 

As of December 31, 2017, our FCC broadcasting licenses represented 37.5% of our total assets. We are required to test our FCC broadcasting licenses for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that our FCC broadcasting licenses might be impaired which may result in future impairment losses. For further discussion, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates included with this Form 10-K.

 

 24 

 

 

Our Business is Subject to Extensive Federal Regulation

 

The broadcasting industry is subject to extensive federal regulation which, among other things, requires approval by the FCC of transfers, assignments and renewals of broadcasting licenses, limits the number of broadcasting properties that may be acquired within a specific market, and regulates programming and operations. For a detailed description of the material regulations applicable to our business, see “Federal Regulation of Radio and Television Broadcasting” and “Other FCC Requirements” in Item 1 of this Form 10-K. Failure to comply with these regulations could, under certain circumstances and among other things, result in the denial or revocation of FCC licenses, shortened license renewal terms, monetary forfeitures or other penalties which would adversely affect our profitability. Changes in ownership requirements could limit our ability to own or acquire stations in certain markets.  

 

New Federal Regulations or Fees Could Affect our Broadcasting Operations

 

There has been proposed legislation in the past and there could be again in the future that requires radio broadcasters to pay additional fees such as a spectrum fee for the use of the spectrum or a royalty fee to record labels and performing artists for use of their recorded music. Currently, we pay royalties to song composers, publishers, and performers indirectly through third parties. Any proposed legislation that is adopted into law could add an additional layer of royalties to be paid directly to the record labels and artists. While this proposed legislation did not become law, it has been the subject of considerable debate and activity by the broadcast industry and other parties affected by the legislation. It is currently unknown what impact any potential required royalty payments would have on our results of operations, cash flows or financial position.

  

The FCC’s Vigorous Enforcement of Indecency Rules Could Affect our Broadcasting Operations

 

Federal law regulates the broadcast of obscene, indecent or profane material. The FCC has increased its enforcement efforts relating to the regulation of indecency violations, and Congress has increased the penalties for broadcasting obscene, indecent or profane programming, and these penalties may potentially subject broadcasters to license revocation, renewal or qualification proceedings in the event that they broadcast such material. In addition, the FCC’s heightened focus on the indecency regulations against the broadcast industry may encourage third parties to oppose our license renewal applications or applications for consent to acquire broadcast stations. Because the FCC may investigate indecency complaints prior to notifying a licensee of the existence of a complaint, a licensee may not have knowledge of a complaint unless and until the complaint results in the issuance of a formal FCC letter of inquiry or notice of apparent liability for forfeiture. We may in the future become subject to inquiries or proceedings related to our stations’ broadcast of obscene, indecent or profane material. To the extent that any inquiries or other proceedings result in the imposition of fines, a settlement with the FCC, revocation of any of our station licenses or denials of license renewal applications, our result of operations and business could be materially adversely affected.

 

 25 

 

 

New Technologies May Affect our Broadcasting Operations

 

The FCC has and is considering ways to introduce new technologies to the broadcasting industry, including satellite and terrestrial delivery of digital audio broadcasting and the standardization of available technologies which significantly enhance the sound quality of AM broadcasters. We are unable to predict the effect such technologies may have on our broadcasting operations. The capital expenditures necessary to implement such technologies could be substantial. Moreover, the FCC may impose additional public service obligations on television broadcasters in return for their use of the digital television spectrum. This could add to our operational costs. One issue yet to be resolved is the extent to which cable systems will be required to carry broadcasters’ new digital channels. Our television stations are highly dependent on their carriage by cable systems in the areas they served. FCC rules that impose no or limited obligations on cable systems to carry the digital television signals of television broadcast stations in their local markets could adversely affected our television operations.  

  

The Company is Controlled by our President, Chief Executive Officer and Chairman

 

As of March 2, 2018, Edward K. Christian, our President, Chief Executive Officer and Chairman, holds approximately 64% of the combined voting power of our Common Stock (not including options to acquire Class B Common Stock and based on Class B shares generally entitled to ten votes per share). As a result, Mr. Christian generally is able to control the vote on most matters submitted to the vote of stockholders and, therefore, is able to direct our management and policies, except with respect to (i) the election of the two Class A directors, (ii) those matters where the shares of our Class B Common Stock are only entitled to one vote per share, and (iii) other matters requiring a class vote under the provisions of our certificate of incorporation, bylaws or applicable law. For a description of the voting rights of our Common Stock, see Note 10 of the Notes to Consolidated Financial Statements included with this Form 10-K. Without the approval of Mr. Christian, we will be unable to consummate transactions involving an actual or potential change of control, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices.

 

 26 

 

 

We May Experience Volatility in the Market Price of our Common Stock

 

The market price of our common stock has fluctuated in the past and may continue to be volatile. In addition to stock market fluctuations due to economic or other factors, the volatility of our shares may be influenced by lower trading volume and concentrated ownership relative to many of our publicly-held competitors. Because several of our shareholders own significant portions of our outstanding shares, our stock is relatively less liquid and therefore more susceptible to price fluctuations than many other companies’ shares. If these shareholders were to sell all or a portion of their holdings of our common stock, then the market price of our common stock could be negatively affected. Investors should be aware that they could experience short-term volatility in our stock if such shareholders decide to sell all or a portion of their holdings of our common stock at once or within a short period of time.

 

Information technology and cybersecurity failures or data security breaches could harm our business

 

Any internal technology error or failure impacting systems hosted internally or externally, or any large scale external interruption in technology infrastructure we depend on, such as power, telecommunications or the Internet, may disrupt our technology network. Any individual, sustained or repeated failure of technology could impact our customer service and result in increased costs or reduced revenues. Our technology systems and related data also may be vulnerable to a variety of sources of interruption due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues. While we have in place, and continue to invest in, technology security initiatives and disaster recovery plans, these measures may not be adequate or implemented properly to prevent a business disruption and its adverse financial and consequences to our business' reputation.

 

In addition, as a part of our ordinary business operations, we may collect and store sensitive data, including personal information of our clients, listeners and employees. The secure operation of the networks and systems on which this type of information is stored, processed and maintained is critical to our business operations and strategy. Any compromise of our technology systems resulting from attacks by hackers or breaches due to employee error or malfeasance could result in the loss, disclosure, misappropriation of or access to clients’, listeners’, employees’ or business partners’ information. Any such loss, disclosure, misappropriation or access could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and damage our reputation, any or all of which could adversely affect our business.

  

Item 1B.   Unresolved Staff Comments

 

None.

 

Item 2.    Properties

 

Our corporate headquarters is located in Grosse Pointe Farms, Michigan. The types of properties required to support each of our stations include offices, studios, and transmitter and antenna sites. A station’s studios are generally housed with its offices in business districts. The transmitter sites and antenna sites are generally located so as to provide maximum market coverage for our stations’ broadcast signals.

 

As of December 31, 2017, the studios and offices of 24 of our 27 operating locations, including our corporate headquarters in Michigan, are located in facilities we own. The remaining studios and offices are located in leased facilities with lease terms that expire in less than 1 month to 7 years. We own or lease our transmitter and antenna sites, with lease terms that expire in 3 months to 72 years. We do 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 our overall operations. We believe that our properties are in good condition and suitable for our operations.

 

We own substantially all of the equipment used in our broadcasting business.

 

Item 3.    Legal Proceedings

 

The Company is subject to various outstanding claims which arise in the ordinary course of business and to other legal proceedings. Management anticipates that any potential liability of the Company, which may arise out of or with respect to these matters, will not materially affect the Company’s financial statements.

 

Item 4.    Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The Company’s Class A Common Stock trades on the NYSE American under the ticker symbol SGA. 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 the NYSE American for the calendar quarters indicated (prices for periods prior to the four-for-three stock split are adjusted for such split):

 

Year  High   Low 
         
2016:          
First Quarter  $42.55   $35.77 
Second Quarter  $46.10   $36.70 
Third Quarter  $45.36   $37.02 
Fourth Quarter  $51.25   $40.05 
2017:          
First Quarter  $51.40   $47.55 
Second Quarter  $51.95   $45.45 
Third Quarter  $46.80   $37.75 
Fourth Quarter  $46.60   $40.35 

  

The closing price for the Company’s Class A Common Stock on March 2, 2018 as reported by the NYSE American was $38.90. As of March 2, 2018, there were approximately 170 holders of record of the Company’s Class A Common Stock, and one holder of the Company’s Class B Common Stock.

 

Dividends

 

During 2017, the Company’s Board of Directors declared four quarterly cash dividends and a special cash dividend totaling $2.00 per share on its Classes A and B shares. These dividends totaling approximately $11.8 million were paid during 2017. See Note 1 of the financial statements for specific details on the dividends.

 

During 2016, the Company’s Board of Directors declared four quarterly cash dividends and a special cash dividend totaling $1.30 per share on its Classes A and B shares. These dividends totaling approximately $7.6 million were paid during 2016. See Note 1 of the financial statements for specific details on the dividends.

 

During 2015, the Company’s Board of Directors declared four quarterly cash dividends and a special cash dividend totaling $1.10 per share on its Classes A and B shares. These dividends totaling approximately $6.4 million were paid during 2015. See Note 1 of the financial statements for specific details on the dividends.

 

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Securities Authorized for Issuance Under Equity Compensation Plan Information

 

The following table sets forth as of December 31, 2017, the number of securities outstanding under our equity compensation plans, the weighted average exercise price of such securities and the number of securities available for grant under these plans:

 

   (a)   (b)   (c) 
           Number of Securities 
           Remaining Available for 
   Number of Shares to       Future Issuance 
   be Issued Upon   Weighted-Average   Under Equity 
   Exercise of
Outstanding
   Exercise Price of
Outstanding Options,
   Compensation
Plans
 
Plan Category  Options
Warrants, and Rights
   Warrants
and Rights
   (Excluding
Column (a))
 
             
Equity Compensation Plans Approved by Stockholders:               
Employees’ 401(k) Savings and Investment Plan      $    520,665 
2005 Incentive Compensation Plan   96,639(1)  $0.00(2)   368,749 
Equity Compensation Plans Not Approved by Stockholders:               
None             
Total   96,639         889,414 

 

(1)All 96,639 shares are restricted stock.

 

(2)Weighted-Average Exercise Price of Outstanding Options is $0.00 as they are all restricted stock.

 

Recent Sales of Unregistered Securities  

 

Not applicable.

 

Issuer Purchases of Equity Securities  

 

The following table summarizes our repurchases of our Class A Common Stock during the three months ended December 31, 2017. All shares repurchased during the quarter were from the retention of shares for the payment of withholding taxes related to the vesting of restricted stock.

 

               Approximate 
           Total Number   Dollar 
           of   Value of 
           Shares   Shares 
           Purchased   that May Yet 
       Average   as Part of   be 
   Total Number   Price   Publicly   Purchased 
   of Shares   Paid per   Announced   Under the 
Period  Purchased   Share   Program   Program(a) 
October 1 - October 31, 2017   -   $-       -   $23,315,667 
November 1 – November 30, 2017   20,134   $45.134    -   $22,406,934 
December 1 – December 31, 2017   -   $-    -   $22,406,934 
Total   20,134   $45.134    -   $22,406,934 

 

(a)We have a Stock Buy-Back Program which allows us to purchase our Class A Common Stock. In February 2013, our Board of Directors authorized an increase in the amount committed to the Buy-Back Program from $60 million to approximately $75.8 million.

 

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Performance Graph

 

COMMON STOCK PERFORMANCE

 

Set forth below is a line graph comparing the cumulative total stockholder return for the years ended December 31, 2013, 2014, 2015, 2016 and 2017 of our Class A Common Stock against the cumulative total return of the NYSE American Stock Market (US Companies) and a Peer Group selected by us consisting of the following radio and/or television broadcast companies: Beasley Broadcast Group, Inc., CBS Corp., CC Media Holdings, Inc., Cumulus Media Inc., Emmis Communications Corp., Entercom Communications Corp., Entravision Communications Corp., The E.W. Scripps Company, The Nielsen Company, Radio One Inc., Saga Communications, Inc., Salem Communications Corp., Sirius XM Radio Inc., Spanish Broadcasting System, Inc., and Townsquare Media, Inc. The graph and table assume that $100 was invested on December 31, 2012, in each of our Class A Common Stock, the NYSE American Stock Market (US Companies) and the Peer Group and that all dividends were reinvested.   The information contained in this graph shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.

 

 

    

Legend
Symbol  Total Return For:  12/12   12/13   12/14   12/15   12/16   12/17 
  Saga Communications Inc.   100.00    149.24    134.85    122.61    165.28    139.00 
                                  
  NYSE American Stock Market (US Companies)   100.00    110.23    115.85    90.09    101.31    111.43 
                                  
  Peer Group   100.00    154.00    143.64    140.76    160.74    162.75 

 

The comparisons in the above table are required by the SEC. This table is not intended to forecast or to be indicative of any future return of our Class A Common Stock.

 

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Item 6.    Selected Financial Data

 

   Years Ended December 31, 
   2017 (1)(2)   2016 (1)(3)   2015 (1)(4)   2014 (1)(5)(6)   2013 (1)(7)(8) 
   (In thousands except per share amounts) 
                     
OPERATING DATA:                         
Net Operating Revenue  $118,149   $118,955   $111,792   $113,627   $109,818 
Station Operating Expense   87,759    86,799    83,188    85,167    79,933 
Corporate General and Administrative   11,657    10,980    10,091    8,901    8,172 
Other Operating (Income) Expense, net   55    (1,351)   509    (1,210)    
Impairment of Intangible Assets   1,449        874    1,936    2,033 
Operating Income From Continuing Operations  $17,229   $22,527   $17,130   $18,833   $19,680 
Interest Expense  $903   $744   $855   $1,032   $1,271 
Net Income:                         
From Continuing Operations  $22,246   $12,910   $9,146   $10,676   $11,090 
From Discontinued Operations   32,471    5,276    4,268    4,228    4,183 
Net Income  $54,717   $18,186   $13,414   $14,904   $15,273 
Basic Earnings (Loss) Per Share:                         
From Continuing Operations  $3.77   $2.20   $1.58   $1.84   $1.93 
From Discontinued Operations   5.50    0.90    0.73    0.73    0.73 
Earnings Per Share  $9.27   $3.10   $2.31   $2.57   $2.66 
Weighted Average Common Shares   5,803    5,761    5,706    5,700    5,681 
Diluted Earnings (Loss) Per Share:                         
From Continuing Operations  $3.77   $2.19   $1.56   $1.83   $1.92 
From Discontinued Operations   5.50    0.90    0.73    0.72    0.72 
Earnings Per Share  $9.27   $3.09   $2.29   $2.55   $2.64 
Weighted Average Common and Common Equivalent Shares   5,807    5,771    5,740    5,753    5,745 
Cash Dividends Declared Per Common Share  $2.00    1.30    1.10    1.80    1.80 

 

   December 31, 
   2017 (1)   2016 (1)   2015 (1)   2014 (1)   2013 (1)(8) 
   (In thousands) 
                     
BALANCE SHEET DATA:                         
Working Capital  $55,269   $36,727   $32,450   $29,476   $27,054 
Net Property and Equipment  $56,235   $49,174   $50,277   $47,514   $48,190 
Net Intangible and Other Assets  $116,360   $118,052   $106,399   $100,942   $102,953 
Total Assets  $248,769   $219,998   $203,464   $190,965   $192,199 
Long-term Debt Including Current Portion  $25,000   $35,287   $35,287   $35,000   $45,000 
Stockholders’ Equity  $179,465   $134,982   $122,816   $115,245   $109,701 

 

 

(footnotes on following page)

 

 31 

 

 

(1) In May 2017, the Company entered into an agreement to sell its Joplin, Missouri and Victoria, Texas television stations and subsequently closed on this transaction in September 2017.  The historical results of operations for the television stations are presented in the discontinued operations for all periods presented.
   
(2) Reflects the results of WCVL-FM operated under the terms of an LMA from February 1, 2015 until acquired on April 18, 2017.  Reflects the results of WCKN-FM, WMXF-FM, WXST-FM, WAVF-FM, WSPO-AM, W261-DG, W257BQ, WVSC-FM, WLHH-FM, WOEX-FM, W256CB, W293BZ acquired on September 1, 2017.
   
(3) Reflects the results of WLVQ-FM operated under the terms of an LMA from November 16, 2015 until acquired in February 2016.

 

(4)Reflects the results of WSVA-AM, WHBG-AM, WQPO-FM, WWRE-FM, and WMQR-FM acquired in August 2015 and WSIG-FM acquired in September 2015. Reflects the results of WLVQ-FM operated under the terms of an LMA effective November 2015. In December 2015, the Company disposed of the Illinois Radio Network.

 

(5)In December 2014, the Company sold the Michigan Radio Network, the Michigan Farm Network, the Minnesota News Network, the Minnesota Farm Network.

 

(6)Reflects the results of WFIZ-FM, acquired in January 2014.

 

(7)In January 2013, the Company consummated a four-for-three stock split of its Class A and Class B Common Stock. All share and per share information prior to the split has been adjusted to reflect the retroactive equivalent change in the weighted average shares.

 

(8)In January 2013, the Company sold WXVT-TV in Greenville, Mississippi. The operating results of WXVT-TV have been reported as discontinued operations for all periods presented.

 

 32 

 

 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with Item 1. Business, Item 6. Selected Financial Data and the consolidated financial statements and notes thereto of Saga Communications, Inc. and its subsidiaries contained elsewhere herein. The following discussion is presented on both a consolidated and segment basis. Corporate general and administrative expenses, interest expense, write-off debt issuance costs, other (income) expense, and income tax provision are managed on a consolidated basis and are reflected only in our discussion of consolidated results.

 

On May 9, 2017 the Company entered into an agreement to sell its Joplin, Missouri and Victoria, Texas television stations and subsequently closed on this transaction on September 1, 2017. The historical results of operations for the television stations are presented in the discontinued operations for all periods presented (see Note 3). As a result of the Company’s television stations being reported as discontinued operations the Company only has one reportable segment at December 31, 2017. Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to the Company’s continuing operations. The discussion of our operating performance focuses on operating income because we manage our stations primarily on operating income. Operating performance is evaluated for each individual market.

 

We use certain financial measures that are not calculated in accordance with generally accepted accounting principles in the United States of America (GAAP) to assess our financial performance. For example, we evaluate the performance of our markets based on “station operating income” (operating income plus corporate general and administrative expenses, depreciation and amortization, other operating (income) expenses, and impairment of intangible assets). Station operating income is generally recognized by the broadcasting industry as a measure of performance, is used by analysts who report on the performance of the broadcasting industry and it serves as an indicator of the market value of a group of stations. In addition, we use it to evaluate individual stations, market-level performance, overall operations and as a primary measure for incentive based compensation of executives and other members of management. Station operating income is not necessarily indicative of amounts that may be available to us for debt service requirements, other commitments, reinvestment or other discretionary uses. Station operating income is not a measure of liquidity or of performance in accordance with GAAP, and should be viewed as a supplement to, and not a substitute for our results of operations presented on a GAAP basis.

 

General

 

We are a broadcast company primarily engaged in acquiring, developing and operating broadcast properties. We actively seek and explore opportunities for expansion through the acquisition of additional broadcast properties. We review acquisition opportunities on an ongoing basis.

 

Continuing Operations - Radio Stations

 

Our radio station’s primary source of revenue is from the sale of advertising for broadcast on our stations. Depending on the format of a particular radio station, there are a predetermined number of advertisements available to be broadcast each hour.

 

Most advertising contracts are short-term and generally run for a few weeks only. The majority of our revenue is generated from local advertising, which is sold primarily by each radio markets’ sales staff. For the years ended December 31, 2017, 2016 and 2015, approximately 88%, 86% and 88%, respectively, of our radio station’s gross revenue was from local advertising. To generate national advertising sales, we engage independent advertising sales representative firms that specialize in national sales for each of our broadcast markets.

 

Our revenue varies throughout the year. Advertising expenditures, our primary source of revenue, generally have been lowest during the winter months, which include the first quarter of each year. Political revenue significantly increased in 2016 due to the increased number of national, state, and local elections in most of our markets as compared to 2015 and 2017.

 

Our net operating revenue, station operating expense and operating income vary from market to market based upon the market’s rank or size which is based upon population and the available radio advertising revenue in that particular market.

 

The broadcasting industry and advertising in general, is influenced by the state of the overall economy, including unemployment rates, inflation, energy prices and consumer interest rates. Our stations broadcast primarily in small to midsize markets. Historically, these markets have been more stable than major metropolitan markets during downturns in advertising spending, but may not experience increases in such spending as significant as those in major metropolitan markets in periods of economic improvement.

 

Our financial results are dependent on a number of factors, the most significant of which is our 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. In a number of our markets, this is measured by periodic reports generated by independent national rating services. In the remainder of our markets it is measured by the results advertisers obtain through the actual running of an advertising schedule. Advertisers measure these results based on increased demand for their goods or services and/or actual revenues generated from such demand. 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, target marketing capability of radio compared to other advertising media, and signal strength.

 

 33 

 

 

When we acquire and/or begin to operate a station or group of stations we generally increase programming and advertising and promotion expenses to increase our share of our target demographic audience. Our strategy sometimes requires levels of spending commensurate with the revenue levels we plan on achieving in two to five years. During periods of economic downturns, or when the level of advertising spending is flat or down across the industry, this strategy may result in the appearance that our cost of operations are increasing at a faster rate than our growth in revenues, until such time as we achieve our targeted levels of revenue for the acquired station or group of stations.

 

The number of advertisements that can be broadcast without jeopardizing listening levels (and the resulting ratings) is limited in part by the format of a particular radio station. Our stations strive to maximize revenue by constantly managing the number of commercials available for sale and by adjusting prices based upon local market conditions and ratings. 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 our revenue, with the exception of those instances where stations are acquired or sold, is generally the result of inventory sell out ratios and pricing adjustments, which are made to ensure that the station efficiently utilizes available inventory.

 

Our radio stations employ a variety of programming formats. We periodically perform market research, including music evaluations, focus groups and strategic vulnerability studies. Because reaching a large and demographically attractive audience is crucial to a station’s financial success, we endeavor to develop strong listener loyalty. Our stations also employ audience promotions to further develop and secure a loyal following. We believe that the diversification of formats on our radio stations helps to insulate us from the effects of changes in musical tastes of the public on any particular format.

 

The primary operating expenses involved in owning and operating radio stations are employee salaries, sales commissions, programming expenses, depreciation, and advertising and promotion expenses.

 

The radio broadcasting industry is subject to rapid technological change, evolving industry standards and the emergence of new media technologies and services. These new technologies and media are gaining advertising share against radio and other traditional media.

 

We are continuing to expand our digital initiative to provide a seamless experience across multiple platforms. Our goal is to allow our listeners to connect with our brands on demand wherever, however, and whenever they choose. We continue to create opportunities through targeted digital advertising and an array of digital services that include online promotions, mobile messaging, and email marketing. In 2017, we also made a concentrated effort to ensure our stations were available via smart speakers such as Amazon Echo, Google Home, etc.

 

 34 

 

 

During the years ended December 31, 2017, 2016 and 2015, our Columbus, Ohio; Des Moines, Iowa; Manchester, New Hampshire; Milwaukee, Wisconsin and Norfolk, Virginia markets, when combined, represented approximately 41%, 42%, and 41%, respectively, of our consolidated net operating revenue. An adverse change in any of these radio markets or relative market position in those markets could have a significant impact on our operating results as a whole.

 

The following tables describe the percentage of our consolidated net operating revenue represented by each of these markets:

 

   Percentage of Consolidated 
   Net Operating Revenue 
   for the Years 
   Ended December 31, 
   2017   2016   2015 
             
Market:               
Columbus, Ohio   11%   12%   9%
Des Moines, Iowa   7%   8%   8%
Manchester, New Hampshire   5%   5%   6%
Milwaukee, Wisconsin   12%   12%   12%
Norfolk, Virginia   6%   5%   6%

 

During the years ended December 31, 2017, 2016 and 2015, the radio stations in our five largest markets when combined, represented approximately 48%, 49% and 44%, respectively, of our consolidated station operating income. The following tables describe the percentage of our consolidated station operating income represented by each of these markets:

 

   Percentage of 
   Consolidated Station 
   Operating Income (*) 
   for the Years 
   Ended December 31, 
   2017   2016   2015 
             
Market:               
Columbus, Ohio   15%   15%   10%
Des Moines, Iowa   7%   7%   8%
Manchester, New Hampshire   6%   9%   8%
Milwaukee, Wisconsin   14%   14%   13%
Norfolk, Virginia   6%   4%   5%

 

 

 

(*)Operating income plus corporate general and administrative expenses, depreciation and amortization, other operating (income) expenses, and impairment of intangible assets.

 

 35 

 

 

Discontinued Operations - Television Stations

 

Our television station’s primary source of revenue was from the sale of advertising for broadcast on our stations. The number of advertisements available for broadcast on our television stations were limited by network affiliation and syndicated programming agreements and, with respect to children’s programs, federal regulation. Our television stations’ local market managers determined the number of advertisements to be broadcast in locally produced programs only, which were primarily news programming and occasionally local sports or information shows.

 

Our net operating revenue, station operating expense and operating income vary from market to market based upon the market’s rank or size, which was based upon population, available television advertising revenue in that particular market, and the popularity of programming being broadcast.

 

Our financial results were dependent on a number of factors, the most significant of which was our ability to generate advertising revenue through rates charged to advertisers. The rates a station was able to charge were, 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 through locally produced news, sports and weather and as a result of syndication and network affiliation agreements, local market competition, the ability of television broadcasting to reach a mass appeal market compared to other advertising media, and signal strength including cable/satellite coverage, and government regulation and policies.

 

Our stations strived to maximize revenue by constantly adjusting prices for our commercial spots based upon local market conditions, advertising demands and ratings. While there may have been shifts from time to time in the number of advertisements broadcast during a particular time of day, the total number of advertisements broadcast on a station generally does not vary significantly from year to year. Any change in our revenue, with the exception of those instances where stations are acquired or sold, was generally the result of pricing adjustments, which were made to ensure that the station efficiently utilizes available inventory.

 

Because audience ratings in the local market are crucial to a station’s financial success, we endeavor to develop strong viewer loyalty by providing locally produced news, weather and sports programming. We believe that this emphasis on the local market provided us with the viewer loyalty we were trying to achieve.

 

Most of our revenue was generated from local advertising, which was sold primarily by each television markets’ sales staff. For the 8 months ended August 31, 2017 and for the years ended December 31, 2016, and 2015, approximately 83%, 77%, and 85% respectively, of our television segment’s gross revenue was from local advertising. To generate national advertising sales, we engaged independent advertising sales representatives that specialize in national sales for each of our television markets.

 

Our revenue varies throughout the year. Advertising expenditures, our primary source of revenue, generally have been lowest during the winter months, which include the first quarter of each year. Political revenue significantly increased in 2016 due to the increased number of national, state, and local elections in most of our markets as compared to 2017 and 2015.

 

The primary operating expenses involved in owning and operating television stations were employee salaries, sales commissions, programming expenses, including news production and the cost of acquiring certain syndicated programming, depreciation, and advertising and promotion expenses.

 

 36 

 

 

Results of Operations

 

The following tables summarize our results of operations for the three years ended December 31, 2017, 2016 and 2015.

 

Consolidated Results of Operations

 

               2017 vs. 2016 (1)   2016 vs. 2015 
   Years Ended December 31,   $ Increase   % Increase   $ Increase   % Increase 
   2017   2016   2015   (Decrease)   (Decrease)   (Decrease)   (Decrease) 
   (In thousands, except %’s and per share information) 
Net operating revenue  $118,149   $118,955   $111,792   $(806)   (0.7)%  $7,163    6.4%
Station operating expense   87,759    86,799    83,188    960    1.1%   3,611    4.3%
Corporate G&A   11,657    10,980    10,091    677    6.2%   889    8.8%
Other operating expense (income), net   55    (1,351)   509    1,406    N/M    (1,860)   N/M 
Impairment of intangible assets   1,449        874    1,449    N/M    (874)   N/M 
Operating income from continuing operations   17,229    22,527    17,130    (5,298)   (23.5)%   5,397    31.5%
Interest expense   903    744    855    159    21.4%   (111)   (13.0)%
Write-off debt issuance costs           557            (557)   N/M 
Income from continuing operations before taxes   16,326    21,783    15,718    (5,457)   (25.1)%   6,065    38.6%
Income tax (benefit) expense   (5,920)   8,873    6,572    (14,793)   N/M     2,301    35.0%
Income from continuing operations, net of tax   22,246    12,910    9,146    9,336    N/M    3,764    41.2%
Income from discontinued operations, net of tax   32,471    5,276    4,268    27,195    N/M    1,008    23.6%
Net income  $54,717   $18,186   $13,414   $36,531    N/M    $4,772    35.6%
Earnings per share:                                   
From continuing operations  $3.77   $2.19   $1.56   $1.58    72.2%  $0.63    40.4%
From discontinued operations   5.50    0.90    0.73    4.60    N/M    0.17    23.3%
Earnings per share (diluted)  $9.27   $3.09   $2.29   $6.18    N/M   $0.80    34.9%

 

 37 

 

 

Results of Discontinued Operations

 

               2017 vs. 2016   2016 vs. 2015 
   Years Ended December 31,   $ Increase   % Increase   $ Increase   % Increase 
   2017(1)   2016   2015   (Decrease)   (Decrease)   (Decrease)   (Decrease) 
   (In thousands, except %’s and per share information) 
Net operating revenue  $14,238   $23,636   $21,064   $(9,398)   (39.8)%  $2,572    12.2%
Station operating expense   9,757    14,743    14,080    (4,986)   (33.8)%   663    4.7%
Other operating expense (income)   31    (42)   32    73    N/M    (74)   N/M 
Operating income from discontinued operations   4,450    8,935    6,952    (4,485)   (50.2)%   1,983    28.5%
Interest expense   21    32    33    (11)   (34.4)%   (1)   (3.0)%
Other income           (417)           417    N/M 
Income before income taxes from discontinued operations   4,429    8,903    7,336    (4,474)   (50.3)%   1,567   21.4%
Pretax gain on the disposal of discontinued operations   50,842            50,842    N/M         
Total pretax gain on discontinued operations   55,271    8,903    7,336    46,368    N/M    1,567    21.4%
Income tax expense   22,800    3,627    3,068    19,173    N/M    559    18.2%
Income from discontinued operations  $32,471   $5,276   $4,268   $27,195    N/M   $1,008    23.6%

 

 
(1)Results of operations for the Television stations are reflected through August 31, 2017. The effective date of the sale was September 1, 2017.

 

N/M = Not Meaningful

 

 38 

 

 

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

 

For the year ended December 31, 2017, consolidated net operating revenue was $118,149,000 compared with $118,955,000 for the year ended December 31, 2016, a decrease of $806,000 or 0.7%. We had an increase of approximately $2,885,000 that was attributable to stations that we did not own or operate for the entire comparable period, offset by a decrease of $3,691,000 generated by stations we owned or operated for the comparable period in 2016 (“same station”). The decrease in same station revenue was primarily the result of decreases in gross political revenue of $2,260,000, and gross local revenue of $1,587,000 from 2016. The decrease in gross political revenue was due to a lower number of national, state and local elections in most of our markets. The decrease in gross local revenue was due to decreases in our Bellingham, Washington; Columbus, Ohio and Springfield, Illinois markets.

 

Station operating expense was $87,759,000 for the year ended December 31, 2017, compared with $86,799,000 for the year ended December 31, 2016, an increase of $960,000 or 1.1%. We had an increase of approximately $2,442,000 that was attributable to stations that we did not own or operate for the entire comparable period, offset by a decrease of approximately $1,482,000 generated by stations we owned or operated for the comparable period in 2016. The decrease is primarily attributable to a decrease of $710,000 in licensing agreements, $387,000 in commission expenses due to lower revenues and $346,000 in compensation costs.

 

Operating income for the year ended December 31, 2017 was $17,229,000 compared to $22,527,000 for the year ended December 31, 2016, a decrease of $5,298,000 or 23.5%. The decrease was a result of the decrease in net operating revenue and the increase in station operating expense, described above, an increase in our corporate general and administrative expenses of $677,000 or 6.2%, an impairment charge of $1,449,000 in 2017 and a decrease in other operating income of $1,406,000 from 2016. The increase in corporate expenses is due to an increase in key man life insurance of $278,000, an increase of $212,000 in compensations costs and an increase in non-cash compensation related to the amortization of restricted stock grants of $179,000. In 2016, we had other operating income of $1,351,000 due to the gain of $1,415,000 received from the sale of a tower in Norfolk, Virginia.

 

Income from continuing operations, net of tax for the year ended December 31, 2017 was $22,246,000 compared to $12,910,000 for the year ended December 31, 2016, an increase of $9,336,000 or 72.3%. The increase in income from continuing operations, net of tax is primarily due to the income tax benefit of approximately $11.5 million for the year due to a decrease in the deferred tax rate for federal income tax from 35% to 21% as a result of the Tax Cuts and Jobs Act partially offset by the decrease of operating income, described above, and an increase in interest expense of $159,000 due to an increase in our interest rates. See Note 6 of the financial statements for more information on the impact of the Tax Cuts and Jobs Act.

 

Income from discontinued operations, net of tax for the period ended August 31, 2017 was $32,471,000 compared to $5,276,000 for the year ended December 31, 2016 an increase of $27,195,000. The increase was a direct result of the pretax gain on the disposal of the operations of $50,842,000, a decrease in station operating expense of $4,986,000 or 33.8%, partially offset by a decrease in net operating revenue of $9,398,000 or 39.8% and an increase in income tax expense of $19,173,000 primarily attributable to the gain on the sale of the television stations. For the period ended August 31, 2017, net operating revenue of our television stations was $14,238,000 compared with $23,636,000 for the year ended December 31, 2016, a decrease of $9,398,000 or 39.8% primarily due to only operating the television stations for eight months in 2017 and a decrease in gross political revenue in our Joplin, Missouri market. Station operating expense in the television stations for the period ended August 31, 2017 was $9,757,000, compared with $14,743,000 for the year ended December 31, 2016, a decrease of $4,986,000 or 33.8%. The decrease is primarily due to only operating the television stations for the eight months in 2017 compared to the whole year in 2016.

 

We generated net income of $54,717,000 ($9.27 per share on a fully diluted basis) during the year ended December 31, 2017, compared to $18,186,000 ($3.09 per share on a fully diluted basis) for the year ended December 31, 2016, an increase of $36,531,000. This is a direct result of the increase of $27,195,000 in income from discontinued operations, net of tax and the increase in income from continuing operations, net of tax of $9,336,000. 

 

 39 

 

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

For the year ended December 31, 2016, consolidated net operating revenue was was $118,955,000 compared with $111,792,000 for the year ended December 31, 2015, an increase of $7,163,000 or 6.4%. Approximately $5,816,000 or 81% was attributable to stations that we did not own or operate for the entire comparable period and $1,347,000 was attributable to stations we owned or operated for the comparable period. The increase in same station revenue was due primarily to an increase in gross political revenue of $2,334,000 partially offset by a decrease in gross local revenue of $983,000 from 2015. The majority of the increase in political revenue was attributable to our Des Moines, Iowa; Manchester, New Hampshire and Milwaukee, Wisconsin markets. The increase in gross political revenue was due to a higher number of national, state and local elections in most of our markets. The decrease in gross local revenue was mainly attributable to decreases in our Bellingham, Washington and Milwaukee, Wisconsin markets.

 

Station operating expense was $86,799,000 for the year ended December 31, 2016, compared with $83,188,000 for the year ended December 31, 2015, an increase of $3,611,000 or 4.3%. The increase was entirely attributable to an increase from stations that we did not own or operate for the entire comparable period.

 

Operating income for the year ended December 31, 2016 was $22,527,000 compared to $17,130,000 for the year ended December 31, 2015, an increase of $5,397,000 or 31.5%. The increase was a result of the increase in net operating revenue partially offset by the increase in station operating expense, described above. Additionally, there was an increase in corporate general and administrative expenses of $889,000 or 8.8% and an increase in other operating income of $1,860,000. Operating income for 2015 also included a non-cash impairment charge of $874,000 in connection with our review of broadcast licenses during the fourth quarter (see Note 2 in the accompanying notes to the consolidated financial statements). The increase in corporate expenses is due to an increase in compensation costs of $527,000 and an increase in non-cash compensation related to the amortization of restricted stock grants of $446,000 partially offset by a decrease in consulting fees of $167,000. Other operating income during 2016 related to the gain of $1,415,000 received from the sale of a tower in our Norfolk, Virginia market as discussed in Note 16 of the financial statements. Other operating expenses during 2015 included the loss of $400,000 incurred from the donation of WBOP-FM to Liberty University, Inc.

 

Income from continuing operations, net of tax for the year ended December 31, 2016 was $12,910,000 compared to $9,146,000 for the year ended December 31, 2015, an increase of $3,764,000 or 41.2%. The increase in income from continuing operations, net of tax is due to the increase in operating income of $5,397,000, as described above, and a decrease in the write-off of debt issuance costs of $557,000, and a decrease in interest expense of $111,000 driven by a decrease in interest rates and amortization of bank fees during 2016. These were partially offset by an increase in income tax expense of $2,301,000

 

Income from discontinued operations, net of tax for year ended December 31, 2016 was $5,276,000 compared to $4,268,000 for the year ended December 31, 2015 an increase of $1,008,000. The increase was a result of the increase in net operating revenue of $2,572,000, partially offset by an increase in station operating expenses of $663,000, combined with an increase in other operating income of $74,000 related to the gain on disposal of fixed assets in 2016 compared to the loss on the disposal of fixed assets in 2015 and a decrease in other income of $417,000 primarily attributable to a gain recognized from insurance proceeds related to lightning damage to two of our transmitters in 2015. The increase in revenue was due primarily to an increase in gross political revenue of $2,929,000 partially offset by a decrease in gross local revenue of $713,000 from 2015. The increase in political revenue was due to a higher number of national, state and local elections our Joplin, Missouri market. The decrease in gross local revenue was mainly attributable to our Victoria, Texas market. The increase in station operating expense was due to increases in compensation related expenses, healthcare costs, national commission expenses, retransmission expense and program rentals of $188,000, $181,000, $159,000, $102,000 and $93,000, respectively. The retransmission cost increases are a direct result of increased revenue in 2016.

 

We generated net income of $18,186,000 ($3.09 per share on a fully diluted basis) during the year ended December 31, 2016, compared to $13,414,000 ($2.29 per share on a fully diluted basis) for the year ended December 31, 2015, an increase of $4,772,000. This is a direct result of the increase of $3,764,000 of income from continuing operations, net of tax and the increase of $1,008,000 of income from discontinued operations, net of tax. 

 

 40 

 

 

Liquidity and Capital Resources

 

Debt Arrangements and Debt Service Requirements

 

On August 18, 2015, we entered into a new credit facility (the “Credit Facility”) with a group of banks. In connection with the execution of the Credit Facility, the credit agreement in place at June 30, 2015 (the “Old Credit Agreement”) was terminated, and all outstanding amounts were paid in full. The Credit Facility consists of a $100 million five-year revolving facility (the “Revolving Credit Facility”) and matures on August 18, 2020.

 

We have pledged substantially all of our assets (excluding our FCC licenses and certain other assets) in support of the Credit Facility and each of our subsidiaries has guaranteed the Credit Facility and has pledged substantially all of their assets (excluding their FCC licenses and certain other assets) in support of the Credit Facility.

 

The proceeds from the Credit Facility were used to repay all amounts outstanding on our Old Credit Agreement and pay transactional fees. The unused portion of the Revolving Credit Facility is available for general corporate purposes, including working capital, capital expenditures, permitted acquisitions and related transaction expenses and permitted stock buybacks. We wrote-off unamortized debt issuance costs relating to the Old Credit Agreement of approximately $557 thousand, pre-tax, due to entering into this new credit facility during the quarter ended September 30, 2015.

 

Approximately $266 thousand of debt issuance costs related to the Credit Facility were capitalized and are being amortized over the life of the Credit Facility. These deferred debt costs are included in other assets, net in the condensed consolidated balance sheets.

 

Interest rates under the Credit Facility are payable, at our option, at alternatives equal to LIBOR (1.375% at December 31, 2017), plus 1% to 2% or the base rate plus 0% to 1%. The spread over LIBOR and the base rate vary from time to time, depending upon our financial leverage. Letter of credit issued under the Credit Facility will be subject to a participation fee (which is equal to the interest rates applicable to Eurocurrency Loans, as defined in the Credit Agreement) payable to each of the Lenders and a fronting fee equal to 0.25% per annum payable to the issuing bank. We also pay quarterly commitment fees of 0.2% to 0.3% per annum on the unused portion of the Revolving Credit Facility.

 

The Credit Facility contains a number of financial covenants (all of which we were in compliance with at December 31, 2017) which, among other things, require us to maintain specified financial ratios and impose certain limitations on us with respect to investments, additional indebtedness, dividends, distributions, guarantees, liens and encumbrances.

 

We had approximately $75 million of unused borrowing capacity under the Revolving Credit Facility at December 31, 2016.

 

On October 5, 2017 and November 3, 2017, the Company used $5,287,000 and $5,000,000, respectively of the proceeds from the Television Sale to pay down a portion of its Revolving Credit Facility.

 

The loan agreement of approximately $1.1 million of secured debt affiliate was amended in April 2017 to extend the due date of the loan for three years to mature on May 1, 2020. Our affiliate repaid this loan when the television stations were sold on September 1, 2017.

 

Sources and Uses of Cash

 

During the years ended December 31, 2017, 2016 and 2015, we had net cash flows from operating activities from continuing operations of $23,912,000, $21,828,000 and $22,042,000, respectively. We believe that cash flow from operations will be sufficient to meet quarterly debt service requirements for interest and scheduled payments of principal under the Credit Facility. However, if such cash flow is not sufficient, we may be required to sell additional equity securities, refinance our obligations or dispose of one or more of our properties in order to make such scheduled payments. There can be no assurance that we would be able to effect any such transactions on favorable terms, if at all.

 

In March 2013, our board of directors authorized an increase to our Stock Buy-Back Program (the “Buy-Back Program”) to allow us to purchase up to $75.8 million of our Class A Common Stock. From its inception in 1998 through December 31, 2017, we have repurchased two million shares of our Class A Common Stock for $53.3 million. During the year ended December 31, 2017, approximately 21,000 shares were retained for payment of withholding taxes for $946,000 related to the vesting of restricted stock.

 

Our capital expenditures, exclusive of acquisitions, for the year ended December 31, 2017 were $6,246,000 ($3,967,000 in 2016) for continuing operations and $335,000 and $894,000 for the years ended December 31, 2017 and 2016, respectively, for discontinued operations. We anticipate capital expenditures in 2018 to be approximately $5.0 million to $6.0 million, which we expect to finance through funds generated from operations.

 

On March 3, 2017, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.30 per share on its Classes A and B Common Stock. This dividend, totaling approximately $1.8 million, was paid on April 14, 2017 to shareholders of record on March 28, 2017 and funded by cash on the Company’s balance sheet.

 

 41 

 

 

On May 3, 2017, the Company’s Board of Directors declared a regular cash dividend of $0.30 per share on its Classes A and B Common Stock. This dividend, totaling approximately $1.8 million, was paid on June 9, 2017 to shareholders of record on May 22, 2017 and funded by cash on the Company’s balance sheet.

 

On September 13, 2017, the Company’s Board of Directors declared a regular cash dividend of $0.30 per share on its Classes A and B Common Stock. This dividend, totaling approximately $1.8 million was paid on October 13, 2017 to shareholders of record on September 25,

2017 and funded by cash on the Company’s balance sheet.

 

On December 7, 2017, the Company’s Board of Directors declared a quarterly cash dividend of $0.30 per share and a special cash dividend of $0.80 per share on its Classes A and B shares. This dividend totaling approximately $6.5 million was paid on January 5, 2018 to shareholders of record on December 18, 2017.

 

On February 28, 2018, the Company’s Board of Directors declared a regular cash dividend of $0.30 per share on its Classes A and B Common Stock. This dividend, totaling approximately $1.8 million, will be paid on March 30, 2018 to shareholders of record on March 12, 2018.

 

On January 16, 2017, we entered into an asset purchase agreement to purchase an FM radio station (WCVL) from WUVA, Incorporated, serving the Charlottesville, Virginia market for approximately $1,650,000. Simultaneously, we entered into a TBA to begin operating the station on February 1, 2017. We completed this acquisition on April 18, 2017. This acquisition was financed through funds generated from operations.

 

On May 9, 2017 we entered into a definitive agreement to sell our Joplin, Missouri and Victoria, Texas television stations for approximately $66.6 million, subject to certain adjustments, to Evening Telegram Company d/b/a Morgan Murphy Media (the “Television Sale”). The Television Sale was completed on September 1, 2017 and the Company received net proceeds of $69.5 million which included the sales price of $66.6 million, the sales of accounts receivable of approximately $3.4 million, offset by certain closing adjustments and transactional costs of $500 thousand. The Company recognized a pretax gain of $50.8 million as a result of the Television Sale in the third quarter of 2017. The gain net of tax for the Television Sale was $29.9 million. Effective September 1, 2017, the Company used $24.2 million of the proceeds from the Television Sale to finance the acquisition of radio stations in South Carolina (as described in Note 9). On October 5, 2017 and November 3, 2017, the Company used $5,287,000 and $5,000,000, respectively of the proceeds from the Television Sale to pay down a portion of its Revolving Credit Facility (as defined and described in Note 8).

 

On May 9, 2017, the Company entered into an Asset Purchase Agreement with Apex Media Corporation and Pearce Development, LLC f/k/a Apex Real Property, LLC to purchase, for approximately $23 million (subject to certain purchase price adjustments) plus the right to air certain radio commercials, substantially all the assets related to the operation of the following radio stations principally serving the South Carolina area: WCKN (FM), WMXF(FM), WXST(FM), WAVF(FM), WSPO(AM), W261DG, W257BQ, WVSC(FM), WLHH(FM), WOEZ(FM), W256CB, W293BZ. The Company closed this transaction effective September 1, 2017, simultaneously with the closing of the Television Sale using funds generated from the Television Sale.

 

We continue to actively seek and explore opportunities for expansion through the acquisitions of additional broadcast properties.

 

We anticipate that any future acquisitions of radio and television stations and dividend payments will be financed through funds generated from operations, borrowings under the Credit Agreement, additional debt or equity financing, or a combination thereof. However, there can be no assurances that any such financing will be available on acceptable terms, if at all.

 

 42 

 

 

Summary Disclosures About Contractual Obligations

 

We have future cash obligations under various types of contracts, including the terms of our Credit Facility, operating leases, programming contracts, employment agreements, and other operating contracts. The following table reflects a summary of our contractual cash obligations and other commercial commitments as of December 31, 2017:

 

   Payments Due By Period 
       Less Than           More Than 
Contractual Obligations:  Total   1 Year   1 to 3 Years   4 to 5 Years   5 Years 
   (In thousands) 
                     
Long-Term Debt Obligations(1)  $25,000   $   $25,000   $   $ 
Interest Payments on Long-Term Debt(2)   2,333    886    1,447         
Operating Leases   8,165    1,453    2,131    1,575    3,006 
Purchase Obligations(3)   26,938    13,344    10,365    1,594    1,635 
Other Long-Term Liabilities                    
                          
Total Contractual Cash Obligations  $62,436   $15,683   $38,943   $3,169   $4,641 

 

  (1) Under our Credit Facility, the maturity on outstanding debt of $25 million could be accelerated if we do not maintain certain covenants. (See Note 4 of the Notes to Consolidated Financial Statements).
  (2) Interest payments on the long-term debt are based on scheduled debt maturities and the interest rates are held constant over the remaining terms.
  (3) Includes $14,758,000 in obligations under employment agreements and contracts with on-air personalities, other employees, and our President, CEO, and Chairman, Edward K. Christian.

 

We anticipate that the above contractual cash obligations will be financed through funds generated from operations or additional borrowings under our Credit Facility, or a combination thereof.

 

 43 

 

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require us to make estimates, judgments and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures and contingencies. We evaluate estimates used in preparation of our financial statements on a continual basis, including estimates related to the following:

 

Revenue Recognition:   Revenue from the sale of commercial broadcast time to advertisers is recognized when commercials are broadcast. Revenue is reported net of advertising agency commissions. Agency commissions, when applicable, are based on a stated percentage applied to gross billing. All revenue is recognized in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Topic 13, Revenue Recognition Revised and Updated and the Accounting Standards Codification (ASC) Topic 605, Revenue Recognition.

 

Carrying Value of Accounts Receivable and Related Allowance for Doubtful Accounts:   We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings, credit history, etc.), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on past loss history and the length of time the receivables are past due, ranging from 50% for amounts 90 days outstanding to 100% for amounts over 120 days outstanding. If our evaluations of the collectability of our accounts receivable differ from actual results, additional bad debt expense and allowances may be required. Our historical estimates have been a reliable method to estimate future allowances and our reserves have averaged approximately 2-4% of our outstanding receivables. The effect of an increase in our allowance of 1% of our outstanding receivables as of December 31, 2017, from 3.9% to 4.9% or from $727,000 to $923,000 would result in a decrease in net income of $117,600, net of taxes for the year ended December 31, 2017.

 

Purchase Accounting:   We account for our acquisitions under the purchase method of accounting. The total cost of acquisitions is allocated to the underlying net assets, based on their respective estimated fair values as of the acquisition date. The excess of consideration paid over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair values of the net assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items.

 

Broadcast Licenses and Goodwill:   As of December 31, 2017, we have recorded approximately $93,259,000 in broadcast licenses and $15,558,000 in goodwill, which represents 43.7% of our total assets. In assessing the recoverability of these assets, we must conduct impairment testing and charge to operations an impairment expense only in the periods in which the carrying value of these assets is more than their fair value. We perform an annual impairment test on October 1 of each year.

 

During the fourth quarter of 2017, we recognized a $1,449,000 impairment charge for broadcast licenses in certain of our radio markets primarily due to declines in available market revenue, market revenue share, profit margins and estimated long-term growth rates in our Columbus, Ohio market. There were no impairment indicators for goodwill. Please refer to Note 2 — Broadcast Licenses, Goodwill and Other Intangible Assets, in the accompanying notes to the consolidated financial statements for a discussion of several key assumptions used in the fair value estimate of our broadcast licenses during our fourth quarter annual impairment test.

 

There was no impairment of broadcast licenses in 2016.

 

During the fourth quarter of 2015, we recognized a $874,000 impairment charge for broadcast licenses in certain of our radio markets primarily due to declines in available market revenue, market revenue share, profit margins and estimated long-term growth rates in our Columbus, Ohio market. There were no impairment indicators for goodwill. Please refer to Note 2 — Broadcast Licenses, Goodwill and Other Intangible Assets, in the accompanying notes to the consolidated financial statements for a discussion of several key assumptions used in the fair value estimate of our broadcast licenses during our fourth quarter annual impairment test.

 

We believe our estimate of the value of our broadcast licenses is a critical accounting estimate as the value is significant in relation to our total assets, and our estimate of the value uses assumptions that incorporate variables based on past experiences and judgments about future operating performance of our stations. These variables include but are not limited to: (1) the forecast growth rate of each radio and television market, including population, household income, retail sales and other expenditures that would influence advertising expenditures; (2) market share and profit margin of an average station within a market; (3) estimated capital start-up costs and losses incurred during the early years; (4) risk-adjusted discount rate; (5) the likely media competition within the market area; and (6) terminal values. Changes in our estimates of the fair value of these assets could result in material future period write-downs in the carrying value of our broadcast licenses. For illustrative purposes only, had the fair values of each of our broadcasting licenses been lower by 10% as of December 31, 2017, the Company would have recorded an additional broadcast license impairment of approximately $1.4 million; had the fair values of each of our broadcasting licenses been lower by 20% as of December 31, 2017, the Company would have recorded an additional broadcast license impairment of approximately $6.1 million; and had the fair value of our broadcasting licenses been lower by 30% as of December 31, 2017, the Company would have recorded an additional broadcast license impairment of approximately $12.9 million.

 

 44 

 

 

Stock Based Compensation:   We use a Black-Scholes valuation model to estimate the fair value of stock option awards. Under the fair value method, stock based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the vesting period. Determining the fair value of share-based awards at grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors. If actual results differ significantly from these assumptions, then stock based compensation expense may differ materially in the future from that previously recorded.

 

The fair value of restricted stock awards is determined based on the closing market price of the Company’s Class A Common Stock on the grant date and is adjusted at each reporting date based on the amount of shares ultimately expected to vest.

 

Litigation and Contingencies:   On an ongoing basis, we evaluate our exposure related to litigation and contingencies and record a liability when available information indicates that a liability is probable and estimable. We also disclose significant matters that are reasonably possible to result in a loss or are probable but not estimable.

 

Market Risk and Risk Management Policies

 

Our earnings are affected by changes in short-term interest rates as a result of our long-term debt arrangements. If market interest rates averaged 1% more in 2017 than they did during 2017, our interest expense would increase, and income before taxes would decrease by $332,000. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

 

Inflation

 

The impact of inflation on our operations has not been significant to date. There can be no assurance that a high rate of inflation in the future would not have an adverse effect on our operations.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements are described in Note 1 to the accompanying financial statements.

 

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.

 

Information appearing under the caption “Market Risk and Risk Management Policies” in Item 7 is hereby incorporated by reference.

 

Item 8.   Financial Statements and Supplementary Data

 

The financial statements attached hereto are filed as part of this annual report.

 

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.   Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures over financial reporting were effective to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

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Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework as set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017. Our internal control over financial reporting as of December 31, 2017 has been audited by UHY LLP, an independent registered public accounting firm, as stated in its report which appears below.

 

 46 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors Saga Communications, Inc.

 

Opinion on Internal Control over Financial Reporting

 

We have audited Saga Communications, Inc.’s (the Company’s) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Saga Communications, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and financial statement schedule, and our report dated March 13, 2018 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ UHY LLP  
Farmington Hills, Michigan  
March 13, 2018  

 

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Item 9B.   Other Information

 

None.

 

PART III

 

Item 10.   Directors, Executive Officers and Corporate Governance

 

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the Company’s fiscal year. See also Item 1. Business — Executive Officers.

 

Item 11.   Executive Compensation

 

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the Company’s fiscal year.

 

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the Company’s fiscal year. In addition, the information contained in the “Securities Authorized for Issuance Under Equity Compensation Plan Information” subheading under Item 5 of this report is incorporated by reference herein.

 

Item 13.   Certain Relationships and Related Transactions, and Director Independence

 

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the Company’s fiscal year.

 

Item 14.   Principal Accountant Fees and Services

 

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the Company’s fiscal year.

 

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PART IV

 

Item 15.   Exhibits and Financial Statement Schedules

 

(a)1.  Financial Statements

 

The following consolidated financial statements attached hereto are filed as part of this annual report:

  

Report of Independent Registered Public Accounting Firm   50
Consolidated Financial Statements:    
—  Consolidated Balance Sheets as of December 31, 2017 and 2016   51
—  Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015   52
—  Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015   53
—  Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015   54
Notes to Consolidated Financial Statements   55

 

2.Financial Statement Schedules

 

Schedule II Valuation and Qualifying Accounts is disclosed in Note 1 to the Consolidated Financial Statements attached hereto and filed as part of this annual report. 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

 

The Exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference.

 

 49 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors of Saga Communications, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Saga Communications, Inc. (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement Schedule II, Valuation and Qualifying Accounts listed in the index at item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of Saga Communications, Inc. at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 13, 2018 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ UHY LLP  

 

We have served as the Company’s auditor since 2015.

 

Farmington Hills, Michigan

March 13, 2018

 

 50 

 

  

Saga Communications, Inc.

 

Consolidated Balance Sheets

(In thousands, except par value)

 

   December 31, 
   2017   2016 
         
ASSETS          
Current assets:          
Cash and cash equivalents  $53,030   $26,697 
Accounts receivable, less allowance of $727 ($518 in 2016)   19,307    17,735 
Prepaid expenses and other current assets   2,517    2,397 
Barter transactions   1,320    1,318 
Current assets of discontinued operations       4,625 
Total current assets   76,174    52,772 
Net property and equipment   56,235    49,174 
Other assets:          
Broadcast licenses, net   93,259    86,622 
Goodwill   15,558    7,407 
Other intangibles, deferred costs and investments, net of accumulated amortization of $12,588 ($11,804 in 2016)   7,543    5,975 
Assets of discontinued operations       18,048 
   $248,769   $219,998 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $2,206   $1,618 
Accrued expenses:          
Payroll and payroll taxes   7,836    6,954 
Dividend payable   6,529     
Other   3,243    3,198 
Barter transactions   1,091    1,304 
Current liabilities of discontinued operations       2,971 
Total current liabilities   20,905    16,045 
Deferred income taxes   21,072    29,741 
Long-term debt   25,000    35,287 
Other liabilities   2,327    2,885 
Liabilities of discontinued operations       1,058 
Total liabilities   69,304    85,016 
Commitments and contingencies        
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, 6,694 issued (6,638 in 2016)   67    66 
Class B common stock, $.01 par value, 3,500 shares authorized, 898 issued and outstanding (878 in 2016)   9    8 
Additional paid-in capital   62,675    59,557 
Retained earnings   151,608    108,733 
Treasury stock (1,656 shares in 2017 and 1,625 in 2016, at cost)   (34,894)   (33,382)
Total stockholders’ equity   179,465    134,982 
   $248,769   $219,998 

 

See accompanying notes.

 

Note: Certain prior period amounts have been reclassified to conform to the current year presentation.

 

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Saga Communications, Inc.

 

Consolidated Statements of Income

 

   Years Ended December 31, 
   2017   2016   2015 
   (In thousands, except per share data) 
             
Net operating revenue  $118,149    118,955    111,792 
Operating expenses (income):               
Station operating expense   87,759    86,799    83,188 
Corporate general and administrative   11,657    10,980    10,091 
Other operating expense (income), net   55    (1,351)   509 
Impairment of intangible assets   1,449        874 
    100,920    96,428    94,662 
Operating income from continuing operations   17,229    22,527    17,130 
Other (income) expenses:               
Interest expense   903    744    855 
Write-off of debt issuance costs           557 
Income from continuing operations before income taxes   16,326    21,783    15,718 
Income tax provision:               
Current   2,290    6,626    4,091 
Deferred   (8,210)   2,247    2,481 
    (5,920)   8,873    6,572 
Income from continuing operations, net of tax   22,246    12,910    9,146 
Income from discontinued operations, net of tax   32,471    5,276    4,268 
Net income  $54,717    18,186    13,414 
                
Basic earnings per share:               
From continuing operations  $3.77   $2.20   $1.58 
From discontinued operations   5.50    0.90    0.73 
Basic earnings per share  $9.27   $3.10   $2.31 
Weighted average common shares   5,803    5,761    5,706 
                
Diluted earnings per share:               
From continuing operations  $3.77   $2.19   $1.56 
From discontinued operations   5.50    0.90    0.73 
Diluted earnings per share  $9.27   $3.09   $2.29 
Weighted average common and common equivalent shares   5,807    5,771    5,740 
Dividends declared per share  $2.00   $1.30   $1.10 

 

See accompanying notes.

 

Note: Certain prior period amounts have been reclassified to conform to the current year presentation.

 

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Saga Communications, Inc.

 

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2017, 2016 and 2015

 

   Class A   Class B   Additional           Total 
   Common Stock   Common Stock   Paid-In   Retained   Treasury   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Earnings   Stock   Equity 
   (In thousands) 
Balance at January 1, 2015   6,446   $64    843   $8   $52,496   $91,178   $(28,501)  $115,245 
Net income                            13,414         13,414 
Conversion of shares from Class B to Class A   40    1    (40)   (1)                   
Issuance of restricted stock   26        30                        
Forfeiture of restricted stock   (2)                                 
Net proceeds from exercised options   93    1    32    1    3,393         (4,162)   (767)
Dividends declared per common share                            (6,412)        (6,412)
Compensation expense related to restricted stock awards                       1,655              1,655 
Purchase of shares held in treasury                                 (563)   (563)
401(k) plan contribution                       (34)        278    244 
Balance at December 31, 2015   6,603   $66    865   $8   $57,510   $98,180   $(32,948)  $122,816 
Net income                            18,186         18,186 
Conversion of shares from Class B to Class A   12        (12)                       
Issuance of restricted stock   23        25                        
Dividends declared per common share                            (7,633)        (7,633)
Compensation expense related to restricted stock awards                       2,101              2,101 
Purchase of shares held in treasury                                 (746)   (746)
401(k) plan contribution                       (54)        312    258 
Balance at December 31, 2016   6,638   $66    878   $8   $59,557   $108,733   $(33,382)  $134,982 
Net income                            54,717         54,717 
Conversion of shares from Class B to Class A   17        (17)                       
Issuance of restricted stock   19        29    1    (1)              
Forfeiture of restricted stock   (1)                                 
Net proceeds from exercised options   21    1    8        826         (826)   1 
Dividends declared per common share                            (11,842)        (11,842)
Compensation expense related to restricted stock awards                       2,279              2,279 
Purchase of shares held in treasury                                 (946)   (946)
401(k) plan contribution                       14         260    274 
Balance at December 31, 2017   6,694   $67    898   $9   $62,675   $151,608   $(34,894)  $179,465 

 

See accompanying notes.

 

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Saga Communications, Inc.

 

Consolidated Statements of Cash Flows

 

   Years Ended December 31, 
   2017   2016   2015 
   (In thousands) 
             
Cash flows from operating activities:               
Net income  $54,717   $18,186   $13,414 
Adjustments to reconcile net income to net cash provided by operating activities:               
Income from discontinued operations   (32,471)   (5,276)   (4,268)
Depreciation and amortization   6,251    5,876    5,425 
Deferred income taxes   (8,210)   2,247    2,481 
Impairment of intangible assets   1,449        874 
Amortization of deferred costs   53    53    131 
Compensation expense related to restricted stock awards   2,279    2,101    1,655 
(Gain) loss on sale of assets   55    (1,351)   509 
Barter revenue, net   (251)   (254)   (163)
Deferred and other compensation   (337)   14    (41)
Write-off of debt issuance costs           557 
Changes in assets and liabilities:               
Decrease (increase) in receivables and prepaid expenses   (434)   (885)   233 
Increase in accounts payable, accrued expenses, and other liabilities   811    1,117    1,235 
Total adjustments   (30,805)   3,642    8,628 
Net cash provided by continuing operating activities   23,912    21,828    22,042 
Net cash provided by (used in) discontinued operating activities   (18,538)   7,478    6,577 
Net cash provided by (used in) operating activities   5,374    29,306    28,619 
Cash flows from investing activities:               
Acquisition of property and equipment   (6,246)   (3,967)   (3,570)
Proceeds from sale and disposal of assets   419    1,676    165 
Acquisition of broadcast properties   (25,856)   (12,841)   (11,842)
Other investing activities   (5)   39    (666)
Net cash used in continuing investing activities   (31,688)   (15,093)   (15,913)
Net cash received provided by (used in) discontinued operations investing activities   69,193    (835)   (1,193)
Net cash received from (used in) investing activities   37,505    (15,928)   (17,106)
Cash flows from financing activities:               
Payments on long-term debt   (10,287)       (35,000)
Proceeds from long-term debt           35,287 
Cash dividends paid   (5,313)   (7,633)   (6,412)
Payments for debt issuance costs           (266)
Other financing activities   (946)   (746)   (1,331)
Net cash used in financing activities   (16,546)   (8,379)   (7,722)
Net increase in cash and cash equivalents   26,333    4,999    3,791 
Cash and cash equivalents, beginning of year   26,697    21,698    17,907 
Cash and cash equivalents, end of year  $53,030   $26,697   $21,698 

 

See accompanying notes.

  

Note: Certain prior period amounts have been reclassified to conform to the current year presentation.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements  

 

1.Summary of Significant Accounting Policies

 

Nature of Business

 

Saga Communications, Inc. is a broadcasting company whose business is devoted to acquiring, developing and operating broadcast properties. As of December 31, 2017, we owned or operated seventy-five FM and thirty-three AM radio stations, serving twenty-six markets throughout the United States. On May 9, 2017 the Company entered into an agreement to sell its Joplin, Missouri and Victoria, Texas television stations and subsequently closed on this transaction on September 1, 2017. The historical results of operations for the television stations are presented in the discontinued operations for all periods presented (see Note 3). As a result of the Company’s television stations being reported as discontinued operations the Company only has one reportable segment at December 31, 2017. Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to the Company’s continuing operations.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Saga Communications, Inc. and our 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 accounting principles generally accepted in the United States (GAAP) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we do not believe that the ultimate settlement of any amounts reported will materially affect our financial position or results of future operations, actual results may differ from estimates provided.

 

Concentration of Risk

  

Certain cash deposits with financial institutions may at times exceed FDIC insurance limits.

 

Our top six markets when combined represented 46%, 48% and 46% of our net operating revenue for the years ended December 31, 2017, 2016 and 2015, respectively.

 

We sell advertising to local and national companies throughout the United States. We perform ongoing credit evaluations of our customers and generally do not require collateral. We maintain an allowance for doubtful accounts at a level which we believe is sufficient to cover potential credit losses.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash on hand and time deposits with original maturities of three months or less. We did not have any time deposits at December 31, 2017 and 2016.

 

Financial Instruments

 

Our financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. The carrying value of long-term debt approximates fair value as it carries interest rates that either fluctuate with the euro-dollar rate, prime rate or have been reset at the prevailing market rate at December 31, 2017.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

Allowance for Doubtful Accounts

 

A provision for doubtful accounts is recorded based on our judgment of the collectability of receivables. Amounts are written off when determined to be fully uncollectible. Delinquent accounts are based on contractual terms. The activity in the allowance for doubtful accounts during the years ended December 31, 2017, 2016 and 2015 was as follows:

 

               Write Off of     
   Balance   Charged to   Allowance   Uncollectible   Balance at 
   at Beginning   Costs and   From   Accounts, Net of   End of 
Year Ended  of Period   Expenses   Acquisitions   Recoveries   Period 
   (in thousands) 
                     
December 31, 2017  $518   $333   $181   $(305)  $727 
December 31, 2016  $614   $195   $   $(291)  $518 
December 31, 2015  $378   $294   $99   $(157)  $614 

 

Barter Transactions

 

Our radio and television stations trade 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 received are used.

 

Property and Equipment

 

Property and equipment are carried at cost. Expenditures for maintenance and repairs are expensed as incurred. When property and equipment is sold or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts and the gain or loss realized on disposition is reflected in earnings. Depreciation is provided using the straight-line method based on the estimated useful life of the assets. We review our property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If the assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. We did not record any impairment of property and equipment during 2017, 2016 and 2015.

 

Property and equipment consisted of the following:

 

   Estimated   December 31, 
   Useful Life   2017   2016 
       (In thousands) 
             
Land and land improvements      $13,594   $12,307 
Buildings   31.5 years    34,905    32,046 
Towers and antennae   7-15 years    24,538    23,066 
Equipment   3-15 years    52,534    56,745 
Furniture, fixtures and leasehold improvements   7-20 years    6,822    7,261 
Vehicles   5 years    3,463    3,255 
         135,856    134,680 
Accumulated depreciation        (79,621)   (85,506)
Net property and equipment       $56,235   $49,174 

 

Depreciation expense for continuing operations for the years ended December 31, 2017, 2016 and 2015 was $5,391,000, $5,234,000 and $5,194,000, respectively. Depreciation expense for discontinued operations for the years ended December 31, 2017, 2016 and 2015 was $445,000, $1,387,000 and $1,399,000, respectively.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

Intangible Assets

 

Intangible assets deemed to have indefinite useful lives, which include broadcast licenses and goodwill, are not amortized and are subject to impairment tests which are conducted as of October 1 of each year, or more frequently if impairment indicators arise.

 

We have 108 broadcast licenses serving 26 markets, which require renewal over the period of 2019-2022. In determining that the Company’s broadcast licenses qualified as indefinite-lived intangible assets, management considered a variety of factors including our broadcast licenses may be renewed indefinitely at little cost; our broadcast licenses are essential to our business and we intend to renew our licenses indefinitely; we have never been denied the renewal of an FCC broadcast license nor do we believe that there will be any compelling challenge to the renewal of our broadcast licenses; and we do not believe that the technology used in broadcasting will be replaced by another technology in the foreseeable future.

 

Separable intangible assets that have finite lives are amortized over their useful lives using the straight-line method. Favorable lease agreements are amortized over the leases length, ranging from five to twenty-six years. Other intangibles are amortized over one to fifteen years. Customer relationships are amortized over three years.

 

Deferred Costs

 

The costs related to the issuance of debt are capitalized and amortized to interest expense over the life of the debt. During the years ended December 31, 2017, 2016 and 2015, we recognized interest expense related to the amortization of debt issuance costs of $53,000, $53,000 and $131,000, respectively. In 2015 we wrote-off unamortized debt issuance costs of $557,000, pre-tax, in connection with our new credit facility. See Note 4 – Long-Term Debt.

 

At December 31, 2017 and 2016 the net book value of debt issuance costs related to our line of credit was $138,000, and $191,000, respectively, and was presented in other intangibles, deferred costs and investments in our Consolidated Balance Sheets.

 

Treasury Stock

 

In March 2013, our board of directors authorized an increase in the amount committed to our Stock Buy-Back Program (the “Buy-Back Program”) from $60 million to $75.8 million. The Buy-Back Program allows us to repurchase our Class A Common Stock. As of December 31, 2017, we had remaining authorization of $22.4 million for future repurchases of our Class A Common Stock.

 

Repurchases of shares of our Common Stock are recorded as Treasury stock and result in a reduction of Stockholders’ equity. During 2017, 2016 and 2015, we acquired 37,141 shares at an average price of $47.72 per share, 18,612 shares at an average price of $40.06 per share and 129,384 shares at an average price of $36.53 per share, respectively.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

Revenue Recognition

 

Revenue from the sale of commercial broadcast time to advertisers is recognized when commercials are broadcast. Revenue is reported net of advertising agency commissions. Agency commissions, when applicable are based on a stated percentage applied to gross billing. All revenue is recognized in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Topic 13, Revenue Recognition Revised and Updated and The Accounting Standards Codification (ASC) Topic 605, Revenue Recognition

 

Local Marketing Agreements

 

We have entered into Local Marketing Agreements (“LMA’s”) in certain markets. In a typical LMA, the FCC licensee of a station makes available, for a fee, blocks of air time on its station to another party that supplies programming to be broadcast during that air time and sells its own commercial advertising announcements during the time periods specified. Revenue and expenses related to LMA’s are included in the accompanying Consolidated Statements of Income. Assets and liabilities related to the LMA’s are included in the accompanying Consolidated Balance Sheets.

 

Advertising and Promotion Costs

 

Advertising and promotion costs are expensed as incurred. Such costs related to our continuing operations amounted to $2,441,000, $2,633,000 and $2,475,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Advertising and promotion costs related to our discontinued operations amounted to $240,000, $341,000 and $328,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Our effective tax rate is higher than the federal statutory rate as a result of the inclusion of state taxes in the income tax amount.

 

Dividends

 

On December 7, 2017, the Company’s Board of Directors declared a quarterly cash dividend of $0.30 per share and a special cash dividend of $0.80 per share on its Classes A and B shares. This dividend totaling approximately $6.5 million was paid on January 5, 2018 to shareholders of record on December 18, 2017.

 

On September 13, 2017, the Company’s Board of Directors declared a regular cash dividend of $0.30 per share on its Classes A and B Common Stock. This dividend, totaling approximately $1.8 million was paid on October 13, 2017 to shareholders of record on September 25,

2017 and funded by cash on the Company’s balance sheet.

 

On May 3, 2017, the Company’s Board of Directors declared a regular cash dividend of $0.30 per share on its Classes A and B Common Stock. This dividend, totaling approximately $1.8 million, was paid on June 9, 2017 to shareholders of record on May 22, 2017 and funded by cash on the Company’s balance sheet.

 

On March 3, 2017, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.30 per share on its Classes A and B Common Stock. This dividend, totaling approximately $1.8 million, was paid on April 14, 2017 to shareholders of record on March 28, 2017 and funded by cash on the Company’s balance sheet.

  

On November 21, 2016 the Company’s Board of Directors declared a quarterly cash dividend of $0.30 per share and a special cash dividend of $0.20 per share on its Classes A and B shares. This dividend totaling $2.9 million was paid on December 23, 2016 to shareholders of record on December 5, 2016.

 

On August 30, 2016, the Company’s Board of Directors declared a regular cash dividend of $0.30 per share on its Classes A and B Common Stock. This dividend, totaling $1.8 million was paid on September 30, 2016 to shareholders of record on September 14,

2016.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

On June 1, 2016, the Company’s Board of Directors declared a regular cash dividend of $0.25 per share on its Classes A and B Common Stock. This dividend, totaling $1.5 million, was paid on July 8, 2016 to shareholders of record on June 15, 2016.

 

On March 2, 2016, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.25 per share on its Classes A and B Common Stock. This dividend, totaling $1.5 million, was paid on April 15, 2016 to shareholders of record on March 28,

2016.

 

On November 17, 2015 the Company’s Board of Directors declared a quarterly cash dividend of $0.25 per share and a special cash dividend of $0.25 per share on its Classes A and B Common Stock. This dividend totaling $2.9 million was paid on December 11, 2015 to shareholders of record on November 30, 2015.

 

On September 2, 2015 the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share on its Classes A and B Common Stock. This dividend totaling $1.2 million was paid on October 2, 2015 to shareholders of record on September 14, 2015.

 

On June 10, 2015 the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share on its Classes A and B Common Stock. This dividend totaling $1.2 million was paid on July 10, 2015 to shareholders of record on June 22, 2015.

 

On March 25, 2015 the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share on its Classes A and B Common Stock. This dividend totaling $1.2 million was paid on April 6, 2015 to shareholders of record on April 17, 2015.

 

Stock-Based Compensation

 

Stock-based compensation cost for stock option awards is estimated on the date of grant using a Black-Scholes valuation model and is expensed on a straight-line method over the vesting period of the options. Stock-based compensation expense is recognized net of estimated forfeitures. The fair value of restricted stock awards is determined based on the closing market price of the Company’s Class A Common Stock on the grant date and is adjusted at each reporting date based on the amount of shares ultimately expected to vest. See Note 7 — Stock-Based Compensation for further details regarding the expense calculated under the fair value based method.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

Earnings Per Share

 

Earnings per share is calculated using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security. The Company has participating securities related to restricted stock units, granted under the Company’s Second Amended and Restated 2005 Incentive Compensation Plan, that earn dividends on an equal basis with common shares. In applying the two-class method, earnings are allocated to both common shares and participating securities.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

   Years Ended December 31, 
   2017   2016   2015 
   (In thousands, except per share data) 
             
Numerator:               
Income from continuing operations  $22,246   $12,910   $9,146 
Less: Income allocated to unvested participating securities   370    231    171 
Income from continuing operations available to common stockholders  $21,876   $12,679   $8,975 
                
Income from discontinued operations  $32,471   $5,276   $4,268 
Less: Income allocated to unvested participating securities   541    94    80 
Income from discontinued operations available to common stockholders  $31,930   $5,182   $4,188 
                
Net income available to common stockholders  $53,806   $17,861   $13,163 
                
Denominator:               
Denominator for basic earnings per share-weighted average shares   5,803    5,761    5,706 
Effect of dilutive securities:               
Stock options   4    10    34 
Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions   5,807    5,771    5,740 
                
Basic earnings per share:               
From continuing operations  $3.77   $2.20   $1.58 
From discontinued operations   5.50    0.90    0.73 
Basic earnings per share  $9.27   $3.10   $2.31 
                
Diluted earnings per share               
From continuing operations  $3.77   $2.19   $1.56 
From discontinued operations   5.50    0.90    0.73 
Diluted earnings per share  $9.27   $3.09   $2.29 

 

The number of stock options outstanding that had an antidilutive effect on our earnings per share calculation, and therefore have been excluded from dilutive earnings per share calculation, was 0, 0 and 0 for the years ended December 31, 2017, 2016, and 2015, respectively. The actual effect of these shares, if any, on the diluted earnings per share calculation will vary significantly depending on fluctuations in the stock price. 

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), which requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This amendment was adopted on January 1, 2017 on a retrospective basis. As a result we have reclassified approximately $1,022,000 of current deferred tax assets into the noncurrent deferred tax liability line item within the Condensed Consolidated Balance Sheet for the period ended December 31, 2016.

 

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which includes multiple amendments intended to simplify aspects of share-based payment accounting. Amendments to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures will be applied using a modified retrospective transition method through a cumulative-effect adjustment to equity as of the beginning of the period of adoption. Amendments to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement will be applied retrospectively, and amendments requiring the recognition of excess tax benefits and tax deficiencies in the income statement are to be applied prospectively. This amendment was adopted on January 1, 2017 and did not have a material impact on our consolidated financial statements.

 

Recent Accounting Pronouncements – Not Yet Adopted

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting)” (“ASU 2017-09”) which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact that this standard will have on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350)” (“ASU 2017-04”) which removes step 2 from the goodwill impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds it fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 will be applied prospectively and is effective for fiscal years and interim impairment tests performed in periods beginning after December 15, 2019 with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on our consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230): Statement of Cash Flows” (“ASU 2016-15”), which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU 2016-15 also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact that this standard will have on our consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019. The Company is currently evaluating the impact that this standard will have on our consolidated financial statements.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”)¸which requires that all leases with a term of more than one year, covering leased assets such as real estate, broadcasting towers and equipment, be reflected on the balance sheet as assets and liabilities for the rights and obligations created by these leases. ASU 2016-02 is effective for fiscal years fiscal years and interim periods beginning after December 15, 2018. While the Company is currently reviewing the effects of this guidance, the Company believes that this would result in an increase in the assets and liabilities reflected on the Company’s consolidated balance sheets. We are still evaluating the impact on our consolidated statements of operations. 

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

   

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under GAAP. The FASB has also issued a number of updates to this standard. This standard is effective for the fiscal and interim periods beginning January 1, 2018. The Company adopted the new guidance on January 1, 2018, using the modified retrospective method, with no impact on its 2017 financial statements. The cumulative effect of initially applying the new guidance had no impact on the opening balance of retained earnings as of January 1, 2018. The Company does not expect the new guidance to have a material impact on its financial statements in future periods. However, additional disclosures will be included in future reporting periods in accordance with requirements of the new guidance.  

 

2.Broadcast Licenses, Goodwill and Other Intangible Assets

 

We evaluate our FCC licenses for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We operate our broadcast licenses in each market as a single asset and determine the fair value by relying on a discounted cash flow approach assuming a start-up scenario in which the only assets held by an investor are broadcast licenses. The fair value calculation contains assumptions incorporating variables that are based on past experiences and judgments about future operating performance using industry normalized information for an average station within a market. These variables include, but are not limited to: (1) the forecasted growth rate of each radio or television market, including population, household income, retail sales and other expenditures that would influence advertising expenditures; (2) the estimated available advertising revenue within the market and the related market share and profit margin of an average station within a market; (3) estimated capital start-up costs and losses incurred during the early years; (4) risk-adjusted discount rate; (5) the likely media competition within the market area; and (6) terminal values. If the carrying amount of FCC licenses is greater than their estimated fair value in a given market, the carrying amount of FCC licenses in that market is reduced to its estimated fair value.

 

We also evaluate goodwill in each of its reporting units (reportable segment) for impairment annually, or more frequently if certain circumstances are present. If the carrying amount of goodwill in a reporting unit is greater than the implied value of goodwill determined by completing a hypothetical purchase price allocation using estimated fair value of the reporting unit, the carrying amount of goodwill in that reporting unit is reduced to its implied value.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

We utilize independent appraisals in testing FCC licenses for impairment when indicators of impairment are present.

 

We evaluate amortizable intangible assets for recoverability when circumstances indicate impairment may have occurred, using an undiscounted cash flow methodology. If the future undiscounted cash flows for the intangible asset are less than net book value, then the net book value is reduced to the estimated fair value. Amortizable intangible assets are included in other intangibles, deferred costs and investments in the consolidated balance sheets.

 

Broadcast Licenses

 

We have recorded the changes to broadcast licenses for the years ended December 31, 2017 and 2016 as follows:

 

   Continuing
Operations
   Discontinued
Operations
   Total 
   (In thousands) 
             
Balance at January 1, 2016  $78,499   $9,607   $88,106 
Acquisitions   8,123        8,123 
Balance at December 31, 2016  $86,622   $9,607   $96,229 
Acquisitions   8,086        8,086 
Dispositions       (9,607)   (9,607)
Impairment charge   (1,449)       (1,449)
Balance at December 31, 2017  $93,259   $   $93,259 

 

2017 Impairment Test

 

We completed our annual impairment test of broadcast licenses during the fourth quarter of 2017 and determined that the fair value of the broadcast licenses were less than the amount reflected in the balance sheet for one of the Company’s radio markets, Springfield, Illinois, and recorded non-cash impairment charge of $1,449,000 to reduce the carrying value of these assets to the estimated fair market value. The reasons for the impairment to the broadcasting licenses recognized in the fourth quarter of 2017 were primarily due to declines in available market revenue, market revenue share, profit margins and estimated long-term growth rates in our Springfield, Illinois market.

 

The following table reflects certain key estimates and assumptions used in the impairment test in the fourth quarter of 2017. The ranges for operating profit margin and market long-term revenue growth rates vary by market. In general, when comparing between 2017, 2016 and 2015: (1) the market specific operating profit margin range remained relatively consistent; (2) the market long-term revenue growth rates were relatively consistent; (3) the discount rate remained relatively consistent; and (4) current year revenues were 0.8 % lower than previously projected for 2017.

 

  

Fourth

Quarter
2017

 

Fourth

Quarter
2016

  Fourth
Quarter
2015
Discount rates  12.4% - 12.5%  12.3% - 12.4%  12.2% - 12.4%
Operating profit margin ranges  19.0% - 36.4%  19.5% - 36.4%  19.5% - 36.4%
Market long-term revenue growth rates  1.1% - 3.5 %  1.0% - 2.9 %  1.3% - 3.1%

 

If actual market conditions are less favorable than those estimated by us or if events occur or circumstances change that would reduce the fair value of our broadcast licenses below the carrying value, we may be required to recognize additional impairment charges in future periods. Such a charge could have a material effect on our consolidated financial statements.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

2016 Impairment Test

 

During the fourth quarter of 2016, we completed our annual impairment test of broadcast licenses and determined that the fair value of the broadcast licenses was greater than the carrying value recorded for each of our markets and, accordingly, no impairment was recorded.

 

2015 Impairment Test

 

We completed our annual impairment test of broadcast licenses during the fourth quarter of 2015 and determined that the fair value of the broadcast licenses were less than the amount reflected in the balance sheet for one of the Company’s radio markets, Columbus, Ohio, and recorded non-cash impairment charge of $874,000 to reduce the carrying value of these assets to the estimated fair market value. The reasons for the impairment to the broadcasting licenses recognized in the fourth quarter of 2015 were primarily due to declines in available market revenue, market revenue share, profit margins and estimated long-term growth rates in our Columbus, Ohio market.

  

Goodwill

 

During the fourth quarter of 2017, the Company performed its annual impairment test of its goodwill in accordance with ASC 350 and determined under the first step that the fair value of our continuing operations was in excess of its carrying value.

 

We have recorded the changes to goodwill for each of the years ended December 31, 2017 and 2016 as follows:

 

   Continuing
Operations
   Discontinued
Operations
   Total 
   (In thousands) 
             
Balance at January 1, 2016  $2,874   $      —   $2,874 
Acquisitions   4,533        4,533 
Balance at December 31, 2016  $7,407   $   $7,407 
Acquisitions   8,151        8,151 
Balance at December 31, 2017  $15,558   $   $15,558 

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

Other Intangible Assets

 

We have recorded amortizable intangible assets at December 31, 2017 as follows:

 

   Gross         
   Carrying   Accumulated   Net 
   Amount   Amortization   Amount 
   (In thousands) 
Non-competition agreements  $3,861   $3,861   $ 
Favorable lease agreements   5,965    5,468    497 
Customer relationships   3,546    1,529    2,017 
Other intangibles   1,834    1,630    204 
Total amortizable intangible assets  $15,206   $12,488   $2,718 

 

We have recorded amortizable intangible assets at December 31, 2016 as follows:

 

   Gross         
   Carrying   Accumulated   Net 
   Amount   Amortization   Amount 
   (In thousands) 
Non-competition agreements  $3,861   $3,861   $ 
Favorable lease agreements   5,763    5,439    324 
Customer relationships   1,744    747    997 
Other intangibles   1,920    1,682    238 
Total amortizable intangible assets  $13,288   $11,729   $1,559 

 

Aggregate amortization expense for these intangible assets for the years ended December 31, 2017, 2016 and 2015, was $860,000, $642,000 and $231,000, respectively. Our estimated annual amortization expense for the years ending December 31, 2018, 2019, 2020, 2021 and 2022 is $1,094,000, $691,000, $475,000, $49,000 and $39,000, respectively.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

3. Discontinued Operations

 

On May 9, 2017 we entered into a definitive agreement to sell our Joplin, Missouri and Victoria, Texas television stations (“Television Sale”) for approximately $66.6 million, subject to certain adjustments, to Evening Telegram Company d/b/a Morgan Murphy Media. The Television Sale was completed on September 1, 2017 and the Company received net proceeds of $69.5 million which included the sales price of $66.6 million, the sale of accounts receivable of approximately $3.4 million, offset by certain closing adjustments and transactional costs of $500 thousand. The Company recognized a pretax gain of $50.8 million as a result of the Television Sale in the third quarter of 2017. The gain net of tax for the Television Sale was $29.9 million. Effective September 1, 2017, the Company used $24.2 million of the proceeds from the Television Sale to finance the acquisition of radio stations in South Carolina, which included the purchase price of $23 million, the purchase of $1.3 million in accounts receivable offset by certain closing adjustments and transactional costs of approximately $50,000 (as described in Note 9). On October 5, 2017 and November 3, 2017, the Company used $5,287,000 and $5,000,000 respectively of the proceeds from the Television Sale to pay down a portion of its Revolving Credit Facility (as defined and described in Note 4).

 

In accordance with authoritative guidance we have reported the results of operations of the Joplin, Missouri and Victoria, Texas television stations as discontinued operations in the accompanying consolidated financial statements. For all previously reported periods, certain amounts in the consolidated financial statements have been reclassified. All of the assets and liabilities of the Joplin, Missouri and Victoria, Texas television stations have been classified as discontinued operations and the net results of operations have been reclassified from continuing operations to discontinued operations. These were previously included in the Company’s television segment.  

 

The following table shows the components of the results from discontinued operations associated with the Television Sale as reflected in the Company’s Consolidated Statements of Operations (in thousands):

 

   Year Ended December 31, 
   2017 (5)   2016   2015 
             
Net operating revenue  $14,238   $23,636   $21,064 
Station operating expense (1)   9,757    14,743    14,080 
Other operating (income) expense   31    (42)   32 
Operating income   4,450    8,935    6,952 
Interest expense (2)   21    32    33 
Other income (3)           (417)
Income before income taxes   4,429    8,903    7,336 
Pretax gain on the disposal of discontinued operations   50,842         
Total pretax gain on discontinued operations   55,271    8,903    7,336 
Income tax expense (4)   22,800    3,627    3,068 
Income from discontinued operations, net of tax  $32,471   $5,276   $4,268 

 

(1)No depreciation expense was recorded by the Company beginning May 9, 2017, the date the Television segment assets’ were held for sale.
(2)Interest expense related to the Surtsey debt that is guaranteed by the Television stations. Our affiliate repaid this loan when the television stations were sold on September 1, 2017.
(3)Other income in 2015 relates to a gain on an insurance claim.
(4)The effective tax rates on pretax income from discontinued operations were approximately 41%.
(5)Results of operations for the Television stations are reflected through August 31, 2017. The effective date of the sale was September 1, 2017.

 

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SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

The following table is a summary of the assets and liabilities of discontinued operations (in thousands):

 

  

December 31,

2017

   December 31,
2016
 
Major Classes of Current Assets of Discontinued Operations          
Accounts receivable  $       —   $3,868 
Prepaid expenses and other current assets       625 
Barter transactions       132 
Total of current assets of discontinued operations  $   $4,625 
           
Major Classes of Non-Current Assets of Discontinued Operations          
Property and equipment, net (1)  $   $7,388 
Broadcast licenses, net (1)       9,607 
Other intangibles, deferred costs and investments, net (1)       1,053 
Total of non-current assets of discontinued operations  $   $18,048 
Total Assets Classified as Part of Discontinued Operations in the Condensed Consolidated Balance Sheets  $   $22,673 
           
Major Classes of Current Liabilities of Discontinued Operations          
Accounts payable  $   $759 
Barter transactions       163 
Current portion of long term debt       1,078 
Other liabilities (1)       971 
Total of current liabilities of discontinued operations  $   $2,971 
           
Major Classes of Current Liabilities of Discontinued Operations          
Other liabilities (1)  $   $1,058 
Total of non-current liabilities of discontinued operations  $   $1,058 
Total Liabilities Classified as Part of Discontinued Operations in the Condensed Consolidated Balance Sheets  $   $4,029 
Net Assets Classified as Part of Discontinued Operations in the Condensed Consolidated Balance Sheets  $   $18,644 

 

(1)For prior periods, the current and long-term classification of assets and liabilities does not change as they did not meet the held-for-sale criteria the prior periods. We closed the disposition on September 1, 2017, therefore all amounts in the current year are considered current assets or liabilities of discontinued operations.

 

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SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

The following table represents the components of the results from discontinued operations associated with the Television Sale as reflected in the Company’s unaudited Condensed Consolidated Statements of Cash Flows (in thousands):

 

  

December 31,

2017

   December 31,
2016
   December 31,
2015
 
             
Cash paid during the period               
Interest  $21   $32   $33 
Income taxes   23,260    2,677    1,972 
                
Significant operating non-cash items               
Depreciation and amortization (1)  $445   $1,387   $1,399 
Broadcast program rights amortization   418    628    637 
Barter revenue, net   18    32    (50)
Acquisition of property and equipment       43    3 
Loss (gain) on sale of assets   31    (42)   32 
Pretax gain on television sale   50,842         
                
Significant investing items               
Acquisition of property and equipment  $335   $894   $1,973 
Proceeds from sale and disposal of assets       (59)   (3)
Net proceeds from sale of television stations (2)   69,528         
Proceeds from insurance claim           (777)

 

(1)No depreciation expense was recorded by the Company beginning May 9, 2017, the date the Television segment assets’ were held for sale.
(2)Net proceeds from the sale of the television stations reflect the sales price of $66.6 million, the sale of accounts receivable of approximately $3.4 million, offset by certain closing adjustments and transactional costs of approximately $500 thousand.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

4.Long-Term Debt

 

Long-term debt consisted of the following:

 

   December 31,   December 31, 
   2017   2016 
   (In thousands) 
     
Credit Facility:          
Revolving Credit Facility  $25,000   $35,287 
Amounts payable within one year        
   $25,000   $35,287 

 

Future maturities of long-term debt are as follows:

 

Year Ending
December 31,
  Amount 
   (In thousands) 
     
2018  $ 
2019    
2020   25,000 
2021    
2022    
Thereafter    
   $25,000 

 

On August 18, 2015, we entered into a new credit facility (the “Credit Facility”) with JPMorgan Chase Bank, N.A., The Huntington National Bank, Citizens Bank, National Association and J.P. Morgan Securities LLC. In connection with the execution of the Credit Facility, the credit agreement in place at June 30, 2015 (the “Old Credit Agreement”) was terminated, and all outstanding amounts were paid in full. The Credit Facility consists of a $100 million five-year revolving facility (the “Revolving Credit Facility”) and matures on August 18, 2020.

 

We have pledged substantially all of our assets (excluding our FCC licenses and certain other assets) in support of the Credit Facility and each of our subsidiaries has guaranteed the Credit Facility and has pledged substantially all of their assets (excluding their FCC licenses and certain other assets) in support of the Credit Facility.

 

 The proceeds from the Credit Facility were used to repay all amounts outstanding on our Old Credit Agreement and pay transactional fees. The unused portion of the Revolving Credit Facility is available for general corporate purposes, including working capital, capital expenditures, permitted acquisitions and related transaction expenses and permitted stock buybacks. We wrote-off unamortized debt issuance costs relating to the Old Credit Agreement of approximately $557,000, pre-tax, due to entering into this new agreement during the year ended December 31, 2015.

 

Approximately $266,000 of debt issuance costs related to the Credit Facility were capitalized and are being amortized over the life of the Credit Facility. These debt issuance costs are included in other assets, net in the consolidated balance sheets.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

Interest rates under the Credit Facility are payable, at our option, at alternatives equal to LIBOR (1.375% at December 31, 2017), plus 1% to 2% or the base rate plus 0% to 1%. The spread over LIBOR and the base rate vary from time to time, depending upon our financial leverage. Letter of credit issued under the Credit Facility will be subject to a participation fee (which is equal to the interest rate applicable to Eurocurrency Loans, as defined in the Credit Agreement) payable to each of the Lenders and a fronting fee equal to 0.25% per annum payable to the issuing bank. We also pay quarterly commitment fees of 0.2% to 0.3% per annum on the unused portion of the Revolving Credit Facility.

 

 The Credit Facility contains a number of financial covenants (all of which we were in compliance with at December 31, 2017) which, among other things, require us to maintain specified financial ratios and impose certain limitations on us with respect to investments, additional indebtedness, dividends, distributions, guarantees, liens and encumbrances.

 

 We had approximately $75 million of unused borrowing capacity under the Revolving Credit Facility at December 31, 2017.

 

On October 5, 2017 and November 3, 2017, the Company used $5,287,000 and $5,000,000, respectively of the proceeds from the Television Sale to pay down a portion of its Revolving Credit Facility.

 

 The loan agreement of approximately $1.1 million of secured debt of affiliate was amended in April, 2017 to extend the due date of the loan for three years to mature on May 1, 2020. Our affiliate repaid this loan when the television stations were sold on September 1, 2017.

  

5.Supplemental Cash Flow Information

 

   Years Ended December 31, 
   2017   2016   2015 
   (In thousands) 
             
Cash paid during the period for:               
Interest  $850   $636   $718 
Income taxes  $2,420   $6,555   $4,192 
Non-cash transactions:               
Barter revenue  $3,618   $3,471   $3,433 
Barter expense  $3,367   $3,217   $3,270 
Purchase of treasury shares in connection with exercise of stock options  $826   $   $3,294 
Acquisition of property and equipment  $8   $49   $44 
Acquisition of broadcast properties  $   $   $50 
Use of treasury shares for 401(k) match  $274   $258   $244 

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

 

6.Income Taxes

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, the following that impact us: (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (3) creating a new limitation on deductible interest expense; (4) repealing the domestic production activities deduction; (5) limiting the deductibility of certain executive compensation; and (6) limiting certain other deductions.

 

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting relating to the Tax Act under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

 

In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional amount of net tax benefit of $11.5 million in the year ended December 31, 2017 related to the remeasurement of our deferred tax balance and other effects. For various reasons including those discussed below, we have not fully completed our accounting for the income tax effects of the Tax Act. As we were able to make reasonable estimates of the effects of the Tax Act, we recorded provisional amounts.

 

In connection with the adoption of the Tax Act, we:

 

Remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally at a federal rate of 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Our financial statements include provisional amounts for the impacts of deferred tax revaluation.

 

Evaluated the future deductibility of executive compensation due to the elimination of the performance-based exception as well as the modification of who is treated as a covered person in connection with limiting the deduction. As part of the Tax Act, there is a transition rule for written, binding contracts in place prior to November 2, 2017 related to executive compensation, that have not been modified in any material respect. Further guidance is needed to fully determine the impact of these provisions. Our financial statements include provisional amounts for the impacts of the changes to the deductibility of executive compensation.

 

Performed initial evaluations of the state conformity to the Tax Act. We continue to assess the conformity of each state in which we operate to the Tax Act. Our financial statements include provisional amounts for the impacts of state conformity.

 

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Saga Communications, Inc.

 

Notes to Consolidated Financial Statements — (Continued)

  

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, 
   2017   2016 
   (In thousands) 
         
Deferred tax liabilities:          
Property and equipment  $4,333   $6,858 
Intangible assets   17,640    24,987 
Prepaid expenses   317    619 
Total deferred tax liabilities   22,290    32,464 
Deferred tax assets:          
Allowance for doubtful accounts   116    224 
Compensation   1,058    2,421 
Other accrued liabilities   44    78 
    1,218    2,723 
Less: valuation allowance        
Total net deferred tax assets   1,218    2,723 
Net deferred tax liabilities  $21,072   $29,741 
Current portion of deferred tax assets  $300   $1,022 
Non-current portion of deferred tax liabilities   (21,372)