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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, 2014

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 Incorporation or Organization)

 

(I.R.S. 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 check mark 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 10, 2014, 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, 2014 and December 31, 2013

  

1

 

 

 

 

 

 

  

Condensed Statements of Operations for the three and nine months ended September 30, 2014 and 2013

  

2

 

 

 

 

 

 

  

Condensed Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

  

3

 

 

 

 

 

 

  

Notes to Condensed Financial Statements

  

4

 

 

 

 

 

ITEM 2.

  

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

  

13

 

 

 

 

 

ITEM 3.

  

Quantitative and Qualitative Disclosures about Market Risk

  

21

 

 

 

 

 

ITEM 4.

  

Controls and Procedures

  

21

 

 

 

 

 

PART II

  

OTHER INFORMATION

  

 

 

 

 

 

 

ITEM 1.

  

Legal Proceedings

  

22

 

 

 

 

 

ITEM 1A.

  

Risk Factors

  

22

 

 

 

 

 

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

22

 

 

 

 

 

ITEM 3.

  

Defaults Upon Senior Securities

  

22

 

 

 

 

 

ITEM 4.

  

Mine Safety Disclosures

  

22

 

 

 

 

 

ITEM 5.

  

Other Information

  

22

 

 

 

 

 

ITEM 6.

  

Exhibits

  

22

 

 

 

 


PART I. FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

MISSION BROADCASTING, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share information, unaudited)

 

 

 

September 30,

 

 

December  31,

 

 

 

2014

 

 

2013

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,872

 

 

$

3,716

 

Accounts receivable, net of allowance for doubtful accounts of $75 and $96,

  respectively

 

 

6,200

 

 

 

5,059

 

Due from Nexstar Broadcasting, Inc.

 

 

10,981

 

 

 

-

 

Deferred tax assets, net

 

 

8,160

 

 

 

8,160

 

Prepaid expenses and other current assets

 

 

1,814

 

 

 

1,621

 

Total current assets

 

 

31,027

 

 

 

18,556

 

Property and equipment, net

 

 

24,824

 

 

 

26,760

 

Goodwill

 

 

32,489

 

 

 

32,489

 

FCC licenses

 

 

41,563

 

 

 

41,563

 

Other intangible assets, net

 

 

21,920

 

 

 

24,038

 

Deferred tax assets, net

 

 

19,449

 

 

 

25,727

 

Other noncurrent assets, net

 

 

9,547

 

 

 

5,616

 

Total assets

 

$

180,819

 

 

$

174,749

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of debt

 

$

1,837

 

 

$

2,334

 

Current portion of broadcast rights payable

 

 

1,387

 

 

 

1,454

 

Due to Nexstar Broadcasting, Inc.

 

 

-

 

 

 

3,847

 

Accounts payable

 

 

847

 

 

 

723

 

Accrued expenses

 

 

3,198

 

 

 

2,372

 

Other current liabilities

 

 

443

 

 

 

401

 

Total current liabilities

 

 

7,712

 

 

 

11,131

 

Debt

 

 

228,301

 

 

 

230,131

 

Other liabilities

 

 

8,923

 

 

 

8,080

 

Total liabilities

 

 

244,936

 

 

 

249,342

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders' deficit:

 

 

 

 

 

 

 

 

Common stock - $1 par value, 1,000 shares authorized, issued and outstanding as of

  each of September 30, 2014 and December 31, 2013

 

 

1

 

 

 

1

 

Subscription receivable

 

 

(1

)

 

 

(1

)

Accumulated deficit

 

 

(64,117

)

 

 

(74,593

)

Total shareholders' deficit

 

 

(64,117

)

 

 

(74,593

)

Total liabilities and shareholders' deficit

 

$

180,819

 

 

$

174,749

 

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

 

 

 

1


MISSION BROADCASTING, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net broadcast revenue

 

$

9,069

 

 

$

7,578

 

 

$

26,698

 

 

$

21,882

 

Revenue from Nexstar Broadcasting, Inc.

 

 

10,105

 

 

 

9,581

 

 

 

29,561

 

 

 

28,885

 

Net revenue

 

 

19,174

 

 

 

17,159

 

 

 

56,259

 

 

 

50,767

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct operating expenses, excluding depreciation and amortization

 

 

4,636

 

 

 

3,751

 

 

 

13,258

 

 

 

10,756

 

Selling, general, and administrative expenses, excluding depreciation

  and amortization

 

 

711

 

 

 

705

 

 

 

2,317

 

 

 

2,266

 

Fees incurred pursuant to local service agreements with

  Nexstar Broadcasting, Inc.

 

 

2,445

 

 

 

2,445

 

 

 

7,335

 

 

 

7,295

 

Amortization of broadcast rights

 

 

1,461

 

 

 

1,729

 

 

 

4,352

 

 

 

4,821

 

Amortization of intangible assets

 

 

635

 

 

 

1,750

 

 

 

2,118

 

 

 

5,486

 

Depreciation

 

 

661

 

 

 

850

 

 

 

2,117

 

 

 

2,771

 

Total operating expenses

 

 

10,549

 

 

 

11,230

 

 

 

31,497

 

 

 

33,395

 

Income from operations

 

 

8,625

 

 

 

5,929

 

 

 

24,762

 

 

 

17,372

 

Interest expense, net

 

 

(2,560

)

 

 

(4,453

)

 

 

(7,576

)

 

 

(13,436

)

Loss on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

(21

)

 

 

-

 

Income before income taxes

 

 

6,065

 

 

 

1,476

 

 

 

17,165

 

 

 

3,936

 

Income tax expense

 

 

(2,371

)

 

 

(752

)

 

 

(6,689

)

 

 

(1,712

)

Net income

 

$

3,694

 

 

$

724

 

 

$

10,476

 

 

$

2,224

 

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

 

 

 

2


MISSION BROADCASTING, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

10,476

 

 

$

2,224

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

6,278

 

 

 

1,647

 

Provision for bad debts

 

 

45

 

 

 

12

 

Depreciation of property and equipment

 

 

2,117

 

 

 

2,771

 

Amortization of intangible assets

 

 

2,118

 

 

 

5,486

 

Amortization of debt financing costs

 

 

422

 

 

 

384

 

Amortization of broadcast rights, excluding barter

 

 

1,287

 

 

 

1,360

 

Payments for broadcast rights

 

 

(1,265

)

 

 

(1,799

)

Loss on asset disposal

 

 

-

 

 

 

58

 

Deferred gain recognition

 

 

(149

)

 

 

(149

)

Amortization of debt discount

 

 

46

 

 

 

394

 

Loss on extinguishment of debt

 

 

21

 

 

 

-

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,186

)

 

 

(2,657

)

Prepaid expenses and other current assets

 

 

(226

)

 

 

(118

)

Other noncurrent assets

 

 

(17

)

 

 

(66

)

Accounts payable and accrued expenses

 

 

995

 

 

 

900

 

Interest payable

 

 

-

 

 

 

2,756

 

Other noncurrent liabilities

 

 

(95

)

 

 

(225

)

Due to/due from Nexstar Broadcasting, Inc.

 

 

(14,828

)

 

 

(13,721

)

Net cash provided by (used in) operating activities

 

 

6,039

 

 

 

(743

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(181

)

 

 

(81

)

Deposits and payments for acquisitions

 

 

(3,200

)

 

 

(59,509

)

Proceeds from disposal of property and equipment

 

 

-

 

 

 

2,917

 

Net cash used in investing activities

 

 

(3,381

)

 

 

(56,673

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

-

 

 

 

65,000

 

Repayments of long-term debt

 

 

(2,373

)

 

 

(5,520

)

Payments for debt financing costs

 

 

(129

)

 

 

(340

)

Net cash (used in) provided by financing activities

 

 

(2,502

)

 

 

59,140

 

Net increase in cash and cash equivalents

 

 

156

 

 

 

1,724

 

Cash and cash equivalents at beginning of period

 

 

3,716

 

 

 

318

 

Cash and cash equivalents at end of period

 

$

3,872

 

 

$

2,042

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

Interest paid

 

$

7,108

 

 

$

9,901

 

Income taxes paid, net of refunds

 

$

589

 

 

$

118

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Accrued debt financing costs

 

$

-

 

 

$

23

 

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

 

 

 

3


MISSION BROADCASTING, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

 

1. Organization and Business Operations

As of September 30, 2014, Mission Broadcasting, Inc. (“Mission” or the “Company”) owned and operated 20 television stations and 2 digital multicast channels, affiliated with the NBC, ABC, FOX, CBS, MyNetworkTV, The CW or Bounce TV television networks, in markets located in New York, Pennsylvania, Illinois, Indiana, Missouri, Louisiana, Texas, Vermont, Arkansas 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 February 26, 2014, 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, 2014, 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 net leverage ratio, (b) a maximum consolidated first lien net leverage 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 default provisions in the event Nexstar does not comply with all covenants contained in its credit agreement. As of September 30, 2014, Nexstar has informed Mission that it was in compliance with all covenants contained in its credit agreement and the indentures governing its senior unsecured notes.

 

2.  Summary of Significant Accounting Policies

Interim Financial Statements

The Condensed Financial Statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 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 (the “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, 2013. The balance sheet as of December 31, 2013 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.

Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, broadcast rights payable, accounts payable and accrued expenses approximate fair value due to their short-term nature. See Note 6 for fair value disclosures related to the Company’s debt.

Basis of Presentation

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income or shareholders’ deficit as previously reported.


4


Recent Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 places responsibility on management to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern. The standard is intended to reduce diversity in the timing and content of footnote disclosures and require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this accounting standard update are effective for interim and annual periods ending after December 15, 2016. Early application 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 May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which updates the accounting guidance on revenue recognition. This standard is intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. The standard is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted. The Company is currently evaluating the impact of the provisions of the accounting standard update.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) (“ASU 2014-08”). ASU 2014-08 provides guidance that raises the threshold for disposals to qualify as a discontinued operation. ASU 2014-08 also allows companies to have significant continuing involvement and continuing cash flows with the discontinued operation and requires additional disclosures for discontinued operation and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The update is effective for the years beginning after December 15, 2014. Early application 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

Pending Acquisitions

CCA/White Knight

On April 24, 2013, the Company and Nexstar entered into a stock purchase agreement to acquire the stock of privately-held Communications Corporation of America (“CCA”) and White Knight Broadcasting (“White Knight”). Due to certain subsequent changes in FCC rules and policies (see Note 7), the parties have agreed to restructure the transaction such that Mission will no longer participate in the acquisition. On June 4, 2014, Mission entered into an assignment and assumption agreement with Marshall Broadcasting Group, Inc. (“Marshall”) pursuant to which Mission assigned its rights and obligations under purchase agreements with Nexstar to Marshall with respect to television stations KPEJ (FOX affiliate) serving the Odessa-Midland market and KMSS (FOX affiliate) serving the Shreveport market, which currently are owned by CCA.

Stainless

On September 13, 2013, the Company entered into a definitive agreement to acquire WICZ, the FOX affiliate, and WBPN-LP, the MyNetworkTV affiliate, both in the Binghamton, New York market, from Stainless Broadcasting, L.P. (“Stainless”). This acquisition will allow the Company entrance into this market. Under the terms of the purchase agreement, the Company will acquire the assets of WICZ and WBPN-LP for $15.3 million in cash, subject to adjustments for working capital. A deposit of $0.2 million was paid in September 2013 upon signing the agreement. The remaining purchase price is expected to be funded through borrowings under the Company’s existing credit facility and cash on hand. The acquisition is subject to FCC approval and other customary conditions and Mission expects it to close in the first quarter of 2015. No significant transaction costs were incurred in connection with this acquisition during the three and nine months ended September 30, 2014.


5


Grant

On November 6, 2013, Nexstar entered into a stock purchase agreement to acquire the outstanding equity of privately-held Grant Company, Inc. (“Grant”). Simultaneous with this agreement, Nexstar entered into a purchase agreement with Mission pursuant to which Mission would acquire one of Grant’s stations, KLJB, the FOX affiliate, in the Quad Cities, Iowa market, from Nexstar. Due to certain subsequent changes in FCC rules and policies (see Note 7), on June 4, 2014, Mission entered into an assignment and assumption agreement with Marshall pursuant to which Mission assigned its rights and obligations under its purchase agreement with Nexstar to Marshall and Marshall will acquire KLJB. Accordingly, Mission will no longer be acquiring KLJB.

Parker

On December 18, 2013, the Company entered into a definitive agreement to acquire the outstanding equity of KFQX, the FOX affiliate, in the Grand Junction, Colorado market, from Excalibur Broadcasting, LLC (“Excalibur”). The acquisition will allow the Company entrance into this market. Because of the new processing policies adopted by the FCC with respect to certain proposed television station transactions, the FCC has not granted consent to the Company’s acquisition of KFQX from Excalibur. On May 27, 2014, the Company and Excalibur terminated their purchase agreement and Mission assumed Excalibur’s rights, title and interest in an existing purchase agreement with Parker Broadcasting, Inc. (“Parker”) to acquire KFQX for $4.0 million in cash, subject to adjustments for working capital. In connection with this restructuring, Mission paid Parker a deposit of $3.2 million on June 13, 2014. The acquisition is subject to FCC approval and other customary conditions and Mission is expecting it to close in the first quarter of 2015. The Company expects to fund the remaining purchase price through cash generated from operations prior to closing. No significant transaction costs were incurred in connection with this acquisition during the three and nine months ended September 30, 2014.

 

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 with which 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 condensed 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 eight to ten years. Nexstar indemnifies Mission from Nexstar’s activities pursuant to the local service agreements to which Nexstar is a party.

 


6


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, 2014:

 

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

JSA

 

5/31/19

5/31/19

 

$60 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

WYOU

 

Wilkes Barre-Scranton, PA

 

SSA

JSA

 

1/4/2018

9/30/24

 

$35 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

KODE

 

Joplin, MO-Pittsburg, KS

 

SSA

JSA

 

3/31/22

9/30/24

 

$75 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

KRBC

 

Abilene-Sweetwater, TX

 

SSA

JSA

 

6/12/23

6/30/23

 

$25 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

KSAN

 

San Angelo, TX

 

SSA

JSA

 

5/31/24

5/31/24

 

$10 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

WAWV

 

Terre Haute, IN

 

SSA

JSA

 

5/8/23

5/8/23

 

$10 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

KCIT/KCPN-LP

 

Amarillo, TX

 

SSA

JSA

 

4/30/19

4/30/19

 

$50 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

KAMC

 

Lubbock, TX

 

SSA

JSA

 

2/15/19

2/15/19

 

$75 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

KOLR

 

Springfield, MO

 

SSA

JSA

 

2/15/19

2/15/19

 

$150 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

WUTR

 

Utica, NY

 

SSA

JSA

 

3/31/24

3/31/24

 

$10 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

WTVO

 

Rockford, IL

 

SSA

JSA

 

10/31/24

10/31/24

 

$75 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

KTVE

 

Monroe, LA-El Dorado, AR

 

SSA

JSA

 

1/16/18

1/16/18

 

$20 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

WTVW

 

Evansville, IN

 

SSA

JSA

 

11/30/19

11/30/19

 

$50 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

KLRT/KASN

 

Little Rock-Pine Bluff, AR

 

SSA

JSA

 

1/1/21

1/1/21

 

$150 thousand per month paid to Nexstar

70% of net revenue received from Nexstar

WVNY

 

Burlington-Plattsburgh, VT

 

SSA

JSA

 

3/1/21

3/1/21

 

$20 thousand per month paid to Nexstar

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, 2014

 

 

December 31, 2013

 

 

 

useful life,

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

in years

 

 

Gross

 

 

Amortization

 

 

Net

 

 

Gross

 

 

Amortization

 

 

Net

 

Network affiliation agreements

 

 

15

 

 

$

84,505

 

 

$

(63,809

)

 

$

20,696

 

 

$

84,505

 

 

$

(61,716

)

 

$

22,789

 

Other definite-lived

  intangible assets

 

1-15

 

 

 

15,661

 

 

 

(14,437

)

 

 

1,224

 

 

 

15,661

 

 

 

(14,412

)

 

 

1,249

 

Other intangible assets

 

 

 

 

 

$

100,166

 

 

$

(78,246

)

 

$

21,920

 

 

$

100,166

 

 

$

(76,128

)

 

$

24,038

 

 

7


The following table presents the Company’s estimate of amortization expense for the remainder of 2014, each of the five succeeding years ended December 31 and thereafter for definite-lived intangible assets as of September 30, 2014 (in thousands):

 

Remainder of 2014

 

$

744

 

2015

 

 

2,561

 

2016

 

 

2,561

 

2017

 

 

2,437

 

2018

 

 

2,145

 

2019

 

 

1,936

 

Thereafter

 

 

9,536

 

 

 

$

21,920

 

 

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

 

 

 

Goodwill

 

 

FCC Licenses

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Gross

 

 

Impairment

 

 

Net

 

 

Gross

 

 

Impairment

 

 

Net

 

Balances as of December 31, 2013

 

$

34,039

 

 

$

(1,550

)

 

$

32,489

 

 

$

52,260

 

 

$

(10,697

)

 

$

41,563

 

Balances as of September 30, 2014

 

 

34,039

 

 

 

(1,550

)

 

 

32,489

 

 

 

52,260

 

 

 

(10,697

)

 

 

41,563

 

 

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, 2014, 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,

 

 

 

2014

 

 

2013

 

Term loans, net of discount of $385 and $431, respectively

 

$

230,138

 

 

$

232,465

 

Less: current portion

 

 

(1,837

)

 

 

(2,334

)

 

 

$

228,301

 

 

$

230,131

 

 

2014 Transactions

Through September 2014, the Company repaid the contractual maturities under its senior secured credit facility of $1.3 million.

On March 10, 2014, pursuant to the mandatory prepayment provisions under the Company’s credit agreement, the Company prepaid $1.0 million of the outstanding principal balance under its Term Loan B-2. The mandatory prepayment was calculated per the credit agreement, based on the Company’s and Nexstar’s consolidated first lien indebtedness ratio, as defined in Nexstar’s credit agreement.

Effective April 30, 2014, the Company and Nexstar amended each of their credit agreements. The amendments reduced the Company’s total commitments under its Term Loan A Facility from $90.0 million to $60.0 million and increased Nexstar’s total commitments under its Term Loan A Facility from $144.0 million to $159.0 million. Pursuant to the terms of the amended credit agreements, the Company may also reallocate its unused Term Loan A Facility to Nexstar and Nexstar may reallocate its unused Term Loan A Facility to the Company. Additionally, the amendments increased the commitment fees on unused Term Loan A Facilities from 0.5% to 1.0% and extended the quarterly principal payments commencement to December 31, 2014.

On October 31, 2014, the Company re-allocated all of its unused Term Loan A Facility to Nexstar and Nexstar borrowed all of the unused commitments under the Company’s and Nexstar’s Term Loan A Facilities. See Note 9 for additional information.


8


Unused Commitments and Borrowing Availability

As of September 30, 2014, the Company had $30.0 million unused revolving loan commitment and $60.0 million unused Term Loan A Facility under its amended senior secured credit facility, all of which was available for borrowing, based on the covenant calculations. Pursuant to the terms of the Company’s and Nexstar’s amended credit agreements, the Company may reallocate any of its unused revolving loan commitments and unused Term Loan A Facility to Nexstar and Nexstar may also reallocate any of its unused revolving loan commitments of up to $75.0 million and Term Loan A Facility of up to $87.2 million to the Company. On October 31, 2014, the Company re-allocated all of its unused Term Loan A Facility to Nexstar and Nexstar borrowed all of the unused commitments under the Company’s and Nexstar’s Term Loan A Facilities. See Note 9 for additional information.

Collateralization and Guarantees of Debt

Nexstar Broadcasting Group, Inc. (Nexstar’s ultimate parent) and its subsidiaries guarantees full payment of all obligations under the Mission senior secured credit facility in the event of Mission’s default. Similarly, Mission is a guarantor of Nexstar’s senior secured credit facility and the $525.0 million 6.875% senior unsecured notes issued by Nexstar (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 includes default provisions 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, 2014

Fair Value of Debt

The aggregate carrying amounts and estimated fair values of the Company’s debt were as follows (in thousands):

 

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Term loans

 

$

230,138

 

 

$

225,654

 

 

$

232,465

 

 

$

233,299

 

The fair value of the term loans 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, as significant inputs to the fair value calculation are unobservable in the market.

 

7.  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 initially established a September 1, 2015 deadline by which low power and television translator stations must cease analog operations, but in October 2014, the FCC suspended that deadline pending final FCC action in a recently initiated rulemaking proceeding.

Media Ownership

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.”


9


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 7, 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 review of the Third Circuit’s decision.

In May 2010, the FCC formally initiated its 2010 review of its media ownership rules with the issuance of a notice of inquiry, and in December 2011, the agency issued a notice of proposed rulemaking seeking comment on specific proposed changes to its ownership rules. The FCC, however, did not complete its 2010 review proceeding.  In March 2014, the FCC initiated its 2014 quadrennial review with the adoption of a Further Notice of Proposed Rulemaking (FNPRM).  The FNPRM incorporates the record of the 2010 quadrennial review proceeding and again solicits comment on proposed changes to the media ownership rules.  Among the proposals in the FNPRM are (1) retention of the current local television ownership rule (but with modifications to certain service contour definitions to conform to digital television broadcasting), (2) elimination of the radio/television cross-ownership rule, (3) elimination of the newspaper/radio cross-ownership rule, and (4) retention of the newspaper/television cross-ownership rule, while considering waivers of that rule in certain circumstances. The FNPRM also proposes to define a category of sharing agreements designated as SSAs between television stations, and to require television stations to disclose those SSAs. Comments and reply comments on the FNPRM were filed in the third quarter of 2014.

Concurrently with its adoption of the FNPRM, the FCC also adopted a rule making television JSAs attributable to the seller of advertising time in certain circumstances.  Under this rule, where a party owns a full-power television station in a market and sells more than 15% of the weekly advertising time for another, non-owned station in the same market under a JSA, that party will be deemed to have an attributable interest in the latter station for purposes of the local television ownership rule.  Parties to newly attributable JSAs that do not comply with the local television ownership rule have until June 19, 2016 to modify or terminate their JSAs to come into compliance. Although the FCC will consider waivers of the new JSA attribution rule, the FCC thus far has provided little guidance on what factors must be present for a waiver to be granted. The Company anticipates requesting a waiver of this new rule before the compliance deadline. In addition, various parties, including Nexstar, have appealed this new rule to the U.S. Court of Appeals for the D.C. Circuit. Mission filed a motion to intervene in this proceeding. If the Company is required to amend or terminate its existing JSAs with Nexstar, it could have a reduction in revenue and increased costs if it is unable to successfully implement alternative arrangements that are as beneficial as the existing JSAs.

Also in March 2014, the FCC’s Media Bureau issued a public notice announcing “processing guidelines” for certain pending and future applications for FCC approval of television acquisitions.  The public notice indicates that the FCC will “closely scrutinize” applications which propose a JSA, SSA or local marketing agreement (“LMA”) between television stations, combined with an option, a similar “contingent interest,” or a loan guarantee. The U.S. Court of Appeals for the D.C. Circuit has dismissed an appeal of the processing guidelines. These new processing guidelines have impacted the Company’s pending acquisitions and may affect the Company’s acquisition of additional stations in the future.

In September 2013, the FCC commenced a rulemaking proceeding to consider whether to eliminate the “UHF discount” that is currently used to calculate compliance with the national television ownership limit.


10


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. In June 2014, the FCC released a Report and Order adopting rules to implement the broadcast television spectrum incentive auction, including rules addressing the design of the incentive auction and various technical issues related to the reallocation of television spectrum for mobile broadband use. Various parties have filed petitions for reconsideration and court appeals of the Report and Order. The FCC has decided and will decide additional issues related to the incentive auction, including final auction procedures and still-outstanding technical issues, in separate proceedings. The FCC has stated its intention to conduct the incentive auction in early 2016. A reallocation of television spectrum for wireless broadband use will involve a “repacking” of the television broadcast band, which will 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 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.

In March 2014, the FCC adopted a rule that prohibits joint retransmission consent negotiation between television stations in the same market which are not commonly owned and which are ranked among the top four stations in the market in terms of audience share. This new rule requires the Company to negotiate retransmission consent agreements for certain of its stations separately from Nexstar. This new rule is now effective and is the subject of a pending court appeal.

 

8.  Commitments and Contingencies

Guarantee of Nexstar Debt

Mission is a guarantor of and has pledged substantially all its assets, excluding FCC licenses, to guarantee Nexstar’s credit facility. Mission is also a guarantor of Nexstar’s 6.875% Notes. The 6.875% Notes are general senior unsecured 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 and 6.875% Notes. As of September 30, 2014, Nexstar had $525.0 million outstanding obligations under its 6.875% Notes due on November 15, 2020 and had a maximum commitment of $494.9 million under its senior secured credit facility, of which $261.4 million in Term Loan B-2 and $71.3 million in Term Loan A were outstanding.

Nexstar’s Term Loan B-2 is payable in consecutive quarterly installments of 0.25% of the aggregate principal, adjusted for any prepayments, with the remainder due in full at maturity on October 1, 2020. Nexstar’s Term Loan A is payable in quarterly installments that increase over time from 5.0% to 10.0% of the aggregate principal, adjusted for any prepayments, beginning December 31, 2014. The remainder of the principal is due at maturity on June 28, 2018.


11


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, Mission’s shareholders have 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 2014 and 2024) 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.

 

9.   Subsequent Events

On October 31, 2014, the Company re-allocated its unused Term Loan A Facility of $60.0 million to Nexstar. Concurrently, Nexstar borrowed $147.2 million under the Term Loan A Facilities, including the amounts re-allocated by Mission. As of this date, there were no unused commitments under the Company’s and Nexstar’s Term Loan A Facilities.

 

 

 

12


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, 2013. 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, 2014, we owned and operated 20 television stations and 2 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.

Our previously disclosed pending acquisitions of 7 television stations from White Knight and Nexstar in the Shreveport, Louisiana, Baton Rouge, Louisiana, Tyler-Longview, Texas, and Odessa-Midland, Texas markets and our previously disclosed acquisition of one television station from Nexstar in the Quad Cities, Iowa market have been terminated due to changes in FCC rules and policies and we are no longer under agreement to purchase these stations.

In December 2013, we entered into a definitive agreement to acquire the outstanding equity of KFQX, the FOX affiliate, in the Grand Junction, Colorado market, from Excalibur. The acquisition will allow us entrance into this market.  The FCC has not granted its consent to our acquisition of KFQX from Excalibur. On May 27, 2014, we and Excalibur terminated our purchase agreement and we assumed Excalibur’s rights, title and interest in an existing purchase agreement with Parker to acquire KFQX for $4.0 million in cash, subject to adjustments for working capital. In connection with this restructuring, we paid Parker a deposit of $3.2 million on June 13, 2014. The acquisition is subject to FCC approval and other customary conditions and we are expecting it to close during the first quarter of 2015. We expect to fund the remaining purchase price of $0.8 million through cash generated from operations prior to closing.

Effective April 30, 2014, we and Nexstar amended each of our credit agreements. The amendments reduced our total commitments under our Term Loan A Facility from $90.0 million to $60.0 million and increased Nexstar’s total commitments under its Term Loan A Facility from $144.0 million to $159.0 million. Pursuant to the terms of the amended credit agreements, we may also reallocate any unused Term Loan A Facility to Nexstar and Nexstar may reallocate its unused Term Loan A Facility to us.

On October 31, 2014, we re-allocated our unused Term Loan A Facility of $60.0 million to Nexstar. Concurrently, Nexstar borrowed $147.2 million under the Term Loan A Facilities, including the amounts we re-allocated. As of this date, there were no unused commitments under our and Nexstar’s Term Loan A Facilities.

The following table summarizes the various local service agreements our stations had in effect as of September 30, 2014 with Nexstar:

 

Service Agreements

 

Stations

TBA Only(1)

 

WFXP and KHMT

SSA & JSA(2)

 

KJTL, KJBO-LP, KLRT, KASN, KOLR, KCIT, KCPN-LP, KAMC, KRBC, KSAN, WUTR, WAWV, WYOU, KODE, WTVO, KTVE, WTVW and WVNY

 

 

 

(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 4 of our Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.


13


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 2014 is an election year and an Olympic year, we expect an increase in advertising revenue to be reported in 2014 compared to 2013.

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.

Industry Trends

As a television broadcaster, we are highly regulated and our operations require that we retain or renew a variety of government approvals and comply with changing federal regulations. On March 31, 2014, the FCC modified its television ownership rules such that a television licensee that sells more than 15 percent of the weekly advertising inventory of another television station in the same Designated Market Area will be deemed to have an attributable ownership interest in that station. Stations with existing JSAs that will be deemed attributable interests and do not comply with the FCC’s local television ownership rule have until June 19, 2016 to amend or terminate those arrangements or to obtain waivers. Although the FCC will consider waivers of the new JSA attribution rule, the FCC thus far has provided little guidance on what factors must be present for a waiver to be granted. We will be required to amend or terminate our JSAs involving advertising sales in excess of 15 percent unless we are able to obtain a waiver of the rule. The Company expects to incur additional costs in complying with this new rule. We do not expect the new rules to impact our revenue from Nexstar in 2014; however, within the next two years our company may begin to be negatively impacted by the new JSA attribution rule. If we are unable to obtain waivers from the FCC and are required to amend or terminate our existing agreements, we could have a reduction in revenue and increased costs if we are unable to successfully implement alternative arrangements that are as beneficial as the existing JSAs.

Also in March 2014, the FCC’s Media Bureau issued a public notice announcing “processing guidelines” for certain pending and future applications for FCC approval of television acquisitions. The FCC will “closely scrutinize” applications which propose a JSA, SSA or LMA between television stations, combined with an option, a similar “contingent interest,” or a loan guarantee. We have two announced acquisitions that are pending FCC approval that include “guideline” agreements. As a result of the recently adopted JSA rule and the processing guidelines, the timing of ultimate approval for these transactions may be delayed in part because the new rule and guidelines may require amendments or waivers in order to obtain FCC approval. We plan to respond to regulatory inquiries associated with each of the announced acquisitions and our intent is to close those transactions in the first quarter of 2015.

Also in March 2014, the FCC amended its rules governing retransmission consent negotiations. The amended rule effectively prohibits two non-commonly owned stations ranked in the top four in viewership in a market from negotiating jointly with MVPDs. Historically, we have negotiated retransmission consent agreements jointly with Nexstar. In most of our markets, we are now required to separately negotiate our retransmission consent agreements with MVPDs. We cannot predict at this time the impact this amended rule will have on future negotiations with MVPDs and the impact, if any, it will have on our revenues and expenses.

14


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,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Retransmission compensation

 

$

7,924

 

 

 

98.3

 

 

$

6,128

 

 

 

97.9

 

 

$

23,237

 

 

 

98.3

 

 

$

18,012

 

 

 

97.8

 

Other

 

 

136

 

 

 

1.7

 

 

 

131

 

 

 

2.1

 

 

 

396

 

 

 

1.7

 

 

 

409

 

 

 

2.2

 

Net broadcast revenue

  before barter

 

 

8,060

 

 

 

100.0

 

 

 

6,259

 

 

 

100.0

 

 

 

23,633

 

 

 

100.0

 

 

 

18,421

 

 

 

100.0

 

Barter revenue

 

 

1,009

 

 

 

 

 

 

 

1,319

 

 

 

 

 

 

 

3,065

 

 

 

 

 

 

 

3,461

 

 

 

 

 

Revenue from Nexstar

 

 

10,105

 

 

 

 

 

 

 

9,581

 

 

 

 

 

 

 

29,561

 

 

 

 

 

 

 

28,885

 

 

 

 

 

Net revenue

 

$

19,174

 

 

 

 

 

 

$

17,159

 

 

 

 

 

 

$

56,259

 

 

 

 

 

 

$

50,767

 

 

 

 

 

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,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Net revenue

 

$

19,174

 

 

 

100.0

 

 

$

17,159

 

 

 

100.0

 

 

$

56,259

 

 

 

100.0

 

 

$

50,767

 

 

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

246

 

 

 

1.3

 

 

 

204

 

 

 

1.2

 

 

 

821

 

 

 

1.5

 

 

 

741

 

 

 

1.5

 

Station direct operating

  expenses

 

 

4,636

 

 

 

24.2

 

 

 

3,751

 

 

 

21.9

 

 

 

13,258

 

 

 

23.6

 

 

 

10,756

 

 

 

21.2

 

Station selling, general and

  administrative expenses

 

 

465

 

 

 

2.4

 

 

 

501

 

 

 

2.8

 

 

 

1,496

 

 

 

2.7

 

 

 

1,525

 

 

 

3.0

 

Fees incurred pursuant to

  local service agreements

  with Nexstar

 

 

2,445

 

 

 

12.8

 

 

 

2,445

 

 

 

14.2

 

 

 

7,335

 

 

 

13.0

 

 

 

7,295

 

 

 

14.4

 

Barter expense

 

 

1,009

 

 

 

5.3

 

 

 

1,319

 

 

 

7.7

 

 

 

3,065

 

 

 

5.4

 

 

 

3,461

 

 

 

6.8

 

Depreciation

 

 

661

 

 

 

3.4

 

 

 

850

 

 

 

5.0

 

 

 

2,117

 

 

 

3.8

 

 

 

2,771

 

 

 

5.5

 

Amortization of

  intangible assets

 

 

635

 

 

 

3.3

 

 

 

1,750

 

 

 

10.2

 

 

 

2,118

 

 

 

3.8

 

 

 

5,486

 

 

 

10.8

 

Amortization of broadcast

  rights, excluding barter

 

 

452

 

 

 

2.3

 

 

 

410

 

 

 

2.4

 

 

 

1,287

 

 

 

2.2

 

 

 

1,360

 

 

 

2.6

 

Income from operations

 

$

8,625

 

 

 

 

 

 

$

5,929

 

 

 

 

 

 

$

24,762

 

 

 

 

 

 

$

17,372

 

 

 

 

 

 


15


Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Revenue

Net revenue for the three months ended September 30, 2014 increased by $2.0 million, or 11.7%, from the same period in 2013. This increase was primarily attributed to compensation from retransmission consent.

Revenue from Nexstar was $10.1 million for the three months ended September 30, 2014, compared to $9.6 million for the same period in 2013, an increase of $0.5 million, or 5.5%, primarily due to 2014 being an election year. The revenue we earn from Nexstar through our JSAs is directly correlated to the advertising revenue earned at our stations.

Compensation from retransmission consent was $7.9 million for the three months ended September 30, 2014, compared to $6.1 million for the same period in 2013, an increase of $1.8 million, or 29.3%. The increase was primarily due to retransmission consent providing for higher rates per subscriber during the quarter.

Operating Expenses

Corporate expenses were consistent at $0.2 million for each of the three months ended September 30, 2014 and 2013. 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 station selling, general and administrative expenses were $5.1 million for the three months ended September 30, 2014, compared to $4.3 million for the same period in 2013, an increase of $0.8 million, or 20.0%. The increase was primarily due to an increase in programming costs of $1.1 million related to recently enacted network agreements. Networks now require additional compensation from broadcasters for the use of network programming. Network program fees have been increasing industry wide and will continue to increase over the next several years.

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 consistent at $2.4 million for each of the three months ended September 30, 2014 and 2013.

Depreciation of property and equipment was $0.7 million for the three months ended September 30, 2014, compared to $0.9 million for the same period in 2013, a decrease of $0.2 million, or 22.2%. This was primarily attributable to decreases in depreciation from certain of our fully depreciated property and equipment.

Amortization of intangible assets was $0.6 million for the three months ended September 30, 2014, compared to $1.8 million for the same period in 2013, a decrease of $1.1 million, or 63.7%. This was primarily attributable to decreases in amortization of other intangible assets from certain fully amortized assets.

Interest Expense

Interest expense, net was $2.6 million for the three months ended September 30, 2014, compared to $4.5 million for the same period in 2013, a decrease of $1.9 million, or 42.5%. The decrease was primarily attributable to lower interest rates on our outstanding debt as a result of refinancing our obligations under the $325.0 million 8.875% senior second lien notes into borrowings under our amended credit facility completed in October 2013. This decrease was partially offset by increased borrowings during 2013 to fund our acquisitions of television stations.

Income Taxes

Income tax expense was $2.4 million for the three months ended September 30, 2014 and $0.8 million for the same period in 2013, or an increase of $1.6 million. The effective tax rates for the three months ended September 30, 2014 and 2013 were 39.1% and 50.9%, respectively. The effective tax rate variance primarily relates to adjustments for 2012 tax return filings completed during 2013 and an overall reduction in the effective state tax rate from 2013 to 2014.


16


Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Revenue

Net revenue for the nine months ended September 30, 2014 increased by $5.5 million, or 10.8%, from the same period in 2013. This increase was primarily attributed to compensation from retransmission consent, revenue from our newly acquired station, WVNY, and as 2014 is an election year and an Olympic year.

Revenue from Nexstar was $29.6 million for the nine months ended September 30, 2014, compared to $28.9 million for the same period in 2013, an increase of $0.7 million, or 2.3%. The increase was primarily due to 2014 being an election year and also due to incremental revenue from our newly acquired station, WVNY. The revenue we earn from Nexstar through our JSAs is directly correlated to the advertising revenue earned at our stations.

Compensation from retransmission consent was $23.2 million for the nine months ended September 30, 2014, compared to $18.0 million for the same period in 2013, an increase of $5.2 million, or 29.0%. The increase was primarily due to retransmission consent providing for higher rates per subscriber during the period and incremental revenue from our newly acquired station, WVNY.

Operating Expenses

Corporate expenses were consistent at $0.8 million for the nine months ended September 30, 2014, compared to $0.7 million for the same period in 2013. 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 $14.8 million for the nine months ended September 30, 2014, compared to $12.3 million for the same period in 2013, an increase of $2.5 million, or 20.1%. The increase was primarily due to an increase in programming costs related to recently enacted network agreements and programming costs of our newly acquired station, WVNY, of $2.8 million. Networks now require additional compensation from broadcasters for the use of network programming. Network program fees have been increasing industry wide and will continue to increase over the next several years.

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 consistent at $7.3 million for each of the nine months ended September 30, 2014 and 2013.

Depreciation of property and equipment was $2.1 million for the nine months ended September 30, 2014, compared to $2.8 million for the same period in 2013, a decrease of $0.7 million, or 23.6%. This was primarily attributable to decreases in depreciation from certain of our fully depreciated property and equipment.

Amortization of intangible assets was $2.1 million for the nine months ended September 30, 2014, compared to $5.5 million for the same period in 2013, a decrease of $3.4 million, or 61.4%. This was primarily attributable to decreases in amortization of other intangible assets from certain fully amortized assets.

Interest Expense

Interest expense, net was $7.6 million for the nine months ended September 30, 2014, compared to $13.4 million for the same period in 2013, a decrease of $5.9 million, or 43.6%. The decrease was primarily attributable to lower interest rates on our outstanding debt as a result of refinancing our obligations under the $325.0 million 8.875% senior second lien notes into borrowings under our amended credit facility completed in October 2013. This decrease was partially offset by increased borrowings during 2013 to fund our acquisitions of television stations.

Income Taxes

Income tax expense was $6.7 million for the nine months ended September 30, 2014 and $1.7 million for the same period in 2013, an increase of $5.0 million. The effective tax rates for the nine months ended September 30, 2014 and 2013 were 39.0% and 43.5%, respectively. The effective tax rate variance primarily relates to adjustments for 2012 tax return filings completed during 2013 and an overall reduction in the effective state tax rate from 2013 to 2014.


17


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 February 26, 2014, 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, 2014. 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,

 

 

 

2014

 

 

2013

 

Net cash provided (used in) by operating activities

 

$

6,039

 

 

$

(743

)

Net cash used in investing activities

 

 

(3,381

)

 

 

(56,673

)

Net cash (used in) provided by financing activities

 

 

(2,502

)

 

 

59,140

 

Net increase in cash and cash equivalents

 

$

156

 

 

$

1,724

 

Cash paid for interest

 

$

7,108

 

 

$

9,901

 

Cash paid for income taxes, net of refunds

 

$

589

 

 

$

118

 

 

 

 

As of

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Cash and cash equivalents

 

$

3,872

 

 

$

3,716

 

Long-term debt including current portion

 

 

230,138

 

 

 

232,465

 

Unused incremental term loan commitments under senior secured credit facilities

 

 

60,000

 

 

 

90,000

 

Unused revolving loan commitments under senior secured credit facilities

 

 

30,000

 

 

 

30,000

 

Cash Flows – Operating Activities

Net cash flows provided by operating activities increased by $6.8 million during the nine months ended September 30, 2014 compared to the same period in 2013. This was primarily due to an increase in retransmission compensation and revenue from Nexstar of $5.9 million less an increase in station and corporate operating expenses of $2.6 million, an increase in collections of accounts receivable of $1.5 million, a $2.8 million decrease in cash paid for interest and a $0.5 million decrease in payments for broadcast rights. These increases in cash flows were partially offset by a $1.1 million increase in payments of amounts due to Nexstar and a $0.5 million increase in cash paid for taxes, net of refunds.

Cash Flows – Investing Activities

Net cash flows used in investing activities decreased by $53.3 million during the nine months ended September 30, 2014, compared to the same period in 2013. In 2014, we paid a deposit of $3.2 million to acquire KFQX, the FOX affiliate, in the Grand Junction, Colorado market. In 2013, we made payments of $53.7 million to acquire the assets of KLRT and KASN from Newport Television, LLC and $5.6 million to acquire the assets of WVNY from Smith Media, LLC. We also paid a $0.2 million deposit upon signing a purchase agreement to acquire WICZ and WBPN-LP from Stainless. These payments were partially offset by proceeds from the disposal of property and equipment of $2.9 million.

18


Cash Flows – Financing Activities

Net cash flows used in financing activities was $2.5 million during the nine months ended September 30, 2014, compared to the net cash flows provided by financing activities of $59.1 million for the same period in 2013. In 2014, we repaid a total of $2.4 million outstanding principal under our term loans and paid debt financing costs of $0.1 million. In 2013, we borrowed a total of $65.0 million in term loans and revolving loans under our senior secured credit facility to finance our acquisitions of KLRT, KASN and WVNY. This was partially offset by our repayment of the $5.0 million outstanding revolving loans, payments for contractual maturity under our senior secured credit facility of $0.5 million and payments for debt financing costs of $0.3 million.

Our senior secured credit facility restricts but does not prohibit the payment of cash dividends to our shareholders.

Future Sources of Financing and Debt Service Requirements

As of September 30, 2014, we had total debt of $230.1 million which represented 138.6% 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 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, 2014, we have $30.0 million unused revolving loan commitment under our senior secured credit facility. Effective April 30, 2014, we entered into an amendment to our credit agreement. The amendment reduced our total commitments under our Term Loan A Facility from $90.0 million to $60.0 million, all of which were unused as of September 30, 2014. Additionally, the amendment increased the commitment fees on our unused Term Loan A Facility from 0.5% to 1.0% and extended the quarterly principal payments commencement to December 31, 2014. Pursuant to the terms of our and Nexstar’s amended credit agreements, we may reallocate any of our unused revolving loan commitments and unused Term Loan A Facility to Nexstar and Nexstar may also reallocate any of its unused revolving loan commitments of up to $75.0 million and Term Loan A Facility of up to $87.2 million to us.

On October 31, 2014, we re-allocated our unused Term Loan A Facility of $60.0 million to Nexstar. Concurrently, Nexstar borrowed $147.2 million under the Term Loan A Facilities, including the amounts re-allocated. As of this date, there were no unused commitments under our and Nexstar’s Term Loan A Facilities.

The unused commitments under our revolving credit facilities are expected to be partially utilized to fund the remaining purchase price to acquire two stations from Stainless for $15.1 million and one station from Parker for $0.8 million, subject to adjustments for working capital, which we expect to close in the first quarter of 2015.

The following table summarizes the approximate aggregate amount of principal indebtedness scheduled to mature for the periods referenced as of September 30, 2014 (in thousands):

 

 

 

 

 

 

 

Remainder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

of 2014

 

 

2015-2016

 

 

2017-2018

 

 

Thereafter

 

Senior secured credit facility

 

$

230,523

 

 

$

460

 

 

$

4,171

 

 

$

4,670

 

 

$

221,222

 

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 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 and the 6.875% 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, 2014, Nexstar had a maximum commitment of $494.9 million under its senior secured credit facility, of which $332.7 million of debt was outstanding, and had $525.0 million of the 6.875% Notes outstanding.

19


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 February 26, 2014. 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 net leverage ratio, (b) a maximum consolidated first lien net leverage 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. As of September 30, 2014, Nexstar has informed us that it was in compliance with all covenants contained in its credit agreement and the indentures governing its senior unsecured notes.

No Off-Balance Sheet Arrangements

As of September 30, 2014, 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, 2013. Management believes that as of September 30, 2014, 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, 2013 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.

 

20


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 under our senior secured credit facility bear interest at a rate of 3.8% as of September 30, 2014, 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 2.4% at September 30, 2014. 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, 2014 level, our annual interest expense would increase and cash flow from operations would decrease by approximately $0.4 million, based on the outstanding balance of our credit facility as of September 30, 2014. Due to the LIBOR floor on our term loan, an increase of 50 basis points in LIBOR or any decrease in LIBOR would not have an impact on our operations or cash flows. As of September 30, 2014, 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

As of the quarter ended September 30, 2014, 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.

 

 

 

21


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 in our Annual Report on Form 10-K for the year ended December 31, 2013, except those reported in our Quarterly Report on Form 10-Q for the period ended March 31, 2014, to which there have been no material changes.

 

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

 

Letter dated September 15, 2014, notifying Mission Broadcasting, Inc. of the election to extend the Agreement for the Sale of Commercial Time (KODE) (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc. on November 7, 2014)

10.2

  

Letter dated September 15, 2014, notifying Mission Broadcasting, Inc. of the election to extend the Agreement for the Sale of Commercial Time (WYOU) (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc. on November 7, 2014)

10.3

  

Letter dated October 15, 2014, notifying Mission Broadcasting, Inc. of the election to extend Shared Services Agreement and Agreement for the Sale of Commercial Time (WTVO) (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 000-50478) filed by Nexstar Broadcasting Group, Inc. on November 7, 2014)

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, 2014 from this Quarterly Report on Form 10-Q, formatted in XBRL (eXtensible Business Reporting Language).*

*

Filed herewith

 

 

 

22


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 12, 2014