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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
for the quarterly period ended September 30, 2012
   
 
OR
   
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
for the transition period from              to             .

Commission File Number: 333-62916-02
 
MISSION BROADCASTING, INC.
(Exact Name of Registrant as Specified in Its Charter)
   
Delaware
51-0388022
(State of Organization or Incorporation)
(IRS Employer Identification No.)
   
30400 Detroit Road, Suite 304, Westlake, Ohio
44145
(Address of Principal Executive Offices)
(Zip Code)
 
(440) 526-2227
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨
 
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
       
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
x  
Smaller reporting company
¨
(Do not check if a smaller reporting company)
     
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of November 2, 2012, the Registrant had 1,000 shares of common stock outstanding, held by two shareholders.
 

 
 

 

TABLE OF CONTENTS
 
     
   
Page
PART I
FINANCIAL INFORMATION
 
     
ITEM 1.
Financial Statements (Unaudited)
 
     
 
Condensed Balance Sheets as of September 30, 2012 and December 31, 2011
1
     
 
Condensed Statements of Operations for the three and nine months ended September 30, 2012 and 2011
2
     
 
Condensed Statement of Changes in Shareholders’ Deficit for the nine months ended September 30, 2012
3
     
 
Condensed Statements of Cash Flows for the nine months ended September 30, 2012 and 2011
4
     
 
Notes to Condensed Financial Statements
5
     
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
     
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
23
     
ITEM 4.
Controls and Procedures
24
     
PART II
OTHER INFORMATION
 
     
ITEM 1.
Legal Proceedings
24
     
ITEM 1A.
Risk Factors
24
     
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
24
     
ITEM 3.
Defaults Upon Senior Securities
24
     
ITEM 4.
Mine Safety Disclosures
24
     
ITEM 5.
Other Information
24
     
ITEM 6.
Exhibits
25
   
   

 
 

 
PART I. FINANCIAL INFORMATION

 
ITEM 1.  Financial Statements

MISSION BROADCASTING, INC.
 
CONDENSED BALANCE SHEETS
 
(in thousands, except share information, unaudited)
 
   
September 30,
   
December 31,
 
 
 
2012
   
2011
 
ASSETS
 
 
       
Current assets:
 
 
       
Cash and cash equivalents
  $ 435     $ 1,898  
Accounts receivable, net of allowance for doubtful accounts of $64 and $113,
               
respectively
    3,443       2,511  
Current portion of broadcast rights
    3,841       3,309  
Due from Nexstar Broadcasting, Inc.
    5,313       -  
Prepaid expenses and other current assets
    182       66  
Total current assets
    13,214       7,784  
Property and equipment, net
    22,201       24,140  
Broadcast rights
    4,020       1,950  
Goodwill
    18,730       18,730  
FCC licenses
    21,939       21,939  
Other intangible assets, net
    11,465       15,276  
Other noncurrent assets, net
    7,171       1,237  
Total assets
  $ 98,740     $ 91,056  
LIABILITIES AND SHAREHOLDERS' DEFICIT
               
Current liabilities:
               
Current portion of debt
  $ 390     $ 390  
Current portion of broadcast rights payable
    4,225       3,782  
Accounts payable
    159       192  
Accrued expenses
    1,123       740  
Taxes payable
    69       78  
Interest payable (Note 6)
    13,239       6,022  
Deferred revenue
    338       408  
Due to Nexstar Broadcasting, Inc.
    -       4,729  
Total current liabilities
    19,543       16,341  
Debt (Note 6)
    366,848       363,087  
Broadcast rights payable
    4,048       2,113  
Deferred tax liabilities
    10,507       9,600  
Deferred revenue
    140       242  
Deferred gain on sale of assets
    1,474       1,623  
Other liabilities
    5,241       5,152  
Total liabilities
    407,801       398,158  
Commitments and contingencies
               
Shareholders' deficit:
               
Common stock - $1 par value, 1,000 shares authorized, issued and outstanding as
               
of each of September 30, 2012 and December 31, 2011
    1       1  
Subscription receivable
    (1 )     (1 )
Contra equity due from Nexstar Broadcasting, Inc. on debt issuance (Note 6)
    (193,979 )     (189,330 )
Accumulated deficit
    (115,082 )     (117,772 )
Total shareholders' deficit
    (309,061 )     (307,102 )
Total liabilities and shareholders' deficit
  $ 98,740     $ 91,056  

The accompanying Notes are an integral part of these Condensed Financial Statements.

 

 
 

 

MISSION BROADCASTING, INC.
 
CONDENSED STATEMENTS OF OPERATIONS
 
(in thousands, unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net broadcast revenue
  $ 4,707     $ 4,630     $ 13,937     $ 14,542  
Revenue from Nexstar Broadcasting, Inc.
    8,012       6,469       23,304       19,985  
Net revenue
    12,719       11,099       37,241       34,527  
Operating expenses:
                               
Direct operating expenses, excluding depreciation and
                               
amortization
    1,833       2,014       5,347       5,795  
Selling, general, and administrative expenses, excluding
                               
depreciation and amortization
    794       1,110       2,041       3,351  
Fees incurred pursuant to local service agreements
                               
with Nexstar Broadcasting, Inc.
    1,935       1,785       5,805       5,355  
Amortization of broadcast rights
    1,099       1,192       3,214       3,434  
Amortization of intangible assets
    1,270       1,271       3,811       4,261  
Depreciation
    701       792       2,142       2,366  
(Gain) loss on asset disposal, net
    -       (27 )     -       52  
Total operating expenses
    7,632       8,137       22,360       24,614  
Income from operations
    5,087       2,962       14,881       9,913  
Interest expense, net
    (3,750 )     (3,684 )     (11,206 )     (10,994 )
Income (loss) before income taxes
    1,337       (722 )     3,675       (1,081 )
Income tax expense
    (338 )     (313 )     (985 )     (936 )
Net income (loss)
  $ 999     $ (1,035 )   $ 2,690     $ (2,017 )

The accompanying Notes are an integral part of these Condensed Financial Statements.

 

 
 

 

MISSION BROADCASTING, INC.
 
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
 
For the Nine Months Ended September 30, 2012
 
(in thousands, unaudited)
 
                                     
                   
Contra Equity
             
                   
Due from
             
                   
Nexstar
             
                   
Broadcasting,
             
                 
Inc. on
       
Total
 
   
Common Stock
 
Subscription
 
Debt
 
Accumulated
 
Shareholders'
 
   
Shares
 
Amount
 
Receivable
 
Issuance
 
Deficit
 
Deficit
 
Balance as of December 31, 2011
    1,000     $ 1     $ (1 )   $ (189,330 )   $ (117,772 )   $ (307,102 )
                                                 
Discount accretion on
                                               
8.875% senior secured
                                               
second lien notes,
                                               
Nexstar portion (Note 6)
    -       -       -       (440 )     -       (440 )
                                                 
Interest accrual on 8.875%
                                               
senior secured second lien
                                               
notes, Nexstar portion, net
                                               
of Nexstar payments
                                               
(Note 6)
    -       -       -       (4,209 )     -       (4,209 )
                                                 
Net income
    -       -       -       -       2,690       2,690  
                                                 
Balance as of September 30, 2012
    1,000     $ 1     $ (1 )   $ (193,979 )   $ (115,082 )   $ (309,061 )

The accompanying Notes are an integral part of these Condensed Financial Statements.

 

 
 

 

MISSION BROADCASTING, INC.
 
CONDENSED STATEMENTS OF CASH FLOWS
 
(in thousands, unaudited)
 
             
   
Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income (loss)
  $ 2,690     $ (2,017 )
Adjustments to reconcile net income (loss) to net cash provided by operating
               
 activities:
               
Deferred income taxes
    913       880  
Provision for bad debts
    5       46  
Depreciation of property and equipment
    2,142       2,366  
Amortization of intangible assets
    3,811       4,261  
Amortization of debt financing costs
    167       160  
Amortization of broadcast rights, excluding barter
    1,044       1,172  
Payments for broadcast rights
    (1,268 )     (1,376 )
Loss on asset disposal, net
    -       52  
Deferred gain recognition
    (149 )     (149 )
Amortization of debt discount
    314       286  
Changes in operating assets and liabilities:
               
Accounts receivable
    (937 )     (219 )
Prepaid expenses and other current assets
    (116 )     50  
Other noncurrent assets
    -       (17 )
Taxes payable
    (9 )     (14 )
Accounts payable and accrued expenses
    266       (146 )
Interest payable
    3,008       3,002  
Deferred revenue
    (172 )     (204 )
Other noncurrent liabilities
    89       82  
Due to/due from Nexstar Broadcasting, Inc.
    (10,042 )     (7,284 )
Net cash provided by operating activities
    1,756       931  
Cash flows from investing activities:
               
Purchases of property and equipment
    (166 )     (419 )
Escrow payment on station acquisition
    (6,000 )     -  
Proceeds from disposals of property and equipment
    -       18  
Net cash used in investing activities
    (6,166 )     (401 )
Cash flows from financing activities:
               
Proceeds from issuance of long-term debt
    4,000       -  
Repayments of long-term debt
    (993 )     (292 )
Payments for debt financing costs
    (60 )     -  
Refund of debt financing costs
    -       8  
Net cash provided by (used in) financing activities
    2,947       (284 )
Net (decrease) increase in cash and cash equivalents
    (1,463 )     246  
Cash and cash equivalents at beginning of period
    1,898       1,250  
Cash and cash equivalents at end of period
  $ 435     $ 1,496  
                 
Supplemental information:
               
Interest paid
  $ 7,717     $ 7,547  
Income taxes paid, net
  $ 81     $ 70  
Non-cash investing activities:
               
Accrued purchases of property and equipment
  $ 53     $ 26  
Accrued debt financing costs
  $ 47     $ -  

The accompanying Notes are an integral part of these Condensed Financial Statements.

 

 
 

 

MISSION BROADCASTING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.
Organization and Business Operations

As of September 30, 2012, Mission Broadcasting, Inc. (“Mission” or the “Company”) owned and operated 17 television stations and four digital multicast channels, affiliated with the NBC, ABC, CBS, FOX, MyNetworkTV or Bounce TV television networks, in markets located in New York, Pennsylvania, Illinois, Indiana, Missouri, 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 Note 4).
 
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 23, 2012, the Company’s available cash, anticipated cash flow from operations and available borrowings under its senior secured 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 September 30, 2012, enabling Mission to continue to operate as a going concern.

Nexstar’s senior secured credit facility agreement contains covenants which require Nexstar to comply with certain financial ratios, including (a) a maximum consolidated total leverage ratio, (b) a maximum consolidated first lien indebtedness ratio, and (c) a minimum consolidated fixed charge coverage ratio. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar and Mission. The Company’s 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, 2012, Nexstar has informed Mission that it was in compliance with all covenants contained in the credit agreements governing the Company’s senior secured credit facility and the indentures governing the publicly-held notes.

2.
Summary of Significant Accounting Policies
 
Interim Financial Statements
 
The Condensed Financial Statements as of September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, are unaudited. However, in the opinion of management, such financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The preparation of the Condensed Financial Statements in conformity with U.S. GAAP requires management 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. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year. These Condensed Financial Statements should be read in conjunction with the Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The Balance Sheet as of December 31, 2011  has been derived from the audited Financial Statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 
 

 


Basis of Presentation
 
Certain prior year amounts have been reclassified to conform to the current year presentation. The acquisition of WTVW from Nexstar, as discussed in Note 3 to the Company’s Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2011, was deemed under U.S. GAAP to be a change in reporting entity. The historical results of the Company have therefore been retrospectively adjusted as if WTVW was owned and operated by the Company as of the earliest period presented.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 clarifies certain topics regarding fair value measurement and adds some disclosures for fair value measurements. The update was effective for the Company beginning on January 1, 2012. The implementation of this standard did not have a material impact on the Company’s financial position or results of operations.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment (Topic 350) (“ASU 2011-08”). ASU 2011-08 allows companies to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the annual two-step goodwill impairment test. The update is effective for the Company’s goodwill impairment testing performed in the fourth quarter of 2012, but early adoption is permitted. The Company does not expect the implementation of this standard to have a material impact on its financial position or results of operations.

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (Topic 350) (“ASU 2012-02”). ASU 2012-02 allows companies to first assess qualitative factors to determine whether it is more likely than not that the intangible asset is impaired as a basis for determining whether it is necessary to perform the annual quantitative indefinite-lived intangible asset impairment test. The update is effective for the Company’s indefinite-lived intangible asset impairment testing performed in the fourth quarter of 2013, but early adoption is permitted. The Company does not expect the implementation of this standard to have a material impact on its financial position or results of operations.

3.
Acquisitions

On July 18, 2012, Mission entered into an asset purchase agreement with Newport Television LLC (“Newport”) to acquire the assets of KLRT, the FOX affiliate, and KASN, the CW affiliate, in Little Rock, Arkansas for $60.0 million, subject to adjustments for working capital acquired. In addition, Nexstar entered into a separate asset purchase agreement with Newport to purchase the assets of ten other television stations (collectively, the “Newport Acquisitions”). A deposit of $6.0 million was made by Mission upon signing the asset purchase agreement.  The Company will finance the purchase price with new bank loans (See Note 6). The Company expects the acquisitions to close in December 2012. Both acquisitions are subject to FCC approval and other customary conditions.

4.
Local Service Agreements with Nexstar

The Company has entered into local service agreements with Nexstar to provide sales and operating services to all of its stations. For the stations with 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 to Nexstar. For each station that the Company has entered into an SSA, it has also entered into a joint sales agreement (“JSA”), whereby Nexstar sells the advertising time of the 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. For the stations with 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, based on the station’s monthly operating expenses. 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 Statements of Operations.

 
 

 


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 agreements to which Nexstar is a party.

Under the local service agreements, Nexstar receives substantially all of the Company’s available cash, after satisfaction of operating costs and debt obligations. The Company anticipates that Nexstar will continue to receive substantially all of its available cash, after satisfaction of operating costs and debt obligations. In compliance with FCC regulations for both the Company and Nexstar, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations. Mission had the following local service agreements in effect with Nexstar as of September 30, 2012:

Station
 
Market
 
Type of Agreement
 
Expiration
 
Consideration from Nexstar
WFXP
 
Erie, PA
 
TBA
 
8/16/16
 
Monthly payments received from Nexstar
                 
KHMT
 
Billings, MT
 
TBA
 
12/13/17
 
Monthly payments received from Nexstar
                 
KJTL/KJBO-LP
 
Wichita Falls, TX-Lawton, OK
 
SSA
 
5/31/19
 
$60 thousand per month paid to Nexstar
       
JSA
 
5/31/19
 
70% of net revenue received from Nexstar
                 
WYOU
 
Wilkes Barre-Scranton, PA
 
SSA
 
1/4/18
 
$35 thousand per month paid to Nexstar
       
JSA
 
9/30/14
 
70% of net revenue received from Nexstar
                 
KODE
 
Joplin, MO-Pittsburg, KS
 
SSA
 
3/31/22
 
$75 thousand per month paid to Nexstar
       
JSA
 
9/30/14
 
70% of net revenue received from Nexstar
                 
KRBC
 
Abilene-Sweetwater, TX
 
SSA
 
6/12/13
 
$25 thousand per month paid to Nexstar
       
JSA
 
6/30/14
 
70% of net revenue received from Nexstar
                 
KSAN
 
San Angelo, TX
 
SSA
 
5/31/14
 
$10 thousand per month paid to Nexstar
       
JSA
 
5/31/14
 
70% of net revenue received from Nexstar
                 
WAWV
 
Terre Haute, IN
 
SSA
 
5/8/13
 
$10 thousand per month paid to Nexstar
       
JSA
 
5/8/13
 
70% of net revenue received from Nexstar
                 
KCIT/KCPN-LP
 
Amarillo, TX
 
SSA
 
4/30/19
 
$50 thousand per month paid to Nexstar
       
JSA
 
4/30/19
 
70% of net revenue received from Nexstar
                 
KAMC
 
Lubbock, TX
 
SSA
 
2/15/19
 
$75 thousand per month paid to Nexstar
       
JSA
 
2/15/19
 
70% of net revenue received from Nexstar
                 
KOLR
 
Springfield, MO
 
SSA
 
2/15/19
 
$150 thousand per month paid to Nexstar
       
JSA
 
2/15/19
 
70% of net revenue received from Nexstar
                 
WUTR
 
Utica, NY
 
SSA
 
3/31/14
 
$10 thousand per month paid to Nexstar
       
JSA
 
3/31/14
 
70% of net revenue received from Nexstar
                 
WTVO
 
Rockford, IL
 
SSA
 
10/31/14
 
$75 thousand per month paid to Nexstar
       
JSA
 
10/31/14
 
70% of net revenue received from Nexstar
                 
KTVE
 
Monroe, LA-El Dorado, AR
 
SSA
 
1/16/18
 
$20 thousand per month paid to Nexstar
       
JSA
 
1/16/18
 
70% of net revenue received from Nexstar
                 
WTVW
 
Evansville, IN
 
SSA
 
11/30/19
 
$50 thousand per month paid to Nexstar
       
JSA
 
11/30/19
 
70% of net revenue received from Nexstar

 
 

 

5.
Intangible Assets and Goodwill
 
Intangible assets subject to amortization consisted of the following (in thousands):

   
Estimated
 
September 30, 2012
 
December 31, 2011
 
   
useful life,
       
Accumulated
             
Accumulated
       
   
in years
 
Gross
 
Amortization
 
Net
 
Gross
 
Amortization
 
Net
 
Network affiliation
                                         
agreements
    15     $ 66,443     $ (55,981 )   $ 10,462     $ 66,443     $ (52,830 )   $ 13,613  
Other definite-lived
                                                       
intangible assets
    1-15       13,118       (12,115 )     1,003       13,118       (11,455 )     1,663  
Other intangible assets
          $ 79,561     $ (68,096 )   $ 11,465     $ 79,561     $ (64,285 )   $ 15,276  

The following table presents the Company’s estimate of amortization expense for the remainder of 2012, each of the five succeeding years ended December 31 and thereafter for definite-lived intangible assets as of September 30, 2012 (in thousands):

     
Remainder of 2012
 
$
1,270 
 
     
2013
   
4,254 
 
     
2014
   
1,382 
 
     
2015
   
1,098 
 
     
2016
   
1,098 
 
     
2017
   
974 
 
     
Thereafter
   
1,389 
 

The carrying amounts of goodwill and FCC licenses were as follows (in thousands):

 
Goodwill
 
FCC Licenses
 
       
Accumulated
             
Accumulated
       
 
Gross
 
Impairment
 
Net
 
Gross
 
Impairment
 
Net
 
                                     
Balance as of December 31, 2011
  $ 20,280     $ (1,550 )   $ 18,730     $ 32,636     $ (10,697 )   $ 21,939  
Balance as of September 30, 2012
  $ 20,280     $ (1,550 )   $ 18,730     $ 32,636     $ (10,697 )   $ 21,939  

There were no changes recorded to goodwill or FCC licenses during the nine months ended September 30, 2012. The Company expenses as incurred any costs to renew or extend its FCC licenses. 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. As of September 30, 2012, the Company did not identify any events that would trigger an impairment assessment.

 
 

 

6.
Debt
 
Long-term debt consisted of the following (in thousands):

   
September 30,
   
December 31,
 
   
2012
   
2011
 
Term loans
  $ 38,122     $ 38,415  
Revolving loans
    10,000       6,700  
8.875% Senior secured second lien notes due 2017, net of discount of $5,884
               
and $6,638, respectively
    319,116       318,362  
      367,238       363,477  
Less: current portion
    390       390  
    $ 366,848     $ 363,087  

2012 Transactions

In connection with the Newport Acquisition, Mission and Nexstar have secured commitments for $445.0 million in new senior secured credit facilities, comprised of $350.0 million in term loans due 2019 and $95.0 million in revolving credit due December 2017. Mission will use its proceeds from these loans to finance the Newport Acquisition, as well as for retirement of debt outstanding under its existing senior secured credit facility.

On October 24, 2012, Nexstar commenced an offer to sell $250.0 million of 6.875% Senior Notes due 2020 (the “6.875 Notes”) at par.  The sale of the notes is expected to be completed on or about November 9, 2012.  The proceeds of the 6.875% Notes will be used to retire  Nexstar’s 7% Senior Subordinated Notes due 2014 (the “7% Notes”) and 7% Senior Subordinated PIK Notes due 2014 (the “7% PIK Notes”), repay a portion of the amounts outstanding under Nexstar’s senior secured credit facility and pay related fees and expenses.  The 6.875% Notes will be senior unsecured obligations of Nexstar and will be guaranteed by Mission.  On October 24, 2012, Nexstar commenced a tender offer to retire the 7% Notes and the 7% PIK Notes. The tender offer will expire on November 21, 2012, unless extended or earlier terminated by Nexstar in its sole discretion.

On October 23, 2012, Mission and Nexstar entered into amendments to each of their senior secured credit facilities. The amendments exclude, through and including December 31, 2012, from the calculation of indebtedness and prepayment requirement, the proceeds of the 6.875% Notes and permit Nexstar to hold the net proceeds of the 6.875% Notes, pending repurchase of its outstanding 7% Notes and 7% PIK Notes and refinancing of a portion of the borrowings outstanding under its senior secured credit facilities with such proceeds, until December 31, 2012.

On September 27, 2012, Mission and Nexstar entered into amendments to each of their senior secured credit facilities. The amendments remove the requirement for the Company to provide pro forma certificates to the lenders prior to entering into an acquisition and exclude any acquisitions from dollar limitations within the credit agreements if they are not to be funded with the existing senior secured credit facilities.

During the nine months ended September 30, 2012, the Company borrowed a net amount of $3.3 million under its senior secured credit facility resulting in a revolving loan balance of $10.0 million as of September 30, 2012.

Unused Commitments and Borrowing Availability
 
As of September 30, 2012, the Company had no unused revolving loan commitments under its senior secured credit facility.

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 senior secured credit facility in the event of its default. Similarly, Mission is a guarantor of Nexstar’s senior secured credit facility, the 7% PIK Notes and the 7% Notes issued by Nexstar. Mission will also be a guarantor of the 6.875% Notes. The senior secured credit facilities are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses, of Nexstar and Mission.


 
 

 


Debt Covenants
 
The Mission senior secured 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. Nexstar has informed the Company that it was in compliance with its debt covenants as of September 30, 2012.
 
8.875% Senior Secured Second Lien Notes

On April 19, 2010, Mission and Nexstar, as co-issuers, completed the issuance and sale of $325.0 million of 8.875% senior secured second lien notes due 2017 (“the 8.875% Notes”). The net proceeds to Mission and Nexstar from the sale of the 8.875% Notes were $316.8 million, net of $8.2 million original issuance discount. Mission received $131.9 million of the net proceeds and $184.9 million was received by Nexstar. As the obligations under the 8.875% Notes are joint and several to Nexstar and Mission, each entity reflects the full amount of the 8.875% Notes, net of discount, and related accrued interest in its separate financial statements. Further, the portions of the recorded balance of the 8.875% Notes and related accrued interest attributable to the respective co-issuer are reflected as a reduction to equity in Mission and Nexstar’s separate financial statements given Nexstar’s deemed controlling financial interest in Mission for financial reporting purposes. As of September 30, 2012, Nexstar had a balance of $186.3 million of debt and $7.7 million of interest payable related to the 8.875% Notes. As of December 31, 2011, Nexstar had a balance of $185.8 million of debt and $3.5 million of interest payable related to the 8.875% Notes. Nexstar’s balances of debt and interest payable are recorded in contra equity due from Nexstar Broadcasting, Inc. on the Balance Sheet.


Fair Value of Debt
 
The aggregate carrying amounts and estimated fair value of Mission’s debt were as follows (in thousands):

 
September 30,2012
 
December 31,2011
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Term loans(1) 
  $ 38,122     $ 37,907     $ 38,415     $ 37,976  
Revolving loans(1) 
    10,000       9,981       6,700       6,664  
8.875% Senior secured second lien notes(2) 
    319,116       351,813       318,362       321,750  
               
(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).
(2)
The fair value of Mission’s fixed rate debt is estimated based on bid prices obtained from an investment banking firm that
   
regularly makes a market for these financial instruments. This fair value measurement is considered Level 2 (significant
   
and observable).

 
 

 


7.
Income Taxes

The Company’s provision for income taxes is primarily comprised of deferred income taxes resulting from the amortization of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. No benefit has been recognized on the Company’s taxable losses for the three and nine months ended September 30, 2012 and 2011 as the utilization of such losses is not more likely than not to be realized in the foreseeable future.

The deferred tax liabilities related to goodwill and other indefinite-lived intangible assets 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 before valuation allowance 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 does not believe they are more likely than not to be realized through future taxable earnings.


 
 

 


8.
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 or adopt other legislation in a manner that could impact the Company’s stations and the television broadcast industry in general.

The FCC has adopted rules with respect to the final conversion of existing low power and television translator stations to digital operations. The FCC has established a September 1, 2015 deadline by which low power and television translator stations must cease analog operations. The Company has transitioned its television translator operations on channels 52-69 to digital operations and will transition its remaining low power and television translator stations to digital operations prior to September 1, 2015.


Media Ownership

In 2006, the FCC initiated a rulemaking proceeding to review all of its media ownership rules, as required by the Communications Act. The FCC 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. On July 6, 2011, the U.S. Court of Appeals for the Third Circuit vacated the FCC’s changes to its newspaper/broadcast cross-ownership rule while upholding the FCC’s retention of its other media ownership rules. In June 2012, the Supreme Court denied various petitions for Supreme Court review of the Third Circuit’s decision.

The FCC is required 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. In May 2010, the FCC formally initiated its 2010 review of its media ownership rules with the issuance of a Notice of Inquiry (NOI). Numerous parties filed comments and reply comments in response to the NOI. In June and July 2011, the FCC released to the public eleven economic studies related to its media ownership rules. In December 2011, the FCC issued a Notice of Proposed Rulemaking (NPRM) to seek comment on specific proposed changes to its ownership rules. Among the specific changes proposed in the NPRM are (1) elimination of the contour overlap provision of the local television ownership rule (making the rule entirely DMA-based), (2) elimination of the radio/television cross-ownership rule, and (3) modest relaxation of the newspaper/broadcast cross-ownership rule along the lines of the changes in the 2006 proceeding that the court vacated. The NPRM also seeks comment on shared services agreements (SSAs) and other joint operating arrangements between television stations, and whether such agreements should be considered attributable. Comments and reply comments on the NPRM were filed in March and April 2012. The Company cannot predict what rules the FCC will adopt or when they will be adopted.

Spectrum

The FCC has initiated various proceedings to assess the availability of spectrum to meet future wireless broadband needs. The FCC’s March 2010 “National Broadband Plan” recommends the reallocation of 120 megahertz of the spectrum currently used for broadcast television for wireless broadband use. The FCC has thus far adopted rules permitting television stations to share a single 6 megahertz channel and requested comment on proposals that include, among other things, whether to add new frequency allocations in the television bands for licensed fixed and mobile wireless uses and whether to implement technical rule modifications to improve the viability of certain channels that are underutilized by digital television stations. In February 2012, Congress adopted legislation authorizing the FCC to conduct an incentive auction whereby television broadcasters could voluntarily relinquish all or part of their spectrum in exchange for consideration. On September 28, 2012, the FCC adopted a Notice of Proposed Rule Making seeking public comment on the design of the incentive auction and various technical issues related to the reallocation of television spectrum for mobile broadband use. A reallocation of television spectrum for wireless broadband use would likely involve a “repacking” of the television broadcast band, which would require some television stations to change channel or otherwise modify their technical facilities. Future steps to reallocate television spectrum to broadband use may be to the detriment of the Company’s investment in digital facilities, could require substantial additional investment to continue current operations, and may require viewers to invest in additional equipment or subscription services to continue receiving broadcast television signals. The Company cannot predict the timing or results of television spectrum reallocation efforts or their impact to its business.
 
Retransmission Consent

On March 3, 2011, the FCC initiated a Notice of Proposed Rulemaking to reexamine its rules (i) governing the requirements for good faith negotiations between multichannel video program distributors (MVPDs) and broadcasters, including implementing a prohibition on one station negotiating retransmission consent terms for another station under a local service agreement; (ii) for providing advance notice to consumers in the event of dispute; and (iii) to extend certain cable-only obligations to all MVPDs. The FCC has also asked for comment on eliminating the network non-duplication and syndicated exclusivity protection rules, which may permit MVPDs to import out-of-market television stations during a retransmission consent dispute. If the FCC prohibits joint negotiations or modifies the network non-duplication and syndicated exclusivity protection rules, such changes likely would affect the Company’s ability to sustain its current level of retransmission consent revenues or grow such revenues in the future and could have an adverse effect on the Company’s business, financial condition and results of operations. The Company cannot predict the resolution of the proposals or their impact to its business.

9.
Commitments and Contingencies
 
Guarantees of Nexstar Debt
 
    Mission is a guarantor of and has pledged substantially all its assets, excluding FCC licenses, to guarantee Nexstar’s senior secured credit facility. Mission is also a guarantor of Nexstar’s 7% Notes and 7% PIK Notes and will guarantee the 6.875% Notes. The notes are general unsecured senior subordinated obligations subordinated to all of Mission’s senior debt. 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 senior secured credit facility, the 7% PIK Notes and the 7% Notes. As of September 30, 2012, Nexstar had a maximum commitment of $173.9 million under its senior secured credit facility, of which $131.9 million of debt was outstanding, had $3.9 million of the 7% senior subordinated notes outstanding and had $112.6 million of the 7% PIK senior subordinated notes outstanding.

Purchase Options Granted to Nexstar
 
In consideration of the guarantee of Mission’s bank credit facility by Nexstar Broadcasting Group, Inc. and its subsidiaries, Mission 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. Additionally, on November 29, 2011, Mission’s shareholders granted Nexstar an option to purchase any or all of the Company’s stock, subject to FCC consent, for a price equal to the pro rata portion of the greater of (1) five times the stations’ cash flow, as defined in the agreement, reduced by the amount of indebtedness, as defined in the agreement, or (2) $100,000. These option agreements (which expire on various dates between 2012 and 2022) are freely exercisable or assignable by Nexstar without consent or approval by Mission or its shareholders. 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 other 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 insignificant 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 with claims that arise out of the normal course of 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.

 
 

 

10.
Subsequent Events

In October 2012, Nexstar commenced the offering of $250.0 million of 6.875% Notes and launched a tender offer to repurchase the 7% Notes and the 7% PIK Notes.  Additionally, Mission and Nexstar each amended its respective senior secured credit agreement to allow for the offering and tender offer and adjust compliance ratios accordingly.  See Note 6 for additional information on these events.

 
 

 

ITEM 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with our Condensed Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and the Financial Statements and related Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011. Throughout this discussion, all references to “Mission”, “we”, “our”, “us” and the “Company” refer to Mission Broadcasting, Inc.
 
Overview of Operations
 
As of September 30, 2012, we owned and operated 17 television stations and four digital multicast channels. We have local service agreements with certain television stations owned by Nexstar, through which Nexstar provides various programming, sales or other services to our television stations. In compliance with FCC regulations for both Nexstar and us, we maintain complete responsibility for and control over programming, finances, personnel and operations for our stations.

On July 18, 2012, Mission entered into an asset purchase agreement with Newport to acquire the assets of two television stations in Little Rock, Arkansas for $60.0 million, subject to adjustments for working capital acquired. In addition, Nexstar entered into a separate asset purchase agreement with Newport to purchase the assets of ten other television stations. We and Nexstar have received Commitments to finance the acquisitions and retire existing debt with $445.0 million in new Senior Secured Credit Facilities comprised of $350.0 million in term loans due 2019 and $95.0 million in revolving credit due December 2017.  A deposit of $6.0 million was made by Mission upon signing the asset purchase agreement.  Mission expects to use the proceeds of the new senior secured credit facilities to finance the acquisition and retire the outstanding balances of our existing senior secured credit facility. We expect the acquisition to close in December 2012. Both acquisitions are subject to customary conditions.

The following table summarizes the various local service agreements our stations had in effect as of September 30, 2012 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, WAWV, WYOU, KODE, KTVE, WTVO and WTVW
 
               
(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 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 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.
 
    Under the local service agreements, Nexstar receives substantially all of our available cash, after satisfaction of operating costs and debt obligations. We anticipate that Nexstar will continue to receive substantially all of our available cash, after satisfaction of operating costs and debt obligations. For more information about our local service agreements with Nexstar, refer to Note 3 of our Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 advertising revenues in 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, when state, congressional and presidential elections occur and advertising airs during the Olympic Games. As 2012 is an election year, we expect an increase in political advertising revenue to be reported in 2012 compared to 2011.

 
 

 


Most of our stations have a network affiliation agreement pursuant to which the network provides programming to the station during specified time periods, including prime time. ABC and CBS 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 NBC, FOX, MyNetworkTV and Bounce do not provide for compensation. In recent years, in conjunction with the renewal of affiliation agreements, 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 is being eliminated and many of the networks are now seeking cash payments from their affiliates.

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 over the license period or period of usage, whichever ends earlier. 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.

 
 

 

Historical Performance
 
Revenue
 
The following table sets forth the principal types of revenue earned by our stations (in thousands) and each type of revenue (other than barter revenue and revenue from Nexstar) as a percentage of total net broadcast revenue before barter:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Retransmission compensation
  $ 3,876       96.4     $ 2,525       65.7     $ 11,461       97.4     $ 7,287       60.0  
Net advertising revenue
    -       -       1,205       31.4       -       -       4,497       37.0  
Network compensation
    58       1.4       94       2.4       177       1.5       293       2.4  
Other
    87       2.2       18       0.5       129       1.1       74       0.6  
Net broadcast revenue before
                                                               
barter
    4,021       100.0       3,842       100.0       11,767       100.0       12,151       100.0  
Barter and trade revenue
    686               788               2,170               2,391          
Revenue from Nexstar
    8,012               6,469               23,304               19,985          
Net revenue
  $ 12,719             $ 11,099             $ 37,241             $ 34,527          

Results of Operations
 
The following table sets forth a summary of our operations (in thousands) and the components of operating expense as a percentage of net revenue:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Net revenue
  $ 12,719       100.0     $ 11,099       100.0     $ 37,241       100.0     $ 34,527       100.0  
Operating expenses:
                                                               
Corporate expenses
    226       1.8       232       2.1       640       1.6       664       1.9  
Station direct operating expenses,
                                                               
net of trade
    1,833       14.4       1,968       17.6       5,347       14.4       5,654       16.4  
Selling, general and administrative
                                                               
expenses
    568       4.6       878       7.9       1,401       3.8       2,687       7.8  
Fees incurred pursuant to local
                                                               
service agreements
                                                               
with Nexstar
    1,935       15.2       1,785       16.1       5,805       15.6       5,355       15.5  
(Gains) loss on asset disposal, net
    -       -       (27 )     (0.2 )     -       -       52       0.1  
Barter and trade expense
    686       5.4       808       7.3       2,170       5.8       2,403       7.0  
Depreciation and amortization
    1,971       15.5       2,063       18.6       5,953       16.0       6,627       19.2  
Amortization of broadcast rights,
                                                               
excluding barter
    413       3.2       430       3.9       1,044       2.8       1,172       3.4  
Income from operations
  $ 5,087             $ 2,962             $ 14,881             $ 9,913          

 
 

 


Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
 
Revenue
 
Net revenue for the three months ended September 30, 2012 increased by $1.6 million, or 14.6%, from the same period in 2011. This increase was primarily attributed to an increase in retransmission compensation.
 
Revenue from Nexstar was $8.0 million for the three months ended September 30, 2012, compared to $6.5 million for the same period in 2011. The revenue we earn from Nexstar through our JSAs is directly correlated to the advertising revenue earned at our stations, which has increased as a result of the increase in political advertising in 2012, which is an election year. We entered into a JSA with Nexstar for WTVW on December 1, 2011 which increased our JSA revenue and discontinued our net advertising revenue stream.

Compensation from retransmission consent and network affiliation agreements was $3.9 million for the three months ended September 30, 2012, compared to $2.6 million for the same period in 2011, an increase of $1.3 million, or 50.2%. The increase was primarily due to cable agreements providing for higher rates per subscriber during the year.
 
Operating Expenses
 
    Corporate expenses were consistent at $0.2 million for each of the three months ended September 30, 2012 and 2011. 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 were $2.4 million for the three months ended September 30, 2012, compared to $2.8 million for the same period in 2011, a decrease of $0.4 million, or 15.6%. We entered into a JSA with Nexstar for WTVW on December 1, 2011 which reduced station direct operating expenses and selling, general and administrative expenses by $0.9 million. This reduction was partially offset by increased programming costs of $0.4 million primarily related to renegotiated network affiliation agreements.
 
    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 were $1.9 million for the three months ended September 30, 2012 compared to $1.8 million for the same period in 2011.  The increase was due to the SSA with Nexstar for WTVW entered into on December 1, 2011.
 
    Amortization of intangible assets remained consistent at $1.3 million for each of the three months ended September 30, 2012 and 2011. Depreciation of property and equipment also remained consistent at $0.7 million and $0.8 million for the three months ended September 30, 2012 and 2011, respectively.
 
Interest Expense
 
    Interest expense remained consistent at $3.8 million and $3.7 million for the three months ended September 30, 2012 and 2011, respectively.

Income Taxes
 
    Income tax expense remained consistent at $0.3 million for each of the three months ended September 30, 2012 and 2011. Our provision for income taxes is primarily created by an increase in the deferred tax liabilities position during the year arising from the amortization of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. No tax benefit was recorded with respect to the taxable losses for 2012 and 2011, as the utilization of such losses is not more likely than not to be realized in the foreseeable future.

 
 

 


Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
 
Revenue
 
Net revenue for the nine months ended September 30, 2012 increased by $2.7 million, or 7.9%, from the same period in 2011. This increase was primarily attributed to an increase in retransmission compensation.
 
Revenue from Nexstar was $23.3 million for the nine months ended September 30, 2012, compared to $20.0 million for the same period in 2011, an increase of $3.3 million or 16.6%. The revenue we earn from Nexstar through our JSAs is directly correlated to the advertising revenue earned at our stations, which has increased as a result of the increase in political advertising in 2012, which is an election year. We entered into a JSA with Nexstar for WTVW on December 1, 2011 which increased our JSA revenue and discontinued our net advertising revenue stream.

Compensation from retransmission consent and network affiliation agreements was $11.6 million for the nine months ended September 30, 2012, compared to $7.6 million for the same period in 2011, an increase of $4.0 million, or 53.5%. The increase was primarily due to renegotiated cable agreements providing for higher rates per subscriber during the period.
 
Operating Expenses
 
Corporate expenses were $0.6 million and $0.7 million for the nine months ended September 30, 2012 and 2011, respectively. 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 were $6.7 million for the nine months ended September 30, 2012, compared to $8.3 million for the same period in 2011, a decrease of $1.6 million, or 19.1%. We entered into a JSA with Nexstar for WTVW on December 1, 2011 which reduced station direct operating expenses and selling, general and administrative expenses by $2.7 million. This reduction was partially offset by increased other program costs of $1.1 million primarily related to our renegotiated network affiliation agreements.

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 were $5.8 million for the nine months ended September 30, 2012, compared to $5.4 million for the same period in 2011. The increase was due to the SSA with Nexstar for WTVW entered into on December 1, 2011.
 
Amortization of intangible assets was $3.8 million for the nine months ended September 30, 2012 compared to $4.3 million for the same period in 2011, a decrease of $0.5 million, or 10.6%.  The decrease was due to incremental amortization recorded in 2011 on network affiliation agreement intangibles on the WTVW FOX affiliate station which terminated on June 30, 2011. Depreciation of property and equipment remained relatively consistent at $2.2 million and $2.4 million for the nine months ended September 30, 2012 and 2011, respectively.
 
Interest Expense
 
Interest expense was $11.2 million for the nine months ended September 30, 2012, compared to $11.0 million for the same period in 2011, an increase of $0.2 million, or 1.9%. The increase was due to a $6.7 million borrowing on our revolving loan made on December 1, 2011 in connection with the acquisition of WTVW and $4.0 million borrowing on our revolving loan made to finance the deposit to acquire the assets of two television stations from Newport.

Income Taxes
 
Income tax expense remained consistent at $1.0 million and $0.9 million for the nine months ended September 30, 2012 and 2011, respectively. Our provision for income taxes is primarily created by an increase in the deferred tax liability position arising from the amortization of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. No tax expense or benefit was recorded with respect to the net income (loss) in 2012 and 2011 as the utilization of net operating losses is not more likely than not 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 are a significant component of our cash flows. On March 23, 2012, 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 secured 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 September 30, 2012. In order to meet future cash needs we may, from time to time, borrow under our existing senior secured 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 our liquidity and capital resources (in thousands):

   
Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
 
Net cash provided by operating activities
  $ 1,756     $ 931  
Net cash used in investing activities
    (6,166 )     (401 )
Net cash provided by (used in) financing activities
    2,947       (284 )
Net (decrease) increase in cash and cash equivalents
  $ (1,463 )   $ 246  
Cash paid for interest
  $ 7,717     $ 7,547  
Cash paid for taxes
    81       70  

   
As of
   
As of
 
 
September 30,
 
December 31,
 
 
2012
 
2011
 
Cash and cash equivalents
  $ 435     $ 1,898  
Long-term debt including current portion(1) 
    367,238       363,477  
Unused commitments under senior secured credit facilities
    -       3,300  
               
  (1 )
We co-issued $325.0 million of 8.875% Notes in April 2010, of which we received $131.9 million of the net proceeds and
     
$184.9 million was received by Nexstar, as discussed in Note 5 of our Condensed Financial Statements. Debt repayment will be split
     
based on the same ratio as the proceeds were received.

Cash Flows – Operating Activities
 
    Net cash flows from operating activities increased by $0.8 million during the nine months ended September 30, 2012 compared to the same period in 2011. The increase was primarily due to the increase in net revenue of $2.7 million and decreased selling, general and administrative expenses of $1.3 million, which was partially offset by the timing of payments of amounts due to/from Nexstar of $2.8 million.
 
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
 
Net cash used in investing activities of $6.2 million during the nine months ended September 30, 2012 included a $6.0 million deposit for the acquisition of two television stations from Newport and purchases of property and equipment of $0.2 million.  Net cash used in investing activities during the nine months ended September 30, 2011 represented net purchases of property and equipment of $0.4 million.
Cash Flows – Financing Activities
 
Net cash flows provided by financing activities was $2.9 million for the nine months ended September 30, 2012 compared to the net cash used in financing activities of $0.3 million for the same period in 2011. We borrowed $4.0 million of revolving loans under our senior secured credit facility to finance the deposit to acquire the assets of two television stations from Newport. We also repaid $0.7 million of revolving loans and paid contractual maturities on our term loans during the nine months ended September 30, 2012.
 
Our senior secured credit facility prohibits the payment of cash dividends to our shareholders.
 
Future Sources of Financing and Debt Service Requirements
 
As of September 30, 2012, we had debt of $367.2 million, including $319.1 million of debt co-issued with Nexstar, which represented 631.2% 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 our debt, which reduces 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 credit facility is based on covenant calculations contained in Nexstar’s credit agreement. As of September 30, 2012, there were no unused commitments under our senior secured credit facility.

The following table summarizes the approximate aggregate amount of principal indebtedness scheduled to mature for the periods referenced as of September 30, 2012 (in thousands):

                 
Remainder
                 
           
Total
 
of 2012
 
2013-2014
 
2015-2016
 
Thereafter
 
Senior secured credit facility
 
$
48,122 
 
$
97 
 
$
10,780 
 
$
37,245 
 
$
 
8.875% Notes(1) 
   
325,000 
   
   
   
   
325,000 
           
$
373,122 
 
$
97 
 
$
10,780 
 
$
37,245 
 
$
325,000 
 
               
(1)
As co-issuers, we received $131.9 million of the net proceeds and $184.9 million was received by Nexstar, as discussed in Note 5
   
of our Condensed Financial Statements. Debt repayment will be split based on the same ratio as the proceeds were received.

We make semi-annual interest payments on our 8.875% Notes in April and October. Interest payments on our senior secured 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 secured credit facility and the indenture governing the 8.875% Notes 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, Inc. (Nexstar’s ultimate parent) and its subsidiaries guarantee full payment of all obligations under our senior secured credit facility in the event of our default. Similarly, we are a guarantor of Nexstar’s senior secured credit facility, the 7% Notes and the 7% PIK Notes issued by Nexstar. The senior secured credit facilities are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses, of Nexstar and us. As of September 30, 2012, Nexstar had a maximum commitment of $173.9 million under its senior secured credit facility, of which $131.9 million of debt was outstanding, had $3.9 million of the 7% Notes outstanding and had $112.6 million of the 7% PIK Notes outstanding.


 
 

 


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 23, 2012. 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. Nexstar’s senior secured credit facility agreement contains covenants which require Nexstar to comply with certain financial ratios, including (a) a maximum consolidated total leverage ratio, (b) a maximum consolidated first lien indebtedness ratio, and (c) a minimum consolidated fixed charge coverage ratio. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar and us. The 8.875% Notes, the 7% Notes and the 7% PIK Notes contain restrictive covenants customary for borrowing arrangements of this type. As of September 30, 2012, Nexstar has informed us that it was in compliance with all covenants contained in the credit agreements governing our senior secured credit facility and the indentures governing the publicly-held notes. As of September 30, 2012, we were in compliance with all covenants related to the 8.875% Notes.

No Off-Balance Sheet Arrangements
 
As of September 30, 2012, 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.
 
Critical Accounting Policies and Estimates
 
Our Condensed Financial Statements have been prepared in accordance with 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 Condensed 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, trade and 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. Results of operations for interim periods are not necessarily indicative of results for the full year.
 
Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in our Annual Report on Form 10-K for the year ended December 31, 2011. Management believes that as of September 30, 2012, there have been no material changes to this information.
 
Recent Accounting Pronouncements
 
Refer to Note 2 of our Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our adoption of recently issued accounting pronouncements, including our expected date of adoption and effects on results of operations and financial position.
 

 
 

 


Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including: any projections or expectations of earnings, revenue, financial performance, liquidity and capital resources or other financial items; any assumptions or projections about the television broadcasting industry; any statements of our plans, strategies and objectives for our future operations, performance, liquidity and capital resources or other financial items; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and other similar words.
 
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ from this projection or assumption in any of our forward-looking statements. Our future financial position and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties, including those described in our Annual Report on Form 10-K for the year ended December 31, 2011 and in our other filings with the Securities and Exchange Commission. The forward-looking statements made in this Quarterly Report on Form 10-Q are made only as of the date hereof, and we do not have or undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances unless otherwise required by law.

ITEM 3.
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.
 
Our term loan borrowings as of September 30, 2012 under our senior secured credit facility bear interest at a rate of 5%, which represented the base rate, or LIBOR, plus the applicable margin, as defined. Our revolving loans bear interest at LIBOR plus the applicable margin, which totaled 4.4% at September 30, 2012. Interest is payable in accordance with the credit agreement.
 
If LIBOR were to increase by 100 basis points, or one percentage point, from its September 30, 2012 level, our annual interest expense would increase and cash flow from operations would decrease by approximately $0.2 million, based on the outstanding balance of our credit facility as of September 30, 2012. Due to the LIBOR floor on our term loan, an increase of 50 basis points in LIBOR or any decrease in LIBOR would have no significant impact on our operations or cash flows. Our 8.875% Notes are fixed rate debt obligations and therefore are not exposed to market interest rate changes. As of September 30, 2012, we have no financial instruments in place to hedge against changes in the benchmark interest rates on our senior secured credit facility.
 
Impact of Inflation
 
We believe that our results of operations are not affected by moderate changes in the inflation rate.


 
 

 


ITEM 4.
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, its internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.                       Legal Proceedings
 
From time to time, we are involved in litigation that arises from the ordinary operations of 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 1A.                                 Risk Factors
 
There are no material changes from the risk factors previously disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.
 
ITEM 2.                       Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
ITEM 3.                       Defaults Upon Senior Securities
 
None.
 
ITEM 4.                      Mine Safety Disclosures
 
None.

ITEM 5.                       Other Information
 
None.
 

 
 

 



ITEM 6.                       Exhibits
 
Exhibit No.
Description
10.1
Asset Purchase Agreement, dated as of July 18, 2012, by and among Mission Broadcasting, Inc., Newport Television LLC and Newport Television License LLC. (Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K (File No. 000-50478), filed by Nexstar Broadcasting Group, Inc. on July 24, 2012)
10.2
Fourth Amendment to the Third Amended and Restated Credit Agreement, dated as of September 19, 2012 (Executed on September 27, 2012), by and among Mission Broadcasting, Inc., Bank of America, N.A. and the several Banks parties thereto. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc. on October 3, 2012).
10.3
Fifth Amendment to the Third Amended and Restated Credit Agreement, dated as of October 23, 2012, by and among Mission Broadcasting, Inc., Bank of America, N.A. and the several Banks parties thereto. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc. on October 25, 2012).
10.4
Sixth Amendment to the Fourth Amended and Restated Credit Agreement, dated as of September 19, 2012 (Executed on September 27, 2012), by and among Nexstar Broadcasting, Inc., Nexstar Broadcasting Group, Inc., Nexstar Finance Holdings, Inc., Bank of America, N.A. and the several Banks parties thereto. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc. on October 3, 2012).
10.5
Seventh Amendment to the Fourth Amended and Restated Credit Agreement, dated as of October 23, 2012, by and among Nexstar Broadcasting, Inc., Nexstar Broadcasting Group, Inc., Nexstar Finance Holdings, Inc., Bank of America, N.A. and the several Banks parties thereto. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc. on October 25, 2012).
31.1
Certification of Dennis Thatcher pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certification of Dennis Thatcher pursuant to 18 U.S.C. ss. 1350.*
101
The Company’s unaudited Condensed Consolidated Financial Statements and related Notes for the quarter ended September 30, 2012 from this Quarterly Report on Form 10-Q, formatted in XBRL (eXtensible Business Reporting Language).*

 
*           Filed herewith
 

 
 

 

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.
 
 
MISSION BROADCASTING, INC.
     
 
/s/ Dennis Thatcher
 
 
By:
Dennis Thatcher
 
Its:
President and Treasurer
 
(Principal Executive Officer and Principal Financial and Accounting Officer)
 
 
Dated: November 8, 2012