SAGA COMMUNICATIONS, INC.
Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

Form 10-Q

     
(Mark One)
   
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the Quarterly Period ended September 30, 2003
 
or
 
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to

Commission file number 1-11588

Saga Communications, Inc.

(Exact name of registrant as specified in its charter)
     
Delaware
  38-3042953
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
73 Kercheval Avenue
Grosse Pointe Farms, Michigan
(Address of principal executive offices)
 
48236
(Zip Code)

Registrant’s telephone number, including area code:
(313) 886-7070

     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 o

     The number of shares of the registrant’s Class A Common Stock, $.01 par value, and Class B Common Stock, $.01 par value, outstanding as of October 31, 2003 was 18,501,632 and 2,360,370, respectively.




TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 SECTION 302 CERTIFICATION OF THE C.E.O.
EX-31.2 SECTION 302 CERTIFICATION OF THE C.F.O.
EX-32.1 SECTION 906 CERTIFICATION OF THE C.E.O.
EX-32.2 SECTION 906 CERTIFICATION OF THE C.F.O.


Table of Contents

INDEX

             
Page

PART I FINANCIAL INFORMATION
Item 1.
  Financial Statements (Unaudited)     2  
    Condensed consolidated balance sheets — September 30, 2003 and December 31, 2002     2  
    Condensed consolidated statements of income — Three and nine months ended September 30, 2003 and 2002     3  
    Condensed consolidated statements of cash flows — Nine months ended September 30, 2003 and 2002     4  
    Notes to unaudited condensed consolidated financial statements     5  
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     15  
Item 3.
  Quantitative and Qualitative Disclosures about Market Risk     24  
Item 4.
  Controls and Procedures     24  
PART II OTHER INFORMATION
Item 2.
  Changes in Securities and Use of Proceeds     24  
Item 6.
  Exhibits and Reports on Form 8-K     25  
Signatures     26  

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PART I — FINANCIAL INFORMATION

Item 1.     Financial Statements

SAGA COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

                   
September 30, December 31,
2003 2002


(Unaudited)
(Dollars in thousands)
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 20,192     $ 5,874  
 
Accounts receivable, net
    20,687       21,355  
 
Prepaid expenses
    2,140       2,102  
 
Other current assets
    2,287       2,117  
     
     
 
Total current assets
    45,306       31,448  
Property and equipment
    126,635       120,974  
 
Less accumulated depreciation
    (65,280 )     (60,813 )
     
     
 
Net property and equipment
    61,355       60,161  
Other assets:
               
 
Broadcast licenses, net
    113,139       102,699  
 
Goodwill, net
    27,378       26,892  
 
Other intangibles, deferred costs
    8,487       5,122  
 
And investments, net
               
     
     
 
Total other assets
    149,004       134,713  
     
     
 
    $ 255,665     $ 226,322  
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
               
 
Accounts payable
  $ 1,792     $ 1,265  
 
Other current liabilities
    11,800       11,358  
 
Current portion of long-term debt
    72       13,308  
     
     
 
Total current liabilities
    13,664       25,931  
Deferred income taxes
    17,092       14,064  
Long-term debt
    120,721       91,920  
Other
    1,749       1,348  
Stockholders’ equity:
               
 
Common stock
    209       209  
 
Additional paid-in capital
    46,903       45,649  
 
Retained earnings
    57,738       48,393  
 
Accumulated other comprehensive income
          (464 )
 
Treasury stock
    (2,411 )     (728 )
     
     
 
Total stockholders’ equity
    102,439       93,059  
     
     
 
    $ 255,665     $ 226,322  
     
     
 

Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See notes to unaudited condensed consolidated financial statements.

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SAGA COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                   
Three Months Ended Nine Months Ended
September 30, September 30,


2003 2002 2003 2002




(In thousands except per share data)
Unaudited
Net operating revenue
  $ 30,433     $ 29,783     $ 88,364     $ 83,474  
Operating expenses:
                               
 
Programming and technical
    7,276       6,753       21,479       19,517  
 
Selling
    6,901       6,620       21,702       20,500  
 
Station general and administrative
    4,661       4,495       14,967       13,348  
 
Corporate general and administrative
    1,794       1,511       4,935       4,345  
 
Depreciation
    1,562       1,523       4,952       4,498  
 
Amortization
    120       125       330       375  
     
     
     
     
 
Operating profit
    8,119       8,756       19,999       20,891  
Other (income) expense:
                               
 
Interest expense
    1,081       1,344       3,773       4,052  
 
Other
    1,215       (150 )     850       (147 )
     
     
     
     
 
Income before income tax
    5,823       7,562       15,376       16,986  
Income tax provision
    2,356       3,176       6,031       7,135  
     
     
     
     
 
Net income
  $ 3,467     $ 4,386     $ 9,345     $ 9,851  
     
     
     
     
 
Earnings per share:
                               
 
Basic
  $ .17     $ .21     $ .45     $ .48  
     
     
     
     
 
 
Diluted
  $ .16     $ .21     $ .44     $ .47  
     
     
     
     
 
Weighted average common shares
    20,810       20,667       20,810       20,590  
     
     
     
     
 
Weighted average common and common equivalent shares
    21,292       21,016       21,303       20,990  
     
     
     
     
 

See notes to unaudited condensed consolidated financial statements.

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SAGA COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                   
Nine Months Ended
September 30,

2003 2002


(Dollars in thousands)
Unaudited
Cash flows from operating activities:
               
 
Cash provided by operating activities
  $ 20,244     $ 20,589  
Cash flows from investing activities:
               
 
Acquisition of property and equipment
    (6,410 )     (5,855 )
 
Proceeds from sale of assets
    337       606  
 
Increase in intangibles and other assets
    (4,974 )     (1,376 )
 
Acquisition of stations
    (9,170 )     (11,753 )
     
     
 
Net cash used in investing activities
    (20,217 )     (18,378 )
Cash flows from financing activities:
               
 
Proceeds from long-term debt
    128,600        
 
Payments on long-term debt
    (113,656 )     (249 )
 
Net proceeds from exercise of stock options
    78       1,261  
 
Purchase of shares held in treasury
    (731 )      
     
     
 
Net cash provided by financing activities
    14,291       1,012  
     
     
 
Net increase in cash and cash equivalents
    14,318       3,223  
Cash and cash equivalents, beginning of period
    5,874       11,843  
     
     
 
Cash and cash equivalents, end of period
  $ 20,192     $ 15,066  
     
     
 

See notes to unaudited condensed consolidated financial statements.

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1.     Summary of Significant Accounting Policies

 
Basis of Presentation

      The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Saga Communications, Inc. Annual Report (Form 10-K) for the year ended December 31, 2002.

 
Reclassification

      Certain amounts previously reported in the 2002 financial statements have been reclassified to conform to the 2003 presentation.

 
Stock Split

      On June 15, 2002 we consummated a five-for-four split of our Class A and Class B Common Stock, resulting in additional shares being issued of approximately 3,685,000 and 472,000, respectively, for holders of record on May 31, 2002. All share and per share information in the accompanying financial statements has been restated retroactively to reflect the split.

 
Income Taxes

      Our effective tax rate is higher than the federal statutory rate as a result of certain non-deductible depreciation and amortization expenses and the inclusion of state taxes in the income tax amount.

 
Time Brokerage Agreements

      We have entered into Time Brokerage Agreements (“TBAs”) in certain markets. In a typical TBA, the Federal Communications Commission (“FCC”) licensee of a station makes available, for a fee, blocks of air time on its station to another party that supplies programming to be broadcast during that air time and sells their own commercial advertising announcements during the time periods specified. We account for TBAs under SFAS 13, “Accounting for Leases” and related interpretations. Revenue and expenses related to TBAs are included in the accompanying consolidated statements of income.

 
Stock-Based Compensation

      We follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations, in accounting for our employee and non-employee director stock options. Under APB 25, when the exercise price of our employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized.

      For purposes of the required pro forma disclosures required for stock-based compensation, the estimated fair value of the options is amortized to expense over the options’ vesting period. Pro forma net income and pro forma earnings per share as if the stock-based awards had been accounted for using the provisions of

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” is as follows:

                                   
Three Months Nine Months
Ended Ended
September 30, September 30,


2003 2002 2003 2002




(In thousands except per share data)
Net income as reported
  $ 3,467     $ 4,386     $ 9,345     $ 9,851  
Add back: stock based compensation cost, net of tax
    13       10       38       32  
Less: pro forma stock based Compensation cost determined under fair value method, net of tax
    (526 )     (402 )     (1,504 )     (1,165 )
     
     
     
     
 
Pro forma net income
  $ 2,954     $ 3,994     $ 7,879     $ 8,718  
     
     
     
     
 
Pro forma earnings per share:
                               
 
Basic
  $ .14     $ .19     $ .38     $ .42  
     
     
     
     
 
 
Diluted
  $ .14     $ .19     $ .37     $ .42  
     
     
     
     
 

      The fair value of our stock options were estimated as of the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the current years grants: risk-free interest rate of 3.39%; a dividend yield of 0%; expected volatility of 32.2%; and a weighted average expected life of the options of 7 years.

2.     Recent Accounting Pronouncements

      On January 1, 2003, we adopted SFAS 143, “Accounting for Asset Retirement Obligations.” SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development, and/or the normal operation of a long lived asset. The adoption of SFAS 143 did not materially impact our financial position or results of operations.

      On January 1, 2003 we adopted SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The adoption of SFAS 146 did not materially impact our financial position or results of operations.

      On January 1, 2003 we adopted the initial recognition provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 45 (“FIN 45”), entitled “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” We adopted the disclosure requirements of FIN 45 in 2002. This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. This interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The adoption of Interpretation No. 45 did not materially impact our financial position, cash flows or results of operations. See Note 4 for a guarantee that we entered into on March 7, 2003.

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN 46 entitled “Consolidation of Variable Interest Entities.” This interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

sufficient financial resources for the entity to support its activities. The Interpretation also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, 2003 and is effective no later than in the first interim or annual period beginning after December 15, 2003 for variable interest entities created prior to February 1, 2003. The adoption of FIN 46 did not materially impact our financial position, cash flows, or results of operations related to variable interest entities created after January 31, 2003. We have not yet determined what the effect, if any, this interpretation will have on our financial statements for the provisions impacting variable interest entities created prior to February 1, 2003.

3.     Total Comprehensive Income and Accumulated Other Comprehensive Income

                                   
Three Months Nine Months
Ended Ended
September 30, September 30,


Total Comprehensive Income Consists of: 2003 2002 2003 2002





(In thousands)
Net income
  $ 3,467     $ 4,386     $ 9,345     $ 9,851  
Accumulated other comprehensive income (loss):
                               
 
Change in fair value of derivative instruments, net of taxes
    171       (166 )     464       (264 )
     
     
     
     
 
Total comprehensive income
  $ 3,638     $ 4,220     $ 9,809     $ 9,587  
     
     
     
     
 

      Accumulated Other Comprehensive Income is comprised solely of the changes in the fair value of derivatives at September 30, 2002. Accumulated Other Comprehensive Income is zero at September 30, 2003.

4.     Acquisitions and Dispositions

      We actively seek and explore opportunities for expansion through the acquisition of additional broadcast properties. This activity is part of our strategy to be the leading broadcaster in the markets where we own properties.

 
Pending Acquisitions, TBA’s and Shared Services

      On October 1, 2003 we acquired two FM radio stations (WJZA-FM Lancaster, Ohio and WJZK-FM Richwood, Ohio) serving the Columbus, Ohio market for approximately $13,000,000 including approximately $1,000,000 of our Class A common stock.

      On October 1, 2003 we entered into an agreement to acquire an AM and FM radio station (WBCO-AM and WQEL-FM) serving the Bucyrus, Ohio market for approximately $2,200,000. This transaction, subject to the approval of the Federal Communications Commission, is expected to close during the first quarter 2004. We began operating these stations under the terms of a TBA on October 1, 2003.

      On March 7, 2003 we entered into an agreement of understanding with Surtsey Productions, Inc. (“Surtsey”), whereby we have guaranteed up to $1,250,000 of the debt that Surtsey will incur in closing on the acquisition of a construction permit for KFJX-TV station in Pittsburg, Kansas. The station, a new full power Fox affiliate, went on the air for the first time on October 18, 2003. Under the FCC’s ownership rules, we are prohibited from owning this station. 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 the Sale of Commercial Time and Broker Agreement. Surtsey is a multi-media

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

company that is 100% owned by the daughter of Edward K. Christian, our principal stockholder, President and CEO.

 
2003 Acquisitions and Dispositions

      On March 11, 2003, we acquired an AM radio station (WOXL-AM) serving the Asheville, North Carolina market for approximately $350,000.

      On March 28, 2003, we acquired an FM radio station (WODB-FM) serving the Columbus, Ohio market for approximately $10,000,000. We began operating this station under the terms of a TBA on January 1, 2003. In conjunction with this transaction we sold our AM radio station (WVKO-AM) serving the Columbus, Ohio market for approximately $1,000,000. We recognized a gain on the disposal of this station of approximately $325,000.

      On April 1, 2003, we acquired an FM radio station (WINQ-FM) in the Winchendon, Massachusetts market for approximately $420,000 plus an additional $500,000 if within five years of closing we obtain approval from the FCC for a city of license change. The radio station was owned by a company in which a member of our Board of Directors has a 26% beneficial ownership interest, which was disclosed to our Board prior to its approval of the transaction. The interested director did not participate in voting on this transaction when it came before the Board. The purchase price was determined on an arm’s length basis. We began operating this station under the terms of a TBA on February 1, 2003, simulcasting WKBK-AM in Keene, New Hampshire.

      On April 1, 2003 we sold an AM radio station (WLLM-AM) serving the Lincoln, Illinois market for approximately $275,000.

 
2002 Acquisitions and Time Brokerage Agreements

      On May 1, 2002, we acquired two FM and two AM radio stations (WKBK-AM, WKNE-FM and WKVT-AM/ FM) serving the Keene, New Hampshire and Brattleboro, Vermont markets, respectively, for approximately $9,400,000.

      On July 1, 2002, we acquired an FM and AM radio station (WOQL-FM and WZBK-AM) serving the Keene, New Hampshire market, for approximately $2,740,000.

      On November 1, 2002, we acquired an AM and FM radio station (WJQY-AM and WJOI-FM) serving the Springfield, Tennessee market for approximately $1,525,000.

      On November 1, 2002, we entered into a time brokerage agreement and a sub-time brokerage agreement for WISE-AM and WOXL-FM, respectively, serving the Asheville, North Carolina market.

      On November 1, 2002, we acquired three FM radio stations (KDEZ-FM, KDXY-FM and KJBX-FM) serving the Jonesboro, Arkansas market for approximately $12,745,000, including approximately $2,245,000 of our Class A common stock.

      The condensed consolidated statements of income include the operating results of the acquired stations from their respective dates of acquisition. All acquisitions were accounted for as purchases and, accordingly, the total costs were allocated to the acquired assets and assumed liabilities based on their estimated fair values as of the acquisition dates. The excess of the consideration paid over the estimated fair value of net assets acquired have been recorded as goodwill. These allocations are preliminary and may change once final

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

valuations are completed. The following condensed balance sheets represent the estimated fair value assigned to the related assets and liabilities of the 2003 and 2002 acquisitions at their respective acquisition dates.

Saga Communications, Inc.

Condensed Consolidated Balance Sheet of 2003 and 2002 Acquisitions

                   
Acquisitions in

2003 2002


(In thousands)
Assets Acquired:
               
Current assets
  $ (103 )   $ 901  
Property and equipment
    (37 )     4,113  
Other assets:
               
 
Broadcast licenses — Radio segment
    10,441       15,864  
 
Goodwill — Radio segment
    180       6,123  
 
Other intangibles, deferred costs and investments
    548        
     
     
 
Total other assets
    11,169       21,987  
     
     
 
Total assets acquired
    11,029       27,001  
     
     
 
Liabilities Assumed:
               
Current liabilities
    488       612  
Long term debt
    621        
     
     
 
Total liabilities assumed
    1,109       612  
     
     
 
Net assets acquired
  $ 9,920     $ 26,389  
     
     
 

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following unaudited pro forma results of our operations for the three and nine months ended September 30, 2003 and 2002 assume the 2003 and 2002 acquisitions and dispositions occurred as of January 1, 2002. The pro forma results give effect to certain adjustments, including depreciation, amortization of intangible assets, increased interest expense on acquisition debt and related income tax effects. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the combinations been in effect on the dates indicated or which may occur in the future.

 
Pro Forma Results of Operations for Acquisitions:
                                 
Three Months Ended Nine Months Ended
September 30, September 30,


Consolidated Results of Operations 2003 2002 2003 2002





(In thousands except per share data)
Net operating revenue
  $ 30,433     $ 30,790     $ 88,364     $ 87,268  
Station operating expense
    18,838       18,644       58,148       56,356  
     
     
     
     
 
Station operating income
    11,595       12,146       30,216       30,912  
Corporate general and administrative
    1,794       1,584       4,935       4,516  
Depreciation
    1,562       1,598       4,952       4,716  
Amortization
    120       125       330       375  
     
     
     
     
 
Operating profit
    8,119       8,839       19,999       21,305  
Interest expense
    1,081       1,416       3,773       4,220  
Other
    1,215       (150 )     850       (147 )
Income tax provision
    2,356       3,181       6,031       7,239  
     
     
     
     
 
Net income
  $ 3,467     $ 4,392     $ 9,345     $ 9,993  
     
     
     
     
 
Basic earnings per share
  $ .17     $ .21     $ .45     $ .49  
     
     
     
     
 
Diluted earnings per share
  $ .16     $ .21     $ .44     $ .47  
     
     
     
     
 
                                 
Three Months Ended Nine Months Ended
September 30, September 30,


Radio Broadcasting Segment 2003 2002 2003 2002





(In thousands)
Net operating revenue
  $ 27,370     $ 27,650     $ 79,570     $ 78,368  
Station operating expense
    16,517       16,360       51,123       49,506  
     
     
     
     
 
Station operating income
    10,853       11,290       28,447       28,862  
Corporate general and administrative
                       
Depreciation
    1,163       1,194       3,678       3,505  
Amortization
    116       119       319       357  
     
     
     
     
 
Operating profit
  $ 9,574     $ 9,977     $ 24,450     $ 25,000  
     
     
     
     
 

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                 
Three Months Nine Months
Ended Ended
September 30, September 30,


Television Broadcasting Segment 2003 2002 2003 2002





(In thousands)
Net operating revenue
  $ 3,063     $ 3,140     $ 8,794     $ 8,900  
Station operating expense
    2,321       2,284       7,025       6,850  
     
     
     
     
 
Station operating income
    742       856       1,769       2,050  
Corporate general and administrative
                       
Depreciation
    349       354       1,125       1,062  
Amortization
    4       6       11       18  
     
     
     
     
 
Operating profit
  $ 389     $ 496     $ 633     $ 970  
     
     
     
     
 

5.     Segment Information

      We evaluate the operating performance of our stations 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 all seventy-two of our radio stations and three radio information networks. The Television segment consists of four television stations and three low power television (“LPTV”) stations. The Radio and Television segments derive their revenue from the sale of commercial broadcast inventory. The category “Corporate and Other” represents the income and expense not allocated to reportable segments.

      We evaluate performance of our operating entities based on station operating income before corporate general and administrative, depreciation and amortization (“station operating income”). We believe that station operating income is useful because it provides a meaningful comparison of operating performance between companies in the broadcasting industry and serves as an indicator of the market value of a group of stations. Station operating income is generally recognized by the broadcasting industry as a measure of performance and is used by analysts who report on the performance of broadcasting groups. 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 accounting principles generally accepted in the United States, and should be viewed as a supplement to and not a substitute for the results of operations presented on the basis of accounting principles generally accepted in the United States.

                                 
Three Months Ended Corporate
September 30, 2003: Radio Television and Other Consolidated





(In thousands)
Net operating revenue
  $ 27,370     $ 3,063     $     $ 30,433  
Station operating expense
    16,517       2,321             18,838  
     
     
     
     
 
Station operating income
    10,853       742             11,595  
Corporate general and administrative
                1,794       1,794  
Depreciation
    1,163       349       50       1,562  
Amortization
    116       4             120  
     
     
     
     
 
Operating profit (loss)
  $ 9,574     $ 389     $ (1,844 )   $ 8,119  
     
     
     
     
 

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                 
Three Months Ended Corporate
September 30, 2002: Radio Television and Other Consolidated





(In thousands)
Net operating revenue
  $ 26,643     $ 3,140     $     $ 29,783  
Station operating expense
    15,584       2,284             17,868  
     
     
     
     
 
Station operating income
    11,059       856             11,915  
Corporate general and administrative
                1,511       1,511  
Depreciation
    1,119       354       50       1,523  
Amortization
    119       6             125  
     
     
     
     
 
Operating profit (loss)
  $ 9,821     $ 496     $ (1,561 )   $ 8,756  
     
     
     
     
 
                                 
Nine Months Ended Corporate
September 30, 2003: Radio Television and Other Consolidated





(In thousands)
Net operating revenue
  $ 79,570     $ 8,794     $     $ 88,364  
Station operating expense
    51,123       7,025               58,148  
     
     
     
     
 
Station operating income
    28,447       1,769               30,216  
Corporate general and administrative
                4,935       4,935  
Depreciation
    3,678       1,125       149       4,952  
Amortization
    319       11             330  
     
     
     
     
 
Operating profit (loss)
  $ 24,450     $ 633     $ (5,084 )   $ 19,999  
     
     
     
     
 
Total assets
  $ 198,927     $ 29,335     $ 27,403     $ 255,665  
     
     
     
     
 
                                 
Nine Months Ended Corporate
September 30, 2002: Radio Television and Other Consolidated





(In thousands)
Net operating revenue
  $ 74,574     $ 8,900     $     $ 83,474  
Station operating expense
    46,515       6,850             53,365  
     
     
     
     
 
Station operating income
    28,059       2,050             30,109  
Corporate general and administrative
                4,345       4,345  
Depreciation
    3,287       1,062       149       4,498  
Amortization
    357       18             375  
     
     
     
     
 
Operating profit (loss)
  $ 24,415     $ 970     $ (4,494 )   $ 20,891  
     
     
     
     
 
Total assets
  $ 174,120     $ 26,375     $ 18,890     $ 219,385  
     
     
     
     
 

6.     Long-Term Debt

      On July 29, 2003, we entered into a new credit agreement (the “Credit Agreement”) with a group of banks, to refinance our outstanding debt under the credit agreement in place at June 30, 2003 (the “Old Credit Agreement”). Our current financing facility (the “Facility”) under the Credit Agreement is a $200,000,000 reducing revolving line of credit (the “Reducing Revolver”). The Reducing Revolver matures July 29, 2010. Our indebtedness under the Facility is 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. We have approximately $79,900,000 of unused borrowing capacity under the Facility.

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      We wrote-off unamortized debt issuance costs relating to the Old Credit Agreement of approximately $1,200,000, pre-tax, due to this refinancing during the quarter ended September 30, 2003.

      The Reducing Revolver was used to refinance our Old Credit Agreement and pay transactional fees. The unused portion of the Reducing Revolver may be used for general corporate purposes, including working capital, capital expenditures, permitted acquisitions and related transaction expenses and permitted stock buybacks. On March 31, 2006, the Revolving Commitments (as defined in the Credit Agreement) will be permanently reduced quarterly in amounts ranging from 3.125% to 12.5% of the total Revolving Commitments in effect on March 31, 2006. Any outstanding balance under the Reducing Revolver will be due on the maturity date of July 29, 2010. In addition, the Revolving Commitments shall be further reduced by specified percentages of Excess Cash Flow (as defined in the Credit Agreement) based on leverage ratios. At September 30, 2003 we have classified our current and non-current portion of long-term debt in accordance with the new Credit Agreement.

      Interest rates under the Facility are payable, at our option, at alternatives equal to LIBOR plus 1.375% to 2.0% or the Agent bank’s base rate plus 0.125% to 0.75%. 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 0.375% to 0.625% per annum on the unused portion of the Facility.

      The Credit Agreement contains a number of financial covenants (all of which we were in compliance with at September 30, 2003) which, among other things, require us to maintain specified financial ratios and impose certain limitation on us with respect to investments, additional indebtedness, dividends, distributions, guarantees, liens and encumbrances.

      Long-term debt consisted of the following:

                   
September 30, December 31,
2003 2002


(In thousands)
Credit Agreement:
               
 
Reducing Revolver
  $ 120,100     $  
 
Senior secured term loan facility
          105,000  
Subordinated promissory note. Payments are due monthly, including interest at 10%. The note matures in 2004.
    72       148  
Other, primarily secured debt of affiliates and covenants not to compete
    621       80  
     
     
 
      120,793       105,228  
Amounts due within one year
    72       13,308  
     
     
 
    $ 120,721     $ 91,920  
     
     
 

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SAGA COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Future maturities of long-term debt are as follows:

           
Year Ending December 31,

(In thousands)
 
2003
  $ 27  
 
2004
    45  
 
2005
     
 
2006
    621  
 
2007
     
 
2008
    20,100  
Thereafter
    100,000  
     
 
    $ 120,793  
     
 
 
7. Subsequent Events

      On October 1, 2003 we acquired two FM radio stations (WJZA-FM Lancaster, Ohio and WJZK-FM Richwood, Ohio) serving the Columbus, Ohio market for approximately $13,000,000 including approximately $1,000,000 of our Class A common stock.

      On October 1, 2003 we entered into an agreement to acquire an AM and FM radio station (WBCO-AM and WQEL-FM) serving the Bucyrus, Ohio market for approximately $2,200,000. This transaction, subject to the approval of the Federal Communications Commission, is expected to close during the first quarter 2004. We began operating these stations under the terms of a TBA on October 1, 2003.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

      The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto of Saga Communications, Inc. and its subsidiaries contained elsewhere herein.

General

      Our financial results are dependent on a number of factors, the most significant of which is the ability to generate advertising revenue through rates charged to advertisers. The rates a station is able to charge are, in large part, based on a station’s ability to attract audiences in the demographic groups targeted by its advertisers, as measured principally by 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, local market competition, relative efficiency of radio and/or television broadcasting compared to other advertising media, signal strength and government regulation and policies. The primary operating expenses involved in owning and operating radio stations are employee salaries, depreciation, programming expenses, solicitation of advertising, and promotion expenses. In addition to these expenses, owning and operating television stations involves the cost of acquiring certain syndicated programming.

      We evaluate performance of our operating entities based on station operating income before corporate general and administrative, depreciation and amortization (“station operating income”). We believe that station operating income is useful because it provides a meaningful comparison of operating performance between companies in the broadcasting industry and serves as an indicator of the market value of a group of stations. Station operating income is generally recognized by the broadcasting industry as a measure of performance and is used by analysts who report on the performance of broadcasting groups. 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 generally accepted accounting principles, and should be viewed as a supplement to and not a substitute for the results of operations presented on the basis of accounting principles generally accepted in the United States.

      During the years ended December 31, 2002 and 2001 and the nine month periods ended September 30, 2003 and 2002, our Columbus, Ohio and Milwaukee, Wisconsin stations were the only operating locations representing more than 15% of our station operating income (i.e., net operating revenue less station operating expense). For the years ended December 31, 2002 and 2001, our Columbus stations accounted for 14% and 15%, respectively, and our Milwaukee stations accounted for 22% and 23%, respectively, of station operating income. For the nine months ended September 30, 2003 and 2002, our Columbus stations accounted for 13% and 15%, respectively, and our Milwaukee stations accounted for 23% and 23%, respectively, of station operating income. While radio revenues in each of the Columbus and Milwaukee markets have remained relatively stable historically, an adverse change in these radio markets or in the relative market position of these locations could have a significant impact on our operating results as a whole.

      Because audience ratings in the local market are crucial to a station’s financial success, we endeavor to develop strong listener/viewer loyalty. 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 number of advertisements that can be broadcast without jeopardizing listening/viewing levels (and the resulting ratings) is limited in part by the format of a particular radio station and, in the case of television stations, by restrictions imposed by the terms of certain network affiliation and syndication agreements. Our stations strive to maximize revenue by constantly managing the number of commercials available for sale and adjusting prices based upon local market conditions. In the broadcasting industry, stations often utilize trade (or barter) agreements to generate advertising time sales in exchange for goods or services used or useful in

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the operation of the stations, instead of for cash. We minimize our use of trade agreements and historically have sold over 95% of our advertising time for cash.

      Most advertising contracts are short-term, and generally run only for a few weeks. Most of our revenue is generated from local advertising, which is sold primarily by each station’s sales staff. For the nine months ended September 30, 2003 and 2002, approximately 81% of our 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 stations.

      Our revenue varies throughout the year. Advertising expenditures, our primary source of revenue, generally have been lowest during the winter months, which comprise the first quarter.

      As a result of acquisitions, as of September 30, 2003 we owned and/or operated seventy-two radio stations, four TV stations, three LPTV stations, and three radio information networks. As of September 30, 2002 we owned and/or operated sixty-three radio stations, four TV stations, three LPTV stations and three radio information networks.

      From January 1, 2002 to September 30, 2003, we have acquired/disposed of the following stations or entered into Time Brokerage Agreements (“TBAs”) for stations serving the markets indicated:

  •  May 1, 2002: we acquired an AM and FM radio stations (WKBK-AM, WKNE-FM) serving the Keene, New Hampshire market, and an Am and FM radio station (WKVT-AM/ FM) serving the Brattleboro, Vermont market, for approximately $9,400,000.
 
  •  July 1, 2002: we acquired an AM and FM radio station (WZBK-AM and WOQL-FM) serving the Keene, New Hampshire market for approximately $2,740,000.
 
  •  November 1, 2002: we acquired three FM radio stations (KDEZ-FM, KDXY-FM and KJBX-FM) serving the Jonesboro, Arkansas market for approximately $12,745,000 including approximately $2,245,000 of our Class A common stock.
 
  •  November 1, 2002: we entered into a TBA and a sub-TBA for WISE-AM and WOXL-FM, respectively, serving the Asheville, North Carolina market.
 
  •  November 1, 2002: we acquired an AM and FM radio station (WJQY-AM and WJOI-FM) serving the Springfield, Tennessee market for approximately $1,525,000.
 
  •  March 11, 2003: we acquired one AM radio station (WOXL-AM) serving the Asheville, North Carolina market for approximately $350,000.
 
  •  March 28, 2003: we acquired one FM radio station (WODB-FM) serving the Columbus, Ohio market for approximately $10,000,000. In conjunction with this transaction we sole one our AM radio stations (WVKO-AM) serving the Columbus, Ohio market for approximately $1,000,000.
 
  •  On April 1, 2003: we acquired one FM radio station (WINQ-FM) serving the Winchendon, Massachusetts market for approximately $400,000 plus an additional $500,000 if within five years of closing we obtain approval from the FCC for a city of license change.
 
  •  On April 1, 2003: we sold an AM radio station (WLLM-AM) serving the Lincoln, Illinois market for approximately $275,000.

      For additional information with respect to these acquisitions and dispositions, see “Liquidity and Capital Resources” below.

      We actively seek and explore opportunities for expansion through the acquisition of additional broadcast properties. We review acquisition opportunities on an ongoing basis.

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Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002

      The following tables summarize our results of operations for the three months ended September 30, 2003 and 2002. The as-reported percentages reflect our historical financial results and include the results of operations for stations that we did not own for the entire comparable period. The same station percentages reflect the results of operations for stations that we owned for the entire comparable period.

Consolidated Results of Operations

                                 
Three Months Ended
September 30, As-Reported Same Station

% Increase % Increase
2003 2002 (Decrease) (Decrease)




(In thousands
except per share data)
Net operating revenue
  $ 30,433     $ 29,783       2.18 %     (2.54 )%
Station operating expense*
    18,838       17,868       5.43 %     (0.83 )%
     
     
                 
Station operating income
    11,595       11,915       (2.69 )%     (5.11 )%
Corporate G&A
    1,794       1,511       18.73 %     N/A  
Depreciation
    1,562       1,523       2.56 %     (2.23 )%
Amortization
    120       125       (4.0 )%     (28.00 )%
     
     
                 
Operating profit
    8,119       8,756       (7.28 )%     (9.41 )%
Interest expense
    1,081       1,344       (19.57 )%        
Other (income) expense
    1,215       (150 )     N/A          
Income taxes
    2,356       3,176       (25.82 )%        
     
     
                 
Net income
  $ 3,467     $ 4,386       (20.95 )%        
     
     
                 
Basic earnings per share
  $ .17     $ .21       (21.83 )%        
     
     
                 
Diluted earnings per share
  $ .16     $ .21       (21.34 )%        
     
     
                 

Radio Broadcasting Segment

                                 
Three Months Ended
September 30, As-Reported Same Station

% Increase % Increase
2003 2002 (Decrease) (Decrease)




(In thousands)
Net operating revenue
  $ 27,370     $ 26,643       2.73 %     (2.56 )%
Station operating expense*
    16,517       15,584       5.99 %     (0.63 )%
     
     
                 
Station operating income
    10,853       11,059       (1.86 )%     (5.27 )%
Depreciation
    1,163       1,119       3.93 %     (2.59 )%
Amortization
    116       119       (2.52 )%     (27.73 )%
     
     
                 
Operating profit
  $ 9,574     $ 9,821       (2.52 )%     (5.30 )%

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Television Broadcasting Segment

                                 
Three Months Ended
September 30, As-Reported Same Station

% Increase % Increase
2003 2002 (Decrease) (Decrease)




(In thousands)
Net operating revenue
  $ 3,063     $ 3,140       (2.45 )%     (2.45 )%
Station operating expense*
    2,321       2,284       1.62 %     (2.23 )%
     
     
                 
Station operating income
    742       856       (13.32 )%     (3.04 )%
Depreciation
    349       354       (1.41 )%     (1.41 )%
Amortization
    4       6       (33.33 )%     (33.33 )%
     
     
                 
Operating profit
  $ 389     $ 496       (21.57 )%     (3.83 )%


Programming, technical, selling and station general and administrative expenses.

      For the three months ended September 30, 2003, net operating revenue was $30,433,000 compared with $29,783,000 for the three months ended September 30, 2002, an increase of $650,000 or 2%. Approximately $1,405,000 of the increase was attributable to revenue generated by stations that we did not own or operate for the comparable period in 2002. Net operating revenue generated by stations that we owned and operated for the entire comparable period (“same station”) decreased by approximately 2.5% ($755,000). This decrease was primarily the result of a decrease in political advertising revenue at a majority of our stations.

      Station operating expense (i.e., programming, technical, selling and station general and administrative expenses) increased by $970,000 or 5% to $18,838,000 for the three months ended September 30, 2003, compared with $17,868,000 for the three months ended September 30, 2002. Of the total increase, approximately $1,118,000 or 115% was the result of the impact of the operation of stations that we did not own or operate for the comparable period in 2002. Station operating expense decreased by approximately $148,000 or 1% on a same station basis.

      Operating profit decreased by $637,000 or 7% to $8,119,000 for the three months ended September 30, 2003, compared with $8,756,000 for the three months ended September 30, 2002. The decrease was primarily the result of the $650,000 increase in net operating revenue offset by the $970,000 increase in station operating expense, and a $283,000 or 19% increase in corporate general and administrative expense. The increase in corporate general and administrative expense was primarily attributable to increases in legal, accounting, consulting and employee benefit related expenses. Of the increase approximately $125,000 or 44% in additional legal and accounting fees related to a conversion of a number of our subsidiaries from C-Corporations to Limited Liability Company’s (“LLC’s”) as part of a state tax saving strategy. The balance of the increases legal, consulting and employee benefit related expenses are primarily the result of recent acquisitions.

      We generated net income in the amount of approximately $3,467,000 ($0.17 per share on a diluted basis) during the three months ended September 30, 2003, compared with net income of $4,386,000 ($0.21 per share on a diluted basis) for the three months ended September 30, 2002, a decrease of approximately $919,000. The decrease in net income was principally the result of the $637,000 decrease in operating profit and a $1,365,000 increase in other expense, offset by a $263,000 decrease in interest expense an $820,000 decrease in income taxes. The increase in other expense was primarily attributable to a $1,200,000 charge incurred for the write-off of unamortized debt issuance costs in conjunction with our Old Credit Agreement. See Note 6 of the Notes to Condensed Consolidated Financial Statements. The decrease in interest expense was the result of lower interest rates over the prior period.

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Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

      The following tables summarize our results of operations for the nine months ended September 30, 2003 and 2002. The as-reported percentages reflect our historical financial results and include the results of operations for stations that we did not own for the entire comparable period. The same station percentages reflect the results of operations for stations that we owned for the entire comparable period.

Consolidated Results of Operations

                                 
Nine Months Ended
September 30, As-Reported Same Station

% Increase % Increase
2003 2002 (Decrease) (Decrease)




(In thousands
except per share data)
Net operating revenue
  $ 88,364     $ 83,474       5.86 %     (0.12 )%
Station operating expense*
    58,148       53,365       8.96 %     0.26 %
     
     
                 
Station operating income
    30,216       30,109       0.36 %     (0.79 )%
Corporate G&A
    4,935       4,345       13.58 %     N/A  
Depreciation
    4,952       4,498       10.09 %     4.32 %
Amortization
    330       375       (12.00 )%     (28.27 )%
     
     
                 
Operating profit
    19,999       20,891       (4.27 )%     (4.45 )%
Interest expense
    3,773       4,052       (6.89 )%        
Other (income)expense
    850       (147 )     N/A          
Income taxes
    6,031       7,135       (15.47 )%        
     
     
                 
Net income
  $ 9,345     $ 9,851       (5.14 )%        
     
     
                 
Basic earnings per share
  $ .45     $ .48       (6.32 )%        
     
     
                 
Diluted earnings per share
  $ .44     $ .47       (5.84 )%        
     
     
                 

Radio Broadcasting Segment

                                 
Nine Months Ended
September 30, As-Reported Same Station

% Increase % Increase
2003 2002 (Decrease) (Decrease)




(In thousands)
Net operating revenue
  $ 79,570     $ 74,574       6.70 %     0.01 %
Station operating expense*
    51,123       46,515       9.91 %     0.10 %
     
     
                 
Station operating income
    28,447       28,059       1.38 %     (0.14 )%
Depreciation
    3,678       3,287       11.90 %     3.99 %
Amortization
    319       357       (10.64 )%     (27.73 )%
     
     
                 
Operating profit
  $ 24,450     $ 24,415       0.14 %     (0.29 )%

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Television Broadcasting Segment

                                 
Nine Months
Ended
September 30, As-Reported Same Station

% Increase % Increase
2003 2002 (Decrease) (Decrease)




(In thousands)
Net operating revenue
  $ 8,794     $ 8,900       (1.19 )%     (1.19 )%
Station operating expense*
    7,025       6,850       2.55 %     1.28 %
     
     
                 
Station operating income
    1,769       2,050       (13.71 )%     (9.46 )%
Depreciation
    1,125       1,062       5.93 %     5.93 %
Amortization
    11       18       (38.89 )%     (38.89 )%
     
     
                 
Operating profit
  $ 633     $ 970       (34.74 )%     (25.77 )%


* Programming, technical, selling and station general and administrative expenses.

      For the nine months ended September 30, 2003, net operating revenue was $88,364,000 compared with $83,474,000 for the nine months ended September 30, 2002, an increase of $4,890,000 or 6%. Approximately $4,988,000 or 102% of the increase was attributable to revenue generated by stations that we did not own or operate for the comparable period in 2002. Net operating revenue generated by stations that we owned and operated for the entire comparable period (“same station”) was relatively flat (decreased by approximately .1% ($98,000).

      Station operating expense (i.e., programming, technical, selling and station general and administrative expenses) increased by $4,783,000 or 9% to $58,148,000 for the nine months ended September 30, 2003, compared with $53,365,000 for the nine months ended September 30, 2002. Of the total increase, approximately $4,648,000 or 97% was the result of the impact of the operation of stations that we did not own or operate for the comparable period in 2002. Station operating expense increased by approximately $135,000 or .3% on a same station basis.

      Operating profit decreased by $892,000 or 4% to $19,999,000 for the nine months ended September 30, 2003, compared with $20,891,000 for the nine months ended September 30, 2002. The increase was primarily the result of the $4,890,000 increase in net operating revenue offset by the $4,783,000 increase in station operating expense, a $590,000 increase in corporate general and administrative and a $454,000 increase in depreciation expense. The increase in corporate general and administrative was primarily attributable to increases in legal, accounting, consulting and employee benefit related expenses. Of the increase approximately $275,000 in additional legal and accounting fees related to a conversion of a number of our subsidiaries from C-Corporations to Limited Liability Company’s (“LLC’s”) as part of a state tax saving strategy. The balance of the increases in legal, consulting and employee benefit related expenses are primarily the result of recent acquisitions.

      We generated net income in the amount of approximately $9,345,000 ($0.44 per share on a diluted basis) during the nine months ended September 30, 2003, compared with net income of $9,851,000 ($0.47 per share on a diluted basis) for the nine months ended September 30, 2002, a decrease of approximately $506,000. The decrease in net income was principally the result of the $892,000 decrease in operating profit and a $1,104,000 increase in other expense, offset a $279,000 decrease in interest expense and a $506,000 decrease in income taxes. The increase in other expense was primarily attributable to a $1,200,000 charge incurred for the write-off of unamortized debt issuance costs in conjunction with our Old Credit Agreement offset by gains recognized on the sale of two of our AM radio stations in the Columbus, Ohio and Springfield, Illinois markets. See Notes 4 and 6 of the Notes to Condensed Consolidated Financial Statements. The decrease in interest expense was the result of lower interest rates over the prior period.

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Outlook

      The following statements are forward-looking statements and should be read in conjunction with “Forward-Looking Statements” below.

      Based on the economic and market conditions as of November 6, 2003, for the year ending December 31, 2003 we anticipate net revenue and station operating income on a pro forma basis to range from flat to up 2%.

Forward-Looking Statements

      Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as “believes,” “anticipates,” “estimates,” “plans”, “expects,” and similar expressions are intended to identify forward-looking statements. These statements are made as of the date of this report or as otherwise indicated, based on current expectations. We undertake no obligation to update this information. A number of important factors could cause our actual results for 2003 and beyond to differ materially from those expressed in any forward-looking statements made by or on our behalf. Forward looking statements are not guarantees of future performance as they involve a number of risks, uncertainties and assumptions that may prove to be incorrect and that may cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks, uncertainties and assumptions that may affect our performance include our financial leverage and debt service requirements, dependence on key personnel, dependence on key stations, U.S. and local economic conditions, our ability to successfully integrate acquired stations, regulatory requirements, new technologies, natural disasters and terrorist attacks. We cannot be sure that we will be able to anticipate or respond timely to changes in any of these factors, which could adversely affect the operating results in one or more fiscal quarters. Results of operations in any past period should not be considered, in and of itself, indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of our stock.

      For a more complete description of the prominent risks and uncertainties inherent in our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward Looking Statements; Risk Factors” in our Form 10-K for the year ended December 31, 2002.

Liquidity and Capital Resources

      As of September 30, 2003, we had $120,793,000 of long-term debt (including the current portion thereof) outstanding and approximately $79,900,000 of unused borrowing capacity under our Credit Agreement.

      On July 29, 2003, we entered into a new credit agreement (the “Credit Agreement”) to refinance our outstanding debt under the Old Credit Agreement. Our current financing facility (the “Facility”) is a $200,000,000 reducing revolving line of credit (the “Reducing Revolver”). The Facility matures July 29, 2010. Our indebtedness under the Facility is 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 Reducing Revolver may be used for general corporate purposes, including working capital, capital expenditures, permitted acquisition and related transaction expenses and permitted stock buybacks. On March 31, 2006, the Revolving Commitments (as defined in the Credit Agreement) will be permanently reduced quarterly in amounts ranging from 3.125% to 12.5% of the total Revolving Commitments in effect on March 31, 2006. Any outstanding balance under the Reducing Revolver will be due on the maturity date of July 29, 2010. In addition, the Revolving Commitments shall be further reduced by specified percentages of Excess Cash Flow (as defined in the New Credit Agreement) based on leverage ratios. At September 30, 2003 we have classified our current and non-current portion of long-term debt in accordance with the new Credit Agreement.

      Interest rates under the Facility are payable, at our option, at alternatives equal to LIBOR plus 1.375% to 2.0% or the Agent bank’s base rate plus 0.125% to 0.75%. The spread over LIBOR and the base rate vary from

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time to time, depending upon our financial leverage. We also pay quarterly commitment fees of 0.375% to 0.625% per annum on the unused portion of the Facility.

      The Credit Agreement contains a number of financial covenants (all of which we were in compliance with at September 30, 2003) which, among other things, require us to maintain specified financial ratios and impose certain limitations on us with respect to investments, additional indebtedness, dividends, distributions, guarantees, liens and encumbrances.

      We may use interest rate swap agreements to reduce our risk of rising interest rates. Our swap agreements, which expired in September, 2003, were used to convert the variable Eurodollar interest rate of a portion of our bank borrowings to a fixed interest rate. At September 30, 2003 we had no interest rate swap agreements in place.

      In September 2003, the following two separate interest rate swap agreements expired, each agreement had the following terms:

  •  Notional amount of $20,000,000. We paid 3.67% calculated on the notional amount. We received LIBOR (1.100% at September 10, 2003) calculated on the notional amount of $20,000,000. These agreements expired in September 2003.

      Net receipts or payments under the agreements were recognized as an adjustment to interest expense. Approximately $756,000 in additional interest expense was recognized as a result of these interest rate swap agreements for the nine months ended September 30, 2003. An aggregate increase in interest expense of approximately $1,736,000 has been recognized since the inception of the agreements.

      During the nine months ended September 30, 2003 and 2002, we had net cash flows from operating activities of $20,244,000 and $9,966,000, 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 Agreement. 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.

      On March 11, 2003 we acquired an AM radio station (WOXL-AM) serving the Asheville, North Carolina market for approximately $350,000. We financed this acquisition through funds generated from operations.

      On March 28, 2003 we acquired an FM radio station (WODB-FM) serving the Columbus, Ohio market for approximately $10,000,000. In conjunction with this transaction we sold our AM radio station (WVKO-AM) serving the Columbus, Ohio market for approximately $1,000,000. We financed this acquisition through borrowings under the Credit Agreement of $8,500,000 and through funds generated from operations.

      On April 1, 2003, we acquired an FM radio station (WINQ-FM) serving the Winchendon, Massachusetts market for approximately $420,000. We financed this acquisition through funds generated from operations.

      We continue to actively seek and explore opportunities for expansion through the acquisition of additional broadcast properties.

      In September 2002, our Board of Directors approved a modification of our Stock Buy-Back Program allowing us to purchase up to $10,000,000 of our Class A Common Stock. From the inception of the Stock Buy-Back program in 1998 through September 30, 2003, we have repurchased 508,165 shares of our Class A Common Stock for approximately $6,690,000.

      We anticipate that any future acquisitions of radio and television stations and purchases of Class A Common Stock under the Stock Buy-Back Program will be financed through funds generated from operations, borrowings under the Credit Agreement, additional debt or equity financing, or a combination thereof. However, there can be no assurances that any such financing will be available.

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      Our capital expenditures, exclusive of acquisitions, for the nine months ended September 30, 2003 were approximately $6,410,000 ($5,855,000 for the nine months ended September 30, 2002). We anticipate capital expenditures in 2003 to be approximately $8,500,000, which we expect to finance through funds generated from operations or additional borrowings under the Credit Agreement.

Summary Disclosures About Contractual Obligations and Commercial Commitments

      We have future cash obligations under various types of contracts under the terms of our Credit Agreement, operating leases, programming contracts, employment agreements, and other operating contracts. For additional information concerning our future cash obligations see “Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation — Summary Disclosures About Contractual Obligations and Commercial Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2002.

      With the exception of our new Credit Agreement disclosed in Note 6, there have been no material changes to such contracts/commitments during the nine months ended September 30, 2003. We anticipate that the above contractual cash obligations will be financed through funds generated from operations or additional borrowings under the Credit Agreement, 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. Our critical accounting policies are described in “Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2002.

Recent Accounting Pronouncements

      On January 1, 2003, we adopted SFAS 143, “Accounting for Asset Retirement Obligations”. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development, and/or the normal operation of a long lived asset. The adoption of SFAS 143 did not materially impact our financial position, cash flows or results of operations.

      On January 1, 2003 we adopted SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The adoption of SFAS 146 did not materially impact our financial position, cash flows or results of operations.

      On January 1, 2003 we adopted the initial recognition provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 45 (“FIN 45”), entitled “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. We adopted the disclosure requirements of FIN 45 in 2002. This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. This interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The adoption of Interpretation No. 45 did not materially impact our financial position, cash flows or results of operations. See Note 4 for a guarantee that we entered into on March 7, 2003.

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN 46 entitled “Consolidation of Variable Interest Entities.” This interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. In general, a variable

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interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. The Interpretation also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, 2003 and is effective no later than the first interim or annual period beginning after December 15, 2003 for variable interest entities created prior to February 1, 2003. The adoption of FIN 46 did not materially impact our financial position, cash flows, or results of operations related to variable interest entities created after January 31, 2003. We have not yet determined what the effect, if any, this interpretation will have on our financial statements for the provisions impacting variable interest entities created prior to February 1, 2003.

Inflation

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

 
Item 3. Quantitative and Qualitative Disclosures about Market Risk

      Refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk and Risk Management Policies” in our Annual Report on Form 10-K for the year ended December 31, 2002 for a complete discussion of our market risk. There have been no material changes to the market risk information included in our 2002 Annual Report on Form 10-K.

 
Item 4. Controls and Procedures

      As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its principal executive and financial officers, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s principal executive and financial officers concluded that our disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed in the reports we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

      There have been no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II OTHER INFORMATION

 
Item 2. Changes in Securities and Use of Proceeds

  (b)  On July 29, 2003, we entered into a new $200,000,000 reducing revolving line of credit maturing on July 29, 2010. The terms of the line of credit contain a number of financial covenants which, among other provisions, impose certain limitations on us with respect to the payment of dividends and distributions.

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Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits

     
31.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
  Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Rule 13-14(b) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
  Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, and Rule 13-14(b) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      (b) Reports on Form 8-K

             
Financial Statements
Date Items Reported Filed



8/07/03
  Item 7 — Financial Statements and Exhibits        
    Item 12 — Results of Operations and Financial Condition     None  
8/26/03
  Item 5 — Other Events     None  

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SIGNATURES

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

  SAGA COMMUNICATIONS, INC.
 
  /s/ SAMUEL D. BUSH
_______________________________________
Samuel D. Bush
  Senior Vice President, Chief Financial
  Officer, and Treasurer
  (Principal Financial Officer)

Date: November 13, 2003

  /s/ CATHERINE A. BOBINSKI
_______________________________________
Catherine A. Bobinski
  Vice President, Corporate Controller
  and Chief Accounting Officer
  (Principal Accounting Officer)

Date: November 13, 2003

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INDEX TO EXHIBITS

         
Exhibit
Number Description


  31.1     Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2     Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1     Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Rule 13-14(b) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2     Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Rule 13-14(b) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.