<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, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _________
Commission file number 1-11588
Saga Communications, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3042953
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
73 Kercheval Avenue
Grosse Pointe Farms, Michigan 48236
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(313) 886-7070
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Class A Common Stock, $.01 par value,
and Class B Common Stock, $.01 par value, outstanding as of November 5, 1999 was
11,672,278 and 1,510,637, respectively.
<PAGE> 2
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--September 30, 1999
and December 31, 1998 3
Condensed consolidated statements of operations and
comprehensive income--Three and nine months ended
September 30, 1999 and 1998
5
Condensed consolidated statements of cash flows--Nine
months ended September 30, 1999 and 1998 6
Notes to unaudited condensed consolidated financial
statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Saga Communications, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 8,334 $ 6,664
Accounts receivable, net 17,601 14,445
Prepaid expenses 1,902 1,461
Other current assets 1,486 1,374
-------- --------
Total current assets 29,323 23,944
Property and equipment 88,062 75,606
Less accumulated depreciation (43,348) (40,042)
-------- --------
Net property and equipment 44,714 35,564
Other assets:
Excess of cost over fair value of assets
acquired, net 20,697 19,765
Broadcast licenses, net 54,527 41,190
Other intangibles, deferred costs and
investments, net 10,854 9,550
-------- --------
Total other assets 86,078 70,505
-------- --------
$160,115 $130,013
======== ========
See notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
Saga Communications, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------- --------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,017 $ 1,871
Other current liabilities 8,874 6,637
Current portion of long-term debt 379 181
-------- --------
Total current liabilities 11,270 8,689
Deferred income taxes 6,210 5,401
Long-term debt 85,362 70,725
Broadcast program rights 604 295
Other 238 180
STOCKHOLDERS' EQUITY:
Common stock 131 128
Additional paid-in capital 42,126 37,355
Note receivable from principal stockholder (490) (648)
Retained earnings 14,645 8,755
Accumulated other comprehensive income 31 31
Treasury stock (12) (898)
-------- --------
Total stockholders' equity 56,431 44,723
-------- --------
$160,115 $130,013
======== ========
Note: The balance sheet at December 31, 1998 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
<PAGE> 5
Saga Communications, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(dollars in thousands except per share data)
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net operating revenue $23,882 $19,941 $65,608 $55,720
Station operating expense:
Programming and technical 5,399 4,342 14,913 12,490
Selling 5,434 4,796 16,823 15,053
Station general and administrative 3,290 2,687 9,552 8,230
------- ------- ------- -------
Total station operating expense 14,123 11,825 41,288 35,773
------- ------- ------- -------
Station operating income before corporate general and
administrative, depreciation and amortization 9,759 8,116 24,320 19,947
Corporate general and administrative 1,128 1,017 3,766 3,278
Depreciation and amortization 2,138 1,633 5,900 4,800
------- ------- ------- -------
Operating profit 6,493 5,466 14,654 11,869
Other expense:
Interest expense 1,566 1,159 4,394 3,442
Other 198 252 92 345
------- ------- ------- -------
Income before income tax 4,729 4,055 10,168 8,082
Income tax provision 1,983 1,663 4,275 3,420
------- ------- ------- -------
Net income and comprehensive income $ 2,746 $ 2,392 $ 5,893 $ 4,662
======= ======= ======= =======
Earnings per share:
Basic $ .21 $ .19 $ .45 $ .37
======= ======= ======= =======
Diluted $ .20 $ .18 $ .44 $ .36
======= ======= ======= =======
Weighted average common shares 13,122 12,711 13,013 12,705
------- ------- ------- -------
Weighted average common and common equivalent shares
13,413 12,979 13,278 12,967
------- ------- ------- -------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
Saga Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
Unaudited
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash provided by operating activities $11,577 $9,036
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (4,194) (2,424)
Proceeds from sale of assets 599 2
Increase in intangibles and other assets (1,495) (2,149)
Acquisition of stations (20,870) (2,155)
------- ------
Net cash used in investing activities (25,960) (6,726)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 14,500 3,500
Payments on long-term debt (185) (2,970)
Purchase of shares held in treasury -- (123)
Net proceeds from exercise of stock options 1,738 4
Fractional shares - five for four stock split -- (1)
------- ------
Net cash provided by financing activities 16,053 410
Net increase in cash and cash equivalents 1,670 2,720
Cash and cash equivalents, beginning of period 6,664 2,209
------- ------
Cash and cash equivalents, end of period $ 8,334 $4,929
======= ======
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 three and nine months ended September
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. 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,
1998.
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. ACQUISITIONS
On January 1, 1999, the Company acquired an AM and FM radio station (KAFE-FM and
KPUG-AM), serving the Bellingham, Washington market for approximately
$6,350,000.
On January 14, 1999, the Company acquired a regional and state farm information
network (The Michigan Farm Radio Network) for approximately $1,660,000,
approximately $1,036,000 of which was paid in the Company's Class A common
stock.
On April 1, 1999, the Company acquired KAVU-TV (an ABC affiliate) and a low
power Univision affiliate, serving the Victoria, Texas market for approximately
$11,700,000, approximately $1,840,000 of which was paid in the Company's Class A
common stock. The Company also assumed an existing Local Marketing Agreement for
KVCT-TV (a Fox affiliate).
7
<PAGE> 8
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
3. ACQUISITIONS (CONTINUED)
On May 1, 1999, the Company acquired an AM radio station (KIXT-AM) serving the
Bellingham, Washington market for approximately $1,000,000.
On July 1, 1999, the Company acquired WXVT-TV (a CBS affiliate) serving the
Greenville, Mississippi market for approximately $5,200,000, approximately
$600,000 of which was paid in the Company's Class A common stock.
All acquisitions were accounted for as purchases and, accordingly, the total
costs were allocated to the acquired assets and assumed liabilities based on
their estimated fair values as of the acquisition date. The excess of
consideration paid over the estimated fair value of the net assets acquired has
been recorded as broadcast licenses and excess of cost over fair value of assets
acquired.
The following unaudited pro forma results of operations of the Company for the
nine months ended September 30, 1999 and 1998 assume the 1998 and 1999
acquisitions occurred as of January 1, 1998. The pro forma results give effect
to certain adjustments, including depreciation, amortization of intangible
assets, increased interest expense on acquisition debt and related income tax
effects. The pro forma results have been prepared for comparative purposes only
and do not purport to indicate the results of operations which would actually
have occurred had the combinations been in effect on the dates indicated, or
which may occur in the future.
Pro Forma Results of Operations for Acquisitions: Nine Months Ended
(In thousands except per share data) September 30,
1999 1998
------- -------
Net operating revenue $67,691 $63,311
------- -------
Net income $ 5,792 $ 4,004
======= =======
Basic earnings per share $ .45 $ .32
======= =======
Diluted earnings per share $ .44 $ .31
======= =======
8
<PAGE> 9
Saga Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Unaudited
4. COMMITMENTS
On September 30, 1999, the Company entered into two interest rate swap
agreements with a total notional amount of $24,500,000. Coincident with these
agreements, the Company also sold an interest rate cap under the same terms with
a fixed price of 6.0%. The swap agreements will be used to convert the variable
Eurodollar interest rate of a portion of its bank borrowings to a fixed interest
rate. In accordance with the terms of the swap agreements, the Company pays
5.685% calculated on a $24,500,000 notional amount. The Company receives LIBOR
(5.50875% at September 30, 1999) calculated on a notional amount of $24,500,000.
The interest rate cap agreement requires that if on any reset date LIBOR is
greater than 6.00% the Company will pay the difference between 6.00% and the
LIBOR rate at the reset date calculated on the notional amount of $24,500,000.
As a result of this combination, the Company will pay a rate of 5.685% with
benefits up to 6%. Should LIBOR increase above 6.00%, the Company will pay LIBOR
less a 31.5 basis point benefit. Net receipts or payments under the agreements
will be recognized as an adjustment to interest expense. These agreements expire
in September 2001.
5. SUBSEQUENT EVENT
On November 9, 1999, the Company entered into an agreement to purchase two FM
and one AM radio station (KICD-AM/FM and KIGL-FM) serving the Spencer, Iowa
market for approximately $6,400,000.
9
<PAGE> 10
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, 1998 and 1997, and the nine month
periods ended September 30, 1999 and 1998, none of the Company's operating
locations represented more than 15% of the Company's station operating income
(i.e., net operating revenue less station operating expense), other than the
Columbus, Ohio and Milwaukee, Wisconsin stations. For the years ended December
31, 1998 and 1997, Columbus accounted for an aggregate of 22% and 24%,
respectively, and Milwaukee accounted for an aggregate of 24%, of the Company's
station operating income. For the nine months ended September 30, 1999 and 1998,
Columbus accounted for an aggregate of 14% and 22%, respectively, and Milwaukee
accounted for an aggregate of 22% and 25%, 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 location's relative market position could
have a significant impact on the Company's operating results as a whole. A
decrease in revenue and station operating income has been experienced at the FM
station in the Company's Columbus, Ohio market, the effect of which is discussed
in the comparative information of this section.
10
<PAGE> 11
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.
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, 1999 and 1998, 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.
As of September 30, 1998, the Company owned and operated thirty-seven
radio stations, one TV station, two radio information networks, and an equity
interest in six FM radio stations serving Reykjavik, Iceland. As a result of
acquisitions, as of September 30, 1999 the Company owned and/or operated
forty-two radio stations, five TV stations, three radio information networks,
and an equity interest in six FM radio stations serving Reykjavik, Iceland.
11
<PAGE> 12
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
For the three months ended September 30, 1999, the Company's net operating
revenue was $23,882,000 compared with $19,941,000 for the three months ended
September 30, 1998, an increase of $3,941,000 or 20%. Approximately $3,000,000
or 76% of the increase was attributable to revenue generated by stations which
were not owned or operated by the Company for the comparable period in 1998. The
balance of the increase in net operating revenue represented a 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.
The net increase in net operating revenue in stations owned and operated
by the Company for the entire comparable period was reflective of an overall
increase of 7% or $1,227,000 in the Company's markets excluding Columbus, Ohio.
The overall increase in markets other than Columbus, Ohio was offset by a
$284,000 or 10% decrease in net operating revenue in the Columbus market. The
decrease in revenue in the Columbus market was primarily due to competitive
pressures in the market which resulted in a short-term decline in the station's
listener ratings. While these competitive pressures created challenges, it is
believed that they are only temporary in nature and will not persist beyond the
fourth quarter of 1999.
Station operating expense (i.e., programming, technical, selling and
station general and administrative expenses) increased by $2,298,000 or 19% to
$14,123,000 for the three months ended September 30, 1999, compared with
$11,825,000 for the three months ended September 30, 1998. Of the total
increase, approximately $2,082,000 or 91% 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 1998. The remaining balance of the increase in station
operating expense of $216,000 represents a total increase of 2% in stations
owned and operated by the Company for the comparable period in 1998.
The net increase in station operating expense in stations owned and
operated by the Company for the entire comparable period was reflective of an
overall increase of 1% or $145,000 in the Company's markets excluding Columbus,
Ohio. The overall increase in markets other than Columbus, Ohio was offset by a
$71,000 or 6% increase in station operating expense in the Columbus market. The
increase in station operating expense in the Columbus market was primarily due
to competitive pressures in the market. In an effort to protect the station's
franchise with its target audience, additional non-budgeted monies were spent on
market research, advertising and promotion.
12
<PAGE> 13
Operating profit increased by $1,027,000 or 19% to $6,493,000 for the
three months ended September 30, 1999, compared with $5,466,000 for the three
months ended September 30, 1998. The improvement was primarily the result of the
$3,941,000 increase in net operating revenue, offset by the $2,298,000 increase
in station operating expense, a $505,000 or 31% increase in depreciation and
amortization, and a $111,000 or 11% 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 represented 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 $2,746,000
($0.20 per share on a fully diluted basis) during the three months ended
September 30, 1999, compared with net income of $2,392,000 ($0.18 per share on a
fully diluted basis) for the three months ended September 30, 1998, an increase
of approximately $354,000. The increase in net income was principally the result
of the $1,027,000 improvement in operating profit and a $54,000 decrease in
other expense, offset by a $407,000 increase in interest expense and a $320,000
increase in income tax expense. The decrease in other expense was principally
the result of a decrease in the loss from an equity investment. The increase in
interest expense was principally the result of the Company's additional
borrowings to finance acquisitions. The increase in income tax expense is
directly associated with the improved operating performance of the Company.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
For the nine months ended September 30, 1999, the Company's net operating
revenue was $65,608,000 compared with $55,720,000 for the nine months ended
September 30, 1998, an increase of $9,888,000 or 18%. Approximately $6,801,000
or 69% of the increase was attributable to revenue generated by stations which
were not owned or operated by the Company for the comparable period in 1998. The
balance of the increase in net operating revenue represented a 6% 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.
The net increase in net operating revenue in stations owned and operated
by the Company for the entire comparable period was reflective of an overall
increase of 7% or $3,411,000 in the Company's markets excluding Columbus, Ohio.
The overall increase in markets other than Columbus, Ohio was offset by a
$324,000 or 4% decrease in net operating revenue in the Columbus market. The
decrease in revenue in the Columbus market was primarily due to competitive
pressures in the market which resulted in a short-term decline in the station's
listener ratings. While these competitive pressures created challenges, it is
believed that they are only temporary in nature and will not persist beyond the
fourth quarter of 1999.
13
<PAGE> 14
Station operating expense (i.e., programming, technical, selling and
station general and administrative expenses) increased by $5,515,000 or 15% to
$41,288,000 for the nine months ended September 30, 1999, compared with
$35,773,000 for the nine months ended September 30, 1998. Of the total increase,
approximately $4,631,000 or 84% 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 1998. The remaining balance of the increase in station operating
expense of $884,000 represents a total increase of 3% in stations owned and
operated by the Company for the comparable period in 1998.
The net increase in station operating expense in stations owned and
operated by the Company for the entire comparable period was reflective of an
overall increase of 1% or $328,000 in the Company's markets excluding Columbus,
Ohio. The overall increase in markets other than Columbus, Ohio was offset by a
$556,000 or 16% increase in station operating expense in the Columbus market.
The increase in station operating expense in the Columbus market was primarily
due to competitive pressures in the market. In an effort to protect the
station's franchise with its target audience, additional non-budgeted monies
were spent on market research, advertising and promotion.
Operating profit increased by $2,785,000 or 24% to $14,654,000 for the
nine months ended September 30, 1999, compared with $11,869,000 for the nine
months ended September 30, 1998. The improvement was primarily the result of the
$9,888,000 increase in net operating revenue, offset by the $5,515,000 increase
in station operating expense, a $1,100,000 or 23% increase in depreciation and
amortization, and a $488,000 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 an increase in
deferred compensation charges of $140,000 pertaining to a discretionary
contribution to the 401(k) plan, and the remaining increase of approximately
$348,000 represents additional costs due to the growth of the Company as a
result of the Company's recent acquisitions.
14
<PAGE> 15
The Company generated net income in the amount of approximately $5,893,000
($0.44 per share on a fully diluted basis) during the nine months ended
September 30, 1999, compared with net income of $4,662,000 ($0.36 per share on a
fully diluted basis) for the nine months ended September 30, 1998, an increase
of approximately $1,231,000. The increase in net income was principally the
result of the $2,785,000 improvement in operating profit and a decrease in other
expense of $253,000, offset by a $952,000 increase in interest expense and a
$855,000 increase in income tax expense. The decrease in other expense was
principally the result of non-recurring income of $500,000 resulting from an
agreement to downgrade a FCC license at one of the Company's stations, offset by
a $250,000 increase in the loss of an unconsolidated affiliate. The increase in
interest expense was principally the result of the Company's additional
borrowings to finance acquisitions. The increase in income tax expense is
directly associated with the improved operating performance of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had $85,741,000 of long-term debt
(including the current portion thereof) outstanding and approximately
$65,500,000 of unused borrowing capacity under the Credit Agreement (as defined
below).
The Company's credit agreement (the "Credit Agreement") has three
facilities (the "Facilities"): a $70,000,000 senior secured term loan (the "Term
Loan"), a $60,000,000 senior secured acquisition loan facility (the "Acquisition
Facility"), and a $20,000,000 senior secured revolving credit facility (the
"Revolving Facility"). The Facilities mature on June 30, 2006. The Company's
indebtedness under the Facilities is secured by a first priority lien on
substantially all the assets of the Company and its subsidiaries, by a pledge of
its subsidiaries' stock and by a guarantee of its subsidiaries.
The Acquisition Facility may be used for permitted acquisitions. The
Revolving Facility may be used for general corporate purposes, including working
capital, capital expenditures, permitted acquisitions (to the extent that the
Acquisition Facility has been fully utilized and limited to $10,000,000) and
permitted stock buybacks. On December 30, 2000, the Acquisition Facility will
convert to a five and a half year term loan. The outstanding amounts of the Term
Loan and the Acquisition Facility are required to be reduced quarterly in
amounts ranging from 2.5% to 7.5% of the initial commitment commencing on March
31, 2001. Any outstanding amount under the Revolving Facility will be due on the
maturity date of June 30, 2006. In addition, the Facilities may be further
reduced by specified percentages of Excess Cash Flow (as defined in the Credit
Agreement) based on leverage ratios.
15
<PAGE> 16
Interest rates under the Facilities are payable, at the Company's option,
at alternatives equal to LIBOR plus 1.0% to 1.75% or the Agent bank's base rate
plus 0% to .75%. 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 of 0.375% to 0.5% per annum on the aggregate
unused portion of the Acquisition and Revolving Facilities.
The Credit Agreement contains a number of financial covenants which, among
other things, require the Company to maintain specified financial ratios and
impose certain limitations on the Company with respect to investments,
additional indebtedness, dividends, distributions, guarantees, liens and
encumbrances.
At September 30, 1999, 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 (5.09625% at September 30, 1999) 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
$244,000 in additional interest expense was recognized as a result of the
interest rate swap agreement for the nine months ended September 30, 1999 and an
aggregate amount of $751,000 in additional interest expense has been recognized
since the inception of the agreement.
On September 30, 1999, the Company entered into two interest rate swap
agreements with a total notional amount of $24,500,000. Coincident with these
agreements, the Company also sold an interest rate cap under the same terms with
a fixed price of 6.0%. The swap agreements will be used to convert the variable
Eurodollar interest rate of a portion of its bank borrowings to a fixed interest
rate. In accordance with the terms of the swap agreements, the Company pays
5.685% calculated on a $24,500,000 notional amount. The Company receives LIBOR
(5.50875% at September 30, 1999) calculated on a notional amount of $24,500,000.
The interest rate cap agreement requires that if on any reset date LIBOR is
greater than 6.00% the Company will pay the difference between 6.00% and the
LIBOR rate at the reset date calculated on the notional amount of $24,500,000.
As a result of this combination, the Company will pay a rate of 5.685% with
benefits up to 6%. Should LIBOR increase above 6.00%, the company will pay LIBOR
less a 31.5 basis point benefit. Net receipts or payments under the agreements
will be recognized as an adjustment to interest expense. These agreements expire
in September 2001. No additional interest expense was recognized as a result of
the interest rate swap agreement for the nine months ended September 30, 1999.
16
<PAGE> 17
During the nine months ended September 30, 1999 and 1998, the Company had
net cash flows from operating activities of $11,577,000 and $9,036,000,
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 January 1, 1999, the Company acquired an AM and FM radio station
(KAFE-FM and KPUG-AM), serving the Bellingham, Washington market for
approximately $6,350,000.
On January 14, 1999, the Company acquired a regional and state farm
information network (The Michigan Farm Radio Network) for approximately
$1,660,000, approximately $1,036,000 of which was paid in the Company's Class A
common stock.
On April 1, 1999, the Company acquired KAVU-TV (an ABC affiliate) and a
low power Univision affiliate, serving the Victoria, Texas market for
approximately $11,700,000, approximately $1,840,000 of which was paid in the
Company's Class A common stock. The Company also assumed an existing Local
Marketing Agreement for KVCT-TV (a Fox affiliate).
On May 1, 1999, the Company acquired an AM radio station (KIXT-AM) serving
the Bellingham, Washington market for approximately $1,000,000.
On July 1, 1999, the Company acquired WXVT-TV (a CBS affiliate) serving
the Greenville, Mississippi market for approximately $5,200,000, approximately
$600,000 of which was paid in the Company's Class A common stock.
The acquisitions during the first nine months of 1999 were financed
through funds generated from operations and additional borrowings of $14,500,000
under the Credit Agreement.
On November 9, 1999, the Company entered into an agreement to purchase two
FM and one AM radio station (KICD-AM/FM and KIGL-FM) serving the Spencer, Iowa
market for approximately $6,400,000.
The Company anticipates that the above and any future acquisitions of
radio and television stations will be financed through funds generated from
operations, borrowings under the Credit Agreement, additional debt or equity
financing, or a combination thereof. However, there can be no assurances that
any such financing will be available on acceptable terms, if any.
17
<PAGE> 18
The Company's capital expenditures for the nine months ended September 30,
1999 were approximately $4,194,000 ($2,424,000 in the comparable period in
1998). The Company anticipates capital expenditures in 1999 to be approximately
$4,500,000, 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. 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.
The Company determined that it was necessary 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 these
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.
The Company's plan to resolve Y2K involved the following four phases:
assessment, remediation, testing, and implementation. 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 Company
has also assessed 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.
18
<PAGE> 19
The Company's remediation phase was 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 has substantially completed this phase
and anticipates completing this phase no later than November 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 November 30, 1999.
The Company has and 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 to be approximately
$500,000, which includes the cost of new software and hardware, most of which
has or will be capitalized. The project is estimated to be 90% completed as of
September 30, 1999, with final completion expected to be on or before November
30, 1999, which is prior to any anticipated impact on its operating systems.
The cost of the project and the date on which the Company believes it will
complete the Y2K 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.
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual work arounds and adjusting staffing strategies.
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.
19
<PAGE> 20
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 1999 and beyond to differ materially from those expressed in
any forward looking statements made by or on behalf of the Company. Forward
looking statements involve a number of risks and uncertainties including, but
not limited to, the Company's financial leverage and debt service requirements,
dependence on key personnel, dependence on key stations, U.S. and local economic
conditions, Y2K issues, the successful integration of acquired stations, and
regulatory matters. The Company cannot assure that it will be able to anticipate
or respond timely to changes in any of the factors listed above, which could
adversely affect the operating results in one or more fiscal quarters. Results
of operations in any past period should not be considered, in and of itself,
indicative of the results to be expected for future periods. Fluctuations in
operating results may also result in fluctuations in the price of the Company's
stock. See "Business - Forward Looking Statements; Risk Factors" in the
Company's 1998 Form 10-K.
20
<PAGE> 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE> 22
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 11, 1999 /s/ Samuel D. Bush
---------------------------------------
Samuel D. Bush
Vice President, Chief Financial
Officer, and Treasurer
(Principal Financial Officer)
Date: November 11, 1999 /s/ Catherine A. Bobinski
---------------------------------------
Catherine A. Bobinski
Vice President, Corporate Controller and
Chief Accounting Officer
(Principal Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 8,334
<SECURITIES> 0
<RECEIVABLES> 17,601
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,323
<PP&E> 88,062
<DEPRECIATION> 43,348
<TOTAL-ASSETS> 160,115
<CURRENT-LIABILITIES> 11,270
<BONDS> 0
0
0
<COMMON> 131
<OTHER-SE> 56,300
<TOTAL-LIABILITY-AND-EQUITY> 160,115
<SALES> 65,608
<TOTAL-REVENUES> 65,608
<CGS> 0
<TOTAL-COSTS> 50,954
<OTHER-EXPENSES> 92
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,394
<INCOME-PRETAX> 10,168
<INCOME-TAX> 4,275
<INCOME-CONTINUING> 5,893
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,893
<EPS-BASIC> .45
<EPS-DILUTED> .44
</TABLE>
