<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _________
Commission file number 1-11588
Saga Communications, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 38-3042953
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
73 Kercheval Avenue
Grosse Pointe Farms, Michigan 48236
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(Address of principal executive offices) (Zip Code)
(313) 886-7070
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
The number of shares of the registrant's Class A Common Stock, $.01 par value,
and Class B Common Stock, $.01 par value, outstanding as of October 31, 1998 was
11,203,360 and 1,510,637, respectively.
<PAGE> 2
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- September 30, 1998
and December 31, 1997 3
Condensed consolidated statements of income -- Three and nine
months ended September 30, 1998 and 1997 5
Condensed consolidated statements of cash flows -- Nine months
ended September 30, 1998 and 1997 6
Notes to unaudited condensed consolidated financial statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Saga Communications, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 4,929 $ 2,209
Accounts receivable, net 14,695 12,833
Prepaid expenses 1,389 1,269
Other current assets 1,566 1,208
--------- ---------
Total current assets 22,579 17,519
Property and equipment 73,223 70,522
Less accumulated depreciation (39,186) (36,494)
--------- ---------
Net property and equipment 34,037 34,028
Other assets:
Excess of cost over fair value of assets
acquired, net 20,099 20,276
Broadcast licenses, net 35,000 35,495
Other intangibles, net 7,906 5,115
--------- ---------
Total other assets 63,005 60,886
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$ 119,621 $ 112,433
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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Saga Communications, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 810 $ 1,001
Other current liabilities 8,000 6,792
Current portion of long-term debt 6,017 8,139
------- --------
Total current liabilities 14,827 15,932
Deferred income taxes 4,972 4,297
Long-term debt 56,118 53,466
Broadcast program rights 347 273
Deferred compensation 326 210
STOCKHOLDERS' EQUITY:
Common stock 127 101
Additional paid-in capital 36,751 36,513
Note receivable from principal stockholder (790) (790)
Retained earnings 7,066 2,431
Treasury Stock (Note 4) (123) --
-------- --------
Total stockholders' equity 43,031 38,255
-------- --------
$119,621 $112,433
======== ========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to unaudited condensed consolidated financial statements.
4
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Saga Communications, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(in thousands except per share data)
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net operating revenue $19,941 $17,091 $55,720 $48,114
Station operating expense:
Programming and technical 4,342 3,928 12,490 11,282
Selling 4,796 4,317 15,053 13,247
Station general and administrative 2,687 2,486 8,230 7,441
------- ------- ------- -------
Total station operating expense 11,825 10,731 35,773 31,970
------- ------- ------- -------
Station operating income before corporate general and
administrative, depreciation and amortization 8,116 6,360 19,947 16,144
Corporate general and administrative 1,017 959 3,278 2,840
Depreciation and amortization 1,633 1,520 4,800 4,252
------- ------- ------- -------
Operating profit 5,466 3,881 11,869 9,052
Other expenses:
Interest expense 1,159 1,325 3,442 3,708
Other 252 - 345 7
------- ------- ------- -------
Income before income tax 4,055 2,556 8,082 5,337
Income tax provision 1,663 1,077 3,420 2,252
------- ------- ------- -------
Net income and comprehensive income $ 2,392 $ 1,479 $ 4,662 $ 3,085
======= ======= ======= =======
Earnings per share:
Basic $ .19 $.12 $.37 $.24
======= ======= ======= =======
Diluted $ .18 $.11 $.36 $.24
======= ======= ======= =======
Weighted average common shares (Note 3) 12,711 12,678 12,705 12,617
======= ======= ======= =======
Weighted average common shares and common equivalents
(Note 3) 12,979 12,911 12,967 12,880
======= ======= ======= =======
</TABLE>
5
See notes to unaudited condensed consolidated financial statements.
<PAGE> 6
Saga Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash provided by operating activities $ 8,716 $ 8,139
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,424) (2,121)
Proceeds from sale of assets 2 304
Increase in intangibles and other assets (2,149) (522)
Acquisition of stations (2,155) (15,383)
Equity in operating results of investment 320 --
------- -------
Net cash used in investing activities (6,406) (17,722)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 3,500 11,250
Payments on long-term debt (2,970) (3,210)
Purchase of treasury stock (123) --
Net proceeds from exercise of stock options 4 392
Fractional shares stock split (1) --
------- -------
Net cash provided by financing activities 410 8,432
------- -------
Net increase (decrease) in cash and temporary investments 2,720 (1,151)
Cash and temporary investments, beginning of period 2,209 4,339
------- -------
Cash and temporary investments, end of period $ 4,929 $ 3,188
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Saga Communications,
Inc. Annual Report (Form 10-K) for the year ended December 31, 1997.
2. INCOME TAXES
The Company's effective tax rate is higher than the statutory rate as a result
of certain non-deductible depreciation and amortization expenses and the
inclusion of state taxes in the income tax amount.
3. STOCK SPLIT
On May 29, 1998 the Company consummated a five-for-four split of its Class A and
Class B Common Stock, resulting in additional shares being issued of
approximately 2,240,000 and 302,000, respectively, for holders of record on May
15, 1998. All share and per share information in the accompanying financial
statements has been restated retroactively to reflect the split.
4. COMMITMENTS
On May 18, 1998 the Company amended its credit agreement to provide that the
Revolving Loan's conversion to a five year term loan be extended to June 30,
1999 from June 30, 1998, and to extend the Facilities maturity date to June 30,
2004 from June 30, 2003. The amendment modified the quarterly payments which are
required on the Term Loan from a range of 2.5% to 5% to a range of 1.25% to 5%.
The amendment also modified the quarterly payments, which are required on the
outstanding amount of the Revolving Loan on September 30, 1999, from a range of
1.25% to 5% to a range of 2.5% to 7.5%.
On July 7, 1998, the Company entered into an agreement to purchase KAVU-TV (an
ABC affiliate) and a low power Univision affiliate, serving the Victoria, Texas
market for approximately $11,875,000, including approximately $2,000,000 of the
Company's Class A common stock. The Company will also assume an existing Local
Marketing Agreement for KVCT-TV (a Fox affiliate). The transaction is subject to
the approval of the Federal Communications Commission and is expected to close
during the first quarter of 1999.
7
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Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
4. COMMITMENTS (CONTINUED)
On August 31, 1998, the Company entered into an agreement to purchase an AM and
FM radio station (KGMI-AM and KISM-FM) serving the Bellingham, Washington market
for approximately $8,000,000. The transaction is subject to the approval of the
Federal Communications Commission, and is expected to close during the fourth
quarter of 1998.
On August 10, 1998 the Company implemented a Stock Buy-Back Program (the
"Buy-Back Program") pursuant to which the Company intends to purchase, up to
$2,000,000 of its Class A Common Stock. As of September 30, 1998 the Company had
purchased 7,700 shares at an average price of $16.00 per share.
On October 22, 1998, the Company entered into an agreement to purchase an AM and
FM radio station (KAFE-FM and KPUG-AM) serving the Bellingham, Washington market
for approximately $6,000,000. The transaction is subject to the approval of the
Federal Communications Commission, and is expected to close during the first
quarter of 1999.
5. STATION ACQUISITIONS
On March 30, 1998, the Company acquired a regional and state news and sports
information network (The Michigan Radio Network) for approximately $1,100,000,
including approximately $234,000 of the Company's Class A common stock. The
acquisition is subject to certain adjustments based on operating performance
levels that could result in an additional acquisition amount of $450,000 payable
in cash and shares of the Company's Class A common stock. The acquisition was
accounted for as a purchase and, accordingly, the total costs were allocated to
the acquired assets and assumed liabilities based on their estimated fair values
as of the acquisition date. The excess of consideration paid over the estimated
fair value of the net assets acquired has been recorded as excess of cost over
fair value of assets acquired.
On June 17, 1998 the Company acquired 50% of the outstanding stock of Finn
Midill, ehf., an Icelandic corporation which owns six FM radio stations serving
Reykjavik, Iceland, for approximately $1,100,000. Additionally, the Company
loaned approximately $570,000 to Finn Midill, ehf. which accrues interest at
7.5% plus an inflationary index, and is to be repaid in June, 2001. The
investment is accounted for using the equity method. The Company's equity in the
operating results of Finn Midill, ehf. is reported in other expenses as a loss
of approximately $320,000.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure such instruments at fair value. The statement is effective for
fiscal quarters of fiscal years beginning after June 15, 1999 and is not
expected to have a material effect on the operations of the Company.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto of Saga
Communications, Inc. and its subsidiaries contained elsewhere herein.
GENERAL
The Company's financial results are dependent on a number of factors, the
most significant of which is the ability to generate advertising revenue through
rates charged to advertisers. The rates a station is able to charge are, in
large part, based on a station's ability to attract audiences in the demographic
groups targeted by its advertisers, as measured principally by quarterly reports
by independent national rating services. Various factors affect the rate a
station can charge, including the general strength of the local and national
economies, population growth, ability to provide popular programming, local
market competition, relative efficiency of radio and/or broadcasting compared to
other advertising media, signal strength and government regulation and policies.
The primary operating expenses involved in owning and operating radio stations
are employee salaries, depreciation and amortization, programming expenses,
solicitation of advertising, and promotion expenses. In addition to these
expenses, owning and operating television stations involve the cost of acquiring
certain syndicated programming.
During the years ended December 31, 1997 and 1996, none of the Company's
operating locations represented more than 15% of the Company's station operating
income (i.e., net operating revenue less station operating expense), other than
the Columbus and Milwaukee stations. For the years ended December 31, 1997 and
1996, Columbus accounted for an aggregate of 24% and 22%, respectively, and
Milwaukee accounted for an aggregate of 24% and 23%, respectively, of the
Company's station operating income. For the nine month periods ended September
30, 1998 and 1997, none of the Company's operating locations represented more
that 15% of the Company's station operating income, other than the Columbus and
Milwaukee stations. For the nine months ended September 30, 1998 and 1997,
Columbus accounted for an aggregate of 22% and 25%, respectively, and Milwaukee
accounted for an aggregate of 25% and 26%, respectively, of the Company's
station operating income. While radio revenues in each of the Columbus and
Milwaukee markets have remained relatively stable historically, an adverse
change in these radio markets or these locations' relative market positions
could have a significant impact on the Company's operating results as a whole.
Because audience ratings in the local market are crucial to a station's
financial success, the Company endeavors to develop strong listener/viewer
loyalty. The Company believes that the diversification of formats on its radio
stations helps the Company to insulate itself from the effects of changes in
musical tastes of the public on any particular format.
The number of advertisements that can be broadcast without jeopardizing
listening/viewing levels (and the resulting ratings) is limited in part by the
format of a particular radio station and, in the case of television stations, by
restrictions imposed by the terms of certain network affiliation and syndication
agreements. The Company's stations strive to maximize revenue by constantly
managing the number of commercials available for sale and adjusting prices based
upon local market conditions. In the broadcasting industry, stations often
utilize trade (or barter) agreements to generate advertising time sales in
exchange for goods or services used or useful in the operation of the stations,
instead of for cash. The Company minimizes its use of trade agreements and
historically has sold over 95% of its advertising time for cash.
9
<PAGE> 10
Most advertising contracts are short-term, and generally run only for a few
weeks. Most of the Company's revenue is generated from local advertising, which
is sold primarily by each station's sales staff. For the nine months ended
September 30, 1998 and 1997, approximately 81% of the Company's gross revenue
was from local advertising. To generate national advertising sales, the Company
engages an independent advertising sales representative that specializes in
national sales for each of its stations.
The Company's revenue varies throughout the year. Advertising expenditures,
the Company's primary source of revenue, generally have been lowest during the
winter months which comprise the first quarter.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
For the three months ended September 30, 1998, the Company's net operating
revenue was $19,941,000 compared with $17,091,000 for the three months ended
September 30, 1997, an increase of $2,850,000 or 17%. Approximately $544,000 or
19% of the increase was attributable to revenue generated by stations which were
not owned or operated by the Company for the comparable period in 1997. The
balance of the increase in net operating revenue represented an 13.5% increase
in stations owned and operated by the Company for the entire comparable period,
primarily as a result of increased advertising rates at the majority of the
Company's stations.
Station operating expense (i.e., programming, technical, selling and
station general and administrative expenses) increased by $1,094,000 or 10% to
$11,825,000 for the three months ended September 30, 1998, compared with
$10,731,000 for the three months ended September 30, 1997. Of the total
increase, approximately $386,000 or 35% was the result of the impact of the
operation of stations which were not owned or operated by the Company for the
comparable period in 1997. The remaining balance of the increase in station
operating expense of $708,000 represents a total increase of 6.6% in stations
owned and operated by the Company for the comparable period in 1997.
Operating profit increased by $1,585,000 or 41% to $5,466,000 for the three
months ended September 30, 1998, compared with $3,881,000 for the three months
ended September 30, 1997. The improvement was primarily the result of the
$2,850,000 increase in net operating revenue, offset by the $1,094,000 increase
in station operating expense, a $113,000 or 7% increase in depreciation and
amortization, and a $58,000 or 6% increase in corporate general and
administrative charges. The increase in depreciation and amortization expense
was principally the result of the Company's recent acquisitions. (See Note 5 to
the Company's Condensed Consolidated Financial Statements.) The increase in
corporate general and administrative charges was primarily attributable to
additional costs due to the growth of the Company as a result of the Company's
recent acquisitions.
The Company generated net income in the amount of approximately $2,392,000
($0.19 per basic share) during the three months ended September 30, 1998,
compared with net income of $1,479,000 ($0.12 per basic share) for the three
months ended September 30, 1997, an increase of approximately $913,000. The
increase in net income was principally the result of the $1,585,000 improvement
in operating profit and a decrease in interest expense of $166,000, offset by a
$252,000 increase in other expense and a $586,000 increase in income taxes
directly associated with the improved operating performance of the Company. The
decrease in interest expense was primarily attributable to decreased interest
rates. The increase in other expense was principally the result of the Company's
equity in the operating results of an investment in Reykjavik, Iceland, the loss
in which is reported as other expense.
10
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
For the nine months ended September 30, 1998, the Company's net operating
revenue was $55,720,000 compared with $48,114,000 for the nine months ended
September 30, 1997, an increase of $7,606,000 or 16%. Approximately $3,130,000
or 41% of the increase was attributable to revenue generated by stations which
were not owned or operated by the Company for the comparable period in 1997. The
balance of the increase in net operating revenue represented a 9% increase in
stations owned and operated by the Company for the entire comparable period,
primarily as a result of increased advertising rates at the majority of the
Company's stations.
Station operating expense (i.e., programming, technical, selling and
station general and administrative expenses) increased by $3,803,000 or 12% to
$35,773,000 for the nine months ended September 30, 1998, compared with
$31,970,000 for the nine months ended September 30, 1997. Of the total increase,
approximately $2,357,000 or 62% was the result of the impact of the operation of
stations which were not owned or operated by the Company for the comparable
period in 1997. The remaining balance of the increase in station operating
expense of $1,446,000 represents a total increase of 5% in stations owned and
operated by the Company for the comparable period in 1997.
Operating profit increased by $2,817,000 or 31% to $11,869,000 for the nine
months ended September 30, 1998, compared with $9,052,000 for the nine months
ended September 30, 1997. The improvement was primarily the result of the
$7,606,000 increase in net operating revenue, offset by the $3,803,000 increase
in station operating expense, a $548,000 or 13% increase in depreciation and
amortization, and a $438,000 or 15% increase in corporate general and
administrative charges. The increase in depreciation and amortization expense
was principally the result of the recent acquisitions. The increase in corporate
general and administrative charges was primarily attributable to a $70,000
increase in deferred compensation charges relating to an accrued bonus to the
Company's principal stockholder, $50,000 in non-recurring employee benefit
related matters, and the remaining increase of approximately $318,000 represents
additional costs due to the growth of the Company as a result of the Company's
recent acquisitions.
The Company generated net income in the amount of approximately $4,662,000
($0.37 per share) during the nine months ended September 30, 1998, compared with
net income of $3,085,000 ($0.24 per share) for the nine months ended September
30, 1997, an increase of approximately $1,577,000. The increase in net income
was principally the result of the $2,817,000 improvement in operating profit and
a $266,000 decrease in interest expense, offset by a $338,000 increase in other
expense and a $1,168,000 increase in income taxes directly associated with the
improved operating performance of the Company. The decrease in interest expense
was primarily attributable to decreased interest rates, the increase in other
expense was principally the result of the Company's equity in the operating
results of an investment in Reykjavik, Iceland.
11
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LIQUIDITY AND CAPITAL RESOURCES
The Company's policy is generally to repay its long-term debt with excess
cash on hand to reduce its financing costs. As of September 30, 1998, the
Company had $62,135,000 of long-term debt (including the current portion
thereof) outstanding and approximately $43,750,000 of unused borrowing capacity
under the Revolving Loan (as defined below).
The Company has a credit agreement (the "Credit Agreement") with
BankBoston, N.A.; The Bank of New York; Fleet Bank, N.A.; Mellon Bank, N.A.; and
Union Bank of California, N.A. (collectively, the "Lenders"), with two
facilities (the "Facilities"): a $54,000,000 senior secured term loan (the "Term
Loan") and a $56,000,000 senior secured reducing revolving/term loan facility
(the "Revolving Loan"). The Facilities mature June 30, 2004. The Company's
indebtedness under the Facilities is secured by a first priority lien on
substantially all the assets of the Company and its subsidiaries, by a pledge of
its subsidiaries' stock and by a guarantee of its subsidiaries.
On May 18, 1998 the Company amended its credit agreement to provide that
the Revolving Loan's conversion to a five year term loan be extended to June 30,
1999 from June 30, 1998, and to extend the Facilities maturity date to June 30,
2004 from June 30, 2003. The amendment modified the quarterly payments which are
required on the Term Loan from a range of 2.5% to 5% to a range of 1.25% to 5%.
The amendment also modified the quarterly payments, which are required on the
outstanding amount of the Revolving Loan on September 30, 1999, from a range of
1.25% to 5% to a range of 2.5% to 7.5%.
The Revolving Loan has a total commitment of $56,000,000, of which
$51,000,000 may be used for permitted acquisitions and related transaction
expenses and $5,000,000 may be used for working capital needs and stand-by
letters of credit. On June 30, 1999 the Revolving Loan will convert to a five
year term loan. The outstanding amount of the Term Loan is required to be
reduced quarterly in amounts ranging from 1.25% to 5% of the initial commitment
and the outstanding amount of the Revolving Loan is required to be reduced
quarterly in amounts ranging from 2.5% to 7.5% of the amount outstanding on
September 30, 1999. In addition, the Facilities may be further reduced by
specified percentages of Excess Cash Flow (as defined in the Credit Agreement)
based on leverage ratios.
Interest rates under the Facilities are payable, at the Company's option,
at alternatives equal to LIBOR plus 1.125% to 1.75% or the prime rate plus 0% to
.5%. The spread over LIBOR and the prime rate vary from time to time, depending
upon the Company's financial leverage. The Company also pays quarterly
commitment fees equal to 1/2% per annum on the aggregate unused portion of the
Revolving Loan.
The Credit Agreement contains a number of financial covenants which, among
other things, require the Company to maintain specified financial ratios and
impose certain limitations on the Company with respect to investments,
additional indebtedness, dividends, distributions, guarantees, liens and
encumbrances.
The Company is currently in the process of negotiating a new credit
agreement, with a total commitment of $150,000,000 in borrowing capacity. The
Company anticipates having the new credit agreement in place late in the fourth
quarter of 1998 or in the first quarter of 1999.
12
<PAGE> 13
At September 30, 1998, the Company had an interest rate swap agreement with
a total notional amount of $32,000,000 that it uses to convert the variable
Eurodollar interest rate of a portion of its bank borrowings to a fixed interest
rate. The swap agreement was entered into to reduce the risk to the Company of
rising interest rates. In accordance with the terms of the swap agreement, dated
November 21, 1995, the Company pays 6.15% calculated on a $32,000,000 notional
amount. The Company receives LIBOR (5.6% at September 30, 1998) calculated on a
notional amount of $32,000,000. Net receipts or payments under the agreement are
recognized as an adjustment to interest expense. The swap agreement expires in
December 1999. As the LIBOR increases, interest payments received and the market
value of the swap position increase. Approximately $100,000 in additional
interest expense was recognized as a result of the interest rate swap agreement
for the nine months ended September 30, 1998 and an aggregate amount of $454,000
in additional interest expense has been recognized since the inception of the
agreement.
During the years ended December 31, 1997, and 1996, the Company had net
cash flows from operating activities of $11,659,000 and $7,679,000,
respectively. During the nine months ended September 30, 1998 and 1997, the
Company had net cash flows from operating activities of $8,716,000 and
$8,139,000, respectively. The Company believes that cash flow from operations
will be sufficient to meet quarterly debt service requirements for interest and
scheduled payments of principal under the Credit Agreement. If such cash flow is
not sufficient to meet such debt service requirements, the Company may be
required to sell additional equity securities, refinance its obligations or
dispose of one or more of its properties in order to make such scheduled
payments. There can be no assurance that the Company would be able to effect any
such transactions on favorable terms.
On March 14, 1997, the Company acquired an FM radio station (KAZR-FM)
serving the Des Moines, Iowa market for approximately $2,700,000. The Company
began operating the radio station under the terms of a local market agreement on
August 1, 1996, which remained in effect until the acquisition.
On April 17, 1997, the Company acquired an FM radio station (KLTI-FM)
serving the Des Moines, Iowa market for approximately $3,200,000. The Company
began operating the radio station under the terms of a local market agreement on
January 1, 1997, which remained in effect until the acquisition.
On May 5, 1997, the Company acquired two AM and two FM radio stations
(WTAX-AM, WDBR-FM, WVAX-AM, and WYXY-FM) serving the Springfield, Illinois
market for approximately $6,000,000. The Company began operating the radio
stations under the terms of a local market agreement on July 1, 1996, which
remained in effect until the acquisition.
On May 9, 1997, the Company acquired two FM radio stations (WFMR-FM and
WPNT-FM) serving the Milwaukee, Wisconsin market for approximately $5,000,000.
On November 18, 1997, the Company acquired an FM radio station (WQLL-FM)
serving the Manchester, New Hampshire market for approximately $3,400,000. The
Company began operating the radio station under the terms of a local market
agreement on July 1, 1997, which remained in effect until the acquisition.
On November 25,1997, the Company acquired a regional and state news and
sports information network (The Illinois Radio Network) for approximately
$1,750,000.
The 1997 acquisitions were financed through funds generated from operations
and additional borrowings of $11,250,000 under the Revolving Loan.
13
<PAGE> 14
On March 30, 1998, the Company acquired a regional and state news and
sports information network (The Michigan Radio Network) for approximately
$1,100,000, including approximately $234,000 of the Company's Class A Common
Stock. The acquisition is subject to certain adjustments based on operating
performance levels, that could result in an additional acquisition amount of
$450,000 payable in shares of the Company's Class A Common Stock.
On June 17, 1998 the Company acquired 50% of the outstanding stock of Finn
Midill, ehf. an Icelandic corporation which owns six FM radio stations serving
Reykjavik, Iceland, for approximately $1,100,000. Additionally, the Company
loaned approximately $570,000 to Finn Midill, ehf. which accrues interest at
7.5% plus an inflationary index, and is to be repaid in June, 2001. The
investment is accounted for using the equity method. The Company's equity in the
operating results of Finn Midill, ehf. since acquisition have not been
significant.
The 1998 acquisition of the Michigan Radio Network and the investment in
Finn Midill, ehf. were financed through additional borrowings of $3,500,000
under the Revolving Loan.
The Company anticipates that any future acquisitions of radio and
television stations will be financed through funds generated from operations,
borrowings under the Revolving Loan, additional debt or equity financing, or a
combination thereof. However, there can be no assurances that any such financing
will be available.
On August 10, 1998 the Company implemented a Stock Buy-Back Program (the
"Buy-Back Program") pursuant to which the Company intends to purchase up to
$2,000,000 of its Class A Common Stock. As of September 30, 1998, the Company
has acquired 7,700 shares at an average price per share of $16.00. The Company
anticipates that any additional shares purchased under the Buy-Back Program will
be financed through funds generated from operations or borrowings under the
Revolving Loan.
The Company's capital expenditures for the nine months ended September 30,
1998 were approximately $2,424,000 ($2,121,000 in the comparable period in
1997). The Company anticipates capital expenditures in 1998 to be approximately
$3,500,000, which it expects to finance through funds generated from operations.
IMPACT OF THE YEAR 2000
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to produce broadcast signals, process financial transactions, or engage in
similar normal business activities.
Based on recent assessments, the Company has determined that it will be
required to modify or replace portions of its software and certain hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications or replacements of existing
software and certain hardware, Y2K can be mitigated. However, if such
modifications and replacements are not made, or are not timely completed, Y2K
could have a material impact on the operations of the Company.
14
<PAGE> 15
The Company's plan to resolve Y2K involves the following four phases:
assessment, remediation, testing, and implementation. To date, the Company has
substantially completed its assessment of all systems that could be
significantly affected by Y2K. The assessment indicated that some significant
financial and operational systems could be affected by Y2K, including: i)
accounting and financial reporting systems, ii) broadcast studio equipment and
software necessary to deliver programming, iii) certain computer hardware not
capable of recognizing a four digit code for the applicable year, iv) certain
traffic and billing software, and v) certain local area networks. The assessment
phase will be completed in the fourth quarter of 1998. The Company is also
assessing the potential external risks associated with Y2K, including Y2K
compliance status of its significant external agents. To date the Company is not
aware of any external agent with a Y2K issue that would materially impact the
Company's result of operations, liquidity or capital resources. However, the
Company has no means of ensuring that external agents will be Y2K compliant. The
inability of external agents to complete their Y2K resolution process in a
timely fashion could materially impact the Company. The effect of non-compliance
by external agents is not determinable.
The Company's remediation phase is to replace or upgrade to Y2K compliant
software and hardware if applicable for related systems based upon its findings
during the assessment phase. The Company anticipates completing this phase no
later than June 30, 1999. The Company's testing and implementation phases will
run concurrently for certain systems. Completion of the testing phase for all
significant systems is expected by June 30, 1999.
The Company will utilize both internal and external resources to replace,
upgrade, test and implement the software and operating equipment for Y2K
modifications. The total Y2K project cost is estimated at approximately
$500,000, which includes the cost of new software and hardware, most of which
will be capitalized. The project is estimated to be completed not later than
September 30, 1999, which is prior to any anticipated impact on its operating
systems. The Company believes that with modifications to existing software and
conversions to new software, Y2K will not pose significant operational problems
for its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, Y2K could have a material impact on the
operations of the Company.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Management of the Company believes it has an effective program in place to
resolve the Y2K issue in a timely manner. As noted above, the Company has not
yet completed all necessary phases of the Y2K program. In the event that the
Company does no complete any additional phases, the Company could experience
disruptions in its operations, including among other things a temporary
inability to process financial transactions, deliver broadcast programming, or
engage in normal operational and business activities. In addition, disruptions
in the economy generally resulting from Y2K issues could also materially
adversely affect the Company. The Company could be subject to litigation for
computer systems failure, equipment shutdown or failure to properly date
business records. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
15
<PAGE> 16
The Company currently has no contingency plans for certain critical
applications. The Company plans to evaluate the status of completion in March
1999 and determine whether such a plan is necessary.
INFLATION
The impact of inflation on the Company's operations has not been
significant to date. There can be no assurance that a high rate of inflation in
the future would not have an adverse effect on the Company's operations.
FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. In addition, when used
in this Form 10-Q, words such as "believes," "anticipates," "expects," and
similar expressions are intended to identify forward looking statements. The
Company cautions that a number of important factors could cause the Company's
actual results for 1998 and beyond to differ materially from those expressed in
any forward looking statements made by or on behalf of the Company. Forward
looking statements involve a number of risks and uncertainties including, but
not limited to, the Company's financial leverage and debt service requirements,
dependence on key stations, U.S. and local economic conditions, the successful
integration of acquired stations, and regulatory matters. The Company cannot
assure that it will be able to anticipate or respond timely to changes in any of
the factors listed above, which could adversely affect the operating results in
one or more fiscal quarters. Results of operations in any past period should not
be considered, in and of itself, indicative of the results to be expected for
future periods. Fluctuations in operating results may also result in
fluctuations in the price of the Company's stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
16
<PAGE> 17
PART II - OTHER INFORMATION
Item 5. Other Information
Stockholders who intend to submit proposals at the 1999 Annual
Meeting of Stockholders, currently scheduled to be held on May 10,
1999, without including such proposals in the Proxy Statement for
such meeting must notify the Company of this intention no later
than February 22, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAGA COMMUNICATIONS, INC.
Date: November 13, 1998 /s/ Samuel D. Bush
-------------------------------
Samuel D. Bush
Vice President, Chief Financial
Officer, and Treasurer
(Principal Financial Officer)
Date: November 13, 1998 /s/ Catherine A. Bobinski
-------------------------------
Catherine A. Bobinski
Corporate Controller and
Chief Accounting Officer
(Principal Accounting Officer)
18
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