Annual Statements Open main menu

SAGA COMMUNICATIONS INC - Quarter Report: 2013 June (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 June 30, 2013

 

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

(State or other jurisdiction of

incorporation or organization)

 

38-3042953

(I.R.S. Employer

Identification No.)

     

73 Kercheval Avenue

Grosse Pointe Farms, Michigan

(Address of principal executive offices)

 

48236

(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 ¨
        (Do not check if a smaller
reporting company)
   

 

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 August 2, 2013 was 4,887,843 and 796,309, respectively.

 

 

 

 
 

 

INDEX

 

  Page  
PART I. FINANCIAL INFORMATION 3  
Item 1. Financial Statements (Unaudited) 3  
Condensed consolidated balance sheets — June 30, 2013 and December 31, 2012 3  
Condensed consolidated statements of income — Three and six months ended June 30, 2013 and 2012 4  
Condensed consolidated statements of cash flows —Six months ended June 30, 2013 and 2012 5  
Notes to unaudited condensed consolidated financial statements 6  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12  
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21  
Item 4. Controls and Procedures 22  
PART II OTHER INFORMATION 22  
Item 1. Legal Proceedings 22  
Item 6. Exhibits 22  
Signatures 23  
EX-31.1  
EX-31.2  
EX-32  
EX-101 INSTANCE DOCUMENT  
EX-101 SCHEMA DOCUMENT  
EX-101 CALCULATION LINKBASE DOCUMENT  
EX-101 LABELS LINKBASE DOCUMENT  
EX-101 PRESENTATION LINKBASE DOCUMENT  
EX-101 DEFINITION LINKBASE DOCUMENT  

  

2
 

  

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SAGA COMMUNICATIONS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2013   2012 
   (Unaudited)   (Note) 
   (In thousands) 
Assets          
Current assets:          
Cash and cash equivalents  $19,303   $15,915 
Accounts receivable, net   19,772    19,692 
Prepaid expenses and other current assets   2,777    2,482 
Barter transactions   1,682    1,347 
Deferred income taxes   861    892 
Current assets of station held for sale       106 
Total current assets   44,395    40,434 
Property and equipment   157,656    155,779 
Less accumulated depreciation   100,000    97,317 
Net property and equipment   57,656    58,462 
Other assets:          
Broadcast licenses, net   90,373    90,361 
Other intangibles, deferred costs and investments, net   5,559    5,286 
Assets of station held for sale       2,787 
   $197,983   $197,330 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Accounts payable  $1,793   $2,218 
Payroll and payroll taxes   5,849    6,364 
Other accrued expenses   2,889    3,244 
Barter transactions   1,801    1,417 
Current portion of long-term debt   1,078     
Current liabilities of station held for sale       125 
Total current liabilities   13,410    13,368 
Deferred income taxes   19,209    17,646 
Long-term debt   50,000    58,828 
Other liabilities   3,092    3,132 
Liabilities of station held for sale       147 
Total liabilities   85,711    93,121 
Commitments and contingencies          
Stockholders’ equity:          
Common stock   72    72 
Additional paid-in capital   51,222    51,061 
Retained earnings   89,498    81,746 
Treasury stock   (28,520)   (28,670)
Total stockholders’ equity   112,272    104,209 
   $197,983   $197,330 

 

Note: The balance sheet at December 31, 2012 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.

 

See notes to unaudited condensed consolidated financial statements.

 

3
 

 

SAGA COMMUNICATIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2013   2012   2013   2012 
   (Unaudited) 
   (In thousands, except per share data) 
Net operating revenue  $33,832   $32,986   $62,789   $62,309 
Station operating expense   23,493    21,959    45,581    44,319 
Corporate general and administrative   1,982    1,940    3,930    3,889 
Operating income from continuing operations   8,357    9,087    13,278    14,101 
Other expenses, net:                    
Interest expense   357    458    715    986 
Other expense (income), net   66    (8)   91    (10)
Income from continuing operations before tax   7,934    8,637    12,472    13,125 
Income tax provision   3,130    3,438    4,942    5,223 
Income from continuing operations, net of tax   4,804    5,199    7,530    7,902 
Income (loss) from discontinued operations, net of tax       (67)   223    (65)
Net income  $4,804   $5,132   $7,753   $7,837 
Basic earnings (loss) per share:                    
From continuing operations  $.85   $.92   $1.33   $1.40 
From discontinued operations       (.01)   .04    (.01)
Basic earnings per share  $.85   $.91   $1.37   $1.39 
Weighted average common shares   5,683    5,661    5,677    5,658 
Diluted earnings (loss) per share:                    
From continuing operations  $.84   $.92   $1.31   $1.39 
From discontinued operations       (.01)   .04    (.01)
Diluted earnings per share  $.84   $.91   $1.35   $1.38 
Weighted average common and common equivalent shares   5,745    5,663    5,740    5,667 

 

See notes to unaudited condensed consolidated financial statements.

 

4
 

 

SAGA COMMUNICATIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Six Months Ended 
   June 30, 
   2013   2012 
   (Unaudited) 
   (In thousands) 
Cash flows from operating activities:          
Cash provided by operating activities  $11,046   $14,756 
Cash flows from investing activities:          
Proceeds from sale of television station   2,960     
Acquisition of property and equipment   (2,465)   (2,502)
Other investing activities   (173)   (74)
Net cash provided by (used in) investing activities   322    (2,576)
Cash flows from financing activities:          
Payments on long-term debt   (7,750)   (10,250)
Payments for debt amendment fees   (289)    
Other financing activities   59    (80)
Net cash used in financing activities   (7,980)   (10,330)
Net increase in cash and cash equivalents   3,388    1,850 
Cash and cash equivalents, beginning of period   15,915    6,991 
Cash and cash equivalents, end of period  $19,303   $8,841 

 

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 June 30, 2013 and the results of operations for the three and six months ended June 30, 2013 and 2012. Results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

 

On January 16, 2013 the Company consummated a four-for-three stock split of its Class A and Class B Common Stock, to shareholders of record as of the close of business on December 28, 2012. The stock split increased the Company’s issued and outstanding shares of common stock from 3,659,753 shares of Class A Common Stock and 597,504 shares of Class B Common Stock to 4,879,186 and 796,672 shares, respectively.

 

All share and per share information in the accompanying financial statements have been restated retroactively to reflect the stock split.

 

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, 2012.

 

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2013, for items that should potentially be recognized in these financial statements or discussed within the notes to the financial statements.

 

Earnings Per Share Information

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2013   2012   2013   2012 
   (In thousands, except per share data) 
Numerator:                    
Net income available to common stockholders  $4,804   $5,132   $7,753   $7,837 
                     
Denominator:                    
Denominator for basic earnings per share — weighted average shares   5,683    5,661    5,677    5,658 
Effect of dilutive securities:                    
Common stock equivalents   62    2    63    9 
Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions   5,745    5,663    5,740    5,667 
Basic earnings per share:  $.85   $.91   $1.37   $1.39 
Diluted earnings per share:  $.84   $.91   $1.35   $1.38 

 

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 14,000 for the three and six months ended June 30, 2013 and 140,000 for the three and six months ended June 30, 2012. The actual effect of these shares, if any, on the diluted earnings per share calculation will vary significantly depending on the fluctuation in the stock price.

 

6
 

 

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 June 30, 2013.

 

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.

 

2. Recent Accounting Pronouncements

 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. The guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely that not that an indefinite-lived intangible asset is impaired. If the qualitative assessment supports that it is more likely than not the fair value of the asset exceeds its carrying amount, the company would not be required to perform a quantitative impairment test. If the qualitative assessment does not support the fair value of the asset, then a quantitative assessment is performed. This update was adopted on January 1, 2013 and did not have any material effect on our consolidated financial statements.

 

3. Intangible Assets

 

We evaluate our FCC licenses 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.

 

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 eleven 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 June 30, 2013:

 

   Common Stock Issued 
   Class A   Class B 
   (Shares in thousands) 
Balance, January 1, 2012   6,360    797 
Exercised options   10     
Balance, December 31, 2012   6,370    797 
Exercised options   5     
Conversion of shares   1    (1)
Balance, June 30, 2013   6,376    796 

 

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 June 30, 2013 we have remaining authorization of $29.9 million for future repurchases of our Class A Common Stock.

 

7
 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

5. Discontinued Operations

 

On April 3, 2012 we entered into a definitive agreement to sell our Greenville, Mississippi TV station (“WXVT”) for $3 million, subject to certain adjustments, to H3 Communications, LLC (“H3”). This transaction was completed on January 31, 2013 and we recognized a gain of approximately $223,000, net of tax, on the sale of WXVT during the first quarter of 2013.

 

In accordance with authoritative guidance we have reported the results of operations of WXVT as discontinued operations in the accompanying consolidated financial statements. For all previously reported periods, certain amounts in the consolidated financial statement have been reclassified. The assets and liabilities of WXVT have been classified as held for sale and the net results of operations have been reclassified from continuing operations to discontinued operations. WXVT was previously included in the Company’s television segment.

 

6. Stock-Based Compensation

 

2005 Incentive Compensation Plan

 

On May 10, 2010, our stockholders approved the Amended and Restated 2005 Incentive Compensation Plan (the “2005 Plan”) which replaced our 2003 Stock Option Plan (the “2003 Plan”) as to future grants. The 2005 Plan extends through March 2015 and allows for the granting of restricted stock, restricted stock units, incentive stock options, nonqualified stock options, and performance awards to officers and a selected number of employees.

 

Stock-Based Compensation

 

For the six months ended June 30, 2012, we had $22,000 of total compensation expense related to stock options. This expense is included in corporate general and administrative expenses in our results of operations. The associated future income tax benefit recognized for the six months ended June 30, 2012 was $9,000. The stock options were fully expensed at March 31, 2012, therefore there was no compensation expense related to stock options for the three months ended June 30, 2012 or the three and six months ended June 30, 2013.

 

The following summarizes the stock option transactions for the 2005 and 2003 Plans for the six months ended June 30, 2013:

 

           Weighted Average     
           Remaining   Aggregate 
   Number of   Weighted Average   Contractual Term   Intrinsic 
   Options   Exercise Price   (Years)   Value 
Outstanding at January 1, 2013   260,660   $34.69    3.0   $1,253,039 
Exercised   (5,403)   28.22           
Expired   (15,299)   57.66           
Outstanding at June 30, 2013   239,958   $33.67    2.6   $3,173,242 
Exercisable at June 30, 2013   239,958   $33.67    2.6   $3,173,242 

 

All stock options were fully vested at December 31, 2012. 

 

The following summarizes the restricted stock transactions for the six months ended June 30, 2013:

 

       Weighted Average 
       Grant Date Fair 
   Shares   Value 
Outstanding at January 1, 2013   5,531   $17.97 
Vested   (5,531)   17.97 
Non-vested and outstanding at June 30, 2013      $ 

 

For the six months ended June 30, 2013 and the three and six months ended June 30, 2012, we had $16,000, $25,000 and $60,000, 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 six months ended June 30, 2013 and the three and six months ended June 30, 2012, was $7,000, $10,000 and $24,000, respectively. The restricted stock was fully expensed at March 31, 2013, therefore there was no compensation expense related to restricted stock for the three months ended June 30, 2013.

 

8
 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

7. Long-Term Debt

 

Long-term debt consisted of the following:

 

   June 30,   December 31, 
   2013   2012 
   (In thousands) 
Credit Agreement:          
Term loan  $30,000   $57,750 
Revolving credit facility   20,000     
Secured debt of affiliate   1,078    1,078 
    51,078    58,828 
Amounts payable within one year   1,078     
   $50,000   $58,828 

 

On May 31, 2013, we amended our $120 million credit facility (the “Credit Facility”) to (i) extend the maturity date to May 31, 2018; (ii) change the allocation between the term loan (the “Term Loan”) and the revolving loan (the “Revolving Credit Facility”) to $30 million and $90 million, respectively; (iii) modify the Consolidated Fixed Charge Coverage ratio to exclude distributions made when the Consolidated Leverage Ratio is less than 2.50 to 1.00 from the fixed charge component of such ratio; (iv) revise the interest rates and commitment fees, as set forth below; (v) remove the cap on additional business acquisitions if the Consolidated Leverage Ratio is less than 2.50 to 1.00, and if equal to or greater than such amount, cap such acquisitions at $35 million subject to certain conditions; and (vi) remove the cap on the annual aggregate of dividends, distributions, and stock redemptions if the Consolidated Leverage Ratio is less than 2.50 to 1.00, and if equal to or greater than such amount, such annual aggregate amount becomes subject to a pro forma covenant compliance.

 

We had $70 million of unused borrowing capacity under the Revolving Credit Facility at June 30, 2013. The unused portion of the Revolving Credit Facility is available for general corporate purposes, including working capital, capital expenditures, permitted acquisitions and related transaction expenses and permitted stock buybacks.

 

The Term Loan principal amortizes in equal installments of 5% of the Term Loan during each year, however, upon satisfaction of certain conditions, as defined in the Credit Facility, no amortization payment is required. The Credit Facility is also subject to mandatory prepayment requirements, including but not limited to, certain sales of assets, certain insurance proceeds, certain debt issuances and certain sales of equity. Optional prepayments of the Credit Facility are permitted without any premium or penalty, other than certain costs and expenses. As of June 30, 2013, we have no required amortization payment.

 

Interest rates under the Credit Facility are payable, at our option, at alternatives equal to LIBOR (0.19535% at June 28, 2013) plus 1.25% to 2.25% (0.2117% at December 31, 2012, plus 1.50% to 2.75%) or the base rate plus 0.25% to 1.25% (0.50% to 1.75% at December 31, 2012). The spread over LIBOR and the base rate vary from time to time, depending upon our financial leverage. We also pay quarterly commitment fees of 0.25% to 0.35% per annum (0.25% to 0.375% per annum at December 31, 2012) on the unused portion of the Revolving Credit Facility.

 

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

 

The Credit Facility contains a number of financial covenants (all of which we were in compliance with at June 30, 2013) 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.

 

9
 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

8. Segment Information

 

We evaluate the operating performance of our markets individually. For purposes of business segment reporting, we have aligned operations with similar characteristics into two business segments: Radio and Television.

 

The Radio segment includes twenty-three markets, which includes all ninety-one of our radio stations and five radio information networks. The Television segment includes two markets and consists of four television stations and four low power television (“LPTV”) stations. The Radio and Television segments derive their revenue from the sale of commercial broadcast inventory. The category “Corporate general and administrative” represents the income and expense not allocated to reportable segments.

 

           Corporate     
   Radio   Television   and Other   Consolidated 
       (In thousands)     
Three Months Ended June 30, 2013:                
Net operating revenue  $28,674   $5,158   $   $33,832 
Station operating expense   20,215    3,278        23,493 
Corporate general and administrative           1,982    1,982 
Operating income (loss) from continuing operations  $8,459   $1,880   $(1,982)  $8,357 
Depreciation and amortization  $1,249   $350   $56   $1,655 

 

           Corporate     
   Radio   Television   and Other   Consolidated 
       (In thousands)     
Three Months Ended June 30, 2012:                     
Net operating revenue   $28,482   $4,504   $   $32,986 
Station operating expense    18,921    3,038        21,959 
Corporate general and administrative            1,940    1,940 
Operating income (loss) from continuing operations   $9,561   $1,466   $(1,940)  $9,087 
Depreciation and amortization   $1,274   $346   $56   $1,676 

 

           Corporate     
   Radio   Television   and Other   Consolidated 
       (In thousands)     
Six Months Ended June 30, 2013:                    
Net operating revenue  $53,136   $9,653   $   $62,789 
Station operating expense   39,222    6,359        45,581 
Corporate general and administrative           3,930    3,930 
Operating income (loss) from continuing operations  $13,914   $3,294   $(3,930)  $13,278 
Depreciation and amortization  $2,491   $692   $113   $3,296 
Total assets  $147,741   $23,068   $27,174   $197,983 

 

10
 

 

SAGA COMMUNICATIONS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS — (Continued)

 

           Corporate     
   Radio   Television   and Other   Consolidated 
       (In thousands)     
Six Months Ended June 30, 2012:                    
Net operating revenue  $53,682   $8,627   $   $62,309 
Station operating expense   38,276    6,043        44,319 
Corporate general and administrative           3,889    3,889 
Operating income (loss) from continuing operations  $15,406   $2,584   $(3,889)  $14,101 
Depreciation and amortization  $2,571   $685   $113   $3,369 
Total assets  $149,508   $23,657   $18,679*  $191,844 

  

 
*Includes $2,960 of Assets held for sale.

 

11
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and 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, 2012. The following discussion is presented on both a consolidated and segment basis. Corporate general and administrative expenses, interest expense, other (income) expense, and income tax expense are managed on a consolidated basis and are reflected only in our discussion of consolidated results.

 

For purposes of business segment reporting, we have aligned operations with similar characteristics into two business segments: Radio and Television. The Radio segment includes twenty-three markets, which includes all ninety-one of our radio stations and five radio information networks (“Networks”). The Television segment includes two markets and consists of four television stations and four LPTV stations. The discussion of our operating performance focuses on segment operating income because we manage our segments primarily on operating income. Operating performance is evaluated for each individual market.

 

We use certain financial measures that are not calculated in accordance with generally accepted accounting principles in the United States of America (GAAP) to assess our financial performance. For example, we evaluate the performance of our markets based on “station operating income” (operating income plus corporate general and administrative expenses, depreciation and amortization). 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.

 

Radio Segment

 

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

 

 Most advertising contracts are short-term and generally run for a few weeks only. The majority of our revenue is generated from local advertising, which is sold primarily by each radio markets’ sales staff. For the six months ended June 30, 2013 and 2012, approximately 88% 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. In 2012 we had a considerable increase in revenue due to political advertising. Because 2013 is a non-election year, we expect political revenue to significantly decrease in 2013.

 

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, is 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.

 

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.

 

12
 

 

The number of advertisements that can be broadcast without jeopardizing listening levels 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, station popularity and format. 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.

 

During the six months ended June 30, 2013 and 2012 and the years ended December 31, 2012 and 2011, our Columbus, Ohio; Des Moines, Iowa; Manchester, New Hampshire; Milwaukee, Wisconsin; and Norfolk, Virginia markets, when combined, represented approximately 34%, 34%, 35% and 34%, 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 Six Months Ended  for the Years Ended
   June 30,  December 31,
   2013  2012  2012  2011
Market:            
Columbus, Ohio  7%  6%  7%  6%
Des Moines, Iowa  7%  7%  6%  7%
Manchester, New Hampshire  5%  5%  6%  5%
Milwaukee, Wisconsin  10%  12%  11%  12%
Norfolk, Virginia  5%  4%  5%  4%

 

We have experienced a significant decline in our net operating revenue for the six months ended June 30, 2013 and year ended December 31, 2012, as compared to the corresponding periods of 2012 and 2011, respectively, in our Milwaukee, Wisconsin market. This decline in net operating revenue has directly affected the operating income of our radio stations in this market. These reductions are attributable to a combination of aggressive competitive pricing due to a soft economy and new rating methodology that has changed the competitive pricing landscape in the market; an increase in the demand for 30 second spots which has caused a reduction in both our rates and inventory available as we control the number of units per hour to provide more entertainment for our listeners; and a decline in certain key category spending in the market.

 

During the six months ended June 30, 2013 and 2012 and the years ended December 31, 2012 and 2011, the radio stations in our five largest markets when combined, represented approximately 38%, 40%, 40% and 36%, 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 Six Months Ended  for the Years Ended
   June 30,  December 31,
   2013  2012  2012  2011
Market:            
Columbus, Ohio  8%  7%  8%  6%
Des Moines, Iowa  5%  5%  5%  5%
Manchester, New Hampshire  7%  8%  8%  7%
Milwaukee, Wisconsin  12%  15%  13%  15%
Norfolk, Virginia  6%  5%  6%  3%

 

 

*Operating income plus corporate general and administrative expenses, depreciation and amortization.

 

13
 

 

Television Segment

 

Our television segment’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 six months ended June 30, 2013 and 2012, approximately 83% and 84%, 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. In 2012 we had a considerable increase in revenue due to political advertising. Because 2013 is a non-election year, we expect political revenue to significantly decrease in 2013.

 

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.

 

Our television market in Joplin, Missouri represented approximately 10%, 9%, 9% and 9%, respectively, of our net operating revenues, and approximately 13%, 11%, 11% and 10%, respectively, of our consolidated station operating income (operating income plus corporate general and administrative expenses, depreciation and amortization) for the six months ended June 30, 2013 and 2012 and the years ended December 31, 2012 and 2011.

 

14
 

 

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

 

Results of Operations

 

The following tables summarize our results of operations for the three months ended June 30, 2013 and 2012.

 

Consolidated Results of Operations

 

   Three Months Ended         
   June 30,   $ Increase   % Increase 
   2013   2012   (Decrease)   (Decrease) 
   (In thousands, except percentages and per share information) 
Net operating revenue  $33,832   $32,986   $846    2.6%
Station operating expense   23,493    21,959    1,534    7.0%
Corporate general and administrative   1,982    1,940    42    2.2%
Operating income from continuing operations   8,357    9,087    (730)   (8.0)%
Interest expense   357    458    (101)   (22.1)%
Other expense (income), net   66    (8)   74    N/M 
Income from continuing operations before income tax   7,934    8,637    (703)   (8.1)%
Income tax provision   3,130    3,438    (308)   (9.0)%
Income from continuing operations, net of income taxes   4,804    5,199    (395)   (7.6)%
Loss from discontinued operations, net of income taxes       (67)   67    N/M 
Net income  $4,804   $5,132   $(328)   (6.4)%
Earnings (loss) per share:                    
From continuing operations  $.84   $.92   $(.08)   (8.7)%
From discontinued operations       (.01)   .01    N/M 
Earnings per share (diluted)  $.84   $.91   $(.07)   (7.7)%

 

Radio Broadcasting Segment

 

   Three Months Ended         
   June 30,   $ Increase   % Increase 
   2013   2012   (Decrease)   (Decrease) 
   (In thousands, except percentages) 
Net operating revenue  $28,674   $28,482   $192    0.7%
Station operating expense   20,215    18,921    1,294    6.8%
Operating income  $8,459   $9,561   $(1,102)   (11.5)%

 

Television Broadcasting Segment

 

   Three Months Ended         
   June 30,   $ Increase   % Increase 
   2013   2012   (Decrease)   (Decrease) 
   (In thousands, except percentages) 
Net operating revenue  $5,158   $4,504   $654    14.5%
Station operating expense   3,278    3,038    240    7.9%
Operating income  $1,880   $1,466   $414    28.2%

  

 

N/M =      Not Meaningful

 

15
 

 

Reconciliation of segment operating income to consolidated operating income from continuing operations:

 

           Corporate     
   Radio   Television   and Other   Consolidated 
   (In thousands) 
Three Months Ended June 30, 2013:                
Net operating revenue  $28,674   $5,158   $   $33,832 
Station operating expense   20,215    3,278        23,493 
Corporate general and administrative           1,982    1,982 
Operating income (loss) from continuing operations  $8,459   $1,880   $(1,982)  $8,357 

 

           Corporate     
   Radio   Television   and Other   Consolidated 
   (In thousands) 
Three Months Ended June 30, 2012:                
Net operating revenue  $28,482   $4,504   $   $32,986 
Station operating expense   18,921    3,038        21,959 
Corporate general and administrative           1,940    1,940 
Operating income (loss) from continuing operations  $9,561   $1,466   $(1,940)  $9,087 

 

Consolidated

 

For the three months ended June 30, 2013, consolidated net operating revenue was $33,832,000 compared with $32,986,000 for the three months ended June 30, 2012, an increase of $846,000 or 3%. Gross local revenue and gross retransmission consent revenue increased $987,000 and $122,000, respectively, from the second quarter of 2012. Gross national revenue increased $342,000 and gross political revenue decreased $545,000. The increase in gross local revenue was attributable to improvements in our Columbus, OH and Victoria, TX markets, partially offset by a decline in gross local revenue in our Portland, ME and Milwaukee, WI markets. The increase in gross national revenue is due to an increase in national advertising on our Networks and in our television markets. The decrease in gross political revenue was expected since 2013 is not an election year and 2012 was an election year.

 

Station operating expense was $23,493,000 for the three months ended June 30, 2013, compared with $21,959,000 for the three months ended June 30, 2012, an increase of $1,534,000 or 7%. The increase is primarily a result of $851,000 in non-recurring credits received in the prior year quarter from two of our performance rights organizations for fees previously paid. Sales commissions and selling expenses increased $226,000 in the current quarter as a result of increased revenue. Salaries increased $150,000 as a result of programming contractual agreements and health care costs increased $90,000.

 

Operating income from continuing operations for the three months ended June 30, 2013 was $8,357,000 compared to $9,087,000 for the three months ended June 30, 2012, a decrease of $730,000 or 8%. The decrease was a result of the increase in net operating revenue offset by an increase in station operating expense, described above.

 

We generated net income of $4,804,000 ($.84 per share on a fully diluted basis) during the three months ended June 30, 2013, compared to $5,132,000 ($.91 per share on a fully diluted basis) for the three months ended June 30, 2012, a decrease of $328,000 or 6%. We had a decrease in operating income from continuing operations of $730,000, as described above, and a decrease in interest expense of $101,000. The decrease in interest expense was attributable to an average decrease in market interest rates and a decrease in average debt outstanding. Income tax expense decreased $308,000 in the current quarter, as a result of the decrease in operating income.

 

Radio Segment

 

For the three months ended June 30, 2013, net operating revenue of the radio segment was $28,674,000 compared with $28,482,000 for the three months ended June 30, 2012, which represents an increase of $192,000 or less than 1%. Gross national revenue and gross local revenue increased $139,000 and $454,000, respectively, from the second quarter of 2012. The increase in gross national revenue is attributable to an increase in national advertising on our Networks and the increase in gross local revenue is attributable to improvements in our Columbus, OH market, partially offset by a decline in gross local revenue in our Portland, ME and Milwaukee, WI markets. Gross political revenue decreased $404,000 in the current year quarter because 2013 is not an election year and 2012 was an election year.

 

16
 

 

Station operating expense for the radio segment was $20,215,000 for the three months ended June 30, 2013, compared with $18,921,000 for the three months ended June 30, 2012, an increase of $1,294,000 or 7%. The increase is primarily a result of $851,000 in non-recurring credits received in the prior year quarter from two of our performance rights organizations for fees previously paid. Sales commissions and selling expenses increased $157,000 in the current quarter.  Salaries increased $105,000 as a result of programming contractual agreements and health care costs increased $73,000.  

 

Operating income in the radio segment decreased $1,102,000 to $8,459,000 for the three months ended June 30, 2013, from $9,561,000 for the three months ended June 30, 2012. The decrease was a result of the increase in station operating expense as described above.

 

Television Segment

 

For the three months ended June 30, 2013, net operating revenue of our television segment was $5,158,000 compared with $4,504,000 for the three months ended June 30, 2012, an increase of $654,000 or 15%. Gross local revenue and gross retransmission consent revenue increased $533,000 and $122,000, respectively, from the second quarter of 2012. The increase in local revenue was attributable to increased spending by the automotive industry and local broadcast television affiliates. Gross national revenue increased $203,000 and gross political revenue decreased $141,000 as compared to the prior year quarter. Increased advertising spending by phone and cellular companies led to the increase in gross national revenue and the decrease in gross political revenue was expected since 2013 is not an election year and 2012 was an election year.

 

Station operating expense in the television segment for the three months ended June 30, 2013 was $3,278,000, compared with $3,038,000 for the three months ended June 30, 2012, an increase of $240,000 or 8%. Sales expense and retransmission fees increased $69,000 and $47,000, respectively, in the current year quarter as a result of the increase in revenue.

 

Operating income in the television segment for the three months ended June 30, 2013 was $1,880,000 compared with $1,466,000 for the three months ended June 30, 2012, an increase of $414,000 or 28%. The increase was a direct result of the improvement in net operating revenue partially offset by the increase in station operating expense, described above.

 

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

 

Results of Operations

 

The following tables summarize our results of operations for the six months ended June 30, 2013 and 2012.

 

Consolidated Results of Operations

 

   Six Months Ended         
   June 30,   $ Increase   % Increase 
   2013   2012   (Decrease)   (Decrease) 
   (In thousands, except percentages and per share information) 
Net operating revenue  $62,789   $62,309   $480    0.8%
Station operating expense   45,581    44,319    1,262    2.8%
Corporate general and administrative   3,930    3,889    41    1.1%
Operating income from continuing operations   13,278    14,101    (823)   (5.8)%
Interest expense   715    986    (271)   (27.5)%
Other expense (income), net   91    (10)   101    N/M 
Income from continuing operations before tax   12,472    13,125    (653)   (5.0)%
Income tax provision   4,942    5,223    (281)   (5.4)%
Income from continuing operations, net of tax   7,530    7,902    (372)   (4.7)%
Income (loss) from discontinued operations, net of tax   223    (65)   288    N/M 
Net income  $7,753   $7,837   $(84)   (1.1)%
Earnings (loss) per share:                    
From continuing operations  $1.31   $1.39   $(.08)   (5.8)%
From discontinued operations   .04    (.01)   .05    N/M 
Earnings per share (diluted)  $1.35   $1.38   $(.03)   (2.2)%

 

17
 

 

Radio Broadcasting Segment

 

   Six Months Ended         
   June 30,   $ Increase   % Increase 
   2013   2012   (Decrease)   (Decrease) 
   (In thousands, except percentages) 
Net operating revenue  $53,136   $53,682   $(546)   (1.0)%
Station operating expense   39,222    38,276    946    2.5%
Operating income  $13,914   $15,406   $(1,492)   (9.7)%

 

Television Broadcasting Segment

 

   Six Months Ended         
   June 30,   $ Increase   % Increase 
   2013   2012   (Decrease)   (Decrease) 
   (In thousands, except percentages) 
Net operating revenue  $9,653   $8,627   $1,026    11.9%
Station operating expense   6,359    6,043    316    5.2%
Operating income  $3,294   $2,584   $710    27.5%

 

 

N/M =        Not Meaningful

 

Reconciliation of segment operating income to consolidated operating income from continuing operations:

 

           Corporate     
   Radio   Television   and Other   Consolidated 
   (In thousands) 
Six Months Ended June 30, 2013:                    
Net operating revenue  $53,136   $9,653   $   $62,789 
Station operating expense   39,222    6,359        45,581 
Corporate general and administrative           3,930    3,930 
Operating income (loss) from continuing operations  $13,914   $3,294   $(3,930)  $13,278 

 

           Corporate     
   Radio   Television   and Other   Consolidated 
   (In thousands) 
Six Months Ended June 30, 2012:                    
Net operating revenue  $53,682   $8,627   $   $62,309 
Station operating expense   38,276    6,043        44,319 
Corporate general and administrative           3,889    3,889 
Operating income (loss) from continuing operations  $15,406   $2,584   $(3,889)  $14,101 

 

18
 

 

Consolidated

 

For the six months ended June 30, 2013, consolidated net operating revenue was $62,789,000 compared with $62,309,000 for the six months ended June 30, 2012, an increase of $480,000 or 1%. Gross local revenue and gross retransmission consent revenue increased $1,313,000 and $228,000, respectively, for the six months of 2013. The increase in gross local revenue was primarily attributable to improvements in our Columbus, OH, Norfolk, VA and Victoria, TX markets, partially offset by a decline in gross local revenue in our Portland, ME and Milwaukee, WI markets. Gross national revenue and gross political revenue decreased $163,000 and $983,000, respectively. The decrease in gross national revenue is due to an overall decline in national advertising in our radio segment and the decrease in gross political revenue was expected since 2013 is not an election year and 2012 was an election year.

 

Station operating expense was $45,581,000 for the six months ended June 30, 2013, compared with $44,319,000 for the six months ended June 30, 2012, an increase of $1,262,000 or 3%. The increase is primarily a result of $851,000 in non-recurring credits received in the prior year from two of our performance rights organizations for fees previously paid. Sales commissions and selling expenses increased $155,000 in the current year as a result of increased revenue. Advertising and promotions expense increased $105,000 in 2013 and was primarily attributable to increased billboard and TV advertising.

 

Operating income from continuing operations for the six months ended June 30, 2013 was $13,278,000 compared to $14,101,000 for the six months ended June 30, 2012, a decrease of $823,000 or 6%. The decrease was a result of the increase in net operating revenue offset by an increase in station operating expense, described above.

 

We generated net income of $7,753,000 ($1.35 per share on a fully diluted basis) during the six months ended June 30, 2013, compared to $7,837,000 ($1.38 per share on a fully diluted basis) for the six months ended June 30, 2012, a decrease of $84,000 or 1%. We had a decrease in operating income from continuing operations of $823,000, as described above, and a decrease in interest expense of $271,000. The decrease in interest expense was attributable to an average decrease in market interest rates of approximately 0.61% and a decrease in average debt outstanding. Income tax expense decreased $281,000 in the current year as a result of the decrease in operating income. In 2013 we recognized income from discontinued operations of $223,000 net of tax from the sale of our Greenville, Mississippi TV station. See Note 5 – Discontinued Operations, in the accompanying notes to the unaudited condensed consolidated financial statements for more on our discontinued operations.

 

Radio Segment

 

For the six months ended June 30, 2013, net operating revenue of the radio segment was $53,136,000 compared with $53,682,000 for the six months ended June 30, 2012, which represents a decrease of $546,000 or 1%. Gross national revenue and gross political revenue decreased $437,000 and $747,000, respectively, in 2013. The decrease in gross national revenue is due to an overall decline in national advertising and the decrease in gross political revenue was expected since 2013 is not an election year and 2012 was an election year. Gross local revenue increased $452,000 in 2013. The increase in gross local revenue was primarily attributable to improvements in our Columbus, OH and Norfolk, VA markets, partially offset by a decline in gross local revenue in our Portland, ME and Milwaukee, WI markets.

 

Station operating expense for the radio segment was $39,222,000 for the six months ended June 30, 2013, compared with $38,276,000 for the six months ended June 30, 2012, an increase of $946,000 or 2%. The increase is primarily a result of $851,000 in non-recurring credits received in the prior year from two of our performance rights organizations for fees previously paid. Advertising and promotions expense increased $138,000 in 2013 and was primarily attributable to increased billboard and TV advertising.

 

Operating income in the radio segment decreased $1,492,000 or 10% to $13,914,000 for the six months ended June 30, 2013, from $15,406,000 for the six months ended June 30, 2012. The decrease was a result of the decline in net operating revenue and increase in station operating expense, as described above.

 

Television Segment

 

For the six months ended June 30, 2013, net operating revenue of our television segment was $9,653,000 compared with $8,627,000 for the six months ended June 30, 2012, an increase of $1,026,000 or 12%. Gross local revenue and gross retransmission consent revenue increased $861,000 and $228,000, respectively, in 2013. The increase in local revenue was attributable to increased spending by the automotive industry and broadcast television affiliates. Gross national revenue increased $274,000 and gross political revenue decreased $236,000 as compared to the prior year. Increased advertising spending by phone and cellular companies led to the increase in gross national revenue and the decrease in gross political revenue was expected since 2013 is not an election year and 2012 was an election year.

 

Station operating expense in the television segment for the six months ended June 30, 2013 was $6,359,000, compared with $6,043,000 for the six months ended June 30, 2012, an increase of $316,000 or 5%. Sales expense and retransmission fees increased $146,000 and $71,000, respectively, in the current year as a result of the increase in revenue.

 

19
 

 

Operating income in the television segment for the six months ended June 30, 2013 was $3,294,000 compared with $2,584,000 for the six months ended June 30, 2012, an increase of $710,000 or 27%. The increase was a result of the improvement in net operating revenue partially offset by the increase in station operating expense, described above.

 

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 2013 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, 2012.

 

Liquidity and Capital Resources

 

Debt Arrangements and Debt Service Requirements

 

On May 31, 2013, we amended our $120 million credit facility (the “Credit Facility”) to (i) extend the maturity date to May 31, 2018; (ii) change the allocation between the term loan (the “Term Loan”) and the revolving loan (the “Revolving Credit Facility”) to $30 million and $90 million, respectively; (iii) modify the Consolidated Fixed Charge Coverage ratio to exclude distributions made when the Consolidated Leverage Ratio is less than 2.50 to 1.00 from the fixed charge component of such ratio; (iv) revise the interest rates and commitment fees, as set forth below; (v) remove the cap on additional business acquisitions if the Consolidated Leverage Ratio is less than 2.50 to 1.00, and if equal to or greater than such amount, cap such acquisitions at $35 million subject to certain conditions; and (vi) remove the cap on the annual aggregate of dividends, distributions, and stock redemptions if the Consolidated Leverage Ratio is less than 2.50 to 1.00, and if equal to or greater than such amount, such annual aggregate amount becomes subject to a pro forma covenant compliance.

 

We had $70 million of unused borrowing capacity under the Revolving Credit Facility at June 30, 2013. The unused portion of the Revolving Credit Facility is available for general corporate purposes, including working capital, capital expenditures, permitted acquisitions and related transaction expenses and permitted stock buybacks.

 

The Term Loan principal amortizes in equal installments of 5% of the Term Loan during each year, however, upon satisfaction of certain conditions, as defined in the Credit Facility, no amortization payment is required. The Credit Facility is also subject to mandatory prepayment requirements, including but not limited to, certain sales of assets, certain insurance proceeds, certain debt issuances and certain sales of equity. Optional prepayments of the Credit Facility are permitted without any premium or penalty, other than certain costs and expenses. As of June 30, 2013, we have no required amortization payment.

 

Interest rates under the Credit Facility are payable, at our option, at alternatives equal to LIBOR (0.19535% at June 28, 2013) plus 1.25% to 2.25% (0.2117% at December 31, 2012, plus 1.50% to 2.75%) or the base rate plus 0.25% to 1.25% (0.50% to 1.75% at December 31, 2012). The spread over LIBOR and the base rate vary from time to time, depending upon our financial leverage. We also pay quarterly commitment fees of 0.25% to 0.35% per annum (0.25% to 0.375% per annum at December 31, 2012) on the unused portion of the Revolving Credit Facility.

 

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

 

The Credit Facility contains a number of financial covenants (all of which we were in compliance with at June 30, 2013) 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.

 

20
 

 

Sources and Uses of Cash

 

During the six months ended June 30, 2013 and 2012, we had net cash flows from operating activities of $11,046,000 and $14,756,000, 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 six months ended June 30, 2013 were $2,465,000 ($2,502,000 in 2012). We anticipate capital expenditures in 2013 to be approximately $5.5 million, which we expect to finance through funds generated from operations.     

 

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 and Commercial Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

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” in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

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, 2012 for a complete discussion of our market risk. There have been no material changes to the market risk information included in our 2012 Annual Report on Form 10-K.

 

21
 

 

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 June 30, 2013, 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

 

We currently and from time to time are involved in litigation incidental to the conduct of our business. We are not a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on our financial position, cash flows or results of operations.

 

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

 

22
 

 

 

SIGNATURES

 

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

 

 

SAGA COMMUNICATIONS, INC.

 

 
Date: August 9, 2013  /s/ SAMUEL D. BUSH    
  Samuel D. Bush   
 

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)  

 
     
Date: August 9, 2013  /s/ CATHERINE A. BOBINSKI    
  Catherine A. Bobinski   
  Senior Vice President, Chief Accounting Officer and Corporate Controller (Principal Accounting Officer)    

 

23