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EX-32.1 - EX-32.1 - MISSION BROADCASTING INCmbcc-ex321_6.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2017

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  

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      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

(Do not check if a smaller reporting company)

 

 

 

 

 

 

 

Emerging growth company                    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of August 11, 2017, 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, 2017 and December 31, 2016

  

1

 

 

 

 

 

 

  

Condensed Statements of Operations for the three and six months ended June 30, 2017 and 2016

  

2

 

 

 

 

 

 

  

Condensed Statements of Cash Flows for the six months ended June 30, 2017 and 2016

  

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

  

21

 

 

 

 

 

ITEM 4.

  

Controls and Procedures

  

21

 

 

 

 

 

PART II

  

OTHER INFORMATION

  

 

 

 

 

 

 

ITEM 1.

  

Legal Proceedings

  

22

 

 

 

 

 

ITEM 1A.

  

Risk Factors

  

22

 

 

 

 

 

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

22

 

 

 

 

 

ITEM 3.

  

Defaults Upon Senior Securities

  

22

 

 

 

 

 

ITEM 4.

  

Mine Safety Disclosures

  

22

 

 

 

 

 

ITEM 5.

  

Other Information

  

22

 

 

 

 

 

ITEM 6.

  

Exhibits

  

22

 

 

 

 

 


PART I. FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

MISSION BROADCASTING, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share information, unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,909

 

 

$

6,474

 

Accounts receivable, net of allowance for doubtful accounts of $134 and $92, respectively

 

 

12,789

 

 

 

12,332

 

Due from Nexstar Broadcasting, Inc.

 

 

102,431

 

 

 

80,815

 

Prepaid expenses and other current assets

 

 

1,477

 

 

 

1,337

 

Total current assets

 

 

122,606

 

 

 

100,958

 

Property and equipment, net

 

 

18,571

 

 

 

19,564

 

Goodwill

 

 

33,187

 

 

 

32,489

 

FCC licenses

 

 

43,102

 

 

 

41,563

 

Other intangible assets, net

 

 

16,989

 

 

 

16,470

 

Deferred tax assets, net

 

 

1,818

 

 

 

5,959

 

Other noncurrent assets, net

 

 

1,127

 

 

 

5,185

 

Total assets

 

$

237,400

 

 

$

222,188

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of debt

 

$

2,320

 

 

$

1,160

 

Current portion of broadcast rights payable

 

 

795

 

 

 

1,077

 

Accounts payable

 

 

1,110

 

 

 

524

 

Accrued expenses

 

 

12,038

 

 

 

7,261

 

Other current liabilities

 

 

710

 

 

 

673

 

Total current liabilities

 

 

16,973

 

 

 

10,695

 

Debt

 

 

224,459

 

 

 

222,605

 

Other noncurrent liabilities

 

 

9,358

 

 

 

9,832

 

Total liabilities

 

 

250,790

 

 

 

243,132

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders' deficit:

 

 

 

 

 

 

 

 

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

  June 30, 2017 and December 31, 2016

 

 

1

 

 

 

1

 

Subscription receivable

 

 

(1

)

 

 

(1

)

Accumulated deficit

 

 

(13,390

)

 

 

(20,944

)

Total shareholders' deficit

 

 

(13,390

)

 

 

(20,944

)

Total liabilities and shareholders' deficit

 

$

237,400

 

 

$

222,188

 

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,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net broadcast revenue

$

17,556

 

 

$

15,085

 

 

$

35,463

 

 

$

30,245

 

Revenue from Nexstar Broadcasting, Inc.

 

9,400

 

 

 

9,625

 

 

 

18,188

 

 

 

18,826

 

Net revenue

 

26,956

 

 

 

24,710

 

 

 

53,651

 

 

 

49,071

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct operating expenses, excluding depreciation and amortization

 

8,895

 

 

 

7,380

 

 

 

17,894

 

 

 

14,867

 

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

 

876

 

 

 

847

 

 

 

1,835

 

 

 

1,754

 

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

 

4,500

 

 

 

4,500

 

 

 

9,000

 

 

 

9,000

 

Amortization of broadcast rights

 

1,414

 

 

 

1,389

 

 

 

2,812

 

 

 

2,781

 

Amortization of intangible assets

 

639

 

 

 

606

 

 

 

1,244

 

 

 

1,211

 

Depreciation

 

587

 

 

 

600

 

 

 

1,175

 

 

 

1,207

 

Total operating expenses

 

16,911

 

 

 

15,322

 

 

 

33,960

 

 

 

30,820

 

Income from operations

 

10,045

 

 

 

9,388

 

 

 

19,691

 

 

 

18,251

 

Interest expense

 

(2,556

)

 

 

(2,309

)

 

 

(5,206

)

 

 

(4,622

)

Loss on extinguishment of debt

 

-

 

 

 

-

 

 

 

(2,133

)

 

 

-

 

Income before income taxes

 

7,489

 

 

 

7,079

 

 

 

12,352

 

 

 

13,629

 

Income tax expense

 

(2,917

)

 

 

(2,775

)

 

 

(4,798

)

 

 

(5,283

)

Net income

$

4,572

 

 

$

4,304

 

 

$

7,554

 

 

$

8,346

 

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,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

7,554

 

 

$

8,346

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

4,141

 

 

 

4,666

 

Provision for bad debt

 

 

42

 

 

 

54

 

Depreciation of property and equipment

 

 

1,175

 

 

 

1,207

 

Amortization of intangible assets

 

 

1,244

 

 

 

1,211

 

Amortization of debt financing costs and debt discount

 

 

360

 

 

 

280

 

Amortization of broadcast rights, excluding barter

 

 

804

 

 

 

796

 

Payments for broadcast rights

 

 

(812

)

 

 

(861

)

Deferred gain recognition

 

 

(99

)

 

 

(99

)

Loss on extinguishment of debt

 

 

2,133

 

 

 

-

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(497

)

 

 

(2,346

)

Prepaid expenses and other current assets

 

 

(418

)

 

 

(51

)

Other noncurrent assets

 

 

7

 

 

 

(5

)

Accounts payable, accrued expenses and other current liabilities

 

 

5,406

 

 

 

859

 

Other noncurrent liabilities

 

 

(181

)

 

 

(105

)

Due to/due from Nexstar Broadcasting, Inc.

 

 

(21,611

)

 

 

(14,859

)

Net cash used in operating activities

 

 

(752

)

 

 

(907

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(182

)

 

 

(110

)

Payment for acquisitions

 

 

(800

)

 

 

-

 

Net cash used in investing activities

 

 

(982

)

 

 

(110

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

230,840

 

 

 

-

 

Repayments of long-term debt

 

 

(225,892

)

 

 

(1,167

)

Payments for debt financing costs

 

 

(3,779

)

 

 

-

 

Net cash provided by (used in) financing activities

 

 

1,169

 

 

 

(1,167

)

Net decrease in cash and cash equivalents

 

 

(565

)

 

 

(2,184

)

Cash and cash equivalents at beginning of period

 

 

6,474

 

 

 

4,361

 

Cash and cash equivalents at end of period

 

$

5,909

 

 

$

2,177

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

Interest paid

 

$

5,572

 

 

$

4,343

 

Income taxes paid, net of refunds

 

$

974

 

 

$

731

 

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, 2017, Mission Broadcasting, Inc. (“Mission” or the “Company”) owned and operated 19 full power television stations, affiliated with the NBC, ABC, CBS, FOX or The CW television networks, in 18 markets located in the states of Arkansas, Colorado, 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., a subsidiary of Nexstar Media Group, Inc. (collectively “Nexstar”) provides sales and operating services to all of the Mission television stations (see Note 4).

The Company is highly leveraged, which makes it vulnerable to changes in general economic conditions. The Company’s ability to repay or refinance its debt will depend on, among other things, financial, business, market, competitive and other conditions, many of which are beyond its control, as well as Nexstar maintaining its pledge to continue the local service agreements with the Company’s stations. Management believes that with Nexstar’s pledge to continue the local service agreements as described in a letter of support dated March 14, 2017, 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, 2017, enabling Mission to continue to operate as a going concern.

Nexstar’s senior secured credit agreement contains a covenant which requires Nexstar to comply with a maximum consolidated first lien net leverage ratio of 4.50 to 1.00 beginning June 30, 2017. The financial covenant, which is formally calculated on a quarterly basis, is based on the combined results of Nexstar and its variable interest entities, including Mission. Mission’s credit 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. As of June 30, 2017, 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, 2017 and 2016 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 Consolidated 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, 2016. The balance sheet as of December 31, 2016 has been derived from the audited Financial Statements as of that date, but does not include all 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 7 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) (ASU 2014-09), 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. 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 is intended to address implementation issues that were raised by stakeholders and provide additional practical expedients. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (ASU 2016-20), which makes minor corrections or minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These updates are effective for interim and annual reporting periods beginning after December 15, 2017. The Company does not plan to early adopt, and accordingly, it will adopt these updates effective January 1, 2018. The Company is currently evaluating its adoption approach and its final determination will depend on a number of factors, including the significance of the impact of these updates on the Company’s financial results, the Company’s ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements and its ability to maintain two sets of financial information under current and new standards if it were to adopt the full retrospective approach. The Company has also started allocating resources to analyze each of its revenue streams. The Company continues to assess the potential impacts of the new standard on its financial statements.

 

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 October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16). The amendments of ASU 2016-16 were issued to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The current guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party which has resulted in diversity in practice and increased complexity within financial reporting. The amendments of ASU 2016-16 would require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and do not require new disclosure requirements. The amendments of ASU 2016-16 are effective for annual reporting periods beginning after December 15, 2017. The Company’s adoption of this update is not expected to have an impact on its financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB Emerging Issues Task Force (ASU 2016-18), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of these updates on its financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-01 provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. To be considered a business under the new guidance, it must include an input and a substantive process that together significantly contribute to the ability to create output. The amendment removes the evaluation of whether a market participant could replace missing elements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and will be applied prospectively. The potential impact of this new guidance will be assessed for future acquisitions or dispositions, but it is not expected to have a material impact on the Company's financial statements.

 


5


In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04). The standard removes Step 2 of the goodwill impairment test, which requires a company to perform procedures to determine the fair value of a reporting unit's assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, a goodwill impairment charge will now be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU No. 2017-04 will be effective for fiscal years beginning on January 1, 2020, including interim periods within those fiscal years, and early adoption as of January 1, 2017 is permitted. The new guidance is required to be applied on a prospective basis and as such, the Company will use the simplified test in its annual fourth fiscal quarter testing or more often if circumstances indicate a potential impairment may exist, or if events have affected the composition of reporting units. The new guidance is not expected to have a material impact on the Company’s financial statements.

 

3. Acquisitions

 

On May 27, 2014, Mission assumed the rights, title and interest to an existing purchase agreement, from Excalibur Broadcasting, LLC, to acquire Parker Broadcasting of Colorado, LLC (“Parker”), the owner of television station KFQX, the FOX affiliate in the Grand Junction, Colorado market, for $4.0 million in cash. In connection with this assumption, Mission paid a deposit of $3.2 million on June 13, 2014. The acquisition was approved by the FCC in February 2017 and met all other customary conditions in March 2017. The acquisition closed on March 31, 2017, at which point Mission paid the remaining purchase price of $0.8 million, funded by cash on hand. The acquisition allows the Company entrance into this market. No significant transaction costs were incurred in connection with this acquisition during the six months ended June 30, 2017.

 

Subject to final determination, which is expected to occur within twelve months of the acquisition date, the provisional fair values of the assets acquired and liabilities assumed in the acquisition are as follows (in thousands):

 

FCC licenses

 

$

1,539

 

Network affiliation agreements

 

 

1,743

 

Other intangible assets

 

 

20

 

Goodwill

 

 

698

 

Total assets acquired

 

$

4,000

 

 

The fair value assigned to goodwill is attributable to future expense reductions utilizing management’s leverage in programming and other station operating costs. The goodwill and FCC licenses are deductible for tax purposes. The intangible assets related to the network affiliation agreements are amortized over 15 years.

 

4.  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 respect to 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 with renewal periods. 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, 2017:

 

 

6


Service Agreements

 

Full Power Stations

TBA Only

 

WFXP, KHMT, and KFQX

SSA & JSA

 

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

 

 

5.  Intangible Assets and Goodwill

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

 

 

 

Estimated

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

useful life,

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

in years

 

 

Gross

 

 

Amortization

 

 

Net

 

 

Gross

 

 

Amortization

 

 

Net

 

Network affiliation agreements

 

 

15

 

 

$

86,248

 

 

$

(70,065

)

 

$

16,183

 

 

$

84,505

 

 

$

(68,885

)

 

$

15,620

 

Other definite-lived

  intangible assets

 

1-15

 

 

 

15,681

 

 

 

(14,875

)

 

 

806

 

 

 

15,661

 

 

 

(14,811

)

 

 

850

 

Other intangible assets

 

 

 

 

 

$

101,929

 

 

$

(84,940

)

 

$

16,989

 

 

$

100,166

 

 

$

(83,696

)

 

$

16,470

 

 

The increase in network affiliation and other definite-lived intangible assets relate to Mission’s acquisition of Parker as discussed in Note 3.

 

The following table presents the Company’s estimate of amortization expense for the remainder of 2017, each of the five succeeding years ended December 31 and thereafter for definite-lived intangible assets as of June 30, 2017 (in thousands):

 

Remainder of 2017

 

$

1,149

 

2018

 

 

2,129

 

2019

 

 

1,919

 

2020

 

 

1,518

 

2021

 

 

1,517

 

2022

 

 

1,517

 

Thereafter

 

 

7,240

 

 

 

$

16,989

 

 

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, 2016

 

$

34,039

 

 

$

(1,550

)

 

$

32,489

 

 

$

52,260

 

 

$

(10,697

)

 

$

41,563

 

Acquisitions (See Note 3)

 

 

698

 

 

 

-

 

 

 

698

 

 

 

1,539

 

 

 

-

 

 

 

1,539

 

Balances as of June 30, 2017

 

$

34,737

 

 

$

(1,550

)

 

$

33,187

 

 

$

53,799

 

 

$

(10,697

)

 

$

43,102

 

 

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, 2017, the Company did not identify any events that would trigger an impairment assessment.

 

6.  Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Network affiliation fees

 

$

10,564

 

 

$

5,181

 

Other

 

 

1,474

 

 

 

2,080

 

 

 

$

12,038

 

 

$

7,261

 

 

 

 

7


 

 

 

 

7.  Debt

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Term loans, net of financing costs and discount of $5,221 and $2,126, respectively

 

$

226,779

 

 

$

223,765

 

Less: current portion

 

 

(2,320

)

 

 

(1,160

)

 

 

$

224,459

 

 

$

222,605

 

 

2017 Transactions

On January 17, 2017, Mission refinanced its then existing indebtedness, which included term loans with a carrying amount of $223.8 million and an $8.0 million commitment under a senior secured revolving credit facility, none of which was outstanding at the time of refinancing. The indebtedness was extinguished and refinanced as follows: issuance $232.0 million, at 99.5%, in senior secured Term Loan B due January 17, 2024 and payable in consecutive quarterly installments of 0.25% of the principal, with the remainder due at maturity, and $3.0 million commitment under a new senior secured revolving credit facility, none of which was drawn at closing. Mission recognized a loss on extinguishment of debt of $2.1 million as a result of refinancing its previous debt.

On January 17, 2017, Mission became a guarantor of Nexstar’s $900.0 million 5.625% senior unsecured notes (the “5.625% Notes”) subject to certain customary release provisions. These notes will mature on August 1, 2024 and interest is payable semi-annually in arrears on February 1 and August 1 of each year. The 5.625% Notes are junior to Mission’s senior secured credit facility to the extent of the value of the assets securing such debt.

Through June 30, 2017, the Company repaid $225.9 million under its term loan, all of which related to the refinancing of debt detailed above.

On July 19, 2017, the Company amended its senior secured credit facility which reduced the applicable margin portion of interest rates of both its Term Loan B and revolving credit facility by 50 basis points and extended the maturity date of revolving credit facility to five years from July 19, 2017.

Unused Commitments and Borrowing Availability

As of June 30, 2017, the Company had $3.0 million unused revolving loan commitment under its 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 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. As discussed above, effective July 19, 2017, the Company amended its senior secured credit facility, including the extension of the maturity date of its revolving credit facility.

Collateralization and Guarantees of Debt

In January 2017, Nexstar entered into a new credit agreement and issued higher new term loans and a new revolving loan commitment. The proceeds from Nexstar’s borrowings under its new credit agreement and the proceeds from Nexstar’s previously issued $900.0 million 5.625% Notes were used to partially finance its merger with Media General, Inc. and the refinancing of certain of its then existing indebtedness, both of which were completed in January 2017.

Nexstar guarantees full payment of all obligations under the Mission senior secured credit facility in the event of Mission’s default. Similarly, Mission is a guarantor of Nexstar’s senior secured credit facility, the $900.0 million 5.625% Notes and the $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.

The 5.625% 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, the Company 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 5.625% Notes, and the 6.125% Notes. As of June 30, 2017, Nexstar had $885.6 million outstanding obligations under its 5.625% Notes, $272.8 million outstanding obligations under its 6.125% Notes, and had a maximum commitment of $2.7 billion under its senior secured credit facility, of which $2.3 billion in Term Loan B and $265.2 million in Term Loan A were outstanding.

8


On July 19, 2017, Nexstar amended certain terms of its senior secured credit facility (See Note 9). On August 7, 2017, Nexstar prepaid $30.0 million of the outstanding principal balance under its Term Loan B.

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, 2017.

Fair Value of Debt

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

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Term loans

 

$

226,779

 

 

$

237,448

 

 

$

223,765

 

 

$

225,646

 

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.

 

8.  FCC Regulatory Matters

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

The FCC has adopted rules with respect to the final conversion of existing low power and television translator stations to digital operations, which must be completed in July 2021.

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 August 2016, the FCC adopted a Second Report and Order (the “2016 Ownership Order”) concluding the agency’s 2010 and 2014 quadrennial reviews.  The 2016 Ownership Order (1) retains 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) extends the current ban on common ownership of two top-four television stations in a market to network affiliation swaps, (3) retains the existing ban on newspaper/broadcast cross-ownership in local markets while considering waivers and providing an exception for failed or failing entities, (4) retains the existing dual network rule, (5) makes JSA relationships attributable interests and (6) defines a category of sharing agreements designated as SSAs between stations and requires public disclosure of those SSAs (while not considering them attributable).

The 2016 Ownership Order reinstated a rule that attributes another in-market station toward the local television ownership limits when one station owner sells more than 15% of the second station’s weekly advertising inventory under a joint sales agreement (this rule had been previously adopted in 2014, but was vacated by the U.S. Court of Appeals for the Third Circuit).  Parties to JSAs entered into prior to March 31, 2014 may continue to operate under those JSAs until September 30, 2025. Nexstar has sought FCC reconsideration of the JSA attribution rule.

On February 3, 2017, the FCC terminated in full its guidance (issued on March 12, 2014) requiring careful scrutiny of broadcast television applications which propose sharing arrangements and contingent interests.  Accordingly, the FCC will no longer evaluate whether options, loan guarantees and similar otherwise non-attributable interests create undue financial influence in transactions which also include sharing arrangements between television stations.

9


The FCC’s media ownership rules limit the percentage of U.S. television households which a party may reach through its attributable interests in television stations to 39% on a nationwide basis.  Historically, the FCC has counted the ownership of an ultra-high frequency (“UHF”) station as reaching only 50% of a market’s percentage of total national audience. On August 24, 2016, the FCC adopted a Report and Order abolishing the UHF discount for the purposes of a licensee’s determination of compliance with the 39% national cap.  This rule change became effective October 24, 2016. On April 20, 2017, the FCC adopted an order on reconsideration that reinstates the UHF discount.  That order states that the FCC will launch a comprehensive rulemaking later in 2017 to evaluate the UHF discount together with the national ownership limit.  The FCC’s April 2017 reinstatement of the UHF discount became effective on June 15, 2017, when the U.S. Court of Appeals for the D.C. Circuit denied a request to stay the reinstatement. A petition for review of the FCC’s order reinstating the UHF discount remains pending at that court. Mission is in compliance with the 39% national cap limitation without the UHF discount and, therefore, with the UHF discount as well.

Spectrum

 

The FCC is in the process of repurposing a portion of the broadcast television spectrum for wireless broadband use.  Pursuant to federal legislation enacted in 2012, the FCC has conducted an incentive auction for the purpose of making additional spectrum available to meet future wireless broadband needs. Under the auction statute and rules, certain television broadcasters accepted bids from the FCC to voluntarily relinquish all or part of their spectrum in exchange for consideration, and certain wireless broadband providers and other entities submitted successful bids to acquire the relinquished television spectrum.  Over the next several years, television stations that are not relinquishing their spectrum will be “repacked” into the frequency band still remaining for television broadcast use.

 

The incentive auction commenced on March 29, 2016 and officially concluded on April 13, 2017.  None of the Company’s television stations accepted bids to relinquish their television channels.  Of those stations, seven have been assigned new channels in the reduced post-auction television band.  These “repacked” stations will be required to construct and license the necessary technical modifications to operate on their new assigned channels, and will need to cease operating on their existing channels, by deadlines which the FCC has established and which are no later than July 13, 2020.  Congress has allocated up to an industry-wide total up to $1.75 billion to reimburse television broadcasters and MVPDs for costs reasonably incurred due to the repack. This fund is not available to reimburse repacking costs for stations which are surrendering their spectrum and entering into channel sharing relationships.  Broadcasters and MVPDs were required to submit estimates to the FCC by July 12, 2017, of their reimbursable costs. As of July 14, 2017, these costs exceeded $2.1 billion (over $350 million more than the amount authorized by Congress).  We cannot determine if the FCC will be able to fully reimburse our repacking costs as this is dependent on certain factors, including our ability to incur repacking costs that are equal to or less than the FCC’s initial allocation of funds to us and whether the FCC will have available funds to reimburse us for additional repacking costs that we previously may not have anticipated. Whether the FCC will have available funds for additional reimbursements will also depend on the repacking costs that will be incurred by other broadcasters and MVPDs that are also seeking reimbursements.

 

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 impact of the incentive auction and subsequent repacking on 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 rule requires the Company to separately negotiate its retransmission consent agreements. 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 were submitted.  In July 2016, the then-Chairman of the FCC publicly announced that the agency would not adopt additional rules in this proceeding, however, the proceeding remains open.


10


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 2015. Although the FCC has not classified OTTDs as MVPDs to date, several OTTDs have signed agreements for retransmission of local stations within their markets and others are actively seeking to negotiate agreements for retransmission of local stations within their markets.

 

9.  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 6.125% Notes and Nexstar’s 5.625% Notes.

The 6.125% Notes and the 5.625% 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 6.125% Notes and, the 5.625% Notes. As of June 30, 2017, Nexstar had $272.8 million outstanding obligations under its 6.125% Notes due on February 15, 2022, $885.6 million outstanding obligations under its 5.625% Notes due on August 1, 2024, and had a maximum commitment of $2.7 billion under its senior secured credit facility, of which $2.3 billion in Term Loan B and $265.2 million in Term Loan A were outstanding.

Nexstar’s Term Loan B 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 January 17, 2024. Nexstar’s Term Loan A is payable in quarterly installments that increase over time from 1.25% to 2.5% of the aggregate principal, adjusted for any prepayments, with the remainder due in full at maturity on January 17, 2022. Nexstar has no amounts outstanding under its revolving credit facility, which will expire on January 17, 2022.

On July 19, 2017, Nexstar amended its senior secured credit facility. The main provisions of the amendments include: (i) Nexstar’s additional Term Loan A borrowings of $456.0 million, the proceeds of which were used to partially repay Nexstar’s outstanding principal balance of Term Loan B, (ii) a reduction in the applicable margin portion of Nexstar’s interest rates by 50 basis points, (iii) an extension of the maturity date of Nexstar’s Term Loan A to five years from July 19, 2017 and (iv) an extension of the maturity date of Nexstar’s revolving credit facility to five years from July 19, 2017.

On August 7, 2017, Nexstar prepaid $30.0 million of the outstanding principal balance under its Term Loan B.

Purchase Options Granted to Nexstar

In consideration of the guarantee of Mission’s bank credit facility by Nexstar Media 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 Mission 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

11


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.

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.

 

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, 2016. Throughout this discussion, all references to “Mission,” “we,” “our,” “us” and the “Company” refer to Mission Broadcasting, Inc.

Acquisitions

 

Acquisition Date

Purchase Price

 

Parker

March 31, 2017

$4.0 million in cash, of which $0.8 million was paid in March 2017 and $3.2 million was paid in June 2014

1 FOX affiliated full power television station in the Grand Junction, CO, market

Debt Transactions

 

On January 17, 2017, we refinanced our then existing indebtedness, which included term loans with a carrying amount of $223.8 million and an $8.0 million commitment under a senior secured revolving credit facility, none of which was outstanding at the time of refinancing. The indebtedness was refinanced as follows: issuance $232.0 million, at 99.5%, in new senior secured Term Loan B due January 17, 2024 and payable in consecutive quarterly installments of 0.25% of the principal, with the remainder due at maturity, and $3.0 million commitment under a new senior secured revolving credit facility, none of which was drawn at closing.

 

Through June 30, 2017, the Company repaid $225.9 million under its term loan, all of which related to the refinancing of debt detailed above.

 

On July 19, 2017, we amended our senior secured credit facility which reduced the applicable margin portion of interest rates of both our Term Loan B and revolving credit facility by 50 basis points and extended the maturity date of our revolving credit facility to five years from July 19, 2017.


12


Overview of Operations

As of June 30, 2017, we owned and operated 19 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 and personnel for our stations.

The following table summarizes the various local service agreements our stations had in effect as of June 30, 2017 with Nexstar:

 

Service Agreements

 

Full Power Stations

TBA Only

 

WFXP, KHMT, and KFQX

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 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 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. 2017 is neither an election year nor an Olympic year.

We earn revenues from local cable providers, DBS 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 network affiliation agreements pursuant to which the networks provide programming to the stations 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.

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


13


Regulatory Developments

As a television broadcaster, the Company is highly regulated and its operations require that it retain or renew a variety of government approvals and comply with changing federal regulations. In 2016, the FCC reinstated a rule providing that a television station licensee which sells more than 15 percent of the weekly advertising inventory of another television station in the same Designated Market Area is deemed to have an attributable ownership interest in that station (this rule had been adopted in 2014 but was vacated by a federal court of appeals). Parties to existing JSAs that are deemed attributable interests and do not comply with the FCC’s local television ownership rule have until September 30, 2025 to come into compliance. The Company expects ultimately to incur additional costs in complying with this new rule, although, given recent legislative and FCC actions extending the compliance deadline until September 30, 2025, the Company does not expect the rule change to impact its JSA revenue in the near term. The FCC currently has before it petitions requesting reconsideration of the JSA attribution rule. If the FCC does not reverse the JSA attribution decision or if Company is ultimately unable to obtain waivers from the FCC and is required to amend or terminate its existing agreements, however, the Company 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.

The FCC is in the process of repurposing a portion of the broadcast television spectrum for wireless broadband use. Under the auction statute and rules, certain television broadcasters accepted bids from the FCC to voluntarily relinquish all or part of their spectrum in exchange for consideration, and television stations that are not relinquishing their spectrum will be “repacked” into the frequency band still remaining for television broadcast use. Seven stations owned by the Company have been assigned to new channels in the reduced post-auction television band and will be required to construct and license the necessary technical modifications to operate on their new assigned channels on a variable schedule ending in July 2020. Congress has allocated up to an industry-wide total of $1.75 billion to reimburse television broadcasters and MVPDs for costs reasonably incurred due to the repack. The Company expects to incur costs between now and July 2020 in connection with the repack, some or all of which will be reimbursable.  If the FCC fails to fully reimburse the Company’s repacking costs, the Company could have increased costs related to the repacking.

In March 2014, the FCC amended its rule 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 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 the Company’s revenues and expenses.


14


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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retransmission compensation

 

$

16,362

 

 

$

13,951

 

 

$

33,154

 

 

$

27,959

 

Other

 

 

181

 

 

 

142

 

 

 

301

 

 

 

301

 

Barter revenue

 

 

1,013

 

 

 

992

 

 

 

2,008

 

 

 

1,985

 

Revenue from Nexstar

 

 

9,400

 

 

 

9,625

 

 

 

18,188

 

 

 

18,826

 

Net revenue

 

$

26,956

 

 

$

24,710

 

 

$

53,651

 

 

$

49,071

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

26,956

 

 

 

100.0

 

 

$

24,710

 

 

 

100.0

 

 

$

53,651

 

 

 

100.0

 

 

$

49,071

 

 

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

315

 

 

 

1.2

 

 

 

293

 

 

 

1.2

 

 

 

620

 

 

 

1.2

 

 

 

659

 

 

 

1.3

 

Station direct operating expenses

 

 

8,895

 

 

 

33.0

 

 

 

7,380

 

 

 

29.9

 

 

 

17,894

 

 

 

33.4

 

 

 

14,867

 

 

 

30.3

 

Station selling, general and administrative expenses

 

 

561

 

 

 

2.1

 

 

 

554

 

 

 

2.2

 

 

 

1,215

 

 

 

2.3

 

 

 

1,095

 

 

 

2.2

 

Fees incurred pursuant to local service agreements  with Nexstar

 

 

4,500

 

 

 

16.7

 

 

 

4,500

 

 

 

18.2

 

 

 

9,000

 

 

 

16.8

 

 

 

9,000

 

 

 

18.3

 

Barter expense

 

 

1,014

 

 

 

3.7

 

 

 

992

 

 

 

4.0

 

 

 

2,008

 

 

 

3.7

 

 

 

1,985

 

 

 

4.0

 

Depreciation

 

 

587

 

 

 

2.2

 

 

 

600

 

 

 

2.4

 

 

 

1,175

 

 

 

2.2

 

 

 

1,207

 

 

 

2.5

 

Amortization of intangible assets

 

 

639

 

 

 

2.4

 

 

 

606

 

 

 

2.5

 

 

 

1,244

 

 

 

2.3

 

 

 

1,211

 

 

 

2.5

 

Amortization of broadcast rights, excluding barter

 

 

400

 

 

 

1.4

 

 

 

397

 

 

 

1.6

 

 

 

804

 

 

 

1.4

 

 

 

796

 

 

 

1.7

 

Total operating expenses

 

 

16,911

 

 

 

 

 

 

 

15,322

 

 

 

 

 

 

 

33,960

 

 

 

 

 

 

 

30,820

 

 

 

 

 

Income from operations

 

$

10,045

 

 

 

 

 

 

$

9,388

 

 

 

 

 

 

$

19,691

 

 

 

 

 

 

$

18,251

 

 

 

 

 

 


15


Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Revenue

Net revenue for the three months ended June 30, 2017 increased by $2.2 million, or 9.1%, from the same period in 2016. This increase was primarily attributed to compensation from retransmission consent.

Revenue from Nexstar was $9.4 million for the three months ended June 30, 2017, compared to $9.6 million for the same period in 2016, a decrease of $0.2 million, or 2.3%, as 2017 is not 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 $16.4 million for the three months ended June 30, 2017, compared to $13.9 million for the same period in 2016, an increase of $2.4 million, or 17.3%. 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, 2017 and 2016. 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 $9.5 million for the three months ended June 30, 2017, compared to $7.9 million for the same period in 2016, an increase of $1.5 million, or 19.2%. The increase was primarily due to an increase in programming costs of $1.5 million primarily related to 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 each of the three months ended June 30, 2017 and 2016.

Depreciation of property and equipment was consistent at $0.6 million for each of the three months ended June 30, 2017 and 2016.

Amortization of intangible assets was consistent at $0.6 million for each of the three months ended June 30, 2017 and 2016.

Interest Expense

Interest expense was $2.6 million for the three months ended June 30, 2017, compared to $2.3 million for the same period in 2016, an increase of $0.2 million primarily due to overall increase in interest rates.

Income Taxes

 

Income tax expense was consistent at $2.9 million for the three months ended June 30, 2017, compared to $2.8 million for the same period in 2016. The effective tax rates for the three months ended June 30, 2017 and 2016 were 39.0% and 39.2%, respectively.

 

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

 

Revenue

Net revenue for the six months ended June 30, 2017 increased by $4.6 million, or 9.3%, from the same period in 2016. This increase was primarily attributed to compensation from retransmission consent.

Revenue from Nexstar was $18.2 million for the six months ended June 30, 2017, compared to $18.8 million for the same period in 2016, a decrease of $0.6 million, or 3.4%, as 2017 is not 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 $33.1 million for the six months ended June 30, 2017, compared to $28.0 million for the same period in 2016, an increase of $5.2 million, or 18.6%. The increase was primarily due to retransmission consent agreements providing for higher rates per subscriber during the period.


16


Operating Expenses

Corporate expenses were consistent at $0.6 million for the six months ended June 30, 2017, compared to $0.7 million for the same period in 2016. 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 $19.1 million for the six months ended June 30, 2017, compared to $16.0 million for the same period in 2016, an increase of $3.1 million, or 19.7%. The increase was primarily due to an increase in programming costs of $3.0 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 each of the six months ended June 30, 2017 and 2016.

Depreciation of property and equipment was consistent at $1.2 million for each of the six months ended June 30, 2017 and 2016.

Amortization of intangible assets was consistent at $1.2 million for each of the six months ended June 30, 2017 and 2016.

Interest Expense

Interest expense was $5.2 million for the six months ended June 30, 2017, compared to $4.6 million for the same period in 2016, an increase of $0.6 million primarily due to one-time fees associated with the refinancing of our debt and overall increase in interest rates.

Loss on Extinguishment of Debt

In 2017, we refinanced our term loans and revolving loans which resulted in loss on debt extinguishment of $2.1 million, representing the write-off of unamortized debt financing costs and debt discounts associated with this debt extinguishment.

Income Taxes

Income tax expense was $4.8 million for the six months ended June 30, 2017 and $5.3 million for the same period in 2016. The effective tax rates for each of the six months ended June 30, 2017 and 2016 were 38.8%.

 


17


Liquidity and Capital Resources

We are highly leveraged, which makes us vulnerable to changes in general economic conditions. Our ability to meet the future cash requirements described below depends on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other conditions, many of which are beyond our control. Our ability to meet future cash requirements is also dependent upon the local service agreements we have entered into with Nexstar. Under our local service agreements, Nexstar sells our advertising time and pays us a percentage of the amount collected. The payments we receive from Nexstar are a significant component of our cash flows. On March 14, 2017, 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 August 11, 2017. 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):

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Net cash used in operating activities

 

$

(752

)

 

$

(907

)

Net cash used in investing activities

 

 

(982

)

 

 

(110

)

Net cash provided by (used in) financing activities

 

 

1,169

 

 

 

(1,167

)

Net decrease in cash and cash equivalents

 

$

(565

)

 

$

(2,184

)

Cash paid for interest

 

$

5,572

 

 

$

4,343

 

Cash paid for income taxes, net of refunds

 

$

974

 

 

$

731