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EX-32.1 - EX-32.1 - MISSION BROADCASTING INCmbcc-ex321_21.htm
EX-31.1 - EX-31.1 - MISSION BROADCASTING INCmbcc-ex311_16.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     .

Commission File Number: 333-62916-02

MISSION BROADCASTING, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

51-0388022

(State of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

30400 Detroit Road, Suite 304, Westlake, Ohio

 

44145

(Address of Principal Executive Offices)

 

(Zip Code)

(440) 526-2227

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Note: The registrant is a voluntary filer and is not subject to the filing requirements. However, the registrant 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.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

 

 

Non-accelerated filer

 

x 

  

Smaller reporting company

 

¨

 

(Do not check if a smaller reporting company)

 

 

 

 

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of August 8, 2016, the Registrant had 1,000 shares of common stock outstanding, held by two shareholders.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

  

 

  

Page

PART I

  

FINANCIAL INFORMATION

  

 

 

 

 

 

 

ITEM 1.

  

Financial Statements (Unaudited)

  

 

 

 

 

 

 

 

  

Condensed Balance Sheets as of June 30, 2016 and December 31, 2015

  

1

 

 

 

 

 

 

  

Condensed Statements of Operations for the three and six months ended June 30, 2016 and 2015

  

2

 

 

 

 

 

 

  

Condensed Statements of Cash Flows for the six months ended June 30, 2016 and 2015

  

3

 

 

 

 

 

 

  

Notes to Condensed Financial Statements

  

4

 

 

 

 

 

ITEM 2.

  

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

  

12

 

 

 

 

 

ITEM 3.

  

Quantitative and Qualitative Disclosures about Market Risk

  

20

 

 

 

 

 

ITEM 4.

  

Controls and Procedures

  

21

 

 

 

 

 

PART II

  

OTHER INFORMATION

  

 

 

 

 

 

 

ITEM 1.

  

Legal Proceedings

  

22

 

 

 

 

 

ITEM 1A.

  

Risk Factors

  

22

 

 

 

 

 

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

22

 

 

 

 

 

ITEM 3.

  

Defaults Upon Senior Securities

  

22

 

 

 

 

 

ITEM 4.

  

Mine Safety Disclosures

  

22

 

 

 

 

 

ITEM 5.

  

Other Information

  

22

 

 

 

 

 

ITEM 6.

  

Exhibits

  

23

 

 

 

 

 


 

PART I. FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

MISSION BROADCASTING, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share information, unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,177

 

 

$

4,361

 

Accounts receivable, net of allowance for doubtful accounts of $178 and $154, respectively

 

 

11,662

 

 

 

9,370

 

Due from Nexstar Broadcasting, Inc.

 

 

66,837

 

 

 

51,978

 

Prepaid expenses and other current assets

 

 

1,160

 

 

 

1,364

 

Total current assets

 

 

81,836

 

 

 

67,073

 

Property and equipment, net

 

 

20,794

 

 

 

21,891

 

Goodwill

 

 

32,489

 

 

 

32,489

 

FCC licenses

 

 

41,563

 

 

 

41,563

 

Other intangible assets, net

 

 

17,681

 

 

 

18,892

 

Deferred tax assets, net

 

 

12,325

 

 

 

15,587

 

Other noncurrent assets, net

 

 

4,408

 

 

 

4,831

 

Total assets

 

$

211,096

 

 

$

202,326

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of debt

 

$

2,335

 

 

$

2,335

 

Current portion of broadcast rights payable

 

 

863

 

 

 

1,174

 

Accounts payable

 

 

14

 

 

 

906

 

Accrued expenses

 

 

6,970

 

 

 

5,219

 

Other current liabilities

 

 

547

 

 

 

516

 

Total current liabilities

 

 

10,729

 

 

 

10,150

 

Debt

 

 

222,330

 

 

 

223,235

 

Other liabilities

 

 

10,101

 

 

 

9,351

 

Total liabilities

 

 

243,160

 

 

 

242,736

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders' deficit:

 

 

 

 

 

 

 

 

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

  June 30, 2016 and December 31, 2015

 

 

1

 

 

 

1

 

Subscription receivable

 

 

(1

)

 

 

(1

)

Accumulated deficit

 

 

(32,064

)

 

 

(40,410

)

Total shareholders' deficit

 

 

(32,064

)

 

 

(40,410

)

Total liabilities and shareholders' deficit

 

$

211,096

 

 

$

202,326

 

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

 

 

 

1


 

MISSION BROADCASTING, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net broadcast revenue

 

$

15,085

 

 

$

12,238

 

 

$

30,245

 

 

$

24,348

 

Revenue from Nexstar Broadcasting, Inc.

 

 

9,625

 

 

 

9,353

 

 

 

18,826

 

 

 

17,907

 

Net revenue

 

 

24,710

 

 

 

21,591

 

 

 

49,071

 

 

 

42,255

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct operating expenses, excluding depreciation and amortization

 

 

7,380

 

 

 

5,468

 

 

 

14,867

 

 

 

10,656

 

Selling, general, and administrative expenses, excluding depreciation and amortization

 

 

847

 

 

 

800

 

 

 

1,754

 

 

 

1,662

 

Fees incurred pursuant to local service agreements with Nexstar Broadcasting, Inc.

 

 

4,500

 

 

 

2,445

 

 

 

9,000

 

 

 

4,890

 

Amortization of broadcast rights

 

 

1,389

 

 

 

1,376

 

 

 

2,781

 

 

 

2,844

 

Amortization of intangible assets

 

 

606

 

 

 

597

 

 

 

1,211

 

 

 

1,207

 

Depreciation

 

 

600

 

 

 

610

 

 

 

1,207

 

 

 

1,212

 

Total operating expenses

 

 

15,322

 

 

 

11,296

 

 

 

30,820

 

 

 

22,471

 

Income from operations

 

 

9,388

 

 

 

10,295

 

 

 

18,251

 

 

 

19,784

 

Interest expense

 

 

(2,309

)

 

 

(2,322

)

 

 

(4,622

)

 

 

(4,638

)

Income before income taxes

 

 

7,079

 

 

 

7,973

 

 

 

13,629

 

 

 

15,146

 

Income tax expense

 

 

(2,775

)

 

 

(3,070

)

 

 

(5,283

)

 

 

(5,891

)

Net income

 

$

4,304

 

 

$

4,903

 

 

$

8,346

 

 

$

9,255

 

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

 

 

 

2


 

MISSION BROADCASTING, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

8,346

 

 

$

9,255

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

4,666

 

 

 

5,388

 

Provision for bad debt

 

 

54

 

 

 

21

 

Depreciation of property and equipment

 

 

1,207

 

 

 

1,212

 

Amortization of intangible assets

 

 

1,211

 

 

 

1,207

 

Amortization of debt financing costs and debt discount

 

 

280

 

 

 

270

 

Amortization of broadcast rights, excluding barter

 

 

796

 

 

 

844

 

Payments for broadcast rights

 

 

(861

)

 

 

(888

)

Deferred gain recognition

 

 

(99

)

 

 

(100

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,346

)

 

 

(1,589

)

Prepaid expenses and other current assets

 

 

(51

)

 

 

(39

)

Other noncurrent assets

 

 

(5

)

 

 

(19

)

Accounts payable and accrued expenses

 

 

859

 

 

 

975

 

Other noncurrent liabilities

 

 

(105

)

 

 

(66

)

Due to/due from Nexstar Broadcasting, Inc.

 

 

(14,859

)

 

 

(10,153

)

Net cash (used in) provided by operating activities

 

 

(907

)

 

 

6,318

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(110

)

 

 

(36

)

Deposit refund

 

 

-

 

 

 

150

 

Net cash (used in) provided by investing activities

 

 

(110

)

 

 

114

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

(1,167

)

 

 

(6,418

)

Payments for debt financing costs

 

 

-

 

 

 

(8

)

Net cash used in financing activities

 

 

(1,167

)

 

 

(6,426

)

Net (decrease) increase in cash and cash equivalents

 

 

(2,184

)

 

 

6

 

Cash and cash equivalents at beginning of period

 

 

4,361

 

 

 

880

 

Cash and cash equivalents at end of period

 

$

2,177

 

 

$

886

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

Interest paid

 

$

4,343

 

 

$

4,366

 

Income taxes paid, net of refunds

 

$

731

 

 

$

557

 

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

 

 

 

3


 

MISSION BROADCASTING, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

 

1.  Organization and Business Operations

As of June 30, 2016, Mission Broadcasting, Inc. (“Mission” or the “Company”) owned and operated 18 full power television stations, affiliated with the NBC, ABC, CBS, FOX or The CW television networks, in 17 markets located in the states of Arkansas, Illinois, Indiana, Louisiana, Missouri, Montana, New York, Pennsylvania, Texas and Vermont. The Company operates in one reportable television broadcasting segment. Through local service agreements, Nexstar Broadcasting, Inc. (“Nexstar”) provides sales and operating services to all of the Mission television stations (see Note 3).

The Company is highly leveraged, which makes it vulnerable to changes in general economic conditions. The Company’s ability to repay or refinance its debt will depend on, among other things, financial, business, market, competitive and other conditions, many of which are beyond its control, as well as Nexstar maintaining its pledge to continue the local service agreements with the Company’s stations. Management believes that with Nexstar’s pledge to continue the local service agreements as described in a letter of support dated March 25, 2016, the Company’s available cash, anticipated cash flow from operations and available borrowings under its senior secured credit facility should be sufficient to fund working capital, capital expenditure requirements, interest payments and scheduled debt principal payments for at least the next twelve months from June 30, 2016, enabling Mission to continue to operate as a going concern.

Nexstar’s senior secured credit facility agreement contains covenants which require Nexstar to comply with certain financial ratios, including (a) a maximum consolidated total net leverage ratio, (b) a maximum consolidated first lien net leverage ratio, and (c) a minimum consolidated fixed charge coverage ratio. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar and its variable interest entities, including Mission. The Company’s senior secured credit facility agreement does not contain financial covenant ratio requirements; however, it does include default provisions in the event Nexstar does not comply with all covenants contained in its credit agreement. As of June 30, 2016, Nexstar has informed Mission that it was in compliance with all covenants contained in its credit agreement and the indentures governing its senior unsecured notes.

 

2.  Summary of Significant Accounting Policies

Interim Financial Statements

The Condensed Financial Statements as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 are unaudited. However, in the opinion of management, such financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The preparation of the Condensed Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year. These Condensed Financial Statements should be read in conjunction with the Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The balance sheet as of December 31, 2015 has been derived from the audited Financial Statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Financial Instruments

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

Basis of Presentation

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


4


 

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which updates the accounting guidance on revenue recognition. This standard is intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Transition to the new guidance may be done using either a full or modified retrospective method. The Company is currently evaluating the impact of the provisions of the accounting standard update.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). The new guidance requires the recording of assets and liabilities arising from leases on the balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements.  The new guidance is expected to provide transparency of information and comparability among organizations. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the provisions of the accounting standard update.

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (ASU 2016-08). The purpose of ASU 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (ASU 2016-10), which clarifies the implementation guidance in identifying performance obligations in a contract and determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (ASU 2016-12). The standard amends guidance in the new revenue standard on collectibility, noncash consideration, presentation of sales tax, and transition and are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as those for ASU 2014-09 discussed above. The Company is currently evaluating the impact of these updates on its financial statements.

 

3.  Local Service Agreements with Nexstar

The Company has entered into local service agreements with Nexstar to provide sales and/or operating services to all of its stations. For the stations with a shared services agreement (“SSA”), the Nexstar station in the market provides certain services including news production, technical maintenance and security, in exchange for monthly payments to Nexstar. For each station with which the Company has entered into an SSA, it has also entered into a joint sales agreement (“JSA”), whereby Nexstar sells certain advertising time of the station and retains a percentage of the related revenue. For the stations with a time brokerage agreement (“TBA”), Nexstar programs most of the station’s broadcast time, sells the station’s advertising time and retains the advertising revenue it generates in exchange for monthly payments to Mission, based on the station’s monthly operating expenses. JSA and TBA fees generated from Nexstar under the agreements are reported as “Revenue from Nexstar Broadcasting, Inc.,” and SSA fees incurred by Mission under the agreements are reported as “Fees incurred pursuant to local service agreements with Nexstar Broadcasting, Inc.” in the accompanying Condensed Statements of Operations.

Under these agreements, Mission is responsible for certain operating expenses of its stations and therefore may have unlimited exposure to any potential operating losses. Mission will continue to operate its stations under the SSAs and JSAs or TBAs until the termination of such agreements. The local service agreements generally have a term of eight to ten years. Nexstar indemnifies Mission from Nexstar’s activities pursuant to the local service agreements to which Nexstar is a party.

Under the local service agreements, Nexstar receives substantially all of the Company’s available cash, after satisfaction of operating costs and debt obligations. The Company anticipates that Nexstar will continue to receive substantially all of its available cash, after satisfaction of operating costs and debt obligations. In compliance with FCC regulations for both the Company and Nexstar, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations. Mission had the following local service agreements in effect with Nexstar as of June 30, 2016:

 

 

Service Agreements

 

Full Power Stations

TBA Only

 

WFXP and KHMT

SSA & JSA

 

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

 


5


 

 

4.  Intangible Assets and Goodwill

Intangible assets subject to amortization consisted of the following (in thousands):

 

 

 

Estimated

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

useful life,

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

in years

 

 

Gross

 

 

Amortization

 

 

Net

 

 

Gross

 

 

Amortization

 

 

Net

 

Network affiliation agreements

 

 

15

 

 

$

84,505

 

 

$

(67,734

)

 

$

16,771

 

 

$

84,505

 

 

$

(66,583

)

 

$

17,922

 

Other definite-lived

  intangible assets

 

1-15

 

 

 

15,661

 

 

 

(14,751

)

 

 

910

 

 

 

15,661

 

 

 

(14,691

)

 

 

970

 

Other intangible assets

 

 

 

 

 

$

100,166

 

 

$

(82,485

)

 

$

17,681

 

 

$

100,166

 

 

$

(81,274

)

 

$

18,892

 

 

The following table presents the Company’s estimate of amortization expense for the remainder of 2016, each of the five succeeding years ended December 31 and thereafter for definite-lived intangible assets as of June 30, 2016 (in thousands):

 

Remainder of 2016

 

$

1,211

 

2017

 

 

2,298

 

2018

 

 

2,007

 

2019

 

 

1,797

 

2020

 

 

1,401

 

2021

 

 

1,401

 

Thereafter

 

 

7,566

 

 

 

$

17,681

 

 

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

 

 

 

Goodwill

 

 

FCC Licenses

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Gross

 

 

Impairment

 

 

Net

 

 

Gross

 

 

Impairment

 

 

Net

 

Balances as of December 31, 2015

 

$

34,039

 

 

$

(1,550

)

 

$

32,489

 

 

$

52,260

 

 

$

(10,697

)

 

$

41,563

 

Balances as of June 30, 2016

 

 

34,039

 

 

 

(1,550

)

 

 

32,489

 

 

 

52,260

 

 

 

(10,697

)

 

 

41,563

 

 

Indefinite-lived intangible assets are not subject to amortization, but are tested for impairment annually or whenever events or changes in circumstances indicate that such assets might be impaired. During the six months ended June 30, 2016, the Company did not identify any events that would trigger an impairment assessment.

 

5.  Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Network affiliation fees

 

$

6,064

 

 

$

4,125

 

Other

 

 

906

 

 

 

1,094

 

 

 

$

6,970

 

 

$

5,219

 

 

 

 


6


 

6.  Debt

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Term loans, net of financing costs and discount of $2,395 and $2,657, respectively

 

$

224,665

 

 

$

225,570

 

Less: current portion

 

 

(2,335

)

 

 

(2,335

)

 

 

$

222,330

 

 

$

223,235

 

 

2016 Transactions

Through June 2016, the Company repaid the scheduled maturity under its term loan of $1.2 million.

Unused Commitments and Borrowing Availability

As of June 30, 2016, the Company had $8.0 million unused revolving loan commitment under its amended senior secured credit facility, all of which was available for borrowing, based on the covenant calculations. Pursuant to the terms of the Company’s and Nexstar’s amended credit agreements, the Company may reallocate any of its unused revolving loan commitment to Nexstar and Nexstar may also reallocate certain of its unused revolving loan commitment to the Company.

Collateralization and Guarantees of Debt

Nexstar Broadcasting Group, Inc. (Nexstar’s parent) and its subsidiaries guarantee full payment of all obligations under the Mission senior secured credit facility in the event of Mission’s default. Similarly, Mission is a guarantor of Nexstar’s senior secured credit facility, and the $525.0 million 6.875% senior unsecured notes (the “6.875% Notes”) and $275.0 million 6.125% senior unsecured notes (the “6.125% Notes”) issued by Nexstar. The senior secured credit facilities are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses, of Nexstar and Mission.

On January 27, 2016, Nexstar Broadcasting Group, Inc. entered into a definitive merger agreement with Media General, Inc. (“Media General”) whereby Nexstar Broadcasting Group, Inc. will acquire Media General’s outstanding equity. In connection with this transaction, Nexstar Broadcasting Group, Inc. has received commitment from a group of commercial banks in the form of credit facilities and notes to provide the debt financing to consummate the merger and refinance certain existing indebtedness of Nexstar, Media General and certain of their variable interest entities. The refinancing will include Mission’s senior secured credit facilities.

On July 27, 2016, Nexstar Escrow Corporation, a wholly-owned subsidiary of Nexstar Broadcasting Group, Inc. (“Nexstar Escrow”), completed the issuance and sale of $900.0 million of 5.625% Senior Unsecured Notes due 2024 at par (the “5.625% Notes”). These notes will mature on August 1, 2024 and interest is payable semiannually in arrears on February 1 and August 1 of each year beginning on February 1, 2017.  The proceeds of the 5.625% Notes, which were deposited into a segregated escrow account, are expected to be used by Nexstar to partially finance the Media General merger, to refinance certain existing indebtedness of Nexstar and Media General, to pay related fees and expenses and for general corporate purposes. The 5.625% Notes are not currently guaranteed. Following the consummation of the merger and the debt refinancing, which is expected to occur in the fourth quarter of 2016, the 5.625% Notes will be guaranteed by Mission and Nexstar and certain of their future wholly-owned subsidiaries, subject to certain customary release provisions. Prior to the consummation of the merger, the 5.625% Notes are secured by a first-priority security interest in the escrow account and all deposits and investment property therein. The 5.625% Notes will be junior to Mission’s senior secured credit facilities to the extent of the value of the assets securing such debt.

Debt Covenants

The Mission senior secured credit facility agreement does not contain financial covenant ratio requirements, but includes default provisions in the event Nexstar does not comply with all covenants contained in its credit agreement. Nexstar has informed Mission that it was in compliance with its debt covenants as of June 30, 2016.

7


 

Fair Value of Debt

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

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Term loans

 

$

224,665

 

 

$

226,625

 

 

$

225,570

 

 

$

225,252

 

The fair values of the term loans are computed based on borrowing rates currently available to Mission for bank loans with similar terms and average maturities. These fair value measurements are considered Level 3, as significant inputs to the fair value calculation are unobservable in the market.

 

7.  FCC Regulatory Matters

Television broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the “Communications Act”). The Communications Act prohibits the operation of television broadcasting stations except under a license issued by the FCC, and empowers the FCC, among other things, to issue, revoke and modify broadcasting licenses, determine the location of television stations, regulate the equipment used by television stations, adopt regulations to carry out the provisions of the Communications Act and impose penalties for the violation of such regulations. The FCC’s ongoing rule making proceedings could have a significant future impact on the television industry and on the operation of the Company’s stations. In addition, the U.S. Congress may act to amend the Communications Act or adopt other legislation in a manner that could impact the Company’s stations and the television broadcast industry in general.

The FCC has adopted rules with respect to the final conversion of existing low power and television translator stations to digital operations, which must be completed within 51 months after the completion of the broadcast television incentive auction.

Media Ownership

The FCC is required to review its media ownership rules every four years and to eliminate those rules it finds no longer serve the “public interest, convenience and necessity.”

In March 2014, the FCC initiated its 2014 quadrennial review with the adoption of a Further Notice of Proposed Rulemaking (“FNPRM”). The FNPRM solicited comment on proposed changes to the media ownership rules. The FNPRM also proposed to define a category of sharing agreements designated as SSAs between television stations, and to require television stations to disclose those SSAs. Comments and reply comments on the FNPRM were filed in the third quarter of 2014.  On June 27, 2016, the Chairman of the FCC announced the circulation for full FCC vote of a decision in the 2014 quadrennial review.  That decision, if adopted, would (1) retain the existing local television ownership rule and radio/television cross-ownership rule (with minor technical modifications to address the transition to digital television broadcasting), (2) extend the current ban on common ownership of two top-four television stations in a market to network affiliation swaps, (3) retain the existing ban on newspaper/broadcast cross-ownership while considering waivers and providing an exception for failed or failing entities, (4) retain the existing dual network rule and (5) define a category of sharing agreements designated as SSAs between stations and require disclosure of those SSAs (while not considering them attributable).

Concurrently with its adoption of the FNPRM, the FCC also adopted a rule making television JSAs attributable to the seller of advertising time in certain circumstances. Under this rule, where a party owns a full-power television station in a market and sells more than 15% of the weekly advertising time for another, non-owned station in the same market under a JSA, that party was deemed to have an attributable interest in the latter station for purposes of the local television ownership rule. Parties to newly attributable JSAs that did not comply with the local television ownership rule were given two years to modify or terminate their JSAs to come into compliance. However, subsequent federal legislation extended the JSA compliance deadline until September 30, 2025. Various parties, including Nexstar, appealed this new rule to the U.S. Court of Appeals for the D.C. Circuit, which in November 2015 transferred the case to the U.S. Court of Appeals for the Third Circuit. Mission intervened in this proceeding. On May 25, 2016, the Third Circuit issued a decision that vacated the JSA attribution rule and remanded it to the FCC. The court determined that the FCC had violated the Communications Act by adopting the JSA attribution rule without determining, through the quadrennial review process, that the underlying local television ownership rule remains in the public interest.  As a result, the FCC’s 2014 JSA attribution rule is not effective at this time, but the FCC has announced its intention to reimpose the rule as part of its pending quadrennial review of its media ownership rules. If the Company is required to amend or terminate its existing agreements with Nexstar, it could have a reduction in revenue and increased costs if it is unable to successfully implement alternative arrangements that are as beneficial as the existing JSAs.


8


 

Spectrum

 

The FCC is seeking to make additional spectrum available to meet future wireless broadband needs. In February 2012, the U.S. Congress adopted legislation authorizing the FCC to conduct an incentive auction whereby television broadcasters could voluntarily relinquish their spectrum in exchange for consideration. The FCC has released various orders and public notices which set forth procedures that the FCC will follow in the incentive auction and the subsequent “repacking” of broadcast television spectrum, establish opening prices for television stations to relinquish their spectrum, and resolve various technical and other issues related to the incentive auction, the possible sharing of channels by television stations, and the repurposing of television spectrum for broadband use.  The Company filed an application to participate in the incentive auction, which commenced on March 29, 2016. The reallocation of television spectrum for wireless broadband use will require many television stations to change channel or otherwise modify their technical facilities. The reallocation of television spectrum to broadband use may be to the detriment of the Company’s investment in digital facilities, could require substantial additional investment to continue current operations, and may require viewers to invest in additional equipment or subscription services to continue receiving broadcast television signals. The Company cannot predict the results of television spectrum reallocation efforts or their impact to its business.

Retransmission Consent

 

On March 3, 2011, the FCC initiated a Notice of Proposed Rulemaking to reexamine its rules (i) governing the requirements for good faith negotiations between multichannel video program distributors (“MVPDs”) and broadcasters, including implementing a prohibition on one station negotiating retransmission consent terms for another station under a local service agreement; (ii) for providing advance notice to consumers in the event of dispute; and (iii) to extend certain cable-only obligations to all MVPDs. The FCC also asked for comment on eliminating the network non-duplication and syndicated exclusivity protection rules, which may permit MVPDs to import out-of-market television stations during a retransmission consent dispute.

 

In March 2014, the FCC adopted a rule that prohibits joint retransmission consent negotiation between television stations in the same market which are not commonly owned and which are ranked among the top four stations in the market in terms of audience share.  On December 5, 2014, federal legislation extended the joint negotiation prohibition to all non-commonly owned television stations in a market. This new rule requires the Company to negotiate retransmission consent agreements separately from Nexstar. The December 2014 legislation also directed the FCC to commence a rulemaking to “review its totality of the circumstances test for good faith [retransmission consent] negotiations.”  The FCC commenced this proceeding in September 2015 and comments and reply comments have been submitted. In July 2016, the Chairman of the FCC publicly announced that the agency would not adopt additional rules in this proceeding.

Concurrently with its adoption of the prohibition on certain joint retransmission consent negotiations, the FCC also adopted a further notice of proposed rulemaking which seeks additional comment on the elimination or modification of the network non-duplication and syndicated exclusivity rules. The FCC’s prohibition on certain joint retransmission consent negotiations and its possible elimination or modification of the network non-duplication and syndicated exclusivity protection rules may affect the Company’s ability to sustain its current level of retransmission consent revenues or grow such revenues in the future and could have an adverse effect on the Company’s business, financial condition and results of operations. The Company cannot predict the resolution of the FCC’s network non-duplication and syndicated exclusivity proposals, or the impact of these proposals or the FCC’s prohibition on certain joint negotiations, on its business.

Further, certain online video distributors and other over-the-top video distributors (“OTTDs”) have begun streaming broadcast programming over the Internet. In June 2014, the U.S. Supreme Court held that an OTTD’s retransmissions of broadcast television signals without the consent of the broadcast station violate copyright holders’ exclusive right to perform their works publicly as provided under the Copyright Act. In December 2014, the FCC issued a Notice of Proposed Rulemaking proposing to interpret the term “MVPD” to encompass OTTDs that make available for purchase multiple streams of video programming distributed at a prescheduled time, and seeking comment on the effects of applying MVPD rules to such OTTDs. Comments and reply comments were filed in the first and second quarters of 2015 and the Company cannot predict the outcome of the proceeding. However, if the FCC ultimately determines that an OTTD is not an MVPD, or declines to apply certain rules governing MVPDs to OTTDs, the Company’s business and results of operations could be materially and adversely affected.


9


 

 

8.  Commitments and Contingencies

Guarantee of Nexstar Debt

Mission is a guarantor of and has pledged substantially all its assets, excluding FCC licenses, to guarantee Nexstar’s credit facility. Mission is also a guarantor of Nexstar’s 6.875% Notes and 6.125% Notes.

The 6.875% Notes and the 6.125% Notes are general senior unsecured obligations subordinated to all of Mission’s senior secured debt. In the event that Nexstar is unable to repay amounts due under these debt obligations, Mission will be obligated to repay such amounts. The maximum potential amount of future payments that Mission would be required to make under these guarantees would be generally limited to the amount of borrowings outstanding under Nexstar’s senior secured credit facility, the 6.875% Notes and the 6.125% Notes. As of June 30, 2016, Nexstar had $525.0 million outstanding principal obligations under its 6.875% Notes due on November 15, 2020, had $275.0 million outstanding principal obligations under its 6.125% Notes due on February 15, 2022, and had a maximum commitment of $495.0 million under its senior secured credit facility, of which $257.5 million of principal in Term Loan B-2, $142.5 million of principal in Term Loan A and $20.0 million in revolving loans were outstanding.

Nexstar’s Term Loan B-2 is payable in consecutive quarterly installments of 0.25% of the aggregate principal, adjusted for any prepayments, with the remainder due in full at maturity on October 1, 2020. Nexstar’s Term Loan A is payable in quarterly installments that increase over time from 5.0% to 10.0% of the aggregate principal, adjusted for any prepayments, with the remainder due in full at maturity on June 28, 2018. The revolving loans are due in December 2017.

On January 27, 2016, Nexstar Broadcasting Group, Inc. entered into a definitive merger agreement with Media General, Inc. (“Media General”) whereby Nexstar Broadcasting Group, Inc. will acquire Media General’s outstanding equity. In connection with this transaction, Nexstar Broadcasting Group, Inc. has received commitment from a group of commercial banks in the form of credit facilities and notes to provide the debt financing to consummate the merger and refinance certain existing indebtedness of Nexstar, Media General and certain of their variable interest entities. The refinancing will include Mission’s senior secured credit facilities.

On July 27, 2016, Nexstar Escrow completed the issuance and sale of $900.0 million of 5.625% Notes. These notes will mature on August 1, 2024 and interest is payable semiannually in arrears on February 1 and August 1 of each year beginning on February 1, 2017.  The proceeds of the 5.625% Notes, which were deposited into a segregated escrow account, are expected to be used by Nexstar to partially finance the Media General merger, to refinance certain existing indebtedness of Nexstar and Media General, to pay related fees and expenses and for general corporate purposes. The 5.625% Notes are not currently guaranteed. Following the consummation of the merger and the debt refinancing, which is expected to occur in the fourth quarter of 2016, the 5.625% Notes will be guaranteed by Mission and Nexstar and certain of their future wholly-owned subsidiaries, subject to certain customary release provisions. Prior to the consummation of the merger, the 5.625% Notes are secured by a first-priority security interest in the escrow account and all deposits and investment property therein. The 5.625% Notes will be junior to Mission’s senior secured credit facilities to the extent of the value of the assets securing such debt.

Purchase Options Granted to Nexstar

In consideration of the guarantee of Mission’s bank credit facility by Nexstar Broadcasting Group, Inc. and its subsidiaries, Mission has granted Nexstar purchase options to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent, for consideration equal to the greater of (1) seven times the station’s cash flow, as defined in the option agreement, less the amount of its indebtedness as defined in the option agreement, or (2) the amount of its indebtedness. Cash flow is defined as income or loss from operations, plus depreciation and amortization (including amortization of broadcast rights), interest income, non-cash trade and barter expenses, nonrecurring expenses (including time brokerage agreement fees), network compensation payments received or receivable and corporate management fees, less payments for broadcast rights, non-cash trade and barter revenue and network compensation revenue. Additionally, Mission’s shareholders have granted Nexstar an option to purchase any or all of the Company’s stock, subject to FCC consent, for a price equal to the pro rata portion of the greater of (1) five times the stations’ cash flow, as defined in the agreement, reduced by the amount of indebtedness, as defined in the agreement, or (2) $100,000. These option agreements (which expire on various dates between 2017 and 2024) are freely exercisable or assignable by Nexstar without consent or approval by Mission or its shareholders. The Company expects these option agreements to be renewed upon expiration.


10


 

Indemnification Obligations

In connection with certain agreements that the Company enters into in the normal course of its business, including local service agreements, business acquisitions and borrowing arrangements, the Company enters into contractual arrangements under which the Company agrees to indemnify the other party to such arrangement from losses, claims and damages incurred by the indemnified party for certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses and the maximum potential amount of future payments the Company could be required to make under these indemnification arrangements may be unlimited. Historically, payments made related to these indemnifications have been insignificant and the Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements.

Litigation

From time to time, the Company is involved with claims that arise out of the normal course of business. In the opinion of management, any resulting liability with respect to these claims would not have a material adverse effect on the Company’s financial position or results of operations.

 

11


 

ITEM 2.

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

The following discussion and analysis should be read in conjunction with our Condensed Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and the Financial Statements and related Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2015. Throughout this discussion, all references to “Mission,” “we,” “our,” “us” and the “Company” refer to Mission Broadcasting, Inc.

Overview of Operations

As of June 30, 2016, we owned and operated 18 full power television stations. We have local service agreements with certain television stations owned by Nexstar, through which Nexstar provides various programming, sales or other services to our television stations. In compliance with FCC regulations for both Nexstar and us, we maintain complete responsibility for and control over programming, finances, personnel and operations for our stations.

The following table summarizes the various local service agreements our stations had in effect as of June 30, 2016 with Nexstar:

 

Service Agreements

 

Full Power Stations

TBA Only

 

WFXP and KHMT

SSA & JSA

 

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

Under the local service agreements, Nexstar receives substantially all of our available cash, after satisfaction of operating costs and debt obligations. We anticipate that Nexstar will continue to receive substantially all of our available cash, after satisfaction of operating costs and debt obligations. For more information about our local service agreements with Nexstar, refer to Note 3 of our Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The operating revenue of our stations is derived primarily from revenues earned under our retransmission agreements with MVPDs and 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 2016 is an election year and an Olympic year, we expect an increase in advertising revenue to be reported in 2016 compared to 2015.

We earn revenues from local cable providers, direct broadcast 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 station during specified time periods, including prime time, in exchange for network affiliation fees and the right to sell a portion of the advertising time during these broadcasts.

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.


12


 

Our primary operating expenses include network affiliation costs, which can vary based on our broadcast programming and retransmission subscribers, and 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.

Regulatory Developments

As a television broadcaster, we are highly regulated and our operations require that we obtain or renew a variety of government approvals and comply with changing federal regulations. In 2014, the FCC modified its television ownership rules such that a television station licensee that sells more than 15 percent of the weekly advertising inventory of another television station in the same Designated Market Area was deemed to have an attributable ownership interest in that station. Parties to existing JSAs that were deemed attributable interests and did not comply with the FCC’s local television station ownership rule were given until September 30, 2025 to come into compliance. Various parties, including Nexstar, appealed this rule to the U.S. Court of Appeals for the D.C. Circuit, which has transferred the appeal to the U.S. Court of Appeals for the Third Circuit. We intervened in this proceeding. On May 25, 2016, the Third Circuit issued a decision that vacated the JSA attribution rule and remanded it to the FCC.  As a result, the FCC’s 2014 JSA attribution rule is not effective at this time, but the FCC has announced its intention to re-impose the rule as part of its pending quadrennial review of its media ownership rules.  If we are required to terminate or modify our JSAs or other local service agreements, we could have a reduction in revenue and increased costs if we are unable to successfully implement arrangements that are as beneficial as the existing JSAs.

In March 2014, the FCC’s Media Bureau issued a public notice announcing “processing guidelines” for certain pending and future applications for FCC approval of television station acquisitions. The public notice indicates that the FCC will “closely scrutinize” applications which propose a JSA, SSA or local marketing agreement between television stations, combined with an option, a similar “contingent interest,” or a loan guarantee. These new processing guidelines have impacted our previously announced acquisitions and may affect future station acquisitions.

Also in March 2014, the FCC amended its rules governing retransmission consent negotiations. The amended rule initially prohibited two non-commonly owned stations ranked in the top four in viewership in a market from negotiating jointly with MVPDs. On December 5, 2014, federal legislation extended the joint negotiation prohibition to all non-commonly owned television stations in a market. We are now required to separately negotiate our retransmission consent agreements with MVPDs for certain of our stations. We cannot predict at this time the impact this amended rule will have on future negotiations with MVPDs and the impact, if any, it will have on our revenues and expenses.


13


 

Historical Performance

Revenue

The following table sets forth the principal types of revenue earned by our stations (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Retransmission compensation

 

$

13,951

 

 

$

11,122

 

 

$

27,959

 

 

$

22,042

 

Other

 

 

142

 

 

 

145

 

 

 

301

 

 

 

306

 

Barter revenue

 

 

992

 

 

 

971

 

 

 

1,985

 

 

 

2,000

 

Revenue from Nexstar

 

 

9,625

 

 

 

9,353

 

 

 

18,826

 

 

 

17,907

 

Net revenue

 

$

24,710

 

 

$

21,591

 

 

$

49,071

 

 

$

42,255

 

Results of Operations

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Net revenue

 

$

24,710

 

 

 

100.0

 

 

$

21,591

 

 

 

100.0

 

 

$

49,071

 

 

 

100.0

 

 

$

42,255

 

 

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

293

 

 

 

1.2

 

 

 

273

 

 

 

1.3

 

 

 

659

 

 

 

1.3

 

 

 

607

 

 

 

1.4

 

Station direct operating expenses

 

 

7,380

 

 

 

29.9

 

 

 

5,468

 

 

 

25.3

 

 

 

14,867

 

 

 

30.3

 

 

 

10,656

 

 

 

25.2

 

Station selling, general and administrative expenses

 

 

554

 

 

 

2.2

 

 

 

527

 

 

 

2.4

 

 

 

1,095

 

 

 

2.2

 

 

 

1,055

 

 

 

2.5

 

Fees incurred pursuant to local service agreements

  with Nexstar

 

 

4,500

 

 

 

18.2

 

 

 

2,445

 

 

 

11.3

 

 

 

9,000

 

 

 

18.3

 

 

 

4,890

 

 

 

11.6

 

Barter expense

 

 

992

 

 

 

4.0

 

 

 

971

 

 

 

4.5

 

 

 

1,985

 

 

 

4.0

 

 

 

2,000

 

 

 

4.7

 

Depreciation

 

 

600

 

 

 

2.4

 

 

 

610

 

 

 

2.8

 

 

 

1,207

 

 

 

2.5

 

 

 

1,212

 

 

 

2.9

 

Amortization of intangible assets

 

 

606

 

 

 

2.5

 

 

 

597

 

 

 

2.8

 

 

 

1,211

 

 

 

2.5

 

 

 

1,207

 

 

 

2.9

 

Amortization of broadcast rights, excluding barter

 

 

397

 

 

 

1.6

 

 

 

405

 

 

 

1.9

 

 

 

796

 

 

 

1.7

 

 

 

844

 

 

 

2.0

 

Income from operations

 

$

9,388

 

 

 

 

 

 

$

10,295

 

 

 

 

 

 

$

18,251

 

 

 

 

 

 

$

19,784

 

 

 

 

 

 


14


 

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Revenue

Net revenue for the three months ended June 30, 2016 increased by $3.1 million, or 14.4%, from the same period in 2015. This increase was primarily attributed to compensation from retransmission consent.

Revenue from Nexstar was $9.6 million for the three months ended June 30, 2016, compared to $9.4 million for the same period in 2015, an increase of $0.3 million, or 2.9%, as 2016 is an election year. The revenue we earn from Nexstar through our JSAs is directly correlated to the advertising revenue earned at our stations.

Compensation from retransmission consent was $13.9 million for the three months ended June 30, 2016, compared to $11.1 million for the same period in 2015, an increase of $2.8 million, or 25.4%. The increase was primarily due to retransmission consent agreements providing for higher rates per subscriber during the quarter.

Operating Expenses

Corporate expenses were consistent at $0.3 million for each of the three months ended June 30, 2016 and 2015. Corporate expense relates to costs associated with the centralized management of our stations.

Station direct operating expenses, consisting primarily of news, engineering and programming, and station selling, general and administrative expenses were $7.9 million for the three months ended June 30, 2016, compared to $6.0 million for the same period in 2015, an increase of $1.9 million, or 32.3%. The increase was primarily due to an increase in programming costs of $1.9 million primarily related to recently enacted network affiliation agreements. Network affiliation fees have been increasing industry wide and will continue to increase over the next several years.

Local service agreement fees associated with Nexstar relate to services provided by Nexstar in the production of newscasts, technical maintenance, promotional and administrative support under the SSAs. SSA fees were $4.5 million for the three months ended June 30, 2016, compared to $2.4 million for the same period in 2015, an increase of $2.1 million, due to amended SSA fees effective on January 1, 2016.

Depreciation of property and equipment was consistent at $0.6 million for each of the three months ended June 30, 2016 and 2015.

Amortization of intangible assets was consistent at $0.6 million for each of the three months ended June 30, 2016 and 2015.

Interest Expense

Interest expense was consistent at $2.3 million for each of the three months ended June 30, 2016 and 2015.

Income Taxes

Income tax expense was $2.8 million for the three months ended June 30, 2016 and $3.1 million for the same period in 2015, a decrease of $0.3 million, or 9.6%. The effective tax rates for the three months ended June 30, 2016 and 2015 were 39.2% and 38.5%, respectively.


15


 

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Revenue

Net revenue for the six months ended June 30, 2016 increased by $6.8 million, or 16.1%, from the same period in 2015. This increase was primarily attributed to compensation from retransmission consent.

Revenue from Nexstar was $18.8 million for the six months ended June 30, 2016, compared to $17.9 million for the same period in 2015, an increase of $0.9 million, or 5.1%, as 2016 is an election year. The revenue we earn from Nexstar through our JSAs is directly correlated to the advertising revenue earned at our stations.

Compensation from retransmission consent was $28.0 million for the six months ended June 30, 2016, compared to $22.0 million for the same period in 2015, an increase of $5.9 million, or 26.8%. The increase was primarily due to retransmission consent agreements providing for higher rates per subscriber during the quarter.

Operating Expenses

Corporate expenses were consistent at $0.7 million for the six months ended June 30, 2016, compared to $0.6 million for the same period in 2015. Corporate expense relates to costs associated with the centralized management of our stations.

Station direct operating expenses, consisting primarily of news, engineering and programming, and station selling, general and administrative expenses were $16.0 million for the six months ended June 30, 2016, compared to $11.7 million for the same period in 2015, an increase of $4.2 million, or 36.3%. The increase was primarily due to an increase in programming costs of $4.2 million primarily related to recently enacted network affiliation agreements. Network affiliation fees have been increasing industry wide and will continue to increase over the next several years.

Local service agreement fees associated with Nexstar relate to services provided by Nexstar in the production of newscasts, technical maintenance, promotional and administrative support under the SSAs. SSA fees were $9.0 million for the six months ended June 30, 2016, compared to $4.9 million for the same period in 2015, an increase of $4.1 million, due to amended SSA fees effective on January 1, 2016.

Depreciation of property and equipment was consistent at $1.2 million for each of the six months ended June 30, 2016 and 2015.

Amortization of intangible assets was consistent at $1.2 million for each of the six months ended June 30, 2016 and 2015.

Interest Expense

Interest expense was consistent at $4.6 million for each of the six months ended June 30, 2016 and 2015.

Income Taxes

Income tax expense was $5.3 million for the six months ended June 30, 2016 and $5.9 million for the same period in 2015, a decrease of $0.6 million, or 10.3%. The effective tax rates for the six months ended June 30, 2016 and 2015 were 38.8% and 38.9%, respectively.

 


16


 

Liquidity and Capital Resources

We are highly leveraged, which makes us vulnerable to changes in general economic conditions. Our ability to meet the future cash requirements described below depends on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other conditions, many of which are beyond our control. Our ability to meet future cash requirements is also dependent upon the local service agreements we have entered into with Nexstar. Under our local service agreements, Nexstar sells our advertising time and pays us a percentage of the amount collected. The payments we receive from Nexstar are a significant component of our cash flows. On March 25, 2016, 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 June 30, 2016. In order to meet future cash needs we may, from time to time, borrow under our existing senior secured credit facility. We will continue to evaluate the best use of our operating cash flow among capital expenditures and debt reduction.

Overview

The following tables present summarized financial information management believes is helpful in evaluating our liquidity and capital resources (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

 

2015

 

Net cash (used in) provided by operating activities

 

$

(907

)

 

$

6,318

 

Net cash (used in) provided by investing activities

 

 

(110

)

 

 

114

 

Net cash used in financing activities

 

 

(1,167

)

 

 

(6,426

)

Net (decrease) increase in cash and cash equivalents

 

$

(2,184

)

 

$

6

 

Cash paid for interest

 

$

4,343

 

 

$

4,366

 

Cash paid for income taxes, net of refunds

 

$

731

 

 

$

557

 

 

 

 

As of

 

 

As of

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Cash and cash equivalents

 

$

2,177

 

 

$

4,361

 

Long-term debt including current portion

 

 

224,665

 

 

 

225,570

 

Unused revolving loan commitments under senior secured credit facilities

 

 

8,000

 

 

 

8,000

 

Cash Flows – Operating Activities

Net cash flows used in operating activities were $0.9 million during the six months ended June 30, 2016, compared to the net cash provided by operating activities of $6.3 million for the same period in 2015. This was primarily due to timing of contractual payments under local service agreements with Nexstar of $4.7 million and timing of collections of accounts receivable of $0.8 million.

Cash Flows – Investing Activities

Net cash flows used in investing activities increased by $0.2 million during the six months ended June 30, 2016, compared to the same period in 2015. In March 2015, our purchase agreement to acquire two stations from Stainless Broadcasting, L.P. was terminated and we received a refund for our deposit of $0.2 million.

Cash Flows – Financing Activities

Net cash flows used in financing activities decreased by $5.3 million during the six months ended June 30, 2016, compared to the same period in 2015. In 2016, we repaid the scheduled principal maturity under our term loan of $1.2 million. In 2015, we repaid the outstanding principal balance under our revolving credit facility of $5.5 million and scheduled principal maturity under our term loan of $0.9 million.

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

17


 

Future Sources of Financing and Debt Service Requirements

As of June 30, 2016, we had total debt of $224.7 million which represented 116.6% of our total capitalization. Our high level of debt requires that a substantial portion of cash flow be dedicated to pay principal and interest on our debt, which reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.

The total amount of borrowings available to us under the revolving loan commitment of our senior credit facility is based on covenant calculations contained in Nexstar’s credit agreement. As of June 30, 2016, we have $8.0 million unused revolving loan commitment under our senior secured credit facility. Pursuant to the terms of our and Nexstar’s amended credit agreements, we may reallocate any of our unused revolving loan commitments to Nexstar and Nexstar may also reallocate certain of its unused revolving loan commitments to us.

On January 27, 2016, Nexstar Broadcasting Group, Inc. entered into a definitive merger agreement with Media General whereby Nexstar Broadcasting Group, Inc. will acquire Media General’s outstanding equity. In connection with this transaction, Nexstar Broadcasting Group, Inc. has received commitment from a group of commercial banks in the form of credit facilities and notes to provide the debt financing to consummate the merger and refinance certain existing indebtedness of Nexstar, Media General and certain of their variable interest entities. The refinancing will include our senior secured credit facilities.

On July 27, 2016, Nexstar Escrow completed the issuance and sale of $900.0 million of 5.625% Notes. These notes will mature on August 1, 2024 and interest is payable semiannually in arrears on February 1 and August 1 of each year beginning on February 1, 2017.  The proceeds of the 5.625% Notes, which were deposited into a segregated escrow account, are expected to be used by Nexstar to partially finance the Media General merger, to refinance certain existing indebtedness of Nexstar and Media General, to pay related fees and expenses and for general corporate purposes. The 5.625% Notes are not currently guaranteed. Following the consummation of the merger and the debt refinancing, which is expected to occur in the fourth quarter of 2016, the 5.625% Notes will be guaranteed by Mission and Nexstar and certain of their future wholly-owned subsidiaries, subject to certain customary release provisions. Prior to the consummation of the merger, the 5.625% Notes are secured by a first-priority security interest in the escrow account and all deposits and investment property therein. The 5.625% Notes will be junior to our senior secured credit facilities to the extent of the value of the assets securing such debt.

The following table summarizes the approximate aggregate amount of principal indebtedness scheduled to mature for the periods referenced as of June 30, 2016 (in thousands):

 

 

 

 

 

 

 

Remainder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

of 2016

 

 

2017-2018

 

 

2019-2020

 

 

Thereafter

 

Senior secured credit facility

 

$

227,060

 

 

$

1,168

 

 

$

4,670

 

 

$

221,222

 

 

$

-

 

Interest payments on our senior secured credit facility are generally paid every one to three months and are payable based on the type of interest rate selected.

The terms of our senior secured credit facility limit, but do not prohibit, us from incurring substantial amounts of additional debt in the future.

We do not have any rating downgrade triggers that would accelerate the maturity dates of our debt. However, a downgrade in our credit rating could adversely affect our ability to renew existing or obtain access to new credit facilities in the future and could increase the cost of such facilities.

Effective on January 1, 2016, the SSAs were amended to increase the monthly fees paid to Nexstar by $0.7 million.


18


 

Collateralization and Guarantees of Debt

Nexstar Broadcasting Group, Inc. and its subsidiaries guarantee full payment of all obligations under our senior secured credit facility in the event of our default. Similarly, we are a guarantor of Nexstar’s senior secured credit facility and the 6.875% Notes and the 6.125% Notes issued by Nexstar. The senior secured credit facilities are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses, of Nexstar and us. As of June 30, 2016, Nexstar had a maximum commitment of $490.0 million under its senior secured credit facility, of which $415.0 million of debt was outstanding, had $520.2 million of the 6.875% Notes outstanding and had $272.4 million of the 6.125% Notes outstanding.

On January 27, 2016, Nexstar Broadcasting Group, Inc. entered into a definitive merger agreement with Media General whereby Nexstar Broadcasting Group, Inc. will acquire Media General’s outstanding equity. In connection with this transaction, Nexstar Broadcasting Group, Inc. has received commitment from a group of commercial banks in the form of credit facilities and notes to provide the debt financing to consummate the merger and refinance certain existing indebtedness of Nexstar, Media General and certain of their variable interest entities. The refinancing will include our senior secured credit facilities.

On July 27, 2016, Nexstar Escrow completed the issuance and sale of $900.0 million of 5.625% Notes. These notes will mature on August 1, 2024 and interest is payable semiannually in arrears on February 1 and August 1 of each year beginning on February 1, 2017.  The proceeds of the 5.625% Notes, which were deposited into a segregated escrow account, are expected to be used by Nexstar to partially finance the Media General merger, to refinance certain existing indebtedness of Nexstar and Media General, to pay related fees and expenses and for general corporate purposes. The 5.625% Notes are not currently guaranteed. Following the consummation of the merger and the debt refinancing, which is expected to occur in the fourth quarter of 2016, the 5.625% Notes will be guaranteed by Mission and Nexstar and certain of their future wholly-owned subsidiaries, subject to certain customary release provisions. Prior to the consummation of the merger, the 5.625% Notes will be secured by a first-priority security interest in the escrow account and all deposits and investment property therein. The 5.625% Notes will be junior to our senior secured credit facilities to the extent of the value of the assets securing such debt.

Debt Covenants

Our ability to continue as a going concern is dependent on Nexstar’s pledge to continue the local services agreements described in a letter of support dated March 25, 2016. Our senior secured credit facility agreement does not contain financial covenant ratio requirements; however, it does include an event of default if Nexstar does not comply with all covenants contained in its credit agreement. Nexstar’s senior secured credit facility agreement contains covenants which require Nexstar to comply with certain financial ratios, including (a) a maximum consolidated total net leverage ratio, (b) a maximum consolidated first lien net leverage ratio, and (c) a minimum consolidated fixed charge coverage ratio. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar and us. As of June 30, 2016, Nexstar has informed us that it was in compliance with all covenants contained in its credit agreement and the indentures governing its senior unsecured notes.

No Off-Balance Sheet Arrangements

As of June 30, 2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Critical Accounting Policies and Estimates

Our Condensed Financial Statements have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Financial Statements and reported amounts of revenue and expenses during the period. On an ongoing basis, we evaluate our estimates, including those related to goodwill and intangible assets, bad debts, broadcast rights, trade and barter, income taxes, commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year.

Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in our Annual Report on Form 10-K for the year ended December 31, 2015. Management believes that as of June 30, 2016, there have been no material changes to this information.

19


 

Recent Accounting Pronouncements

Refer to Note 2 of our Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our adoption of recently issued accounting pronouncements, including our expected date of adoption and effects on results of operations and financial position.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including: any projections or expectations of earnings, revenue, financial performance, liquidity and capital resources or other financial items; any assumptions or projections about the television broadcasting industry; any statements of our plans, strategies and objectives for our future operations, performance, liquidity and capital resources or other financial items; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and other similar words.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ from 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, including those described in our Annual Report on Form 10-K for the year ended December 31, 2015 and in our other filings with the SEC. The forward-looking statements made in this Quarterly Report on Form 10-Q are made only as of the date hereof, and we do not have or undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances unless otherwise required by law.

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations.

Our term loan borrowings under our senior secured credit facility bear interest at a rate of 3.8% as of June 30, 2016, which represented the base rate, or LIBOR, plus the applicable margin, as defined. Our revolving loans bear interest at LIBOR plus the applicable margin, which totaled 2.4% at June 30, 2016. Interest is payable in accordance with the credit agreement.

If LIBOR were to increase by 100 basis points, or one percentage point, from its June 30, 2016 level, our annual interest expense would increase and cash flow from operations would decrease by approximately $1.1 million, based on the outstanding balance of our credit facility as of June 30, 2016. Due to the LIBOR floor on our term loan, an increase of 50 basis points in LIBOR or any decrease in LIBOR would not have an impact on our operations or cash flows. As of June 30, 2016, we have no financial instruments in place to hedge against changes in the benchmark interest rates on our senior secured credit facility.

Impact of Inflation

We believe that our results of operations are not affected by moderate changes in the inflation rate.

 


20


 

ITEM 4.

Controls and Procedures 

Evaluation of Disclosure Controls and Procedures

Mission’s management, with the participation of Mission’s President and Treasurer (who is Mission’s principal executive officer and principal financial and accounting officer), conducted an evaluation as of the end of the period covered by this report of the effectiveness of the design and operation of Mission’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.

Based upon that evaluation, Mission’s President and Treasurer concluded that as of the end of the period covered by this report, Mission’s disclosure controls and procedures were effective, at a reasonable assurance level, to ensure that information required to be disclosed by Mission in the reports it files or submits under the Securities Exchange Act of 1934, as amended, (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to Mission’s management, including its President and Treasurer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

As of the quarter ended June 30, 2016, there have been no changes in Mission’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

 

 

21


 

PART II. OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

From time to time, we are involved in litigation that arises from the ordinary operations of business, such as contractual or employment disputes or other general actions. In the event of an adverse outcome of these proceedings, we believe the resulting liabilities would not have a material adverse effect on our financial condition or results of operations.

 

ITEM 1A.

Risk Factors

There are no material changes from the risk factors previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

ITEM 3.

Defaults Upon Senior Securities

None.

 

ITEM 4.

Mine Safety Disclosures

None.

 

ITEM 5.

Other Information

None.

 

22


 

ITEM  6.