Item 1. Business
Overview
We are a television broadcasting company focused exclusively on the acquisition, development and operation of television stations in medium-sized markets in the United States, primarily markets that rank from 50 to 175, as reported by A.C. Nielsen Company. As of December 31, 2009, we owned and operated 16 stations. The stations that we own and operate are in markets located in New York, Pennsylvania, Illinois, Indiana, Missouri, Arkansas, Louisiana, Texas and Montana. These stations are diverse in their network affiliations: 14 have primary affiliation agreements with one of the four major networks-3 with NBC, 5 with Fox, 4 with ABC, and 2 with CBS, and 2 stations have an agreement with MyNetworkTV. Additionally, one of the stations has a secondary network affiliation with MyNetworkTV that is broadcast over a digital multicast (DM).
We believe that medium-sized markets offer significant advantages over large-sized markets, most of which result from a lower level of competition. First, because there are fewer well-capitalized acquirers with a medium-market focus, we have been successful in purchasing stations on more favorable terms than acquirers of large market stations. Second, in many of our markets only four or five local commercial television stations exist. As a result, we achieve lower programming costs than stations in larger markets because the supply of quality programming exceeds the demand.
The stations we own and operate provide free over-the-air programming to our markets’ television viewing audiences. This programming includes (a) programs produced by networks with which the stations are affiliated; (b) programs that the stations produce; and (c) first-run and rerun syndicated programs that the stations acquire. Our primary source of revenue is indirectly derived from the sale of commercial air time to local and national advertisers that is paid to us by Nexstar under local service agreements.
Our principal offices are located at 7650 Chippewa Road, Suite 305, Brecksville, Ohio 44141. Our telephone number is (440) 526-2227.
Local Service Agreements and Purchase Options
The following table summarizes the various local service agreements our stations had in effect as of December 31, 2009 with Nexstar-owned stations:
Service Agreements
Stations
TBA Only(1)
WFXP and KHMT
SSA & JSA(2)
KJTL, KJBO-LP, KOLR, KCIT, KCPN-LP, KAMC, KRBC, KSAN, WUTR, WFXW, WYOU, KODE, KTVE and WTVO
(1)
Mission has a time brokerage agreement (“TBA”) for each of these stations which allows Nexstar to program most of each station’s broadcast time, sell each station’s advertising time and retain the advertising revenue generated in exchange for monthly payments to Mission.
(2)
Mission has both a shared services agreement (“SSA”) and a joint sales agreement (“JSA”) for each of these stations. The SSA allows the sharing of services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments from Mission as described in the SSAs. The JSAs permit Nexstar to sell and retain a percentage of the net revenue from the station’s advertising time in return for monthly payments to Mission of the remaining percentage of net revenue, as described in the JSAs.
In conjunction with its acquisition of KTVE, the NBC affiliate in the Monroe, Louisiana - El Dorado, Arkansas market, effective January 16, 2008, Mission entered into an SSA and JSA with Nexstar. The terms of the SSA and JSA are comparable to the terms of the SSAs and JSAs between Nexstar and Mission as discussed above.
Under these agreements, Mission is responsible for certain operating expenses of its stations and therefore may have unlimited exposure to any potential operating losses. Mission will continue to operate its stations under the SSAs and JSAs or TBAs until the termination of such agreements. The SSAs and JSAs generally have terms of ten years. Nexstar indemnifies Mission for Nexstar’s activities pursuant to the local service agreements.
The arrangements under the SSAs and JSAs have had the effect of Nexstar receiving substantially all of the available cash, after debt service costs, generated by the stations listed above. The arrangements under the TBAs have also had the effect of Nexstar receiving substantially all of the available cash generated by the TBA stations listed above. Mission anticipates that, through these local service agreements, Nexstar will continue to receive substantially all of Mission’s available cash, after payments for debt service costs, generated by the stations listed above.
Nexstar Broadcasting Group, Inc. and its subsidiaries (“Nexstar Broadcasting Group”) guarantee all obligations incurred under our senior credit facility. We are a guarantor of the senior credit facility entered into by Nexstar and the senior subordinated notes issued by Nexstar. In consideration of Nexstar Broadcasting Group’s guarantee of our senior credit facility, Mission’s sole shareholder has granted Nexstar purchase options to acquire the assets and assume the liabilities of each Mission television station, subject to FCC consent, for consideration equal to the greater of (1) seven times the station’s cash flow, as defined in the option agreement, less the amount of its indebtedness as defined in the option agreement, or (2) the amount of its indebtedness. These option agreements (which expire on various dates between 2011 and 2018) are freely exercisable or assignable by Nexstar without consent or approval by Mission’s sole shareholder. We expect these option agreements to be renewed upon expiration.
Refer to Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence” for a more complete disclosure of the local service and option agreements our stations had in effect as of December 31, 2009.
Nexstar does not own Mission or Mission’s television stations. However, as a result of Nexstar Broadcasting Group’s guarantee of all obligations incurred under our senior credit facility and the arrangements under the local service agreements and purchase option agreements with us, Nexstar is deemed under accounting principles generally accepted in the United States of America (“U.S. GAAP”) to have a controlling financial interest in Mission while complying with the Federal Communications Commission (“FCC”) rules regarding ownership limits in television markets. In order for both Nexstar and Mission to comply with FCC regulations, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations.
Business Strategy
The operating revenue of our stations is derived primarily from broadcast advertising revenue sold and collected by Nexstar and paid to us under the JSAs. Broadcast advertising revenue is affected by a number of factors, including the economic conditions of the markets in which we operate, the demographic makeup of those markets and the marketing strategy employed in each market. Our primary operating expense consists of fixed monthly SSA fees paid to Nexstar for news production and technical and other services. To a lesser extent, our operating expenses include employee compensation and related benefits. A large percentage of the costs involved in the operation of our stations remain fixed.
The Stations
The following chart sets forth general information about the stations that we owned and operated as of December 31, 2009:
Market Rank(1)
Market
Station
Affiliation
Commercial
Stations in
Market (2)
FCC
License
Expiration
Date
Wilkes Barre-Scranton, PA
WYOU
CBS
(3)
Springfield, MO
KOLR
CBS
(3)
Amarillo, TX
KCIT
Fox
(3)
KCPN-LP
MyNetworkTV
(3)
Rockford, IL
WTVO
ABC/MyNetworkTV
(3)
Monroe, LA-El Dorado, AR
KTVE
NBC
6/1/13
Lubbock, TX
KAMC
ABC
(3)
Erie, PA
WFXP
Fox
(3)
Joplin, MO-Pittsburg, KS
KODE
ABC
(3)
Wichita Falls, TX- Lawton, OK
KJTL
Fox
(3)
KJBO-LP
MyNetworkTV
(3)
Terre Haute, IN
WFXW
Fox
(3)
Abilene-Sweetwater, TX
KRBC
NBC
(3)
Billings, MT
KHMT
Fox
(3)
Utica, NY
WUTR
ABC
(3)
San Angelo, TX
KSAN
NBC
(3)
(1)
Market rank refers to ranking the size of the Designated Market Area (“DMA”) in which the station is located in relation to other DMAs. Source: Investing in Television Market Report 2009 4th Edition, as published by BIA Financial Network, Inc.
(2)
The term “commercial station” means a television broadcast station and excludes non-commercial stations, religious and Spanish-language stations, cable program services or networks. Source: Investing in Television Market Report 2009 4th Edition, as published by BIA Financial Network, Inc.
(3)
Application for renewal of license timely was submitted to the FCC. Under the FCC’s rules, a license expiration date automatically is extended pending review of and action on the renewal application by the FCC.
Industry Background
Commercial television broadcasting began in the United States on a regular basis in the 1940s. Currently a limited number of channels are available for over-the-air broadcasting in any one geographic area and a license to operate a television station must be granted by the FCC. All television stations in the country are grouped by A.C. Nielsen Company, a national audience measuring service, into 210 generally recognized television markets, known as designated market areas (“DMAs”), that are ranked in size according to various metrics based upon actual or potential audience. Each DMA is an exclusive geographic area consisting of all counties in which the home-market commercial stations receive the greatest percentage of total viewing hours. A.C. Nielsen periodically publishes data on estimated audiences for the television stations in the DMA. The estimates are expressed in terms of a “rating,” which is a station’s percentage of the total potential audience in the market, or a “share,” which is the station’s percentage of the audience actually watching television. A station’s rating in a market can be a factor in determining advertising rates.
Most television stations are affiliated with networks and receive a significant part of their programming, including prime-time hours, from networks. Whether or not a station is affiliated with one of the four major networks (NBC, ABC, CBS or Fox) has a significant impact on the composition of the station’s revenue, expenses and operations. Network programming, along with cash payments for some NBC, ABC and CBS affiliates, is provided to the affiliate by the network in exchange for the network’s retention of a substantial majority of the advertising time during network programs. The network then sells this advertising time and retains the revenue. The affiliate retains the revenue from the remaining advertising time it sells during network programs and from advertising time it sells during non-network programs.
Broadcast television stations compete for advertising revenue primarily with other commercial broadcast television stations, cable and satellite television systems and, to a lesser extent, with newspapers, radio stations and internet advertising serving the same market. Non-commercial, religious and Spanish-language broadcasting stations in many markets also compete with commercial stations for viewers. In addition, the Internet and other leisure activities may draw viewers away from commercial television stations.
The television broadcast industry transitioned to an advanced digital television (“DTV”) transmission system on June 12, 2009. DTV transmissions deliver improved video and audio signals including high definition television and have substantial multiplexing and data transmission capabilities. For each licensed television station, the FCC allocated a matching DTV channel for the transition period. Television broadcasters were required to cease analog broadcasting by June 12, 2009 and return one of their channels to the FCC.
Network Affiliations
Each of our stations is affiliated with a network pursuant to an affiliation agreement, as described below:
Station
Market
Affiliation
Expiration
KCIT
Amarillo, TX
Fox
June
KHMT
Billings, MT
Fox
June
KJTL
Wichita Falls, TX-Lawton, OK
Fox
June
WFXP
Erie, PA
Fox
June
WFXW
Terre Haute, IN
Fox
June
KSAN
San Angelo, TX
NBC
December 2010
KRBC
Abilene-Sweetwater, TX
NBC
December
WUTR
Utica, NY
ABC
December
WTVO
Rockford, IL
ABC
December
KAMC
Lubbock, TX
ABC
December
KCPN-LP
Amarillo, TX
MyNetworkTV
August
KJBO-LP
Wichita Falls, TX-Lawton, OK
MyNetworkTV
August
WTVO-DM
Rockford, IL
MyNetworkTV
August
KTVE
Monroe, LA-El Dorado, AR
NBC
December
KODE
Joplin, MO-Pittsburg, KS
ABC
December
KOLR
Springfield, MO
CBS
June
WYOU
Wilkes Barre-Scranton, PA
CBS
June
Each affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the network with which it is affiliated. In exchange, the network has the right to sell a substantial majority of the advertising time during these broadcasts. In addition, some stations receive compensation from the network based on the hours of network programming they broadcast.
We expect all of the network affiliation agreements listed above to be renewed upon expiration.
Competition
Competition in the television industry takes place on several levels: competition for audience, competition for programming and competition for advertising.
Audience. Our stations compete for audience share specifically on the basis of program popularity. The popularity of a station’s programming has a direct effect on the advertising rates it can charge its advertisers. A portion of the daily programming on the stations that we own is supplied by the network with which each station is affiliated. In those periods, the stations are dependent upon the performance of the network programs in attracting viewers. Stations program non-network time periods with a combination of self-produced news, public affairs and other entertainment programming, including movies and syndicated programs. The major television networks have also begun to sell their programming directly to the consumer via portable digital devices such as video iPods and cell phones which presents an additional source of competition for television broadcaster audience share. Other sources of competition for audiences include home entertainment systems, such as VCRs, DVDs, and DVRs; video-on-demand and pay-per-view; the Internet; and television game devices.
Although the commercial television broadcast industry historically has been dominated by the ABC, NBC, CBS and Fox television networks, other newer television networks and the growth in popularity of subscription systems, such as local cable and direct broadcast satellite (“DBS”) systems which air exclusive programming not otherwise available in a market, have become significant competitors for the over-the-air television audience.
Programming. Competition for programming involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming. Stations compete against in-market broadcast station operators for exclusive access to off-network reruns (such as Seinfeld) and first-run product (such as Entertainment Tonight) in their respective markets. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations. Time Warner Inc., General Electric Company, Viacom Inc., News Corporation and the Walt Disney Company each owns a television network and also owns or controls major production studios, which are the primary source of programming for the networks. It is uncertain whether in the future such programming, which is generally subject to short-term agreements between the studios and the networks, will be moved to the networks. Television broadcasters also compete for non-network programming unique to the markets they serve. As such, stations strive to provide exclusive news stories, unique features such as investigative reporting and coverage of community events and to secure broadcast rights for regional and local sporting events.
Advertising. Stations compete for advertising revenue with other television stations in their respective markets; and other advertising media such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, local cable systems, DBS systems and the Internet. Competition for advertising dollars in the broadcasting industry occurs primarily within individual markets. Generally, a television broadcast station in a particular market does not compete with stations in other market areas.
Additional Competitive Factors. The broadcasting industry is continually faced with technological change and innovation which increase the popularity of competing entertainment and communications media. Further advances in technology may increase competition for household audiences and advertisers. The increased use of digital technology by cable systems and DBS, along with video compression techniques, will reduce the bandwidth required for television signal transmission. These technological developments are applicable to all video delivery systems, including over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences. Reductions in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized “niche” programming. This ability to reach very narrowly defined audiences is expected to alter the competitive dynamics for advertising expenditures. We are unable to predict the effect that these or other technological changes will have on the broadcast television industry or on the future results of our operations.
Federal Regulation
Television broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the “Communications Act”). The following is a brief discussion of certain provisions of the Communications Act and the FCC’s regulations and policies that affect the business operations of television broadcasting stations. Over the years, Congress and the FCC have added, amended and deleted statutory and regulatory requirements to which station owners are subject. Some of these changes have a minimal business impact whereas others may significantly affect the business or operation of individual stations or the broadcast industry as a whole. The following discussion summarizes some of the statutory and regulatory rules and policies currently in effect. For more information about the nature and extent of FCC regulation of television broadcast stations you should refer to the Communications Act and the FCC’s rules, public notices, and policies.
License Grant and Renewal. The Communications Act prohibits the operation of broadcast stations except under licenses issued by the FCC. Television broadcast licenses are granted for a maximum term of eight years and are subject to renewal upon application to the FCC. The FCC is required to grant an application for license renewal if during the preceding term the station served the public interest, the licensee did not commit any serious violations of the Communications Act or the FCC’s rules, and the licensee committed no other violations of the Communications Act or the FCC’s rules which, taken together, would constitute a pattern of abuse. A majority of renewal applications are routinely granted under this standard. If a licensee fails to meet this standard the FCC may still grant renewal on terms and conditions that it deems appropriate, including a monetary forfeiture or renewal for a term less than the normal eight-year period.
After a renewal application is filed, interested parties, including members of the public, may file petitions to deny a renewal application, to which the licensee/renewal applicant is entitled to respond. After reviewing the pleadings, if the FCC determines that there is a substantial and material question of fact whether grant of the renewal application would serve the public interest, the FCC is required to hold a trial-type hearing on the issues presented. If, after the hearing, the FCC determines that the renewal applicant has met the renewal standard the FCC will grant the renewal application. If the licensee/renewal applicant fails to meet the renewal standard or show that there are mitigating factors entitling it to renewal subject to appropriate sanctions, the FCC can deny the renewal application. In the vast majority of cases where a petition to deny is filed against a renewal application, the FCC ultimately grants the renewal without a hearing. No competing application for authority to operate a station and replace the incumbent licensee may be filed against a renewal application.
In addition to considering rule violations in connection with a license renewal application, the FCC may sanction a station license for failing to observe FCC rules and policies during the license term, including the imposition of a monetary forfeiture.
The Communications Act prohibits the assignment or the transfer of control of a broadcast license without prior FCC approval.
Ownership Restrictions. The FCC has rules which establish limits on the ownership of broadcast stations. These ownership limits apply to attributable interests in a station licensee held by an individual, corporation, partnership or other entity. In the case of corporations, officers, directors and voting stock interests of 5% or more (20% or more in the case of qualified investment companies, such as insurance companies and bank trust departments) are considered attributable interests. For partnerships, all general partners and non-insulated limited partners are attributable. Limited liability companies are treated the same as partnerships. The FCC also considers attributable the holder of more than 33% of a licensee’s total assets (defined as total debt plus total equity), if that person or entity also provides over 15% of the station’s total weekly broadcast programming or has an attributable interest in another media entity in the same market which is subject to the FCC’s ownership rules, such as a radio or television station, cable television system or daily newspaper.
Local Ownership (Duopoly Rule). Under the current duopoly rule, a single entity is allowed to own or have attributable interests in two television stations in a market if (1) the two stations do not have overlapping service areas, or (2) after the combination there are at least eight independently owned and operating full-power television stations and one of the combining stations is not ranked among the top four stations in the DMA. The duopoly rule allows the FCC to consider waivers to permit the ownership of a second station only in cases where the second station has failed or is failing or unbuilt.
Under the duopoly rule, the FCC attributes toward the local television ownership limits another in-market station when one station owner programs a second in-market station pursuant to a time brokerage or local marketing agreement, if the programmer provides more than 15% of the second station’s weekly broadcast programming. However, local marketing agreements entered into prior to November 5, 1996 are exempt attributable interests until the FCC determines otherwise. This “grandfathered” period, when reviewed by the FCC, is subject to possible extension or termination.
In certain of our markets, we own and operate both full-power and low-power television broadcast stations (in Wichita Falls, we own and operate KJTL and KJBO-LP; and in Amarillo, we own and operate KCIT and KCPN-LP). The FCC’s duopoly rules and policies regarding ownership of television stations in the same market apply only to full-power television stations and not low-power television stations such as KJBO-LP and KCPN-LP.
We currently do not operate two full-power stations in any market.
National Ownership. There is no nationwide limit on the number of television stations which a party may own. However, the Communications Act and FCC’s rules limit the percentage of U.S. television households which a party may reach through its attributable interests in television stations to 39%. The stations that Mission owns have a combined national audience reach of 2.4%.
Radio/Television Cross-Ownership Rule (One-to-a-Market Rule). In markets with at least 20 independently owned media outlets, ownership of one television station and up to seven radio stations, or two television stations (if allowed under the television duopoly rule) and six radio stations is permitted. If the number of independently owned media outlets is fewer than 20 but greater than or equal to 10, ownership of one television station (or two if allowed) and four radio stations is permitted. In markets with fewer than 10 independent media voices, ownership of one television station (or two if allowed) and one radio station is permitted. In calculating the number of independent media voices in a market, the FCC includes all radio and television stations, independently owned cable systems (counted as one voice), and independently owned daily newspapers which have circulation that exceeds 5% of the households in the market.
Local Television/Newspaper Cross-Ownership Rule. Under this rule, a party is prohibited from having an attributable interest in a television station and a daily newspaper except in cases where the market at issue is one of the 20 largest DMAs, and subject to other criteria and limitations.
As a result of the FCC’s 2006 rulemaking proceeding, which provided a comprehensive review of all of its media ownership rules, in February 2008, the FCC made modest changes to its newspaper cross-ownership rule, while retaining the rest of its rules as then currently in effect. Multiple challenges to this proceeding were filed with the U.S. Court of Appeals, which remain pending. Sometime during 2010, the FCC is expected to officially initiate the next statutorily-mandated review of its media ownership rules and request public comments thereon.
Local Television/Cable Cross-Ownership. There is no FCC rule prohibiting common ownership of a cable television system and a television broadcast station in the same area.
Cable “Must-Carry” or Retransmission Consent Rights. Every three years television broadcasters are required to make an election between “must-carry” or retransmission consent rights in connection with the carriage of their signal on cable television systems within their DMA. The most recent election date was October 1, 2008, for the three-year period beginning January 1, 2009.
If a broadcaster chooses to exercise its must-carry rights, it may request cable system carriage on its over-the-air channel or another channel on which it was carried on the cable system as of a specified date. A cable system generally must carry the station’s signal in compliance with the station’s carriage request, and in a manner that makes the signal available to all cable subscribers. However, must-carry rights are not absolute, and whether a cable system is required to carry the station on its system, or in the specific manner requested, depends on variables such as the location, size and number of activated channels of the cable system and whether the station’s programming duplicates, or substantially duplicates, the programming of another station carried on the cable system. If certain conditions are met, a cable system may decline to carry a television station that has elected must-carry status, although it is unusual for all the required conditions to exist.
If a broadcaster chooses to exercise its retransmission consent rights, a cable television system which is subject to that election may not carry the station’s signal without the station’s consent. This generally requires the cable system and television station operator to negotiate the terms under which the broadcaster will consent to the cable system’s carriage of its station’s signal.
We have elected to exercise retransmission consent rights for all of our stations where we have a legal right to do so. We have negotiated retransmission consent agreements with substantially all of the cable systems which carry our stations’ signals.
Direct-to-Home Satellite Services and Carriage Rights. DBS providers are permitted to carry local channels including “significantly viewed” out-of-market stations when local service is provided. Under certain circumstances, DBS providers also are permitted to provide network service from a station outside a local market for subscribers in the market who are “unserved” by a local station affiliated with the same network. In addition, DBS subscribers who were not receiving a digital signal as of December 8, 2004 may receive distant signals for digital television programming from their DBS provider if they were receiving the local analog signal of a network affiliate and the subscriber cannot receive a local digital signal of that network-affiliated station over-the-air.
Satellite carriers that provide any local-into-local service in a market must carry, upon request, all stations in that market that have elected mandatory carriage, and DBS operators are now carrying other local stations in local-into-local markets, including some noncommercial, independent and foreign language stations. However, satellite carriers are not required to carry duplicative network signals from a local market unless the stations are licensed to different communities in different states. Satellite carriers are required to carry all local television stations in a contiguous manner on their channel line-up and may not discriminate in their carriage of stations.
Commercial television stations make elections between retransmission consent and must-carry status for satellite services on the same schedule as cable elections, with the most recent elections made by October 1, 2008 for the three-year period that began on January 1, 2009. DirecTV currently provides satellite carriage of our stations in the Rockford, Springfield and Wilkes Barre-Scranton markets. Dish Network currently provides satellite carriage of our stations in the Abilene-Sweetwater, Amarillo, Billings, Erie, Joplin, MO-Pittsburg, KS, Lubbock, Rockford, San Angelo, Springfield, Terre Haute, Wichita Falls, TX-Lawton, OK and Wilkes Barre-Scranton markets. We have long-term carriage agreements that expire in 2011 with both DirecTV and Dish Network that provide for the carriage of the currently carried stations, as well as those subsequently added in new local-to-local markets, or those added by acquisition or other means.
Digital Television (“DTV”). In February 2009, President Obama signed into law legislation that established June 12, 2009 as the deadline for television broadcasters to complete their transition to DTV-only operations and return their analog spectrum to the FCC. The DTV transmission system delivers video and audio signals of higher quality (including high definition television) than the existing analog transmission system. DTV also has substantial capabilities for multiplexing (the broadcast of several channels of programs concurrently) and data transmission. The introduction of digital television requires consumers to purchase new television sets that are capable of receiving and displaying the DTV signals, or adapters to receive DTV signals and convert them to analog signals for display on their existing receivers.
On June 12, 2009, all full-power television broadcasters were required to cease operating in an analog format and operate exclusively in digital (DTV) format. All of Mission’s stations have completed the transition from analog to digital and hold DTV authorizations issued by the FCC.
Television station operators may use their DTV signals to provide ancillary services, such as computer software distribution, Internet, interactive materials, e-commerce, paging services, audio signals, subscription video, or data transmission services. To the extent a station provides such ancillary services it is subject to the same regulations as are applicable to other analogous services under the FCC’s rules and policies. Commercial television stations also are required to pay the FCC 5% of the gross revenue derived from all ancillary services provided over their DTV signals for which a station received a fee in exchange for the service or received compensation from a third party in exchange for transmission of material from that third party, not including commercial advertisements used to support broadcasting.
Programming and Operation. The Communications Act requires broadcasters to serve “the public interest.” Television station licensees are required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. The FCC may consider complaints from viewers concerning programming when it evaluates a station’s license renewal application, although viewer complaints also may be filed and considered by the FCC at any time. Stations also must follow various rules promulgated under the Communications Act that regulate, among other things:
•
political advertising (its price and availability);
•
sponsorship identification;
•
contest and lottery advertising;
•
obscene and indecent broadcasts;
•
technical operations, including limits on radio frequency radiation;
•
discrimination and equal employment opportunities;
•
closed captioning;
•
children’s programming;
•
program ratings guidelines; and
•
network affiliation agreements.
Employees
As of December 31, 2009, we had a total of 32 employees, all of which were full-time. As of December 31, 2009, none of our employees were covered by a collective bargaining agreement. We believe that our employee relations are satisfactory, and we have not experienced any work stoppages at any of our facilities.
Item 1A.
Item 1A. Risk Factors
You should carefully consider the following risk factors, which we believe are the most significant risks related to our business, as well as the other information contained in this document.
Risks Related to Our Operations
The continued economic slowdown in the United States and the national and world-wide financial crisis may adversely affect our results of operations, cash flows and financial condition. Among other things, these negative economic trends could adversely affect demand for television advertising, reduce the availability, and increase the cost, of short-term funds for liquidity requirements, and adversely affect our ability to meet long-term commitments. In addition, general trends in the television industry could adversely affect demand for television advertising as consumers turn to alternative media, including the Internet, for entertainment.
The continued economic slowdown in the United States is likely to adversely affect our results of operations and cash flows by, among other things, reducing demand for local and national television advertising and making it more difficult for customers to pay their accounts. Moreover, television viewing among consumers has been negatively impacted by the increasing availability of alternative media, including the Internet. As a result, in recent years demand for television advertising has been declining and demand for advertising in alternative media has been increasing, and we expect this trend to continue.
Disruptions in the capital and credit markets, as have been experienced during 2009 and may continue in 2010, could adversely affect our ability to draw on our bank revolving credit facilities. Our access to funds under the revolving credit facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time.
Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and other discretionary uses of cash.
We have a history of net losses.
We had net losses of $2.6 million, $7.5 million and $4.0 million, respectively, for the years ended December 31, 2009, 2008 and 2007. We may not be able to achieve or maintain profitability.
Our substantial debt could limit our ability to grow and compete.
As of December 31, 2009, we had $172.4 million of debt which represented 254.6% of our total capitalization. Our high level of debt could have important consequences to our business. For example, it could:
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limit our ability to borrow additional funds or obtain additional financing in the future;
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limit our ability to pursue acquisition opportunities;
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expose us to greater interest rate risk since the interest rate on borrowings under our senior credit facility is variable;
•
limit our flexibility to plan for and react to changes in our business and our industry; and
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impair our ability to withstand a general downturn in our business and place us at a disadvantage compared to our competitors that are less leveraged.
Refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Contractual Obligations” for disclosure of the approximate aggregate amount of principal indebtedness scheduled to mature.
We could also incur additional debt in the future. The terms of our senior credit facility limit, but do not prohibit, us from incurring substantial amounts of additional debt. To the extent we incur additional debt, we would become even more susceptible to the leverage-related risks described above.
The agreement governing our debt contains various covenants that limit our management’s discretion in the operation of our business.
Our senior credit facility contains various covenants that restrict our ability to, among other things:
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incur additional debt and issue preferred stock;
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pay dividends and make other distributions;
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make investments and other restricted payments;
•
make acquisitions;
•
merge, consolidate or transfer all or substantially all of our assets;
•
enter into sale and leaseback transactions;
•
create liens;
•
sell assets or stock of our subsidiaries; and
•
enter into transactions with affiliates.
Our bank credit facility agreement does not contain financial covenant ratio requirements, but does provide for default in the event Nexstar does not comply with all covenants contained in its credit agreement. Future financing agreements may contain financial covenants which could limit our management’s ability to operate our business at its discretion, and consequently we may be unable to compete effectively, pursue acquisitions or take advantage of new business opportunities, any of which could harm our business.
If we fail to comply with the restrictions in present or future financing agreements, a default may occur. A default could allow creditors to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. A default could also allow creditors to foreclose on any collateral securing such debt.
Our ability to continue as a going concern is dependent on Nexstar’s pledge to continue the local services agreements described in a letter of support dated March 9, 2010. Nexstar’s senior secured credit facility agreement contains covenants which require them to comply with certain financial ratios, including: (a) maximum total and senior leverage ratios, (b) a minimum interest coverage ratio, and (c) a minimum fixed charge coverage ratio. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar Broadcasting and us. Our senior secured credit facility agreement does not contain financial covenant ratio requirements; however it does include an event of default if Nexstar does not comply with all covenants contained in its credit agreement. As of September 30, 2009, Nexstar was in compliance with all indentures governing their publicly-held notes. As of September 30, 2009, Nexstar was not in compliance with all covenants contained in the credit agreements governing their senior credit facility. On October 8, 2009, Nexstar amended their credit facility to modify certain covenants. The October 8, 2009 amendment contained a limited waiver for the leverage ratios which cured the violation as of September 30, 2009 contained in the credit agreement governing Nexstar’s senior credit facility. As of December 31, 2009, Nexstar was in compliance with all covenants contained in the credit agreements governing their senior secured credit facility and the indentures governing their publicly-held notes.
On March 30, 2009, Nexstar closed an offer to exchange $143,600,000 of the 7% senior subordinated notes due 2014 in exchange for $142,320,761 7% senior subordinated PIK Notes due 2014 (the “PIK Notes”). Based on the financial covenants in the Nexstar senior credit facility, the PIK Notes are not included in the debt amount used to calculate the total leverage ratio until January 2011.
Nexstar believes the consummation of the exchange offer combined with the actions described above, will allow them to maintain compliance with all covenants contained in the credit agreements governing their senior secured credit facility and the indentures governing their publicly held notes for a period of at least the next twelve months from December 31, 2009.
We guarantee the aggregate principal amount of $47.9 million of 7% senior subordinated notes, $142.9 million of 7% senior subordinated PIK notes and the aggregate principal amount of $226.3 million of outstanding bank facility term and revolving loans issued or drawn by Nexstar Broadcasting, Inc.
If Nexstar, which is highly leveraged with debt, is unable to meet its obligations under the indentures governing its senior subordinated notes or its senior credit facility agreement, we can be held liable for those obligations under guarantees. Additionally, Nexstar has $12.5 million of unused revolver commitments available under its senior credit facility, which is also guaranteed by us.
Our broadcast operations could be adversely affected if our stations fail to maintain or renew their network affiliation agreements on favorable terms, or at all.
Due to the quality of the programming provided by the networks, stations that are affiliated with a network generally have higher ratings than unaffiliated independent stations in the same market. As a result, it is important for stations to maintain their network affiliations. All of the stations that we operate have network affiliation agreements - 3 stations have primary affiliation agreements with NBC, 2 with CBS, 4 with ABC, 5 with Fox and 2 with MyNetworkTV. Each of NBC, CBS and ABC generally provides affiliated stations with up to 22 hours of prime time programming per week, while each of Fox and MyNetworkTV provides affiliated stations with up to 15 hours of prime time programming per week. In return, affiliated stations broadcast the respective network’s commercials during the network programming. Under the affiliation agreements with NBC, CBS and ABC, most of the stations we operate also receive compensation from these networks.
All of the network affiliation agreements of the stations that we own and operate are scheduled to expire at various times beginning in June 2010 through June 2015. Network affiliation agreements are also subject to earlier termination by the networks under limited circumstances. For more information regarding these network affiliation agreements, see Item 1. “Business--Network Affiliations.”
The loss of or material reduction in retransmission consent revenues could have an adverse effect on our business, financial condition, and results of operations.
Mission’s retransmission consent agreements with cable operators, direct broadcast satellite operators, and others permit the operators to carry our stations’ signals in exchange for the payment of compensation to us from the system operators as consideration. The television networks have recently asserted to their local television station affiliates the networks’ position that they, as the owners or licensees of programming we broadcast and provide for retransmission, are entitled to a portion of the compensation under the retransmission consent agreements. Networks have proposed to include these provisions in their network affiliation agreements. Inclusion of these or similar provisions in our network affiliation agreements could materially reduce this revenue source to Mission and could have an adverse effect on our business, financial condition, and results of operations.
The FCC could decide not to grant renewal of the FCC license of any of the stations we operate which would require that station to cease operations.
Television broadcast licenses are granted for a maximum term of eight years and are subject to renewal upon application to the FCC. The FCC is required to grant an application for license renewal, if during the preceding term, the station served the public interest, the licensee did not commit any serious violations of the Communications Act or the FCC’s rules, and the licensee committed no other violations of the Communications Act or the FCC’s rules which, taken together, would constitute a pattern of abuse. A majority of renewal applications are routinely granted under this standard. If a licensee fails to meet this standard the FCC may still grant renewal on terms and conditions that it deems appropriate, including a monetary forfeiture or renewal for a term less than the normal eight-year period.
On January 3, 2006, Cable America Corporation (“Cable America”) submitted a petition to deny the applications for renewal of license for Nexstar’s station, KSFX, and our station, KOLR, both licensed to Springfield, Missouri. Cable America alleged that Nexstar’s local service agreement arrangements with us give Nexstar improper control over our operations. We and Nexstar submitted a joint opposition to this petition to deny and Cable America submitted a reply. Cable America subsequently requested that the FCC dismiss its petition. However, the petition remains pending with the FCC.
We began to submit renewal of license applications for our stations beginning in April 2005. We expect the FCC to renew the licenses for our stations in due course.
Our growth may be limited if we are unable to implement our acquisition strategy.
We intend to continue our growth by selectively pursuing acquisitions of television stations. The television broadcast industry is undergoing consolidation, which may reduce the number of acquisition targets and increase the purchase price of future acquisitions. Some of our competitors may have greater financial or management resources with which to pursue acquisition targets. Therefore, even if we are successful in identifying attractive acquisition targets, we may face considerable competition and our acquisition strategy may not be successful. On October 8, 2009, we amended our credit facility and the amendment also specifically restricts our ability to pursue our acquisition strategy.
FCC rules and policies may also make it more difficult for us to acquire additional television stations. Television station acquisitions are subject to the approval of the FCC and, potentially, other regulatory authorities. The need for FCC and other regulatory approvals could restrict our ability to consummate future transactions if, for example, the FCC or other government agencies believe that a proposed transaction would result in excessive concentration in a market, even if the proposed combinations may otherwise comply with FCC ownership limitations.
Growing our business through acquisitions involves risks and if we are unable to manage effectively our growth, our operating results will suffer.
Since January 1, 2003, we have tripled the number of stations that we operate, having acquired 10 stations. We will continue to actively pursue additional acquisition opportunities. To manage effectively our growth and address the increased reporting requirements and administrative demands that will result from future acquisitions, we will need, among other things, to continue to develop our financial and management controls and management information systems. We will also need to continue to identify, attract and retain highly skilled finance and management personnel. Failure to do any of these tasks in an efficient and timely manner could seriously harm our business.
There are other risks associated with growing our business through acquisitions. For example, with any past or future acquisition, there is the possibility that:
•
we may not be able to successfully reduce costs, increase advertising revenue or audience share or realize anticipated synergies and economies of scale with respect to any acquired station;
•
an acquisition may increase our leverage and debt service requirements or may result in our assuming unexpected liabilities;
•
our management may be reassigned from overseeing existing operations by the need to integrate the acquired business;
•
we may experience difficulties integrating operations and systems, as well as, company policies and cultures;
•
we may fail to retain and assimilate employees of the acquired business; and
•
problems may arise in entering new markets in which we have little or no experience.
The occurrence of any of these events could have a material adverse effect on our operating results, particularly during the period immediately following any acquisition.
The FCC may decide to terminate “grandfathered” time brokerage agreements.
The FCC attributes time brokerage agreements and local marketing agreements (“TBAs”) to the programmer under its ownership limits if the programmer provides more than 15% of a station’s weekly broadcast programming. However, TBAs entered into prior to November 5, 1996 are exempt attributable interests for now. Our TBA’s with Nexstar were entered into prior to November 2006 and are grandfathered.
The FCC will review these “grandfathered” TBAs in the future. During this review, the FCC may determine to terminate the “grandfathered” period and make all TBAs fully attributable to the programmer. If the FCC does so, we will be required to terminate the TBAs with Nexstar for stations WFXP and KHMT unless the FCC simultaneously changes its duopoly rules to allow ownership of two stations in the applicable markets
FCC actions may restrict our ability to enter into local service agreements with Nexstar, which would harm our operations.
We have entered into local service agreements with Nexstar for our stations. While all of our existing local service agreements comply with FCC rules and policies, we cannot assure you that the FCC will continue to permit local service agreements as a means of creating substantial operating efficiencies, and the FCC may challenge our existing arrangements with Nexstar in the future.
On August 2, 2004, the FCC initiated a rule making proceeding to determine whether to make television joint sales agreements attributable under its ownership rules. Comments and reply comments were filed in this proceeding in the fourth quarter of 2004. The FCC has not yet issued a decision in this proceeding. However, if the FCC adopts a JSA attribution rule for television stations we will be required to comply with the rule.
Cable America has alleged that our local service agreements with Nexstar give Nexstar improper control over our operations. If the FCC challenges our existing arrangements with Nexstar and determines that our arrangements violate the FCC’s rules and policies, we may be required to terminate such arrangements and we could be subject to sanctions, fines and/or other penalties.
We have a material amount of goodwill and intangible assets, and therefore we could suffer losses due to future asset impairment charges.
As of December 31, 2009, approximately $64.9 million, or 63.0%, of total assets consisted of goodwill and intangible assets, including FCC licenses and network affiliation agreements. We recorded an impairment charge of $2.3 million during the third quarter of 2009 that included an impairment to the carrying values of FCC licenses of $2.0 million, related to eight of our stations and an impairment to the carrying values of goodwill of $0.3 million, related to one reporting unit consisting of one of our television stations. We recorded an impairment charge of $11.4 million during the year ended December 31, 2008 that included an impairment to the carrying value of FCC licenses of $8.7 million, related to 9 of our television stations; an impairment to the carrying value of network affiliation agreements of $1.4 million related to 2 of our television stations; and an impairment to the carrying values of goodwill of $1.3 million, related to 3 of our television stations. We test goodwill and FCC licenses annually, and on an interim date if factors or indicators become apparent that would require an interim test of these assets, in accordance with accounting and disclosure requirements for goodwill and other intangible assets. We test network affiliation agreements whenever circumstances or indicators become apparent the asset may not be recoverable through expected future cash flows. The methods used to evaluate the impairment of our goodwill and intangible assets would be affected by a significant reduction in operating results or cash flows at one or more of our television stations, or a forecast of such reductions, a significant adverse change in the advertising marketplaces in which our television stations operate, the loss of network affiliations, or by adverse changes to FCC ownership rules, among others, which may be beyond our control. If the carrying amount of goodwill and intangible assets is revised downward due to impairment, such non-cash charge could materially affect our financial position and results of operations.
Risks Related to Our Industry
Preemption of regularly scheduled programming by network news coverage may affect our revenue and results of operations.
We may experience a loss of advertising revenue and incur additional broadcasting expenses due to preemption of our regularly scheduled programming by network coverage of a major global news event such as a war or terrorist attack. As a result, advertising may not be aired and the revenue for such advertising may be lost unless the station is able to run the advertising at agreed-upon times in the future. Advertisers may not agree to run such advertising in future time periods, and space may not be available for such advertising. The duration of such preemption of local programming cannot be predicted if it occurs. In addition, our stations may incur additional expenses as a result of expanded news coverage of a war or terrorist attack. The loss of revenue and increased expenses could negatively affect our results of operations.
If we are unable to respond to changes in technology and evolving industry trends, our television businesses may not be able to compete effectively.
New technologies could also adversely affect our television stations. Information delivery and programming alternatives such as cable, direct satellite-to-home services, pay-per-view, the Internet, telephone company services, mobile devices, digital video recorders and home video and entertainment systems have fractionalized television viewing audiences and expanded the numbers and types of distribution channels for advertisers to access. Over the past decade, cable television programming services, other emerging video distribution platforms and the Internet have captured an increasing market share, while the aggregate viewership of the major television networks has declined. In addition, the expansion of cable and satellite television, the Internet and other technological changes have increased, and may continue to increase, the competitive demand for programming. Such increased demand, together with rising production costs, may increase our programming costs or impair our ability to acquire or develop desired programming.
In addition, video compression techniques, now in use with direct broadcast satellites, cable and wireless cable, are expected to permit greater numbers of channels to be carried within existing bandwidth. These compression techniques as well as other technological developments are applicable to all video delivery systems, including over-the-air broadcasting, and have the potential to provide vastly expanded programming to targeted audiences. Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized niche programming, resulting in more audience fractionalization. This ability to reach very narrowly defined audiences may alter the competitive dynamics for advertising expenditures. We are unable to predict the effect that these and other technological changes will have on the television industry or on the future results of our television businesses.
If direct broadcast satellite companies do not carry the stations that we own and operate, we could lose audience share and revenue.
Direct broadcast satellite television companies are permitted to transmit local broadcast television signals to subscribers in local markets provided that they offer to carry all local stations in that market. However, satellite providers have limited satellite capacity to deliver local station signals in local markets. Satellite providers, such as DirecTV and Dish Network, carry our stations in only some of our markets and may choose not to carry local stations in any of our other markets. DirecTV currently provides satellite carriage of our stations in the Rockford, Springfield and Wilkes Barre-Scranton markets. Dish Network currently provides satellite carriage of our stations only in the Abilene-Sweetwater, Amarillo, Billings, Erie, Joplin, MO-Pittsburg, KS, Lubbock, Rockford, San Angelo, Springfield, Terre Haute, Wichita Falls, TX-Lawton, OK and Wilkes Barre-Scranton markets. In those markets in which the satellite providers do not carry local station signals, subscribers to those satellite services are unable to view local stations without making further arrangements, such as installing antennas and switches. Furthermore, when direct broadcast satellite companies do carry local television stations in a market, they are permitted to charge subscribers extra for such service. Some subscribers may choose not to pay extra to receive local television stations. In the event subscribers to satellite services do not receive the stations that we own and operate, we could lose audience share which would adversely affect our revenue and earnings.
The FCC can sanction us for programming broadcast on our stations which it finds to be indecent.
In 2004, the FCC began to impose substantial fines on television broadcasters for the broadcast of indecent material in violation of the Communications Act and its rules. The FCC also revised its indecency review analysis to more strictly prohibit the use of certain language on broadcast television. Because our stations’ programming is in large part comprised of programming provided by the networks with which the stations are affiliated, we do not have full control over what is broadcast on our stations, and we may be subject to the imposition of fines if the FCC finds such programming to be indecent. The fines which may be imposed on a television broadcaster for an indecency violation can reach a maximum of $325 thousand per violation.
Intense competition in the television industry could limit our growth and impair our ability to become profitable.
As a television broadcasting company, we face a significant level of competition, both directly and indirectly. Generally we compete for our audience against all the other leisure activities in which one could choose to engage rather than watch television. Specifically, stations we own compete for audience share, programming and advertising revenue with other television stations in their respective markets and with other advertising media, including newspapers, radio stations, cable television, DBS systems and the Internet.
The entertainment and television industries are highly competitive and are undergoing a period of consolidation. Many of our current and potential competitors have greater financial, marketing, programming and broadcasting resources than we do. The markets in which we operate are also in a constant state of change arising from, among other things, technological improvements and economic and regulatory developments. Technological innovation and the resulting proliferation of television entertainment, such as cable television, wireless cable, satellite-to-home distribution services, pay-per-view and home video and entertainment systems, have fractionalized television viewing audiences and have subjected free over-the-air television broadcast stations to increased competition. We may not be able to compete effectively or adjust our business plans to meet changing market conditions. We are unable to predict what form of competition will develop in the future, the extent of the competition or its possible effects on our businesses.
The FCC could implement regulations or Congress could adopt legislation that might have a significant impact on the operations of the stations we own and operate or the television broadcasting industry as a whole.
The FCC has initiated proceedings to determine whether to make TV joint sales agreements attributable interests under its ownership rules; to determine whether it should establish formal rules under which broadcasters will be required to serve the local public interest; and to determine whether to modify or eliminate certain of its broadcast ownership rules, including the radio-television cross-ownership rule and the newspaper-television cross-ownership rule. A change to any of these rules may have a significant impact on us and the stations we own and operate.
In addition, the FCC may decide to initiate other new rule making proceedings on its own or in response to requests from outside parties, any of which might have such an impact. Congress also may act to amend the Communications Act in a manner that could impact our stations and the stations we provide services to or the television broadcast industry in general.
The FCC may reallocate some portion of the spectrum available for use by television broadcasters to wireless broadband use which alteration could substantially impact our future operations and may reduce viewer access to our programming.
The FCC has initiated a proceeding to assess the availability of spectrum to meet future wireless broadband needs pursuant to which the FCC is examining whether some portion of the spectrum currently used for commercial broadcast television can be made available for wireless broadband use. The FCC has proposed requiring television stations to co-locate their antennas and/or reducing the amount of spectrum allocated to each television station from 6 megahertz to 3 megahertz. If the FCC determines to move forward with reducing the spectrum available to television broadcasters for their use, it may render our investment in digital facilities worthless and consequently reduce the useful lives of certain digital equipment, could require substantial additional investment to continue our operations, and may require viewers to invest in additional equipment or subscription services to continue receiving broadcast television signals.
Item 1B.
Item 1B.
Unresolved Staff Comments
None
Item 2.
Item 2. Properties
We own and lease facilities in the following locations:
Station Metropolitan Area and Use
Owned or
Leased
Square
Footage/Acreage
Approximate Size
Expiration
of Lease
WYOU-Wilkes Barre-Scranton, PA
Office-Studio(1)
-
-
-
Tower/Transmitter Site-Penobscot Mountain
100% Owned
120.33 Acres
-
Tower/Transmitter Site-Bald Mountain
100% Owned
7.2 Acres
-
Tower/Transmitter Site-Williamsport
33% Owned
1.35 Acres
-
Tower/Transmitter Site-Sharp Mountain
33% Owned
0.23 Acres
-
Tower/Transmitter Site-Stroudsburg
Leased
10,000 Sq. Ft.
Month to Month
WFXW-Terre Haute, IN
Office-Studio(2)
-
-
-
Tower/Transmitter Site (3)
-
-
-
WFXP-Erie, PA
Office-Studio(3)
-
-
-
Tower/Transmitter Site(3)
-
-
-
KJTL-Wichita Falls, TX-Lawton, OK
Office-Studio(4)
-
-
-
Tower/Transmitter Site
Leased
Acres
1/30/15
KJBO-LP-Wichita Falls, TX-Lawton, OK
Office-Studio(4)
-
-
-
Tower/Transmitter Site
Leased
Acres
Year to Year
KODE-Joplin, MO-Pittsburg, KS
Office-Studio
100% Owned
2.74 Acres
-
Tower/Transmitter Site
Leased
Sq. Ft.
5/1/27
KRBC-Abilene-Sweetwater, TX
Office-Studio
100% Owned
5.42 Acres
-
Office-Studio
100% Owned
19,312 Sq. Ft.
-
Tower/Transmitter Site(10)
-
-
-
KSAN-San Angelo, TX
Office-Studio(5)
-
-
-
Tower/Transmitter Site
Leased
Acres
5/15/15
KOLR-Springfield, MO
Office-Studio
100% Owned
30,000 Sq. Ft.
-
Office-Studio
100% Owned
Acres
-
Tower/Transmitter Site
Leased
0.5 Acres
5/12/21
KCIT/KCPN-LP-Amarillo, TX
Office-Studio(6)
-
-
-
Tower/Transmitter Site
Leased
Acres
5/12/21
Tower/Transmitter Site-Parmer County, TX
Leased
Sq. Ft.
Month to Month
Tower/Transmitter Site-Guyman, OK
Leased
Sq. Ft.
Month to Month
Tower/Transmitter Site-Curry County, NM
Leased
Acres
Month to Month
KTVE-Monroe, LA-El Dorado, AR
Office-Studio(9)
-
-
-
Tower/Transmitter Site
Leased
Acres
4/30/32
Tower/Transmitter Site - El Dorado
Leased
Acres
4/30/32
Tower/Transmitter Site - Union Parrish
Leased
2.7 Acres
4/30/32
Tower/Transmitter Site - Bolding
Leased
11.5 Acres
4/30/32
KAMC-Lubbock, TX
Office-Studio(7)
-
-
-
Tower/Transmitter Site
Leased
Acres
5/12/21
Tower/Transmitter Site
Leased
1,200 Sq. Ft.
Month to Month
KHMT-Billings, MT
Office-Studio(8)
-
-
-
Tower/Transmitter Site
Leased
Acres
5/12/21
Station Metropolitan Area and Use
Owned or
Leased
Square
Footage/Acreage
Approximate Size
Expiration
of Lease
WUTR-Utica, NY
Office-Studio
100% Owned
12,100 Sq. Ft.
-
Tower/Transmitter Site
100% Owned
Acres
-
WTVO-Rockford, IL
Office-Studio-Tower/Transmitter Site
100% Owned
20,000 Sq. Ft.
-
Corporate Office-Brecksville, OH
Leased
Sq. Ft.
10/31/10
(1)
The office space and studio used by WYOU are owned by Nexstar.
(2)
The office space and studio used by WFXW are owned by Nexstar.
(3)
The office space, studio and tower used by WFXP are owned by Nexstar.
(4)
The office space and studio used by KJTL and KJBO-LP are owned by Nexstar.
(5)
The office space and studio used by KSAN are owned by Nexstar.
(6)
The office space and studio used by KCIT/KCPN-LP are owned by Nexstar.
(7)
The office space and studio used by KAMC are owned by Nexstar.
(8)
The office space and studio used by KHMT are owned by Nexstar.
(9)
The office space and studio used by KTVE are owned by Nexstar.
(10)
The tower/transmitter used by KRBC is owned by Nexstar.
Item 3.
Item 3. Legal Proceedings
From time to time, we are involved in litigation that arises from the ordinary operations of our business, such as contractual or employment disputes or other general actions. In the event of an adverse outcome of these proceedings, we believe the resulting liabilities would not have a material adverse effect on our financial condition or results of operations.
Item 4.
Item 4. Reserved
PART II
Item 5.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information
As of December 31, 2009, Mission’s common stock was not traded on any market and David S. Smith, the sole shareholder of Mission, held 1,000 shares of common stock. Mission has never paid any dividends.
Item 6.
Item 6. Selected Financial Data
We have derived the following statement of operations data for 2009, 2008, and 2007 and balance sheet data as of December 31, 2009 and 2008 from our financial statements included herein. We have derived the following statement of operations data for 2006 and 2005 and balance sheet data as of December 31, 2007, 2006, and 2005 from our 2007 Form 10-K filed on March 11, 2008 and our 2006 Form 10-K filed on March 15, 2007. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Financial Statements and the related Notes to Financial Statements, which are included herein.
(1)
Net broadcast revenue is defined as revenue, excluding revenue from Nexstar Broadcasting, Inc.
(2)
We have joint sales agreements with Nexstar, which permits Nexstar to sell and retain a percentage of the net revenue from the advertising time on our stations in return for monthly payments to us of the remaining percentage of the net revenue. We also have time brokerage agreements with Nexstar that allow Nexstar to program most of the broadcast time for us, sell the advertising time and retain the advertising revenue generated in exchange for monthly payments to us.
(3)
We have shared services agreements with Nexstar, which allows the sharing of services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments from us.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with Item 6. “Selected Financial Data” and the financial statements and related notes included in Part IV, Item 15(a) of this Annual Report on Form 10-K. As used in this discussion, unless the context indicates otherwise, “Mission” refers to Mission Broadcasting, Inc., and all references to “we”, “our”, “us” and the “Company” refer to Mission.
Overview of Operations
As of December 31, 2009, we owned and operated 16 television stations. We have local service agreements with certain television stations owned by Nexstar Broadcasting, Inc. (“Nexstar”), through which Nexstar provides various programming, sales or other services to our television stations. In order for both Nexstar and us to comply with Federal Communications Commission (“FCC”) regulations, we maintain complete responsibility for and control over programming, finances, personnel and operations of our stations.
The following table summarizes the various local service agreements our stations had in effect as of December 31, 2009 with Nexstar:
Service Agreements
Stations
TBA Only (1)
WFXP and KHMT
SSA & JSA (2)
KJTL, KJBO-LP, KOLR, KCIT, KCPN-LP, KAMC, KRBC, KSAN, WUTR, WFXW, WYOU, KODE, KTVE and WTVO
(1)
We have a time brokerage agreement (“TBA”) for each of these stations which allows Nexstar to program most of each station’s broadcast time, sell each station’s advertising time and retain the advertising revenue generated in exchange for monthly payments to us.
(2)
We have both a shared services agreement (“SSA”) and a joint services agreement (“JSA”) for each of these stations. The SSA allows the sharing of services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments from us as described in the SSAs. The JSAs permit Nexstar to sell the station’s advertising time and retain a percentage of the net revenue from the station’s advertising time in return for monthly payments to us of the remaining percentage of the net revenue, as described in the JSAs.
In conjunction with its acquisition of KTVE, the NBC affiliate in the Monroe, Louisiana - El Dorado, Arkansas market, effective January 16, 2008, Mission entered into a SSA and JSA with Nexstar. The terms of the SSA and JSA are comparable to the terms of the SSAs and JSAs between Nexstar and Mission as discussed above.
The arrangements under the SSAs and JSAs have had the effect of Nexstar receiving substantially all of the available cash, after debt service costs, generated by the stations listed above. The arrangements under the TBAs have also had the effect of Nexstar receiving substantially all of the available cash generated by the TBA stations listed above. Mission anticipates that Nexstar will continue to receive substantially all of Mission’s available cash, after payments for debt service costs, generated by the stations listed above. For more information about our local service agreements with Nexstar, refer to Note 5 of our financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K.
Nexstar Broadcasting Group, Inc. and its subsidiaries (“Nexstar Broadcasting Group”) guarantee all obligations incurred under our senior credit facility. We are a guarantor of the senior credit facility entered into by Nexstar and the senior subordinated notes issued by Nexstar. In consideration of Nexstar’s guarantee of our senior credit facility, our sole shareholder has granted Nexstar purchase options to acquire the assets and assume the liabilities of each of our television stations, subject to FCC consent. These option agreements (which expire on various dates between 2011 and 2018) are freely exercisable or assignable by Nexstar without consent or approval by our sole shareholder. We expect these option agreements to be renewed upon expiration.
The operating revenue of our stations is derived primarily from broadcast advertising revenue sold and collected by Nexstar and paid to us under the JSAs. Broadcast advertising revenue is affected by a number of factors, including the economic conditions of the markets in which we operate, the demographic makeup of those markets and the marketing strategy employed in each market. Advertising revenue is positively affected by strong local economies, national and regional political election campaigns, and certain events such as the Olympic Games or the Super Bowl. Because television broadcast stations rely on advertising revenue, declines in advertising budgets, particularly in recessionary periods, adversely affect the broadcast industry, and as a result may contribute to a decrease in the revenue of broadcast television stations. The stations’ advertising revenue is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to, and including, the holiday season. In addition, advertising revenue is generally higher during even-numbered years resulting from political advertising and advertising aired during the Olympic Games.
Each of our stations has a network affiliation agreement pursuant to which the network provides programming to the station during specified time periods, including prime time. NBC, CBS and ABC compensate some of our affiliated stations for distributing the network’s programming over the air and for allowing the network to keep a portion of advertising inventory during those time periods. The affiliation agreements with Fox and MyNetworkTV do not provide for compensation. In recent years, in conjunction with the renewal of affiliation agreements with NBC, CBS and ABC, the amount of network compensation has been declining from year to year. We expect this trend to continue in the future. Therefore, revenue associated with network compensation agreements is expected to decline in future years and may be eliminated altogether at some point in time.
Each station acquires licenses to broadcast programming in non-news and non-network time periods. The licenses are either purchased from a program distributor for cash or the program distributor is allowed to sell some of the advertising inventory as compensation to eliminate or reduce the cash cost for the license. The latter practice is referred to as barter broadcast rights. The station records the estimated fair market value of the licenses, including any advertising inventory given to the program distributor, as a broadcast right asset and liability. Barter broadcast rights are recorded at management’s estimate of the value of the advertising time exchanged using historical advertising rates, which approximates the fair value of the program material received. The assets are amortized as a component of amortization of broadcast rights. Amortization is computed using the straight-line method based on the license period or usage, whichever yields the greater expense. The cash broadcast rights liabilities are reduced by monthly payments while the barter liability is amortized over the life of the contract as barter revenue.
Our primary operating expense consists of fixed monthly SSA fees paid to Nexstar for news production and technical and other services. To a lesser extent our operating expenses include employee compensation and related benefits. A large percentage of the costs involved in the operation of our stations remains fixed.
Pending Transaction
On April 11, 2006, we and Nexstar filed an application with the FCC for consent to assignment of the license for KFTA Channel 24 (Ft. Smith, Arkansas) from Nexstar to us. Consideration for this transaction is set at $5.6 million. Also in 2006, we entered into an affiliation agreement with the Fox network which provides Fox programming to KFTA. On August 28, 2006, we and Nexstar entered into a local service agreement whereby we pay Nexstar for the right to broadcast programming on KFTA and Nexstar pays us for the right to sell all advertising time within certain time periods. The time brokerage agreement will terminate upon the assignment of KFTA’s FCC license from Nexstar to us. Upon completing the assignment of KFTA’s license, we plan to enter into joint sales and shared services agreements with Nexstar-owned KNWA in Fort Smith-Fayetteville-Springdale-Rogers, Arkansas, whereby KNWA will provide local news, sales and other non-programming services to KFTA. In March 2008, the FCC granted the application to assign the license for KFTA from Nexstar to Mission with certain restrictions. Mission and Nexstar are appealing the restrictions.
Historical Performance
Revenue
The following table sets forth the principal types of revenue earned by our stations for the periods indicated and each type of revenue (other than barter revenue and revenue from Nexstar Broadcasting, Inc.) as a percentage of total gross revenue:
Results of Operations
The following table sets forth a summary of our operations for the periods indicated and their percentages of net revenue:
Year Ended December 31, 2009 Compared to Year Ended December 31,
Revenue
Net revenue for the year ended December 31, 2009, decreased by $8.1 million, or 19.3%, from the same period in 2008. This decrease was primarily attributed to the decrease in revenue from Nexstar, partially offset by an increase in retransmission compensation, as discussed below.
Revenue from Nexstar was $25.4 million for the year ended December 31, 2009, compared to $35.3 million for the same period in 2008, a decrease of $9.9 million, or 27.9%. The decrease was primarily attributed to a decrease in the local, national and political revenue that Nexstar generated from selling all of the advertising of our stations, which in turn decreased the revenue we earned from Nexstar through the JSAs.
Compensation from retransmission consent and network affiliation agreements was $5.9 million for the year ended December 31, 2009, compared to $4.0 million for the same period in 2008, an increase of $1.9 million, or 47.3%. The increase was primarily due to an increase in the compensation we receive under retransmission consent agreements which resulted from cable agreements being renegotiated at higher rates at the end of 2008.
Operating Expenses
Corporate expenses were $1.3 million for the year ended December 31, 2009 compared to $0.9 million for the same period in 2008, an increase of $0.4 million or 39.1%. The increase was primarily due to legal fees associated with the amendment of the credit facility in 2009, combined with a reduction in employee bonuses in 2008. Corporate expense relates to costs associated with the centralized management of our stations.
Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses decreased by $0.8 million, or 9.3% for the year ended December 31, 2009, compared to the same period in 2008. The decrease was primarily due to a reduction in network fees, a decrease in utilities expense as a result of switching to DTV and a reduction in medical health claims.
Local service agreement fees associated with Nexstar relate to services provided by Nexstar in the production of newscasts, technical maintenance, promotional and administrative support under the SSAs. SSA fees decreased by $0.7 million, or 8.2%, for the year ended December 31, 2009 compared to the same period in 2008. These fees decreased due to the elimination of the newscast in Wilkes-Barre in the first quarter of 2009.
In 2009, we recorded an impairment charge of $2.3 million that included an impairment to the carrying values of FCC licenses of $2.0 million, related to eight of our stations and an impairment to the carrying values of goodwill of $0.3 million, related to one reporting unit consisting of one of our television stations. We recorded impairment charges of $11.4 million during 2008 that included an impairment to the carrying values of FCC licenses of $8.7 million, related to 9 of our television stations; an impairment to the carrying value of network affiliation agreements of $1.4 million, related to 2 of our television stations; and an impairment to the carrying values of goodwill of $1.3 million, related to 3 of our television stations. As required by the authoritative guidance for goodwill and other intangible assets, we tested our FCC licenses and goodwill for impairment at September 30, 2009, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our reporting units below their carrying amounts and that our FCC licenses might be impaired. These events and circumstances include the overall economic recession and a continued decline in demand for advertising at several of our stations. See Note 7 in the Notes to Financial Statements in Item 8 of this document.
Amortization of broadcast rights, excluding barter, increased by $0.1 million, or 3.3%, for the year ended December 31, 2009, compared to the same period in 2008. The increase was primarily due to the write-down of broadcast rights related to a program at one of the stations.
Amortization of intangible assets decreased by $0.3 million or 4.7% for the year ended December 31, 2009, compared to the same period in 2008. The decrease was due to the 2008 impairment of network affiliation agreements at two stations.
Depreciation of property and equipment increased by $0.3 million, or 9.6%, for the year ended December 31, 2009, compared to the same period in 2008. The increase was primarily due to new additions relating to the exchange of equipment with Sprint Nextel.
For the years ended December 31, 2009 and 2008, we recognized gains of $2.4 million and $0.9 million, respectively from the exchange of equipment under an arrangement with Sprint Nextel Corporation. During 2008, we recognized a gain of $0.5 million related to an insurance recovery of a casualty loss, partially offset by a loss on disposal of assets of $0.1 million.
Income from Operations
Income from operations was $4.4 million for the year ended December 31, 2009, compared to $1.1 million for the same period of 2008, an increase of $3.3 million, or 286.2%. Income from operations increased primarily due to the reduction in the impairment charge; the reduction in station direct operating expenses, including selling, general and administrative expenses; the reduction in LSA fees; the increase in gain on asset exchange; partially offset by the decrease in net revenue.
Interest Expense
Interest expense, including amortization of debt financing costs, decreased by $3.4 million, or 36.1%, for the year ended December 31, 2009, compared to the same period in 2008. The decrease in interest expense was primarily attributed to lower average interest rates incurred during the year ended December 31, 2009 compared to the same period in 2008.
Income Taxes
Income tax expense was $1.0 million for the year ended December 31, 2009, compared to income tax benefit of $0.7 million for the same period in 2008, an increase of $1.7 million or 233.8%. The increase was primarily due to the tax benefit recognized in 2008 as a result of the impairment charge on indefinite-lived assets. Our provision for income taxes is primarily created by an increase in the deferred tax liabilities position during the year arising from the amortizing of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. The 2008 impairment charge reduced the book value and therefore decreased the deferred tax liability position. No tax benefit was recorded with respect to the losses for 2009 and 2008, as the utilization of such losses is not likely to be realized in the foreseeable future.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007.
Revenue
Net revenue for the year ended December 31, 2008, increased by $4.6 million, or 12.4%, from the same period in 2007. This increase was primarily attributed to the increase in revenue from Nexstar.
Revenue from Nexstar was $35.3 million for the year ended December 31, 2008, compared to $30.6 million for the same period in 2007, an increase of $4.7 million, or 15.5%. The increase was primarily attributed to an increase in the political revenue that Nexstar generated from selling all of the advertising of our stations, which in turn increased the revenue we earned from Nexstar through the JSAs.
Compensation from retransmission consent and network affiliation agreements was $4.0 million for the year ended December 31, 2008, compared to $4.3 million for the same period in 2007, a decrease of $0.3 million, or 6.3%. The increase was primarily due to an increase in the compensation we receive under retransmission consent agreements which resulted from increases in the number cable and satellite subscribers in our markets.
Operating Expenses
Corporate expenses were $0.9 million for the year ended December 31, 2008. Corporate expense relates to costs associated with the centralized management of our stations.
Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses increased by $1.6 million, or 25.0% for the year ended December 31, 2008, compared to the same period in 2007. Of the increase $1.2 million was due to the addition of KTVE which was acquired in January 2008.
Local service agreement fees associated with Nexstar relate to services provided by Nexstar in the production of newscasts, technical maintenance, promotional and administrative support under the SSAs. SSA fees increased by $0.2 million, or 2.9%, for the year ended December 31, 2008 compared to the same period in 2007. These fees increased due to the addition of KTVE in January 2008.
We recorded impairment charges of $11.4 million during 2008 that included an impairment to the carrying values of FCC licenses of $8.7 million, related to 9 of our television stations; an impairment to the carrying value of network affiliation agreements of $1.4 million, related to 2 of our television stations; and an impairment to the carrying values of goodwill of $1.3 million, related to 3 of our television stations. See Note 7 in the Notes to Financial Statements in Item 8.
Amortization of broadcast rights, excluding barter, increased by $0.2 million, or 12.7%, for the year ended December 31, 2008, compared to the same period in 2007. The increase was primarily due to the addition of KTVE in 2008.
Amortization of intangible assets was $5.4 million for both the years ended December 31, 2008 and 2007.
Depreciation of property and equipment increased by $0.1 million, or 3.0%, for the year ended December 31, 2008, compared to the same period in 2007.
For the years ended December 31, 2008 and 2007, we recognized non-cash gains of $0.9 million and $0.3 million, respectively from the exchange of equipment under an arrangement we first transacted with Sprint Nextel Corporation in the third quarter of 2007. Additionally, we recognized a gain of $0.5 million related to an insurance recovery of a casualty loss, partially offset by a loss on disposal of assets of $0.1 million.
Income from Operations
Income from operations was $1.1 million for the year ended December 31, 2008, compared to $9.3 million for the same period of 2007, a decrease of $8.2 million, or 87.8%. Income from operations decreased primarily due to the non-cash impairment charge related to goodwill and other intangible assets, combined with an increase in operating costs from newly acquired KTVE, partially offset by the increase in net revenue.
Interest Expense
Interest expense, including amortization of debt financing costs, decreased by $2.9 million, or 23.3%, for the year ended December 31, 2008, compared to the same period in 2007. The decrease in interest expense was primarily attributed to lower average interest rates incurred during the year ended December 31, 2008 compared to the same period in 2007, partially offset by an increase in the average amount outstanding during 2008 under our senior credit facility.
Income Taxes
Income tax benefit was $0.7 million for the year ended December 31, 2008, compared to income tax expense of $1.1 million for the same period in 2007, a decrease of $1.8 million. The decrease was primarily due to the tax benefit recognized as a result of the impairment charge on indefinite-lived assets. Our provision for income taxes is primarily created by an increase in the deferred tax liabilities position during the year arising from the amortizing of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. The impairment charge reduced the book value and therefore decreased the deferred tax liability position. No tax benefit was recorded with respect to the losses for 2008 and 2007, as the utilization of such losses is not likely to be realized in the foreseeable future.
Liquidity and Capital Resources
We are highly leveraged, which makes us vulnerable to changes in general economic conditions. Our ability to meet the future cash requirements described below depends on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other conditions, many of which are beyond our control. Our ability to meet future cash requirements is also dependent upon the local service agreements we have entered into with Nexstar. Under our local service agreements, Nexstar sells our advertising time and pays us a percentage of the amount collected. The payments we receive from Nexstar under the local service agreements are a significant component of our cash flows. On March 9, 2010, Nexstar represented to us that it will continue the various local service agreements under which it provides sales and other services to our television stations thereby providing financial support to enable us to continue to operate as a going concern. We believe that with Nexstar’s pledge to continue the local service agreements, our available cash, anticipated cash flow from operations and available borrowings under our senior credit facility should be sufficient to fund working capital, capital expenditure requirements, interest payments and scheduled debt principal payments for at least the next twelve months from December 31, 2009. In order to meet future cash needs we may, from time to time, borrow under our available credit facility. We will continue to evaluate the best use of our operating cash flow among capital expenditures, acquisitions and debt reduction.
Overview
The following tables present summarized financial information management believes is helpful in evaluating the Company’s liquidity and capital resources:
(1)
As of December 31, 2009, all $8.0 million of total unused commitments under Mission’s credit facility were available for borrowing.
Cash Flows - Operating Activities
The comparative net cash flows provided by operating activities decreased by $4.6 million during the year ended December 31, 2009 compared to the same period in 2008. The decrease was primarily due to the overall decrease in net revenue of $8.1 million, partially offset by the decrease in cash paid for interest of $3.6 million.
Cash paid for interest decreased $3.6 million for the year ended December 31, 2009 compared to the same period in 2008 due to lower average interest rates incurred in 2009 compared to 2008.
The comparative net cash flows provided by operating activities increased by $4.9 million during the year ended December 31, 2008 compared to the same period in 2007. The increase was primarily due to: (1) our increase in net revenue of $4.6 million, partially offset by an increase in direct operating and general and administrative expenses of $1.6 million; (2) a decrease in cash paid for interest of $2.9 million; and (3) an increase of $0.7 million in cash flows from deferred revenue, partially offset by a decrease of $1.5 million resulting from the timing of payments made to reduce our payable to Nexstar.
Cash paid for interest decreased $2.9 million for the year ended December 31, 2008 compared to the same period in 2007 due to lower average interest rates incurred in 2008 compared to 2007, partially offset by an increase in the average amount outstanding during 2008 under the senior credit facility.
Due to our recent history of net operating losses, we currently do not pay any federal income taxes. These net operating losses may be carried forward, subject to expiration and certain limitations, and used to reduce taxable earnings in future years. Through the use of available loss carryforwards, it is possible that we may not pay significant amounts of federal income taxes in the foreseeable future.
Cash Flows - Investing Activities
The comparative net cash flows used for investing activities decreased by $14.4 million during the year ended December 31, 2009 compared to the same period in 2008. Cash flows from investing activities consisted of cash used for capital additions.
Capital expenditures were $1.2 million for the year ended December 31, 2009, compared to $8.2 million for the same period in 2008. The decrease was primarily attributed to the conversion of more stations to DTV in 2008.
The comparative net cash flows used for investing activities increased by $12.7 million during the year ended December 31, 2008 compared to the same period in 2007. Cash flows from investing activities consisted of cash used for capital additions and acquisition-related payments.
Capital expenditures were $8.2 million for the year ended December 31, 2008, compared to $2.5 million for the same period in 2007. The increase was primarily attributed to digital conversion expenditures, which increased from $2.3 million in 2007 to $7.3 million in 2008.
Acquisition related payments for the years ended December 31, 2008 and 2007 were $7.9 million and $0.4 million, respectively, both of which were related to the acquisition of KTVE. The $0.4 million spent in 2007 related to the down payment on KTVE and the remainder was paid in 2008.
Cash Flows - Financing Activities
The comparative net cash flows from financing activities decreased by $1.8 million during the year ended December 31, 2009 compared to the same period in 2008 due to payments for debt finance costs related to the October 2009 amendment of our senior credit facility. Scheduled term loan maturities under our senior secured credit facility were $1.7 million for both the years ended December 31, 2009 and 2008.
The comparative net cash flows from financing activities decreased by $7.0 million during the year ended December 31, 2008 compared to the same period in 2007 due to $7.0 million of proceeds from revolving loan borrowings made in 2007 under our senior secured credit facility. The $7.0 million borrowing in December 2007 was made in contemplation of closing on our pending acquisition of KTVE. We made a remaining payment of $7.4 million on January 16, 2008 to complete our acquisition of KTVE. Scheduled term loan maturities under our senior secured credit facility were $1.7 million for both the years ended December 31, 2008 and 2007.
Although our senior credit facility now allows for the payment of cash dividends, we do not currently intend to declare or pay a cash dividend.
Future Sources of Financing and Debt Service Requirements
As of December 31, 2009, we had debt of $172.4 million, which represented 254.6% of our total capitalization. Our high level of debt requires that a substantial portion of cash flow be dedicated to pay principal and interest on debt which will reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.
The total amount of borrowings available to us under the revolving loan commitment of our senior secured credit facility is based on covenant calculations contained in Nexstar’s credit agreement. As of December 31, 2009, $8.0 million of total unused commitments under our credit facility were available for borrowing.
The following table summarizes the approximate aggregate amount of principal indebtedness scheduled to mature for the periods referenced as of December 31, 2009:
Interest payments on our senior credit facility are generally paid every one to three months and are payable based on the type of interest rate selected.
The terms of our senior credit facility limit, but do not prohibit, us from incurring substantial amounts of additional debt in the future.
We do not have any rating downgrade triggers that would accelerate the maturity dates of our debt. However, a downgrade in our credit rating could adversely affect our ability to renew existing, or obtain access to new, credit facilities in the future and could increase the cost of such facilities.
Collateralization and Guarantees of Debt
Nexstar Broadcasting Group and its subsidiaries guarantee full payment of all obligations under our bank credit facility in the event of our default. Similarly, we are a guarantor of Nexstar’s bank credit facility and the senior subordinated notes issued by Nexstar. The bank credit facilities are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses, of Nexstar and us. As of December 31, 2009, Nexstar had a maximum commitment of $238.8 million under its bank credit facility, of which $226.3 million of debt was outstanding, and had issued an aggregate principal amount outstanding of $47.9 million of 7% senior subordinated notes and $142.9 million of 7% PIK senior subordinated notes.
Debt Covenants
Our ability to continue as a going concern is dependent on Nexstar’s pledge to continue the local services agreements described in a letter of support dated March 9, 2010. Nexstar’s senior secured credit facility agreement contains covenants which require them to comply with certain financial ratios, including: (a) maximum total and senior leverage ratios, (b) a minimum interest coverage ratio, and (c) a minimum fixed charge coverage ratio. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar Broadcasting and us. Our senior secured credit facility agreement does not contain financial covenant ratio requirements; however it does include an event of default if Nexstar does not comply with all covenants contained in its credit agreement. On October 8, 2009, Nexstar amended its senior secured credit facility to modify certain terms of the underlying credit agreement. The modifications included, but are not limited to, changes to financial covenants, including the Consolidated Total Leverage Ratio and Consolidated Senior Leverage Ratio, a general tightening of the exceptions to the negative covenants (principally by means of reducing the types and amounts of permitted transactions) and an increase to the interest rates and fees payable with respect to the borrowings under the amended credit agreement. The following table compares the old and new covenant requirements.
Prior
As Amended
Consolidated Total Leverage Ratio:
July 1, 2009 through September 30, 2009
6.50 to 1.00
6.75 to 1.00
October 1, 2009 to December 31, 2009
6.50 to 1.00
8.75 to 1.00
January 1, 2010 through March 31, 2010
6.50 to 1.00
9.50 to 1.00
April 1, 2010 through June 30, 2010
6.50 to 1.00
10.25 to 1.00
July 1, 2010 through September 30, 2010
6.25 to 1.00
9.25 to 1.00
October 1, 2010 through and including March 31, 2011
6.25 to 1.00
7.75 to 1.00
April 1, 2011 and thereafter
6.00 to 1.00
6.00 to 1.00
Consolidated Senior Leverage Ratio:
July 1, 2009 through September 30, 2009
4.50 to 1.00
5.50 to 1.00
October 1, 2009 to December 31, 2009
4.50 to 1.00
7.00 to 1.00
January 1, 2010 through March 31, 2010
4.25 to 1.00
7.00 to 1.00
April 1, 2010 through June 30, 2010
4.25 to 1.00
7.50 to 1.00
July 1, 2010 through September 30, 2010
4.25 to 1.00
6.75 to 1.00
October 1, 2010 through and including March 31, 2011
4.25 to 1.00
5.50 to 1.00
April 1, 2011 and thereafter
4.00 to 1.00
4.00 to 1.00
As of September 30, 2009, Nexstar was in compliance with all indentures governing their publicly-held notes. As of September 30, 2009, Nexstar was not in compliance with all covenants contained in the credit agreement governing their senior secured credit facility. The October 8, 2009 debt amendment contained a limited waiver for the leverage ratios which cured the violation as of September 30, 2009. As of December 31, 2009, Nexstar was in compliance with all covenants contained in the credit agreements governing their senior secured credit facility and the indentures governing their publicly-held notes.
On March 30, 2009, Nexstar closed an offer to exchange $143,600,000 of the 7% senior subordinated notes due 2014 in exchange for $142,320,761 7% senior subordinated PIK Notes due 2014 (the “PIK Notes”). Based on the financial covenants in the Nexstar senior secured credit facility, the PIK Notes are not included in the debt amount used to calculate the total leverage ratio until January 2011.
Nexstar believes the consummation of the exchange offer and debt amendment along with the actions described above, will allow Nexstar to maintain compliance with all covenants contained in the credit agreements governing its senior secured facility and the indentures governing its publicly held notes for a period of at least the next twelve months from December 31, 2009.
Cash Expenditures for DTV Conversion
On June 12, 2009, all full-power television broadcasters were required to cease operating in an analog format and operate exclusively in digital (DTV) format. All of Mission’s stations have completed the transition from analog to digital and hold DTV authorizations issued by the FCC.
DTV conversion expenditures were $1.0 million, $7.3 million and $2.3 million, respectively, for the years ended December 31, 2009, 2008 and 2007.
Cash Requirements for Pending Transaction
On April 18, 2006, we and Nexstar announced that we had filed an application with the FCC for consent to assignment of the license for KFTA Channel 24 (Ft. Smith, Arkansas) from Nexstar to us. The FCC granted the application in March 2008 with certain restrictions. Mission and Nexstar are appealing the restrictions. Consideration for this transaction was set at $5.6 million. We intend to finance this transaction through cash on hand and borrowings under our senior secured credit facility.
No Off-Balance Sheet Arrangements
At December 31, 2009, 2008 and 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Contractual Obligations
The following summarizes our contractual obligations at December 31, 2009, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
(1)
Excludes broadcast rights barter payable commitments recorded on the financial statements at December 31, 2009 in the amount of $3.0 million.
As discussed in Note 11, “Income Taxes” of the Notes to the Financial Statements, we adopted interpretive guidance related to accounting for uncertainty in income taxes as of January 1, 2007. At December 31, 2009, we had $3.7 million of unrecognized tax benefits. This liability represents an estimate of tax positions that the corporation has taken in its tax returns which may ultimately not be sustained upon examination by the tax authorities. The resolution of these tax positions may not require cash settlement due to the existence of net operating loss carryforwards.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. On an ongoing basis, we evaluate our estimates, including those related to goodwill and intangible assets, bad debts, broadcast rights, barter, income taxes, commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
For an overview of our significant accounting policies, we refer you to Note 2 to the financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K. We believe the following critical accounting policies are those that are the most important to the presentation of our financial statements, affect our more significant estimates and assumptions, and require the most subjective of complex judgments by management.
Valuation of Goodwill and Intangible Assets
Approximately $64.9 million, or 63.0%, of our total assets as of December 31, 2009 consisted of intangible assets. Intangible assets principally include FCC licenses, goodwill and network affiliation agreements. If the fair value of these assets is less than the carrying value, we may be required to record an impairment charge.
As required by authoritative guidance, we test the impairment of our FCC licenses annually or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment test consists of a comparison of the fair value of FCC licenses with their carrying amount on a station-by-station basis using a discounted cash flow valuation method, assuming a hypothetical startup scenario.
Also as required by authoritative guidance, we test the impairment of our goodwill annually or whenever events or changes in circumstances indicate that goodwill might be impaired. The first step of the goodwill impairment test compares the fair value of the station (“reporting unit”) to its carrying amount, including goodwill. The fair value of a reporting unit is determined through the use of a discounted cash flow analysis. The valuation assumptions used in the discounted cash flow model reflect historical performance of the reporting unit and the prevailing values in the markets for broadcasting properties. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing an assumed purchase price allocation, using the reporting unit’s fair value (as determined in the first step described above) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess but not more than the carrying value of goodwill.
In accordance with authoritative guidance for accounting for the impairment or disposal of long-lived assets, the Company tests network affiliation agreements whenever events or circumstances indicate that their carrying amount may not be recoverable, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. An impairment in the carrying amount of a network affiliation agreement is recognized when the expected future operating cash flow derived from the operations to which the asset relates is less than its carrying value.
We recorded an impairment charge of $2.3 million during the third quarter of 2009 that included an impairment to the carrying values of FCC licenses of $2.0 million, related to eight of our stations and an impairment to the carrying values of goodwill of $0.3 million, related to one reporting unit consisting of one of our television stations. As required by the authoritative guidance for goodwill and other intangible assets, we tested our FCC licenses and goodwill for impairment at September 30, 2009, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our reporting units below their carrying amounts and that our FCC licenses might be impaired. These events and circumstances include the overall economic recession and a continued decline in demand for advertising at several of our stations.
We completed our annual test for impairment of goodwill and FCC licenses as of December 31, 2009 which resulted in no additional impairment charge. Based on our annual assessment, the Company has no reporting units at risk for impairment.
We tested our network affiliation, FCC licenses and goodwill for impairment as of September 30, 2008, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our reporting units below their carrying amounts and that our FCC licenses and network affiliation agreements might be impaired. These events included the decline in overall economic conditions and the resulting decline in advertising revenues at some of our television stations. We recorded an impairment charge of $5.9 million as a result of that test which included an impairment to the carrying values of FCC licenses of $4.7 million, related to 6 of our television stations; an impairment to the carrying value of network affiliation agreements of $1.0 million, related to 2 of our television stations; and an impairment to the carrying values of goodwill of $0.2 million, related to 2 of our television stations.
We performed our annual test for impairment at December 31, 2008 and due to the continued decline in overall economic conditions during the fourth quarter of 2008 and the further decline in our forecasts for advertising revenues at some stations, the Company recorded an additional $5.5 million in impairment charges, for an annual total of $11.4 million. Of the additional $5.5 million impairment charges, $4.0 million was for FCC licenses, related to 9 of our television stations, $0.4 million was for network affiliation agreements related to 1 television station, and $1.1 million was for goodwill, related to 3 of our television stations.
Further deterioration in the advertising marketplaces in which Nexstar and Mission operate could lead to further impairment and reduction of the carrying value of the Company’s goodwill and intangible assets, including FCC licenses and network affiliation agreements. If such a condition were to occur, the resulting non-cash charge could have a material adverse effect on Nexstar and Mission’s financial position and results of operations.
The tables below illustrate how assumptions used in the fair value calculations varied from period to period in 2009 and 2008. The increase in the discount rate between third and fourth quarter 2008 reflects the volatility of stock prices of public companies within the media sector along with the increase in the corporate borrowing rate. The changes in the market growth rates and operating profit margins reflect the general economic pressures impacting both the national and a number of local economies, and specifically, national and local advertising expenditures in the markets where our stations operate.
The assumptions used in the valuation testing have certain subjective components including anticipated future operating results and cash flows based on our own internal business plans as well as future expectations about general economic and local market conditions.
We based the valuation of FCC licenses on the following basic assumptions:
September 30, 2009
December 31, 2008
September 30, 2008
Market growth rates
0.0% to 4.1%
2.0% to 2.8%
2.0% to 2.8%
Operating profit margins
11.5% to 24.3%
11.9% to 25.4%
12.1% to 25.4%
Discount rate
10.5%
10.8%
9.5%
Tax rate
35.2% to 40.6%
34.0% to 40.6%
34.0% to 40.6%
Capitalization rate
7.8% to 8.5%
8.0% to 8.8%
6.8% to 7.5%
We based the valuation of network affiliation agreements on the following basic assumptions:
September 30, 2009
December 31, 2008
September 30, 2008
Market growth rates
2.3% to 3.7%
2.0% to 2.8%
2.0% to 2.5%
Operating profit margins
20.0% to 30.8%
14.0% to 26.3%
14.3% to 26.4%
Discount rate
10.5%
10.8%
9.5%
Tax rate
35.2% to 40.6%
34.0% to 39.6%
34.0% to 39.6%
Capitalization rate
7.8% to 8.5%
8.3% to 8.8%
7.0% to 7.5%
We based the valuation of goodwill on the following basic assumptions:
September 30, 2009
December 31, 2008
September 30, 2008
Market growth rates
0.0% to 4.1%
2.0% to 2.8%
2.0% to 2.8%
Operating profit margins
20.0% to 30.8%
20.0% to 32.1%
20.0% to 34.1%
Discount rate
10.5%
10.8%
9.5%
Tax rate
35.2% to 40.6%
34.0% to 40.6%
34.0% to 40.6%
Capitalization rate
7.8% to 8.5%
8.0% to 8.8%
6.8% to 7.5%
The assumptions utilized for our annual impairment assessment for FCC licenses and goodwill as of December 31,2009 were consistent with those utilized at September 30, 2009.
Allowance for Doubtful Accounts
We provide for allowances for doubtful accounts when necessary for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. There was no allowance for doubtful accounts at December 31, 2009 and 2008 since the accounts receivable balance consisted primarily of billings to cable and satellite carriers for compensation associated with retransmission consent agreements and amounts due from the major television networks under the network affiliation agreements.
Broadcast Rights Carrying Amount
Broadcast rights are stated at the lower of unamortized cost or net realizable value. Cash broadcast rights are initially recorded at the amount paid or payable to program distributors for the limited right to broadcast the distributors’ programming. Barter broadcast rights are recorded at our estimate of the fair value of the advertising time exchanged, which approximates the fair value of the programming received. The fair value of the advertising time exchanged is estimated by applying average historical rates for specific time periods. Amortization of broadcast rights is computed using the straight-line method based on the license period or programming usage, whichever period yields the shorter life. The current portion of broadcast rights represents those rights available for broadcast which will be amortized in the succeeding year. When projected future net revenue associated with a program is less than the current carrying amount of the program broadcast rights, for example, due to poor ratings, we write-down the unamortized cost of the broadcast rights to equal the amount of projected future net revenue. If the expected broadcast period was shortened or cancelled , we would be required to write-off the remaining value of the related broadcast rights to operations on an accelerated basis or possibly immediately. As of December 31, 2009, the amounts of our current broadcast rights and non-current broadcast rights were $3.0 million and $1.8 million, respectively.
Characterization of SSA Fees
We present the fees incurred pursuant to SSAs with Nexstar as an operating expense in our financial statements. Our decision to characterize the SSA fees in this manner is based on our conclusion that (a) the benefit our stations receive from these local service agreements is sufficiently separate from the consideration paid to us from Nexstar under JSAs, (b) we can reasonably estimate the fair value of the benefit our stations receive under the SSA agreement, and (c) the SSA fee we pay to Nexstar does not exceed the estimated fair value of the benefit our stations receive.
Barter Transactions
We barter advertising time for certain program material. These transactions, except those involving exchange of advertising time for network programming, are recorded at management’s estimate of the fair value of the advertising time exchanged, which approximates the fair value of the program material received. The fair value of advertising time exchanged is estimated by applying average historical advertising rates for specific time periods. We recorded both barter revenue and barter expense of $2.4 million, $2.5 million and $2.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Income Taxes
We account for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. A valuation allowance is applied against net deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. While we have considered future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period such a determination was made.
On January 1, 2007, we adopted interpretive guidance related to income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. For interest and penalties relating to income taxes we recognize these items as components of income tax expense.
Claims and Loss Contingencies
In the normal course of business, we are party to various claims and legal proceedings. We record a liability for these matters when an adverse outcome is probable and the amount of loss is reasonably estimated. We consider a combination of factors when estimating probable losses, including judgments about potential actions by counterparties.
Nonmonetary Asset Exchanges
In connection with a spectrum allocation exchange ordered by the FCC within the 1.9 GHz band, Sprint Nextel Corporation (“Nextel”) is required to replace certain existing analog equipment with comparable digital equipment. The Company has agreed to accept the substitute equipment that Nextel will provide and in turn must relinquish its existing equipment to Nextel. Neither party will have any continuing involvement in the equipment transferred following the exchange. We account for this arrangement as an exchange of assets in accordance with accounting and disclosure requirements for exchanges of nonmonetary assets.
These transactions are recorded at the estimated fair market value of the equipment received. We derive our estimate of fair market value from the most recent prices paid to manufacturers and vendors for the specific equipment we acquire. As equipment is exchanged, the Company records a gain to the extent that the fair market value of the equipment received exceeds the carrying amount of the equipment relinquished.
Recent Accounting Pronouncements
In June 2009 the Financial Accounting Standards Board (“the FASB”) issued the FASB Accounting Standards Codification™ (“the Codification”). The Codification is the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards are superseded. All other accounting guidance not included in the Codification is considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification. The Codification was effective for our September 30, 2009 financial statements. The Codification does not change existing GAAP. The principal impact on our financial statements from the Codification adoption is limited to disclosures as all references to authoritative accounting literature are now referenced in accordance with the Codification.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of VIE’s. This amendment requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. The amendment requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This amendment is effective for our fiscal year beginning January 1, 2010. We are currently evaluating the impact of adopting this amendment on our consolidated financial statements.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment removes the concept of a qualifying special-purpose entity. This amendment also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The amendment is effective for our fiscal year beginning January 1, 2010. We are currently evaluating the impact of adopting this amendment on our consolidated financial statements.
In May 2009, the FASB issued a general standard of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard became effective for our second quarter ended June 30, 2009.
In April 2009, the FASB issued a new accounting and disclosure requirement, which increases the frequency of fair value disclosures from an annual to a quarterly basis. The guidance relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value. The new authoritative guidance is effective for interim and annual periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009, and it did not impact our financial position or results of operations. It did, however, result in additional disclosures related to the fair value of our debt.
In April 2009, the FASB issued guidance for estimating fair values when there is no active market or where the price inputs being used represent distressed sales and identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009, and it did not have any effect on the Company’s financial position or results of operations.
In April 2008, the FASB issued guidance related to the determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the accounting and disclosure requirements related to goodwill and other intangible assets. This new guidance also provides additional disclosure requirements related to recognized intangible assets. We adopted this guidance in January 2009 and it did not have a material impact on our financial position or results of operations.
In January 2008, we adopted the FASB’s accounting and disclosure requirements related to fair value measurements as they pertain to financial assets and liabilities. The adoption did not have a material impact on our financial position or results of operations. These new requirements established a framework for measuring fair value, and enhanced the disclosures for fair value measurements. This authoritative guidance applies when other accounting pronouncements require or permit fair value measurements, but it does not require new fair value measurements. In February 2008, the FASB issued a one-year deferral for the application of this standard as it pertains to non-financial assets and liabilities. We adopted this standard for non-financial assets and liabilities in the first quarter of 2009. There were no material effects on our financial statements upon adoption of this new accounting pronouncement; however, this pronouncement could have a material impact in future periods.
In December 2007, the FASB issued authoritative guidance related to business combinations, as well as guidance for the accounting and reporting of noncontrolling interests in consolidated financial statements. These new standards significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. We adopted these standards on January 1, 2009. The impact of adopting the standard related to business combinations will be primarily limited to business combinations occurring on or after January 1, 2009. Adoption of the guidance related to noncontrolling interests in consolidated financial statements had no impact on our financial position or results of operations.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations.
All term loan borrowings at December 31, 2009 under our senior credit facility bear interest at 5.0%, which represented the base rate, or LIBOR, plus the applicable margin, as defined. All revolving loan borrowings at December 31, 2009 under our senior credit facility bear interest at 5.0%, which represented the base rate, or prime, plus the applicable margin, as defined. Interest is payable in accordance with the credit agreement.
The following table estimates the changes to cash flow from operations as of December 31, 2009 if interest rates were to fluctuate by 100 or 50 basis points, or BPS (where 100 basis points represents one percentage point), for a twelve-month period:
The estimated fair value of the Company’s total long-term debt at December 31, 2009 was approximately $161.5 million, which was approximately $10.9 million less than its carrying value. Fair values are determined from quoted market prices where available or based on estimates made by investment banking firms.
Given the interest rates that were in effect at December 31, 2008, as of that date, we estimated that our cash flows from operations would have increased by approximately $1.7 million and $0.9 million, respectively, for a 100 BPS and 50 BPS interest rate decrease, and decreased by approximately $0.9 million and $1.7 million, respectively, for a 50 BPS and 100 BPS interest rate increase.
Impact of Inflation
We believe that our results of operations are not affected by moderate changes in the inflation rate.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Our Financial Statements are filed with this report. The Financial Statements and supplementary data are included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Mission’s management, with the participation of Mission’s President and Treasurer (who is Mission’s principal executive officer and principal financial and accounting officer), conducted an evaluation as of the end of the period covered by this report of the effectiveness of the design and operation of Mission’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.
Based upon that evaluation, Mission’s President and Treasurer concluded that as of the end of the period covered by this report Mission’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by Mission in the reports it files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to Mission’s management, including its President and Treasurer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarterly period as of the end of the period covered by this report, there have been no changes in Mission’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Mission’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Mission’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Mission’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of Mission’s internal control over financial reporting as of December 31, 2009 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on management’s assessment, we have concluded that, as of December 31, 2009, Mission’s internal control over financial reporting was effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of Mission’s independent registered public accounting firm regarding the effectiveness of Mission’s internal control over financial reporting. Management’s report was not subject to attestation by Mission’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit Mission to provide only management’s report in this Annual Report on Form 10-K.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers of the Registrant and Corporate Governance
The table below sets forth information about Mission’s director and executive officers:
Name
Age
Position With Company
David S. Smith
President, Treasurer and Director
Nancie J. Smith
Vice President and Secretary
Dennis Thatcher
Executive Vice President and Chief Operating Officer
David S. Smith has served as Mission’s President and Treasurer since December 1997. Prior to that, Mr. Smith was the General Manager of WSTR television in Cincinnati, Ohio from 1990 to 1995. He is currently an ordained Evangelical Lutheran Church of America pastor at Zion Lutheran Church in Youngstown, Ohio.
Mr. Smith’s qualifications for being a director of the Company include his years of experience in the television broadcast industry. He is also the sole shareholder of the Company.
Nancie J. Smith has served as Mission’s Vice President and Secretary since December 1997. Nancie J. Smith is married to David S. Smith.
Dennis Thatcher has served as Executive Vice President and Chief Operating Officer since October 2004. From November 2003 to March 2004, Mr. Thatcher served as Regional Market Manager for United Media Partners. From November 2002 to October 2003, Mr. Thatcher served as General Sales Manager of KZTV for Eagle Creek Broadcasting. From July 2000 to October 2002, Mr. Thatcher pursued personal interests. From April 1998 to June 2000, Mr. Thatcher served as Senior Vice President and Central Regional Manager for Paxson Communications.
Code of Ethics
Our sole director adopted a code of ethics that applies to our president and treasurer, vice president and secretary, and executive vice president and chief operating officer. The purpose of the code of ethics is to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, to promote full, fair, accurate, timely and understandable disclosure in periodic reports required to be filed by us, and to promote compliance with all applicable rules and regulations that apply to us and our officers and directors. The code of ethics is filed hereby as Exhibit 14.1 to this Annual report on Form 10-K. Any amendments to or waivers from a provision of this code of ethics will be filed on a Current Report on Form 8-K.
Item 11.
Item 11.
Executive Compensation
David S. Smith, as the sole director of Mission’s Board of Directors, has submitted the following report and has recommended that the Compensation Discussion and Analysis set forth below be included in this Annual Report on Form 10-K for the year ended December 31, 2009 for filing with the SEC.
Compensation Discussion and Analysis
The Company has entered into a management services agreement with its President which provides for compensation in exchange for performing certain services in connection with the ownership and operations of the Company’s television stations. Under the agreement, our President David S. Smith is compensated up to $0.4 million per year.
Our Chief Operating Officer is compensated based on his scope of responsibilities, taking into account competitive market compensation paid by other similarly situated companies for this position. The Chief Operating Officer’s salary is reviewed annually, and adjusted to ensure its alignment with market levels and taking into account individual accomplishments and overall performance in the past year.
At this time, no other form of compensation is provided to the Company’s executive officers.
The following table sets forth the compensation earned or awarded for services rendered to the Company by our executive officers for the fiscal year ended December 31, 2009.
Summary Compensation Table
Employment Agreements
We are a party to a management services agreement with David S. Smith and Nancie J. Smith. Under this agreement, David S. Smith is paid up to $0.4 million per year for certain management services and Nancie J. Smith is paid by the hour for certain management services. Effective July 1, 2008, Nancie J. Smith is no longer an employee of the Company.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
David S. Smith owns 100% of the equity interests in Mission, which comprises 1,000 shares of common stock.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The following table summarizes the various local service agreements Mission-owned stations had in effect with Nexstar as of December 31, 2009:
(1)
Payments are variable based on station’s monthly operating expenses.
(2)
TBA will terminate upon the assignment of KFTA’s FCC license from Nexstar.
Under these agreements, Mission is responsible for certain operating expenses of its stations and therefore may have unlimited exposure to any potential operating losses. Mission will continue to operate its stations under the SSAs and JSAs or TBAs until the termination of such agreements. The SSAs and JSAs generally have a term of ten years. Nexstar indemnifies Mission for Nexstar’s activities pursuant to the local service agreements.
For disclosure of the amounts of revenue associated with and the fees incurred by Mission pursuant to the local service agreements Mission’s stations have with Nexstar, we refer you to Note 5 to the financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
Option Agreements
In consideration of Nexstar’s guarantee of our indebtedness, Nexstar has options to purchase the assets of all of our stations, subject to prior FCC approval. Our owner, David S. Smith, is a party to these option agreements.
The following table summarizes the option agreements Mission and David S. Smith have in effect with Nexstar as of December 31, 2009:
Station
Market
Affiliation
Date of Execution
Expiration Date
WFXP
Erie, PA
Fox
12/01/05
12/01/14
KJTL and
Wichita Falls, TX-Lawton, OK
Fox
06/01/99
06/01/18
KJBO-LP
MyNetworkTV
06/01/99
06/01/18
WYOU
Wilkes Barre-Scranton, PA
CBS
05/19/98
05/19/18
KODE
Joplin, MO-Pittsburg, KS
ABC
04/24/02
04/24/11
KRBC
Abilene-Sweetwater, TX
NBC
06/13/03
06/13/12
KSAN
San Angelo, TX
NBC
06/13/03
06/13/12
WFXW
Terre Haute, IN
Fox
05/09/03
05/09/12
KCIT and
Amarillo, TX
Fox
03/17/09
05/01/18
KCPN-LP
MyNetworkTV
03/17/09
05/01/18
KHMT
Billings, MT
Fox
12/30/03
12/30/12
KAMC
Lubbock, TX
ABC
12/30/03
12/30/12
KTVE
Monroe, LA-El Dorado, AR
NBC
1/16/08
1/16/17
KOLR
Springfield, MO
CBS
12/30/03
12/30/12
WUTR
Utica, NY
ABC
04/01/04
04/01/13
WTVO
Rockford, IL
ABC/MyNetworkTV
11/01/04
11/01/13
Under the terms of these option agreements, Nexstar may exercise its option upon written notice to us and David S. Smith. In each option agreement, the exercise price is the greater of (1) seven times the station’s cash flow, as defined in the option agreement, less the amount of its indebtedness as defined in the option agreement, or (2) the amount of its indebtedness. We and/or David S. Smith may terminate each option agreement by written notice any time after the seventh anniversary date of the relevant option agreement.
Management Services Agreement
Mission, David S. Smith and Nancie J. Smith, the wife of David S. Smith, are parties to a management services agreement. Under this agreement, Mission pays David S. Smith up to $0.4 million per year for certain management services and pays Nancie J. Smith by the hour for certain management services. Effective July 1, 2008, Nancie J. Smith is no longer an employee of the Company.
Item 14.
Item 14. Principal Accountant Fees and Services
We retained PricewaterhouseCoopers LLP to audit the financial statements of Mission Broadcasting, Inc. for the fiscal years ended December 31, 2009 and 2008, and review the financial statements included in each of its Quarterly Reports on Form 10-Q during such fiscal years and for tax compliance matters. The aggregate fees billed for professional services rendered by PricewaterhouseCoopers LLP in fiscal years 2009 and 2008 for these various services were:
(1)
“Audit Fees” are fees billed by PricewaterhouseCoopers LLP for professional services for the audit of the financial statements included in our Annual Report on Form 10-K and review of financial statements included in our Quarterly Reports on Form 10-Q, or for services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.
(2)
“Audit Related Fees” are fees billed by PricewaterhouseCoopers LLP for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements.
(3)
“Tax Fees” are fees billed by PricewaterhouseCoopers LLP for tax compliance, tax advice and tax planning.
(4)
“All Other Fees” are fees billed by PricewaterhouseCoopers LLP for any services not included in the first three categories. Amount represents fees incurred to audit acquired company financial statements.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) Financial Statements. The following financial statements of Mission Broadcasting, Inc. have been included on pages through of this Annual Report on Form 10-K:
•
See the Index to the Financial Statements on page for a list of financial statements filed with this report.
(2) Financial Statement Schedules. The schedule of Valuation and Qualifying Accounts appears in Note 15 to the financial statements filed as a part of this report.
(3) Exhibits. The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index beginning on page E-1 of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 15, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following person on behalf of the registrant and in the capacities indicated on March 15, 2010.
Name
Title
/s/ David S. Smith
President, Treasurer and Director
David S. Smith
(Principal Executive Officer and
Principal Financial and Accounting Officer)
MISSION BROADCASTING, INC.
Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2009 and 2008
Statements of Operations for the years ended December 31, 2009, 2008 and
Statements of Changes in Shareholder’s Deficit for the years ended December 31, 2009, 2008 and 2007
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholder of Mission Broadcasting Inc:
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Mission Broadcasting, Inc. at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.
The Company has a significant relationship with Nexstar Broadcasting Group, Inc. which is discussed in Notes 1, 2, 4, 5, 8 and 13 to the financial statements.
/s/PricewaterhouseCoopers, LLP
Dallas, Texas
March 15,
MISSION BROADCASTING, INC.
BALANCE SHEETS
December 31, 2009 and 2008
(in thousands, except share information)
The accompanying notes are an integral part of these financial statements.
MISSION BROADCASTING, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2009, 2008 and 2007
(in thousands)
The accompanying notes are an integral part of these financial statements.
MISSION BROADCASTING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER’S DEFICIT
For the Years Ended December 31, 2009, 2008 and 2007
(in thousands, except share information)
The accompanying notes are an integral part of these financial statements.
MISSION BROADCASTING, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2009, 2008 and 2007
(in thousands)
The accompanying notes are an integral part of these financial statements.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS
1. Business Operations
As of December 31, 2009, Mission Broadcasting, Inc. (“Mission” or the “Company”) owned and operated 16 television stations all of which were affiliated with the NBC, ABC, CBS, Fox or MyNetworkTV television networks in markets located in New York, Pennsylvania, Illinois, Indiana, Missouri, Arkansas, Louisiana, Texas and Montana. The Company operates in one reportable television broadcasting segment. Through local service agreements, Nexstar Broadcasting, Inc. (“Nexstar”) provides sales and operating services to all of the Mission television stations (see Notes 2 and 5).
The Company is highly leveraged, which makes it vulnerable to changes in general economic conditions. The Company’s ability to repay or refinance its debt will depend on, among other things, financial, business, market, competitive and other conditions, many of which are beyond its control, as well as Nexstar maintaining its pledge to continue the local service agreements with the Company’s stations. Management believes that with Nexstar’s pledge to continue the local service agreements, as described in a letter of support dated March 9, 2010, our available cash, anticipated cash flow from operations and available borrowings under our senior credit facility should be sufficient to fund working capital, capital expenditure requirements, interest payments and scheduled debt principal payments for at least the next twelve months from December 31, 2009, enabling Mission to continue to operate as a going concern.
On October 8, 2009, Nexstar and Mission both amended their senior credit facilities. See Note 8 for a more complete discussion of the changes to the credit facilities. Nexstar’s senior secured credit facility agreement contains covenants which require them to comply with certain financial ratios, including (a) maximum total and senior leverage ratios, (b) a minimum interest coverage ratio, and (c) a minimum fixed charge coverage ratio. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar and us. Our senior secured credit facility agreement does not contain financial covenant ratio requirements; however it does include an event of default if Nexstar does not comply with all covenants contained in its credit agreement. As of September 30, 2009, Nexstar was not in compliance with all covenants contained in the credit agreements governing their senior secured credit facility. On October 8, 2009, Nexstar amended their credit facility to modify certain covenants. The October 8, 2009 debt amendment contained a limited waiver for the leverage ratios which cured the violation as of September 30, 2009. As of December 31, 2009, Nexstar was in compliance with all covenants contained in the credit agreements governing their senior secured credit facility.
On March 30, 2009, Nexstar closed an offer to exchange $143,600,000 of the 7% senior subordinated notes due 2014 in exchange for $142,320,761 7% senior subordinated PIK Notes due 2014 (the “PIK Notes”). Based on the financial covenants in the Nexstar senior secured credit facility, the PIK Notes are not included in the debt amount used to calculate the total leverage ratio until January 2011.
Nexstar believes the consummation of the debt amendment will allow Nexstar to maintain compliance with all covenants contained in the credit agreements governing its senior secured facility and the indentures governing its publicly held notes for a period of at least the next twelve months from December 31, 2009.
2. Summary of Significant Accounting Policies
Local Service Agreements and Purchase Options
The following table summarizes the various local service agreements Mission’s stations had in effect as of December 31, 2009 with Nexstar:
Service Agreements
Stations
TBA Only (1)
WFXP and KHMT
SSA & JSA (2)
KJTL, KJBO-LP, KOLR, KCIT, KCPN-LP, KAMC, KRBC, KSAN, WUTR, WFXW, WYOU, KODE, KTVE and WTVO
(1)
Mission has a time brokerage agreement (“TBA”) for each of these stations which allows Nexstar to program most of each station’s broadcast time, sell each station’s advertising time and retain the advertising revenue generated in exchange for monthly payments to Mission.
(2)
Mission has both a shared service agreement (“SSA”) and a joint services agreement (“JSA”) for each of these stations. The SSA allows the sharing of services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments from Mission as described in the SSAs. The JSAs permit Nexstar to sell the station’s advertising time and retain a percentage of the net revenue from the station’s advertising time in return for monthly payments to Mission of the remaining percentage of the net revenue, as described in the JSAs.
Under these agreements, Mission is responsible for certain operating expenses of its stations and therefore may have unlimited exposure to any potential operating losses. Mission will continue to operate its stations under the SSAs and JSAs or TBAs until the termination of such agreements. The SSAs and JSAs generally have terms of ten years. Nexstar indemnifies Mission from Nexstar’s activities pursuant to the local service agreements.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
2. Summary of Significant Accounting Policies-(Continued)
The arrangements under the SSAs and JSAs have had the effect of Nexstar receiving substantially all of the available cash, after debt service costs, generated by the stations listed above. The arrangements under the TBAs have also had the effect of Nexstar receiving substantially all of the available cash generated by the TBA stations listed above. Mission anticipates that through these local service agreements, Nexstar will continue to receive substantially all of Mission’s available cash, after payments for debt service costs, generated by the stations listed above.
Mission’s sole shareholder has granted Nexstar purchase options to acquire the assets and assume the liabilities of each Mission station, subject to Federal Communications Commission (“FCC”) consent, for consideration equal to the greater of (1) seven times the station’s cash flow, as defined in the option agreement, less the amount of its indebtedness as defined in the option agreement, or (2) the amount of its indebtedness. Cash flow is defined as income or loss from operations, plus depreciation and amortization (including amortization of broadcast rights), interest income, non-cash trade and barter expenses, nonrecurring expenses (including time brokerage agreement fees), network compensation payments received or receivable and corporate management fees, less payments for broadcast rights, non-cash trade and barter revenue and network compensation revenue. These option agreements (which expire on various dates between 2011 and 2018) are freely exercisable or assignable by Nexstar without consent or approval by Mission’s sole shareholder. The Company expects these option agreements to be renewed upon expiration.
Nexstar does not own Mission or Mission’s television stations. However, as a result of the guarantee of all obligations incurred under Mission’s senior secured credit facility by Nexstar Broadcasting Group, Inc. (Nexstar’s ultimate parent) and its subsidiaries (“Nexstar Broadcasting Group”) and the arrangements under the local service agreements and purchase option agreements with Nexstar, Nexstar is deemed, under accounting principles generally accepted in the United States of America (“U.S. GAAP”), to have a controlling financial interest in Mission while complying with the FCC’s rules regarding ownership limits in television markets. In order for both Nexstar and Mission to comply with the FCC regulations, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations.
Characterization of SSA Fees
We present the fees incurred pursuant to SSAs with Nexstar as an operating expense in our financial statements. Our decision to characterize the SSA fees in this manner is based on our conclusion that (a) the benefit our stations receive from these local service agreements is sufficiently separate from the consideration paid to us from Nexstar under JSAs, (b) we can reasonably estimate the fair value of the benefit our stations receive under the SSA agreement, and (c) the SSA fee we pay to Nexstar does not exceed the estimated fair value of the benefit our stations receive.
Variable Interest Entities
In accordance with interpretive guidance for the consolidation of variable interest entities, the Company will consolidate an entity when it is determined that the Company is the primary beneficiary of such entity.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and the disclosure for contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The more significant estimates made by management include those relating to the allowance for doubtful accounts, barter transactions, income taxes, the recoverability of broadcast rights, the carrying amounts, recoverability, and useful lives of intangible assets and the fair values of non-monetary asset exchanges. Actual results may vary from estimates used.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
2. Summary of Significant Accounting Policies-(Continued)
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable consists primarily of billings to cable and satellite carriers for compensation associated with retransmission consent agreements and amounts due from the major television networks under the network affiliation agreements. The Company maintains an allowance for doubtful accounts when necessary for estimated losses resulting from the inability of customers to make required payments. Management evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations, an allowance is recorded to reduce their receivable amount to an amount estimated to be collected. The Company had no allowance for doubtful accounts at December 31, 2009 and 2008 given the composition of its accounts receivable at those dates. The Company had no bad debt expense for the years ended December 31, 2009, 2008 and 2007.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents. Cash deposits are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits; however, the Company believes these deposits are maintained with financial institutions of reputable credit and are not subject to any unusual credit risk.
Revenue Recognition
The Company’s revenue is primarily derived from the sale of television advertising by Nexstar under JSAs, network compensation and other broadcast related revenues. Advertising revenue is recognized, net of agency commissions, in the period during which the commercial is aired.
•
Revenue from Nexstar, representing a percentage of net advertising revenue derived from the sale of commercials on the Company’s stations, is recognized in the period during which the time spots are aired.
•
Retransmission compensation is recognized based on the number of subscribers over the contract period.
•
Other revenues, which may include tower rent revenue and other similar activities from time to time, are recognized in the period during which the services are provided.
•
Network compensation is either recognized when the Company’s station broadcasts specific network programming based upon a negotiated hourly-rate, or on a straight-line basis based upon the total negotiated compensation to be received by the Company over the term of the agreement.
The Company barters advertising time for certain program material. These transactions, except those involving exchange of advertising time for network programming, are recorded at management’s estimate of the fair value of the advertising time exchanged, which approximates the fair value of the program material received. The fair value of advertising time exchanged is estimated by applying average historical advertising rates for specific time periods. Revenue from barter transactions is recognized as the related advertisement spots are broadcast. The Company recorded $2.4 million, $2.5 million and $2.3 million of barter revenue for the years ended December 31, 2009, 2008 and 2007, respectively.
Barter expense is recognized at the time program broadcast rights assets are used. The Company recorded $2.4 million, $2.5 million and $2.3 million of barter expense for the years ended December 31, 2009, 2008 and 2007, respectively, which was included in amortization of broadcast rights in the Company’s statement of operations.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
2. Summary of Significant Accounting Policies-(Continued)
Broadcast Rights and Broadcast Rights Payable
The Company records rights to programs, primarily in the form of syndicated programs and feature movie packages obtained under license agreements for the limited right to broadcast the suppliers’ programming when the following criteria are met: 1) the cost of each program is known or reasonably determinable, 2) the license period has begun, 3) the program material has been accepted in accordance with the license agreement, and 4) the programming is available for use. Broadcast rights are initially recorded at the amount paid or payable to program suppliers; or, in the case of barter transactions, at management’s estimate of the fair value of the advertising time exchanged using historical advertising rates, which approximates the fair value of the program material received. Broadcast rights are stated at the lower of unamortized cost or net realizable value. The current portion of broadcast rights represents those rights available for broadcast which will be amortized in the succeeding year. Amortization of broadcast rights is computed using the straight-line method based on the license period or programming usage, whichever period yields the shorter life. Broadcast rights liabilities are reduced by monthly payments to program suppliers; or, in the case of barter transactions, are amortized over the life of the associated programming license contract as a component of trade and barter revenue. When projected future net revenue associated with a program is less than the current carrying amount of the program broadcast rights, for example, due to poor ratings, the Company writes down the unamortized cost of the broadcast rights to equal the amount of projected future net revenue. If the expected broadcast period was shortened or cancelled, the Company would be required to write-off the remaining value of the related broadcast rights on an accelerated basis or possibly immediately. Such reductions in unamortized costs is included in amortization of broadcast rights in the statement of operations.
Property and Equipment
Property and equipment is stated at cost. The cost and related accumulated depreciation applicable to assets sold or retired are removed from the accounts and the gain or loss on disposition is recognized. Major renewals and betterments are capitalized and ordinary repairs and maintenance are charged to expense in the period incurred. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets ranging from 3 to 39 years (see Note 6).
Network Affiliation Agreements
Network affiliation agreements are stated at estimated fair value at the date of acquisition using a discounted cash flow method. Amortization is computed on a straight-line basis over the estimated useful life of 15 years.
Each of the Company’s stations has a network affiliation agreement pursuant to which the broadcasting network provides programming to the station during specified time periods, including prime time. Under the affiliation agreements with NBC, CBS and ABC, most of the Company’s stations receive compensation for distributing the network’s programming over the air and for allowing the network to keep a portion of advertising inventory during those time periods. The affiliation agreements with Fox and MyNetworkTV do not provide for compensation.
Intangible Assets
Intangible assets consist primarily of goodwill, broadcast licenses (“FCC licenses”) and network affiliation agreements that are stated at estimated fair value at the date of acquisition using a discounted cash flow method. The Company’s goodwill and FCC licenses are considered to be indefinite-lived intangible assets and are not amortized but instead are tested for impairment annually or whenever events or changes in circumstances indicate that such assets might be impaired. Network affiliation agreements are subject to amortization computed on a straight-line basis over the estimated useful life of 15 years.
As required by authoritative guidance for goodwill and other intangible assets, we test our FCC licenses and goodwill for impairment annually or whenever we believe events have occurred and circumstances changed that would more likely than not reduce the fair value of our reporting units below their carrying amounts. The impairment test for FCC licenses consists of a station-by-station comparison of the carrying amount of FCC licenses with their fair value, using a discounted cash flow analysis. The impairment test for goodwill utilizes a two-step fair value approach. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the station (“reporting unit”) to its carrying amount. The fair value of a reporting unit is determined using a discounted cash flows analysis. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing an assumed purchase price allocation, using the reporting unit fair value (as determined in Step 1) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
2. Summary of Significant Accounting Policies-(Continued)
In accordance with authoritative guidance for accounting for the impairment or disposal of long-lived assets, the Company tests network affiliation agreements whenever events or changes in circumstances indicate that their carrying amount may not be recoverable, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. An impairment in the carrying amount of a network affiliation agreement is recognized when the expected future operating cash flow derived from the operation to which the asset relates is less than its carrying value. The impairment test for network affiliation agreements consists of a station-by-station comparison of the carrying amount of network affiliation agreements with their fair value, using a discounted cash flow analysis. See Note 7 for additional information.
Debt Financing Costs
Debt financing costs represent direct costs incurred to obtain long-term financing and are amortized to interest expense over the term of the related debt. Previously capitalized debt financing costs are expensed and included in loss on extinguishment of debt if the Company determines that there has been a substantial modification of the related debt. As of December 31, 2009 and 2008, debt financing costs of $1.8 million and $0.2 million, respectively, were included in other noncurrent assets.
Advertising Expense
The cost of advertising is expensed as incurred. The Company had $2 thousand in advertising expense for the year ended December 31, 2009 and no advertising expense for the years ended December 31, 2008 and 2007.
Financial Instruments
The carrying amount of cash and cash equivalents, broadcast rights payable, accounts payable and accrued expenses approximates fair value due to their short-term nature. The interest rates on the Company’s term loan and revolving credit facility are adjusted regularly to reflect current market rates.
Income Taxes
The Company accounts for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. A valuation allowance is applied against net deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
On January 1, 2007, the Company adopted interpretive guidance related to income taxes that addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. For interest and penalties relating to income taxes the Company recognizes these items as components of income tax expense.
Nonmonetary Asset Exchanges
In connection with a spectrum allocation exchange ordered by the FCC within the 1.9 GHz band, Sprint Nextel Corporation (“Nextel”) is required to replace certain existing analog equipment with comparable digital equipment. The Company has agreed to accept the substitute equipment that Nextel will provide and in turn must relinquish its existing equipment to Nextel. Neither party will have any continuing involvement in the equipment transferred following the exchange. We account for this arrangement as an exchange of assets in accordance with accounting and disclosure requirements for exchanges of nonmonetary assets. The equipment the Company receives under this arrangement is recorded at their estimated fair market value and depreciated over estimated useful lives ranging from 5 to 15 years. Management’s determination of the fair market value is derived from the most recent prices paid to manufacturers and vendors for the specific equipment acquired. As equipment is exchanged, the Company records a gain to the extent that the fair market value of the equipment received exceeds the carrying amount of the equipment relinquished.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
2. Summary of Significant Accounting Policies-(Continued)
Recent Accounting Pronouncements
In June 2009 the Financial Accounting Standards Board (“the FASB”) issued the FASB Accounting Standards Codification (“the Codification”). The Codification is the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards are superseded. All other accounting guidance not included in the Codification is considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification. The Codification was effective for our September 30, 2009 financial statements. The Codification does not change existing GAAP. The principal impact on our financial statements from the Codification adoption is limited to disclosures as all references to authoritative accounting literature are now referenced in accordance with the Codification.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of VIE’s. This amendment requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. The amendment requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This amendment is effective for our fiscal year beginning January 1, 2010. We are currently evaluating the impact of adopting this amendment on our consolidated financial statements.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment removes the concept of a qualifying special-purpose entity. This amendment also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The amendment is effective for our fiscal year beginning January 1, 2010. We are currently evaluating the impact of adopting this amendment on our consolidated financial statements.
In May 2009, the FASB issued a general standard of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard became effective for our second quarter ended June 30, 2009.
In April 2009, the FASB issued a new accounting and disclosure requirement, which increases the frequency of fair value disclosures from an annual to a quarterly basis. The guidance relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value. The new authoritative guidance is effective for interim and annual periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009, and it did not impact our financial position or results of operations. It did, however, result in additional disclosures related to the fair value of our debt.
In April 2009, the FASB issued guidance for estimating fair values when there is no active market or where the price inputs being used represent distressed sales and identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009, and it did not have any effect on the Company’s financial position or results of operations.
In April 2008, the FASB issued guidance related to the determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the accounting and disclosure requirements related to goodwill and other intangible assets. This new guidance also provides additional disclosure requirements related to recognized intangible assets. We adopted this guidance in January 2009 and it did not have a material impact on our financial position or results of operations.
In January 2008, we adopted the FASB’s accounting and disclosure requirements related to fair value measurements as they pertain to financial assets and liabilities. The adoption did not have a material impact on our financial position or results of operations. These new requirements established a framework for measuring fair value, and enhanced the disclosures for fair value measurements. This authoritative guidance applies when other accounting pronouncements require or permit fair value measurements, but it does not require new fair value measurements. In February 2008, the FASB issued a one-year deferral for the application of this standard as it pertains to non-financial assets and liabilities. We adopted this standard for non-financial assets and liabilities in the first quarter of 2009. There were no material effects on our financial statements upon adoption of this new accounting pronouncement; however, this pronouncement could have a material impact in future periods.
In December 2007, the FASB issued authoritative guidance related to business combinations, as well as guidance for the accounting and reporting of noncontrolling interests in consolidated financial statements. These new standards significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. We adopted these standards on January 1, 2009. The impact of adopting the standard related to business combinations will be primarily limited to business combinations occurring on or after January 1, 2009. Adoption of the guidance related to noncontrolling interests in consolidated financial statements had no impact on our financial position or results of operations.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
3. Acquisitions
Purchase Acquisitions
During 2008, the Company consummated the acquisition listed below. This acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair value on the acquisition date. The excess of the purchase price over the fair values assigned to the net assets acquired was recorded as goodwill.
Station
Network Affiliation
Market
Date Acquired
KTVE
NBC
Monroe, Louisiana - El Dorado, Arkansas
January 16,
KTVE
On June 27, 2007, Mission entered into a purchase agreement with Piedmont Television Holdings LLC to acquire substantially all the assets of KTVE, the NBC affiliate serving the Monroe, Louisiana/El Dorado, Arkansas market. On January 16, 2008, Mission completed the acquisition of KTVE for total additional consideration of $8.3 million, inclusive of transaction costs of $0.5 million which is included in goodwill. Pursuant to the terms of the agreement, Mission made a down payment of $0.4 million against the purchase price in June 2007 and paid the remaining $7.4 million, exclusive of transaction costs, on January 16, 2008 from available cash on hand. Upon closing the purchase of KTVE, Mission entered into a JSA and SSA with Nexstar-owned KARD, the Fox affiliate in the market, whereby KARD provides local news, sales and other non-programming services to KTVE.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
Of the $3.8 million of acquired intangible assets, $2.7 million was assigned to FCC licenses that are not subject to amortization and $1.1 million was assigned to network affiliation agreements (estimated useful life of 15 years). Goodwill of $2.8 million is expected to be deductible for tax purposes. The $2.2 million of acquired lease cost is included in other long term liabilities.
Unaudited Pro Forma Information
The following unaudited pro forma information has been presented as if the acquisition of KTVE had occurred on January 1, 2007:
The above selected unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of results of operations in future periods or results that would have been achieved had the Company owned the acquired station during the specified period.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
4. Pending Transaction with Nexstar
On April 11, 2006, Nexstar and Mission filed an application with the FCC for consent to assignment of the license for KFTA Channel 24 (Ft. Smith, Arkansas) from Nexstar to Mission. Consideration for this transaction is set at $5.6 million. On August 28, 2006, Mission and Nexstar entered into a local service agreement whereby Mission pays Nexstar for the right to broadcast programming on KFTA and Nexstar pays Mission for the right to sell all advertising time on KFTA within certain time periods. Also in 2006, Mission entered into an affiliation agreement with the Fox network which provides Fox programming to KFTA. Upon completing the assignment of KFTA’s license, the Company plans to enter into JSA and SSA agreements with Nexstar-owned KNWA in Fort Smith-Fayetteville-Springdale-Rogers, Arkansas, whereby KNWA will provide local news, sales and other non-programming services to KFTA. See Note 5 for a more complete discussion of the KFTA local service agreement.
In March 2008, the FCC granted the application to assign the license for KFTA from Nexstar to Mission. The grant contained conditions which Nexstar is currently appealing.
5. Related Party Transactions
Local Service Agreements
Mission has entered into local service agreements with Nexstar to provide sales and operating services to all of the Mission stations. Under the terms of a shared services agreement (“SSA”), the Nexstar station in the market provides certain services including news production, technical maintenance and security, in exchange for monthly payments from Mission to Nexstar. For each station that Mission has entered into an SSA, it has also entered into a joint sales agreement (“JSA”). Under the terms of the JSA, Nexstar sells the advertising time of the Mission station and retains a percentage of the net revenue it generates in return for monthly payments to Mission of the remaining percentage of net revenue. Under the terms of a time brokerage agreement (“TBA”), Nexstar programs most of the station’s broadcast time, sells the station’s advertising time and retains the advertising revenue it generates in exchange for monthly payments to Mission. JSA and TBA fees generated from Nexstar under the agreements are reported as “Revenue from Nexstar Broadcasting, Inc.”, and SSA fees incurred by Mission under the agreements are reported as “Fees incurred pursuant to local service agreements with Nexstar Broadcasting, Inc.” in the accompanying statement of operations.
The arrangements under the local service agreements each Mission station has entered into with Nexstar has had the effect of Nexstar receiving substantially all of the available cash, after Mission’s payment of operating costs and debt service, generated by the Company’s stations. Mission anticipates that Nexstar will continue to receive substantially all of Mission’s available cash, after payments for operating costs and debt service, generated by its stations.
In order for both Nexstar and Mission to comply with FCC regulations, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
5. Related Party Transactions-(Continued)
The following table summarizes the various local service agreements Mission-owned stations had in effect with Nexstar as of December 31, 2009:
Station
Market
Affiliation
Type of
Agreement
Expiration
Consideration received from or paid to Nexstar
Mission-owned:
WFXP
Erie, PA
Fox
TBA
8/16/11
Monthly payments received from Nexstar(1)
KJTL and
KJBO-LP
Wichita Falls, TX-Lawton, OK
Fox
MyNetworkTV
SSA
JSA
5/31/19
5/31/19
$60 thousand per month paid to Nexstar
70% of the KJTL/KJBO-LP net revenue collected each month received from Nexstar
WYOU
Wilkes Barre-Scranton, PA
CBS
SSA
1/4/18
$35 thousand per month paid to Nexstar
JSA
9/30/14
70% of the WYOU net revenue collected each month received from Nexstar
KODE
Joplin, MO-Pittsburg, KS
ABC
SSA
3/31/12
$75 thousand per month paid to Nexstar
JSA
9/30/14
70% of the KODE net revenue collected each month received from Nexstar
KRBC
Abilene-Sweetwater, TX
NBC
SSA
6/12/13
$25 thousand per month paid to Nexstar
JSA
6/30/14
70% of the KRBC net revenue collected each month received from Nexstar
KSAN
San Angelo, TX
NBC
SSA
5/31/14
$10 thousand per month paid to Nexstar
JSA
5/31/14
70% of the KSAN net revenue collected each month received from Nexstar
WFXW
Terre Haute, IN
Fox
SSA
5/8/13
$10 thousand per month paid to Nexstar
JSA
5/8/13
70% of the WFXW net revenue collected each month received from Nexstar
KCIT and
KCPN-LP
Amarillo, TX
Fox
MyNetworkTV
SSA
JSA
4/30/19
4/30/19
$50 thousand per month paid to Nexstar
70% of the KCIT/KCPN-LP net revenue collected each month received from Nexstar
KHMT
Billings, MT
Fox
TBA
12/13/17
Monthly payments received from Nexstar(1)
KAMC
Lubbock, TX
ABC
SSA
2/15/19
$75 thousand per month paid to Nexstar
JSA
2/15/19
70% of the KAMC net revenue collected each month received from Nexstar
KOLR
Springfield, MO
CBS
SSA
2/15/19
$150 thousand per month paid to Nexstar
JSA
2/15/19
70% of the KOLR net revenue collected each month received from Nexstar
WUTR
Utica, NY
ABC
SSA
3/31/14
$10 thousand per month paid to Nexstar
JSA
3/31/14
70% of the WUTR net revenue collected each month received from Nexstar
WTVO
Rockford, IL
ABC/
MyNetworkTV
SSA
JSA
10/31/14
10/31/14
$75 thousand per month paid to Nexstar
70% of the WTVO net revenue collected each month received from Nexstar
KTVE
Monroe, LA-El Dorado, AR
NBC
SSA
1/16/18
$20 thousand per month paid to Nexstar
JSA
1/16/18
70% of the KTVE net revenue collected each month received from Nexstar
Nexstar-owned:
KFTA
Ft. Smith-Fayetteville-Springdale-Rogers, AR
Fox/NBC
TBA
(2)
$5 thousand per month paid to Nexstar
$20 thousand per month received from Nexstar
(1)
Payments are variable based on station’s monthly operating expenses.
(2)
TBA will terminate upon the assignment of KFTA’s FCC license from Nexstar.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
5. Related Party Transactions-(Continued)
Under these agreements, Mission is responsible for certain operating expenses of its stations and therefore may have unlimited exposure to any potential operating losses. Mission will continue to operate its stations under the SSAs and JSAs or TBAs until the termination of such agreements. The SSAs and JSAs generally have a term of ten years. Nexstar indemnifies Mission from Nexstar’s activities pursuant to the local service agreement to which Nexstar is a party.
Management Services Agreement
Mission’s sole shareholder and his spouse are parties to a management services agreement. Under this agreement, Mission pays the sole shareholder up to $0.4 million per year for certain management services and pays his spouse by the hour for certain management services. Pursuant to the management services agreement, Mission paid compensation to its sole shareholder in the amount of $ 0.4 million, $0.3 million, and $0.4 million for the years ended December 31, 2009, 2008 and 2007, respectively, which is included in selling, general and administrative expenses in the Company’s statement of operations. Effective July 1, 2008, the sole shareholder's spouse is no longer an employee of the Company.
6. Property and Equipment
Property and equipment consisted of the following:
The Company recorded depreciation expense in the amounts of $3.7 million, $3.3 million and $3.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.
In February 2006, President Bush signed into law legislation that established February 17, 2009 as the deadline for television broadcasters to complete their transition to digital transmission and return their analog spectrum to the FCC. In February 2009, President Obama extended this deadline to June 12, 2009. As a result, the Company reassessed the estimated useful lives of its analog transmission equipment and has accelerated the depreciation of certain equipment affected by the digital conversion. Equipment having a net book value of approximately $2.4 million as of February 1, 2006, which was previously being depreciated over various remaining useful lives which extended from 2013 to 2020, was fully depreciated as of February 2009. During the years ended December 31, 2009, 2008 and 2007, the accelerated depreciation of analog transmission equipment increased depreciation expense and net loss by approximately $0.1 million, $0.6 million and $0.6 million, respectively.
During the fourth quarter of 2009, the Company corrected depreciation expense for an error that increased 2009 net loss by $0.1 million. The error related to depreciation of analog equipment that should have been accelerated so the equipment would have been fully depreciated by June 2009. We evaluated this error taking into account both qualitative and quantitative factors and considered the impact of this error in relation to the current period, which is when it was corrected, as well as prior periods when the depreciation should have been recognized. Management believes this error is immaterial to both the 2009 financial statements as well as any prior periods affected.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
6. Property and Equipment-(Continued)
During the second quarter of 2009, the Company corrected depreciation expense and certain balance sheet accounts for an error discovered during the quarter which increased the 2009 net loss by $0.2 million. The error related to the estimated fair values and subsequent depreciation of certain fixed assets associated with the KTVE acquisition in 2008 which had shortened useful lives due to the conversion from analog to digital equipment as mandated by the FCC. The impact of correcting this error in 2008 would have also increased net loss by $0.2 million for the annual period and lesser amounts for each quarter during the year. No periods prior to 2008 would have been impacted since the assets were acquired in January 2008. We evaluated this error taking into account both qualitative and quantitative factors and considered the impact of this error in relation to the current period, which is when it was corrected, as well as the period in which it originated. Management believes this error is immaterial to both the 2009 annual financial statements as well as to 2008 annual financial statements.
On May 11, 2001, the Company sold its telecommunications tower facilities associated with KCIT, KOLR, KHMT and KAMC for cash and entered into noncancellable operating leases with the buyer for tower space. In 2001, the Company recorded a gain on the sale which has been deferred and is being recognized over the lease term which expires in May 2021. The deferred gain at December 31, 2009 and 2008 was approximately $1.9 million and $2.1 million, respectively ($0.2 million was included in current liabilities at December 31, 2009 and 2008).
7. Intangible Assets and Goodwill
Intangible assets subject to amortization consisted of the following:
We recorded an impairment charge of $2.3 million during the third quarter of 2009 that included an impairment to the carrying values of FCC licenses of $2.0 million, related to eight of our stations and an impairment to the carrying values of goodwill of $0.3 million, related to one reporting unit consisting of one of our television stations. As required by the authoritative guidance for goodwill and other intangible assets, we tested our FCC licenses and goodwill for impairment at September 30, 2009, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our reporting units below their carrying amounts and that our FCC licenses might be impaired. These events and circumstances include the overall economic recession and a continued decline in demand for advertising at several of our stations.
We completed our annual test for impairment of goodwill and FCC licenses as of December 31, 2009 which resulted in no additional impairment charge.
As required by authoritative guidance for goodwill and other intangible assets and authoritative guidance for accounting for the impairment or disposal of long-lived assets, we tested our network affiliation agreements, FCC licenses and goodwill for impairment at September 30, 2008, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our reporting units below their carrying amounts and that our FCC licenses and network affiliation agreements might be impaired. These events included the decline in overall economic conditions and the resulting decline in advertising revenues at some of our television stations. We recorded an impairment charge of $5.9 million that included an impairment to the carrying values of FCC licenses of $4.7 million, related to 6 of our television stations; an impairment to the carrying value of network affiliation agreements of $1.0 million, related to 2 of our television stations; and an impairment to the carrying values of goodwill of $0.2 million, related to 2 of our television stations.
We performed our annual test for impairment at December 31, 2008 and due to the continued decline in overall economic conditions during the fourth quarter of 2008 and the further decline in our forecasts for advertising revenues at some stations, the Company recorded an additional $5.5 million in impairment charges in the fourth quarter 2008, for an annual total of $11.4 million. Of the additional $5.5 million impairment charges, $4.0 million was for FCC licenses, related to 9 of our television stations, $0.4 million was for network affiliation agreements related to 1 television stations, and $1.1 million was for goodwill, related to 3 of our television stations.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
7. Intangible Assets and Goodwill-(Continued)
Determining the fair value of our television stations requires our management to make a number of judgments about assumptions and estimates that are highly subjective and that are based on unobservable inputs. The actual results may differ from these assumptions and estimates; and it is possible that such differences could have a material impact on our financial statements. In addition to the various inputs (i.e. market growth, operating profit margins, discount rates) that we use to calculate the fair value of our FCC licenses and reporting units, we evaluate the reasonableness of our assumptions by comparing the total fair value of all our reporting units to our total market capitalization; and by comparing the fair value of our reporting units or television stations, and FCC licenses to recent television station sale transactions. The assumptions used in the valuation testing have certain subjective components including anticipated future operating results and cash flows based on our own internal business plans as well as future expectations about general economic and local market conditions.
As noted above, we are required under authoritative guidance to test our indefinite-lived intangible assets on an annual basis or whenever events or changes in circumstances indicate that these assets might be impaired. As a result, if the current economic trends continue and the credit and capital markets continue to be disrupted, it is possible that we may record further impairments in the future.
The estimated useful life of network affiliation agreements contemplates renewals of the underlying agreements based on the Company’s historical ability to renew such agreements without significant cost or modifications to the conditions from which the value of the affiliation was derived. These renewals can result in estimated useful lives of individual affiliations ranging from 12 to 20 years. Management has determined that 15 years is a reasonable estimate within the range of such estimated useful lives.
Total amortization expense from definite-lived intangibles for the years ended December 31, 2009, 2008 and 2007 was $5.1 million, $5.4 million and $5.4 million, respectively.
The following table presents the Company’s estimate of amortization expense for each of the five succeeding fiscal years and thereafter for definite-lived intangible assets recorded on its books as of December 31, 2009 (in thousands):
The aggregate carrying value of indefinite-lived intangibles, consisting of FCC licenses and goodwill, was $39.4 million and $41.3 million at December 31, 2009 and 2008, respectively. Indefinite-lived intangible assets are not subject to amortization, but are tested for impairment annually or whenever events or changes in circumstances indicate that such assets might be impaired.
The changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008, respectively, are as follows:
During 2009, the Company reclassified certain amounts representing goodwill that were improperly classified as property and equipment when recording the fair value of KTVE assets, which were acquired in 2008.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
7. Intangible Assets and Goodwill-(Continued)
The changes in the carrying amount of FCC licenses for the years ended December 31, 2009 and 2008, respectively are as follows:
The fair value measurements of our goodwill and FCC licenses are as follows using the three-level fair value hierarchy established by authoritative accounting guidance for the year ended December 31, 2009:
Determining the fair value of our television stations requires our management to make a number of judgments about assumptions and estimates that are highly subjective and that are based on unobservable inputs or assumptions. The actual results may differ from these assumptions and estimates; and it is possible that such differences could have a material impact on our financial statements.
8. Debt
Long-term debt consisted of the following:
On October 8, 2009, Mission amended its senior secured credit facility. The amendment modifies certain terms of Mission Credit Agreement, including, but not limited to a general tightening of the exceptions to the negative covenants (principally by means of reducing the types and amounts of permitted transactions) and an increase to the interest rates and fees payable with respect to the borrowings under the Amended Mission Credit Agreement. The Amended Mission Credit Agreement also incorporates, by reference to the Amended Nexstar Credit Agreement changes to the financial covenants and applicable definitions.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
8. Debt-(Continued)
On an annual basis following the delivery of Mission's year end financial statements, the Amended Mission Credit Agreement requires mandatory prepayments of principal, as well as a permanent reduction in revolving credit commitments, subject to a computation of excess cash flow for the preceding fiscal year, as more fully set forth in the Amended Mission Credit Agreement. The Amended Mission Credit Agreement also places additional restrictions on the use of proceeds from asset sales, equity issuances, or debt issuances (with the result that such proceeds, subject to certain exceptions, be used for mandatory prepayments of principal and permanent reductions in revolving credit commitments), and includes an anti-cash hoarding provision which requires that Mission utilize unrestricted cash and cash equivalent balances in excess of $15 million to repay principal amounts outstanding, but not permanently reduce capacity, under the revolving credit facility.
The Amended Mission Credit Agreement also revised the interest rate provisions. As amended, borrowings under the Facility may bear interest at either (i) a Eurodollar Rate, which has been amended to include an interest rate floor equal to 1% or (ii) a Base Rate, which, as amended, is defined as the greater of (1) the sum of 1/2 of 1% plus the Federal Funds Rate, (2) Bank of America, N.A.'s prime rate and (3) the sum of (x) 1% plus (y) the Eurodollar Rate. The definition of applicable margin was changed to eliminate the pricing grid and replace it with a fixed rate. As amended, the applicable margin for Eurodollar loans is a rate per annum equal to 4% and the applicable margin for Base Rate loans is a rate per annum equal to 3%.
In conjunction with the amendment to our credit agreement, $0.1 million related to professional fees were recognized as administrative expense as incurred.
Senior Secured Credit Facility
On April 1, 2005, Mission entered into an amended and restated senior secured credit facility agreement (the “Mission Facility”) with a group of commercial banks which replaced its previous bank credit facility that had provided for a $152.0 million Term Loan D and a $30.0 million revolving loan. The Mission Facility consists of a Term Loan B and a $15.0 million revolving loan. Proceeds obtained under the Term Loan B were used to repay Mission’s existing Term Loan D in the amount of $150.9 million plus accrued interest and repay outstanding borrowings under the revolving loan in the amount of $21.5 million plus accrued interest.
As of December 31, 2009 and 2008, Mission had $165.4 million and $167.1 million, respectively, outstanding under its Term Loan B and $7.0 million outstanding under its revolving loan.
The Term Loan B matures in October 2012, and is payable in consecutive quarterly installments amortized at 0.25% quarterly, which commenced on December 30, 2005, with the remaining 93.25% due at maturity. During the year ended December 31, 2009 repayments of Mission’s Term Loan B totaled $1.7 million. The revolving loan is not subject to incremental reduction and matures in April 2012. Mission is required to prepay borrowings outstanding under the Mission Facility with certain net proceeds, recoveries and excess cash flows as defined in the credit facility agreement.
Interest rates are selected at Mission’s option and the applicable margin is adjusted quarterly as defined in the credit facility agreement. The total weighted-average interest rate of the Mission Facility was 5.0% and 3.2% at December 31, 2009 and 2008, respectively. Interest is payable periodically based on the type of interest rate selected. Additionally, Mission is required to pay quarterly commitment fees on the unused portion of its revolving loan commitment of 0.75% per annum, based on the consolidated senior leverage ratio of Nexstar and Mission for that particular quarter.
As of December 31, 2009, there were approximately $8.0 million of unused commitments under Mission’s credit facility. The total amount of borrowings available under the revolving loan commitment of Mission’s senior secured credit facility is based on covenant calculations contained in Nexstar’s credit agreement. As of December 31, 2009, all $8.0 million of total unused commitments under the Mission credit facility were available for borrowing.
Collateralization and Guarantees of Debt
Nexstar Broadcasting Group, Inc. (Nexstar’s ultimate parent) and its subsidiaries guarantee full payment of all obligations under the Mission Facility in the event of its default. Similarly, Mission is a guarantor of Nexstar’s bank credit facility, the 7% PIK senior subordinated notes and the 7% senior subordinated notes issued by Nexstar. The bank credit facilities are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses, of Nexstar and Mission.
Debt Covenants
Mission’s bank credit facility agreement does not contain financial covenant ratio requirements, but does provide for default in the event Nexstar does not comply with all covenants contained in its credit agreement.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
8. Debt-(Continued)
Fair Value of Debt
The aggregate carrying amounts and estimated fair value of Mission’s debt were as follows:
(1)
The fair value of bank credit facilities is computed based on borrowing rates currently available to Mission for bank loans with similar terms and average maturities. These fair value measurements are considered Level 3 (significant and unobservable).
Debt Maturities
At December 31, 2009, scheduled maturities of Mission’s debt (undiscounted) are summarized as follows (in thousands):
9. Common Stock
The Company is 100% owned by one shareholder, David S. Smith. As of December 31, 2009 and 2008, the Company had authorized, issued and outstanding 1,000 shares of common stock with a $1 dollar par value. Each share of common stock is entitled to one vote.
10. Gain on Asset Exchange
In 2004, the FCC approved a spectrum allocation exchange between Sprint Nextel Corporation (“Nextel”) and public safety entities to eliminate interference being caused to public safety radio licensees by Nextel’s operations. As part of this spectrum exchange, the FCC granted Nextel the right to certain spectrum within the 1.9 GHz band that is currently used by television broadcasters. In order to utilize this spectrum, Nextel is required to relocate the broadcasters to new spectrum by replacing all analog equipment currently used by broadcasters with comparable digital equipment. The Company has agreed to accept the substitute equipment that Nextel will provide and in turn must relinquish its existing equipment back to Nextel. This transition began on a market by market basis beginning in the third quarter of 2007. The equipment the Company receives under this arrangement is recorded at their estimated fair market value and depreciated over estimated useful lives ranging from 5 to 15 years. Management’s determination of fair market value is derived from the most recent prices paid to manufacturers and vendors for the specific equipment acquired. As equipment is exchanged, the Company records a gain to the extent that the fair market value of the equipment received exceeds the carrying amount of the equipment relinquished. For the years ended December 31, 2009, 2008 and 2007, the Company recognized gains of $2.4 million, $0.9 million and $0.3 million, respectively, from the exchange of this equipment.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
11. Income Taxes
The provision (benefit) for income taxes consisted of the following components:
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 35% to loss from operations before income taxes. The sources and tax effects of the differences were as follows:
The components of the net deferred tax asset and liability were as follows:
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
11. Income Taxes-(Continued)
The Company’s income tax expense is primarily comprised of deferred income taxes created by an increase in the deferred tax liabilities position during the year resulting from the amortization of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. These deferred tax liabilities do not reverse on a scheduled basis and are not used to support the realization of deferred tax assets. The Company’s deferred tax assets primarily result from federal and state net operating loss carryforwards (“NOLs”). The Company’s NOLs are available to reduce future taxable income if utilized before their expiration. The Company has provided a valuation allowance for certain deferred tax assets as it believes they may not be realized through future taxable earnings.
On May 18, 2006, the State of Texas enacted legislation to change its existing franchise tax from a tax based on taxable capital or earned surplus to a new tax based on modified gross revenue (“Margin Tax”). The former Texas franchise tax structure remained in existence until the end of 2006. Beginning in 2007, the Margin Tax imposes a 1% tax on revenues, less certain costs, as specified in the legislation, generated from Texas activities. Additionally, the legislation provides a temporary credit for Texas business loss carryovers existing through 2006 to be used as an offset to the Margin Tax. On June 15, 2007, the Texas Governor signed legislation that provided various technical corrections to the Texas Margin Tax. Based on the changes provided in this newly enacted tax law, the Company adjusted its temporary credit for Texas business loss carryovers to be utilized as an offset to the Margin Tax and a related deferred tax asset during the second quarter of 2007. The effect of the revision made to the temporary credit increased the Company’s deferred tax assets position resulting in approximately a $0.3 million reduction in the deferred state income tax provision for the year ended December 31, 2007.
As discussed in Note 2, the Company adopted interpretive guidance related to uncertainty surrounding tax benefits on January 1, 2007. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):
Interest expense and penalties related to the Company’s uncertain tax positions are reflected as a component of income tax expense in the Company’s Consolidated Statements of Operations. As of December 31, 2009 and 2008, the Company has not accrued interest on the unrecognized tax benefits as an unfavorable outcome upon examination would not result in a cash outlay but would reduce NOLs subject to a valuation allowance.
As of December 31, 2009, the total gross unrecognized tax benefits were approximately $3.7 million. If recognized, this amount would result in a favorable effect on the Company’s effective tax rate excluding impact on the Company’s valuation allowance position. The Company does not expect the amount of unrecognized tax benefits to significantly change in the next twelve months.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
11. Income Taxes-(Continued)
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal tax examinations for years after 2005. Additionally, any NOLs that were generated in prior years and will be utilized in the future may also be subject to examination by the Internal Revenue Service. State jurisdictions that remain subject to examination are not considered significant.
The valuation allowance increased for the years ended December 31, 2009 and 2008 by $0.7 million and $3.2 million, respectively primarily related to the generation of current year net operating losses, the benefit of which may not be realized.
At December 31, 2009, the Company has NOLs available of approximately $86.1 million which are available to reduce future taxable income if utilized before their expiration. The federal NOLs begin to expire in 2016 through 2029 if not utilized. Utilization of NOLs in the future may be limited if changes in the Company’s ownership occurs.
12. FCC Regulatory Matters
Television broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the “Communications Act”). The Communications Act prohibits the operation of television broadcasting stations except under a license issued by the FCC, and empowers the FCC, among other things, to issue, revoke, and modify broadcasting licenses, determine the location of television stations, regulate the equipment used by television stations, adopt regulations to carry out the provisions of the Communications Act and impose penalties for the violation of such regulations. The FCC’s ongoing rule making proceedings could have a significant future impact on the television industry and on the operation of the Company’s stations. In addition, the U.S. Congress may act to amend the Communications Act in a manner that could impact the Company’s stations and the television broadcast industry in general.
Some of the more significant FCC regulatory matters impacting the Company’s operations are discussed below.
Digital Television (“DTV”) Conversion
In February 2009, President Obama signed into law legislation that established June 12, 2009 as the deadline for television broadcasters to complete their transition to DTV-only operations and return their analog spectrum to the FCC. The DTV transmission system delivers video and audio signals of higher quality (including high definition television) than the existing analog transmission system. DTV also has substantial capabilities for multiplexing (the broadcast of several channels of programs concurrently) and data transmission. The introduction of digital television requires consumers to purchase new television sets that are capable of receiving and displaying the DTV signals, or adapters to receive DTV signals and convert them to analog signals for display on their existing receivers.
On June 12, 2009, all full-power television broadcasters were required to cease operating in an analog format and operate exclusively in digital (DTV) format. All of Mission’s stations have completed the transition from analog to digital and hold DTV authorizations issued by the FCC.
DTV conversion expenditures were $1.0 million, $7.3 million and $2.3 million, respectively, for the years ended December 31, 2009, 2008 and 2007.
Media Ownership
In 2006, the FCC initiated a rulemaking proceeding which provides for a comprehensive review of all of its media ownership rules, as required by the Communications Act. The Commission considered rules relating to ownership of two or more TV stations in a market, ownership of local TV and radio stations by daily newspapers in the same market, cross-ownership of local TV and radio stations, and changes to how the national TV ownership limits are calculated. In February 2008, the FCC adopted modest changes to its newspaper broadcast cross-ownership rule while retaining the rest of its ownership rules then currently in effect. Multiple challenges to this proceeding were filed with the U.S. Courts of Appeal. The court proceedings remain pending. The FCC will be making a further review of its media ownership rules in 2010.
The FCC is required by statute to review its media ownership rules every four years and to eliminate those rules it finds no longer serve the “public interest, convenience and necessity”. During 2009, the FCC held a series of hearings designed to evaluate possible changes to its rules. Sometime during 2010, the FCC is expected to officially initiate the next statutorily-mandated review of its media ownership rules and request public comments thereon.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
13. Commitments and Contingencies
Broadcast Rights Commitments
Broadcast rights acquired for cash under license agreements are recorded as an asset and a corresponding liability at the inception of the license period. Future minimum payments arising from unavailable future broadcast license commitments outstanding are as follows at December 31, 2009 (in thousands):
Unavailable broadcast rights commitments represent obligations to acquire cash program rights for which the license period has not commenced and, accordingly, for which no asset or liability has been recorded.
Operating Leases
The Company leases towers, office space and operating equipment under noncancelable operating lease arrangements expiring through April 2032. Charges to operations for such leases aggregated approximately $1.9 million, $1.8 million and $1.8 million, respectively for the years ended December 31, 2009, 2008 and 2007. Future minimum lease payments under these operating leases are as follows at December 31, 2009 (in thousands):
Guarantees of Nexstar Debt
Mission is a guarantor of and has pledged substantially all its assets, excluding FCC licenses, to Nexstar’s bank credit facility. Nexstar’s bank credit facility, which matures in 2012, consists of a Term Loan B and a $82.5 million revolving loan.
Mission is also a guarantor of the 7% senior subordinated notes (“7% Notes”) and 7% PIK senior subordinated notes, both due 2014 issued by Nexstar. Both notes are general unsecured senior subordinated obligations subordinated to all of Mission’s senior debt.
Mission guarantees full payment of all obligations incurred under Nexstar’s bank credit facility agreement and the 7% Notes. In the event that Nexstar is unable to repay amounts due under these debt obligations, Mission will be obligated to repay such amounts. The maximum potential amount of future payments that Mission would be required to make under these guarantees would be generally limited to the amount of borrowings outstanding under Nexstar’s bank credit facility, the 7% PIK senior subordinated notes and the 7% Notes. At December 31, 2009, Nexstar had issued an aggregate principal amount of $47.9 million of the 7% Notes, $142.9 million of the 7% PIK senior subordinated notes and had $226.3 million outstanding under its bank credit facility.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
13. Commitments and Contingencies-(Continued)
Purchase Options Granted to Nexstar
In consideration of Nexstar Broadcasting Group’s guarantee of Mission’s bank credit facility, Mission’s sole shareholder has granted Nexstar purchase options to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent, for consideration equal to the greater of (1) seven times the station’s cash flow, as defined in the option agreement, less the amount of its indebtedness as defined in the option agreement, or (2) the amount of its indebtedness. Cash flow is defined as income or loss from operations, plus depreciation and amortization (including amortization of broadcast rights), interest income, non-cash trade and barter expenses, nonrecurring expenses (including time brokerage agreement fees), network compensation payments received or receivable and corporate management fees, less payments for broadcast rights, non-cash trade and barter revenue and network compensation revenue. These option agreements (which expire on various dates between 2011 and 2018) are freely exercisable or assignable by Nexstar without consent or approval by Mission’s sole shareholder. The Company expects these option agreements to be renewed upon expiration.
Indemnification Obligations
In connection with certain agreements that the Company enters into in the normal course of its business, including local service agreements, business acquisitions and borrowing arrangements, the Company enters into contractual arrangements under which the Company agrees to indemnify the third party to such arrangement from losses, claims and damages incurred by the indemnified party for certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses and the maximum potential amount of future payments the Company could be required to make under these indemnification arrangements may be unlimited. Historically, payments made related to these indemnifications have been immaterial and the Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements.
Litigation
From time to time, the Company is involved in claims that arise out of the normal course of its business. In the opinion of management, any resulting liability with respect to these claims would not have a material adverse effect on the Company’s financial position or results of operations.
14. Employment Benefits
Retirement Savings Plan
The Company has established a retirement savings plan under Section 401(k) of the Internal Revenue Code (the “Plan”). The Plan covers substantially all employees of the Company who meet minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis. Contributions to the Plan may be made at the discretion of the Company. The Company did not make any contributions to the Plan in 2009 and 2008. Mission recorded contributions of $17 thousand year ended December 31, 2007.
15. Valuation and Qualifying Accounts
Allowance for Doubtful Accounts Rollforward
(1)
Uncollectible accounts written off, net of recoveries.
MISSION BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
15. Valuation and Qualifying Accounts-(Continued)
Valuation Allowance for Deferred Tax Assets Rollforward
(1)
Increase in valuation allowance related to the generation of net operating losses and other deferred tax assets.
(2)
Decrease in valuation allowance associated with adjustments to certain deferred tax assets and their related allowance.
Exhibit No.
Exhibit Index
3.1
Certificate of Incorporation of Mission Broadcasting, Inc. (f/k/a Mission Broadcasting of Wichita Falls, Inc.) (Incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 333-62916-02) filed by Mission Broadcasting of Wichita Falls, Inc.)
3.2
By-laws of Mission Broadcasting, Inc. (f/k/a Mission Broadcasting of Wichita Falls, Inc.) (Incorporated by reference to Exhibit 3.2 to Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 333-62916-02) filed by Mission Broadcasting of Wichita Falls, Inc.)
4.1
Indenture, dated as of March 30, 2009, among Nexstar Broadcasting, Inc., Mission Broadcasting, Inc., as guarantor, and The Bank of New York Mellon, as Trustee. (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on April 3, 2009)
4.2
First Supplemental Indenture, dated as of March 30, 2009, among Nexstar Broadcasting, Inc., Mission Broadcasting, Inc., as guarantor, and Nexstar Broadcasting Group, Inc., as parent guarantor, and The Bank of New York Mellon, as Trustee. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on April 3, 2009)
10.1
Purchase and Sale Agreement, dated as of December 31, 2001, by and among Mission Broadcasting of Joplin, Inc., GOCOM Broadcasting of Joplin, LLC and GOCOM of Joplin License Sub, LLC. (Incorporated by reference to Exhibit 10.24 to Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 333-68964) filed by Nexstar Finance Holdings, L.L.C. and Nexstar Finance Holdings, Inc.)
10.2
Time Brokerage Agreement, dated as of December 31, 2001, by and between GOCOM of Joplin License Sub, LLC and Mission Broadcasting of Joplin, Inc. (Incorporated by reference to Exhibit 10.25 to Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 333-68964) filed by Nexstar Finance Holdings, L.L.C. and Nexstar Finance Holdings, Inc.)
10.3
Option Agreement, dated as of January 12, 2001, made by each of the Nexstar Broadcasting of Wichita Falls, L.P. (Incorporated by reference to Exhibit 10.10 to Registration Statement on Form S-4 (File No. 333-62916) filed by Nexstar Finance, L.L.C. and Nexstar Finance, Inc.)
10.4
Shared Services Agreement, dated as of June 1, 1999, among Mission Broadcasting of Joplin, Inc., David Smith and Nexstar Broadcasting of Wichita Falls, L.P. (Incorporated by reference to Exhibit 10.24 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.5
Agreement, dated as of June 1, 1999, among Mission Broadcasting of Joplin, Inc. (Incorporated by reference to Exhibit 10.25 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.6
Option Agreement, dated as of June 5, 2002, among Nexstar Finance, L.P. (Incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.7
Shared Services Agreement, dated as of June 5, 2002, among Bastet Broadcasting, Inc. (Incorporated by reference to Exhibit 10.10 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.8
Option Agreement, dated as of November 30, 2002, among Bastet Broadcasting, Inc., David Smith and Nexstar Broadcasting Group, L.L.C. (Incorporated by reference to Exhibit 10.37 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.9
Time Brokerage Agreement, dated as of April 1, 1996, by and between SJL Communications, L.P. and NV Acquisitions Co. (Incorporated by reference to Exhibit 10.48 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.10
Shared Services Agreement, dated as of June 1, 1999, among Mission Broadcasting of Wichita Falls, Inc., David Smith and NV Acquisitions Co. (Incorporated by reference to Exhibit 10.43 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.11
Agreement, dated as of June 1, 1999, among Mission Broadcasting of Joplin, Inc. and Nexstar Broadcasting of Joplin, L.P. (Incorporated by reference to Exhibit 10.44 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.12
Shared Services Agreement, dated as of April 1, 2002, by and between Mission Broadcasting of Joplin, Inc. and Nexstar Broadcasting of Joplin, L.L.C. (Incorporated by reference to Exhibit 10.51 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.13
Amendment to Option Agreements, dated as of October 18, 2002, among Mission Broadcasting, Inc., David Smith, Nexstar Broadcasting of Northeastern Pennsylvania, L.L.C., Nexstar Broadcasting Group, L.L.C., Nexstar Broadcasting of Wichita Falls, L.L.C., and Nexstar Broadcasting of Joplin, L.L.C. (Incorporated by reference to Exhibit 10.54 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
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10.14
Asset Purchase Agreement, dated as of December 13, 2002, by and among LIN Television Corporation, TVL Broadcasting of Abilene, Inc., Abilene Broadcasting, L.L.C. and Mission Broadcasting, Inc. (Incorporated by reference to Exhibit 10.47 to Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 333-62916) filed by Nexstar Finance, L.L.C. and Nexstar Finance, Inc.)
10.15
Local Marketing Agreement, dated as of December 13, 2002, by and among LIN Television Corporation, TVL Broadcasting of Abilene, Inc., Abilene Broadcasting, L.L.C. and Mission Broadcasting, Inc. (Incorporated by reference to Exhibit 10.48 to Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 333-62916) filed by Nexstar Finance, L.L.C. and Nexstar Finance, Inc.)
10.16
Shared Services Agreement, dated as of June 13, 2003, by and between Mission Broadcasting, Inc. and Nexstar Broadcasting of Abilene, L.L.C. (Incorporated by reference to Exhibit 10.63 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.17
Option Agreement, dated as of June 13, 2003, among Mission Broadcasting, Inc., David Smith and Nexstar Broadcasting of Abilene, L.L.C. (Incorporated by reference to Exhibit 10.64 to Registration Statement on Form S-1 (File No. 333-86994) filed by Nexstar Broadcasting Group, Inc.)
10.18
Shared Services Agreement, dated as of May 9, 2003, by and between Mission Broadcasting, Inc. and Nexstar Broadcasting of the Midwest, Inc. (Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the period ended June 30, 2003 (File No. 333-62916-02) filed by Mission Broadcasting, Inc.)
10.19
Agreement for the Sale of Commercial Time, dated as of May 9, 2003, by and between Mission Broadcasting, Inc. and Nexstar Broadcasting of the Midwest, Inc. (Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the period ended June 30, 2003 (File No. 333-62916-02) filed by Mission Broadcasting, Inc.)
10.20
Option Agreement, dated as of May 9, 2003, among Mission Broadcasting, Inc., David Smith and Nexstar Broadcasting of the Midwest, Inc. (Incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the period ended June 30, 2003 (File No. 333-62916-02) filed by Mission Broadcasting, Inc.)
10.21
Indenture, among Nexstar Finance Holdings, L.L.C., Nexstar Finance Holdings, Inc., Mission Broadcasting, Inc. and The Bank of New York, dated as of March 27, 2003. (Incorporated by reference to Exhibit 4.4 to Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 333-68964) filed by Nexstar Finance Holdings, L.L.C. and Nexstar Finance Holdings, Inc.)
10.22
First Restated Guaranty Agreement, dated as of December 30, 2003, executed by Mission Broadcasting, Inc. in favor of the banks set forth therein. (Incorporated by reference to Exhibit 10.37 to Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 333-62916-02) filed by Mission Broadcasting, Inc.)
10.23
First Restated Security Agreement, dated as of December 30, 2003, by Mission Broadcasting, Inc. in favor of Bank of America, N.A., as collateral agent. (Incorporated by reference to Exhibit 10.38 to Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 333-62916-02) filed by Mission Broadcasting, Inc.)
10.24
First Restated Pledge and Security Agreement, dated as of December 30, 2003, by Mission Broadcasting, Inc. in favor of Bank of America, N.A., as collateral agent. (Incorporated by reference to Exhibit 10.39 to Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 333-62916-02) filed by Mission Broadcasting, Inc.)
10.25
Indenture, among Nexstar Broadcasting, Inc., the guarantors and The Bank of New York, dated as of December 30, 2003 (Incorporated by reference to Exhibit 10.91 to Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc.)
10.26
Amendment to Agreement for Sale of Commercial Time, dated December 30, 2003, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (KAMC-KLBK). (Incorporated by reference to Exhibit 10.91 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.27
Amendment to Shared Services Agreement, dated December 30, 2003, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (KAMC-KLBK). (Incorporated by reference to Exhibit 10.92 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.28
Amendment to Agreement for Sale of Commercial Time, dated December 30, 2003, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (KOLR-KSFX (formerly KDEB)). (Incorporated by reference to Exhibit 10.93 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
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10.29
Amendment to Shared Services Agreement, dated December 30, 2003, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (KOLR-KSFX). (Incorporated by reference to Exhibit 10.94 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.30
Amendment to Agreement for Sale of Commercial Time, dated January 1, 2004, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (KCIT-KAMR). (Incorporated by reference to Exhibit 10.95 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.31
Amendment to Shared Services Agreement, dated January 1, 2004, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (KCIT-KAMR). (Incorporated by reference to Exhibit 10.96 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.32
Amendment to Agreement for Sale of Commercial Time, dated January 13, 2004, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (WFXW-WTWO). (Incorporated by reference to Exhibit 10.97 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.33
Amendment to Shared Services Agreement, dated January 13, 2004, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (WFXW-WTWO). (Incorporated by reference to Exhibit 10.98 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.34
Agreement for Sale of Commercial Time, dated April 1, 2004, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (WUTR-WFXV). (Incorporated by reference to Exhibit 10.99 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.35
Shared Services Agreement, dated April 1, 2004, by and between Nexstar Broadcasting, Inc. and Mission Broadcasting, Inc. (WUTR-WFXV). (Incorporated by reference to Exhibit 10.100 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.36
Amendment to Agreement for Sale of Commercial Time, dated January 1, 2004, by and between Nexstar Broadcasting, Inc. (as successor to Nexstar Broadcasting of Wichita Falls, L.P.) and Mission Broadcasting, Inc. (f/k/a Mission Broadcasting of Wichita Falls, Inc.) (KJBO-KFDX). (Incorporated by reference to Exhibit 10.101 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.37
Amendment to Shared Services Agreement, dated January 1, 2004, by and between Nexstar Broadcasting, Inc. (as successor to Nexstar Broadcasting of Wichita Falls, L.P.) and Mission Broadcasting, Inc. (f/k/a Mission Broadcasting of Wichita Falls, Inc.) (KJBO-KFDX). (Incorporated by reference to Exhibit 10.102 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-114963) filed by Nexstar Broadcasting, Inc.)
10.38
Asset Purchase Agreement, dated October 4, 2004, by and among Mission Broadcasting, Inc., Young Broadcasting, Inc. and Winnebago Television Corporation. (Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K (File No. 333-62916-02) filed by Mission Broadcasting, Inc. on October 8, 2004).
10.39
Supplemental Indenture, dated as of April 1, 2005, among Nexstar Broadcasting, Inc., Nexstar Broadcasting Group, Inc., Mission Broadcasting, Inc., and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc. on April 6, 2005)
10.40
Guarantee, dated as of April 1, 2005, of Nexstar Broadcasting Group, Inc. executed pursuant to the Indenture dated as of December 30, 2003, among Nexstar Broadcasting, Inc., Mission Broadcasting, Inc. and The Bank of New York, as Trustee, as amended and supplemented by the Supplemental Indenture (as defined therein). (Incorporated by reference to Exhibit 99.5 to the Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc. on April 6, 2005)
10.41
Third Amended and Restated Credit Agreement, dated as of April 1, 2005, among Mission Broadcasting, Inc., the several banks and other financial institutions or entities from time to time parties thereto, Bank of America, N.A., as the Administrative Agent for the Lenders, and UBS Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Co-Syndication Agents. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 333-62916-02) filed by Mission Broadcasting, Inc. on April 7, 2005)
10.42
First Amendment and Confirmation Agreement to Mission Guarantee of Nexstar Obligations, dated as of April 1, 2005, by and among Mission Broadcasting, Inc. as Guarantor and Bank of America, N.A. as Collateral Agent, on behalf of the Majority Lenders (as defined therein). (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K (File No. 333-62916-02) filed by Mission Broadcasting, Inc. on April 7, 2005)
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10.43
Confirmation Agreement for the Smith Pledge Agreement, dated as of April 1, 2005, by David S. Smith and Bank of America, N.A. as Collateral Agent. (Incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K (File No. 333-62916-02) filed by Mission Broadcasting, Inc. April 7, 2005)
10.44
Fourth Amended and Restated Credit Agreement, dated as of April 1, 2005, among Nexstar Broadcasting, Inc., Nexstar Broadcasting Group, Inc., certain of its subsidiaries from time to time parties to the Credit Agreement, the several banks and other financial institutions or entities from time to time parties hereto, Bank of America, N.A., as the Administrative Agent for the Lenders, and UBS Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Co-Syndication Agents. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Broadcasting, Inc., on April 6, 2005)
10.45
Asset Purchase Agreement, dated as of June 27, 2007 (entered into by Mission Broadcasting, Inc. on June 27, 2007), by, between and among Mission Broadcasting, Inc. and Piedmont Television Holdings LLC, Piedmont Television Communications LLC, Piedmont Television of Monroe/El Dorado LLC and Piedmont Television of Monroe/El Dorado License LLC. (Incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on August 8, 2007)
10.46
Agreement for the Sale of Commercial Air Time, dated as of January 16, 2008, by and between Mission Broadcasting, Inc. and Nexstar Broadcasting, Inc. (Incorporated by reference to Exhibit 8.1 to Current Report on Form 8-K (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on January 22, 2008)
10.47
Shared Services Agreement, dated as of January 16, 2008, by and between Mission Broadcasting, Inc. and Nexstar Broadcasting, Inc. (Incorporated by reference to Exhibit 8.2 to Current Report on Form 8-K (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on January 22, 2008)
10.48
Option Agreement, dated as of January 16, 2008, by and between Mission Broadcasting, Inc., David Smith and Nexstar Broadcasting, Inc. (Incorporated by reference to Exhibit 8.3 to Current Report on Form 8-K (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on January 22, 2008)
10.49
Second Amendment, dated August 12, 2008, to Agreement between Mission Broadcasting, Inc. and David S. Smith and Nancie J. Smith (originally dated January 1, 2001) (Incorporated by reference to Exhibit 99.1 to Quarterly Report on Form 10-Q (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on August 18, 2008)
10.50
Guarantee, dated as of March 30, 2009, of Nexstar Broadcasting Group, Inc. executed pursuant to the Indenture, dated as of March 30, 2009, among Nexstar Broadcasting, Inc., Mission Broadcasting, Inc., as guarantor, and The Bank of New York Mellon, as Trustee, as amended and supplemented by the First Supplemental Indenture referenced above (included as part of Exhibit 4.2). (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on April 3, 2009)
10.51
Registration Rights Agreement, dated March 30, 2009, by and among Nexstar Broadcasting, Inc., Mission Broadcasting, Inc. and Nexstar Broadcasting Group, Inc. and UBS Securities LLC for the benefit of holders of PIK Notes. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on April 3, 2009)
10.52
First Amendment to Third Amended and Restated Credit Agreement dated October 8, 2009, among Mission Broadcasting, Inc., Bank of America, N.A., Banc of America Securities, UBS Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and the several banks parties thereto. (Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q (File No. 333-62916-02), filed by Mission Broadcasting, Inc. on November 12, 2009)
14.1
Mission Broadcasting, Inc. Code of Ethics. (Incorporated by reference to Exhibit 14.1 to Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 333-62916-02) filed by Mission Broadcasting, Inc.)
23.1
Consent of PricewaterhouseCoopers LLP on March 15, 2010.*
31.1
Certification of David S. Smith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certification of David S. Smith pursuant to 18 U.S.C. ss. 1350.*
*
Filed herewith
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