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, 2014 we owned or operated ninety-two radio stations, four television stations, five low-power television stations and one radio information network serving twenty-five markets throughout the United States.

Basis of Presentation

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

All share and per share information in the accompanying financial statements for periods prior to the split have been restated retroactively to reflect the stock split. The common stock and additional paid-in capital accounts reflect the retroactive capitalization of the four-for-three 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.

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 43 %, 44 % and 44 % of our net operating revenue for the years ended December 31, 2014, 2013 and 2012, respectively.

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. We did not have any time deposits at December 31, 2014 and 2013.

Financial Instruments

Our financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. The carrying value of long-term debt approximates fair value as it carries interest rates that either fluctuate with the euro-dollar rate, prime rate or have been reset at the prevailing market rate at December 31, 2014.

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, 2014, 2013 and 2012 was as follows:

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

December 31, 2014	$	578	$	139	$	(322)	$	395
December 31, 2013	$	577	$	293	$	(292)	$	578
December 31, 2012	$	794	$	134	$	(351)	$	577

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 received are 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 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 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 2014, 2013 and 2012.

Property and equipment consisted of the following:

	Estimated	December 31,
	Useful Life	2014		2013
		(In thousands)

Land and land improvements	—	$	11,026	$	10,984
Buildings	31.5 years		33,275		32,378
Towers and antennae	7-15 years		26,191		25,761
Equipment	3-15 years		79,216		77,908
Furniture, fixtures and leasehold improvements	7-20 years		8,104		7,926
Vehicles	5 years		3,790		3,805
			161,602		158,762
Accumulated depreciation			(106,415)		(102,425)
Net property and equipment		$	55,187	$	56,337

Depreciation expense for the years ended December 31, 2014, 2013 and 2012 was $6,648,000, $6,716,000 and $6,805,000, respectively.

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.

We have 99 broadcast licenses serving 25 markets, some of which are currently under renewal, while others require renewal over the period of 2015-2022. 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 an 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.

Deferred Costs

The costs related to the issuance of debt are capitalized and amortized to interest expense over the life of the debt. During the years ended December 31, 2014, 2013 and 2012, we recognized interest expense related to the amortization of debt issuance costs of $187,000 , $204,000 and $231,000, respectively. In 2013 we also wrote-off unamortized debt issuance costs of $55,000, pre-tax, in connection with an amendment to our credit facility. See Note 4 – Long-Term Debt.

At December 31, 2014 and 2013 the net book value of deferred costs was $636,000, and $823,000, respectively, and was presented in Other intangibles, deferred costs and investments in our Consolidated Balance Sheets.

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 terms of the syndication agreements and estimated usage in future years.

Treasury Stock

In March 2013, our board of directors authorized an increase in the amount committed to our Stock Buy-Back Program (the “Buy-Back Program”) from $60 million to $75.8 million. The Buy-Back Program allows us to repurchase our Class A Common Stock. As of December 31, 2014, we had remaining authorization of $29.7 million for future repurchases of our Class A Common Stock.

Repurchases of shares of our Common Stock are recorded as Treasury stock and result in a reduction of Stockholders’ equity. During 2014, 2013 and 2012, we acquired 6,165 shares at an average price of $41.15 per share, 2,179 shares at an average price of $43.98 per share and 2,924 shares at an average price of $27.30 per share, respectively.

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 Income. Assets and liabilities related to the TBA’s/LMA’s are included in the accompanying Consolidated Balance Sheets.

Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred. Such costs amounted to $3,056,000, $3,225,000 and $3,182,000 for the years ended December 31, 2014, 2013 and 2012, 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. Our effective tax rate is higher than the federal statutory rate as a result of the inclusion of state taxes in the income tax amount.

Dividends

On December 3, 2014 the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share and a special cash dividend of $1.20 per share on its Classes A and B Common Stock. This dividend totaling $8.2 million was paid on December 29, 2014 to shareholders of record on December 15, 2014.

On September 23, 2014 the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share on its Classes A and B Common Stock. This dividend totaling $1.1 million was paid on October 17, 2014 to shareholders of record on October 3, 2014.

On June 30, 2014 the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share on its Classes A and B Common Stock. This dividend totaling $1.1 million was paid on July 25, 2014 to shareholders of record on July 11, 2014.

On November 21, 2013 the Company’s Board of Directors declared a special cash dividend of $1.80 per share on its Classes A and B Common Stock. This dividend totaling $10.3 million was paid on December 12, 2013 to shareholders of record on December 2, 2013.

On October 2, 2012 the Company’s Board of Directors declared a special cash dividend of $1.24 per share on its Classes A and B Common Stock. This dividend totaling $7.0 million was paid on December 3, 2012 to shareholders of record on November 15, 2012.

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

Earnings per share is calculated using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security. The Company has participating securities related to restricted stock units, granted under the Company’s Second Amended and Restated 2005 Incentive Compensation Plan, that earn dividends on an equal basis with common shares. In applying the two-class method, earnings are allocated to both common shares and participating securities.

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

	Years Ended December 31,
	2014		2013		2012
	(In thousands, except per share data)

Numerator:
Net income	$	14,904	$	15,273	$	17,925
Less: Net income allocated to unvested participating securities		234		135		—
Net income available to common stockholders	$	14,670	$	15,138	$	17,925
Denominator:
Denominator for basic earnings per share-weighted average shares		5,700		5,681		5,659
Effect of dilutive securities:
Stock options		53		64		13
Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions		5,753		5,745		5,672
Basic earnings per share	$	2.57	$	2.66	$	3.17
Diluted earnings per share	$	2.55	$	2.64	$	3.16

The number of stock options outstanding that had an antidilutive effect on our earnings per share calculation, and therefore have been excluded from dilutive earnings per share calculation, was 45,000, 13,000 and 93,000 for the years ended December 31, 2014, 2013, and 2012, respectively. 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.

Recently Adopted Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, to change the criteria for determining which disposals can be presented as discontinued operations and to enhance the related disclosure requirements for discontinued operations. We early adopted ASU 2014-08 in our fourth quarter of 2014 and applied the new guidance in accounting for the sale of the Michigan Radio Network, the Michigan Farm Network, the Minnesota News Network and the Minnesota Farm Network. We determined that the sale of our networks did not represent a strategic shift that will have a major effect on our operations and financial results, and accordingly it was not reported as a discontinued operation.

Recent Accounting Pronouncements

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for the first interim period within annual reporting periods beginning after December 15, 2016 and is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This new standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under GAAP. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of the provisions of this new standard on our consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, an amendment to FASB ASC Topic 740, Income Taxes. This amendment requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in the settlement of uncertain tax positions. This amendment was adopted on January 1, 2014 and did not have a material impact on our consolidated financial statements.

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements Which the Total Amount of the Obligation is Fixed at the Reporting Date, an amendment to FASB ASC Topic 405, Liabilities. This update provides guidance on the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements, including debt arrangements, other contractual obligations, and settled litigation and judicial rulings, for which the total amount of the obligation is fixed at the reporting date. This amendment was adopted on January 1, 2014 and did not have a material impact on our consolidated financial statements.