10-K 1 d275547d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark one)

 

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

For the fiscal year ended December 31, 2011

OR

  ¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period for                  to                 

Commission file number 1-11588

SAGA COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   38-3042953
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

73 Kercheval Avenue

Grosse Pointe Farms, Michigan

 

48236

(Zip Code)

(Address of principal executive offices)  

Registrant’s telephone number, including area code:

(313) 886-7070

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Class A Common Stock, $.01 par value   NYSE Amex

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.    ¨

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

 

Large accelerated filer  ¨

  Accelerated filer  þ   Non-accelerated filer  ¨    Smaller reporting company  ¨
  (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 Act).    Yes  ¨        No  þ

Aggregate market value of the Class A Common Stock and the Class B Common Stock (assuming conversion thereof into Class A Common Stock) held by nonaffiliates of the registrant, computed on the basis of the closing price of the Class A Common Stock on June 30, 2011 on the NYSE Amex: $134,907,883.

The number of shares of the registrant’s Class A Common Stock, $.01 par value, and Class B Common Stock, $.01 par value, outstanding as of March 9, 2012 was 3,652,539 and 597,504, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2012 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year) are incorporated by reference in Part III hereof.

 

 

 


Table of Contents

Saga Communications, Inc.

2011 Form 10-K Annual Report

Table of Contents

 

          Page  
PART I   

Item 1.

   Business      4   

Item 1A.

   Risk Factors      24   

Item 1B.

   Unresolved Staff Comments      28   

Item 2.

   Properties      28   

Item 3.

   Legal Proceedings      28   

Item 4.

   Mine Safety Disclosures      28   
PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      29   

Item 6.

   Selected Financial Data      32   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      33   

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk      46   

Item 8.

   Financial Statements and Supplementary Data      46   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      47   

Item 9A.

   Controls and Procedures      47   

Item 9B.

   Other Information      49   
PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      49   

Item 11.

   Executive Compensation      49   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      49   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      49   

Item 14.

   Principal Accountant Fees and Services      49   
PART IV   

Item 15.

   Exhibits and Financial Statement Schedules      50   

Signatures

        79   

 

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Table of Contents

Forward-Looking Statements

Statements contained in this Form 10-K that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as “believes,” “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 2012 and beyond to differ materially from those expressed in any forward-looking statements made by or on our behalf. Forward-looking statements are not guarantees of future performance as they involve a number of risks, uncertainties and assumptions that may prove to be incorrect and that may cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks, uncertainties and assumptions that may affect our performance, which are described in Item 1A of this report, include our financial leverage and debt service requirements, dependence on key personnel, dependence on key stations, 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.

 

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Table of Contents

PART I

Item 1.    Business

We are a broadcast company primarily engaged in acquiring, developing and operating broadcast properties. As of February 29, 2012, we owned and/or operated five television stations and four low-power television stations serving three markets, five radio information networks, and sixty-one FM and thirty AM radio stations serving twenty-three markets, including Bellingham, Washington; Columbus, Ohio; Norfolk, Virginia; Milwaukee, Wisconsin; Manchester, New Hampshire; Des Moines, Iowa; and Joplin, Missouri.

The following table sets forth information about our radio stations and the markets they serve as of February 29, 2012:

 

Station

  

Market (a)

   2011
Market
Ranking
By Radio
Revenue (b)
     2011
Market
Ranking
By Radio
Market (b)
    

Station Format

   Target
Demographics

FM:

              

WKLH

   Milwaukee, WI      27         38       Classic Rock    Men 35-54

WHQG

   Milwaukee, WI      27         38       Rock    Men 25-49

WJMR-FM

   Milwaukee, WI      27         38       Urban Adult Contemporary    Women 25-54

WZBK

   Milwaukee, WI      27         38       Classic Country    Adults 45-64

WSNY

   Columbus, OH      35         36       Adult Contemporary    Women 25-54

WNND

   Columbus, OH      35         36       Adult Hits    Adults 25-49

WNNP

   Columbus, OH      35         36       Adult Hits    Adults 25-49

WVMX

   Columbus, OH      35         36       Hot Adult Contemporary    Women 25-44

WNOR

   Norfolk, VA      40         43       Rock    Men 18-49

WAFX

   Norfolk, VA      40         43       Classic Rock    Men 35-54

KSTZ

   Des Moines, IA      72         90       Hot Adult Contemporary    Women 25-44

KIOA

   Des Moines, IA      72         90       Classic Hits    Adults 45-64

KAZR

   Des Moines, IA      72         90       Rock    Men 18-34

KLTI

   Des Moines, IA      72         90       Soft Adult Contemporary    Women 35-54

KIOA-HD2

   Des Moines, IA      72         90       Contemporary Hits    Adults 18-34

WMGX

   Portland, ME      93         167       Hot Adult Contemporary    Women 25-44

WYNZ

   Portland, ME      93         167       Classic Hits    Adults 45-64

WPOR

   Portland, ME      93         167       Country    Adults 25-54

WCLZ

   Portland, ME      93         167       Adult Album Alternative    Adults 25-54

WAQY

   Springfield, MA      94         87       Classic Rock    Men 35-54

WLZX

   Springfield, MA      94         87       Rock    Men 18-34

WRSI

   Northampton, MA      94         87       Adult Album Alternative    Adults 35-54

WRSY

   Brattleboro, VT      N/A         N/A       Adult Album Alternative    Adults 35-54

WHAI

   Greenfield, MA      N/A         N/A       Adult Contemporary    Women 25-54

WPVQ

   Greenfield, MA      N/A         N/A       Country    Adults 25-54

WLZX-HD2

   Greenfield, MA      N/A         N/A       Contemporary Hits    Adults 18-34

WZID

   Manchester, NH      112         193       Adult Contemporary    Women 25-54

WMLL

   Manchester, NH      112         193       Classic Hits    Adults 35-54

WZID-HD2

   Manchester, NH      112         193       Contemporary Hits    Adults 18-34

WLRW

   Champaign, IL      159         213       Hot Adult Contemporary    Women 25-44

WIXY

   Champaign, IL      159         213       Country    Adults 25-54

WCFF

   Champaign, IL      159         213       Classic Hits    Adults 35-44

WYXY

   Champaign, IL      159         213       Classic Country    Adults 45-64

WLRW-HD2

   Champaign, IL      159         213       Oldies    Adults 45-64

WIXY-HD2

   Champaign, IL      159         213       Rock    Men 18-49

(footnotes follow tables)

 

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Station

  

Market (a)

   2011
Market
Ranking

By Radio
Revenue (b)
     2011
Market
Ranking

By Radio
Market (b)
    

Station Format

  Target
Demographics

WYMG

   Springfield, IL      N/A         N/A       Classic Rock   Men 25-54

WQQL

   Springfield, IL      N/A         N/A       Oldies   Adults 45-64

WDBR

   Springfield, IL      N/A         N/A       Contemporary Hits   Adults 18-34

WABZ

   Springfield, IL      N/A         N/A       Variety Hits   Adults 25-54

WOXL

   Asheville, NC      151         158       Adult Contemporary   Women 25-54

WTMT

   Asheville, NC      151         158       Rock   Men 18-49

WOXL-HD2

   Asheville, NC      151         158       Adult Album Alternative   Adults 18-49

WNAX

   Sioux City IA      200         265       Country   Adults 35+

WWWV

   Charlottesville, VA      N/A         N/A       Rock   Men 25-54

WQMZ

   Charlottesville, VA      N/A         N/A       Adult Contemporary   Women 25-54

WCNR

   Charlottesville, VA      N/A         N/A       Adult Album Alternative   Adults 18-49

KEGI

   Jonesboro, AR      238         277       Classic Hits   Men 25-54

KDXY

   Jonesboro, AR      238         277       Country   Adults 25-54

KJBX

   Jonesboro, AR      238         277       Adult Contemporary   Women 25-54

KDXY-HD2

   Jonesboro, AR      238         277       Contemporary Hits   Adults 18-34

KDXY-HD3

   Jonesboro, AR      238         277       Oldies   Adults 45-64

WCVQ

   Clarksville, TN —

Hopkinsville, KY

     N/A         N/A       Hot Adult Contemporary   Women 25-54

WVVR

   Clarksville, TN —
Hopkinsville, KY
     N/A         N/A       Country   Adults 25-54

WZZP

   Clarksville, TN —
Hopkinsville, KY
     N/A         N/A       Rock   Men 18-34

WEGI

   Clarksville, TN —
Hopkinsville, KY
     N/A         N/A       Classic Hits   Adults 35-54

KISM

   Bellingham, WA      N/A         N/A       Classic Rock   Men 25-54

KAFE

   Bellingham, WA      N/A         N/A       Adult Contemporary   Women 25-54

KICD

   Spencer, IA      N/A         N/A       Country   Adults 35+

KLLT

   Spencer, IA      N/A         N/A       Adult Contemporary   Women 25-54

KMIT

   Mitchell, SD      N/A         N/A       Country   Adults 35+

KUQL

   Mitchell, SD      N/A         N/A       Classic Hits   Adults 45-64

WKVT

   Brattleboro, VT      N/A         N/A       Classic Hits   Adults 25-54

WKNE

   Keene, NH      N/A         N/A       Hot Adult Contemporary   Women 25-54

WSNI

   Keene, NH      N/A         N/A       Adult Contemporary   Women 35-54

WINQ

   Keene, NH      N/A         N/A       Country   Adults 25-54

WKNE-HD2

   Keene, NH      N/A         N/A       Classic Rock   Men 25-54

WKNE-HD3

   Keene, NH      N/A         N/A       Classic Hits   Adults 45-64

WQEL

   Bucyrus, OH      N/A         N/A       Classic Hits   Adults 25-54

WIII

   Ithaca, NY      N/A         N/A       Classic Rock   Men 25-54

WQNY

   Ithaca, NY      N/A         N/A       Country   Adults 25-54

WYXL

   Ithaca, NY      N/A         N/A       Adult Contemporary   Women 25-54

WYXL-HD2

   Ithaca, NY      N/A         N/A       Contemporary Hits   Adults 18-34

WYXL-HD3

   Ithaca, NY      N/A         N/A       Adult Album Alternative   Adults 35-54

(footnotes follow tables)

 

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Station

  

Market (a)

   2011
Market
Ranking

By Radio
Revenue (b)
     2011
Market
Ranking

By Radio
Market (b)
    

Station Format

  Target
Demographics

AM:

             

WJYI

   Milwaukee, WI      27         38       Christian   Adults 18+

WJOI

   Norfolk, VA      40         43       Adult Standards   Adults 45+

KRNT

   Des Moines, IA      72         90       Adult Standards/Sports   Adults 45+

KPSZ

   Des Moines, IA      72         90       Christian   Adults 18+

WGAN

   Portland, ME      93         167       News/Talk   Adults 35+

WZAN

   Portland, ME      93         167       News/Talk/Sports   Men 25-54

WBAE

   Portland, ME      93         167       News/Talk/Sports   Adults 45+

WVAE

   Portland, ME      93         167       News/Talk/Sports   Adults 45+

WHMP

   Northampton, MA      94         87       News/Talk   Adults 35+

WHNP

   Springfield, MA      94         87       News/Talk   Adults 35+

WHMQ

   Greenfield, MA      N/A         N/A       News/Talk   Adults 35+

WFEA

   Manchester, NH      112         193       Adult Standards   Adults 45+

WTAX

   Springfield, IL      N/A         N/A       News/Talk   Adults 35+

WISE

   Asheville, NC      151         158       Sports/Talk   Men 18+

WYSE

   Asheville, NC      151         158       Sports/Talk   Men 18+

WNAX

   Yankton, SD      200         265       News/Talk   Adults 35+

WINA

   Charlottesville, VA      N/A         N/A       News/Talk   Adults 35+

WVAX

   Charlottesville, VA      N/A         N/A       Sports Talk   Men 18+

WEGI

   Clarksville, TN —
Hopkinsville, KY
     N/A         N/A       Classic Hits   Adults 35-54

WKFN

   Clarksville, TN —
Hopkinsville, KY
     N/A         N/A       Sports/Talk   Men 18+

KGMI

   Bellingham, WA      N/A         N/A       News/Talk   Adults 35+

KPUG

   Bellingham, WA      N/A         N/A       Sports/Talk   Men 18+

KBAI

   Bellingham, WA      N/A         N/A       Progressive Talk   Adults 35+

KICD

   Spencer, IA      N/A         N/A       News/Talk   Adults 35+

WKVT

   Brattleboro, VT      N/A         N/A       News/Talk   Adults 35+

WKBK

   Keene, NH      N/A         N/A       News/Talk   Adults 35+

WZBK

   Keene, NH      N/A         N/A       Sports Talk   Men 18+

WBCO

   Bucyrus, OH      N/A         N/A       Adult Standards   Adults 45+

WNYY

   Ithaca, NY      N/A         N/A       Progressive Talk   Adults 35+

WHCU

   Ithaca, NY      N/A         N/A       News/Talk   Adults 35+

 

(a) Actual city of license may differ from metropolitan market actually served.

 

(b) Derived from Investing in Radio 2011 Market Report.

 

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The following table sets forth information about our television stations and the markets they serve as of February 29, 2012:

 

Station

  

Market (a)

   2011 Market
Ranking by

Number of TV
Households (b)
     Station
Affiliate
   Fall 2011
Station Ranking
(by # of viewers) (b)

KOAM

   Joplin, MO — Pittsburg, KS      149       CBS    1

KFJX(d)

   Joplin, MO — Pittsburg, KS      149       FOX    2

WXVT

   Greenwood — Greenville, MS      187       CBS    N/S

KAVU

   Victoria, TX      204       ABC    N/S

KVCT(c)

   Victoria, TX      204       FOX    N/S

KMOL-LD

   Victoria, TX      204       NBC    N/S

KXTS-LD

   Victoria, TX      204       CBS    N/S

KUNU-LP

   Victoria, TX      204       Univision    N/S

KVTX-LP

   Victoria, TX      204       Telemundo    N/S

 

(a) Actual city of license may differ from metropolitan market actually served.

 

(b) Derived from Fall 2011 A.C. Nielsen ratings and data.

 

(c) Station operated under the terms of a TBA.

 

(d) Station operated under the terms of a Shared Services Agreement.

N/S Station is a non-subscriber to the A.C Nielsen ratings and data.

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 three markets and consists of five television stations and four low power television (“LPTV”) stations. For more information regarding our reportable segments, see Note 13 of the Notes to Consolidated Financial Statements included with this Form 10-K, which is incorporated herein by reference.

Strategy

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

Programming and marketing are key components in our strategy to achieve top ratings in both our radio and television operations. In many of our markets, the three or four most highly rated stations (radio and/or television) receive a disproportionately high share of the market’s advertising revenues. As a result, a station’s revenue is dependent upon its ability to maximize its number of listeners/viewers within an advertiser’s given demographic parameters. In certain cases we use attributes other than specific market listener data for sales activities. In those markets where sufficient alternative data is available, we do not subscribe to an independent listener rating service.

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

The television stations that we own and/or operate are comprised of three CBS affiliates, one ABC affiliate, two Fox affiliates, one Univision affiliate, one NBC affiliate, and one Telemundo affiliate. In addition to securing network programming, we carefully select available syndicated programming to maximize viewership. We also develop local programming, including a strong local news franchise in each of our television markets.

 

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We concentrate on the development of strong decentralized local management, which is responsible for the day-to-day operations of the stations we own and/or operate. We compensate local management based on the station’s financial performance, as well as other performance factors that are deemed to affect the long-term ability of the stations to achieve financial performance objectives. Corporate management is responsible for long-range planning, establishing policies and procedures, resource allocation and monitoring the activities of the stations.

Under the Telecommunications Act of 1996 (the “Telecommunications Act”), we are permitted to own as many as 8 radio stations in a single market. See “Federal Regulation of Radio and Television Broadcasting”. We seek to acquire reasonably priced broadcast properties with significant growth potential that are located in markets with well-established and relatively stable economies. We often focus on local economies supported by a strong presence of state or federal government or one or more major universities. Future acquisitions will be subject to the availability of financing, the terms of our credit facility, and compliance with the Communications Act of 1934 (the “Communications Act”) and FCC rules.

Advertising Sales

Our primary source of revenue is from the sale of advertising for broadcast on our stations. Depending on the format of a particular radio station, there are a predetermined number of advertisements broadcast each hour. The number of advertisements broadcast on our television stations may be limited by certain network affiliation and syndication agreements and, with respect to children’s programs, federal regulation. We determine the number of advertisements broadcast hourly that can maximize a station’s available revenue dollars without jeopardizing listening/viewing levels. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of the day, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year. Any change in our revenue, with the exception of those instances where stations are acquired or sold, is generally the result of pricing adjustments, which are made to ensure that the station efficiently utilizes available inventory.

Advertising rates charged by radio and television stations are based primarily on a station’s ability to attract audiences in the demographic groups targeted by advertisers, the number of stations in the market competing for the same demographic group, the supply of and demand for radio and television advertising time, and other qualitative factors including rates charged by competing radio and television stations within a given market. Radio rates are generally highest during morning and afternoon drive-time hours, while television advertising rates are generally higher during prime time evening viewing periods. Most advertising contracts are short-term, generally running for only a few weeks. This allows broadcasters the ability to modify advertising rates as dictated by changes in station ownership within a market, changes in listener/viewer ratings and changes in the business climate within a particular market.

Approximately $118,040,000 or 84% of our gross revenue for the year ended December 31, 2011 (approximately $120,142,000 or 86% in fiscal 2010 and approximately $113,753,000 or 86% in fiscal 2009) was generated from the sale of local advertising. Additional revenue is generated from the sale of national advertising, network compensation payments, barter and other miscellaneous transactions. In all of our markets, we attempt to maintain a local sales force that is generally larger than our competitors. The principal goal in our sales efforts is to develop long-standing customer relationships through frequent direct contacts, which we believe represents a competitive advantage. We also typically provide incentives to our sales staff to seek out new opportunities resulting in the establishment of new client relationships, as well as new sources of revenue, not directly associated with the sale of broadcast time.

Each of our stations also engages independent national sales representatives to assist us in obtaining national advertising revenues. These representatives obtain advertising through national advertising agencies and receive a commission from us based on our net revenue from the advertising obtained. Total gross revenue resulting from national advertising in fiscal 2011 was approximately $21,794,000 or 16% of our gross revenue (approximately $20,220,000 or 14% in fiscal 2010 and approximately $18,896,000 or 14% in fiscal 2009).

 

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Competition

Both radio and television broadcasting are highly competitive businesses. Our stations compete for listeners/viewers and advertising revenues directly with other radio and/or television stations, as well as other media, within their markets. Our radio and television stations compete for listeners/viewers primarily on the basis of program content and by employing on-air talent which appeals to a particular demographic group. By building a strong listener/viewer base comprised of a specific demographic group in each of our markets, we are able to attract advertisers seeking to reach these listeners/viewers.

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

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

Seasonality

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

Environmental Compliance

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

Employees

As of December 31, 2011, we had approximately 828 full-time employees and 340 part-time employees, none of whom are represented by unions. We believe that our relations with our employees are good.

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

Available Information

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

Federal Regulation of Radio and Television Broadcasting

Introduction.    The ownership, operation and sale of radio and television stations, including those licensed to us, are subject to the jurisdiction of the FCC, which acts under authority granted by the Communications Act. Among other things, the FCC assigns frequency bands for broadcasting; determines the particular frequencies, locations and operating power of stations; issues, renews, revokes and modifies station licenses; determines whether to approve changes in ownership or control of station licenses; regulates equipment used by stations; adopts and implements regulations and policies that directly or indirectly affect the ownership, operation and

 

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employment practices of stations; and has the power to impose penalties for violations of its rules or the Communications Act. For additional information on the impact of FCC regulations and the introduction of new technologies on our operations, see “Forward Looking Statements” and “Risk Factors” contained elsewhere herein.

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

License Renewal.    Radio and television broadcasting licenses are granted for maximum terms of eight years, and are subject to renewal upon application to the FCC. Under its “two-step” renewal process, the FCC must grant a renewal application if it finds that during the preceding term the licensee has served the public interest, convenience and necessity, and there have been no serious violations of the Communications Act or the FCC’s rules which, taken together, would constitute a pattern of abuse. If a renewal applicant fails to meet these standards, the FCC may either deny its application or grant the application on such terms and conditions as are appropriate, including renewal for less than the full 8-year term. In making the determination of whether to renew the license, the FCC may not consider whether the public interest would be served by the grant of a license to a person other than the renewal applicant. If the FCC, after notice and opportunity for a hearing, finds that the licensee has failed to meet the requirements for renewal and no mitigating factors justify the imposition of lesser sanctions, the FCC may issue an order denying the renewal application, and only thereafter may the FCC accept applications for a construction permit specifying the broadcasting facilities of the former licensee. Petitions may be filed to deny the renewal applications of our stations, but any such petitions must raise issues that would cause the FCC to deny a renewal application under the standards adopted in the “two-step” renewal process. We have filed applications to renew the Company’s radio and television station licenses, as necessary, and we intend to timely file renewal applications, as required for the Company’s stations. Under the Communications Act, if a broadcast station fails to transmit signals for any consecutive 12-month period, the FCC license expires at the end of that period, unless the FCC exercises its discretion to extend or reinstate the license “to promote equity and fairness.” The FCC, to date, has refused to exercise such discretion.

The following table sets forth the market and broadcast power of each of our broadcast stations and the date on which each such station’s FCC license expires:

 

Station

  

Market (1)

  

Power
(Watts) (2)

  

Expiration Date of
FCC Authorization

FM:

        

WSNY

   Columbus, OH    50,000   

October 1, 2012

WNNP

   Columbus, OH    6,000   

October 1, 2012

WNND

   Columbus, OH    6,000   

October 1, 2012

WVMX

   Columbus, OH    6,000   

October 1, 2012

WQEL

   Bucyrus, OH    3,000   

October 1, 2012

WKLH

   Milwaukee, WI    50,000   

December 1, 2012

WHQG

   Milwaukee, WI    50,000   

December 1, 2012

WZBK

   Milwaukee, WI    6,000   

December 1, 2012

WJMR

   Milwaukee, WI    6,000   

December 1, 2012

WNOR

   Norfolk, VA    50,000   

October 1, 2011(6)

WAFX

   Norfolk, VA    100,000   

October 1, 2011(6)

KSTZ

   Des Moines, IA    100,000   

February 1, 2013

KIOA

   Des Moines, IA    100,000   

February 1, 2013

KAZR

   Des Moines, IA    100,000   

February 1, 2013

KLTI

   Des Moines, IA    100,000   

February 1, 2013

WMGX

   Portland, ME    50,000   

April 1, 2014

WYNZ

   Portland, ME    25,000   

April 1, 2014

(footnotes follow tables)

 

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Station

  

Market (1)

  

Power
(Watts) (2)

 

Expiration Date of
FCC Authorization

WPOR

   Portland, ME    50,000  

April 1, 2014

WCLZ

   Portland, ME    50,000  

April 1, 2014

WLZX

   Springfield, MA    6,000  

April 1, 2014

WAQY

   Springfield, MA    50,000  

April 1, 2006(6)

WZID

   Manchester, NH    50,000  

April 1, 2014

WMLL

   Manchester, NH    6,000  

April 1, 2014

WYMG

   Springfield, IL    50,000  

December 1, 2012

WQQL

   Springfield, IL    50,000  

December 1, 2012

WDBR

   Springfield, IL    50,000  

December 1, 2012

WABZ

   Springfield, IL    25,000  

December 1, 2012

WLRW

   Champaign, IL    50,000  

December 1, 2012

WIXY

   Champaign, IL    25,000  

December 1, 2012

WCFF

   Champaign, IL    25,000  

December 1, 2012

WYXY

   Champaign, IL    50,000  

December 1, 2012

WNAX

   Yankton, SD    100,000  

April 1, 2013

KISM

   Bellingham, WA    100,000  

February 1, 2014

KAFE

   Bellingham, WA    100,000  

February 1, 2014

KICD

   Spencer, IA    100,000  

February 1, 2013

KLLT

   Spencer, IA    25,000  

February 1, 2013

WCVQ

   Clarksville, TN/Hopkinsville, KY    100,000  

August 1, 2012

WZZP

   Clarksville, TN/Hopkinsville, KY    6,000  

August 1, 2012

WVVR

   Clarksville, TN/Hopkinsville, KY    100,000  

August 1, 2012

WEGI

   Clarksville, TN/Hopkinsville, KY    6,000  

August 1, 2012

KMIT

   Mitchell, SD    100,000  

April 1, 2013

KUQL

   Mitchell, SD    100,000  

April 1, 2013

WHAI

   Greenfield, MA    3,000  

April 1, 2014

WKNE

   Keene, NH    50,000  

April 1, 2014

WRSI

   Northampton, MA    3,000  

April 1, 2014

WRSY

   Brattleboro, VT    3,000  

April 1, 2014

WPVQ

   Greenfield, MA    3,000  

April 1, 2014

WKVT

   Brattleboro, VT    6,000  

April 1, 2014

WSNI

   Keene, NH    6,000  

April 1, 2014

WINQ

   Keene, NH    6,000  

April 1, 2014

WOXL

   Asheville, NC    25,000  

December 1, 2019

WTMT

   Asheville, NC    50,000  

December 1, 2011(6)

KEGI

   Jonesboro, AR    50,000  

June 1, 2012(6)

KDXY

   Jonesboro, AR    25,000  

June 1, 2012(6)

KJBX

   Jonesboro, AR    6,000  

June 1, 2012(6)

WWWV

   Charlottesville, VA    50,000  

October 1, 2019

WQMZ

   Charlottesville, VA    6,000  

October 1, 2019

WCNR

   Charlottesville, VA    6,000  

October 1, 2019

WYXL

   Ithaca, NY    50,000  

June 1, 2014

WQNY

   Ithaca, NY    50,000  

June 1, 2014

WIII

   Ithaca, NY    50,000  

June 1, 2014

(footnotes follow tables)

 

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Station

  

Market (1)

  

Power
(Watts) (2)

  

Expiration Date of
FCC Authorization

AM:

        

WJYI

   Milwaukee, WI    1,000   

December 1, 2012

WJOI

   Norfolk, VA    1,000   

October 1, 2011(6)

KRNT

   Des Moines, IA    5,000   

February 1, 2013

KPSZ

   Des Moines, IA    10,000   

February 1, 2013

WGAN

   Portland, ME    5,000   

April 1, 2014

WZAN

   Portland, ME    5,000   

April 1, 2014

WBAE

   Portland, ME    1,000   

April 1, 2014

WVAE

   Portland, ME    1,000   

April 1, 2014

WHNP

   Springfield, MA    2,500(5)   

April 1, 2014

WHMP

   Northampton, MA    1,000   

April 1, 2014

WFEA

   Manchester, NH    5,000   

April 1, 2014

WTAX

   Springfield, IL    1,000   

December 1, 2012

WNAX

   Yankton, SD    5,000   

April 1, 2013

KGMI

   Bellingham, WA    5,000   

February 1, 2014

KPUG

   Bellingham, WA    10,000   

February 1, 2014

KBAI

   Bellingham, WA    1,000(5)   

February 1, 2014

KICD

   Spencer, IA    1,000   

February 1, 2013

WEGI

   Clarksville, TN/Hopkinsville, KY    1,000(5)   

August 1, 2012

WKFN

   Clarksville, TN    1,000(5)   

August 1, 2012

WHMQ

   Greenfield, MA    1,000   

April 1, 2014

WKBK

   Keene, NH    5,000   

April 1, 2014

WZBK

   Keene, NH    1,000(5)   

April 1, 2014

WKVT

   Brattleboro, VT    1,000   

April 1, 2014

WISE

   Asheville, NC    5,000(5)   

December 1, 2019

WYSE

   Asheville, NC    5,000(5)   

December 1, 2019

WBCO

   Bucyrus, OH    5,000(5)   

October 1, 2012

WINA

   Charlottesville, VA    5,000   

October 1, 2011(6)

WVAX

   Charlottesville, VA    1,000   

October 1, 2019

WHCU

   Ithaca, NY    5,000(5)   

June 1, 2014

WNYY

   Ithaca, NY    5,000(5)   

June 1, 2014

TV/Channel:

        

KOAM (DTV Ch 7)

   Joplin, MO/Pittsburg, KS    DTV 14,800   

June 1, 2006(6)

KAVU (DTV Ch 15)

   Victoria, TX    DTV 900,000   

August 1, 2006(6)

KVCT(3) (DTV Ch 11)

   Victoria, TX    DTV 11,350   

August 1, 2006(6)

KUNU-LP(4) (Operating on Analog Ch 41/Has Permit for Digital Ch 28)

   Victoria, TX    Analog 1,000 (vis)   

August 1, 2006(6)

KVTX-LP(4) (Operating on Analog Ch 45/Has Permit for Digital Ch 45)

   Victoria, TX    Analog 1,000 (vis)   

August 1, 2006(6)

KXTS-LD(4) (Digital 19)

   Victoria, TX    Analog 1,000 (vis)   

August 1, 2006(6)

KMOL-LD(4) (Digital Ch 17)

   Victoria, TX    Analog 50,000 (vis)   

August 1, 2006(6)

WXVT (DTV Ch 15)

   Greenville, MS    DTV 330,000   

June 1, 2005(6)

 

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

 

(2)

Some stations are licensed to operate with a combination of effective radiated power (“ERP”) and antenna height, which may be different from, but provide equivalent coverage to, the power shown. The ERP of

 

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  television stations is expressed in terms of visual (“vis”) components. WYSE, WISE, KPSZ, KPUG, KGMI, KBAI, WZBK, WBCO, WEGI, WKFN, WNYY and WHCU operate with lower power at night than the power shown.

 

(3) We program this station pursuant to a TBA with the licensee of KVCT, Surtsey Media, LLC (“Surtsey”). See Note 9 of the Notes to Consolidated Financial Statements included with this Form 10-K for additional information on our relationship with Surtsey.

 

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

 

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

 

(6) An application for renewal of license is pending before the FCC.

Ownership Matters.    The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee without the prior approval of the FCC. In determining whether to grant or renew a broadcast license, the FCC considers a number of factors pertaining to the licensee, including compliance with the Communications Act’s limitations on alien ownership; compliance with various rules limiting common ownership of broadcast, cable and newspaper properties; and the “character” and other qualifications of the licensee and those persons holding “attributable or cognizable” interests therein.

Under the Communications Act, broadcast licenses may not be granted to any corporation having more than one-fifth of its issued and outstanding capital stock owned or voted by aliens (including non-U.S. corporations), foreign governments or their representatives (collectively, “Aliens”). The Communications Act also prohibits a corporation, without FCC waiver, from holding a broadcast license if that corporation is controlled, directly or indirectly, by another corporation in which more than 25% of the issued and outstanding capital stock is owned or voted by Aliens. The FCC has issued interpretations of existing law under which these restrictions in modified form apply to other forms of business organizations, including partnerships. Although we serve as a holding company for most of our various radio station subsidiaries (where we could not have more than 25% of our stock owned or voted by Aliens), we directly own two radio stations and an FM translator so that we cannot have more than 20% of our stock owned by Aliens.

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

The FCC established criteria for obtaining a waiver of the rules to permit the ownership of two television stations in the same DMA that would not otherwise comply with the FCC’s rules. Under certain circumstances, a television station may merge with a “failed” or “failing” station or an “unbuilt” station if strict criteria are

 

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satisfied. Additionally, the FCC now permits a party to own up to two television stations (if permitted under the modified TV duopoly rule) and up to six radio stations (if permitted under the local radio ownership rules), or one television station and up to seven radio stations, in any market where at least 20 independently owned media voices remain in the market after the combination is effected (“Qualifying Market”). The FCC will permit the common ownership of up to two television stations and four radio stations in any market where at least 10 independently owned media voices remain after the combination is affected. The FCC will permit the common ownership of up to two television stations (if permitted under the FCC’s local television multiple ownership rule) and one radio station notwithstanding the number of voices in the market. The FCC also adopted rules that make television time brokerage agreements or TBA’s count as if the brokered station were owned by the brokering station in making a determination of compliance with the FCC’s multiple ownership rules. TBA’s entered into before November 5, 1996, are grandfathered until the FCC announces a required termination date. As a result of the FCC’s rules, we would not be permitted to acquire a television broadcast station (other than low power television) in a non-Qualifying Market in which we now own any television properties. The FCC revised its rules to permit a television station to affiliate with two or more major networks of television broadcast stations under certain conditions. (Major existing networks are still subject to the FCC’s dual network ban).

We are permitted to own an unlimited number of radio stations on a nationwide basis (subject to the local ownership restrictions described below). We are permitted to own an unlimited number of television stations on a nationwide basis so long as the ownership of the stations would not result in an aggregate national audience reach (i.e., the total number of television households in the Arbitron Area of Dominant Influence (“ADI”) markets in which the relevant stations are located divided by the total national television households as measured by ADI data at the time of a grant, transfer or assignment of a license) of 35%. As the result of a ruling by the U.S. Court of Appeals, D.C. Circuit on July 2, 2003, the FCC released a “Report and Order and Notice of Proposed Rulemaking” in MB Docket No. 02-277 that significantly modified the FCC’s multiple ownership rules. The multiple ownership rules now permit opportunities for newspaper-broadcast combinations, as follows:

 

   

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

 

   

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

 

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

 

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

 

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

 

   

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

Under the rules, the number of radio stations one party may own in a local Arbitron-rated radio market is determined by the number of commercial and noncommercial radio stations in the market as determined by Arbitron and BIA Financial, Inc. Radio markets that are not Arbitron rated are determined by analysis of the broadcast coverage contours of the radio stations involved. Numerous parties, including the Company, have sought reconsideration of the new rules. In Prometheus Radio v. FCC, Case No. 03-3388 (U.S. Court of Appeals D.C. Circuit), on June 24, 2004, the court remanded the case to the FCC for the FCC to justify or modify its approach to setting numerical limits and for the FCC to reconsider or better explain its decision to repeal the failed station solicitation rule, and lifted a previously-imposed stay on the effect of the revised radio multiple ownership rules. By Further Notice of Proposed Rule Making (2006 Quadrennial Regulatory Review), released July 24, 2006, the Commission solicited comments. The rules adopted in the 2006 Quadrennial Regulatory Review were vacated in part by the Third Circuit Court of Appeals in Prometheus Radio Project v. FCC (652 F. 3d 432 (2011)) because the FCC’s procedures in the rule making proceeding did not satisfy the Administrative

 

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Procedure Act. The newspaper-broadcast cross-ownership rule was vacated, but the media ownership rules were affirmed. The FCC had created special benefits for so-called “eligible entities.” Because there was no data attempting to show a connection between the FCC’s eligible entity definition and the goal of increasing ownership of minorities and women under §309(j) of the Telecommunication Act of 1996, the “eligible entity” definition adopted was vacated as arbitrary and capricious. In its 2010 Quadrennial Regulatory Review, released December 22, 2011, the Commission proposed to eliminate the radio/television cross-ownership rule in favor of reliance on the local radio rule and local television rule. Other rules were left largely unchanged:

 

   

Local Television Ownership Rule. The FCC tentatively concluded that it should retain the current local television ownership rule with minor modifications (eliminate the Grade B contour overlap provision of the current rule). The FCC tentatively concluded that it should retain the prohibition against mergers among the top-four-rated stations, the eight-voices test, and the existing numerical limits. In addition, the FCC sought comment on whether to adopt a waiver standard applicable to small markets, as well as appropriate criteria for any such standard. The FCC sought comment on whether multicasting should be a factor in determining the television ownership limits.

 

   

Local Radio Ownership Rule. The FCC proposed to retain the current local radio ownership rule; however, the FCC is seeking comment on modifications to the rule and whether and how the rule should account for other audio platforms. The FCC proposed to also retain the AM/FM subcaps (limitations on how many AM and FM stations may be owned in a market), and sought comment on the impact of the introduction of digital radio. The FCC also sought comment on whether to adopt a waiver standard and on specific criteria to adopt.

 

   

Newspaper/Broadcast Cross-Ownership Rule. The FCC tentatively concluded that some newspaper/broadcast cross-ownership restrictions continue to be necessary to protect and promote viewpoint diversity, and proposed to use DMA definitions to determine that relevant market area for television stations. The FCC proposed to adopt a rule that includes elements of the 2006 rule, including the top 20 DMA demarcation point, the top-four television station restrictions, and the eight remaining voices test.

 

   

Dual Network Rule. The FCC tentatively concluded that the dual network rule remains necessary in the public interest to promote competition and localism and should be retained without modification.

The FCC is also seeking comment on whether television local news service (“LNS”) agreements and shared service agreements (“SSA”) are substantively equivalent to agreements that are already subject to the FCC’s attribution rules, and are therefore attributable now or should be in the future.

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

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

 

Number of Stations

In Radio Market

  

Number of Stations We Can Own

14 or Fewer

   Total of 5 stations, not more than 3 in the same service (AM or FM), except the Company cannot own more than 50% of the stations in the market.

15-29

   Total of 6 stations, not more than 4 in the same service (AM or FM).

30-44

   Total of 7 stations, not more than 4 in the same service (AM or FM).

45 or More

   Total of 8 stations, not more than 5 in the same service (AM or FM).

 

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New rules to be promulgated under the Communications Act may permit us to own, operate, control or have a cognizable interest in additional radio broadcast stations if the FCC determines that such ownership, operation, control or cognizable interest will result in an increase in the number of radio stations in operation. No firm date has been established for initiation of this rule-making proceeding.

The FCC generally applies its ownership limits to “attributable” interests held by an individual, corporation, partnership or other association. In the case of corporations holding broadcast licenses, the interests of officers, directors and those who, directly or indirectly, have the right to vote 5% or more of the corporation’s stock (or 20% or more of such stock in the case of certain passive investors that are holding stock for investment purposes only) are generally attributable, as are positions of an officer or director of a corporate parent of a broadcast licensee. Currently, one of our directors has an attributable interest or interests in companies applying for or licensed to operate broadcast stations other than us.

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

On January 21, 2010, the FCC launched an initiative on the future of media and the information needs of communities in the digital age, which will examine the changes underway in the media marketplace, analyze the full range of future technologies and services that will provide communities with news and information in the digital age, and, as appropriate, make policy recommendations to the FCC, other government entities, and other parties. Initial topics under consideration include: the state of TV, radio, newspaper, and Internet news and information services; the effectiveness and nature of public interest obligations in a digital era; the role of public media and private sector foundations; and many others. The Company cannot predict what changes, if any, will be made as a result of the FCC’s initiative.

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

Programming and Operation.    The Communications Act requires broadcasters to serve the “public interest.” Licensees are required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. Complaints from listeners concerning a station’s programming often will be considered by the FCC when it evaluates renewal applications of a licensee, although such complaints may be filed at any time and generally may be considered by the FCC at any time. Stations also must follow various rules promulgated under the Communications Act that regulate, among other things, political advertising, sponsorship identification, the advertisement of contests and lotteries, obscene and indecent broadcasts, and technical operations, including limits on radio frequency radiation. The FCC now requires the owners of antenna supporting structures (towers) to register them with the FCC. As an owner of such towers, we are subject to the registration requirements. The Children’s Television Act of 1990 and

 

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the FCC’s rules promulgated thereunder require television broadcasters to limit the amount of commercial matter which may be aired in children’s programming to 10.5 minutes per hour on weekends and 12 minutes per hour on weekdays. The Children’s Television Act and the FCC’s rules also require each television licensee to serve, over the term of its license, the educational and informational needs of children through the licensee’s programming (and to present at least three hours per week of “core” educational programming specifically designed to serve such needs). Licensees are required to publicize the availability of this programming and to file quarterly a report with the FCC on these programs and related matters. On October 27, 2011, the FCC released an Order on Reconsideration and Further Notice of Proposed Rule Making, Standardized and Enhanced Disclosure Requirements for Television Broadcast Licensee Public Interest Obligations, which vacated a 2008 order that, among other things, would have required television stations to file on a quarterly basis, a new “Standardized Television Disclosure” form setting forth in detail. In the 2011 notice, the FCC stated that, in a separate proceeding, it would determine whether to adopt such a standardized form and what to include in it, as a replacement for the issues/programs list that television stations currently place in their files. The FCC also proposed to largely replace the requirement that television stations maintain a paper public file at their main studios with a requirement to submit documents for inclusion in an online public file to be hosted by the FCC. The FCC also proposed to require that sponsorship identification, now disclosed only on-air, also be disclosed in the online public file, and proposed to require disclosure online of shared services agreements. The FCC proposed to limit these changes to television licensees and stated it would consider at a later date whether to apply similar reforms to radio licensees. Television stations are required to provide closed captioning for certain video programming.

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

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

 

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

The FCC’s multiple ownership rules count stations brokered under a joint sales agreement (“JSA”) toward the brokering station’s permissible ownership totals, as long as (1) the brokering entity owns or has an attributable interest in one or more stations in the local market, and (2) the joint advertising sales amount to more than 15% of the brokered station’s advertising time per week. In a “Notice of Proposed Rulemaking” in MB Docket No. 04-256, released August 2, 2004, the FCC sought comment from the public on whether television JSAs should also be attributable to the brokering station. The issue of whether to make attributable Share Services Agreements and Local News Service Agreements is among the subjects being considered in the 2010 Quadrennial Regulatory Review. We cannot predict whether the FCC will make such agreements attributable. The FCC rules permit, under certain circumstances, the ownership of two or more television stations in a Qualifying Market and require the termination of certain non-complying existing television TBA’s. We currently have a television TBA in the Victoria, Texas market with Surtsey. Even though the Victoria market is not a Qualifying Market such that the duopoly would otherwise be permissible, as discussed above, we believe that the TBA is “grandfathered” under the FCC’s rules and need not be terminated earlier than the date to be established in the ownership review proceeding. See “Ownership Matters” above.

On March 7, 2003 we entered into an agreement of understanding with Surtsey, whereby we have guaranteed up to $1,250,000 of the debt incurred by Surtsey in closing on the acquisition of a construction permit for KFJX-TV, a television station in Pittsburg, Kansas, serving Joplin, Missouri. In consideration for our guarantee, Surtsey has entered into various agreements with us relating to the station, including a Shared Services Agreement, Technical Services Agreement, Agreement for Use of Ancillary Digital Spectrum and Agreement for the Sale of Commercial Time. On January 31, 2012, the Company and Surtsey amended these agreements and entered into an agreement which included an assignable option with Surtsey for KFJX-TV. Under the FCC’s ownership rules, we are prohibited from owning or having an attributable or cognizable interest in KFJX-TV. On January 31, 2012, we entered into an agreement which included an extension of the grandfathered TBA for KVCT-TV and an assignable option with Surtsey for KVCT-TV. As noted above, if the FCC decides to attribute television SSA’s and JSA’s, we would be required to terminate the Agreement for the Sale of Commercial Time.

Other FCC Requirements

The “V-Chip.”    The FCC adopted methodology that will be used to send program ratings information to consumer TV receivers (implementation of “V-Chip” legislation contained in the Communications Act). The FCC also adopted the TV Parental Guidelines, developed by the Industry Ratings Implementation Group, which apply to all broadcast television programming except for news and sports. As a part of the legislation, television station licensees are required to attach as an exhibit to their applications for license renewal a summary of written comments and suggestions received from the public and maintained by the licensee that comment on the licensee’s programming characterized as violent.

Digital Television.    The FCC’s rules provide for the conversion by all U.S. television broadcasters to digital television (“DTV”), including the return of NTSC channels to the government. The FCC has attempted to provide DTV coverage areas that are comparable to the former NTSC (analog) service areas. DTV licensees may use their DTV channels for a multiplicity of services such as high-definition television broadcasts, multiple standard definition television broadcasts, data, audio, and other services so long as the licensee provides at least

 

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one free video channel equal in quality to the previous NTSC technical standard. Our full-service television stations currently provide DTV service and have terminated NTSC operations. The Company has constructed full, authorized DTV facilities serving at least 80% of their analog population coverage. We hold licenses that authorize KOAM-TV to operate on Channel 7 for DTV and WXVT to operate on Channel 15 for DTV and KAVU-TV to operate on Channel 15 for DTV. The FCC’s rules require broadcasters to include Program and System Information Protocol (“PSIP”) information in their digital broadcast signals.

Brokered Station KVCT is providing DTV service on Channel 11. KFJX-TV, with which KOAM-TV shares certain services, is providing DTV services on Channel 13. KOAM-TV elected to use Channel 7 for DTV operations at the end of the digital transition and to make available to Surtsey the use of Channel 13 for KFJX-TV.

In October 2003, the FCC adopted rules requiring “plug and play” cable compatibility that will allow consumers to plug their cable directly into their digital TV set without the need for a set-top box. The FCC has adopted rules whereby television licensees are charged a fee of 5% of gross revenue derived from the offering of ancillary or supplementary services on DTV spectrum for which a subscription fee is charged. Licensees and “permittees” of DTV stations must file with the FCC a report by December 1 of each year describing such services. None of the Company’s stations to date are offering ancillary or supplementary services on their DTV channels.

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

“Must-Carry” Rules.    The Cable Television Consumer Protection and Competition Act of 1992, among other matters, requires cable television system operators to carry the signals of local commercial and non-commercial television stations and certain low power television stations. Cable television operators and other multi-channel video programming distributors may not carry broadcast signals without, in certain circumstances, obtaining the transmitting station’s consent. A local television broadcaster must make a choice every three years whether to proceed under the “must-carry” rules or waive the right to mandatory-uncompensated coverage and negotiate a grant of retransmission consent in exchange for consideration from the cable system operator. Such must-carry rights will extend to the new DTV signals broadcast by our stations.

Low Power and Class A Television Stations.    Currently, the service areas of low power television (“LPTV”) stations are not protected. LPTV stations can be required to terminate their operations if they cause interference to full power stations. LPTV stations meeting certain criteria were permitted to certify to the FCC their eligibility to be reclassified as “Class A Television Stations” whose signal contours would be protected against interference from other stations. Stations deemed “Class A Stations” by the FCC would thus be protected from interference. We own four operating LPTV stations, KUNU-LP, KVTX-LP, KXTS-LD, and KMOL-LD, Victoria, Texas. None of the stations qualifies under the FCC’s established criteria for Class A Status. In January 2006, the FCC announced a filing window from May 1 through May 12, 2006, during which analog LPTV stations may apply for a digital companion channel or implement DTV operation on their existing analog channels. The Company’s LPTV stations did not apply for a companion channel, and instead filed applications to “flash-cut” to implement DTV operation on their existing analog channels, or filed “displacement” applications to use different digital channels.

Low Power FM Radio.    The FCC created a “low power radio service” (“LPFM”) in which the FCC authorizes the construction and operation of two classes of noncommercial educational FM stations, LP100 (up to 100 watts effective radiated power (“ERP”) with antenna height above average terrain (“HAAT”) at up to

 

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30 meters (100 feet) which is calculated to produce a service area radius of approximately 3.5 miles, and LP10 (up to 10 watts ERP and up to 30 meters HAAT) with a service area radius of approximately 1 to 2 miles. The FCC will not permit any broadcaster or other media entity subject to the FCC’s ownership rules to control or hold an attributable interest in an LPFM station or enter into related operating agreements with an LPFM licensee. Thus, absent a waiver, we could not own or program an LPFM station. LPFM stations are allocated throughout the FM broadcast band, i.e., 88 to 108 MHz, although they must operate with a noncommercial format. The FCC has established allocation rules that require FM stations to be separated by specified distances to other stations on the same frequency, and stations on frequencies on the first, second and third channels adjacent to the center frequency. The FCC has granted construction permits and licenses for LPFM stations. On January 4, 2011, the President signed into law the Local Community Radio Act of 2010 which requires the Commission to modify the rules authorizing the operation of LPFM, as proposed in MM Docket No. 99-25. The law requires the Commission to: (1) Prescribe protection for co-channels and first- and second-adjacent channels; (2) Prohibit any applicant from obtaining a low-power FM license if the applicant has engaged in any manner in the unlicensed operation of any station in violation of the Communications Act; (3) Eliminate provisions prohibiting the FCC from extending the eligibility for application for low-power FM stations beyond the organizations and entities as proposed in the docket; and (4) Eliminate third-adjacent minimum distance separation requirements between: (i) LPFM stations and (ii) full-service FM stations, FM translator stations, and FM booster stations. The new law prohibits the FCC from reducing the minimum co-channel and first- and second-adjacent channel distance separation requirements in effect on the date of enactment of the law between LPFM stations and full-service FM stations. The new law authorizes a waiver of the second-adjacent channel distance separation requirement to any LPFM station that establishes that its proposed operations will not interfere with any authorized radio service, provided that, upon notification by the FCC that it is causing certain interference, such LPFM station must: (i) suspend operation; and (ii) resume operation only after interference has been eliminated or it demonstrates that such interference was not due to the low-power FM station’s emissions. The new law requires the FCC to comply with its existing minimum distance separation requirements for full-service FM stations, FM translator stations, and FM booster stations that broadcast radio reading services via an analog subcarrier frequency to avoid potential interference by LPFM stations; and when licensing new FM translator stations, FM booster stations, and low-power FM stations, to ensure that: (i) licenses are available to FM translator stations, FM booster stations, and low-power FM stations; (ii) such decisions are made based on the needs of the local community; and (iii) FM translator stations, FM booster stations, and LPFM stations remain equal in status and secondary to existing and modified full-service FM stations. The law requires the FCC to modify its rules to address the potential for predicted interference to FM translator input signals on third-adjacent channels set forth in a specified technical report; and modifies the interference complaint process in specified ways. On January 5, 2012, the FCC released a Report to Congress on the impact that low-power FM stations will have on full-service commercial FM stations. The FCC “found no statistically reliable evidence that LPFM stations have a substantial or consistent economic impact on full-service commercial FM stations,” and that “LPFM stations generally do not have, and in the future are unlikely to have, a demonstrable economic impact on full-service commercial FM radio stations.” Before the new law can be implemented, the FCC must conduct a rulemaking proceeding, which has not yet been commenced. We cannot predict what, if any, impact the new LPFM stations will have on the Company’s full-service stations and FM translators.

Digital Audio Radio Satellite Service and Internet Radio.    In adopting its rules for the Digital Audio Radio Satellite Service (“DARS”) in the 2310-2360 MHz frequency band, the FCC stated, “although healthy satellite DARS systems are likely to have some adverse impact on terrestrial radio audience size, revenues and profits, the record does not demonstrate that licensing satellite DARS would have such a strong adverse impact that it threatens the provision of local service.” The FCC granted two nationwide licenses, one to XM Satellite Radio, which began broadcasting in May 2001, and a second to Sirius Satellite Radio, which began broadcasting in February 2002. The satellite radio systems provide multiple channels of audio programming in exchange for the payment of a subscription fee. The Commission approved the application of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. to transfer control of the licenses and authorizations held by the two companies to one company, which is now known as Sirius XM Radio, Inc. We cannot predict the extent to which DARS will have an adverse impact on our business. Various companies have introduced devices that permit the

 

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reception of audio programming streamed over the Internet on home computers, on portable receivers, such as cell phones, and in automobiles. A number of digital music providers have developed and are offering their product through the Internet. Terrestrial radio operators are also making their product available through the Internet. We cannot predict whether, or the extent to which, such reception devices will have an adverse impact on our business.

Satellite Carriage of Local TV Stations.    The Satellite Home Viewer Improvement Act (“SHVIA”), a copyright law, prevents direct-to-home satellite television carriers from retransmitting broadcast network television signals to consumers unless those consumers (1) are “unserved” by the over-the-air signals of their local network affiliate stations, and (2) have not received cable service in the preceding 90 days. According to the SHVIA, “unserved” means that a consumer cannot receive, using a conventional outdoor rooftop antenna, a television signal that is strong enough to provide an adequate television picture. In December 2001 the U.S. Court of Appeals for the District of Columbia upheld the FCC’s rules for satellite carriage of local television stations which require satellite carriers to carry upon request all local TV broadcast stations in local markets in which the satellite carriers carry at least one TV broadcast station, also known as the “carry one, carry all” rule. In December 2004, Congress passed and the President signed the Satellite Home Viewer Extension and Reauthorization Act of 2004 (“SHVERA”), which again amends the copyright laws and the Communications Act. The SHVIA governs the manner in which satellite carriers offer local broadcast programming to subscribers, but the SHVIA copyright license for satellite carriers was more limited than the statutory copyright license for cable operators. Specifically, for satellite purposes, “local,” though out-of-market (i.e., “significantly viewed”) signals were treated the same as truly “distant” (e.g., hundreds of miles away) signals for purposes of the SHVIA’s statutory copyright licenses. The SHVERA is intended to address this inconsistency by giving satellite carriers the option to offer Commission-determined “significantly viewed” signals to subscribers. In November, 2005, the FCC adopted a Report and Order to implement SHVERA to enable satellite carriers to offer FCC-determined “significantly viewed” signals of out-of-market broadcast stations to subscribers subject to certain constraints set forth in SHVERA. The Order includes an updated list of stations currently deemed significantly viewed. On November 23, 2010, the FCC released three orders that implemented the Satellite Television Extension and Localism Act of 2010 (“STELA”). The FCC modified its Significantly Viewed (“SV”) rules to implement Section 203 of the STELA which amends Section 340 of the Communications Act to give satellite carriers the authority to offer out-of-market but SV broadcast television stations as part of their local service to subscribers. Section 203 of the STELA changes the restrictions on subscriber eligibility to receive SV network stations from satellite carriers. To implement the STELA, the FCC revised its satellite subscriber eligibility rules. The new rules could result in satellite carriers providing additional signals in DMAs where the Company operates television stations, but we cannot predict at this time, what, if any, impact the rules might have on the Company.

In-Band On-Channel “Hybrid Digital” Radio.    On May 31, 2007, the FCC released its Second Report and Order, First Order on Reconsideration and Second Further Notice of Proposed Rulemaking (Digital Audio Broadcasting Systems) that adopted rules permitting radio stations to broadcast using in-band, on-channel (IBOC) as the technology that allows AM and FM stations to operate using the IBOC systems developed by iBiquity Digital Corporation. This technology has become commonly known as “hybrid digital” or HD radio. Stations broadcast the same main channel program material in both analog and digital modes. IBOC technology permits “hybrid” operations, the simultaneous transmission of analog and digital signals with a single AM and FM channel. IBOC technology can provide near CD-quality sound on FM channels and FM quality on AM channels. Hybrid IBOC also permits the transmission of up to three additional program streams over the radio stations. Hybrid IBOC operations will have minimal impact on the present broadcast service. At the present time, we are broadcasting in HD radio on 45 stations and we continue to convert stations to HD radio on an ongoing basis. On January 29, 2010, the FCC adopted an Order that permits FM radio stations to voluntarily increase digital power levels up to ten percent of analog power levels and establishes interference mitigation and remediation procedures to promptly resolve complaints of interference to analog stations. The Commission hopes the changes will boost digital signal coverage while safeguarding analog reception against interference from higher power digital transmissions.

 

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Use of FM Translators by AM Stations and Digital Program Streams.    FM translator stations are relatively low power stations that rebroadcast the programs of full-power FM stations on a secondary basis, meaning they must terminate or modify their operation if they cause interference to a full-power station. The FCC permits AM stations to be rebroadcast on FM translator stations in order to improve reception of programs broadcast by AM stations. The Company intends to continue to use some of its existing FM translators in connection with some of its AM stations. The Company is using some of its existing FM translators to rebroadcast HD radio program streams generated by some of its FM stations.

Hart-Scott-Rodino Antitrust Improvements Act of 1976.    The Federal Trade Commission and the Department of Justice, the federal agencies responsible for enforcing the federal antitrust laws, may investigate certain acquisitions. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, an acquisition meeting certain size thresholds requires the parties to file Notification and Report Forms with the Federal Trade Commission and the Department of Justice and to observe specified waiting period requirements before consummating the acquisition. Any decision by the Federal Trade Commission or the Department of Justice to challenge a proposed acquisition could affect our ability to consummate the acquisition or to consummate it on the proposed terms. The FCC has eliminated its previous scrutiny of some proposed acquisitions and mergers on antitrust grounds that were manifest in a policy of placing a “flag” soliciting public comment on concentration of control issues based on advertising revenue shares or other criteria, on the public notice announcing the acceptance of assignment and transfer applications. Notwithstanding this action, we cannot predict whether the FCC will adopt rules that would restrict our ability to acquire additional stations.

Recent Supreme Court Case on Political Broadcasting.    On January 21, 2010, in Citizens United v. FEC, the U.S. Supreme Court struck down portions of the Bipartisan Campaign Reform Act that prohibits corporations and unions from using their general treasury funds to make independent expenditures for speech that is an “electioneering communication” or for speech that expressly advocates the election or defeat of a candidate. The Company is unable to reliably predict what effect this may have on its operations.

Recent Changes to Application and Assignment Procedures.    In January 2010, the FCC adopted a First Report and Order that gives tribes a priority to obtain broadcast radio licenses in tribal communities. The Order provides an opportunity for tribes to establish new service specifically designed to offer programming that meets the needs of tribal citizens. In addition, the First Report and Order modified the Commission’s radio application and assignment procedures, assisting qualified applicants to more rapidly introduce new radio service to the public. These modifications (1) Prohibit an AM applicant that obtains a construction permit through a dispositive Section 307(b) preference from downgrading the service level that led to the dispositive preference; (2) Requires technical proposals for new or major change AM facilities filed with Form 175 applications to meet certain minimum technical standards to be eligible for further auction processing; and (3) Gives FCC operating bureaus authority to cap filing window applications. On December 29, 2011, the FCC released its Third Report and Order which limits eligibility for authorizations associated with allotments added to the FM Table of Allotments using the recently established Tribal Priority to the Tribes whom the Tribal Priority was intended to benefit. In a Public Notice released December 2, 2010 (GN Docket No. 10-244) the FCC sought comment on how it could design, adopt, and implement an additional new preference program in its competitive bidding process for persons or entities who have overcome substantial disadvantage and would be eligible for a bidding credit. In the Quadrennial Regulatory Review NPRM, the Commission also sought comment on a proposal for applicants to be accorded licensing preferences if they could demonstrate that they have overcome “significant social and economic disadvantages.” The Company cannot predict whether such preferences will be adopted, or whether they would have any impact on the Company.

Proposed Changes.    The FCC has under consideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect us and the operation and ownership of our broadcast properties. Application processing rules adopted by the FCC might require us to apply for facilities modifications to our standard broadcast stations in future “window” periods for filing applications or result in the stations being “locked in” with their present facilities. The Balanced Budget

 

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Act of 1997 authorizes the FCC to use auctions for the allocation of radio broadcast spectrum frequencies for commercial use. The implementation of this law could require us to bid for the use of certain frequencies.

The Company pays for the use of music on its stations by obtaining licenses from organizations called performing rights societies, e.g. Broadcast Music, Inc. (“BMI”), which, in turn pay composers, authors and publishers for their works. In 2009, a bill, H.R. 848, the Performance Rights Act, was introduced in Congress, but did not pass in the 111th Congress. If passed, this bill would have required the Company to pay additional fees to an organization called MusicFirst which would distribute the money to other entities. Efforts continue by MusicFirst to persuade Congress to enact a law that would require such payments. We cannot predict whether such a law might be enacted. Should such a law be enacted, it would impose an additional financial burden on the Company, but the extent of the burden would depend on how the fee payment requirement was structured.

On March 25, 2010, the FCC issued a Public Notice implementing the Common Alerting Protocol (“CAP”), which is an open, interoperable, data interchange format for collecting and distributing all-hazard safety notifications and emergency warnings to multiple information networks, public safety alerting systems, and personal communications devices. CAP will allow the Federal Emergency Management Agency (“FEMA”), the National Weather Service (“NWS”), a State Governor, or any other authorized initiator of a public alert and warning to automatically format and geo-target a particular alert simultaneously to the public over multiple media platforms, such as television, radio, cable, cell phones and electronic highway signs. CAP will also allow an alert initiator to send alerts specifically formatted for people with disabilities and for non-English speakers. The deadline for compliance with CAP has been extended to June 12, 2012. Compliance with CAP will require the Company to make a significant investment in new technical equipment.

On November 30, 2010, the FCC adopted a Notice of Proposed Rulemaking in ET Docket No. 10-235 that proposes that wireless broadband providers have equal access to television broadcast frequencies that could become available in spectrum auctions. The Notice seeks comment on establishing new allocations for both fixed and mobile wireless services in the TV broadcast bands. The Notice also explores enabling TV stations to voluntarily combine their operations and distinct programming lineups on a single TV channel. The Notice requests comment on the proposed rules that would enable TV broadcasters to opt to share channels. The Notice also seeks comment on steps that would improve TV reception on the VHF channels (2-13), such as by increasing transmitting power and establishing minimum performance standards for indoor antennas. The Company cannot predict whether the rules will be adopted, or, if adopted, in what form. At this time, the Company has made no decision as to whether it will voluntarily participate in combining operations or spectrum auctions.

The 1996 Telecommunications Act lifted previous restrictions on a local telephone company providing video programming directly to customers within the telephone company’s service areas. The law now permits a telephone company to distribute video services either under the rules applicable to cable television systems or as operators of so-called “wireless cable” systems as common carriers or under FCC rules regulating “open video systems” subject to common carrier regulations. We cannot predict what effect these services may have on us. Likewise, we cannot predict what other changes might be considered in the future, nor can we judge in advance what impact, if any, such changes might have on our business.

 

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Executive Officers

Our current executive officers are:

 

Name

   Age     

Position

Edward K. Christian

     67       President, Chief Executive Officer and Chairman; Director

Steven J. Goldstein

     55       Executive Vice President and Group Program Director

Warren S. Lada

     57       Senior Vice President, Operations

Samuel D. Bush

     54       Senior Vice President and Chief Financial Officer

Marcia K. Lobaito

     63       Senior Vice President, Corporate Secretary, and Director of Business Affairs

Catherine A. Bobinski

     52       Senior Vice President/Finance, Chief Accounting Officer, Corporate Controller and Treasurer

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

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

Mr. Goldstein has been Executive Vice President and Group Program Director since 1988. Mr. Goldstein has been employed by us since our inception in 1986.

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

Mr. Bush has been Senior Vice President since 2002 and Chief Financial Officer since September 1997. He was Treasurer from 1997 to 2012 and Vice President from 1997 to 2002. From 1988 to 1997 he held various positions with the Media Finance Group at AT&T Capital Corporation, including senior vice president.

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

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

Item 1A.    Risk Factors

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

Global Economic Conditions and Uncertainties May Continue to Affect our Business

The demand for advertising services is sensitive to changes in the level of economic activity. The global economic downturn that began in 2008 caused a decline in advertising and marketing by our customers. This reduction in advertising spending had an adverse effect on our revenue, profit margins and cash flows. Although we believe that economic conditions are improving, uncertainty continues to exist over the stability of the U.S. and global economies. There can be no assurance that any of the recent economic improvements will be broad based and sustainable, or that they will enhance conditions in markets relevant to us. Further, there can be no assurance that we will not experience further adverse effects that may be material to our cash flows, competitive position, financial condition, results of operations, or our ability to access capital.

 

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

We Have Substantial Indebtedness and Debt Service Requirements

At December 31, 2011 our long-term debt (including the current portion thereof and our guarantee of debt of Surtsey Media, LLC) was approximately $69,078,000. We have borrowed and expect to continue to borrow to finance acquisitions and for other corporate purposes. Because of our substantial indebtedness, a significant portion of our cash flow from operations is required for debt service. Our leverage could make us vulnerable to an increase in interest rates, a downturn in our operating performance, or a decline in general economic conditions. The 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. Any outstanding balance under the credit facility will be due on the maturity date of June 13, 2016. We believe that cash flows from operations will be sufficient to meet our debt service requirements for interest and scheduled payments of principal under the credit facility. However, if such cash flow is not sufficient, we may be required to sell additional equity securities, refinance our obligations or dispose of one or more of our properties in order to make such scheduled payments. We cannot be sure that we would be able to effect any such transactions on favorable terms, if at all.

Our Debt Covenants Restrict our Financial and Operational Flexibility

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

We Depend on Key Personnel

Our business is partially dependent upon the performance of certain key individuals, particularly Edward K. Christian, our President and CEO. Although we have entered into employment and non-competition agreements with Mr. Christian, which terminate on March 31, 2018, and certain other key personnel, including on-air personalities, we cannot be sure that such key personnel will remain with us. We do not maintain key man life insurance on Mr. Christian’s life. We can give no assurance that all or any of these employees will remain with us or will retain their audiences. Many of our key employees are at-will employees who are under no legal obligation to remain with us. Our competitors may choose to extend offers to any of these individuals on terms which we may be unwilling to meet. In addition, any or all of our key employees may decide to leave for a variety of personal or other reasons beyond our control. Furthermore, the popularity and audience loyalty of our key on-air personalities is highly sensitive to rapidly changing public tastes. A loss of such popularity or audience loyalty is beyond our control and could limit our ability to generate revenues.

 

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We Depend on Key Stations

Historically our top six markets when combined represented 44%, 44% and 45% of our net operating revenue for the years ended December 31, 2011, 2010 and 2009, respectively. Accordingly, we may have greater exposure to adverse events or conditions that affect the economy in any of these markets, which could have a material adverse effect on our revenue, results of operations and financial condition.

Disputes with Performance Rights Organizations May Adversely Affect our Business

Effective December 31, 2009, our radio music license agreements with American Society of Composers, Authors and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”) expired. In January 2010, The Radio Music Licensing Committee (“RMLC”), of which we are a participant, filed motions in the U.S. District Court in New York against BMI and ASCAP on behalf of the radio industry, seeking interim fees and a determination of fair and reasonable industry-wide license fees. The courts approved reduced interim fees for ASCAP and BMI.

In January 2012, the ASCAP and RMLC entered into a settlement that was approved by the court and covers the period from January 1, 2010 through December 31, 2016. This settlement also includes a credit for the interim fees paid in 2010 and 2011 and such fees are expected to be credited over a five year period beginning in January 2012.

The fees for BMI, still to be determined by the court, may be retroactive to January 1, 2010 and may be different from the interim fees.

Local and National Economic Conditions May Affect our Advertising Revenue

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

Our Stations Must Compete for Advertising Revenues in Their Respective Markets

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

 

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

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

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

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

Our Business is Subject to Extensive Federal Regulation

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

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

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

 

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New Technologies May Affect our Broadcasting Operations

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

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

As of March 9, 2012, Edward K. Christian, our President, Chief Executive Officer and Chairman, holds approximately 62% of the combined voting power of our Common Stock (not including options to acquire Class B Common Stock and based on Class B shares generally entitled to ten votes per share). As a result, Mr. Christian generally is able to control the vote on most matters submitted to the vote of stockholders and, therefore, is able to direct our management and policies, except with respect to (i) the election of the two Class A directors, (ii) those matters where the shares of our Class B Common Stock are only entitled to one vote per share, and (iii) other matters requiring a class vote under the provisions of our certificate of incorporation, bylaws or applicable law. For a description of the voting rights of our Common Stock, see Note 10 of the Notes to Consolidated Financial Statements included with this Form 10-K. Without the approval of Mr. Christian, we will be unable to consummate transactions involving an actual or potential change of control, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices.

 

Item 1B.    Unresolved Staff Comments

None.

 

Item 2.    Properties

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

As of December 31, 2011 the studios and offices of 27 of our 32 operating locations, including our corporate headquarters in Michigan, are located in facilities we own. The remaining studios and offices are located in leased facilities with lease terms that expire in 8 months to 5 years. We own or lease our transmitter and antenna sites, with lease terms that expire in 1 month to 78 years. We do not anticipate any difficulties in renewing those leases that expire within the next five years or in leasing other space, if required.

No one property is material to our overall operations. We believe that our properties are in good condition and suitable for our operations.

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

 

Item 3.    Legal Proceedings

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 4.    Mine Safety Disclosures

Not applicable.

 

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PART II

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

The Company’s Class A Common Stock trades on the NYSE Amex under the ticker symbol SGA. There is no public trading market for the Company’s Class B Common Stock. The following table sets forth the high and low sales prices of the Class A Common Stock as reported by the NYSE Amex for the calendar quarters indicated:

 

Year

   High      Low  

2010:

     

First Quarter

   $ 27.47       $ 10.82   

Second Quarter

   $ 29.00       $ 21.65   

Third Quarter

   $ 23.49       $ 16.53   

Fourth Quarter

   $ 26.72       $ 19.50   

2011:

     

First Quarter

   $ 34.80       $ 24.04   

Second Quarter

   $ 40.45       $ 31.00   

Third Quarter

   $ 39.60       $ 26.85   

Fourth Quarter

   $ 40.08       $ 26.65   

The closing price for the Company’s Class A Common Stock on March 9, 2012 as reported by the NYSE Amex was $38.00. As of March 9, 2012, there were approximately 264 holders of record of the Company’s Class A Common Stock, and one holder of the Company’s Class B Common Stock.

The Company has not paid any cash dividends on its Common Stock during the three most recent fiscal years. See Item 7. Management’s Discussion and Analysis of Financial Position and Results of Operations — Liquidity and Capital Resources and Note 4 of the Notes to Consolidated Financial Statements included with this Form 10-K.

 

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Securities Authorized for Issuance Under Equity Compensation Plan Information

The following table sets forth as of December 31, 2011, the number of securities outstanding under our equity compensation plans, the weighted average exercise price of such securities and the number of securities available for grant under these plans:

 

      (a)     (b)     (c)  

Plan Category

   Number of Shares to
be Issued Upon
Exercise of
Outstanding Options
Warrants, and Rights
    Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
    Number of Securities
Remaining Available for
Future Issuance

Under Equity
Compensation Plans
(Excluding Column (a))
 

Equity Compensation Plans Approved by Stockholders:

      

Employees’ 401(k) Savings and Investment Plan

          $        328,382   

1992 Stock Option Plan

     24,375      $ 83.200          

2003 Stock Option Plan

     21,688      $ 77.050          

2005 Incentive Compensation Plan

     191,598 (1)    $ 42.146 (2)      371,568   

Equity Compensation Plans Not Approved by Stockholders:

      

None

                
  

 

 

     

 

 

 

Total

     237,661          699,950   
  

 

 

     

 

 

 

 

(1) Includes 9,914 shares of restricted stock.

 

(2) Weighted-Average Exercise Price of Outstanding Options.

Recent Sales of Unregistered Securities

Not applicable.

Issuer Purchases of Equity Securities

There were no repurchases of our equity securities during the quarter ended December 31, 2011.

 

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Performance Graph

COMMON STOCK PERFORMANCE

Set forth below is a line graph comparing the cumulative total stockholder return for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 of our Class A Common Stock against the cumulative total return of the NYSE Amex Stock Market (US Companies) and a Peer Group selected by us consisting of the following radio and/or television broadcast companies: Arbitron Inc., Beasley Broadcast Group, Inc., CBS Corp., CC Media Holdings, Inc., Cumulus Media Inc., Emmis Communications Corp., Entercom Communications Corp., Entravision Communications Corp., Fisher Communications Inc., Journal Communications, Inc., Radio One Inc., Saga Communications, Inc., Salem Communications Corp., Sirius XM Radio Inc., Spanish Broadcasting System, Inc. and Dial Global, Inc. The graph and table assume that $100 was invested on December 31, 2006, in each of our Class A Common Stock, the NYSE Amex Stock Market (US Companies) and the Peer Group and that all dividends were reinvested. The information contained in this graph shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.

 

LOGO

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

 

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Item 6.    Selected Financial Data

 

     Years Ended December 31,  
     2011      2010      2009(1)     2008(1)     2007(1)(2)  
     (In thousands except per share amounts)  

OPERATING DATA:

            

Net Operating Revenue

   $ 127,295       $ 127,817       $ 120,798      $ 139,956      $ 144,023   

Station Operating Expense

     93,362         92,754         94,647        105,805        106,302   

Corporate General and Administrative

     7,590         7,274         7,944        9,979        9,800   

Gain on Asset Exchange

                     (495     (506       

Impairment of Intangible Assets

                     17,286        116,443          
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

   $ 26,343       $ 27,789       $ 1,416      $ (91,765   $ 27,921   

Interest Expense

   $ 3,420       $ 5,622       $ 4,948      $ 7,173      $ 8,954   

Net Income (Loss)

   $ 12,631       $ 15,136       $ (2,581   $ (66,492   $ 11,004   

Basic Earnings (Loss) Per Share

   $ 2.98       $ 3.58       $ (0.61   $ (14.05   $ 2.19   

Cash Dividends Declared Per Common Share

                                     

Weighted Average Common Shares

     4,238         4,230         4,207        4,734        5,023   

Diluted Earnings (Loss) Per Share

   $ 2.98       $ 3.58       $ (0.61   $ (14.05   $ 2.19   

Weighted Average Common Shares and Common Equivalents

     4,242         4,231         4,207        4,734        5,029   

 

     December 31,  
     2011      2010      2009      2008(1)      2007(1)(2)  
     (In thousands)  

BALANCE SHEET DATA:

              

Working Capital

   $ 16,322       $ 18,130       $ 7,753       $ 20,438       $ 24,075   

Net Property and Equipment

   $ 63,186       $ 65,561       $ 69,216       $ 73,383       $ 76,217   

Net Intangible and Other Assets

   $ 96,188       $ 97,683       $ 96,241       $ 113,276       $ 220,045   

Total Assets

   $ 190,334       $ 199,803       $ 202,351       $ 221,460       $ 337,644   

Long-term Debt Including Current Portion

   $ 69,078       $ 96,078       $ 121,078       $ 135,411       $ 129,911   

Stockholders’ Equity

   $ 92,975       $ 80,078       $ 64,093       $ 65,097       $ 149,076   

 

(1) In January 2009, the Company consummated a one-for-four reverse stock split of its Class A and Class B Common Stock. All share and per share information has been adjusted to reflect the retroactive equivalent change in the weighted average shares.

 

(2) Reflects the results of WIII acquired in September 2007, and WCLZ acquired in November 2007.

 

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

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

Our discussion of the results of operations of our operating segments focuses on their operating income because we manage our operating segments primarily based on their operating income. 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 three markets and consists of five television stations and four low power television (“LPTV”) stations.

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 years ended December 31, 2011, 2010 and 2009, approximately 85%, 86% and 86%, 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 experienced a significant increase in political advertising in 2010 due to the number of congressional, senatorial, gubernatorial and local elections in most of our markets. Because 2011 was a non-election year, political revenue significantly declined. We expect a considerable increase in political advertising for 2012, which is a presidential election 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, 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

 

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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 by adjusting prices based upon local market conditions and ratings. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of the day, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year. Any change in our revenue, with the exception of those instances where stations are acquired or sold, is generally the result of inventory sell out ratios and pricing adjustments, which are made to ensure that the station efficiently utilizes available inventory.

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

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

The radio broadcasting industry is subject to rapid technological change, evolving industry standards and the emergence of new media technologies and services (such as the Internet, satellite radio and mp3 players). These recent technologies and media are gaining advertising share against radio and other traditional media.

We are continuing to expand our interactive initiative to provide a seamless audio experience across numerous platforms to connect with our listeners where and when they want, and have added online components including streaming our stations over the Internet and on-demand options. Third and fourth generation mobile networks have enabled a steady increase in the audio quality and reliability of mobile Internet radio streaming, and this is expected to continue to increase as fourth generation networks become the standard. We expect that improvements from higher bandwidths, wider programming selection and advancements in functionality will continue making Internet radio and smartphone applications an important revenue source.

In addition, we continue the rollout of HD RadioTM. HD RadioTM 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 streams in each radio market.

During the years ended December 31, 2011, 2010 and 2009, our Bellingham, Washington; Des Moines, Iowa; Manchester, New Hampshire; and Milwaukee, Wisconsin markets, when combined, represented approximately 28%, 30% and 30%, respectively, of our consolidated net operating revenue. An adverse change in any of these radio markets or relative market position in those markets could have a significant impact on our operating results as a whole.

 

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We have experienced a decline in our net operating revenue for the year ended December 31, 2011 as compared to the corresponding period of 2010 in our Milwaukee, Wisconsin market. This decline in net operating revenue has directly affected the operating income of our radio stations in these markets. These reductions are attributable to a combination of aggressive competitive pricing due to a soft economy and new ratings 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.

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

 

     Percentage of Consolidated Net
Operating Revenue

for the Years
Ended December 31,
 
         2011             2010             2009      

Market:

      

Bellingham, Washington

     5     5     5

Des Moines, Iowa

     6     6     7

Manchester, New Hampshire

     5     6     5

Milwaukee, Wisconsin

     12     13     13

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, impairment of intangible assets, less gain on asset exchange). 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.

During the years ended December 31, 2011, 2010 and 2009, the radio stations in our four largest markets when combined, represented approximately 34%, 36% and 41%, respectively, of our consolidated station operating income. The following tables describe the percentage of our consolidated station operating income represented by each of these markets:

 

     Percentage of
Consolidated Station
Operating Income (*)
for the Years
Ended December 31,
 
         2011             2010             2009      

Market:

      

Bellingham, Washington

     6     7     7

Des Moines, Iowa

     6     4     7

Manchester, New Hampshire

     7     8     7

Milwaukee, Wisconsin

     15     17     20

 

(*) Operating income (excluding non-cash impairment charge in 2009) plus corporate general and administrative expenses, depreciation and amortization, less gain on asset exchange.

 

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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 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 years ended December 31, 2011, 2010 and 2009, approximately 80%, 80% and 82%, 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.

We had a significant increase in political advertising in 2010 due to the number of congressional, senatorial, gubernatorial and local elections in most of our markets. Since 2011 was a non-election year, political revenue significantly declined. We expect a considerable increase in political advertising for 2012, which is a presidential election year.

In 2009 we entered into retransmission consent agreements with certain cable and satellite providers as to the terms of their carriage of our television stations, and the compensation we would receive for granting such carriage rights. We recognized revenue of approximately $608,000 for the year ended December 31, 2011 as a result of these agreements. In 2011 we engaged in negotiating new agreements with these and other providers which will result in a significant increase in our retransmission consent revenue. We expect to recognize revenue of approximately $2.1 million in 2012 and, per the terms of our network affiliation agreements, we expect to remit approximately $580,000 of this revenue to our network partners as their share of our retransmission consent revenue.

 

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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, advertising and promotion expenses, and depreciation.

Our television market in Joplin, Missouri represented approximately 8% of our net operating revenues, and approximately 10%, 10% and 9%, respectively, of our consolidated station operating income (operating income excluding non-cash impairment charge in 2009, plus corporate general and administrative expenses, depreciation and amortization, less gain on asset exchange) for the years ended December 31, 2011, 2010 and 2009.

Results of Operations

The following tables summarize our results of operations for the three years ended December 31, 2011, 2010 and 2009.

Consolidated Results of Operations

 

     Years Ended December 31,     2011 vs. 2010     2010 vs. 2009  
       $ Increase
(Decrease)
    %  Increase
(Decrease)
    $ Increase
(Decrease)
    %  Increase
(Decrease)
 
     2011      2010     2009          
     (In thousands, except %’s and per share information)  

Net operating revenue

   $ 127,295       $ 127,817      $ 120,798      $ (522     (0.4 )%    $ 7,019        5.8

Station operating expense

     93,362         92,754        94,647        608        0.7     (1,893     (2.0 )% 

Corporate G&A

     7,590         7,274        7,944        316        4.3     (670     (8.4 )% 

Gain on asset exchange

                    (495                   (495     N/M   

Impairment of intangible assets

                    17,286                      (17,286     N/M   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     26,343         27,789        1,416        (1,446     (5.2 )%      26,373        N/M   

Interest expense

     3,420         5,622        4,948        (2,202     (39.2 )%      674        13.6

Write-off debt issuance costs

     1,326                       1,326        N/M               N/M   

Other (income) expense, net

     536         (3,369     210        3,905        N/M        (3,579     N/M   

Income taxes

     8,430         10,400        (1,161     (1,970     (18.9 )%      11,561        N/M   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 12,631       $ 15,136      $ (2,581   $ (2,505     (16.5 )%    $ 17,717        N/M   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

               

Basic

   $ 2.98       $ 3.58      $ (0.61   $ (0.60     (16.8 )%    $ 4.19        N/M   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 2.98       $ 3.58      $ (0.61   $ (0.60     (16.8 )%    $ 4.19        N/M   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Radio Broadcasting Segment

 

     Years Ended December 31,      2011 vs. 2010     2010 vs. 2009  
        $ Increase
(Decrease)
    %  Increase
(Decrease)
    $ Increase
(Decrease)
    %  Increase
(Decrease)
 
     2011      2010      2009           
     (In thousands, except %’s)  

Net operating revenue

   $ 108,938       $ 109,891       $ 104,601       $ (953     (0.9 )%    $ 5,290        5.1

Station operating expense

     79,130         79,012         80,382         118        0.1     (1,370     (1.7 )% 

Impairment of intangible assets

                     16,206                       (16,206     N/M   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 29,808       $ 30,879       $ 8,013       $ (1,071     (3.5 )%    $ 22,866        N/M   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Television Broadcasting Segment

 

     Years Ended December 31,     2011 vs. 2010     2010 vs. 2009  
       %  Increase
(Decrease)
    %  Increase
(Decrease)
    %  Increase
(Decrease)
    %  Increase
(Decrease)
 
     2011      2010      2009          
     (In thousands, except %’s)  

Net operating revenue

   $ 18,357       $ 17,926       $ 16,197      $ 431        2.4   $ 1,729        10.7

Station operating expense

     14,232         13,742         14,265        490        3.6     (523     (3.7 )% 

Gain on asset exchange

                     (495                   (495     N/M   

Impairment of intangible assets

                     1,080                      (1,080     N/M   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 4,125       $ 4,184       $ 1,347      $ (59     (1.4 )%    $ 2,837        N/M   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

N/M=Not meaningful

Reconciliation of segment operating income to consolidated operating income:

 

Year Ended December 31, 2011:

   Radio      Television      Corporate and Other     Consolidated  
     (In thousands)  

Net operating revenue

   $ 108,938       $ 18,357       $      $ 127,295   

Station operating expense

     79,130         14,232                93,362   

Corporate general and administrative

                     7,590        7,590   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 29,808       $ 4,125       $ (7,590   $ 26,343   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Year Ended December 31, 2010:

   Radio      Television      Corporate and Other     Consolidated  
     (In thousands)  

Net operating revenue

   $ 109,891       $ 17,926       $      $ 127,817   

Station operating expense

     79,012         13,742                92,754   

Corporate general and administrative

                     7,274        7,274   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 30,879       $ 4,184       $ (7,274   $ 27,789   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Year Ended December 31, 2009:

   Radio      Television     Corporate and Other     Consolidated  
     (In thousands)  

Net operating revenue

   $ 104,601       $ 16,197      $      $ 120,798   

Station operating expense

     80,382         14,265               94,647   

Corporate general and administrative

                    7,944        7,944   

Gain on asset exchange

             (495            (495

Impairment of intangible assets

     16,206         1,080               17,286   
  

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 8,013       $ 1,347      $ (7,944   $ 1,416   
  

 

 

    

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Consolidated

For the year ended December 31, 2011, consolidated net operating revenue was $127,295,000 compared with $127,817,000 for year ended December 31, 2010, a decline of $522,000 or less than 1%. Gross national revenue and gross local revenue increased $1,573,000 and $633,000, respectively. Gross political revenue decreased $2,734,000 for the year ended December 31, 2011 as compared to 2010. The improvement in gross national revenue was primarily the result of increased advertising from the financial services, cellular and automotive industries. Gross local revenue increased primarily as a result of increased local advertising in our

 

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Joplin, MO market following a tornado that caused significant damage in the market in May 2011, and an increase in advertising spending in general. The decrease in gross political revenue was attributable to political advertising in 2010 which was an election year.

Station operating expense was $93,362,000 for the year ended December 31, 2011, compared with $92,754,000 for the year ended December 31, 2010, an increase of $608,000 or less than 1%. Salaries increased $400,000 as a result of the 3.75% reinstatement in 2011 of the 5% salary reductions implemented in March 2009. Our health care costs increased $683,000 in the current year, primarily resulting from both increased claims and Health Care Reform. These increases were partially offset by reductions in music license fees and depreciation expense of $241,000 and $240,000, respectively.

Operating income for the year ended December 31, 2011 was $26,343,000 compared to $27,789,000 for the year ended December 31, 2010, a decrease of $1,446,000, or 5%. The decrease was a result of the decline in net operating revenue and increase in station operating expense, described above. Additionally, our corporate general and administrative charges increased $316,000 in the current year. The increase in corporate general and administrative charges was primarily from an increase in IT expenses of $200,000 and an increase in officers’ life insurance expense of $61,000 that is attributable to a decline in the cash surrender value of the life insurance policies.

We generated net income of $12,631,000 ($2.98 per share on a fully diluted basis) during the year ended December 31, 2011, compared with $15,136,000 ($3.58 per share on a fully diluted basis) for the year ended December 31, 2010, a decrease of $2,505,000 or 17%. In 2011, we had a decrease in operating income of $1,446,000, as described above, and decreases in interest expense and income tax expense of $2,202,000 and $1,970,000, respectively. The reduction in interest expense was attributable to an average decline in market interest rates of approximately 0.98%, a decrease in the amortization of debt financing costs, and a decrease in the average obligation of debt outstanding. The reduction in income tax expense was attributable to current year operating performance. Additionally, in 2011, we recognized a $1,326,000 charge for the write-off of unamortized debt issuance costs in conjunction with our previous credit agreement. See Note 4 — Long-Term Debt, in the accompanying notes to the consolidated financial statements. In 2010, we had non-recurring income of $3,561,000 resulting from an agreement to downgrade an FCC license at one of our stations.

Radio Segment

For the year ended December 31, 2011, net operating revenue of the radio segment was $108,938,000 compared with $109,891,000 for the year ended December 31, 2010, a decrease of $953,000 or 1%. Gross national revenue improved $1,464,000 in the current year. Gross political revenue and gross local revenue declined $1,935,000 and $495,000, respectively, for the year ended December 31, 2011 as compared to the prior year. The increase in gross national revenue was primarily the result of increased advertising from the financial services, cellular and automotive industries. The reduction in gross political revenue was attributable to political advertising in 2010 which was an election year. The decline in gross local revenue was primarily the result of a softening in local advertising.

Station operating expense for the radio segment was $79,130,000 for the year ended December 31, 2011, compared with $79,012,000 for the year ended December 31, 2010, an increase of approximately $118,000 or less than 1%. Salaries increased $350,000 as a result of the 3.75% reinstatement in 2011 of the 5% salary reductions implemented in March 2009. Our health care costs increased approximately $537,000 in 2011, primarily resulting from both increased claims and Health Care Reform. These increases were partially offset by reductions in music license fees and ratings service expense of $247,000 and $156,000, respectively. Additionally, we had a decline in depreciation and amortization expense of $254,000 in 2011.

 

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Operating income in the radio segment for the year ended December 31, 2011 was $29,808,000 compared with $30,879,000 for the year ended December 31 2010, a decrease of $1,071,000 or 3%. The decrease was a direct result of the decline in net operating revenue and the increase in station operating expense, described above.

Television Segment

For the year ended December 31, 2011, net operating revenue of our television segment was $18,357,000 compared with $17,926,000 for the year ended December 31, 2010, an increase of $431,000 or 2%. Gross national revenue increased $104,000 in the current year. Gross local revenue increased $1,128,000, but was partially offset by a decline in gross political revenue of $799,000. The improvement in local revenue was primarily a result of an increase in local advertising in our Joplin, MO market following a tornado in May 2011 that caused significant damage in the market. Our television stations that we own and operate in Joplin did not sustain damage in the tornado. The decline in gross political revenue was attributable to political advertising in 2010 which was an election year.

Station operating expense in the television segment for the year ended December 31, 2011 was $14,232,000, compared with $13,742,000 for the year ended December 31, 2010, an increase of $490,000 or 4%. Our health care costs increased $146,000, primarily resulting from both increased claims and Health Care Reform. Sales commission and selling expenses increased $119,000 as a result of increased revenue. In addition, salaries increased $56,000 from the 3.75% reinstatement in 2011 of the 5% salary reductions implemented in March 2009.

Operating income in the television segment was relatively unchanged for the year ended December 31, 2011 compared with the year ended December 31, 2010.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Consolidated

For the year ended December 31, 2010, consolidated net operating revenue was $127,817,000 compared with $120,798,000 for the year ended December 31, 2009, an increase of approximately $7,019,000 or 6%. Gross national revenue and gross local revenue increased approximately $1,326,000 and $3,039,000, respectively. Gross political revenue increased approximately $3,345,000. The increase in both gross national and gross local revenue was primarily the result of the improvement in the U.S. economy and advertising spending in general. The increase in gross political revenue was directly attributable to advertising related to the November 2010 congressional, senatorial, gubernatorial and local elections.

Station operating expense was $92,754,000 for the year ended December 31, 2010, compared with $94,647,000 for the year ended December 31, 2009, a decrease of approximately $1,893,000 or 2%. Severance costs (primarily programming), license fees and ratings service expense decreased approximately $250,000, $450,000 and $575,000, respectively, in 2010. Additionally, depreciation expense was approximately $894,000 higher in 2009, primarily as a result of a change in the estimated useful life of television analog equipment, which was fully depreciated in 2009. These cost reductions were partially offset by a $470,000 increase in advertising and promotions expense in 2010 as compared to the same period of 2009.

Operating income for the year ended December 31, 2010 was $27,789,000 compared to $1,416,000 for the year ended December 31, 2009, an increase of approximately $26,373,000. The increase was primarily due to the absence of an impairment charge in 2010 as compared to an impairment charge of $17,286,000 that was recognized in the fourth quarter of 2009. The improvement in net operating revenue and reduction in station operating expense, described in detail above, also contributed to the increase in operating income in 2010. In addition, corporate general and administrative expense decreased $670,000 or 8% in 2010 as compared to 2009.

 

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The decrease in corporate general and administrative charges was primarily attributable to reductions of approximately $400,000 in compensation related costs. Operating income in 2009 included a $495,000 gain from the exchange of equipment under an arrangement we had with Sprint Nextel Corporation. The equipment exchange was completed in 2009.

We reported net income of approximately $15,136,000 ($3.58 per share on a fully diluted basis) during the year ended December 31, 2010, compared with a net loss of $2,581,000 (-$0.61 per share on a fully diluted basis) for the year ended December 31, 2009, an improvement of approximately $17,717,000. The increase was the result of changes in operating income as discussed above, and an increase in other income of $3,579,000, offset by increases in interest expense and income tax expense of $674,000 and $11,561,000, respectively. In the first quarter of 2010, we had non-recurring income of approximately $3,561,000 resulting from an agreement to downgrade an FCC license at one of our stations. The increase in interest expense was attributable to an average increase in market interest rates of approximately 0.7%, and an increase in the amortization of debt financing costs, partially offset by a decrease in the average obligation of debt outstanding. The increase in income tax expense was directly attributable to 2010 operating performance and the fourth quarter non-cash impairment charge in 2009.

Radio Segment

For the year ended December 31, 2010, net operating revenue of the radio segment was $109,891,000 compared with $104,601,000 for the year ended December 31, 2009, an increase of approximately $5,290,000 or 5%. Gross national revenue and gross local revenue increased approximately $596,000 and $2,690,000, respectively. Gross political revenue increased approximately $2,429,000. The increase in both gross national and gross local revenue was primarily the result of the improvement in the U.S. economy and advertising spending in general. The increase in gross political revenue was directly attributable to advertising related to the November 2010 congressional, senatorial, gubernatorial and local elections.

Station operating expense for the radio segment was $79,012,000 for the year ended December 31, 2010, compared with $80,382,000 for the year ended December 31, 2009, a decrease of approximately $1,370,000 or 2%. Severance costs (primarily programming), license fees and ratings service expense decreased approximately $225,000, $470,000 and $575,000, respectively, in 2010. In addition, depreciation expense decreased $375,000 in 2010 primarily due to the decrease in capital expenditures over the past two years. These cost reductions were partially offset by a $400,000 increase in advertising and promotions expense in 2010 as compared to 2009. Salaries and related expenses for the year ended December 31, 2010 increased approximately $180,000 from the same period of 2009, primarily as a result of improved operating performance due to the strengthening of the U.S. economy.

Operating income in the radio segment for the year ended December 31, 2010 was $30,879,000 compared to $8,013,000 for the year ended December 31, 2009, an increase of approximately $22,866,000 or 285%. The increase was primarily due to the absence of an impairment charge in 2010 as compared to an impairment charge of $16,206,000 that was recognized in the fourth quarter of 2009. The improvement in net operating revenue and reduction in station operating expense, described in detail above, also contributed to the increase in operating income in 2010.

Television Segment

For the year ended December 31, 2010, net operating revenue of our television segment was $17,926,000 compared with $16,197,000 for the year ended December 31, 2009, an increase of approximately $1,729,000 or 11%. Gross national revenue and gross local revenue increased approximately $730,000 and $349,000, respectively. Gross political revenue increased approximately $916,000 in 2010 as compared to 2009. The increase in both gross national and gross local revenue was primarily the result of the improvement in the U.S. economy and advertising spending in general. The increase in gross political revenue was directly attributable to advertising related to the November 2010 congressional, senatorial, gubernatorial and local elections.

 

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Station operating expense in the television segment for the year ended December 31, 2010 was $13,742,000 compared with $14,265,000 for the year ended December 31, 2009, a decrease of approximately $523,000 or 4%. Depreciation expense decreased $520,000 in 2010, primarily because of television analog equipment, which was fully depreciated in 2009.

Operating income in the television segment for the year ended December 31, 2010 was $4,184,000 compared to $1,347,000 for the year ended December 31, 2009, an increase of approximately $2,837,000 or 211%. The increase was primarily due to the improvement in net operating revenue and reduction in station operating expense, described in detail above. Additionally, the absence of an impairment charge in 2010 as compared to an impairment charge of $1,080,000 that was recognized in the fourth quarter of 2009 contributed to the increase in operating income in 2010. Operating income in 2009 included a $495,000 gain from the exchange of equipment under an arrangement we had with Sprint Nextel Corporation. The equipment exchange was completed in 2009.

Liquidity and Capital Resources

Debt Arrangements and Debt Service Requirements

On June 13, 2011, we entered into a new $120 million credit facility ($118.5 million at December 31, 2011) (the “Credit Facility”) with a group of banks, to refinance our outstanding debt under our credit agreement that was maturing on July 29, 2012 (the “Old Credit Agreement”). The Credit Facility consisted of a $60 million term loan ($58.5 million at December 31, 2011) (the “Term Loan”) and a $60 million revolving loan (the “Revolving Credit Facility”) and matures on June 13, 2016. An additional $40 million financing may, in the future, be made available to the Company subject to compliance with terms and conditions of the Credit Facility.

The proceeds from the Credit Facility were used to refinance our Old Credit Agreement and pay transactional fees.

We had approximately $50.5 million of unused borrowing capacity under the Revolving Credit Facility at December 31, 2011. 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 Credit Facility permits up to $25 million, annually, in aggregate amount of additional business acquisitions, subject to certain terms and conditions as set forth in the Credit Facility in further detail, and also permits the Company to make up to $20 million, annually, in aggregate amount of dividends, distributions and stock redemptions.

We wrote-off unamortized debt issuance costs relating to the Old Credit Agreement of approximately $1.3 million, pre-tax, due to this refinancing during the quarter ended June 30, 2011.

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.

Interest rates under the Credit Facility are payable, at our option, at alternatives equal to LIBOR plus 1.50% to 2.75% or the base rate plus 0.50% to 1.75%. 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 0.375% per annum on the unused portion of the Revolving Credit Facility.

 

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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 December 31, 2011) 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.

In 2003, we entered into an agreement of understanding with Surtsey Media whereby we have guaranteed up to $1,250,000 of the debt incurred, in closing the acquisition of a construction permit for KFJX-TV station in Pittsburg, Kansas, a full power Fox affiliate serving Joplin, Missouri. At December 31, 2011, there was $1,078,000 of debt outstanding under this agreement. We do not have any recourse provision in connection with our guarantee that would enable us to recover any amounts paid under the guarantee. As a result, at December 31, 2011, we have recorded $1,078,000 in debt and $1,000,000 in intangible assets, primarily broadcast licenses. In consideration for the guarantee, Surtsey Media entered into various agreements with us relating to the station, including a Shared Services Agreement, Technical Services Agreement, Agreement for the Sale of Commercial Time and Broker Agreement. See Note 9 of the Notes to Consolidated Financial Statements included within this Form 10-K, which is incorporated by reference.

Sources and Uses of Cash

During the years ended December 31, 2011, 2010 and 2009, we had net cash flows from operating activities of $27,178,000, $27,539,000 and $25,281,000, respectively. We believe that cash flow from operations will be sufficient to meet quarterly debt service requirements for interest and scheduled payments of principal under the Credit Facility. However, if such cash flow is not sufficient, we may be required to sell additional equity securities, refinance our obligations or dispose of one or more of our properties in order to make such scheduled payments. There can be no assurance that we would be able to effect any such transactions on favorable terms, if at all.

We have a Stock Buy-Back Program (the “Buy-Back Program”) which allows us to purchase up to $60 million of our Class A Common Stock. From its inception in 1998 through December 31, 2011, we have repurchased 1,391,586 shares of our Class A Common Stock for approximately $45.7 million. During the year ended December 31, 2011, approximately 4,000 shares were retained for payment of withholding taxes related to the vesting of restricted stock for $117,000.

Our capital expenditures, exclusive of acquisitions, for the year ended December 31, 2011 were approximately $5,577,000 ($4,348,000 in 2010). We anticipate capital expenditures in 2012 to be approximately $5.0 million, which we expect to finance through funds generated from operations.

 

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Summary Disclosures About Contractual Obligations

We have future cash obligations under various types of contracts, including the terms of our Credit Facility, operating leases, programming contracts, employment agreements, and other operating contracts. The following table reflects a summary of our contractual cash obligations and other commercial commitments as of December 31, 2011:

 

     Payments Due By Period  

Contractual Obligations(1):

   Total      Less Than
1 Year
     1 to 3 Years      4 to 5 Years      More Than
5 Years
 
     (In thousands)  

Long-Term Debt Obligations(2)

   $ 69,078       $ 3,000       $ 7,078       $ 59,000       $   

Operating Leases

     6,738         1,332         1,618         853         2,935   

Purchase Obligations(3)

     27,062         11,526         10,310         3,527         1,699   

Other Long-Term Liabilities

                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Cash Obligations

   $ 102,878       $ 15,858       $ 19,006       $ 63,380       $ 4,634   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The above amounts do not include interest, which is primarily variable in amount.

 

(2) Under our Credit Facility, the maturity on outstanding debt of $68 million could be accelerated if we do not maintain certain covenants. Long- Term Obligations include the guarantee of debt of a related party of $1,078,000. (See Notes 4 and 9 of the Notes to Consolidated Financial Statements).

 

(3) Includes $17,786,000 in obligations under employment agreements and contracts with on-air personalities, other employees, and our president, CEO, and chairman, Edward K. Christian and $9,276,000 in purchase obligations under general operating agreements and contracts including but not limited to syndicated programming contracts; sports programming rights; software rights; ratings services; television advertising; and other operating expenses.

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

Critical Accounting Policies and Estimates

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

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

Carrying Value of Accounts Receivable and Related Allowance for Doubtful Accounts:    We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings, credit history, etc.), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on past loss history and the length of time the receivables are past due, ranging from 50% for

 

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amounts 90 days outstanding to 100% for amounts over 120 days outstanding. If our evaluations of the collectability of our accounts receivable differ from actual results, additional bad debt expense and allowances may be required. Our historical estimates have been a reliable method to estimate future allowances and our reserves have averaged approximately 4% of our outstanding receivables. The effect of an increase in our allowance of 1% of our outstanding receivables as of December 31, 2011, from 4.0% to 5.0% or from $794,000 to $994,000 would result in a decrease in net income of $118,000, net of taxes for the year ended December 31, 2011.

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

Broadcast Licenses and Goodwill:    We have made acquisitions in the past for which a significant amount of the purchase price was allocated to broadcast licenses and goodwill assets. As of December 31, 2011, we have recorded approximately $90,584,000 in broadcast licenses, which represents 47.6% of our total assets. In assessing the recoverability of these assets, we must conduct impairment testing and charge to operations an impairment expense only in the periods in which the carrying value of these assets is more than their fair value. In 2009, we recorded an impairment loss of $17,286,000 for broadcast licenses. Our goodwill was fully impaired in 2008; therefore we have no goodwill at December 31, 2011.

We completed the impairment test for broadcast licenses during the fourth quarter of 2011 and determined that the fair value of the broadcast licenses was greater than the carrying value recorded for each of our markets and, accordingly, no impairment was recorded.

We believe our estimate of the value of our broadcast licenses is a critical accounting estimate as the value is significant in relation to our total assets, and our estimate of the value uses assumptions that incorporate variables based on past experiences and judgments about future operating performance of our stations. These variables include but are not limited to: (1) the forecast growth rate of each radio and television market, including population, household income, retail sales and other expenditures that would influence advertising expenditures; (2) market share and profit margin of an average station within a market; (3) estimated capital start-up costs and losses incurred during the early years; (4) risk-adjusted discount rate; (5) the likely media competition within the market area; and (6) terminal values. Changes in our estimates of the fair value of these assets could result in material future period write-downs in the carrying value of our broadcast licenses. For illustrative purposes only, had the fair values of each of our broadcasting licenses been lower by 10% as of December 31, 2011, the Company would have recorded a broadcast license impairment of approximately $0.9 million; had the fair values of each of our broadcasting licenses been lower by 20% as of December 31, 2011, the Company would have recorded a broadcast license impairment of approximately $4.3 million; and had the fair value of our broadcasting licenses been lower by 30% as of December 31, 2011, the Company would have recorded a broadcast license impairment of approximately $9.8 million. Please refer to Note 2 — Broadcast Licenses and Other Intangible Assets, in the accompanying notes to the consolidated financial statements for a discussion of several key assumptions used in the fair value estimate of our broadcast licenses during our fourth quarter annual impairment test.

Market Capitalization:    As of December 31, 2011, our total market capitalization was $66.0 million more than our book value. We believe this difference can be attributed to the increase in our stock price in 2011 and a reduction in equity book value due to impairments to broadcasting licenses and goodwill in 2008 and 2009. In the accompanying notes to the financial statements, please refer to Note 2 — Broadcast Licenses and Other Intangible Assets, for a discussion of impairment charges in 2009.

 

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

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

Market Risk and Risk Management Policies

Our earnings are affected by changes in short-term interest rates as a result of our long-term debt arrangements. If market interest rates averaged 1% more in 2011 than they did during 2011, our interest expense would increase, and income before taxes would decrease by $886,000. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

Inflation

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

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU change the wording used to describe many of the requirements in U.S. generally accepted accounting principles (“GAAP”) for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in this ASU to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update will be effective for the Company on January  1, 2012 and is not expected to have a material impact on our consolidated financial statements.

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

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

Item 8.    Financial Statements and Supplementary Data

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

 

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

None.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

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

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

Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2011. Our internal control over financial reporting as of December 31, 2011 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which appears below.

 

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Attestation Report of the Independent Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited Saga Communications, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Saga Communications, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, Saga Communications, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Saga Communications, Inc. as of December 31, 2011 and 2010, and the consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011 of Saga Communications, Inc. and our report dated March 15, 2012 expressed an unqualified opinion thereon.

 

LOGO

Detroit, Michigan

March 15, 2012

 

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Item 9B.    Other Information

None.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the Company’s fiscal year. See also Item 1. Business — Executive Officers.

Item 11.    Executive Compensation

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed not later than 120  days after the end of the Company’s fiscal year.

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

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the Company’s fiscal year. In addition, the information contained in the “Securities Authorized for Issuance Under Equity Compensation Plan Information” subheading under Item 5 of this report is incorporated by reference herein.

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

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the Company’s fiscal year.

Item 14.    Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the information contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the Company’s fiscal year.

 

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

 

(a) 1.    Financial Statements

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

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements:

— Consolidated Balance Sheets as of December 31, 2011 and 2010

— Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009

— Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011, 2010 and 2009

— Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements

2.    Financial Statement Schedules

Schedule II Valuation and qualifying accounts is disclosed in Note 1 to the Consolidated Financial Statements attached hereto and filed as part of this annual report. All other schedules for which provision are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

3.    Exhibits

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

 

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Report of Independent Registered Public Accounting Firms

The Board of Directors and Shareholders

Saga Communications, Inc.

We have audited the accompanying consolidated balance sheets of Saga Communications, Inc.(the “company”) as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saga Communications, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for the each of three years in the period ended December 31, 2011 in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) Saga Communications, Inc. internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2012 expressed an unqualified opinion thereon.

 

LOGO

Detroit, Michigan

March 15, 2012

 

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Saga Communications, Inc.

Consolidated Balance Sheets

(In thousands, except par value)

 

     December 31,  
     2011     2010  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 6,991      $ 12,197   

Short-term investments

            1,007   

Accounts receivable, less allowance of $794 ($797 in 2010)

     19,415        18,985   

Prepaid expenses and other current assets

     1,987        2,002   

Barter transactions

     1,398        1,377   

Deferred income taxes

     1,169        991   
  

 

 

   

 

 

 

Total current assets

     30,960        36,559   

Net property and equipment

     63,186        65,561   

Other assets:

    

Broadcast licenses, net

     90,584        90,584   

Other intangibles, deferred costs and investments, net of accumulated amortization of $11,756 ($14,662 in 2010)

     5,604        7,099   
  

 

 

   

 

 

 

Total other assets

     96,188        97,683   
  

 

 

   

 

 

 
   $ 190,334      $ 199,803   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable

   $ 1,808      $ 1,683   

Accrued expenses:

    

Payroll and payroll taxes

     5,730        5,524   

Other

     2,502        3,460   

Barter transactions

     1,598        1,641   

Current portion of long-term debt

     3,000        6,121   
  

 

 

   

 

 

 

Total current liabilities

     14,638        18,429   

Deferred income taxes

     13,383        7,105   

Long-term debt

     66,078        89,957   

Broadcast program rights

     1,275        1,646   

Other

     1,985        2,588   
  

 

 

   

 

 

 

Total liabilities

     97,359        119,725   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, 1,500 shares authorized, none issued and outstanding

              

Common stock:

    

Class A common stock, $.01 par value, 35,000 shares authorized, 4,771 issued (4,770 in 2010)

     47        47   

Class B common stock, $.01 par value, 3,500 shares authorized, 597 issued and outstanding (598 in 2010)

     6        6   

Additional paid-in capital

     50,681        50,298   

Retained earnings

     70,831        58,200   

Treasury stock (1,116 shares in 2011 and 1,112 in 2010, at cost)

     (28,590     (28,473
  

 

 

   

 

 

 

Total stockholders’ equity

     92,975        80,078   
  

 

 

   

 

 

 
   $ 190,334      $ 199,803   
  

 

 

   

 

 

 

 

See accompanying notes.

 

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Saga Communications, Inc.

Consolidated Statements of Operations

 

     Years Ended December 31,  
     2011      2010     2009  
     (In thousands, except per share data)  

Net operating revenue

   $ 127,295       $ 127,817      $ 120,798   

Station operating expense

     93,362         92,754        94,647   

Corporate general and administrative

     7,590         7,274        7,944   

Gain on asset exchange

                    (495

Impairment of intangible assets

                    17,286   
  

 

 

    

 

 

   

 

 

 
     100,952         100,028        119,382   
  

 

 

    

 

 

   

 

 

 

Operating income

     26,343         27,789        1,416   

Other (income) expenses:

       

Interest expense

     3,420         5,622        4,948   

Write-off debt issuance costs

     1,326                  

Other

     536         (3,369 )     210   
  

 

 

    

 

 

   

 

 

 

Income (loss) before income tax

     21,061         25,536        (3,742

Income tax provision (benefit):

       

Current

     2,330         5,320        (16

Deferred

     6,100         5,080        (1,145
  

 

 

    

 

 

   

 

 

 
     8,430         10,400        (1,161
  

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 12,631       $ 15,136      $ (2,581
  

 

 

    

 

 

   

 

 

 

Basic earnings (loss) per share

   $ 2.98       $ 3.58      $ (0.61
  

 

 

    

 

 

   

 

 

 

Weighted average common shares

     4,238         4,230        4,207   
  

 

 

    

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ 2.98       $ 3.58      $ (0.61
  

 

 

    

 

 

   

 

 

 

Weighted average common and common equivalent shares

     4,242         4,231        4,207   
  

 

 

    

 

 

   

 

 

 

 

 

See accompanying notes.

 

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Saga Communications, Inc.

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2011, 2010 and 2009

 

     Class A
Common Stock
     Class B
Common Stock
     Additional
Paid-In

Capital
    Retained
Earnings
    Treasury
Stock
    Total
Stockholders’

Equity
 
     Shares     Amount      Shares     Amount           
     (In thousands)  

Balance at January 1, 2009

     4,770      $ 47         600      $ 6       $ 51,951      $ 45,645      $ (32,552   $ 65,097   

Net loss

                 (2,581       (2,581

Conversion of shares from Class B to Class A

     1           (1                

Net proceeds from exercised options

     2                41            41   

Forfeiture of restricted stock

     (2                     

Compensation expense related to restricted stock awards

               508            508   

Share-based compensation cost

               858            858   

Purchase of shares held in treasury

                   (20     (20

401(k) plan contribution

               (3,981       4,171        190   

Employee stock purchase plan

               (6       6          
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

     4,771      $ 47         599      $ 6       $ 49,371      $ 43,064      $ (28,395   $ 64,093   

Net income

                 15,136          15,136   

Conversion of shares from Class B to Class A

     1           (1                

Forfeiture of restricted stock

     (2                     

Compensation expense related to restricted stock awards

               360            360   

Share-based compensation cost

               567            567   

Purchase of shares held in treasury

                   (78     (78
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     4,770      $ 47         598      $ 6       $ 50,298      $ 58,200      $ (28,473   $ 80,078   

Net income

                 12,631          12,631   

Conversion of shares from Class B to Class A

     1           (1                

Compensation expense related to restricted stock awards

               187            187   

Share-based compensation cost

               196            196   

Purchase of shares held in treasury

                   (117     (117
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     4,771      $ 47         597      $ 6       $ 50,681      $ 70,831      $ (28,590   $ 92,975   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes.

 

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Saga Communications, Inc.

Consolidated Statements of Cash Flows

 

     Years Ended December 31,  
     2011     2010     2009  
     (In thousands)  

Cash flows from operating activities:

      

Net income (loss)

   $ 12,631      $ 15,136      $ (2,581

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Depreciation and amortization

     7,486        7,718        8,629   

Impairment of intangible assets

                   17,286   

Share based compensation expense

     196        567        858   

Barter revenue, net

     (216     (13     (187

Broadcast program rights amortization

     721        732        706   

Deferred income taxes

     6,100        5,080        (1,145

Income tax expense on exercise of options

                   24   

Loss on sale of assets

     643        386        210   

Gain on license downgrade

            (3,561       

Gain on asset exchange

                   (495

Other gains

     (109     (195       

Deferred and other compensation

     38        42        89   

Compensation expense related to restricted stock awards

     187        360        508   

Write-off of debt issuance costs

     1,326                 

Amortization of deferred costs

     642        1,079        502   

Changes in assets and liabilities:

      

(Increase) decrease in receivables and prepaid expenses

     (365 )     688        3,685   

Payments for broadcast program rights

     (715     (744     (725

(Decrease) increase in accounts payable, accrued expenses, and other liabilities

     (1,387     264        (2,083
  

 

 

   

 

 

   

 

 

 

Total adjustments

     14,547        12,403        27,862   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     27,178        27,539        25,281   

Cash flows from investing activities:

      

Acquisition of property and equipment

     (5,577     (4,348     (4,041

Proceeds from sale of short-term investments

     1,018        998          

Proceeds from sale and disposal of assets

     531        280        166   

Proceeds from license downgrade

            3,561          

Purchases of short-term investments

            (2,005 )       

Other investing activities

     (90 )     (146 )     (155 )
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (4,118     (1,660     (4,030

Cash flows from financing activities:

      

Payments on long-term debt

     (119,100     (25,000     (14,350

Proceeds from long-term debt

     92,100               17   

Payments for debt issuance costs

     (1,149     (1,503     (967

Purchase of shares held in treasury

     (117     (78     (20

Other financing activities

                   (24
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (28,266     (26,581     (15,344
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (5,206 )     (702     5,907   

Cash and cash equivalents, beginning of year

     12,197        12,899        6,992   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 6,991      $ 12,197      $ 12,899   
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes.

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements

 

1. Summary of Significant Accounting Policies

Nature of Business

Saga Communications, Inc. is a broadcasting company whose business is devoted to acquiring, developing and operating broadcast properties. As of December 31, 2011 we owned or operated ninety-one radio stations, five television stations, four low-power television stations and five radio information networks serving twenty-six markets throughout the United States.

Basis of Presentation

On January 27, 2009 the Company declared a one-for-four reverse stock split of its Class A and Class B Common Stock, effective January 28, 2009. The reverse stock split reduced the Company’s issued and outstanding shares of common stock from approximately 14,425,104 shares of Class A Common Stock and 2,402,338 shares of Class B Common Stock to approximately 3,606,932 and 600,585 shares, respectively. All share and per share information in the accompanying financial statements have been restated retroactively to reflect the reverse stock split.

Principles of Consolidation

The consolidated financial statements include the accounts of Saga Communications, Inc. and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Change in Accounting Estimate

In the second quarter of 2008, the Company reviewed the estimated useful lives of its television analog equipment. This review was performed because of the Federal Communications Commission’s (“FCC”) mandatory requirement that all television stations convert from analog to digital spectrum by June 2009. As a result of this review, the Company’s depreciation rate of its analog equipment was increased to reflect the estimated period during which these assets would remain in service. This change of estimated useful lives was deemed as a change in accounting estimate and was accounted for prospectively, effective April 1, 2008. The effect of this change in estimate was to decrease net income approximately $292,000 and decrease earnings per share (basic and diluted) by $.07 for the year ended December 31, 2009. The analog equipment was fully depreciated in June of 2009.

Use of Estimates

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

Concentration of Risk

Our top six markets when combined represented 44%, 44% and 45% of our net operating revenue for the years ended December 31, 2011, 2010 and 2009, respectively.

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

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

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and time deposits with original maturities of three months or less. At December 31, 2010, we had approximately $1 million of time deposits included in cash and cash equivalents. We did not have any time deposits at December 31, 2011.

Financial Instruments

Our financial instruments are comprised of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and long-term debt. The carrying value of cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair value due to their short maturities. The carrying value of long-term debt approximates fair value as it carries interest rates that either fluctuate with the euro-dollar rate, prime rate or have been reset at the prevailing market rate at December 31, 2011.

Allowance for Doubtful Accounts

A provision for doubtful accounts is recorded based on our judgment of the collectability of receivables. Amounts are written off when determined to be fully uncollectible. Delinquent accounts are based on contractual terms. The activity in the allowance for doubtful accounts during the years ended December 31, 2011, 2010 and 2009 was as follows:

 

Year Ended

   Balance
at Beginning
of Period
     Charged to
Costs and
Expenses
     Write Off of
Uncollectible
Accounts, Net of
Recoveries
    Balance at
End of
Period
 
     (In thousands)  

December 31, 2011

   $ 797       $ 526       $ (529   $ 794   

December 31, 2010

   $ 733       $ 560       $ (496   $ 797   

December 31, 2009

   $ 1,071       $ 714       $ (1,052   $ 733   

Barter Transactions

Our radio and television stations trade air time for goods and services used principally for promotional, sales and other business activities. An asset and a liability are recorded at the fair market value of goods or services received. Barter revenue is recorded when commercials are broadcast, and barter expense is recorded when goods or services are received or used.

Property and Equipment

Property and equipment are carried at cost. Expenditures for maintenance and repairs are expensed as incurred. When property and equipment is sold or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts and the gain or loss realized on disposition is reflected in earnings. Depreciation is provided using the straight-line method based on the estimated useful life of the assets. We review our property and equipment, deferred costs and investments for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

expected to generate. If the assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. We did not record any impairment of property and equipment during 2011, 2010 and 2009.

Property and equipment consisted of the following:

 

     Estimated
Useful Life
     December 31,  
        2011     2010  
            (In thousands)  

Land and land improvements

           $ 11,319      $ 11,292   

Buildings

     31.5 years         32,678        32,375   

Towers and antennae

     7-15 years         27,275        26,898   

Equipment

     3-15 years         77,619        76,857   

Furniture, fixtures and leasehold improvements

     7-20 years         7,704        7,499   

Vehicles

     5 years         3,835        3,668   
     

 

 

   

 

 

 
        160,430        158,589   

Accumulated depreciation

        (97,244     (93,028
     

 

 

   

 

 

 

Net property and equipment

      $ 63,186      $ 65,561   
     

 

 

   

 

 

 

Depreciation expense for the years ended December 31, 2011, 2010 and 2009 was $7,438,000, $7,668,000 and $8,562,000, respectively.

In 2006, the FCC granted to Sprint Nextel Corporation (“Nextel”) the right to reclaim from television broadcasters in each market across the country the 1.9 GHz spectrum to use for an emergency communications system. In order to reclaim this signal, Nextel replaced all analog equipment using this spectrum with digital equipment. All television broadcasters agreed to use the digital substitute that Nextel provided. The exchange of equipment was completed on a market by market basis. As the equipment was exchanged and put into service in each of our television markets we recorded gains to the extent that the fair market value of the equipment we received exceeded the book value of the analog equipment we exchanged. See Note 3 — Gain on Asset Exchange.

Intangible Assets

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

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

Separable intangible assets that have finite lives are amortized over their useful lives using the straight-line method. Favorable lease agreements are amortized over the leases ranging from 4 to 26 years. Other intangibles are amortized over one to eleven years.

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

Deferred Costs

The costs related to the issuance of debt are capitalized and accounted for as interest expense over the life of the debt. During the years ended December 31, 2011, 2010 and 2009, we recognized interest expense related to the amortization of debt issuance costs of $642,000, $1,079,000 and $502,000, respectively. During 2011 we wrote-off unamortized debt issuance costs of $1,326,000, pre-tax, in connection with the refinancing of our bank debt. See Note 4 — Long-Term Debt.

At December 31, 2011 and 2010, the net book value of deferred costs was $1,024,000 and $1,840,000, respectively, and was presented in Other intangibles, deferred costs and investments in our consolidated balance sheet.

Broadcast Program Rights

We record the capitalized costs of broadcast program rights when the license period begins and the programs are available for use. Amortization of the program rights is recorded using the straight-line method over the license period or based on the number of showings. Amortization of broadcast program rights is included in station operating expense. Unamortized broadcast program rights are classified as current or non-current based on estimated usage in future years.

Treasury Stock

We have a Stock Buy-Back Program (the “Buy-Back Program”) which allows us to purchase up to $60 million of our Class A Common Stock. From its inception in 1998 through December 31, 2011, we have repurchased 1,391,586 shares of our Class A Common Stock for approximately $45.7 million. Repurchases of shares of our Common Stock are recorded as Treasury Stock and result in a reduction of Stockholders’ Equity. During 2011, 2010 and 2009, we acquired 4,035 shares at an average price of $28.95 per share, 5,466 shares at an average price of $14.25 per share and 5,682 shares at an average price of $3.50 per share, respectively. During 2009 we issued 62,243 shares of Treasury Stock in connection with our 401(k) employer match. None were issued in 2010 or 2011.

Revenue Recognition

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

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 its own commercial advertising announcements during the time periods specified. Revenue and expenses related to TBA’s/LMA’s are included in the accompanying Consolidated Statements of Operations.

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred. Such costs amounted to approximately $3,694,000, $3,583,000 and $3,117,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

Income Taxes

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

Stock-Based Compensation

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

Earnings Per Share

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

 

     Years Ended December 31,  
     2011      2010      2009  
     (In thousands, except per share data)  

Numerator:

        

Net income (loss) available to common stockholders

   $ 12,631       $ 15,136       $ (2,581
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Denominator for basic earnings per share-weighted average shares

     4,238         4,230         4,207   

Effect of dilutive securities:

        

Stock options

     4         1           
  

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions

     4,242         4,231         4,207   
  

 

 

    

 

 

    

 

 

 

Basic earnings (loss) per share

   $ 2.98       $ 3.58       $ (0.61
  

 

 

    

 

 

    

 

 

 

Diluted earnings (loss) per share

   $ 2.98       $ 3.58       $ (0.61
  

 

 

    

 

 

    

 

 

 

Approximately 600 incremental shares were not included in the diluted loss per share calculation for the year ended December 31, 2009, because the effect of their inclusion would be antidilutive, or would decrease the reported loss per share.

Potentially dilutive common shares primarily consist of employee stock options. Employee stock options to purchase approximately 228,000, 294,000 and 388,000 shares of our stock were outstanding at December 31, 2011, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the effect would have been antidilutive as the options’ exercise prices exceeded the average market price. The actual effect of these shares, if any, on the diluted earnings per share calculation will vary significantly depending on fluctuations in the stock price.

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU change the wording used to describe many of the requirements in U.S. generally accepted accounting principles (“GAAP”) for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in this ASU to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update will be effective for the Company on January 1, 2012 and is not expected to have a material impact on our consolidated financial statements.

 

2. Broadcast Licenses and Other Intangibles Assets

Broadcast Licenses

We evaluate our FCC licenses for impairment annually or more frequently if events or changes in 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.

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

We have recorded the changes to broadcast licenses for the years ended December 31, 2010 as follows:

 

     Radio      Television      Total  
     (In thousands)  

Balance at January 1, 2010

   $ 80,736       $ 9,816       $ 90,552   

Acquisitions

     32                 32   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2010

   $ 80,768       $ 9,816       $ 90,584   
  

 

 

    

 

 

    

 

 

 

There were no changes to broadcast licenses for the year ended December 31, 2011.

2011 Impairment Test

We completed our annual impairment test of broadcast licenses during the fourth quarter of 2011 and determined that the fair value of the broadcast licenses was greater than the carrying value recorded for each of our markets and, accordingly, no impairment was recorded.

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

The following table reflects certain key estimates and assumptions used in the impairment test in the fourth quarter of 2011. The ranges for operating profit margin and market long-term revenue growth rates vary based on our specific markets. In general, when comparing between 2011 and 2010: (1) the market specific operating profit margin range remained consistent; (2) the market long-term revenue growth rates were relatively consistent; (3) the discount rate remained consistent; and (4) current year revenues were 1% less than previously projected for 2011.

 

     Fourth
Quarter
2011
   Fourth
Quarter
2010

Discount rates

   11.9% - 12.2%    11.9% - 12.2%

Operating profit margin ranges

   17.4% - 35.8%    17.4% - 35.0%

Market long-term revenue growth rates

   2.0% - 3.0%    2.0% - 3.0%

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

2010 Impairment Test

During the fourth quarter of 2010, we completed our annual impairment test of broadcast licenses and determined that the fair value of the broadcast licenses was greater than the carrying value recorded for each of our markets and, accordingly, no impairment was recorded.

2009 Impairment Test

During the fourth quarter of 2009, we completed our annual impairment test of broadcast licenses and determined that the fair value of the broadcast licenses was less than the carrying value for sixteen of our twenty-three markets, and recorded a non-cash impairment charge of $17,286,000 to reduce the carrying value of these assets. The economic recession negatively affected the radio and television broadcasting industry, resulting in lower advertising revenues in 2009. The primary reasons for the impairment to the broadcasting licenses recognized in the fourth quarter of 2009 were: the actual revenue decline for the industry and the Company were greater than those originally forecasted for 2009, a decline in market share in certain of our markets, a decline in available revenue in certain of our markets, and an increase in the weighted average cost of capital and the related risk adjusted discount rate in all of our markets.

Other Intangible Assets

We evaluate amortizable intangible assets for recoverability when circumstances indicate impairment may have occurred, using an undiscounted cash flow methodology. If the future undiscounted cash flows for the intangible asset are less than net book value, then the net book value is reduced to the estimated fair value.

We have recorded amortizable intangible assets at December 31, 2011 as follows:

 

     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Amount
 
     (In thousands)  

Non-competition agreements

   $ 4,565       $ 4,565       $   

Favorable lease agreements

     5,862         5,504         358   

Other intangibles

     1,716         1,562         154   
  

 

 

    

 

 

    

 

 

 

Total amortizable intangible assets

   $ 12,143       $ 11,631       $ 512   
  

 

 

    

 

 

    

 

 

 

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

We have recorded amortizable intangible assets at December 31, 2010 as follows:

 

     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Amount
 
     (In thousands)  

Non-competition agreements

   $ 4,565       $ 4,565       $   

Favorable lease agreements

     5,862         5,467         395   

Other intangibles

     1,691         1,549         142   
  

 

 

    

 

 

    

 

 

 

Total amortizable intangible assets

   $ 12,118       $ 11,581       $ 537   
  

 

 

    

 

 

    

 

 

 

Aggregate amortization expense for these intangible assets for the years ended December 31, 2011, 2010 and 2009, was $50,000, $49,000 and $68,000, respectively. Our estimated annual amortization expense for the years ending December 31, 2012, 2013, 2014, 2015 and 2016 is approximately $50,000, $50,000, $50,000, $37,000 and $36,000, respectively.

 

3. Gain on Asset Exchange

In 2006, the FCC granted to Nextel the right to reclaim from television broadcasters in each market across the country the 1.9 GHz spectrum to use for an emergency communications system. In order to reclaim this signal, Nextel replaced all analog equipment using this spectrum with digital equipment. We agreed to accept the substitute equipment that Nextel provided and in turn we relinquished our existing equipment to Nextel. This arrangement was accounted for as an exchange of assets.

The equipment we received under this arrangement was recorded at its estimated fair market value and depreciated over estimated useful lives ranging from 5 to 15 years. Fair market value was derived from quoted prices obtained from manufacturers and vendors for the specific equipment acquired. As the equipment was exchanged and put into service in each of our television markets we recorded gains to the extent that the fair market value of the equipment we received exceeded the book value of the analog equipment we exchanged. For the year ended December 31, 2009, we recognized gains of approximately $495,000 from the exchange of this equipment. There was no exchange in 2011 or 2010.

 

4. Long-Term Debt

Long-term debt consisted of the following:

 

     December 31,  
     2011      2010  
     (In thousands)  

Credit Agreement:

     

Term loan

   $ 58,500       $   

Revolving credit facility

     9,500           

Reducing revolver facility

             95,000   

Secured debt of affiliate

     1,078         1,078   
  

 

 

    

 

 

 
     69,078         96,078   

Amounts payable within one year

     3,000         6,121   
  

 

 

    

 

 

 
   $ 66,078       $ 89,957   
  

 

 

    

 

 

 

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

Future maturities of long-term debt are as follows:

 

Year Ending December 31,

   (In thousands)  

2012

   $ 3,000   

2013

     3,000   

2014

     4,078   

2015

     3,000   

2016

     56,000   

Thereafter

       
  

 

 

 
   $ 69,078   
  

 

 

 

On June 13, 2011, we entered into a new $120 million credit facility ($118.5 million at December 31, 2011) (the “Credit Facility”) with a group of banks, to refinance our outstanding debt under our credit agreement that was maturing on July 29, 2012 (the “Old Credit Agreement”). The Credit Facility consisted of a $60 million term loan ($58.5 million at December 31, 2011) (the “Term Loan”) and a $60 million revolving loan (the “Revolving Credit Facility”) and matures on June 13, 2016.

The proceeds from the Credit Facility were used to refinance our Old Credit Agreement and pay transactional fees.

We wrote-off unamortized debt issuance costs relating to the Old Credit Agreement of approximately $1.3 million, pre-tax, due to this refinancing during the quarter ended June 30, 2011.

We had approximately $50.5 million of unused borrowing capacity under the Revolving Credit Facility at December 31, 2011. 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.

Interest rates under the Credit Facility are payable, at our option, at alternatives equal to LIBOR (0.296% at December 31, 2011) plus 1.50% to 2.75% or the base rate plus 0.50% to 1.75%. 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 0.375% per annum 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 December 31, 2011) 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.

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

Our Old Credit Agreement was a revolving line of credit maturing on July 29, 2012. Our indebtedness under the Old Credit Agreement was secured by a first priority lien on substantially all of our assets and of our subsidiaries, by a pledge of our subsidiaries’ stock and by a guarantee of our subsidiaries. The Old Credit Agreement was used for general corporate purposes, including working capital and capital expenditures.

Interest rates under the Old Credit Agreement were payable, at our option, at alternatives equal to LIBOR at the reset date (0.3125% at December 31, 2010) plus 3.00% to 4.25% or the Agent bank’s base rate plus 2.00% to 3.25%. The spread over LIBOR and the base rate vary from time to time, depending upon our financial leverage. We were also required to pay quarterly commitment fees of 0.375% to 0.625% per annum on the unused portion of the Old Credit Agreement.

In June 2011, approximately $1.1 million of secured debt of an affiliate was amended to extend the maturity date to May 2014.

 

5. Supplemental Cash Flow Information

 

     Years Ended December 31,  
     2011      2010      2009  
     (In thousands)  

Cash paid (received) during the period for:

        

Interest

   $ 2,788       $ 4,504       $ 4,428   

Income taxes

   $ 3,202       $ 4,664       $ (1,358 )

Non-cash transactions:

        

Barter revenue

   $ 4,428       $ 4,632       $ 4,825   

Barter expense

   $ 4,212       $ 4,618       $ 4,637   

Acquisition of property and equipment

   $ 286       $ 137       $ 573   

 

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Saga Communications, Inc.

Notes to Consolidated Financial Statements — (Continued)

 

6. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets are as follows:

 

     December 31,  
     2011     2010  
     (In thousands)  

Deferred tax liabilities:

    

Property and equipment

   $ 9,766      $ 8,981   

Intangible assets

     5,538        255   

Prepaid expenses

     439        439   
  

 

 

   

 

 

 

Total deferred tax liabilities

     15,743        9,675   

Deferred tax assets: