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Section 1: 10-Q (FORM 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

  þ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period ended September 30, 2017

 

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 þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 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. (Check one):

 

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 Exchange Act). Yes ¨ No þ

 

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 2, 2017 was 5,024,862 and 882,141, respectively.

 

 

 

 

 

 

INDEX

 

    Page
PART I. FINANCIAL INFORMATION   3
Item 1. Financial Statements (Unaudited)   3
Condensed consolidated balance sheets — September 30, 2017 and December 31, 2016   3
Condensed consolidated statements of income — Three and nine months ended September 30, 2017 and 2016   4
Condensed consolidated statements of cash flows — Nine months ended September 30, 2017 and 2016   5
Notes to unaudited condensed consolidated financial statements   6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
Item 3. Quantitative and Qualitative Disclosures about Market Risk   30
Item 4. Controls and Procedures   31
PART II OTHER INFORMATION   31
Item 1. Legal Proceedings   31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   31
Item 6. Exhibits   32
Signatures   33

 

EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

 

 2 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SAGA COMMUNICATIONS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2017   2016 
   (Unaudited)   (Note) 
   (In thousands) 
Assets          
Current assets:          
Cash and cash equivalents  $81,035   $26,697 
Accounts receivable, net   18,880    17,735 
Prepaid expenses and other current assets   2,026    2,397 
Barter transactions   1,721    1,318 
Current assets of discontinued operations       4,625 
Total current assets   103,662    52,772 
Property and equipment   135,644    134,680 
Less accumulated depreciation   79,299    85,506 
Net property and equipment   56,345    49,174 
Other assets:          
Broadcast licenses, net   94,708    86,622 
Goodwill   15,417    7,407 
Other intangibles, deferred costs and investments, net   7,822    5,975 
Assets of discontinued operations       18,048 
   $277,954   $219,998 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Accounts payable  $2,211   $1,618 
Payroll and payroll taxes   6,836    6,954 
Other accrued expenses   26,348    3,198 
Barter transactions   1,394    1,304 
Current portion of long term debt   10,287     
Current liabilities of discontinued operations   292    2,971 
Total current liabilities   47,368    16,045 
Deferred income taxes   31,762    29,741 
Long-term debt   25,000    35,287 
Other liabilities   2,269    2,885 
Liabilities of discontinued operations       1,058 
Total liabilities   106,399    85,016 
Commitments and contingencies        
Stockholders’ equity:          
Common stock   75    74 
Additional paid-in capital   62,157    59,557 
Retained earnings   143,308    108,733 
Treasury stock   (33,985)   (33,382)
Total stockholders’ equity   171,555    134,982 
   $277,954   $219,998 

 

Note: The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain prior period amounts have been reclassified to conform to the current year presentation.

 

See notes to unaudited condensed consolidated financial statements. 

 

 3 

 

 

SAGA COMMUNICATIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
   (Unaudited) 
   (In thousands, except per share data) 
     
Net operating revenue  $30,269   $29,878   $86,685   $88,208 
Station operating expense   21,755    21,775    64,521    64,757 
Corporate general and administrative   3,132    2,728    8,875    8,065 
Other operating expense   (127)   (1,393)   (69)   (1,388)
Operating income from continuing operations   5,509    6,768    13,358    16,774 
Interest expense   254    187    691    548 
Income from continuing operations before tax   5,255    6,581    12,667    16,226 
Income tax expense   2,290    2,678    5,280    6,665 
Income from continuing operations, net of tax   2,965    3,903    7,387    9,561 
Income from discontinued operations, net of tax (Note 5)   30,451    1,511    32,501    3,688 
Net income  $33,416   $5,414   $39,888   $13,249 
Basic Earnings per share:                    
From continuing operations  $.50   $.66   $1.25   $1.63 
From discontinued operations   5.16    .26    5.51    .63 
Basic earnings per share  $5.66   $.92   $6.76   $2.26 
                     
Weighted average common shares   5,807    5,755    5,800    5,753 
                     
Diluted Earnings per share:                    
From continuing operations  $.50   $.66   $1.25   $1.62 
From discontinued operations   5.16    .26    5.51    .63 
Diluted earnings per share  $5.66   $.92   $6.76   $2.25 
                     
Weighted average common and common equivalent shares   5,807    5,764    5,804    5,762 
                     
Dividends declared per share  $.30   $.30   $.90   $.80 

 

See notes to unaudited condensed consolidated financial statements.

 

 4 

 

 

SAGA COMMUNICATIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine Months Ended 
   September 30, 
   2017   2016 
   (Unaudited) 
   (In thousands) 
Cash flows from operating activities:          
Cash provided by operating activities  $18,677   $21,020 
Cash flows from investing activities:          
Acquisition of property and equipment   (4,850)   (4,149)
Acquisition of broadcast properties   (25,856)   (12,733)
Proceeds from sale of television stations   69,528     
Proceeds from disposals of fixed assets   417    1,644 
Other investing activities       11 
Net cash provided by (used in) investing activities   39,239    (15,227)
Cash flows from financing activities:          
Cash dividends paid   (3,541)   (4,688)
Purchase of treasury shares   (37)   (5)
Other financing activities        
Net cash used in financing activities   (3,578)   (4,693)
Net increase in cash and cash equivalents   54,338    1,100 
Cash and cash equivalents, beginning of period   26,697    21,614 
Cash and cash equivalents, end of period  $81,035   $22,714 

 

See notes to unaudited condensed consolidated financial statements.

 

 5 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements.

 

In our opinion, the accompanying financial statements include all adjustments of a normal, recurring nature considered necessary for a fair presentation of our financial position as of September 30, 2017 and the results of operations for the three and nine months ended September 30, 2017 and 2016. Results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

We own or operate broadcast properties in 26 markets, including 75 FM and 33 AM radio stations.

 

On May 9, 2017 the Company entered into an agreement to sell the Joplin, Missouri and Victoria, Texas television stations. The disposition closed on September 1, 2017. The historical results of operations for the television stations are presented in discontinued operations for all periods presented (see Note 5). Unless indicated otherwise, the information in the notes to the accompanying unaudited condensed consolidated financial statements relates to the Company’s continuing operations. As a result of the Company’s television stations sale, the Company only has one reportable segment at September 30, 2017.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Saga Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 2016.

 

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2017, for items that should potentially be recognized in these financial statements or discussed within the notes to the financial statements.

 

 6 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

Earnings Per Share Information

 

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:

 

   Three Months Ended 
September 30,
   Nine Months Ended 
September 30,
 
   2017   2016   2017   2016 
   (In thousands, except per share data) 
Numerator:                    
Income from continuing operations  $2,965   $3,903   $7,387   $9,561 
Less: Income allocated to unvested participating securities   51    72    126    176 
Income from continuing operations available to common stockholders  $2,914   $3,831   $7,261   $9,385 
                     
Income from discontinued operations  $30,451   $1,511   $32,501   $3,688 
Less: Income allocated to unvested participating securities   520    28    556    68 
Income from discontinued operations available to common stockholders  $29,931   $1,483   $31,945   $3,620 
                     
Net income available to common stockholders  $32,845   $5,314   $39,206   $13,005 
                     
Denominator:                    
Denominator for basic earnings per share — weighted average shares   5,807    5,755    5,800    5,753 
Effect of dilutive securities:                    
Common stock equivalents       9    4    9 
Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions   5,807    5,764    5,804    5,762 
                     
Basic earnings per share:                    
From continuing operations  $.50   $.66   $1.25   $1.63 
From discontinued operations   5.16    .26    5.51    .63 
Basic earnings per share  $5.66   $.92   $6.76   $2.26 
                     
Diluted earnings per share                    
From continuing operations  $.50   $.66   $1.25   $1.62 
From discontinued operations   5.16    .26    5.51    .63 
Diluted earnings per share  $5.66   $.92   $6.76   $2.25 

 

The number of stock options outstanding that had an antidilutive effect on our earnings per share calculation, and therefore have been excluded from diluted earnings per share calculation, was 0 for the three and nine months ended September 30, 2017 and 0 for the three and nine months ended September 30, 2016, respectively. All stock options were exercised during the second quarter of 2017 and there were no stock options outstanding at September 30, 2017.

 

 7 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

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 September 30, 2017.

 

Income Taxes

 

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.

 

Time Brokerage Agreements/Local Marketing Agreements

 

We have entered into Time Brokerage Agreements (“TBA’s”) or Local Marketing Agreements (“LMA’s”) in certain markets. In a typical TBA/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 their own commercial advertising announcements during the time periods specified. Revenue and expenses related to TBA’s/LMA’s are included in the accompanying unaudited Condensed Consolidated Statements of Income. At September 30, 2017 we had no TBA’s/LMA’s in place.

 

2. 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.

 

 8 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

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. 

  

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 has completed our preliminary analysis of the standard, our evaluation of contracts and the potential impact of this standard on our consolidated financial statements. Based on our preliminary assessment, which is subject to change, the impact of this guidance should not be material to the Company’s financial position, results of operations or cash flows. We plan to adopt the new guidance using the modified retrospective method. 

 

 9 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

3. Intangible Assets

 

We evaluate our FCC licenses and goodwill for impairment annually as of October 1st or more frequently if events or circumstances indicate that the asset might be impaired. FCC licenses are evaluated for impairment at the market level using a direct method. 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. 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.

 

Intangible assets that have finite lives are amortized over their useful lives using the straight-line method. Favorable lease agreements are amortized over the lives of the leases ranging from four to twenty-six years. Other intangibles are amortized over one to fifteen years.

 

4. Common Stock and Treasury Stock

 

The following summarizes information relating to the number of shares of our common stock issued in connection with stock transactions through September 30, 2017:

 

   Common Stock Issued 
   Class A   Class B 
   (Shares in thousands) 
Balance, January 1, 2016   6,603    865 
Conversion of shares   12    (12)
Issuance of restricted stock   23    25 
Balance, December 31, 2016   6,638    878 
Exercise of stock options   21    8 
Conversion of shares   4    (4)
Forfeiture of restricted stock   (1)    
Balance, September 30, 2017   6,662    882 

 

We have a Stock Buy-Back Program to allow us to purchase up to $75.8 million of our Class A Common Stock. As of September 30, 2017, we have remaining authorization of $23.3 million for future repurchases of our Class A Common Stock. On September 14, 2017, the Board of Directors authorized the repurchase of its Class A Common Stock under its trading plan adopted pursuant to Securities and Exchange Commission Rule 10b5-1. The Rule 10b5-1 repurchase plan allows the Company to repurchase its shares during periods when it would normally not be active in the market due to its internal trading blackout periods.  Under the plan, the Company may repurchase its Class A Common Stock in any combination of open market, block transactions and privately negotiated transactions subject to market conditions, legal requirements including applicable SEC regulations (which include certain price, market, volume and timing constraints), specific repurchase instructions and other corporate considerations.  Purchases under the plan will be funded by cash on the Company's balance sheet.  The plan does not obligate Saga to acquire any particular amount of Class A Common Stock.  The authorization is effective until September 1, 2018, but may be suspended, extended or amended at any time at the Company's discretion.

 

 10 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

5. 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, and the proceeds from sale of related 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 6). 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).

 

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 unaudited Condensed Consolidated Statements of Operations (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017 (4)   2016   2017 (4)   2016 
                 
Net operating revenue  $3,296   $6,241   $14,238   $17,094 
Station operating expense (1)   2,372    3,684    9,727    10,807 
Other operating (income) expense           31    3 
Operating income   924    2,557    4,480    6,284 
Interest Expense (2)   5    9    21    26 
Income before income taxes   919    2,548    4,459    6,258 
Pretax gain on the disposal of discontinued operations   50,842        50,842     
Total pretax gain on discontinued operations   51,761    2,548    55,301    6,258 
Income tax expense (3)   21,310    1,037    22,800    2,570 
Income from discontinued operations, net of tax  $30,451   $1,511   $32,501   $3,688 

 

(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 Surtsey Media, LLC debt that is guaranteed by the Television stations. Our affiliate repaid this loan when the television stations were sold on September 1, 2017.
(3)The effective tax rates on pretax income from discontinued operations were 41%.
(4)Results of operations for the Television stations are reflected through August 31, 2017. The effective date of the sale was September 1, 2017.

 

 11 

 

 

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):

 

   September 30,
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  $84   $759 
Barter transactions       163 
Current portion of long term debt       1,078 
Other liabilities (1)   208    971 
Total of current liabilities of discontinued operations  $292   $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  $292   $4,029 
Net Assets Classified as Part of Discontinued Operations in the Condensed Consolidated Balance Sheets  $(292)  $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.

 

 12 

 

 

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):

 

   September 30,
2017
   September 30, 
2016
 
Significant operating non-cash items          
Depreciation and amortization (1)  $445   $1,023 
Broadcast program rights amortization   418    467 
Barter revenue, net   18    58 
Loss on sale of assets   31    3 
           
Significant investing items          
Acquisition of property and equipment  $125   $717 
Proceeds from sale and disposal of assets       13 
Net proceeds from sale of television stations (2)   69,528     

 

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

 

6. Acquisitions and Dispositions

 

We actively seek and explore opportunities for expansion through the acquisition of additional broadcast properties. The consolidated statements of income include the operating results of the acquired stations from their respective dates of acquisition. All acquisitions were accounted for as purchases and, accordingly, the total purchase consideration was allocated to the acquired assets and assumed liabilities based on their estimated fair values as of the acquisition dates. The excess of the consideration paid over the estimated fair value of net assets acquired have been recorded as goodwill. The Company accounts for acquisition under the provisions of FASB ASC Topic 805, Business Combinations.

 

Management assigned fair values to the acquired property and equipment through a combination of cost and market approaches based upon each specific asset’s replacement cost, with a provision for depreciation, and to the acquired intangibles, primarily an FCC license, based on the Greenfield valuation methodology, a discounted cash flow approach.

 

2017 Acquisitions and Disposals

 

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 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, and the proceeds from sale of related accounts receivable of approximately $3.4 million, offset by certain closing adjustments and transactional costs of approximately $500 thousand.

 

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, both Companies of which a member of our Board of directors, G. Dean Pearce, is President of, to purchase radio stations principally serving the South Carolina area 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: 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 for $24.2 million, which included the purchase price of $23 million, and the purchase of $1.3 million in related accounts receivable offset by certain closing adjustments and transactional costs of approximately $50,000. Management attributes the goodwill recognized in the acquisition to the power of the existing brands in the Charleston, South Carolina and Hilton Head, South Carolina market as well as synergies and growth opportunities expected through the combination with the Company’s existing stations.

 

 13 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

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 $1,658,000, which included $8,000 in transactional costs. 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. Unaudited proforma results of operations for this acquisition are not required, as such information is not material to our financial statements and therefore is not presented in the pro forma tables in the following pages.

 

2016 Acquisitions

 

On November 2, 2015, we entered into an agreement to acquire an FM radio station (WLVQ) from Wilks Broadcast - Columbus, LLC, serving the Columbus, Ohio market for approximately $13,791,000, which included $734,000 in accounts receivable and $57,000 in transactional costs. We completed this acquisition on February 3, 2016. We operated this station under an LMA from November 16, 2015 through our completion of the acquisition. This acquisition was financed through funds generated from operations. Management attributes the goodwill recognized in the acquisition to the power of the existing brands in the Columbus, Ohio market as well as the synergies and growth opportunities expected through the combination with the Company’s existing stations.

 

On March 16, 2016 we acquired an FM translator serving the Portland, Maine market for approximately $50,000. 

 

On March 25, 2016 we acquired an FM translator serving the Milwaukee, Wisconsin market for approximately $50,000. 

 

On April 8, 2016 we acquired an FM translator serving the Charlottesville, Virginia market for approximately $100,000.

 

On April 11, 2016 we acquired an FM translator serving the Clarksville, Tennessee market for approximately $30,000.

 

On June 3, 2016 we acquired an FM translator serving the Spencer, Iowa market for approximately $35,000.

 

On August 11, 2016 we acquired two FM translators serving the Bellingham, Washington market for approximately $50,000.

 

On September 12, 2016 we acquired an FM translator serving the Portland, Maine market for approximately $45,000.

 

On October 11, 2016 we acquired a FM Translator serving the Bellingham, Washington market for approximately $25,000.

 

On November 8, 2016 we acquired a FM Translator serving the Des Moines, Iowa market for approximately $25,000.

 

On November 14, 2016 we acquired a FM Translator serving the Springfield, Illinois market for approximately $23,000.

 

On December 2, 2016 we acquired a FM Translator serving the Ithaca, New York market for approximately $35,000.

 

 14 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

Condensed Consolidated Balance Sheet of 2017 and 2016 Acquisitions:

 

The following unaudited condensed balance sheets represent the estimated fair value assigned to the related assets and liabilities of the 2017 and 2016 acquisitions at their respective acquisition dates. The allocation of the purchase price for the 2017 and 2016 acquisitions is preliminary at September 30, 2017.

 

Saga Communications, Inc.  

 

Condensed Consolidated Balance Sheet of 2017 and 2016 Acquisitions

 

   Acquisitions in 
   2017   2016 
   (In thousands) 
Assets Acquired:          
Current assets  $1,440   $814 
Property and equipment   6,678    375 
Other assets:          
Broadcast licenses   8,086    8,123 
Goodwill   8,011    4,533 
Other intangibles, deferred costs and investments   2,019    398 
Total other assets   18,116    13,054 
Total assets acquired   26,234    14,243 
Liabilities Assumed:          
Current liabilities   378    41 
Total liabilities assumed   378    41 
Net assets acquired  $25,856   $14,202 

 

 15 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

Pro Forma Results of Operations for Acquisitions (Unaudited)

 

The following unaudited pro forma results of our operations for the three and nine months ended September 30, 2017 and 2016 assume the 2017 and 2016 acquisitions occurred as of January 1, 2016. The translators are start-up stations and therefore, have no pro forma revenue and expenses. 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.

 

   Three Months Ended 
September 30,
   Nine Months Ended 
September 30,
 
   2017   2016   2017   2016 
     
ProForma Results of Operation                    
Net operating revenue  $31,546   $31,888   $92,187   $93,993 
Station operating expense   23,000    23,478    69,325    69,874 
Corporate general and administrative   3,132    2,728    8,875    8,065 
Other operating (income) expense, net   (127)   (1,393)   (69)   (1,388)
Operating income   5,541    7,075    14,056    17,442 
Interest expense   254    187    691    548 
Income from continuing operations, before tax   5,287    6,888    13,365    16,894 
Income tax expense   2,430    2,804    5,566    6,939 
Income from continuing operations, net of tax   2,857    4,084    7,799    9,955 
Income from discontinued operations, net of tax   30,451    1,511    32,501    3,688 
Net income  $33,308   $5,595   $40,300   $13,643 
                     
Basic earnings per share:                    
From continuing operations  $.47   $.70   $1.32   $1.70 
From discontinued operations   5.16    .26    5.51    .63 
Basic earnings per share  $5.63   $.96   $6.83   $2.33 
                     
Diluted earnings per share:                    
From continuing operations  $.47   $.70   $1.32   $1.70 
From discontinued operations   5.16    .26    5.51    .63 
Diluted earnings per share  $5.63   $.96   $6.83   $2.33 

 

 16 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

7. Stock-Based Compensation

 

2005 Incentive Compensation Plan

 

On October 16, 2013 our stockholders approved the Second Amended and Restated Saga Communications, Inc. 2005 Incentive Compensation Plan (the “Second Restated 2005 Plan”). The 2005 Incentive Compensation Plan was first approved by stockholders in 2005 and replaced our 2003 Stock Option Plan (the “2003 Plan”). The 2005 Incentive Compensation Plan was re-approved by stockholders in 2010. The changes made in the Second Restated 2005 Plan (i) increases the number of authorized shares by 233,334 shares of Common Stock, (ii) extends the date for making awards to September 6, 2018, (iii) includes directors as participants, (iv) targets awards according to groupings of participants based on ranges of base salary of employees and/or retainers of directors, (v) requires participants to retain 50% of their net annual restricted stock awards during their employment or service as a director, and (vi) includes a clawback provision. The Second Restated 2005 Plan allows for the granting of restricted stock, restricted stock units, incentive stock options, nonqualified stock options, and performance awards to eligible employees and non-employee directors.

 

The number of shares of Common Stock that may be issued under the Second Restated 2005 Plan may not exceed 280,000 shares of Class B Common Stock, 900,000 shares of Class A Common Stock of which up to 620,000 shares of Class A Common Stock may be issued pursuant to incentive stock options and 280,000 Class A Common Stock issuable upon conversion of Class B Common Stock. Awards denominated in Class A Common Stock may be granted to any employee or director under the Second Restated 2005 Plan. However, awards denominated in Class B Common Stock may only be granted to Edward K. Christian, President, Chief Executive Officer, Chairman of the Board of Directors, and the holder of 100% of the outstanding Class B Common Stock of the Company. Stock options granted under the Second Restated 2005 Plan may be for terms not exceeding ten years from the date of grant and may not be exercised at a price which is less than 100% of the fair market value of shares at the date of grant.

 

Stock-Based Compensation

 

All stock options granted were fully vested and expensed at December 31, 2012, therefore there was no compensation expense related to stock options for the three and nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, respectively.

 

The following summarizes the stock option transactions for the Second Restated 2005 Plan and 2003 Plan for the nine months ended September 30, 2017:

 

           Weighted Average     
       Weighted   Remaining   Aggregate 
   Number of   Average   Contractual Term   Intrinsic 
   Options   Exercise Price   (Years)   Value 
Outstanding at January 1, 2017   29,035   $28.47    0.4   $633,834 
Exercised   (29,035)   28.47           
Outstanding at September 30, 2017      $       $ 
Exercisable at September 30, 2017      $       $ 

 

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SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

The following summarizes the restricted stock transactions for the nine months ended September 30, 2017:

 

       Weighted
Average
 
       Grant Date
Fair
 
   Shares   Value 
Outstanding at January 1, 2017   103,262   $43.73 
Vested   (3,434)   43.10 
Forfeited   (594)   45.39 
Non-vested and outstanding at September 30, 2017   99,234   $43.75 

 

For the three and nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, we had $629,000, $1,761,000, $536,000 and $1,594,000, respectively, of total compensation expense related to restricted stock-based compensation arrangements. This expense is included in corporate general and administrative expenses in our results of operations. The associated tax benefit recognized for the three and nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, was $252,000, $704,000, $214,000 and $638,000, respectively.

 

8. Long-Term Debt

 

Long-term debt consisted of the following:

 

   September 30,   December 31, 
   2017   2016 
   (In thousands) 
         
Revolving credit facility  $35,287   $35,287 
Secured debt of affiliate       1,078 
    35,287    36,365 
Amounts payable within one year   10,287     
   $25,000   $36,365 

 

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.

  

Approximately $266,000 of transaction fees related to the Credit Facility were capitalized and are being amortized over the life of the Credit Facility. Those 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 (1.25% at September 30, 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. Letters 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.

 

 18 

 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

The Credit Facility contains a number of financial covenants (all of which we were in compliance with at September 30, 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 $65 million of unused borrowing capacity under the Revolving Credit Facility at September 30, 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. Those amounts were classified as current portion of long term debt at September 30, 2017.

 

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.

 

9. Litigation

 

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.

 

10. Dividends

 

On September 13, 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 $1.8 million, which is recorded within Other accrued expenses as of September 30, 2017 was paid on October 13, 2017 to shareholders of record on September 25, 2017.

 

On May 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 $1.8 million was paid on June 9, 2017 to shareholders of record on May 22, 2017.

 

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 $1.8 million, was paid on April 14, 2017 to shareholders of record on March 28, 2017.

 

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.

 

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.

 

 19 

 

 

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 and the audited financial statements and Management Discussion and Analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2016. The following discussion is presented on a consolidated basis. 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 discontinued operations for all periods presented (see Note 5). As a result of the Company’s television stations being reported as discontinued operations the Company only has one reportable segment at September 30, 2017. Unless indicated otherwise, the information in the notes to the accompanying unaudited condensed consolidated financial statements relates to the Company’s continuing operations.

 

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. For additional information with respect to acquisitions, see “Liquidity and Capital Resources” below. We own or operate broadcast properties in 26 markets, including 75 FM and 33 AM radio stations.

 

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. We have twenty-six radio station markets, which include all 108 of our radio stations. 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.

 

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 nine months ended September 30, 2017 and 2016, approximately 89% and 89%, respectively, of our radio segment’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. We expect a decrease in political advertising for 2017 due to the decreased number of national, state and local elections in most of our markets as compared to prior year. 

 

Our net operating revenue, station operating expense and operating income varies 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, are influenced by the state of the overall economy, including unemployment rates, inflation, energy prices and consumer interest rates. Our stations primarily broadcast 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.

 

 20 

 

 

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.

 

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 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 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 numerous platforms to allow our listeners and viewers to connect with our products where and when they want. 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 addition, we continue the rollout of HD radio™. HD radio™ utilizes digital technology that provides improved sound quality over standard analog broadcasts and also allows for the delivery of additional channels of diversified programming or data streaming in each radio market.

 

 21 

 

 

During the nine months ended September 30, 2017 and 2016 and the years ended December 31, 2016 and 2015, our Columbus, Ohio; Des Moines, Iowa; Manchester, New Hampshire; Milwaukee, Wisconsin; and Norfolk, Virginia markets, when combined, represented approximately 43%, 43%, 43% and 41%, respectively, of our consolidated net operating revenue. An adverse change in any of these radio markets or our 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   Percentage of Consolidated 
   Net Operating Revenue for   Net Operating Revenue 
   the Nine Months Ended   for the Years Ended 
   September 30,   December 31, 
   2017   2016   2016   2015 
Market:                
Columbus, Ohio   12%   12%   12%   9%
Des Moines, Iowa   8%   8%   8%   8%
Manchester, New Hampshire   5%   6%   6%   6%
Milwaukee, Wisconsin   12%   12%   12%   12%
Norfolk, Virginia   6%   5%   5%   6%

 

During the nine months ended September 30, 2017 and 2016 and the years ended December 31, 2016 and 2015, the radio stations in our five largest markets when combined, represented approximately 48%, 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   Percentage of Consolidated 
   Station Operating Income (*)   Station Operating Income (*) 
   for the Nine Months Ended   for the Years Ended 
   September 30,   December 31, 
   2017   2016   2016   2015 
Market:                
Columbus, Ohio   15%   15%   15%   10%
Des Moines, Iowa   7%   7%   7%   8%
Manchester, New Hampshire   6%   8%   9%   8%
Milwaukee, Wisconsin   14%   14%   14%   13%
Norfolk, Virginia   6%   4%   4%   5%

 

 

 

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

 

 22 

 

 

Discontinued Operations - Television Stations

 

Our television station’s primary source of revenue is from the sale of advertising for broadcast on our stations. The number of advertisements available for broadcast on our television stations is limited by network affiliation and syndicated programming agreements and, with respect to children’s programs, federal regulation. Our television stations’ local market managers determine the number of advertisements to be broadcast in locally produced programs only, which are 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 is based upon population, available television advertising revenue in that particular market, and the popularity of programming being broadcast.

 

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, 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 strive to maximize revenue by constantly adjusting prices for our commercial spots based upon local market conditions, advertising demands and ratings. While there may be 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 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.

 

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 provides us with the viewer loyalty we are trying to achieve.

 

Most of our revenue is generated from local advertising, which is sold primarily by each television markets’ sales staff. For the eight months ended August 31, 2017 and the nine months ended September 30, 2016, approximately 83% and 85%, respectively, of our television segment’s gross revenue was from local advertising. To generate national advertising sales, we engage independent advertising sales representatives that specialize in national sales for each of our 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. We had a decrease in political advertising for 2017 due to the decreased number of national, state and local elections in most of our markets as compared to prior year. 

 

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

 

 23 

 

 

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

 

Results of Operations

 

The following tables summarize our results of operations for the three months ended September 30, 2017 and 2016.

 

Consolidated Results of Operations

 

   Three Months Ended         
   September 30,   $ Increase   % Increase 
   2017   2016   (Decrease)   (Decrease) 
   (In thousands, except percentages and per share information) 
Net operating revenue  $30,269   $29,878   $391    1.3%
Station operating expense   21,755    21,775    (20)   (0.1)%
Corporate general and administrative   3,132    2,728    404    14.8%
Other operating expense   (127)   (1,393)   1,266    N/M 
Operating income from continuing operations   5,509    6,768    (1,259)   (18.6)%
Interest expense   254    187    67    35.8%
Income from continuing operations before taxes   5,255    6,581    (1,326)   (20.1)%
Income tax expense   2,290    2,678    (388)   (14.5)%
Income from continuing operations, net of tax   2,965    3,903    (938)   (24.0)%
Income from discontinued operations, net of tax   30,451    1,511    28,940    N/M  
Net income  $33,416   $5,414   $28,002    N/M  
                     
Earnings per share:                    
From continuing operations  $.50   $.66   $(.16)   (24.2)%
From discontinued operations   5.16    .26    4.90    N/M 
Earnings per share (diluted)  $5.66   $.92   $4.74    N/M  

 

Results of Discontinued Operations

 

   Three Months Ended         
   September 30,   $ Increase   % Increase 
   2017 (1)   2016   (Decrease)   (Decrease) 
   (In thousands, except percentages) 
Net operating revenue  $3,296   $6,241   $(2,945)   (47.2)%
Station operating expense   2,372    3,684    (1,312)   (35.6)%
Operating income from discontinued operations   924    2,557    (1,633)   (63.9)%
Interest expense   5    9    (4)   (44.4)%
Income before income taxes from discontinued operations   919    2,548    (1,629)   (63.9)%
Pretax gain on the disposal of discontinued operations   50,842        50,842    N/M 
Total pretax gain on discontinued operations   51,761    2,548    49,213    N/M 
Income tax expense   21,310    1,037    20,273    N/M 
Income from discontinued operations  $30,451   $1,511   $28,940    N/M 

 

 

 

(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 

 

 24 

 

 

For the three months ended September 30, 2017, consolidated net operating revenue was $30,269,000 compared with $29,878,000 for the three months ended September 30, 2016, an increase of $391,000 or 1.3%. We had an increase of approximately $717,000 that was attributable to stations that we did not own or operate for the entire comparable period, partially offset by a decrease of $326,000 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 local revenue of $311,000, gross political revenue of $197,000 partially offset by a decrease in agency commissions of approximately $123,000 from the third quarter of 2016. The decrease in gross local revenue was due to decreases in our Bellingham, Washington and Springfield, Illinois markets. 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 agency commissions is due to lower gross local agency and political revenue.

 

Station operating expense was $21,755,000 for the three months ended September 30, 2017, compared with $21,775,000 for the three months ended September 30, 2016, a decrease of $20,000 or 0.1%. We had an increase of approximately $581,000 that was attributable to stations that we did not own or operate for the entire comparable period, offset by a decrease of approximately $601,000 generated by stations we owned or operated for the comparable period in 2016. The decrease is primarily attributable to a decrease of $203,000 in compensation costs, a decrease of $191,000 in licensing agreements and a decrease in music licensing fees of $128,000 due to a credit received in the 3rd quarter of 2017 resulting from SESAC arbitration partially offset by an increase in other music licensing fees.

 

Operating income for the three months ended September 30, 2017 was $5,509,000 compared to $6,768,000 for the three months ended September 30, 2016, a decrease of $1,259,000 or 18.6%. The decrease was a result of the increase in net operating revenue partially offset by a decrease in station operating expense, described above, an increase in our corporate general and administrative expenses of $404,000 or 14.8%, and a decrease in other operating income of $1,266,000 from the third quarter of 2016. The increase in corporate expenses is due to an increase in key man life insurance of $103,000, an increase in non-cash compensation related to the amortization of restricted stock grants of $93,000, an increase of $80,000 in legal and other fees due to the Charleston/Hilton Head South Carolina acquisition, an increase of $42,000 in compensation costs, an increase in transportation costs of $35,000 and an increase in healthcare costs of $24,000. In 2016, we had other operating income of $1,393,000 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 three months ended September 30, 2017 was $2,965,000 compared to $3,903,000 for the three months ended September 30, 2016, a decrease of $938,000 or 24.0%. The decrease in income from continuing operations, net of tax is due to the decrease of operating income, described above, an increase in interest expense of $67,000 due to an increase in our interest rates partially offset by a decrease in income taxes of $388,000.

 

Income from discontinued operations, net of tax for the two months ended August 31, 2017 was $30,451,000 compared to $1,511,000 for the three months ended September 30, 2016 an increase of $28,940,000. The increase was a direct result of the pretax gain on the disposal of the Television stations of $50,842,000, a decrease in station operating expense of $1,312,000 or 35.6%, partially offset by a decrease in net operating revenue of $2,945,000 or $47.2% and an increase in income tax related to the gain on the sale of $20,273,000. For the two months ended August 31, 2017, net operating revenue of our television stations was $3,296,000 compared with $6,241,000 for the three months ended September 30, 2016, a decrease of $2,945,000 or 47.2% primarily due to only operating the television stations for two months in 2017 and a decrease in gross political revenue in our Joplin, Missouri market. Station operating expense of the television stations for the two months ended August 31, 2017 was $2,372,000, compared with $3,684,000 for the three months ended September 30, 2016, a decrease of $1,312,000 or 35.6%. The decrease is primarily due to only operating the television stations for two months in 2017 compared to the whole quarter in 2016.

 

We generated net income of $33,416,000 ($5.66 per share on a fully diluted basis) during the three months ended September 30, 2017, compared to $5,414,000 ($.92 per share on a fully diluted basis) for the three months ended September 30, 2016, an increase of $28,002,000. This is a direct result of the increase of $28,940,000 from discontinued operations partially offset by a decrease in income from continuing operations of $938,000. 

 

 25 

 

 

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

 

Results of Operations

 

The following tables summarize our results of operations for the nine months ended September 30, 2017 and 2016.

 

Consolidated Results of Operations

 

   Nine Months Ended         
   September 30,   $ Increase   % Increase 
   2017   2016   (Decrease)   (Decrease) 
   (In thousands, except percentages and per share information) 
Net operating revenue  $86,685   $88,208   $(1,523)   (1.7)%
Station operating expense   64,521    64,757    (236)   (0.4)%
Corporate general and administrative   8,875    8,065    810    10.0%
Other operating expense   (69)   (1,388)   1,319    N/M 
Operating income   13,358    16,774    (3,416)   (20.4)%
Interest expense   691    548    143    26.1%
Income from continuing operations before taxes   12,667    16,226    (3,559)   (21.9)%
Income tax expense   5,280    6,665    (1,385)   (20.8)%
Income from continuing operations, net of tax   7,387    9,561    (2,174)   (22.7)%
Income from discontinued operations, net of tax   32,501    3,688    28,813    N/M 
                     
Net income  $39,888   $13,249   $26,639    N/M 
                     
Earnings per share:                    
From continuing operations  $1.25   $1.62   $(.37)   (22.8)%
From discontinued operations   5.51    .63    4.88    N/M  
Earnings per share (diluted)  $6.76   $2.25   $4.50    N/M  

 

Results of Discontinued Operations

 

   Nine Months Ended         
   September 30,   $ Increase   % Increase 
   2017 (1)   2016   (Decrease)   (Decrease) 
   (In thousands, except percentages) 
Net operating revenue  $14,238   $17,094   $(2,856)   (16.7)%
Station operating expense   9,727    10,807    (1,080)   (10.0)%
Other operating   31    3    28    N/M 
Operating income from discontinued operations   4,480    6,284    (1,804)   (28.7)%
Interest expense   21    26    (5)   (19.2)%
Income before income taxes from discontinued operations   4,459    6,258    (1,799)   (28.7)%
Pretax gain on the disposal of discontinued operations   50,842        50,842    N/M 
Total pretax gain on discontinued operations   55,301    6,258    49,043    N/M 
Income tax expense   22,800    2,570    20,230    N/M  
Income from discontinued operations  $32,501   $3,688   $28,813    N/M  
                     

 

 

 

(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

 

 26 

 

 

For the nine months ended September 30, 2017, consolidated net operating revenue was $86,685,000 compared with $88,208,000 for the nine months ended September 30, 2016, a decrease of $1,523,000 or 1.7%. We had an increase of approximately $874,000 that was attributable to stations that we did not own or operate for the entire comparable period, offset by a decrease of approximately $2,397,000 generated by stations we owned or operated for the comparable period in 2016 (“same station”). On a same station basis gross political revenue, gross local revenue and gross national revenue decreased $1,289,000, $1,097,000 and $505,000 respectively from 2016. These decreases were partially offset by a decrease in agency commissions of $470,000. The decrease in gross political revenue was due to the decreased number of national, state and local elections in most of our markets as compared to prior year. The decrease in gross local revenue was due to decreases in our Bellingham, Washington; Charlottesville, Virginia; Columbus, Ohio; Ithaca, New York; Springfield, Illinois and Springfield, Massachusetts markets. The decrease in gross national revenue is due to decreases in our Champaign, Illinois and Yankton, South Dakota markets. The decrease in agency commissions is due to lower local agency, national and political revenues.

 

Station operating expense was $64,521,000 for the nine months ended September 30, 2017, compared with $64,757,000 for the nine months ended September 30, 2016, a decrease of $236,000 or 0.4%. We had an increase of approximately $696,000 that was attributable to stations that we did not own or operate for the entire comparable period, offset by a decrease of approximately $932,000 generated by stations we owned or operated for the comparable period in 2016. The decrease is primarily attributable to a $568,000 decrease in licensing agreements, a $206,000 decrease in sales commission expense and a decrease in compensation costs of $138,000.

 

Operating income for the nine months ended September 30, 2017 was $13,358,000 compared to $16,774,000 for the nine months ended September 30, 2016, a decrease of $3,416,000 or 20.4%. The decrease was a result of the decrease in net operating revenue partially offset by a decrease in station operating expense, described above, an increase in our corporate general and administrative expenses of $810,000 or 10.0%, and a decrease in other operating income of $1,319,000 from 2016. The increase in corporate expenses is due to an increase in key man life insurance of $286,000, an increase in non-cash compensation related to the amortization of restricted stock grants of $167,000, an increase in transportation costs of $110,000, and increase in compensation costs of $91,000, an increase in legal expenses of $87,000 and an increase of $50,000 in healthcare costs. In 2016, we had other operating income of $1,393,000 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 nine months ended September 30, 2017 was $12,667,000 compared to $16,226,000 for the nine months ended September 30, 2016, a decrease of $3,559,000 or 21.9%. The decrease in income from continuing operations, net of tax is due to the decrease of operating income, described above, an increase in interest expense of $143,000 due to an increase in our interest rates partially offset by a decrease in income taxes of $1,385,000.

 

Income from discontinued operations, net of tax for the eight months ended August 31, 2017 was $32,501,000 compared to $3,688,000 for the nine months ended September 30, 2016 an increase of $28,813,000. The increase was a direct result of the pretax gain on the disposal of the Television stations of $50,842,000, a decrease in station operating expense of $1,080,000 or 10%, partially offset by a decrease in net operating revenue of $2,856,000 or $16.7% and an increase in income tax related to the gain on the sale of $20,230,000. For the eight months ended August 31, 2017, net operating revenue of our television stations was $14,238,000 compared with $17,094,000 for the nine months ended September 30, 2016, a decrease of $2,856,000 or 16.7% 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 of the television stations for the eight months ended August 31, 2017 was $9,727,000, compared with $10,807,000 for the nine months ended September 30, 2016, a decrease of $1,080,000 or 10%. The decrease is primarily due to only operating the television stations for eight months in 2017 compared to the nine months in 2016.

 

We generated net income of $39,888,000 ($6.76 per share on a fully diluted basis) during the nine months ended September 30, 2017, compared to $13,249,000 ($2.25 per share on a fully diluted basis) for the nine months ended September 30, 2016, an increase of $26,639,000. This is a direct result of the increase in income from discontinued operations of $28,813,000 partially offset by a decrease in income from continuing operations of $2,174,000.

 

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Forward-Looking Statements

 

Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as “believes,” “anticipates,” “estimates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. These statements are made as of the date of this report or as otherwise indicated, based on current expectations. We undertake no obligation to update this information. A number of important factors could cause our actual results for 2017 and beyond to differ materially from those expressed in any forward-looking statements made by or on our behalf. Forward-looking statements are not guarantees of future performance as they involve a number of risks, uncertainties and assumptions that may prove to be incorrect and that may cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks, uncertainties and assumptions that may affect our performance include our financial leverage and debt service requirements, dependence on key personnel, dependence on key stations, U.S. and local economic conditions, our ability to successfully integrate acquired stations, regulatory requirements, new technologies, natural disasters and terrorist attacks. We cannot be sure that we will be able to anticipate or respond timely to changes in any of these factors, which could adversely affect the operating results in one or more fiscal quarters. Results of operations in any past period should not be considered, in and of itself, indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of our stock.

 

For a more complete description of the prominent risks and uncertainties inherent in our business, see Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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.

 

Approximately $266,000 of transaction fees related to the Credit Facility were capitalized and are being amortized over the life of the Credit Facility. Those 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 (1.25% at September 30, 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. Letters 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 September 30, 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 $65 million of unused borrowing capacity under the Revolving Credit Facility at September 30, 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. Those amounts were classified as current portion of long term debt at September 30, 2017.

 

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.

 

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Sources and Uses of Cash

 

During the nine months ended September 30, 2017 and 2016, we had net cash flows from operating activities of $18,677,000 and $21,020,000, respectively. We believe that cash flow from operations will be sufficient to meet quarterly debt service requirements for interest and payments of principal under our 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.

 

Our capital expenditures, exclusive of acquisitions, for the nine months ended September 30, 2017 were $4,850,000 ($4,149,000 in 2016). We anticipate capital expenditures in 2017 to be approximately $6.5 million, including approximately $750 thousand relating to our recent acquisitions in Charleston and Hilton Head, which we expect to finance through funds generated from operations.

 

On September 13, 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 $1.8 million, which is recorded within Other accrued expenses as of September 30, 2017 was paid on October 13, 2017 to shareholders of record on September 25, 2017.

 

On May 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 $1.8 million was paid on June 9, 2017 to shareholders of record on May 22, 2017and 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 $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 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 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, and the proceeds from sales of related 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 6). 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, proceeds from the Television Sale, 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.

 

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Summary Disclosures About Contractual Obligations and Commercial Commitments

 

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. For additional information concerning our future cash obligations see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Summary Disclosures About Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require us to make estimates, judgments and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures and contingencies. We evaluate estimates used in preparation of our financial statements on a continual basis. There have been no significant changes to our critical accounting policies that are described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2016.

  

Recent Accounting Pronouncements

 

Recent accounting pronouncements are described in Note 2 to the accompanying financial statements.

 

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Refer to “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk and Risk Management Policies” in our Annual Report on Form 10-K for the year ended December 31, 2016 for a complete discussion of our market risk. There have been no material changes to the market risk information included in our 2016 Annual Report on Form 10-K.

 

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Item 4. 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. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to cause the material information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table summarizes our repurchases of our Class A Common Stock during the three months ended September 30, 2017. Shares repurchased during the quarter were from the retention of shares for cashless exercise of stock options and the payment of the withholding taxes related to those stock option exercises.

 

               Approximate 
           Total Number   Dollar 
           of   Value of 
           Shares   Shares 
           Purchased   that May Yet 
           as Part of   be 
   Total Number   Average Price   Publicly   Purchased 
   of Shares   Paid per   Announced   Under the 
Period  Purchased   Share   Program   Program(a) 
July 1 – July 31, 2017      $       $23,352,857 
August 1 – August 31, 2017   916   $40.60       $23,315,667 
September 1 – September 30, 2017      $       $23,315,667 
Total   916   $40.60       $23,315,667 

 

(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.

 

 31 

 

 

Item 6. Exhibits

 

31.1   Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Rule 13-14(b) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 32 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SAGA COMMUNICATIONS, INC.  
   
Date: November 9, 2017  /s/ SAMUEL D. BUSH  
  Samuel D. Bush  
  Senior Vice President and Chief Financial Officer
(Principal Financial Officer)  
   
Date: November 9, 2017  /s/ CATHERINE A. BOBINSKI  
  Catherine A. Bobinski  
  Senior Vice President, Chief Accounting Officer and
Corporate Controller (Principal Accounting Officer)  

 

 33 

 

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Section 2: EX-31.1 (EXHIBIT 31.1)

 

EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)

AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS AMENDED

 

I, Edward K. Christian, Chief Executive Officer of Saga Communications, Inc., certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Saga Communications, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2017  /s/ Edward K. Christian  
  Edward K. Christian     
  Chief Executive Officer     

 

 

 

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Section 3: EX-31.2 (EXHIBIT 31.2)

 

EXHIBIT 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)

AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS AMENDED

 

I, Samuel D. Bush, Chief Financial Officer of Saga Communications, Inc., certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Saga Communications, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2017  /s/ Samuel D. Bush    
  Samuel D. Bush   
  Chief Financial Officer   

 

 

 

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Section 4: EX-32 (EXHIBIT 32)

 

EXHIBIT 32

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Saga Communications, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Edward K. Christian, Chief Executive Officer of the Company, and Samuel D. Bush, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our knowledge, that:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

  

Dated: November 9, 2017  /s/ Edward K. Christian    
  Edward K. Christian   
  Chief Executive Officer   
   
Dated: November 9, 2017  /s/ Samuel D. Bush    
  Samuel D. Bush   
  Chief Financial Officer   

 

 

 

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