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EX-23.1 - PWC CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS - MISSION BROADCASTING INCpwcconsent.htm
EX-31.1 - THATCHER CERTIFICATION 31.1 - MISSION BROADCASTING INCthatcher31_1.htm
EX-32.1 - THATCHER CERTIFICATION 32.1 - MISSION BROADCASTING INCthatcher32_1.htm
EXCEL - IDEA: XBRL DOCUMENT - MISSION BROADCASTING INCFinancial_Report.xls

 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
 
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)

 
 
 
Securities Registered Pursuant to Section 12(b) of the Act: None
 
Securities Registered Pursuant to Section 12(g) of the Act: None

 
 
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
 
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
 
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 March 26, 2012, the Registrant had 1,000 shares of common stock outstanding.

 
 

 


 
 

 

TABLE OF CONTENTS
 
   
Page
 
 
PART I
 
     
        ITEM 1.
Business
 2
     
        ITEM 1A.
Risk Factors
 9
     
        ITEM 1B.
Unresolved Staff Comments
 15
     
        ITEM 2.
Properties
 16
     
        ITEM 3.
Legal Proceedings
 17
     
        ITEM 4.
Mine Safety Disclosures
 17
   
PART II
 
     
        ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 17
     
        ITEM 6.
Selected Financial Data
 18
     
        ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 19
     
        ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
 29
     
        ITEM 8.
Financial Statements and Supplementary Data
 29
     
        ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 29
     
        ITEM 9A.
Controls and Procedures
 30
     
        ITEM 9B.
Other Information
 30
   
PART III
 
     
        ITEM 10.
Directors, Executive Officers and Corporate Governance
 31
     
        ITEM 11.
Executive Compensation
 31
     
        ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 32
     
        ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
 33
     
        ITEM 14.
Principal Accountant Fees and Services
 34
   
PART IV
 
     
        ITEM 15.
Exhibits and Financial Statement Schedules
 35
   
Index to Financial Statements
 F-1
   
Index to Exhibits
 E-1
 


 
 

 

General
 
As used in this Annual Report on Form 10-K and unless the context indicates otherwise, “Mission,” “we,” “our,” “ours”, “us” and the “Company” refer to Mission Broadcasting, Inc., “Nexstar Broadcasting Group” refers to Nexstar Broadcasting Group, Inc. and its consolidated subsidiaries and “Nexstar” refers to Nexstar Broadcasting, Inc., an indirect subsidiary of Nexstar Broadcasting Group. Mission has entered into time brokerage, shared services and joint sales agreements (which we generally refer to as local service agreements) with certain television stations owned by Nexstar, but Mission does not own any equity interests in Nexstar and Nexstar does not own any equity interests in Mission. For a description of the relationship between Mission and Nexstar, see Item 13. “Certain Relationships and Related Transactions, and Director Independence.”
 
There are 210 generally recognized television markets, known as Designated Market Areas, or DMAs, in the United States. DMAs are ranked in size according to various factors based upon actual or potential audience. DMA rankings contained in this Annual Report on Form 10-K are from Investing in Television Market Report 2011 4th Edition, as published by BIA Financial Network, Inc.
 
Reference is made in this Annual Report on Form 10-K to the following trademarks/tradenames which are owned by the third parties referenced in parentheses:  Seinfeld (Columbia Tristar Televisions Distribution, a unit of Sony Pictures) and Entertainment Tonight (Paramount Distribution, a division of Viacom Inc.).
 
Cautionary Note Regarding Forward-Looking Statements
 
This Annual Report on Form 10-K 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, as amended (“Exchange Act”). 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 a 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 discussed under Item 1A. “Risk Factors” elsewhere in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission (“SEC”). The forward-looking statements made in this Annual Report on Form 10-K 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.
 
 
 
 

 
1

 

PART I
 
Item 1.                      Business
 
Overview
 
We are a television broadcasting company focused exclusively on the acquisition, development and operation of television stations in medium-sized markets in the United States, primarily markets that rank from 50 to 175 out of the 210 generally recognized television markets, as reported by A.C. Nielsen Company.
 
As of December 31, 2011, we owned and operated 17 stations and four digital multicast (“DM”) channels. The stations are in markets located in New York, Pennsylvania, Illinois, Indiana, Missouri, Louisiana, Texas and Montana. Our stations are affiliated with NBC (3 stations), FOX (4 stations), ABC (5 stations), CBS (2 stations), MyNetworkTV (2 stations and one DM), Bounce TV (3 DMs) and one of our stations is independent.
 
We believe that medium-sized markets offer significant advantages over large-sized markets, most of which result from a lower level of competition. First, because there are fewer well-capitalized acquirers with a medium-market focus, we have been successful in purchasing stations on more favorable terms than acquirers of large market stations. Second, in many of our markets only four or five local commercial television stations exist. As a result, we achieve lower programming costs than stations in larger markets because the supply of quality programming exceeds the demand.
 
Our stations provide free over-the-air programming to our markets’ television viewing audiences. This programming includes (a) programs produced by networks with which the stations are affiliated; (b) programs that the stations produce; and (c) first-run and rerun syndicated programs that the stations acquire. Our primary source of revenue is indirectly derived from the sale of commercial air time on our stations to local and national advertisers by Nexstar under local service agreements.
 
Our principal offices are located at 30400 Detroit Road, Suite 304, Westlake, Ohio 44145. Our telephone number is (440) 526-2227.
 
Local Service Agreements and Purchase Options
 
The following table summarizes the various local service agreements our stations had in effect as of December 31, 2011 with Nexstar-owned stations:
 
Service Agreements
Stations
TBA Only(1)
WFXP and KHMT
   
SSA & JSA(2)
KJTL, KJBO-LP, KOLR, KCIT, KCPN-LP, KAMC, KRBC, KSAN, WUTR, 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 Mission, based on the station’s monthly operating expenses.
(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 Mission as described in the SSAs. The JSAs permit Nexstar to sell and retain a percentage of the net revenue from the station’s advertising time in return for monthly payments to Mission of the remaining percentage of net revenue, as described in the JSAs.
 
Under these agreements, we are responsible for certain operating expenses of our stations and therefore may have unlimited exposure to any potential operating losses. We expect to continue to operate our stations under the SSAs and JSAs or TBAs until the termination of such agreements. The SSAs and JSAs generally have terms of ten years. Nexstar indemnifies Mission for Nexstar’s activities pursuant to the local service agreements.
 
Under these local service agreements, Nexstar has received 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. In compliance with Federal Communications Commission (“FCC”) regulations for Mission and Nexstar, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations.

 
2

 

 
Nexstar Broadcasting Group guarantees all obligations incurred under our senior secured credit facility. We are a guarantor of the senior secured credit facility entered into by Nexstar and the senior subordinated notes issued by Nexstar. In consideration of Nexstar Broadcasting Group’s guarantee of our senior secured credit facility, we have granted Nexstar purchase options to acquire the assets and assume the liabilities of each Mission television station 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. Additionally, on November 29, 2011, we granted Nexstar an option to purchase any or all of our stock 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 2021) are freely exercisable or assignable by Nexstar without our consent or approval. We expect these option agreements to be renewed upon expiration. Nexstar’s acquisition of any station or our stock pursuant to an exercise of the applicable option is subject to prior FCC approval.
 
Refer to Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence” for a more complete disclosure of the local service and option agreements our stations had in effect as of December 31, 2011.
 
Business Strategy
 
The operating revenue of our stations is derived primarily from broadcast advertising revenue sold and collected by Nexstar and paid to us under the JSAs. Broadcast advertising revenue is affected by a number of factors, including the economic conditions of the markets in which we operate, the demographic makeup of those markets and the marketing strategy employed in each market. Our primary operating expense consists of fixed monthly SSA fees paid to Nexstar for news production and technical and other services. To a lesser extent, our operating expenses include employee compensation and related benefits. A large percentage of the costs involved in the operation of our stations remain fixed.
 
The Stations
 
The following chart sets forth general information about the stations that we owned and operated as of December 31, 2011:
 
Market
Rank(1)
Market
Station
Affiliation
Commercial
Stations in
Market (2)
FCC
License
Expiration
Date
54
Wilkes Barre-Scranton, PA
WYOU
CBS
7
(3)
75
Springfield, MO
KOLR
CBS
7
(3)
104
Evansville, IN
WTVW
Independent
5
8/1/13
130
Amarillo, TX
KCIT
FOX
5
(3)
   
KCPN-LP
MyNetworkTV
 
(3)
134
Rockford, IL
WTVO/WTVO-D-2
ABC/MyNetworkTV
4
(3)
137
Monroe, LA-El Dorado, AR
KTVE
NBC
6
6/1/13
142
Wichita Falls, TX- Lawton, OK
KJTL/KJTL-D-2
FOX/Bounce TV
5
(3)
   
KJBO-LP
MyNetworkTV
 
(3)
143
Lubbock, TX
KAMC/KAMC-D-2
ABC/Bounce TV
5
(3)
146
Erie, PA
WFXP
FOX
4
(3)
149
Joplin, MO-Pittsburg, KS
KODE
ABC
4
(3)
154
Terre Haute, IN
WAWV
ABC
3
(3)
164
Abilene-Sweetwater, TX
KRBC/KRBC-D-2
NBC/Bounce TV
4
(3)
168
Billings, MT
KHMT
FOX
4
(3)
172
Utica, NY
WUTR
ABC
4
(3)
197
San Angelo, TX
KSAN
NBC
4
(3)
              
(1)
Market rank refers to ranking the size of the Designated Market Area (“DMA”) in which the station is located in relation to other DMAs. Source: Investing in Television Market Report 2011 4th Edition, as published by BIA Financial Network, Inc.
(2)
The term “commercial station” means a television broadcast station and excludes non-commercial stations, religious and Spanish-language stations, cable program services or networks. Source: Investing in Television Market Report 2011 4th Edition, as published by BIA Financial Network, Inc.
(3)
Application for renewal of license was submitted timely to the FCC. Under the FCC’s rules, a license expiration date automatically is extended pending review of and action on the renewal application by the FCC.


 
3

 

 
Industry Background
 
Commercial television broadcasting began in the United States on a regular basis in the 1940s. Currently a limited number of channels are available for over-the-air broadcasting in any one geographic area and a license to operate a television station must be granted by the FCC. All television stations in the country are grouped by A.C. Nielsen Company, a national audience measuring service, into 210 generally recognized television markets, known as designated market areas (“DMAs”), that are ranked in size according to various metrics based upon actual or potential audience. Each DMA is an exclusive geographic area consisting of all counties in which the home-market commercial stations receive the greatest percentage of total viewing hours. A.C. Nielsen periodically publishes data on estimated audiences for the television stations in the DMA. The estimates are expressed in terms of a “rating,” which is a station’s percentage of the total potential audience in the market, or a “share,” which is the station’s percentage of the audience actually watching television. A station’s rating and share in a market can be a factor in determining advertising rates.
 
Most television stations are affiliated with networks and receive a significant part of their programming, including prime-time hours, from networks. Whether or not a station is affiliated with one of the four major networks (NBC, ABC, CBS or FOX) has a significant impact on the composition of the station’s revenue, expenses and operations. Network programming is provided to the affiliate by the network in exchange for the network’s retention of a substantial majority of the advertising time during network programs. The network then sells this advertising time and retains the revenue. The affiliate retains the revenue from the remaining advertising time it sells during network programs and from advertising time it sells during non-network programs.
 
Broadcast television stations compete for advertising revenue primarily with other commercial broadcast television stations, cable and satellite television systems and, to a lesser extent, with newspapers, radio stations and Internet advertising serving the same market. Non-commercial, religious and Spanish-language broadcasting stations in many markets also compete with commercial stations for viewers. In addition, the Internet and other leisure activities may draw viewers away from commercial television stations.
 
Network Affiliations
 
Most of our stations are affiliated with a network pursuant to an affiliation agreement, as described below:
 
Station
Market
Affiliation
Expiration
KTVE
Monroe, LA-El Dorado, AR
NBC
June 2012
KSAN
San Angelo, TX
NBC
June 2012
KRBC
Abilene-Sweetwater, TX
NBC
June 2012
KOLR
Springfield, MO
CBS
June 2013
KCIT
Amarillo, TX
FOX
December 2013
KHMT
Billings, MT
FOX
December 2013
KJTL
Wichita Falls, TX-Lawton, OK
FOX
December 2013
WFXP
Erie, PA
FOX
December 2013
KCPN-LP
Amarillo, TX
MyNetworkTV
August 2014
KJBO-LP
Wichita Falls, TX-Lawton, OK
MyNetworkTV
August 2014
WTVO-D-2
Rockford, IL
MyNetworkTV
August 2014
KJTL-D-2
Wichita Falls, TX-Lawton, OK
Bounce TV
September 2014
KAMC-D-2
Lubbock, TX
Bounce TV
September 2014
KRBC-D-2
Abilene-Sweetwater, TX
Bounce TV
September 2014
WYOU
Wilkes Barre-Scranton, PA
CBS
June 2015
WAWV
Terre Haute, IN
ABC
June 2017
WUTR
Utica, NY
ABC
June 2017
WTVO
Rockford, IL
ABC
June 2017
KAMC
Lubbock, TX
ABC
June 2017
KODE
Joplin, MO-Pittsburg, KS
ABC
June 2017

Each affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the network with which it is affiliated. In exchange, the network has the right to sell a substantial majority of the advertising time during these broadcasts.
 
We expect all of the network affiliation agreements listed above to be renewed upon expiration.

 
4

 

 
Competition
 
Competition in the television industry takes place on several levels: competition for audience, competition for programming and competition for advertising.
 
Audience. Our stations compete for audience share specifically on the basis of program popularity. The popularity of a station’s programming has a direct effect on the advertising rates it can charge its advertisers. A portion of the daily programming on our stations is supplied by the network with which each station is affiliated. In those periods, the stations are dependent upon the performance of the network programs in attracting viewers. Stations program non-network time periods with a combination of self-produced news, public affairs and other entertainment programming, including movies and syndicated programs. The major television networks have also begun to sell their programming directly to the consumer via portable digital devices such as video iPods and cell phones, which presents an additional source of competition for television broadcaster audience share. Other sources of competition for audiences include home entertainment systems (such as VCRs, DVDs, and DVRs), video-on-demand and pay-per-view, the Internet (including network distribution of programming through websites) and gaming devices.
 
Although the commercial television broadcast industry historically has been dominated by the ABC, NBC, CBS and FOX television networks, other newer television networks and the growth in popularity of subscription systems, such as local cable and direct broadcast satellite (“DBS”) systems which air exclusive programming not otherwise available in a market, have become significant competitors for the over-the-air television audience.
 
Programming. Competition for programming involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming. Stations compete against in-market broadcast station operators for exclusive access to off-network reruns (such as Seinfeld) and first-run product (such as Entertainment Tonight) in their respective markets. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations. Time Warner Inc., Comcast Corporation, Viacom Inc., News Corporation and the Walt Disney Company each owns a television network and also owns or controls major production studios, which are the primary source of programming for the networks. It is uncertain whether in the future such programming, which is generally subject to short-term agreements between the studios and the networks, will be moved to the networks. Television broadcasters also compete for non-network programming unique to the markets they serve. As such, stations strive to provide exclusive news stories, unique features such as investigative reporting and coverage of community events and to secure broadcast rights for regional and local sporting events.
 
Advertising. Stations compete for advertising revenue with other television stations in their respective markets and with other advertising media such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, local cable systems, DBS systems and the Internet. Competition for advertising dollars in the broadcasting industry occurs primarily within individual markets. Generally, a television broadcast station in a particular market does not compete with stations in other market areas.
 
Additional Competitive Factors. The broadcasting industry is continually faced with technological change and innovation which increase the popularity of competing entertainment and communications media. Further advances in technology may increase competition for household audiences and advertisers. The increased use of digital technology by cable systems and DBS, along with video compression techniques, will reduce the bandwidth required for television signal transmission. These technological developments are applicable to all video delivery systems, including over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences. Reductions in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized “niche” programming. This ability to reach very narrowly defined audiences is expected to alter the competitive dynamics for advertising expenditures. We are unable to predict the effect that these or other technological changes will have on the broadcast television industry or on the future results of our operations.
 
Federal Regulation

Television broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (“the Communications Act”). The following is a brief discussion of certain provisions of the Communications Act and the FCC’s regulations and policies that affect the business operations of television broadcast stations. Over the years, Congress and the FCC have added, amended and deleted statutory and regulatory requirements to which station owners are subject. Some of these changes have a minimal business impact whereas others may significantly affect the business or operation of individual stations or the broadcast industry as a whole. For more information about the nature and extent of FCC regulation of television broadcast stations, you should refer to the Communications Act and the FCC’s rules, public notices and policies.

 
5

 

License Grant and Renewal. The Communications Act prohibits the operation of broadcast stations except under licenses issued by the FCC. Television broadcast licenses are granted for a maximum term of eight years and are subject to renewal upon application to the FCC. The FCC is required to grant an application for license renewal if during the preceding term the station served the public interest, the licensee did not commit any serious violations of the Communications Act or the FCC’s rules, and the licensee committed no other violations of the Communications Act or the FCC’s rules which, taken together, would constitute a pattern of abuse. A majority of renewal applications are routinely granted under this standard. If a licensee fails to meet this standard the FCC may still grant renewal on terms and conditions that it deems appropriate, including a monetary forfeiture or renewal for a term less than the normal eight-year period.
 
After a renewal application is filed, interested parties, including members of the public, may file petitions to deny the application, to which the licensee/renewal applicant is entitled to respond. After reviewing the pleadings, if the FCC determines that there is a substantial and material question of fact whether grant of the renewal application would serve the public interest, the FCC is required to hold a trial-type hearing on the issues presented. If, after the hearing, the FCC determines that the renewal applicant has met the renewal standard, the FCC will grant the renewal application. If the licensee/renewal applicant fails to meet the renewal standard or show that there are mitigating factors entitling it to renewal subject to appropriate sanctions, the FCC can deny the renewal application. In the vast majority of cases where a petition to deny is filed against a renewal application, the FCC ultimately grants the renewal without a hearing. No competing application for authority to operate a station and replace the incumbent licensee may be filed against a renewal application.
 
In addition to considering rule violations in connection with a license renewal application, the FCC may sanction a station licensee for failing to observe FCC rules and policies during the license term, including the imposition of a monetary forfeiture.
 
Station Transfer. The Communications Act prohibits the assignment or the transfer of control of a broadcast license without prior FCC approval.
 
Ownership Restrictions. The Communications Act limits the extent of non-U.S. ownership of companies that own U.S. broadcast stations. Under this restriction, a U.S. broadcast company such as ours may have no more than 20% non-U.S. ownership (by vote and by equity).
 
The FCC also has rules which establish limits on the ownership of broadcast stations. These ownership limits apply to attributable interests in a station licensee held by an individual, corporation, partnership or other entity. In the case of corporations, officers, directors and voting stock interests of 5% or more (20% or more in the case of qualified investment companies, such as insurance companies and bank trust departments) are considered attributable interests. For partnerships, all general partners and non-insulated limited partners are attributable. Limited liability companies are treated the same as partnerships. The FCC also considers attributable the holder of more than 33% of a licensee’s total assets (defined as total debt plus total equity), if that person or entity also provides over 15% of the station’s total weekly broadcast programming or has an attributable interest in another media entity in the same market which is subject to the FCC’s ownership rules, such as a radio or television station or daily newspaper.

Local Television Ownership (Duopoly Rule). Under the current local television ownership, or “duopoly,” rule, a single entity is allowed to own or have attributable interests in two television stations in a market if (1) the two stations do not have overlapping service areas, or (2) after the combination there are at least eight independently owned and operating full-power television stations in the DMA with overlapping service contours and one of the combining stations is not ranked among the top four stations in the DMA. The duopoly rule allows the FCC to consider waivers to permit the ownership of a second station only in cases where the second station has failed or is failing or unbuilt.
 
Under the duopoly rule, the FCC attributes toward the local television ownership limits another in-market station when one station owner programs a second in-market station pursuant to a time brokerage or local marketing agreement, if the programmer provides more than 15% of the second station’s weekly broadcast programming. However, local marketing agreements entered into prior to November 5, 1996 are exempt attributable interests until the FCC determines otherwise. This “grandfathering,” when reviewed by the FCC, is subject to possible extension or termination.
 
In certain of our markets, we own and operate both full-power and low-power television broadcast stations (in Wichita Falls, we own and operate KJTL and KJBO-LP; and in Amarillo, we own and operate KCIT and KCPN-LP). The FCC’s duopoly rules and policies regarding ownership of television stations in the same market apply only to full-power television stations and not low-power television stations such as KJBO-LP and KCPN-LP.
 
We currently do not operate two full-power stations in any market.

 
6

 


 
National Television Ownership. There is no nationwide limit on the number of television stations which a party may own. However, the FCC’s rules limit the percentage of U.S. television households which a party may reach through its attributable interests in television stations. This rule provides that when calculating a party’s nationwide aggregate audience coverage, the ownership of a UHF station is counted as 50% of a market’s percentage of total national audience. In 2004, Congress determined that one party may have an attributable interest in television stations which reach, in the aggregate, 39% of all U.S. television households; and the FCC thereafter modified its corresponding rule. The FCC currently is considering whether this act has any impact on the FCC’s authority to examine and modify the UHF discount. Our stations have a combined national audience reach of 1.6% of television households with the UHF discount.
 
Radio/Television Cross-Ownership Rule (One-to-a-Market Rule). In markets with at least 20 independently owned media “voices”, ownership of one television station and up to seven radio stations, or two television stations (if allowed under the television duopoly rule) and six radio stations is permitted. If the number of independently owned media “voices” is fewer than 20 but greater than or equal to 10, ownership of one television station (or two if allowed) and four radio stations is permitted. In markets with fewer than 10 independent media “voices”, ownership of one television station (or two if allowed) and one radio station is permitted. In calculating the number of independent media “voices” in a market, the FCC includes all radio and television stations, independently owned cable systems (counted as one voice), and independently owned daily newspapers which have circulation that exceeds 5% of the households in the market. In all cases, the television and radio components of the combination must also comply, respectively, with the local television ownership rule and the local radio ownership rule.
 
Local Television/Newspaper Cross-Ownership Rule. Under this rule, a party is prohibited from having an attributable interest in a television station and a daily newspaper in the same market.

As a result of the FCC’s 2006 rulemaking proceeding, which provided a comprehensive review of all of its media ownership rules, in February 2008, the FCC adopted modest changes to its newspaper cross-ownership rule, while retaining the rest of its rules as then currently in effect. In July 2011, however, the U.S. Court of Appeals for the Third Circuit vacated the FCC’s changes to the newspaper/broadcast cross-ownership rule while upholding the FCC’s retention of its other media ownership rules.

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). The NOI was intended to assist the Commission in establishing a framework within which to analyze whether its media ownership rules remain “necessary in the public interest as a result of competition,” due to the dramatic changes occurring in the media marketplace. 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. Initial comments on the NPRM were filed on March 5, 2012, and reply comments are due in April 2012. We cannot predict what rules the FCC will adopt or when they will be adopted.

Local Television/Cable Cross-Ownership. There is no FCC rule prohibiting common ownership of a cable television system and a television broadcast station in the same area.

Cable and Satellite Carriage of Local Television Signals.  Broadcasters may obtain carriage of their stations’ signals on cable, satellite and other multichannel video programming distributors (“MVPDs”) through either mandatory carriage or through “retransmission consent.” Every three years all stations must formally elect either mandatory carriage (“must-carry” for cable distributors and “carry one-carry all” for satellite television providers) or retransmission consent. The next election must be made by October 1, 2014, and will be effective January 1, 2015. Must-carry elections require that the MVPD carry one station programming stream and related data in the station’s local market. However, MVPDs may decline a must-carry election in certain circumstances. MVPDs do not pay a fee to stations that elect mandatory carriage.

 
7

 

 
A broadcaster that elects retransmission consent waives its mandatory carriage rights, and the broadcaster and the MVPD must negotiate in good faith for carriage of the station’s signal. Negotiated terms may include channel position, service tier carriage, carriage of multiple program streams, compensation and other consideration. If a broadcaster elects to negotiate retransmission terms, it is possible that the broadcaster and the MVPD will not reach agreement and that the MVPD will not carry the station’s signal.
 
MVPD operators are actively seeking to change the regulations under which retransmission consent is negotiated before both the U.S. Congress and the FCC in order to increase their bargaining leverage with television stations. 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 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.
 
The FCC’s rules also govern which local television signals a satellite subscriber may receive. Congress and the FCC have also imposed certain requirements relating to satellite distribution of local television signals to “unserved” households that do not receive a useable signal from a local network-affiliated station and to cable and satellite carriage of out-of-market signals.
 
We elected to exercise retransmission consent rights for all of our stations where we have a legal right to do so. We have negotiated retransmission consent agreements with all of the MVPDs which carry the stations’ signals.
 
Programming and Operation. The Communications Act requires broadcasters to serve “the public interest.” Television station licensees are required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. The FCC may consider complaints from viewers concerning programming when it evaluates a station’s license renewal application, although viewer complaints also may be filed and considered by the FCC at any time. Stations also must follow various rules promulgated under the Communications Act that regulate, among other things:
 
 
political advertising (its price and availability);
 
 
sponsorship identification;
 
 
contest and lottery advertising;
 
 
obscene and indecent broadcasts;
 
 
technical operations, including limits on radio frequency radiation;
 
 
discrimination and equal employment opportunities;
 
 
closed captioning (and, under recently reinstated rules, video description);
 
 
children’s programming;
 
 
program ratings guidelines; and
 
 
network affiliation agreements.
 
Technical Regulation. FCC rules govern the technical operating parameters of television stations, including permissible operating channel, power and antenna height and interference protections between stations. Under various FCC rules and procedures, all full power television stations completed the transition from analog to digital television (DTV) broadcasting in June 2009. The FCC has adopted rules with respect to the conversion of existing low power and television translator stations to digital operation, establishing a September 1, 2015 deadline by which low power and television translator stations must cease analog operation.
 
Employees
 
As of December 31, 2011, we had a total of 34 employees, all of which were full-time. As of December 31, 2011, none of our employees were covered by a collective bargaining agreement. We believe that our employee relations are satisfactory, and we have not experienced any work stoppages at any of our facilities.

 
8

 

 
Available Information
 
We file annual, quarterly and current reports, and other information with the SEC. You may read and copy any reports, statements and other information filed by us at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549-0102. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers, including us, that file electronically with the SEC. The address for the SEC’s website is http://www.sec.gov.


Item 1A.                      Risk Factors
 
You should carefully consider the following risk factors, which we believe are the most significant risks related to our business, as well as the other information contained in this document.
 
Risks Related to Our Operations
 
General trends in the television industry could adversely affect demand for television advertising as consumers flock to alternative media, including the Internet, for entertainment.  
 
Television viewing among consumers has been negatively impacted by the increasing availability of alternative media, including the Internet. As a result, in recent years demand for television advertising has been declining and demand for advertising in alternative media has been increasing, and we expect this trend to continue.
 
In recent years, the networks have streamed their programming on the Internet and other distribution platforms in close proximity to network programming broadcast on local television stations, including those we own. These and other practices by the networks dilute the exclusivity and value of network programming originally broadcast by the local stations and could adversely affect the business, financial conditions and results of operations of our stations.
 
We have a history of net losses.
 
We had net losses of $1.7 million, $2.7 million and $0.6 million, respectively, for the years ended December 31, 2011, 2010 and 2009. We may not be able to achieve or maintain profitability.
 
Our substantial debt could limit our ability to grow and compete.
 
As of December 31, 2011, we had $363.5 million of debt, including $318.4 million of debt co-issued with Nexstar, which represented 645% of our total capitalization. Our high level of debt could have important consequences to our business. For example, it could:
 
 
limit our ability to borrow additional funds or obtain additional financing in the future;
 
 
limit our ability to pursue acquisition opportunities;
 
 
expose us to greater interest rate risk since the interest rate on borrowings under our senior secured credit facility is variable;
 
 
limit our flexibility to plan for and react to changes in our business and our industry; and
 
 
impair our ability to withstand a general downturn in our business and place us at a disadvantage compared to our competitors that are less leveraged.
 
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations––Contractual Obligations” for disclosure of the approximate aggregate amount of principal indebtedness scheduled to mature.
 
We could also incur additional debt in the future. The terms of our senior secured credit facility limit, but do not prohibit, us from incurring substantial amounts of additional debt. To the extent we incur additional debt, we would become even more susceptible to the leverage-related risks described above.

 
9

 

 
The agreement governing our debt contains various covenants that limit our management’s discretion in the operation of our business.
 
Our senior secured credit facility contains various covenants that restrict our ability to, among other things:
 
 
incur additional debt and issue preferred stock;
 
 
pay dividends and make other distributions;
 
 
make investments and other restricted payments;
 
 
make acquisitions;
 
 
merge, consolidate or transfer all or substantially all of our assets;
 
 
enter into sale and leaseback transactions;
 
 
create liens;
 
 
sell assets or stock of our subsidiaries; and
 
 
enter into transactions with affiliates.
 
Our bank credit facility agreement does not contain financial covenant ratio requirements, but does provide for default in the event Nexstar does not comply with all covenants contained in its credit agreement. Future financing agreements may contain financial covenants which could limit our management’s ability to operate our business at its discretion, and consequently we may be unable to compete effectively, pursue acquisitions or take advantage of new business opportunities, any of which could harm our business.
 
If we fail to comply with the restrictions in present or future financing agreements, a default may occur. A default could allow creditors to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. A default could also allow creditors to foreclose on any collateral securing such debt.
 
Our ability to continue as a going concern is dependent on Nexstar’s pledge to continue the local services agreements described in a letter of support dated March 23, 2012. Nexstar’s senior secured credit facility agreement contains covenants which require Nexstar to comply with certain financial ratios, including consolidated leverage ratios and fixed charge coverage ratios. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar and us. Our senior secured credit facility agreement does not contain financial covenant ratio requirements; however, it does include an event of default if Nexstar does not comply with all covenants contained in its credit agreement. As of December 31, 2011, Nexstar was in compliance with all covenants contained in the credit agreements governing its senior secured credit facility and the indentures governing its publicly-held notes.
 
We guarantee $37.9 million of outstanding 7% senior subordinated notes issued by Nexstar, $112.6 million of outstanding 7% senior subordinated PIK notes issued by Nexstar and $127.3 million of amounts outstanding under Nexstar’s senior secured credit facilty
 
If Nexstar, which is highly leveraged with debt, is unable to satisfy its debt obligations, we can be held liable for those obligations under our guarantees. Additionally, Nexstar has $47.4 million of unused revolver commitments available under its senior secured credit facility, which is also guaranteed by us.
 
Our broadcast operations could be adversely affected if our stations fail to maintain or renew their network affiliation agreements on favorable terms, or at all.
 
Due to the quality of the programming provided by the networks, stations that are affiliated with a network generally have higher ratings than unaffiliated independent stations in the same market. As a result, it is important for stations to maintain their network affiliations. Most of the stations that we operate have network affiliation agreements – 3 stations have primary affiliation agreements with NBC, 2 with CBS, 5 with ABC, 4 with FOX and 2 with MyNetworkTV. Each of NBC, CBS and ABC generally provides affiliated stations with up to 22 hours of prime time programming per week, while each of FOX and MyNetworkTV provides affiliated stations with up to 15 hours of prime time programming per week. In return, affiliated stations broadcast the respective network’s commercials during the network programming.


 
10

 

All of the network affiliation agreements of our stations are scheduled to expire at various times through June 2017. Our NBC network agreements for three stations expire on June 1, 2012. In order to renew certain of our affiliation agreements we may be required to make cash payments to the network, and to accept other material modifications of existing affiliation agreements. If any of our stations cease to maintain affiliation agreements with networks for any reason, we would need to find alternative sources of programming, which may be less attractive and more expensive. Further, some of our network affiliation agreements are subject to earlier termination by the networks under specified circumstances. For more information regarding these network affiliation agreements, see Item 1. “Business––Network Affiliations.”
 
The loss of or material reduction in retransmission consent revenues could have an adverse effect on our business, financial condition, and results of operations.  
 
Mission’s retransmission consent agreements with cable operators, direct broadcast satellite operators, and others permit the operators to carry our stations’ signals in exchange for the payment of compensation to us from the system operators as consideration. The television networks have recently asserted to their local television station affiliates the networks’ position that they, as the owners or licensees of programming we broadcast and provide for retransmission, are entitled to a portion of the compensation under the retransmission consent agreements and are including these provisions in their network affiliation agreements. In addition, our affiliation agreements with some broadcast networks include certain terms that may affect our ability to allow MVPDs to retransmit network programming, and in some cases, we may lose the right to grant retransmission consent to such providers. Inclusion of these or similar provisions in our network affiliation agreements could materially reduce this revenue source and could have an adverse effect on our business, financial condition, and results of operations.
 
In addition, system operators are actively seeking to change the regulations under which retransmission consent is negotiated before both the U.S. Congress and the FCC in order to increase their bargaining leverage with television stations. On March 3, 2011, the FCC initiated a Notice of Proposed Rulemaking to reexamine its rules (1) governing the requirements for good faith negotiations between MVPDs and broadcasters, including implementing a prohibition on one station negotiating retransmission consent terms for another station under a local service agreement; (2) for providing advance notice to consumers in the event of dispute; and (3) 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 could materially reduce this revenue source and could have an adverse effect on our business, financial condition and results of operations. 
 
The FCC could decide not to grant renewal of the FCC license of any of the stations we operate, which would require that station to cease operations.
 
Television broadcast licenses are granted for a maximum term of eight years and are subject to renewal upon application to the FCC. The FCC is required to grant an application for license renewal if, during the preceding term, the station served the public interest, the licensee did not commit any serious violations of the Communications Act or the FCC’s rules, and the licensee committed no other violations of the Communications Act or the FCC’s rules which, taken together, would constitute a pattern of abuse. A majority of renewal applications are routinely granted under this standard. If a licensee fails to meet this standard the FCC may still grant renewal on terms and conditions that it deems appropriate, including a monetary forfeiture or renewal for a term less than the normal eight-year period.
 
On January 3, 2006, Cable America Corporation (“Cable America”) submitted a petition to deny the applications for renewal of license for Nexstar’s station, KOZL, and our station, KOLR, both licensed to Springfield, Missouri. Cable America alleged that Nexstar’s local service agreement arrangements with us give Nexstar improper control over our operations. We and Nexstar submitted a joint opposition to this petition to deny and Cable America submitted a reply. Cable America subsequently requested that the FCC dismiss its petition. However, the petition remains pending with the FCC.
 
We filed renewal of license applications for our stations between April 2005 and April 2008. The majority of these applications, including the KOLR application discussed above, remain pending with the FCC. Once a renewal application is timely filed, a station may continue to operate under its license even if its expiration date has passed. We expect the FCC to renew the licenses for our stations in due course but cannot provide any assurances that the FCC will do so.

 
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Our growth may be limited if we are unable to implement our acquisition strategy.
 
We intend to continue our growth by selectively pursuing acquisitions of television stations. The television broadcast industry is undergoing consolidation, which may reduce the number of acquisition targets and increase the purchase price of future acquisitions. Some of our competitors may have greater financial or management resources with which to pursue acquisition targets. Therefore, even if we are successful in identifying attractive acquisition targets, we may face considerable competition and our acquisition strategy may not be successful.
 
FCC rules and policies may also make it more difficult for us to acquire additional television stations. Television station acquisitions are subject to the approval of the FCC and, potentially, other regulatory authorities. FCC rules limit the number of television stations a company may own, and those rules are subject to change. The need for FCC and other regulatory approvals could restrict our ability to consummate future transactions if, for example, the FCC or other government agencies believe that a proposed transaction would result in excessive concentration in a market, even if the proposed combinations may otherwise comply with FCC ownership limitations.

Growing our business through acquisitions involves risks and if we are unable to manage effectively our growth, our operating results will suffer.
 
Since January 1, 2003, we have tripled the number of stations that we operate, having acquired 11 stations. We will continue to actively pursue additional acquisition opportunities. To manage effectively our growth and address the increased reporting requirements and administrative demands that will result from future acquisitions, we will need, among other things, to continue to develop our financial and management controls and management information systems. We will also need to continue to identify, attract and retain highly skilled finance and management personnel. Failure to do any of these tasks in an efficient and timely manner could seriously harm our business.
 
There are other risks associated with growing our business through acquisitions. For example, with any past or future acquisition, there is the possibility that:
 
 
we may not be able to successfully reduce costs, increase advertising revenue or audience share or realize anticipated synergies and economies of scale with respect to any acquired station;
 
 
an acquisition may increase our leverage and debt service requirements or may result in our assuming unexpected liabilities;
 
 
our management may be reassigned from overseeing existing operations by the need to integrate the acquired business;
 
 
we may experience difficulties integrating operations and systems, as well as company policies and cultures;
 
 
we may fail to retain and assimilate employees of the acquired business; and
 
 
problems may arise in entering new markets in which we have little or no experience.
 
The occurrence of any of these events could have a material adverse effect on our operating results, particularly during the period immediately following any acquisition.
 
The FCC may decide to terminate “grandfathered” time brokerage agreements.
 
The FCC attributes time brokerage agreements and local marketing agreements (“TBAs”) to the programmer under its ownership limits if the programmer provides more than 15% of a station’s weekly broadcast programming. However, TBAs entered into prior to November 5, 1996 are exempt attributable interests for now. Our TBAs with Nexstar were entered into prior to November 1996 and are grandfathered.
 
The FCC will review these “grandfathered” TBAs in the future. During this review, the FCC may determine to terminate the “grandfathered” period and make all TBAs fully attributable to the programmer. If the FCC does so, we will be required to terminate the TBAs with Nexstar for stations WFXP and KHMT unless the FCC simultaneously changes its duopoly rules to allow ownership of two stations in the applicable markets.

 
12

 

 
FCC actions may restrict our ability to enter into local service agreements with Nexstar, which would harm our operations.
 
We have entered into local service agreements with Nexstar for our stations. While all of our existing local service agreements comply with FCC rules and policies, we cannot assure you that the FCC will continue to permit local service agreements as a means of creating substantial operating efficiencies, and the FCC may challenge our existing arrangements with Nexstar in the future.

On August 2, 2004, the FCC initiated a rule making proceeding to determine whether to make television joint sales agreements attributable under its ownership rules. Comments and reply comments were filed in this proceeding in the fourth quarter of 2004. The FCC has not yet issued a decision in this proceeding.

In addition, the FCC is required by statute to review its media ownership rules every four years and to eliminate those rules it finds no longer serve the “public interest, convenience and necessity”. The FCC initiated its statutory review of its ownership rules in May 2010, and in December 2011 it issued a notice of proposed rulemaking (NPRM) in that review.  The NPRM specifically requests comment on shared services agreements and other joint operating arrangements between television stations, and whether such agreements should be considered attributable. We believe the FCC will continue its review during 2012 but we cannot predict when the FCC will issue a decision on any proposed rule changes. However, if the FCC adopts a joint sales agreement attribution rule, or any other new or modified rule affecting the ownership of or local service agreements between television stations, we will be required to comply with such rules.

Cable America has alleged that our local service agreements with Nexstar give Nexstar improper control over our operations. If the FCC challenges our existing arrangements with Nexstar and determines that our arrangements violate the FCC’s rules and policies, we may be required to terminate such arrangements and we could be subject to sanctions, fines and/or other penalties.

We have a material amount of goodwill and intangible assets, and therefore we could suffer losses due to future asset impairment charges.
 
As of December 31, 2011, $55.9 million, or 61.4%, of our total assets consisted of goodwill and intangible assets, including FCC licenses and network affiliation agreements. We recorded an impairment charge of $2.3 million during the year ended December 31, 2009 that included an impairment to the carrying values of FCC licenses of $2.0 million, related to eight of our stations, and an impairment to the carrying value of goodwill of $0.3 million, related to one reporting unit consisting of one of our stations. We test goodwill and FCC licenses annually, and on an interim date if factors or indicators become apparent that would require an interim test of these assets, in accordance with accounting and disclosure requirements for goodwill and other intangible assets. We test network affiliation agreements whenever circumstances or indicators become apparent the asset may not be recoverable through expected future cash flows. The methods used to evaluate the impairment of our goodwill and intangible assets would be affected by a significant reduction in operating results or cash flows at one or more of our television stations, or a forecast of such reductions, a significant adverse change in the advertising marketplaces in which our television stations operate, the loss of network affiliations, or by adverse changes to FCC ownership rules, among others, which may be beyond our control. If the carrying amount of goodwill and intangible assets is revised downward due to impairment, such non-cash charge could materially affect our financial position and results of operations.
 
Risks Related to Our Industry
 
Preemption of regularly scheduled programming by network news coverage may affect our revenue and results of operations.
 
We may experience a loss of advertising revenue and incur additional broadcasting expenses due to preemption of our regularly scheduled programming by network coverage of a major global news event such as a war or terrorist attack. As a result, advertising may not be aired and the revenue for such advertising may be lost unless the station is able to run the advertising at agreed-upon times in the future. Advertisers may not agree to run such advertising in future time periods, and space may not be available for such advertising. The duration of such preemption of local programming cannot be predicted if it occurs. In addition, our stations may incur additional expenses as a result of expanded news coverage of a war or terrorist attack. The loss of revenue and increased expenses could negatively affect our results of operations.

 
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If we are unable to respond to changes in technology and evolving industry trends, our television businesses may not be able to compete effectively. 
 
New technologies could also adversely affect our television stations. Information delivery and programming alternatives such as cable, direct satellite-to-home services, pay-per-view, the Internet, telephone company services, mobile devices, digital video recorders and home video and entertainment systems have fractionalized television viewing audiences and expanded the numbers and types of distribution channels for advertisers to access. Over the past decade, cable television programming services, other emerging video distribution platforms and the Internet have captured an increasing market share, while the aggregate viewership of the major television networks has declined. In addition, the expansion of cable and satellite television, the Internet and other technological changes have increased, and may continue to increase, the competitive demand for programming. Such increased demand, together with rising production costs, may increase our programming costs or impair our ability to acquire or develop desired programming.
 
In addition, video compression techniques now in use with direct broadcast satellites, cable and wireless cable are expected to permit greater numbers of channels to be carried within existing bandwidth. These compression techniques as well as other technological developments are applicable to all video delivery systems, including over-the-air broadcasting, and have the potential to provide vastly expanded programming to targeted audiences. Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized niche programming, resulting in more audience fractionalization. This ability to reach very narrowly defined audiences may alter the competitive dynamics for advertising expenditures. We are unable to predict the effect that these and other technological changes will have on the television industry or on our results of operations.
 
The FCC can sanction us for programming broadcast on our stations which it finds to be indecent.
 
In 2004, the FCC began to impose substantial fines on television broadcasters for the broadcast of indecent material in violation of the Communications Act and its rules. The FCC also revised its indecency review analysis to more strictly prohibit the use of certain language on broadcast television. In one of several judicial appeals of FCC enforcement actions, a Federal court in July 2010 held the FCC’s indecency standards to be unconstitutionally vague under the First Amendment. The Supreme Court agreed to review that decision and heard oral argument in the case in January 2012. Because our stations’ programming is in large part comprised of programming provided by the networks with which the stations are affiliated, we do not have full control over what is broadcast on our stations, and we may be subject to the imposition of fines if the FCC finds such programming to be indecent. Fines may be imposed on a television broadcaster for an indecency violation to a maximum of $325,000 per violation.
 
Intense competition in the television industry could limit our growth and impair our ability to become profitable.
 
As a television broadcasting company, we face a significant level of competition, both directly and indirectly. Generally we compete for our audience against all the other leisure activities in which one could choose to engage rather than watch television. Specifically, stations we own compete for audience share, programming and advertising revenue with other television stations in their respective markets and with other advertising media, including newspapers, radio stations, cable television, DBS systems and the Internet.
 
The entertainment and television industries are highly competitive and are undergoing a period of consolidation. Many of our current and potential competitors have greater financial, marketing, programming and broadcasting resources than we do. The markets in which we operate are also in a constant state of change arising from, among other things, technological improvements and economic and regulatory developments. Technological innovation and the resulting proliferation of television entertainment, such as cable television, wireless cable, satellite-to-home distribution services, pay-per-view, home video and entertainment systems and Internet and mobile distribution of video programming have fractionalized television viewing audiences and have subjected free over-the-air television broadcast stations to increased competition. We may not be able to compete effectively or adjust our business plans to meet changing market conditions. We are unable to predict what form of competition will develop in the future, the extent of the competition or its possible effects on our business.

 
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The FCC could implement regulations or Congress could adopt legislation that might have a significant impact on the operations of the stations we own and operate or the television broadcasting industry as a whole.
 
The FCC has initiated proceedings to determine whether to make TV joint sales agreements and shared services agreements attributable interests under its ownership rules; to determine whether it should establish formal rules under which broadcasters will be required to serve the local public interest; to determine whether to require TV stations to maintain their public inspection files online (with additional information disclosed); and to determine whether to modify or eliminate certain of its broadcast ownership rules, including the radio-television cross-ownership rule and the newspaper-television cross-ownership rule. A change to any of these rules may have a significant impact on us.
 
In addition, the FCC has sought comment on whether there are alternatives to the use of DMAs to define local markets such that certain viewers whose current DMAs straddle multiple states would be provided with more in-state broadcast programming. If the FCC determines to modify the use of existing DMAs to determine a station’s local market, such change might materially alter current station operations and could have an adverse effect on our business, financial condition and results of operations.
 
The FCC may also decide to initiate other new rule making proceedings on its own or in response to requests from outside parties, any of which might have such an impact. Congress also may act to amend the Communications Act in a manner that could impact our stations or the television broadcast industry in general.
 
The FCC may reallocate some portion of the spectrum available for use by television broadcasters to wireless broadband use, which could substantially impact our future operations and may reduce viewer access to our programming.
 
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 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, whether to permit two television stations to share a single 6 megahertz channel 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 incentive auctions whereby spectrum holders, including television broadcasters, could voluntarily relinquish all or part of their spectrum in exchange for consideration. 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 our investment in digital facilities, could require substantial additional investment to continue our current operations, and may require viewers to invest in additional equipment or subscription services to continue receiving broadcast television signals. We cannot predict the timing or results of television spectrum reallocation efforts or their impact to our business.
 
Item 1B.
Unresolved Staff Comments
 
None

 
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Item 2.                      Properties
 
We own and lease facilities in the following locations:
 
Station Metropolitan Area and Use
Owned or
Leased
Approximate Size
Expiration
of Lease
       
WYOU—Wilkes Barre-Scranton, PA
     
Office-Studio(1) 
Tower/Transmitter Site—Penobscot Mountain
100% Owned
120.33 Acres
Tower/Transmitter Site—Bald Mountain
100% Owned
7.2 Acres
Tower/Transmitter Site—Williamsport
33% Owned
1.35 Acres
Tower/Transmitter Site—Sharp Mountain
33% Owned
0.23 Acres
Tower/Transmitter Site—Stroudsburg
Leased
10,000 Sq. Ft.
Month to Month
       
WAWV—Terre Haute, IN
     
Office-Studio(1) 
Tower/Transmitter Site
100% Owned
1 Acre
       
WFXP—Erie, PA
     
Office-Studio(1) 
Tower/Transmitter Site(1) 
       
KJTL/KJBO-LP—Wichita Falls, TX—Lawton, OK
     
Office-Studio(1) 
Tower/Transmitter Site
Leased
40 Acres
1/30/15
Tower/Transmitter Site
Leased
5 Acres
Year to Year
       
KODE—Joplin, MO-Pittsburg, KS
     
Office-Studio
100% Owned
2.74 Acres
Tower/Transmitter Site
Leased
215 Sq. Ft.
4/30/27
       
KRBC—Abilene-Sweetwater, TX
     
Office-Studio
100% Owned
5.42 Acres
Office-Studio
100% Owned
19,312 Sq. Ft.
Tower/Transmitter Site(1) 
       
KSAN—San Angelo, TX
     
Office-Studio(1) 
Tower/Transmitter Site
Leased
10 Acres
5/15/15
       
KOLR—Springfield, MO
     
Office-Studio
100% Owned
30,000 Sq. Ft.
Office-Studio
100% Owned
7 Acres
Tower/Transmitter Site
Leased
0.5 Acres
5/12/21
       
KCIT/KCPN-LP—Amarillo, TX
     
Office-Studio(1) 
Tower/Transmitter Site
Leased
100 Acres
5/12/21
Tower/Transmitter Site—Parmer County, TX
Leased
80 Sq. Ft.
Month to Month
Tower/Transmitter Site—Guyman, OK
Leased
80 Sq. Ft.
Month to Month
Tower/Transmitter Site—Curry County, NM
Leased
6 Acres
Month to Month
       
KTVE—Monroe, LA-El Dorado, AR
     
Office-Studio(1) 
Tower/Transmitter Site
Leased
2 Acres
4/30/32
Tower/Transmitter Site – El Dorado
Leased
3 Acres
4/30/32
Tower/Transmitter Site – Bolding
Leased
11.5 Acres
4/30/32

 
16

 


Station Metropolitan Area and Use
Owned or
Leased
Approximate Size
Expiration
of Lease
       
KAMC—Lubbock, TX
     
Office-Studio(1) 
Tower/Transmitter Site
Leased
40 Acres
5/12/21
Tower/Transmitter Site
Leased
1,200 Sq. Ft.
Month to Month
       
KHMT—Billings, MT
     
Office-Studio(1) 
Tower/Transmitter Site
Leased
4 Acres
5/12/21
       
WUTR—Utica, NY
     
Office-Studio
100% Owned
12,100 Sq. Ft.
Tower/Transmitter Site
100% Owned
21 Acres
Tower/Transmitter Site-Mohawk
Leased
48 Sq. Ft
Month to Month
       
WTVO—Rockford, IL
     
Office-Studio-Tower/Transmitter Site
100% Owned
20,000 Sq. Ft.
       
WTVW-Evansville, IN
     
Office-Studio (1) 
Tower/Transmitter Site
Leased
16.36 Acres
5/12/21
       
Corporate Office—Westlake, OH
Leased
640 Sq. Ft.
12/31/13
              
(1)
These locations used by the stations are owned by Nexstar.
 
Item 3.                      Legal Proceedings
 
From time to time, we are involved in litigation that arises from the ordinary course of our business, such as contractual or employment disputes or other general actions. In the event of an adverse outcome of these legal proceedings, we believe the resulting liabilities would not have a material adverse effect on our financial condition, results of operations or cash flows.
 
Item 4.                      Mine Safety Disclosures
 
None.

PART II
 
Item 5.                      Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information
 
As of December 31, 2011, our common stock was not traded on any market and two shareholders held 1,000 shares of common stock. Our senior secured credit agreement prohibits us from paying dividends to shareholders over the term of the agreement.
 


 
17

 

 
Item 6.                 Selected Financial Data
 
On December 1, 2011, we acquired WTVW, an independent station in Evansville, Indiana, from Nexstar. Nexstar is deemed under accounting principles generally accepted in the United States of America (“U.S. GAAP”) to have a controlling financial interest in Mission, due to (1) the local service agreements we have with Nexstar, (2) Nexstar’s guarantee of the obligations under our senior secured credit facility, (3) Nexstar having power over significant activities affecting our economic performance, including budgeting for advertising revenue, advertising and hiring and firing of sales force personnel and (4) purchase options granted by Mission that permit Nexstar to acquire the assets and assume the liabilities of our stations and to acquire our stock, subject to FCC consent. Our acquisition of WTVW, therefore, was deemed under U.S. GAAP to be a change in our reporting entity and our historical results have been presented as if we owned and operated WTVW as of the earliest period presented. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Financial Statements and related Notes, included herein. Amounts below are presented in thousands.

   
2011
   
2010
   
2009
   
2008
   
2007
 
   
Statement of Operations Data, for the years ended December 31:
 
Net broadcast revenue
  $ 18,933     $ 18,086     $ 16,210     $ 16,124     $ 15,599  
Revenue from Nexstar (1)
    27,800       29,878       25,435       35,283       30,556  
Net revenue
    46,733       47,964       41,645       51,407       46,155  
Operating expenses (income):
                                       
Direct operating expenses, excluding depreciation and amortization
    7,797       8,165       8,306       9,074       7,583  
Selling, general and administrative expenses, excluding depreciation and amortization
    4,507       4,691       4,837       4,719       4,584  
Fees incurred pursuant to local service agreements with Nexstar(2)
    7,190       7,160       7,425       8,090       7,860  
Impairment of goodwill
                261       1,289        
Impairment of other intangible assets
                1,997       10,149        
Loss (gain) on asset exchange
          11       (2,738 )     (869 )     (317 )
Loss (gain) on asset disposal, net
    190       159       56       (349 )     92  
Amortization of broadcast rights
    4,646       4,611       5,638       5,533       5,466  
Depreciation and amortization
    8,674       8,650       9,392       9,192       9,038  
Income from operations
    13,729       14,517       6,471       4,579       11,849  
Interest expense
    (14,681 )     (12,998 )     (6,051 )     (9,420 )     (12,252 )
Loss on extinguishment of debt
          (2,432 )                  
(Loss) income before income taxes
    (952 )     (913 )     420       (4,841 )     (403 )
Income tax (expense) benefit
    (749 )     (1,836 )     (986 )     737       (1,135 )
Net loss
  $ (1,701 )   $ (2,749 )   $ (566 )   $ (4,104 )   $ (1,538 )
                                         
Balance Sheet Data, as of December 31:
                                       
Cash and cash equivalents
  $ 1,898     $ 1,250     $ 903     $ 1,572     $ 10,054  
Working capital (deficit)
    (8,557 )     1,843       (2,169 )     (7,357 )     (12,576 )
Net intangible assets and goodwill
    55,945       61,476       66,806       74,038       84,450  
Total assets
    91,056       107,526       111,266       116,998       126,578  
Total debt
    363,477       356,241       172,360       174,087       175,814  
Total shareholders’ deficit
    (307,102 )     (279,497 )     (87,958 )     (87,392 )     (83,288 )
   
Statement of Cash Flows Data, for the years ended December 31:
 
Net cash provided by (used in):
                                       
Operating activities
  $ 1,551     $ 4,370     $ 4,636     $ 8,837     $ 4,208  
Investing activities
    (7,221 )     (295 )     (1,756 )     (15,592 )     (3,064 )
Financing activities
    6,318       (3,728 )     (3,548 )     (1,727 )     5,273  
Capital expenditures
    541       295       1,756       8,247       2,683  
Cash payments for broadcast rights
    1,815       2,009       1,951       1,857       1,808  
              
 
(1)
We have joint sales agreements with Nexstar, which permit Nexstar to sell and retain a percentage of the net revenue from the advertising time on our stations in return for monthly payments to us of the remaining percentage of the net revenue. We also have time brokerage agreements with Nexstar that allow Nexstar to program most of the broadcast time for us, sell the advertising time and retain the advertising revenue generated in exchange for monthly payments to us.
 
(2)
We have shared services agreements with Nexstar, which allow the sharing of services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments from us.


 
18

 

Item 7.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with Item 6. “Selected Financial Data” and the Financial Statements and related Notes included in Part IV, Item 15(a) of this Annual Report on Form 10-K. As used in this discussion, unless the context indicates otherwise, “Mission” refers to Mission Broadcasting, Inc., and all references to “we”, “our”, “us” and the “Company” refer to Mission.
 
Overview of Operations
 
As of December 31, 2011, 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 and personnel for our stations.
 
The following table summarizes the various local service agreements our stations had in effect as of December 31, 2011 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, based on the station’s monthly operating expenses.
(2)
We have both a shared services agreement (“SSA”) and a joint services agreement (“JSA”) for each of these stations. The SSA allows the sharing of services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments from us as described in the SSAs. The JSAs permit Nexstar to sell the station’s advertising time and retain a percentage of the net revenue from the station’s advertising time in return for monthly payments to us of the remaining percentage of the net revenue, as described in the JSAs.
 
Under the local service agreements, Nexstar has received 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 Financial Statements in Part IV, Item 15(a) of this Annual Report on Form 10-K.
 
On December 1, 2011, we acquired WTVW, an independent station in Evansville, Indiana, from Nexstar for $6.7 million in cash, funded with borrowings from our senior secured credit agreement. Nexstar is deemed under U.S. GAAP to have a controlling financial interest in Mission, due to (1) the local service agreements we have with Nexstar, (2) Nexstar’s guarantee of the obligations under our senior secured credit facility, (3) Nexstar having power over significant activities affecting our economic performance, including budgeting for advertising revenue, advertising and hiring and firing of sales force personnel and (4) purchase options granted by Mission that permit Nexstar to acquire the assets and assume the liabilities of our stations and acquire our stock, subject to FCC consent. Our acquisition of WTVW, therefore, was deemed under U.S. GAAP to be a change in our reporting entity and our historical results have been presented as if we owned and operated WTVW as of the earliest period presented.  For further discussion of this acquisition, see Note 3 to our Financial Statements.
 
The operating revenue of our stations is derived primarily from broadcast advertising revenue sold and collected by Nexstar and paid to us under the JSAs. Broadcast advertising revenue is affected by a number of factors, including the economic conditions of the markets in which we operate, the demographic makeup of those markets and the marketing strategy employed in each market. Advertising revenue is positively affected by strong local economies, national and regional political election campaigns, and certain events such as the Olympic Games or the Super Bowl. Because television broadcast stations rely on advertising revenue, declines in advertising budgets, particularly in recessionary periods, adversely affect the broadcast industry, and as a result may contribute to a decrease in the revenue of broadcast television stations. The stations’ advertising revenue is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to, and including, the holiday season. In addition, advertising revenue is generally higher during even-numbered years, when state, congressional and presidential elections occur and from advertising aired during the Olympic Games. As 2011 was not an election year, we are reporting less revenue in 2011 compared to 2010, which is in line with our expectations.

 
19

 

 
We earn revenues from local cable providers, satellite services and other MVPDs for the retransmission of our broadcasts. These revenues are generally earned based on a price per subscriber of the MVPD within the retransmission area. We have been successful at negotiating favorable pricing with MVPDs, as well as signing retransmission agreements with additional MVPDs, driving significant revenue gains over the last few years.
 
Most of our stations have a network affiliation agreement pursuant to which the network provides programming to the stations during specified time periods, including prime time. NBC 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 ABC, FOX, MyNetworkTV and Bounce TV do not provide for compensation. In recent years, in conjunction with the renewal of affiliation agreements with NBC, CBS, ABC and FOX, network compensation is being eliminated and many of the networks are now seeking cash payments from their affiliates. In 2011, we renewed our affiliation agreements with ABC through June 2017 for our four ABC stations. Additionally, we signed an agreement with ABC for affiliation of our station in Terre Haute, Indiana. The Terre Haute station, previously the FOX affiliate WFXW, launched with ABC on September 1, 2011 as WAWV. On July 1, 2011, WTVW in Evansville, Indiana launched Local 7, an independent station. WTVW’s FOX affiliation agreement terminated on June 30, 2011. In 2011, we renewed our affiliation agreements with FOX through December 2013 for our four remaining FOX stations. On September 26, 2011, we launched three new digital multicasts as affiliates of Bounce TV network, the first broadcast television network targeting African-American audiences.
 
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 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 same amortization period as the asset 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.
 
Amendment to Credit Agreement

On July 29, 2011, Mission entered into the Third Amendment to its Third Amended and Restated Credit Agreement and Nexstar entered into the Fifth Amendment to its Fourth Amended and Restated Credit Agreement. The amendments, among other things, removed as an event of default the termination of more than three stations’ network affiliation agreements with major networks and lowered the maximum consolidated total leverage ratio of Nexstar and Mission to 7.50 to 1.00 through December 30, 2012 and 6.50 to 1.00 thereafter.

 
20

 

 
Historical Performance
 
Revenue
 
The following table sets forth the principal types of revenue earned by our stations for the years ended December 31 and each type of revenue (other than barter revenue and revenue from Nexstar Broadcasting, Inc.) as a percentage of total gross revenue (dollars in thousands):
 
   
2011
   
2010
   
2009
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Retransmission compensation
  $ 9,837       62.9     $ 7,132       47.8     $ 5,560       43.5  
Net advertising revenue
    5,363       34.3       6,685       44.9       6,129       48.0  
Network compensation
    351       2.2       986       6.6       1,000       7.8  
Other
    96       0.6       101       0.7       90       0.7  
Net broadcast revenue before barter revenue
    15,647       100.0       14,904       100.0       12,779       100.0  
Barter and trade revenue
    3,286               3,182               3,431          
Revenue from Nexstar Broadcasting, Inc.
    27,800               29,878               25,435          
Net revenue
  $ 46,733             $ 47,964             $ 41,645          
 

 
Results of Operations
 
The following table sets forth a summary of our operations for the years ended December 31 and the components as a percentage of net revenue (dollars in thousands):
 
   
2011
   
2010
   
2009
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Net revenue
  $ 46,733       100.0     $ 47,964       100.0     $ 41,645       100.0  
Operating expenses (income):
                                               
Corporate expenses
    913       2.0       1,090       2.3       1,263       3.0  
Station direct operating expenses
    7,622       16.3       7,941       16.6       8,154       19.6  
Selling, general and administrative expenses
    3,594       7.7       3,601       7.5       3,574       8.6  
Fees incurred pursuant to local service agreements with Nexstar Broadcasting, Inc.
    7,190       15.4       7,160       14.9       7,425       17.8  
Loss (gain) on asset exchange
                11             (2,738 )     (6.5 )
Loss on asset disposal, net
    190       0.4       159       0.4       56       0.1  
Barter and trade expense
    3,280       7.0       3,184       6.6       3,427       8.2  
Depreciation and amortization
    8,674       18.6       8,650       18.0       9,392       22.6  
Impairment of goodwill
                            261       0.6  
Impairment of other intangible assets
                            1,997       4.8  
Amortization of broadcast rights, excluding barter
    1,541       3.2       1,651       3.4       2,363       5.7  
Income from operations
  $ 13,729             $ 14,517             $ 6,471          
 


 
21

 

 
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
 
Revenue
 
Net revenue for the year ended December 31, 2011 remained relatively consistent with a decrease of $1.2 million, or 2.6%, from the same period in 2010. This decrease was primarily attributed to decreases in revenue from Nexstar and net advertising revenue, which was partially offset by an increase in retransmission compensation.
 
Revenue from Nexstar and net advertising revenue was $33.2 million for the year ended December 31, 2011, compared to $36.6 million for the same period in 2010, a decrease of $3.4 million, or 9.3%. The decrease was primarily attributed to the decrease in political revenue that Nexstar generated from selling all of the advertising of our stations, which in turn decreased the revenue we earned from Nexstar through the JSAs. The decrease in political revenue was as we expected, as 2011 was not an election year.
 
Compensation from retransmission consent and network affiliation agreements was $10.2 million for the year ended December 31, 2011, compared to $8.1 million for the same period in 2010, an increase of $2.1 million, or 25.5%. The increase was primarily due to renegotiated cable agreements providing for higher rates per subscriber during the year, which is consistent with industry-wide trends.
 
Operating Expenses
 
Corporate expenses were $0.9 million for the year ended December 31, 2011 compared to $1.1 million for the same period in 2010, a decrease of $0.2 million or 16.2%. The decrease was primarily related to a decrease in employee compensation expense, due to the death of our former President on March 28, 2011 and vacancy in the position during a portion of the year. Our Chairman of the Board fulfilled certain management functions throughout the year, but received a lower salary than our former President. The position of President and Treasurer was filled, effective December 19, 2011, with our former Executive Vice President and Chief Operating Officer. Corporate expenses relate 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 remained relatively consistent with a decrease of $0.3 million, or 2.8% for the year ended December 31, 2011, compared to the same period in 2010. Within this category, we had a decrease of $0.4 million in technical costs, due to our release from certain tower leases for replaced analog equipment, which was partially offset by an increase of $0.3 million in programming costs, due to increased fees paid to our network affiliates.
 
Local service agreement fees associated with Nexstar relate to services provided by Nexstar in the production of newscasts, technical maintenance, administrative support and other services under the SSAs. SSA fees remained consistent at $7.2 million for each of the years ended December 31, 2011 and 2010.
 
Amortization of broadcast rights, excluding barter, remained fairly consistent at $1.5 million for the year ended December 31, 2011, compared to $1.6 million for the same period in 2010, a decrease of $0.1 million, or 6.7%.
 
Depreciation of property and equipment remained fairly consistent at $3.1 million for the year ended December 31, 2011, compared to $3.3 million for the same period in 2010.
 
Interest Expense
 
Interest expense, net, increased by $1.7 million, or 12.9%, for the year ended December 31, 2011, compared to the same period in 2010. The increase in interest expense was primarily related to the full year of interest and accretion of discount on the 8.875% Notes, which were issued in April of 2010.
 
Income Taxes
 
Income tax expense was $0.7 million for the year ended December 31, 2011, compared to $1.8 million for the same period in 2010. Our provision for income taxes is primarily created by an increase in the deferred tax liabilities position during the year arising from the amortizing of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. No tax benefit was recorded with respect to the taxable losses for 2011 and 2010, as the utilization of such losses is not more likely than not to be realized in the foreseeable future.

 
22

 

 
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
Revenue
 
Net revenue for the year ended December 31, 2010, increased by $6.3 million, or 15.2%, from the same period in 2009. This increase was primarily attributed to an increase in revenue from Nexstar, supplemented by an increase in retransmission compensation.
 
Revenue from Nexstar and net advertising revenue was $36.6 million for the year ended December 31, 2010, compared to $31.6 million for the same period in 2009, an increase of $5.0 million, or 15.8%. The increase was primarily attributed to increases in the local, national and political revenue that Nexstar generated from selling all of the advertising of our stations, which in turn increased the revenue we earned from Nexstar through the JSAs.
 
Compensation from retransmission consent and network affiliation agreements was $8.1 million for the year ended December 31, 2010, compared to $6.6 million for the same period in 2009, an increase of $1.6 million, or 23.8%. The increase was primarily due to renegotiated cable agreements providing for higher rates per subscriber during the year.
 
Operating Expenses
 
Corporate expenses were $1.1 million for the year ended December 31, 2010 compared to $1.3 million for the same period in 2009, a decrease of $0.2 million or 13.8%. The decrease was primarily due to the elimination of 2009 legal fees associated with the amendment of the credit facility. Corporate expenses relate to costs associated with the centralized management of our stations.
 
Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses decreased by $0.2 million, or 1.6% for the year ended December 31, 2010, compared to the same period in 2009. The decrease was primarily due to a decrease in utility usage as a result of switching from analog to digital broadcasts.
 
Local service agreement fees associated with Nexstar relate to services provided by Nexstar in the production of newscasts, technical maintenance, administrative support and other services under the SSAs. SSA fees decreased by $0.3 million, or 3.6%, for the year ended December 31, 2010 compared to the same period in 2009. These fees decreased due to the elimination of the newscast in Wilkes-Barre in the first quarter of 2009.
 
Amortization of broadcast rights, excluding barter, decreased by $0.7 million, or 30.1%, for the year ended December 31, 2010, compared to the same period in 2009. The decrease was primarily due to a lower amount of write-downs of broadcast rights to net realizable value during the year and the elimination of the TBA agreement with KFTA.
 
Depreciation of property and equipment decreased by $0.7 million, or 18.3%, for the year ended December 31, 2010, compared to the same period in 2009. The decrease was primarily due to write-offs incurred in 2009 for obsolete analog equipment and studio and equipment at one station.
 
During the year ended December 31, 2009, we recognized a gain of $2.7 million from the exchange of equipment under an arrangement with Sprint Nextel Corporation. The exchange program was substantially complete at the end of 2009. During 2009, we recognized impairment on our goodwill and intangibles.
 
Interest Expense
 
Interest expense, net, increased by $6.9 million, or 114.6%, for the year ended December 31, 2010, compared to the same period in 2009. The increase in interest expense was primarily related to the higher interest rates and accretion of discount on the 8.875% Notes compared to the bank debt.
 
Income Taxes
 
Income tax expense was $1.8 million for the year ended December 31, 2010, compared to $1.0 million for the same period in 2009. The increase was primarily due to the tax benefit recognized in 2009 as a result of the impairment charge on indefinite-lived assets. Our provision for income taxes is primarily created by an increase in the deferred tax liabilities position during the year arising from the amortizing of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. The 2009 impairment charge reduced the book value and therefore decreased the deferred tax liability position. No tax benefit was recorded with respect to the taxable losses for 2010 and 2009, as the utilization of such losses is not more likely than not to be realized in the foreseeable future.

 
23

 

 
Liquidity and Capital Resources
 
We are highly leveraged, which makes us vulnerable to changes in general economic conditions. Our ability to meet the future cash requirements described below depends on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other conditions, many of which are beyond our control. Our ability to meet future cash requirements is also dependent upon the local service agreements we have entered into with Nexstar. Under our local service agreements, Nexstar sells our advertising time and pays us a percentage of the amount collected. The payments we receive from Nexstar under the local service agreements are a significant component of our cash flows. On March 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 December 31, 2011. In order to meet future cash needs we may, from time to time, borrow under our available credit facility. We will continue to evaluate the best use of our operating cash flow among capital expenditures, acquisitions and debt reduction.

Overview
 
The following tables present summarized financial information management believes is helpful in evaluating the Company’s liquidity and capital resources (in thousands):
 
   
Years Ended December 31,
 
   
2011
   
2010
   
2009
 
Net cash provided by operating activities
  $ 1,551     $ 4,370     $ 4,635  
Net cash used in investing activities
    (7,221 )     (295 )     (1,756 )
Net cash provided by (used in) financing activities
    6,318       (3,728 )     (3,548 )
Net increase (decrease) in cash and cash equivalents
  $ 648     $ 347     $ (669 )
Cash paid for interest
  $ 14,075     $ 9,956     $ 5,848  
Cash paid for income taxes, net
  $ 65     $ 61     $ 80  
 
   
As of December 31,
 
   
2011
   
2010
 
Cash and cash equivalents
  $ 1,898     $ 1,250  
Long-term debt including current portion(2)
  $ 363,477     $ 356,241  
Unused commitments under senior secured credit facility(1)
  $ 3,300     $ 10,000  
              
(1)  
As of December 31, 2011, all $3.3 million of total unused commitments under our credit facility were available for borrowing.
(2)  
We co-issued $325.0 million of 8.875% Notes during the year ended December 31, 2010, of which we received $131.9 million of the net proceeds and $184.9 million was received by Nexstar, as discussed in Note 7 of our Financial Statements. Debt repayment will be split based on the same ratio as the proceeds were received.
 
Cash Flows – Operating Activities
 
Net cash provided by operating activities decreased by $2.8 million, or 64.5% during the year ended December 31, 2011, compared to the same period in 2010. The decrease was primarily due to an increase in cash paid for interest of $4.1 million and a decrease of net revenue of $1.2 million, which was partially offset by a decrease in net repayments of amounts due to Nexstar of $2.1 million. The increase in cash paid for interest was due to the full year of interest payments on the 8.875% Notes, which were issued in April of 2010.
 
Net cash provided by operating activities decreased by $0.3 million during the year ended December 31, 2010, compared to the same period in 2009. The decrease was primarily caused by an increase in cash paid for interest of $4.1 million and an increase in net repayments of amounts due to Nexstar of $5.2 million, which was partially offset by an increase in net revenue of $6.3 million for the year, increased collections from amounts due from customers of $0.7 million and a change in the timing of payments of operating expenses of $1.6 million. The increase in cash paid for interest was due to the higher interest rates on the 8.875% Notes compared to the bank debt.

 
24

 

 
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 increased by $6.9 million during the year ended December 31, 2011 compared to the same period in 2010. Cash flows from investing activities consisted of capital expenditures and the acquisition of WTVW from Nexstar. Capital expenditures were $0.5 million for the year ended December 31, 2011, compared to $0.3 million for the same period in 2010. We acquired WTVW on December 1, 2011 for $6.7 million in cash.
 
Net cash used in investing activities decreased by $1.5 million during the year ended December 31, 2010 compared to the same period in 2009. Cash flows from investing activities consisted of capital expenditures. Capital expenditures were $0.3 million for the year ended December 31, 2010, compared to $1.8 million for the same period in 2009. The decrease was primarily attributed to the completion of the conversion of stations from analog to digital broadcasting in 2009.

 
Cash Flows – Financing Activities
 
Net cash provided by financing activities was $6.3 million during the year ended December 31, 2011 compared to cash used in financing activities of $3.7 million for the same period in 2010. In connection with the acquisition of WTVW, on December 1, 2011, we borrowed $6.7 million of revolving loans in our senior secured credit facility. We paid $0.4 million of scheduled term loan maturities in our senior secured credit facility.
 
Net cash used in financing activities increased by $0.2 million during the year ended December 31, 2010 compared to the same period in 2009. In April 2010, we received $131.9 million of proceeds from issuance of the 8.875% Notes. We paid $133.6 million on our senior secured credit facility, $0.6 of which were scheduled term loan maturities and $133.0 of which were paid in April 2010 in connection with the amendment of our senior secured credit facility. We also paid $1.1 million of debt financing costs and $1.0 million in fees to creditors connected to the issuance of the 8.875% Notes and the amendment of our senior secured credit facility.
 
Our senior secured credit facility prohibits the payment of cash dividends to our shareholders.
 
Future Sources of Financing and Debt Service Requirements
 
As of December 31, 2011, we had debt of $363.5 million, including $318.4 million of debt co-issued with Nexstar, which represented 645% of our total capitalization. Our high level of debt requires that a substantial portion of cash flow be dedicated to pay principal and interest on debt which will reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.
 
The total amount of borrowings available to us under the revolving loan commitment of our senior secured credit facility is based on covenant calculations contained in Nexstar’s credit agreement. As of December 31, 2011, $3.3 million of total unused commitments under our credit facility were available for borrowing.
 
The following table summarizes the aggregate amount of principal indebtedness scheduled to mature in the following years as of December 31, 2011 (in thousands):
 
   
Total
   
2012
      2013 - 2014       2015 - 2016    
Thereafter
 
Senior secured credit facility
  $ 45,115     $ 390     $ 7,480     $ 37,245     $  
8.875% senior secured second lien notes due 2017(1)
    325,000       —        —        —        325,000  
    $ 370,115     $ 390     $ 7,480     $ 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 7 of our 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, 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.

 
25

 

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. guarantees 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, 7% senior subordinated notes due 2014 and 7% senior subordinated PIK notes due 2014. Nexstar’s and our senior secured credit facilities are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses, of Nexstar and Mission. As of December 31, 2011, Nexstar had a maximum commitment of $174.7 million under its senior secured credit facility, of which $127.3 million of debt was outstanding, and had $37.9 million of 7% senior subordinated notes and $112.6 million of 7% PIK senior subordinated notes outstanding.
 
Debt Covenants

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 contain restrictive covenants customary for borrowing arrangements of this type. As of December 31, 2011, Nexstar was in compliance with all covenants contained in the credit agreements governing its senior secured credit facility and Nexstar and we were in compliance with all covenants contained in the indentures governing our respective publicly-held notes. Nexstar has informed us that it believes it will be able to maintain compliance with all covenants contained in the credit agreements governing its senior secured credit facility and its indentures governing publicly held notes for a period of at least the next twelve months from December 31, 2011.

 
No Off-Balance Sheet Arrangements
 
As of December 31, 2011 and 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
 
Contractual Obligations
 
The following summarizes our contractual obligations as of December 31, 2011, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
 
   
Total 
   
2012 
      2013 - 2014       2015 - 2016    
Thereafter 
 
Senior secured credit facility
  $ 45,115     $ 390     $ 7,480     $ 37,245     $  
8.875% senior secured second lien notes due 2017(1)
    325,000                         325,000  
Cash interest on debt(1)
    168,085       31,048       61,728       60,887       14,422  
Broadcast rights current cash commitments(2)
    2,191       754       1,299       138        
Broadcast rights future cash commitments
    2,119       116       1,111       816       76  
Operating lease obligations
    23,966       1,470       3,143       3,360       15,993  
 Total contractual cash obligations   $ 566,476     $ 33,778     $ 74,761     $ 102,446     $ 355,491  
             
(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 7 of our Financial Statements. Principal and interest will be paid based on the ratio of the proceeds received. The full amounts are disclosed above as we are jointly and severally liable on these amounts as a co-issuer of the notes.
(2)
Excludes broadcast rights barter payable commitments recorded on the Financial Statements at December 31, 2011 in the amount of $3.7 million.

 
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As of December 31, 2011, we had $3.7 million of unrecognized tax benefits. This liability represents an estimate of tax positions that the Company has taken in its tax returns which may ultimately not be sustained upon examination by the tax authorities. The resolution of these tax positions may not require cash settlement due to the existence of net operating loss carryforwards.
 
Critical Accounting Policies and Estimates
 
Our Financial Statements have been prepared in accordance with U.S. GAAP which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Financial Statements and reported amounts of revenue and expenses during the period. On an ongoing basis, we evaluate our estimates, including those related to goodwill and intangible assets, bad debts, retransmission revenue, broadcast rights, barter, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
 
For an overview of our significant accounting policies, we refer you to Note 2 to the Financial Statements in Part IV, Item 15(a) of this Annual Report on Form 10-K. We believe the following critical accounting policies are those that are the most important to the presentation of our Financial Statements, affect our more significant estimates and assumptions, and require the most subjective of complex judgments by management.
 
Valuation of Goodwill and Intangible Assets
 
Intangible assets represented $55.9 million, or 61.4%, of our total assets as of December 31, 2011. Intangible assets principally include FCC licenses, goodwill and network affiliation agreements. If the fair value of these assets is less than the carrying value, we may be required to record an impairment charge.
 
We test the impairment of our FCC licenses annually or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment test consists of a comparison of the fair value of FCC licenses with their carrying amount on a market-by-market basis using a discounted cash flow valuation method, assuming a hypothetical startup scenario.
 
We test the impairment of our goodwill annually or whenever events or changes in circumstances indicate that goodwill might be impaired. The first step of the goodwill impairment test compares the fair value of the market (“reporting unit”) to its carrying amount, including goodwill. The fair value of a reporting unit is determined through the use of a discounted cash flow analysis. The valuation assumptions used in the discounted cash flow model reflect historical performance of the reporting unit and the prevailing values in the markets for broadcasters. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing an assumed purchase price allocation, using the reporting unit’s fair value (as determined in the first step described above) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess but not more than the carrying value of goodwill.
 
We test network affiliation agreements whenever events or circumstances indicate that their carrying amount may not be recoverable, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. Impairment in the carrying amount of a network affiliation agreement is recognized when the expected future operating cash flow derived from the operations to which the asset relates is less than its carrying value.
 
We completed our annual test for impairment of goodwill and FCC licenses as of December 31, 2011 and 2010 which resulted in no impairment charges. All of the fair values of our reporting units and FCC licenses tested for impairment exceeded their book values by a margin of at least 10%.

 
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The assumptions used in the valuation testing have certain subjective components including anticipated future operating results and cash flows based on our own internal business plans as well as future expectations about general economic and local market conditions.
 
We utilized the following assumptions in our impairment testing for the years ended December 31:
 
 
    2011   
    2010   
Market growth rates
0.8 – 2.7%
(0.2) – 3.6%
Operating profit margins – FCC licenses
11.5 – 24.0%
11.5 – 24.0%
Operating profit margins – goodwill
20.0 – 31.6%
21.6 – 34.7%
Discount rate
10.0%
10.0%
Tax rate
35.3 – 40.6%
35.2 – 40.6%
Capitalization rate
7.3 – 8.0%
7.3 – 8.0%
 
Broadcast Rights Carrying Amount
 
Broadcast rights are stated at the lower of unamortized cost or net realizable value. Cash broadcast rights are initially recorded at the amount paid or payable to program distributors for the limited right to broadcast the distributors’ programming. Barter broadcast rights are recorded at our estimate of the fair value of the advertising time exchanged, which approximates the fair value of the programming received. The fair value of the advertising time exchanged is estimated by applying average historical rates for specific time periods. Amortization of broadcast rights is computed using the straight-line method based on the license period or programming usage, whichever period yields the shorter life. The current portion of broadcast rights represents those rights available for broadcast which will be amortized in the succeeding year. When projected future net revenue associated with a program is less than the current carrying amount of the program broadcast rights, for example, due to poor ratings, we write-down the unamortized cost of the broadcast rights to equal the amount of projected future net revenue. If the expected broadcast period was shortened or cancelled, we would be required to write-off the remaining value of the related broadcast rights to operations on an accelerated basis or possibly immediately. As of December 31, 2011, the carrying amounts of our current broadcast rights were $3.3 million and non-current broadcast rights were $2.0 million.

Characterization of SSA Fees
 
We present the fees incurred pursuant to SSAs with Nexstar as an operating expense in our Financial Statements. Our decision to characterize the SSA fees in this manner is based on our conclusion that (a) the benefit our stations receive from these local service agreements is sufficiently separate from the consideration paid to us from Nexstar under JSAs, (b) we can reasonably estimate the fair values of the benefits our stations receive under the SSA agreements, and (c) the SSA fees we pay to Nexstar do not exceed the estimated fair values of the benefits our stations receive.
 
Retransmission Revenue
 
We earn revenues from local cable providers, satellite services and MVPDs for the retransmission of our broadcasts. These revenues are generally earned based on a price per subscriber of the MVPD within the retransmission area. The MVPDs report their subscriber numbers to us periodically, generally upon payment of the fees due to us. Prior to receiving the MVPD reporting, we record revenue based on management’s estimate of the number of subscribers, utilizing historical levels and trends of subscribers for each MVPD.

Barter and Trade Transactions
 
We barter advertising time for certain program material. These transactions, except those involving exchange of advertising time for network programming, are recorded at management’s estimate of the fair value of the advertising time exchanged, which approximates the fair value of the program material received. The fair value of advertising time exchanged is estimated by applying average historical advertising rates for specific time periods. We trade certain advertising time for various goods and services, which are recorded at the estimated fair values of the goods or services received. We recorded both barter revenue and barter expense of $3.1 million, $3.0 million and $3.2 million for the years ended December 31, 2011, 2010 and 2009, respectively. We recorded trade revenue and expense of $0.2 million for each of the years ended December 31, 2011, 2010 and 2009.

 
28

 

 
Income Taxes
 
We account for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. A valuation allowance is applied against net deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. While we have considered future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period such a determination was made.
 
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. We recognize interest and penalties relating to income taxes as components of income tax expense.
 
Recent Accounting Pronouncements
 
Refer to Note 2 of our Financial Statements in Part IV, Item 15(a) of this Annual Report on Form 10-K for a discussion of recently issued accounting pronouncements, including our expected date of adoption and effects on results of operations and financial position.
 
Item 7A.                      Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate Risk
 
Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations.
 
The interest rate on the term loan borrowings under our senior secured credit facility was 5.0% as of December 31, 2011 and the interest rate on the revolver loans was 4.3%, which represented the base rate, or LIBOR, plus the applicable margin, as defined. Interest is payable in accordance with the credit agreement.
 
Including the impact of the LIBOR floor on our term loans, an increase in LIBOR of 100 basis points (one percentage point) or 50 basis points (one-half of a percentage point) from its December 31, 2011 level would increase our annual interest expense and decrease our cash flow from operations by $0.3 million or $0.1 million, respectively, based on the outstanding balance of our credit facilities as of December 31, 2011. Conversely, a decrease in LIBOR by 100 or 50 basis points would decrease our annual interest expense and increase our cash flow from operations by less than $0.1 million. Our 8.875% Notes are fixed rate debt obligations and therefore are not exposed to market interest rate changes. As of December 31, 2011, we have no financial instruments in place to hedge against changes in the benchmark interest rates on our senior credit facility.
 
Impact of Inflation
 
We believe that our results of operations are not affected by moderate changes in the inflation rate.
 
Item 8.
Financial Statements and Supplementary Data
 
Our Financial Statements are filed with this report. The Financial Statements and supplementary data are included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.


 
29

 

 
Item 9A.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our President and Treasurer (our 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 our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
 
Based upon that evaluation, our President and Treasurer concluded that as of December 31, 2011, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act (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 our management, including our 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 our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Management assesses the effectiveness of our internal control over financial reporting as of December 31, 2011 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.
 
Based on management’s assessment, we have concluded that our internal control over financial reporting was effective as of December 31, 2011.
 
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding the effectiveness of our internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
 
Item 9B.
Other Information
 
None.

 
30

 

 
PART III
 
Item 10.
Directors, Executive Officers of the Registrant and Corporate Governance
 
The table below sets forth information about our Director and executive officers:
 
Name Age Position With Company
Nancie J. Smith
59
Chairman of the Board and Secretary
Dennis Thatcher
65
President, Treasurer and Director
David S. Smith
-
Former President, Treasurer and Director
 
Nancie J. Smith has served as our Secretary since December 1997. Ms. Smith was elected as Chairman of the Board effective December 19, 2011. Ms. Smith performed roles similar to our principal executive officer, principal financial officer and principal accounting officer until Mr. Thatcher’s appointment as President and Treasurer became effective. Ms. Smith is the widow of David S. Smith.
 
Ms. Smith’s qualifications for being a Director of the Company include her years of experience in the television broadcast industry.
 
Dennis Thatcher was appointed as President and Treasurer and elected to the Board of Directors effective December 19, 2011. Previously, Mr. Thatcher served as Executive Vice President and Chief Operating Officer since October 2004. From November 2003 to March 2004, Mr. Thatcher served as Regional Market Manager for United Media Partners. From November 2002 to October 2003, Mr. Thatcher served as General Sales Manager of KZTV for Eagle Creek Broadcasting. From July 2000 to October 2002, Mr. Thatcher pursued personal interests. From April 1998 to June 2000, Mr. Thatcher served as Senior Vice President and Central Regional Manager for Paxson Communications.
 
Mr. Thatcher’s qualifications for being a Director of the Company include his years of experience in the television broadcast industry.
 
David S. Smith served as our President and Treasurer and Director from December 1997 until his death on March 28, 2011. Prior to that, Mr. Smith was the General Manager of WSTR television in Cincinnati, Ohio from 1990 to 1995. Mr. Smith was an ordained minister in the Evangelical Lutheran Church of America.
 
Mr. Smith’s qualifications for being a Director of the Company included his years of experience in the television broadcast industry.

Code of Ethics
 
Our Board of Directors adopted a code of ethics that applies to our senior management and Board of Directors, including our Named Executive Officers. The purpose of the code of ethics is to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, to promote full, fair, accurate, timely and understandable disclosure in periodic reports required to be filed by us, and to promote compliance with all applicable rules and regulations that apply to us and our officers and Directors. The code of ethics is filed hereby as Exhibit 14.1 to this Annual Report on Form 10-K. Any amendments to or waivers from a provision of this code of ethics will be filed on a Current Report on Form 8-K.
 
Item 11.
Executive Compensation
 
The Board of Directors has submitted the following report and has recommended that the Compensation Discussion and Analysis set forth below be included in this Annual Report on Form 10-K for the year ended December 31, 2011 for filing with the SEC.

 
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Compensation Discussion and Analysis
 
The Company was a party to a management services agreement with its former President, David S. Smith, which provided compensation of $0.4 million per year for services performed. The management services agreement terminated upon his death on March 28, 2011.

On December 19, 2011, the Company entered into an employment agreement with Dennis Thatcher to serve as President of the Company. The agreement provides for $142,000 in annual compensation with 2% annual increases. The agreement has no fixed termination date. In the event of termination pursuant to a Consolidation, Merger or Comparable transaction, as defined in the agreement, Mr. Thatcher is eligible to receive his salary for a period of six months. Prior to December 19, 2011, Mr. Thatcher served as our Chief Operating Officer and was compensated based on his scope of responsibilities, taking into account competitive market compensation paid by other similarly situated companies for this position Mr. Thatcher also serves as a Director.

On December 19, 2011, the Company entered into an employment agreement with Nancie J. Smith to serve as Chairman of the Board and Secretary of the Company. The agreement provides for $120,000 in annual compensation with 2% annual increases. The agreement has no fixed termination date. In the event of termination pursuant to a Consolidation, Merger or Comparable transaction, as defined in the agreement, Ms. Smith is eligible to receive her salary for a period of six months. During the interim period after the death of David S. Smith and prior to the execution of the agreement, Ms. Smith was employed by the Company as Vice President, Secretary and compensated at an annual salary of $120,000.

The following table sets forth the compensation earned or awarded for services rendered to the Company by our executive officers for the fiscal years ended December 31.
 
Summary Compensation Table
 
Year
Salary
Bonus
Stock
Awards
Option
Awards
Non-Equity
Incentive Plan
Compensation
Change in
Pension Value
and
Non-Qualified
Deferred
Compensation
Earnings
All Other
Compensation
Total
Dennis Thatcher
President, Treasurer and Director, former Executive Vice President and COO
2011
$142,200
$— 
$— 
$— 
$ — 
$ — 
$ — 
$142,200
2010
142,200
 — 
 — 
 — 
 — 
 — 
 — 
142,200
2009
142,120
 — 
 — 
 — 
 — 
 — 
 — 
142,120
                   
David S. Smith
former President, Treasurer and Director
2011
102,308
 — 
 — 
 — 
 — 
 — 
 — 
102,308
2010
388,654
 — 
 — 
 — 
 — 
 — 
 — 
388,654
2009
405,000
 — 
 — 
 — 
 — 
 — 
 — 
405,000
                   
Nancie J. Smith
Chairman of the Board and Secretary, former Vice President
2011
73,845
 — 
 — 
 — 
 — 
 — 
 — 
73,845
2010
 — 
 — 
 — 
 — 
 — 
 — 
 — 
 — 
2009
 — 
 — 
 — 
 — 
 — 
 — 
 — 
 — 
                   
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Prior to his death, Mr. Smith owned 100% of the equity interests in Mission, which is comprised of 1,000 shares of common stock. Upon settlement of his estate, the shares of stock transferred to Ms. Smith, Mr. Smith’s widow. Mr. Thatcher purchased 490 shares of the Company at par value on December 19, 2011.
 

 
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Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
The following table summarizes the various local service agreements Mission-owned stations had in effect with Nexstar as of December 31, 2011:
Station
Market
Type of
Agreement
Expiration
Consideration from/to 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
3/31/12
$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
 
 
Under these agreements, we are responsible for certain operating expenses of our stations and therefore may have unlimited exposure to any potential operating losses. We will continue to operate our 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 us for Nexstar’s activities pursuant to the local service agreements.
 
For disclosure of the amounts of revenue associated with and the fees incurred by Mission pursuant to the local service agreements our stations have with Nexstar, we refer you to Note 4 to the Financial Statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

 
33

 

 
Option Agreements
 
In consideration of Nexstar Broadcasting Group’s guarantee of our indebtedness, Nexstar has options to purchase the assets of all of our stations. Additionally, on November 29, 2011, we granted Nexstar an option to purchase any or all of our stock 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. This stock purchase option expires on November 29, 2019.
 
The following table summarizes the station option agreements we have in effect with Nexstar as of December 31, 2011:
 
Station
Market
Affiliation
Date of
Execution
Expiration
Date
WFXP
Erie, PA
FOX
12/01/05
12/01/14
KJTL and
Wichita Falls, TX-Lawton, OK
FOX
06/01/99
06/01/18
KJBO-LP
 
MyNetworkTV
06/01/99
06/01/18
WYOU
Wilkes Barre-Scranton, PA
CBS
05/19/98
05/19/18
KODE
Joplin, MO-Pittsburg, KS
ABC
04/24/02
04/24/21
KRBC
Abilene-Sweetwater, TX
NBC
06/13/03
06/13/12
KSAN
San Angelo, TX
NBC
06/13/03
06/13/12
WAWV
Terre Haute, IN
ABC
05/09/03
05/09/12
KCIT and
Amarillo, TX
FOX
03/17/09
05/01/18
KCPN-LP
 
MyNetworkTV
03/17/09
05/01/18
KHMT
Billings, MT
FOX
12/30/03
12/30/12
KAMC
Lubbock, TX
ABC
12/30/03
12/30/12
KTVE
Monroe, LA-El Dorado, AR
NBC
1/16/08
1/16/17
KOLR
Springfield, MO
CBS
12/30/03
12/30/12
WUTR
Utica, NY
ABC
04/01/04
04/01/13
WTVO
Rockford, IL
ABC/MyNetworkTV
11/01/04
11/01/13

Under the terms of these option agreements, Nexstar may exercise its option upon written notice to us. In each option agreement, the exercise price is the greater of (1) seven times the station’s cash flow, as defined in the option agreement, less the amount of its indebtedness as defined in the option agreement, or (2) the amount of its indebtedness. We may terminate each option agreement by written notice any time after the seventh anniversary date of the relevant option agreement. Nexstar’s acquisition of any station or our stock pursuant to an exercise of the applicable option is subject to prior FCC approval.
 
Item 14.
Principal Accountant Fees and Services
 
We retained PricewaterhouseCoopers LLP to audit the Financial Statements of Mission Broadcasting, Inc. for the years ended December 31, 2011 and 2010, and review the Financial Statements included in each of its Quarterly Reports on Form 10-Q during such years and for tax compliance matters. The aggregate fees billed for professional services rendered by PricewaterhouseCoopers LLP in the years ended December 31, 2011 and 2010 for these various services were:
 
   
2011
   
2010
 
Audit Fees (1)
  $ 178,750     $ 176,000  
Audit Related Fees (2)
           
Tax Fees (3)
    73,778       56,850  
All Other Fees (4)
    —        —   
Total
  $ 252,528     $ 232,850  
              
(1)
“Audit Fees” are fees billed by PricewaterhouseCoopers LLP for professional services for the audit of the Financial Statements included in our Annual Report on Form 10-K and review of Financial Statements included in our Quarterly Reports on Form 10-Q, or for services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.
(2)
“Audit Related Fees” are fees billed by PricewaterhouseCoopers LLP for assurance and related services that are reasonably related to the performance of the audit or review of our Financial Statements.
(3)
“Tax Fees” are fees billed by PricewaterhouseCoopers LLP for tax compliance, tax advice and tax planning.
(4)
“All Other Fees” are fees billed by PricewaterhouseCoopers LLP for any services not included in the first three categories.

 
34

 

PART IV
 
Item 15.
Exhibits and Financial Statement Schedules
 
(a) Documents filed as part of this report:
 
 
(1) Financial Statements. The Financial Statements of Mission Broadcasting, Inc. listed on the index on page F-1 have been included beginning on page F-3 of this Annual Report on Form 10-K:
 
 
(2) Financial Statement Schedules. The schedule of Valuation and Qualifying Accounts appears in Note 13 to the Financial Statements filed as a part of this report.
 
 
(3) Exhibits. The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index beginning on page E-1 of this Annual Report on Form 10-K.
 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Mission Broadcasting, Inc.
   
 By:  /s/ Dennis Thatcher
 
Dennis Thatcher
President and Treasurer
(Principal Executive Officer and
Principal Financial and Accounting Officer)
 
Dated: March 30, 2012
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on March 30, 2012.
 

/s/ Nancie J. Smith
Nancie J. Smith
Chairman of the Board
 
 
/s/ Dennis Thatcher
Dennis Thatcher
President, Treasurer and Director
(Principal Executive Officer and
Principal Financial and Accounting Officer)


 
35

 

MISSION BROADCASTING, INC.
INDEX TO FINANCIAL STATEMENTS
 

Report of Independent Registered Public Accounting Firm
F-2
   
Balance Sheets as of December 31, 2011 and 2010
F-3
   
Statements of Operations for the years ended December 31, 2011, 2010 and 2009
F-4
   
Statement of Changes in Shareholders’ Deficit for the three years ended December 31, 2011
F-5
   
Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
F-6
   
Notes to Financial Statements
F-7
 

 
F-1

 
 
Report of Independent Registered Public Accounting Firm

To the Shareholders of Mission Broadcasting Inc:

In our opinion, the accompanying balance sheets and the related statements of operations, shareholders’ deficit and cash flows present fairly, in all material respects, the financial position of Mission Broadcasting, Inc. at December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The Company has a significant relationship with Nexstar Broadcasting Group, Inc. that is discussed in Notes 1, 2, 4, 7 and 11 to the financial statements.



/s/PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2012

 
 

 
F-2

 

MISSION BROADCASTING, INC.
BALANCE SHEETS
(in thousands, except share information)
 
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 1,898     $ 1,250  
Accounts receivable, net of allowance for doubtful accounts of $113 and $146, respectively)
    2,511       3,292  
Current portion of broadcast rights
    3,309       3,722  
Due from Nexstar Broadcasting, Inc.
          5,579  
Prepaid expenses and other current assets
    66       132  
Total current assets
    7,784       13,975  
Property and equipment, net
    24,140       28,477  
Broadcast rights
    1,950       2,147  
Goodwill
    18,730       18,730  
FCC licenses
    21,939       21,939  
Other intangible assets, net
    15,276       20,807  
Other noncurrent assets, net
    1,237       1,451  
Total assets
  $ 91,056     $ 107,526  
LIABILITIES AND SHAREHOLDERS’ DEFICIT
               
Current liabilities:
               
Current portion of debt
  $ 390     $ 390  
Current portion of broadcast rights payable
    3,782       4,038  
Taxes payable
    78       67  
Accounts payable
    192       389  
Accrued expenses
    740       722  
Interest payable (Note 7)
    6,022       6,015  
Deferred revenue
    408       511  
Due to Nexstar Broadcasting, Inc.
    4,729       —   
Total current liabilities
    16,341       12,132  
Debt (Note 7)
    363,087       355,851  
Broadcast rights payable
    2,113       2,765  
Deferred tax liabilities
    9,600       8,936  
Deferred revenue
    242       475  
Deferred gain on sale of assets
    1,623       1,821  
Other liabilities
    5,152       5,043  
Total liabilities
    398,158       387,023  
                 
Commitments and contingencies
               
                 
Shareholders’ deficit:
               
Common stock, $1.00 par value, 1,000 shares authorized, issued and outstanding as of each of December 31, 2011 and 2010
    1       1  
Subscription receivable
    (1 )     (1 )
Contra equity due from Nexstar Broadcasting, Inc. on debt issuance (Note 7)
    (189,330 )     (188,790 )
Accumulated deficit
    (117,772 )     (90,707 )
Total shareholders’ deficit
    (307,102 )     (279,497 )
Total liabilities and shareholders’ deficit
  $ 91,056     $ 107,526  
 
The accompanying Notes are an integral part of these Financial Statements.
 

 
F-3

 

MISSION BROADCASTING, INC.
STATEMENTS OF OPERATIONS
(in thousands)
 
   
Years Ended December 31,
 
   
2011
   
2010
   
2009
 
Net broadcast revenue
  $ 18,933     $ 18,086     $ 16,210  
Revenue from Nexstar Broadcasting, Inc.
    27,800       29,878       25,435  
Net revenue
    46,733       47,964       41,645  
Operating expenses (income):
                       
Direct operating expenses, excluding depreciation and amortization
    7,797       8,165       8,306  
Selling, general, and administrative expenses, excluding depreciation and amortization
    4,507       4,691       4,837  
Fees incurred pursuant to local service agreements with Nexstar Broadcasting, Inc.
    7,190       7,160       7,425  
Impairment of goodwill
                261  
Impairment of other intangible assets
   
            1,997  
Amortization of broadcast rights
    4,646       4,611       5,638  
Amortization of intangible assets
    5,531       5,330       5,330  
Depreciation
    3,143       3,320       4,062  
Loss (gain) on asset exchange