10-Q 1 nxsq31110q.htm NEXSTAR Q3 2011 10Q nxsq31110q.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 September 30, 2011

OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to             .
 
Commission File Number: 000-50478
 
NEXSTAR BROADCASTING GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Delaware
23-3083125
(State of Incorporation or Organization)
(I.R.S. Employer Identification No.)
   
5215 N. O’Connor Blvd., Suite 1400, Irving, Texas
75039
(Address of Principal Executive Offices)
(Zip Code)
 
(972) 373-8800
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
 
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
x  
Smaller reporting company
¨
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of November 4, 2011, the registrant had 15,387,131 shares of Class A Common Stock and 13,411,588 shares of Class B Common Stock outstanding.

 
 

 


TABLE OF CONTENTS

   
Page
PART I
FINANCIAL INFORMATION
 
     
ITEM 1.
Financial Statements (Unaudited)
 
     
 
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010
1
     
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010
2
     
 
Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the nine months ended September 30, 2011
3
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010
4
     
 
Notes to Condensed Consolidated Financial Statements
5
     
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
     
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
35
     
ITEM 4.
Controls and Procedures
35
     
PART II
OTHER INFORMATION
 
     
ITEM 1.
Legal Proceedings
36
     
ITEM 1A.
Risk Factors
36
     
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
36
     
ITEM 3.
Defaults Upon Senior Securities
36
     
ITEM 4.
Reserved
36
     
ITEM 5.
Other Information
36
     
ITEM 6.
Exhibits
36
   
EXHIBIT INDEX
 

 
 

 

PART I. FINANCIAL INFORMATION

ITEM 1.
Financial Statements
 
NEXSTAR BROADCASTING GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information, unaudited)
 
   
September 30, 2011
   
December 31,
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 7,814     $ 23,658  
Accounts receivable, net of allowance for doubtful accounts of $872 and $2,075, respectively
    60,689       63,501  
Current portion of broadcast rights
    20,538       18,056  
Prepaid expenses and other current assets
    1,681       1,986  
Deferred tax asset
    15       15  
Total current assets
    90,737       107,216  
Property and equipment, net
    141,800       137,036  
Broadcast rights
    11,461       11,749  
Goodwill
    109,684       109,059  
FCC licenses
    115,467       106,789  
FCC licenses of Mission
    20,698       20,698  
Other intangible assets, net
    84,775       102,494  
Other noncurrent assets
    7,485       6,918  
Deferred tax asset
    566       577  
Total assets
  $ 582,673     $ 602,536  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
Current liabilities:
               
Current portion of debt
  $ 1,500     $ 1,000  
Current portion of broadcast rights payable
    17,448       15,290  
Accounts payable
    9,240       10,372  
Accrued expenses
    11,719       8,536  
Taxes payable
    257       380  
Interest payable
    15,628       9,270  
Deferred revenue
    2,485       2,803  
Other liabilities of Mission
    5,126       4,857  
Other liabilities
    1,130       1,086  
Total current liabilities
    64,533       53,594  
Debt
    621,392       642,100  
Broadcast rights payable
    10,574       10,884  
Deferred tax liabilities
    39,260       36,230  
Deferred revenue
    539       889  
Deferred gain on sale of assets
    2,299       2,495  
Deferred representation fee incentive
    4,499       4,963  
Other liabilities of Mission
    17,871       17,539  
Other liabilities
    8,673       9,007  
Total liabilities
    769,640       777,701  
Commitments and contingencies
               
                 
Stockholders’ deficit:
               
Preferred stock - $0.01 par value, 200,000 shares authorized; none issued and outstanding at each of September 30, 2011 and December 31, 2010
           
Class A Common stock - $0.01 par value, 100,000,000 shares authorized; 15,387,131 and 15,038,839 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    154       150  
Class B Common stock - $0.01 par value, 20,000,000 shares authorized; 13,411,588 shares issued and outstanding at each of September 30, 2011 and December 31, 2010
    134       134  
Class C Common stock - $0.01 par value, 5,000,000 shares authorized; none issued and outstanding at each of September 30, 2011 and December 31, 2010
           
Additional paid-in capital
    406,355       403,006  
Accumulated deficit
    (593,610 )     (578,455 )
Total stockholders’ deficit
    (186,967 )     (175,165 )
Total liabilities and stockholders’ deficit
  $ 582,673     $ 602,536  
 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 
1

 

NEXSTAR BROADCASTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts, unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net revenue
  $ 74,839     $ 73,126     $ 220,289     $ 216,294  
Operating expenses:
                               
Direct operating expenses, excluding depreciation and amortization
    20,826       19,669       59,634       58,232  
Selling, general, and administrative expenses, excluding depreciation and amortization
    26,346       23,986       76,313       71,990  
Amortization of broadcast rights
    6,650       5,421       17,499       15,728  
Amortization of intangible assets
    7,213       5,932       20,411       17,851  
Depreciation
    5,618       5,252       16,053       15,889  
Loss (gain) on asset disposal, net
    (82 )     10       20       (34 )
Total operating expenses
    66,571       60,270       189,930       179,656  
Income from operations
    8,268       12,856       30,359       36,638  
                                 
Interest expense, net
    (13,069 )     (14,309 )     (40,082 )     (40,153 )
Loss on extinguishment of debt
          (65 )     (1,155 )     (7,874 )
Loss before income taxes
    (4,801 )     (1,518 )     (10,878 )     (11,389 )
Income tax expense
    (1,458 )     (1,477 )     (4,277 )     (4,700 )
Net loss
  $ (6,259 )   $ (2,995 )   $ (15,155 )   $ (16,089 )
Net loss per common share:
                               
Basic and diluted
  $ (0.22 )   $ (0.11 )   $ (0.53 )   $ (0.57 )
Weighted average number of common shares outstanding:
                               
Basic and diluted
    28,799       28,432       28,568       28,431  
 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 
2

 

NEXSTAR BROADCASTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Nine Months Ended September 30, 2011
(in thousands, except share information, unaudited)

 
               
Common Stock
   
Additional
         
Total
 
   
Preferred Stock
   
Class A
   
Class B
   
Class C
   
Paid-In
   
Accumulated
   
Stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Deficit
 
Balance as of December 31, 2010
        $       15,038,839     $ 150       13,411,588     $ 134           $     $ 403,006     $ (578,455 )   $ (175,165 )
Stock-based compensation expense
                                                    863             863  
Exercise of stock options
                14,000       1                               66             67  
Issuance of stock for station acquisition
                334,292       3                               2,420             2,423  
Net loss
                                                          (15,155 )     (15,155 )
Balance as of September 30, 2011
        $       15,387,131     $ 154       13,411,588     $ 134           $     $ 406,355     $ (593,610 )   $ (186,967 )
 

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

 
3

 

NEXSTAR BROADCASTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
  $ (15,155 )   $ (16,089 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Deferred income taxes
    3,914       4,344  
Provision for bad debts
    1,517       1,026  
Depreciation of property and equipment
    16,053       15,889  
Amortization of intangible assets
    20,411       17,851  
Amortization of debt financing costs
    1,292       1,646  
Amortization of broadcast rights, excluding barter
    7,662       7,221  
Payments for broadcast rights
    (8,008 )     (7,422 )
Payment-in-kind interest accrued to debt
    21       723  
Loss (gain) on asset disposal, net
    20       (34 )
Loss on extinguishment of debt
    1,155       7,874  
Premium on debt extinguishment, net
    (254 )     (1,335 )
PIK interest paid upon debt extinguishment
    (215 )     (7,047 )
Issue discount paid upon debt extinguishment
    (3,126 )     (1,454 )
Deferred gain recognition
    (327 )     (328 )
Amortization of debt discount
    1,397       7,253  
Amortization of deferred representation fee incentive
    (464 )     (466 )
Stock-based compensation expense
    863       2,495  
Changes in operating assets and liabilities, net of acquisitions:
               
Accounts receivable
    1,343       2,434  
Prepaid expenses and other current assets
    447       (282 )
Other noncurrent assets
    4       (91 )
Accounts payable and accrued expenses
    1,344       3,167  
Taxes payable
    (123 )     (46 )
Interest payable
    6,358       12,302  
Deferred revenue
    (668 )     (1,297 )
Other liabilities of Mission
    (161 )     (582 )
Other noncurrent liabilities
    (334 )     (513 )
Net cash provided by operating activities
    34,966       47,239  
Cash flows from investing activities:
               
Purchases of property and equipment
    (10,842 )     (11,882 )
Proceeds from insurance on casualty loss
    94       459  
Payments for acquisitions
    (21,064 )      
Net cash used in investing activities
    (31,812 )     (11,423 )
Cash flows from financing activities:
               
Repayments of long-term debt
    (87,832 )     (340,729 )
Payments for debt financing costs
    (533 )     (4,187 )
Consideration paid for debt extinguishments
          (2,730 )
Proceeds from issuance of long-term debt
    69,300       316,839  
Proceeds from exercise of stock options
    67       2  
Net cash used in financing activities
    (18,998 )     (30,805 )
Net (decrease) increase in cash and cash equivalents
    (15,844 )     5,011  
Cash and cash equivalents at beginning of period
    23,658       12,752  
Cash and cash equivalents at end of period
  $ 7,814     $ 17,763  
Supplemental information:
               
Interest paid
  $ 34,208     $ 26,581  
Income taxes paid, net
  $ 499     $ 416  
Non-cash investing and financing activities:
               
Accrued debt financing costs
  $ 30     $ 204  
Accrued purchases of property and equipment
  $ 1,068     $ 382  
Purchases of property and equipment through trade
  $ 430     $  
Station acquisition through issuance of Class A common stock
  $ 2,423     $  

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

 
4

 

NEXSTAR BROADCASTING GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Organization and Business Operations
 
As of September 30, 2011, Nexstar Broadcasting Group, Inc. (“Nexstar”) owned, operated, programmed or provided sales and other services to 61 television stations and 14 digital multi-cast channels, including those owned by Mission Broadcasting, Inc. (“Mission”), in 36 markets in the states of Illinois, Indiana, Maryland, Missouri, Montana, Texas, Pennsylvania, Louisiana, Arkansas, Alabama, New York, Rhode Island, Utah, Florida, Wisconsin and Michigan. The stations are affiliates of NBC (12 stations), CBS (13 stations), ABC (10 stations), FOX (11 stations), MyNetworkTV (7 stations and one digital multi-cast channel), The CW (4 stations), LATV (2 digital multi-cast channels), Azteca America (1 station), Telemundo (1 digital multi-cast channel) and Bounce TV (10 digital multi-cast channels) and three of our stations are independent. Through various local service agreements, Nexstar provided sales, programming and other services to 25 stations and seven digital multi-cast channels owned and/or operated by independent third parties. Nexstar operates in one reportable television broadcasting segment. The economic characteristics, services, production process, customer type and distribution methods for Nexstar’s operations are substantially similar and are therefore aggregated as a single reportable segment.

In June 2011, Nexstar’s Board of Directors retained Moelis & Company as its financial advisor to assist with the exploration and evaluation of strategic alternatives intended to maximize stockholder value, including a possible sale of the Company. The Company has not made a decision to pursue any specific strategic transaction or other strategic alternative and there is no set timetable for the process, so there can be no assurance that the exploration of strategic alternatives will result in a sale of the Company or any other transaction.
 
2.
Summary of Significant Accounting Policies

Principles of Consolidation
 
The Condensed Consolidated Financial Statements include the accounts of Nexstar and its subsidiaries. Also included in the Condensed Consolidated Financial Statements are the accounts of the independently-owned variable interest entity (“VIE”), Mission (Nexstar and Mission are collectively referred to as the “Company”). Where the assets of Mission are not available to be used to settle the obligations of Nexstar, they are presented as the assets of Mission on the Condensed Consolidated Balance Sheets. Conversely, where the creditors of Mission do not have recourse to the general credit of Nexstar, the related liabilities are presented as the liabilities of Mission on the Condensed Consolidated Balance Sheets. Nexstar management evaluates each arrangement that may include variable interests and determines the need to consolidate an entity where it determines Nexstar is the primary beneficiary of a VIE in accordance with related authoritative literature and interpretive guidance.
 
All intercompany account balances and transactions have been eliminated in consolidation.

Liquidity

Nexstar is highly leveraged, which makes it vulnerable to changes in general economic conditions. Nexstar’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 Nexstar’s control.
 
During 2011, Nexstar Finance Holdings, Inc. (“Nexstar Holdings”), a wholly-owned subsidiary of Nexstar, redeemed the balance of its 11.375% senior discount notes due 2013 (“11.375% Notes”) by a redemption of $12.5 million in January 2011, a repurchase of $0.2 million in January 2011 and a redemption of the remaining balance of $33.2 million in May 2011. Nexstar Broadcasting, Inc. (“Nexstar Broadcasting”), a wholly-owned indirect subsidiary of Nexstar, repurchased additional outstanding notes during the nine months ended September 30, 2011, including $7.5 million of 7% senior subordinated notes due 2014 and $24.2 million of 7% senior subordinated PIK notes due 2014. The Company also repaid scheduled maturities on its senior secured credit facilities. See Note 7 for more details related to these transactions.


 
5

 

Additionally, in April 2011, Nexstar Broadcasting entered into an amendment to Nexstar’s senior secured credit facility. The amendment provided $50.0 million additional funding, which was used for the May redemption of the 11.375% Notes, repurchases of additional outstanding notes and general corporate purposes. See Note 7 for more details related to this amendment. Additionally, on July 1, 2011, Nexstar Broadcasting borrowed $19.3 million from its revolving loan in its senior secured credit facility in connection with the purchase of two stations. See Note 3 for more details related to this transaction. Nexstar Broadcasting repaid $12.5 million of its outstanding revolving loan on September 30, 2011.

Interim Financial Statements
 
The Condensed Consolidated Financial Statements as of September 30, 2011 and for the nine months ended September 30, 2011 and 2010 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 Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in Nexstar’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. 

Mission
 
Mission is included in these Condensed Consolidated Financial Statements because Nexstar is deemed to have a controlling financial interest in Mission as a VIE for financial reporting purposes as a result of (a) local service agreements Nexstar has with the Mission stations, (b) Nexstar’s guarantee of the obligations incurred under Mission’s senior secured credit facility (see Note 12), (c) Nexstar having power over significant activities affecting Mission’s economic performance, including budgeting for advertising revenue, advertising and hiring and firing of sales force personnel and (d) purchase options granted by Mission which will permit Nexstar to acquire the assets and assume the liabilities of each Mission station, subject to Federal Communications Commission (“FCC”) consent. The purchase options are freely exercisable or assignable by Nexstar without consent or approval by Mission 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. These option agreements expire on various dates between 2012 and 2021. The Company expects these option agreements, if unexercised, will be renewed upon expiration. As of September 30, 2011, the assets of Mission consisted of current assets of $3.7 million (excluding broadcast rights), broadcast rights of $5.4 million, FCC licenses of $20.7 million, goodwill of $18.7 million, other intangible assets of $16.5 million, property and equipment of $23.8 million and other noncurrent assets of $1.3 million. Substantially all of Mission’s assets, except for its FCC licenses, collateralize its secured debt obligation. See Note 13 for a presentation of condensed consolidating financial information of the Company, which includes the accounts of Mission.

Nexstar has entered into local service agreements with Mission to provide sales and/or operating services to the Mission stations. The following table summarizes the various local service agreements Nexstar had in effect with Mission as of September 30, 2011:
 
Service Agreements
Mission Stations
TBA Only(1)
WFXP and KHMT
   
SSA & JSA(2)
KJTL, KJBO-LP, KOLR, KCIT, KCPN-LP, KAMC, KRBC, KSAN, WUTR, WAWV, WYOU, KODE, WTVO and KTVE
           
(1)
Nexstar has a time brokerage agreement (“TBA”) with each of these stations which allows Nexstar to program most of each station’s broadcast time, sell each station’s advertising time and retain the advertising revenue generated in exchange for monthly payments to Mission.
(2)
Nexstar has both a shared services agreement (“SSA”) and a joint sales agreement (“JSA”) with each of these stations. Each SSA allows the Nexstar station in the market to provide services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments from Mission as described in the SSAs. Each JSA permits Nexstar to sell the station’s advertising time and retain a percentage of the net revenue from the station’s advertising time in return for monthly payments to Mission of the remaining percentage of net revenue as described in the JSAs.
 

 
6

 


Nexstar’s ability to receive cash from Mission is governed by these local service agreements. Under the local service agreements, Nexstar has received substantially all of Mission’s available cash, after satisfaction of operating costs and debt obligations. Nexstar anticipates it will continue to receive substantially all of Mission’s available cash, after satisfaction of its operating costs and debt obligations. In compliance with FCC regulations for both Nexstar and Mission, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations. 

Variable Interest Entities
 
The Company may determine that a station is a VIE as a result of local service agreements entered into with the owner-operator of the station. The term local service agreements generally refers to a contract between two separately owned television stations serving the same market, whereby the owner-operator of one station contracts with the owner-operator of the other station to provide it with administrative, sales and other services required for the operation of its station. Nevertheless, the owner-operator of each station retains control and responsibility for the operation of its station, including ultimate responsibility over all programming broadcast on its station. In addition to those with Mission, Nexstar has VIEs in connection with local service agreements entered into with stations as discussed below.
 
Nexstar has determined that it has variable interests in WYZZ, the FOX affiliate in Peoria, Illinois and WUHF, the FOX affiliate in Rochester, New York, each owned by a subsidiary of Sinclair Broadcasting Group, Inc. (“Sinclair”), as a result of outsourcing agreements it has entered into with Sinclair. Nexstar also has determined that it has a variable interest in WHP, the CBS affiliate in Harrisburg, Pennsylvania, which is owned by Newport Television License, LLC (“Newport”), as a result of Nexstar becoming successor-in-interest to a TBA entered into by a former owner of WLYH. Nexstar has evaluated its arrangements with Sinclair and Newport and has determined that it is not the primary beneficiary of the variable interests because it does not have the ultimate power to direct the activities that most significantly impact the economic performance of the stations, including developing the annual operating budget, programming and oversight and control of sales management personnel. Therefore Nexstar has not consolidated these stations under authoritative guidance related to the consolidation of variable interest entities. Under the outsourcing agreements with Sinclair, Nexstar pays for certain operating expenses of WYZZ and WUHF, and therefore may have unlimited exposure to any potential operating losses. Nexstar’s management believes that Nexstar’s minimum exposure to loss under the Sinclair outsourcing agreements consists of the fees paid to Sinclair. Additionally, Nexstar indemnifies the owners of WHP, WYZZ and WUHF from and against all liability and claims arising out of or resulting from its activities, acts or omissions in connection with the agreements. The maximum potential amount of future payments Nexstar could be required to make for such indemnification is undeterminable at this time. Nexstar made payments to Sinclair under the outsourcing agreements of $1.0 million and $1.2 million for the three months ended September 30, 2011 and 2010, respectively and $3.7 million and $3.2 million for the nine months then ended. Nexstar has a balance in accounts payable to Sinclair for fees under these arrangements in the amount of $0.5 million as of September 30, 2011. Nexstar also has receivables in the amount of $2.2 million for advertising aired on these two stations.

Nexstar has also determined that it has a variable interest in Four Points Media Group Holdings, LLC (“Four Points”) due to a management services agreement between the two companies. Four Points owns and operates seven individual stations in four markets. Under this agreement, Nexstar manages the stations for Four Points but does not have ultimate control over the policies or operations of the stations. Nexstar has evaluated the business arrangement with Four Points and concluded that Nexstar is not the primary beneficiary of the variable interest because it does not have the ultimate power to direct the activities that most significantly impact the economic performance of the stations, including developing the annual operating budget, setting advertising rates, programming and oversight and control of employees responsible for carrying out business activities of the stations. Therefore, Nexstar does not consolidate Four Points’ financial results into its own. As of September 30, 2011, Nexstar had a balance in accounts receivable from Four Points of $1.0 million, of which $0.5 million relates to incentive fees recorded in the three months ended September 30, 2011 for meeting certain financial targets. Nexstar owes Four Points for retransmission revenue it collects on Four Points’ behalf of $0.4 million as of September 30, 2011, which is recorded as an accrued expense. Nexstar must indemnify Four Points for any claim or liability that arises out of its acts or omissions related to the agreement. For this reason, the maximum exposure to loss as a result of this agreement with Four Points is not determinable. In September 2011, Four Points entered into a definitive agreement to sell their stations to Sinclair Broadcast Group. The management services agreement will terminate at the earlier of the closing of the sale or March 31, 2012.


 
7

 

Loss Per Share
 
Basic loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period using the treasury stock method. Potential common shares consist of stock options outstanding. For the three and nine months ended September 30, 2011 and 2010, the effect of potential common shares was anti-dilutive due to the net losses and was excluded from the computation of diluted net loss per share. Options were outstanding to purchase the following weighted-average shares of Nexstar’s Class A common stock:
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Options with a potentially dilutive effect
    1,454,212       446,593       1,350,007       595,237  
Out-of-the-money and other anti-dilutive options
    2,316,788       3,282,591       2,429,967       3,172,268  
Total options
    3,771,000       3,729,184       3,779,974       3,767,505  

Basis of Presentation
 
Certain prior year amounts have been reclassified to conform to the current year presentation.
 
Recent Accounting Pronouncements
 
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605):  Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 allows the use of companies’ estimated selling prices as the value for deliverable elements under certain circumstances and eliminates the use of the residual method for allocation of deliverable elements. The Company adopted this guidance effective January 1, 2011, and the adoption had no impact to the Company’s financial position or results of operations.

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

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

 
8

 

3.
Acquisitions
 
    On July 1, 2011, Nexstar Broadcasting acquired the assets of WFRV and WJMN, the CBS affiliates serving the Green Bay, Wisconsin and Marquette, Michigan markets, respectively, from an affiliate of Liberty Media Corporation for $21.5 million. This acquisition allows the Company entrance into these markets. The purchase consideration is comprised of $19.1 million of cash, borrowed under Nexstar Broadcasting’s senior secured credit facility, and the issuance of 334,292 unregistered shares of Nexstar Class A common stock, valued at $2.4 million.
 
    The fair values of the assets acquired and liabilities assumed in the acquisition are as follows (in thousands):

Broadcast rights
  $ 286  
Prepaid tower lease
    1,037  
Property and equipment
    9,525  
FCC licenses
    8,678  
Network affiliation agreement
    1,784  
Other intangibles
    159  
Goodwill
    439  
Other assets
    94  
Total assets acquired
    22,002  
Less:  Broadcast rights payable
    (365 )
Less:  Accrued expenses
    (149 )
Net assets acquired
  $ 21,488  
 
    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 is deductible for tax purposes. The intangible asset related to the network affiliation agreement acquired will be amortized over 15 years.

On July 14, 2011, Nexstar acquired the assets of internet technology provider GoLocal.Biz for $1.0 million. GoLocal.Biz provides local business directory, coupon, movie and entertainment listings to all 35 of Nexstar’s community portal websites and to other U.S. local market clients.
 
    The fair values of the assets acquired and liabilities assumed in the acquisition are as follows (in thousands):

Accounts receivable
  $ 48  
Property and equipment
    16  
Software and other intangible assets
    750  
Goodwill
    186  
Total assets acquired
  $ 1,000  
 
    The fair value assigned to goodwill is attributable to future revenue growth and expense reductions utilizing our large sales force and management’s experience in eMedia. The goodwill is deductible for tax purposes. The intangible asset related to the software acquired will be amortized over five years.
 
    The above acquisitions are immaterial, both individually and in aggregate, therefore we have not provided pro forma information for these acquisitions.
 
    On August 8, 2011, Nexstar signed a definitive agreement to acquire the assets of WEHT, the ABC affiliate serving the Evansville, Indiana market, from Gilmore Broadcasting Corporation for approximately $18.5 million in cash, subject to adjustments for working capital acquired. In addition, on August 8, 2011, Nexstar signed a definitive agreement to sell the FCC licenses and certain equipment of WTVW to Mission for $6.7 million in cash. Upon consummation of the sale of WTVW, Nexstar expects to sign local service agreements with Mission for WTVW, similar to Nexstar’s existing local service arrangements with Mission. Both transactions have been approved by the FCC and the Company expects them to close on December 1, 2011. Nexstar and Mission intend to fund the acquisitions with borrowings from the revolving loans under their senior secured credit facilities.


 
9

 

4.
Fair Value Measurements
 
In accordance with authoritative literature pertaining to fair value measurements for financial assets and financial liabilities measured on a recurring basis the Company utilizes the following categories of methodology for valuation of such financial assets and liabilities:
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;
 
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The Company invests in short-term interest bearing obligations with original maturities less than 90 days, primarily money market funds. The Company does not enter into investments for trading or speculative purposes. As of September 30, 2011 and December 31, 2010, the Company had $0.8 million and $17.2 million, respectively, invested in money market investments, which are carried at fair value. The Company has determined that the fair value of the money market investment is defined as Level 1 in the fair value hierarchy. See Note 7 for fair value disclosures related to the Company’s debt.

5.
Intangible Assets and Goodwill
 
Intangible assets subject to amortization consisted of the following (in thousands):
 
   
Estimated
   
September 30, 2011
   
December 31, 2010
 
   
useful life,
 in years
   
Gross
   
Accumulated Amortization
   
Net
   
Gross
   
Accumulated Amortization
   
Net
 
                                           
Network affiliation agreements
    15     $ 319,395     $ (237,350 )   $ 82,045     $ 344,662     $ (244,712 )   $ 99,950  
Other definite-lived intangible assets
    1-15       14,287       (11,557 )     2,730       13,464       (10,920 )     2,544  
Other intangible assets
          $ 333,682     $ (248,907 )   $ 84,775     $ 358,126     $ (255,632 )   $ 102,494  

Total amortization expense from definite-lived intangibles was $7.2 million and $5.9 million for the three months ended September 30, 2011 and 2010, respectively, and $20.4 million and $17.9 million for the nine months then ended. In the second quarter of 2011, the Company was notified by FOX Broadcasting Company that the affiliation agreement with three of its stations would be terminated. WTVW in Evansville, Indiana terminated effective June 30, 2011, WFFT in Ft. Wayne, Indiana terminated effective July 31, 2011 and KSFX in Springfield, Missouri terminated August 31, 2011. The intangible assets related to these affiliation agreements were amortized through the date of their terminations, resulting in incremental amortization expense of $3.0 million for the nine months ended September 30, 2011. We are in continued negotiations with FOX Broadcasting Company for the renewal of our remaining FOX affiliate stations and expect to sign a new FOX affiliation agreement by the first quarter of 2012.

The following table presents the Company’s estimate of amortization expense for the remainder of 2011, each of the five succeeding years ended December 31 and thereafter for definite-lived intangibles assets as of September 30, 2011 (in thousands):
 
Remainder of 2011
  $ 5,550  
2012
    21,859  
2013
    16,733  
2014
    10,666  
2015
    9,279  
2016
    5,525  
Thereafter
    15,163  


 
10

 

The amounts recorded to goodwill and FCC licenses were as follows (in thousands): 

   
Goodwill
   
FCC Licenses
 
   
Gross
   
Accumulated
Impairment
   
Net
   
Gross
   
Accumulated
Impairment
   
Net
 
Balance as of December 31, 2010
  $ 155,275     $ (46,216 )   $ 109,059     $ 177,689     $ (50,202 )   $ 127,487  
Acquisition of WFRV/WJMN
    439             439       8,678             8,678  
Acquisition of GoLocal.Biz
    186             186                    
Balance as of September 30, 2011
  $ 155,900     $ (46,216 )   $ 109,684     $ 186,367     $ (50,202 )   $ 136,165  

The Company expenses as incurred any costs to renew or extend its FCC licenses. Indefinite-lived intangible assets are not subject to amortization, but are tested for impairment annually or whenever events or changes in circumstances indicate that such assets might be impaired. As of September 30, 2011, the Company did not identify any events that would trigger an impairment assessment. The FCC licenses acquired for WFRV and WJMN currently expire on December 1, 2013 and October 1, 2013, respectively, when they are subject to renewal. The CBS network affiliation agreement acquired for WFRV and WJMN continues through April 16, 2014, when it is subject to renewal.

6.
Accrued Expenses

Accrued expenses consisted of the following (in thousands):
   
September 30, 2011
   
December 31, 2010
 
Compensation and related taxes
  $ 5,044     $ 3,195  
Sales commissions
    1,340       1,426  
Employee benefits
    837       719  
Property taxes
    1,216       344  
Other accruals related to operating expenses
    3,282       2,852  
    $ 11,719     $ 8,536  

7.         Debt
 
Long-term debt consisted of the following (in thousands):
   
September 30, 2011
   
December 31, 2010
 
Term loans
  $ 148,500     $ 99,500  
Revolving credit facilities
    6,800        
8.875% Senior secured second lien notes due 2017, net of discount of $6,878 and $7,564
    318,122       317,436  
7% Senior subordinated notes due 2014, net of discount of $440 and $684
    37,472       44,761  
7% Senior subordinated PIK notes due 2014, net of discount of $595 and $1,310
    111,998       135,496  
11.375% Senior discount notes due 2013
          45,907  
      622,892       643,100  
Less: current portion
    (1,500 )     (1,000 )
    $ 621,392     $ 642,100  
 
2011 Transactions

On July 29, 2011, Nexstar entered into the Fifth Amendment to its Fourth Amended and Restated Credit Agreement and Mission entered into the Third Amendment to its Third Amended and Restated Credit Agreement. The amendments, among other things, removed as an event of default the termination of more than three stations’ network affiliation agreements with major networks and lowered the maximum consolidated Nexstar Broadcasting and Mission total leverage ratio to 7.50 to 1.00 through December 30, 2012 and 6.50 to 1.00 thereafter.
 
    On July 1, 2011, Nexstar borrowed $19.3 million of its revolving loan in its senior secured credit facility in connection with the acquisition of the assets of WFRV and WJMN in Green Bay, Wisconsin and Marquette, Michigan, respectively. See Note 3 for more details on the acquisition. On September 30, 2011, Nexstar repaid $12.5 million of its outstanding revolving loan balance.


 
11

 
 
    On April 15, 2011, Nexstar Broadcasting entered into an amendment to its senior secured credit facility. The amendment expands Nexstar Broadcasting’s Term Loan B by $50.0 million to $149.5 million, allows the proceeds of the credit facility to be used to refinance the existing notes held by Nexstar Broadcasting and Nexstar Holdings and retains its incremental term loan capacity of $100.0 million. The amendment also provides for payment of normal and customary fees and expenses. The net proceeds of the additional Term Loan B funding were used to redeem the remaining balance of the 11.375% senior discount notes due 2013 (“11.375% Notes”), for additional repurchases of outstanding notes and for general corporate purposes. The additional $50.0 million Term Loan B was funded on May 15, 2011.
 
    On January 15, 2011, Nexstar Holdings redeemed, on a pro rata basis, $12.5 million of its 11.375% senior discount notes due 2013 (“11.375% Notes”). Nexstar Holdings also repurchased $0.2 million outstanding 11.375% Notes in January 2011. Both transactions were priced at approximately 102%. On May 16, 2011, Nexstar Holdings redeemed the remaining $33.2 million balance of its 11.375% Notes at the redemption price of 100.0%. These transactions resulted in a loss on extinguishment of debt of $0.7 million.
 
    In the nine months ended September 30, 2011, Nexstar Broadcasting repurchased an aggregate of $24.2 million of its outstanding 7% senior subordinated PIK notes due 2014 (“7% PIK Notes”) at prices from 97.75% to 100.5%. These repurchases resulted in a loss on extinguishment of debt of $0.3 million.
 
    In the nine months ended September 30, 2011, Nexstar Broadcasting repurchased an aggregate of $7.5 million of its outstanding 7% senior subordinated notes due 2014 (“7% Notes”) at prices from 98.25% to 100.5%. These repurchases resulted in a loss on extinguishment of debt of $0.2 million.
 
    In March, June and September 2011, Nexstar Broadcasting and Mission each paid the contractual maturities under their senior secured credit facilities, for a total payment of $1.0 million.

Unused Commitments and Borrowing Availability
 
Nexstar Broadcasting and Mission had $68.2 million of total unused revolving loan commitments under their respective senior secured credit facilities, all of which was available for borrowing, based on the covenant calculations as of September 30, 2011.

Debt Covenants
 
The Nexstar Broadcasting senior secured credit facility agreement contains covenants which require the Company to comply with certain financial covenant ratios, including (1) a maximum consolidated total leverage ratio of Nexstar Broadcasting and Mission of 7.50 to 1.00 at September 30, 2011, (2) a maximum consolidated first lien indebtedness ratio of 2.50 to 1.00 at any time and (3) a minimum consolidated fixed charge coverage ratio of 1.10 to 1.00 at any time. The covenants, which are formally calculated on a quarterly basis, are based on the combined results of Nexstar Broadcasting and Mission. Mission’s senior secured 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 senior secured credit facility agreement. As of September 30, 2011, the Company was in compliance with all of its covenants.

Collateralization and Guarantees of Debt
 
Nexstar Broadcasting’s and Mission’s senior secured credit facilities are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses, of Nexstar and Mission. Nexstar and its subsidiaries guarantee full payment of all obligations incurred under the Mission senior secured credit facility in the event of Mission’s default. Similarly, Mission is a guarantor of the Nexstar Broadcasting senior secured credit facility and the senior subordinated notes issued by Nexstar Broadcasting.
 

 
12

 

Fair Value of Debt
 
The aggregate carrying amounts and estimated fair values of the Company’s debt were as follows (in thousands):
   
September 30, 2011
   
December 31, 2010
 
   
Carrying
Amount
   
Fair Value
   
Carrying
Amount
   
Fair Value
 
 
Term loans(1)
  $ 148,500     $ 145,160     $ 99,500     $ 99,500  
Revolving credit facilities(1)
    6,800       6,724              
8.875% Senior secured second lien notes(2)
    318,122       323,781       317,436       345,313  
7% Senior subordinated notes(2)
    37,472       37,722       44,761       44,309  
7% Senior subordinated PIK notes(2)
    111,998       112,030       135,496       129,966  
11.375% Senior discount notes(2)
                45,907       46,538  
           
(1)
The fair value of senior secured credit facilities is computed based on borrowing rates currently available to Nexstar and Mission for bank loans with similar terms and average maturities. These fair value measurements are considered Level 3 (significant and unobservable).
(2)
The fair value of Nexstar’s fixed rate debt is estimated based on bid prices obtained from an investment banking firm that regularly makes a market for these financial instruments. These fair value measurements are considered Level 2 (significant and observable).
 
8.
Contract Termination
 
On March 31, 2008, Nexstar signed a ten year agreement for national sales representation with two units of Katz Television Group, a subsidiary of Katz Media Group (“Katz”), transferring 24 stations in 14 of its markets from Petry Television Inc. (“Petry”) and Blair Television Inc. (“Blair”). Nexstar, Blair, Petry and Katz entered into a termination and mutual release agreement under which Blair agreed to release Nexstar from its future contractual obligations in exchange for payments totaling $8.0 million. Katz is making the payments on behalf of Nexstar as an inducement for Nexstar to enter into the long-term contract with Katz. A liability of $7.2 million, representing the present value of the payments Katz is making to Blair, was recorded and is being recognized as a non-cash reduction to operating expenses over the term of the agreement with Katz. Effective May 1, 2009, Nexstar signed another agreement to transfer the remaining Nexstar stations to Katz and its related companies. Moving these contracts resulted in Nexstar cancelling multiple contracts with Blair. As a result, Blair sued the Company for additional termination fees. Katz indemnified the Company for all expenses related to the settlement and defense of this lawsuit. The lawsuit was settled effective May 7, 2010. Termination of these contracts resulted in an additional liability of $0.2 million, which is being recognized over the remaining contract term with Katz.

As of September 30, 2011, $0.7 million of this liability was included in other current liabilities and $4.5 million was included in deferred representation fee incentive in the accompanying Condensed Consolidated Balance Sheet. The Company recognized $0.2 million of these incentives as a reduction in selling, general, and administrative expense for each of the three months ended September 30, 2011 and 2010 and $0.6 million for each of the nine months then ended.

9.         Other Non-Current Liabilities
 
Other non-current liabilities consist of the following (in thousands):
 
   
September 30, 2011
   
December 31, 2010
 
Deferred rent
  $ 4,539     $ 4,405  
Software agreement obligation
    3,345       3,698  
Other
    789       904  
    $ 8,673     $ 9,007  


 
13

 

10.         Income Taxes

The Company’s provision for income taxes is primarily comprised of deferred income taxes resulting from the amortization of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. No tax benefit has been recognized on the Company’s taxable losses for the three and nine months ended September 30, 2011 and 2010 as the utilization of such losses is not more likely than not to be realized in the foreseeable future.

The deferred tax liabilities related to goodwill and other indefinite-lived intangible assets do not reverse on a scheduled basis and are not used to support the realization of deferred tax assets. The Company’s deferred tax assets before valuation allowance primarily result from federal and state net operating loss carryforwards (“NOLs”). The Company’s NOLs are available to reduce future taxable income if utilized before their expiration. The Company has provided a valuation allowance for certain deferred tax assets as it does not believe they are more likely than not to be realized through future taxable earnings.

11.
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 and the stations to which it provides services. 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, the stations to which it provides services and the television broadcast industry in general.

The FCC has adopted rules with respect to the final conversion of existing low power and television translator stations to digital operations. The FCC has established a September 1, 2015 deadline by which low power and television translator stations must cease analog operations, with low power and television translator stations operating on channels 52-69 being required to cease operation on those channels by December 31, 2011. The Company holds three low power analog station licenses and 13 analog television translator station licenses, three of which will need to transition to digital operations by December 31, 2011 with the remainder to transition to digital operations by September 1, 2015.
 
Media Ownership

In 2006, the FCC initiated a rulemaking proceeding to review all of its media ownership rules, as required by the Communications Act. The Commission considered rules relating to ownership of two or more TV stations in a market, ownership of local TV and radio stations by daily newspapers in the same market, cross-ownership of local TV and radio stations, and changes to how the national TV ownership limits are calculated. In February 2008, the FCC adopted modest changes to its newspaper broadcast cross-ownership rule while retaining the rest of its ownership rules then currently in effect. On July 7, 2011, the U.S. Court of Appeals for the Third Circuit vacated the FCC’s changes to its newspaper/broadcast cross-ownership rule while upholding the FCC’s retention of its other media ownership rules.

The FCC is required by statute to review its media ownership rules every four years and to eliminate those rules it finds no longer serve the “public interest, convenience and necessity.” During 2009, the FCC held a series of hearings designed to evaluate possible changes to its rules. In May 2010, the FCC formally initiated its 2010 review of its media ownership rules with the issuance of a Notice of Inquiry (NOI). The NOI is intended to assist the Commission in establishing a framework within which to analyze whether its media ownership rules remain “necessary in the public interest as a result of competition,” due to the dramatic changes occurring in the media marketplace. Numerous parties have filed comments and reply comments in response to the NOI. In June and July 2011, the FCC released to the public eleven economic studies related to its media ownership rules. The Company believes that the next step will be for the FCC to issue a Notice of Proposed Rulemaking (NPRM) to seek comment on specific proposed changes to its ownership rules. The Company cannot predict when the FCC will issue this NPRM.


 
14

 

Spectrum
 
The FCC has initiated various proceedings to assess the availability of spectrum to meet future wireless broadband needs. The FCC’s March 2010 “National Broadband Plan” recommends the reallocation of 120 megahertz of the spectrum currently used for broadcast television for wireless broadband use. The FCC has thus far requested comment on proposals that include, among other things, whether to add new frequency allocations in the television bands for licensed fixed and mobile wireless uses, whether to permit two television stations to share a single 6 megahertz channel and whether to implement technical rule modifications to improve the viability of certain channels that are underutilized by digital television stations. At the same time, Congress is considering legislation that would authorize the FCC to conduct incentive auctions whereby spectrum holders, including television broadcasters, could voluntarily relinquish all or part of their spectrum in exchange for consideration. A reallocation of television spectrum for wireless broadband use would likely involve a “repacking” of the television broadcast band, which would require some television stations to change channel or otherwise modify their technical facilities. If Congress or the FCC determines to move forward with one or more of these proposals, it 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 resolution of the proposals 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 MVPDs and broadcasters, including implementing a prohibition on one station negotiating retransmission consent terms for another station under a local service agreement; (ii) for providing advance notice to consumers in the event of dispute; and (iii) to extend certain cable-only obligations to all MVPDs. The FCC has also asked for comment on eliminating the network non-duplication and syndicated exclusivity protection rules, which may permit MVPDs to import out-of-market television stations during a retransmission consent dispute. If the FCC prohibits joint negotiations or modifies the network non-duplication and syndicated exclusivity protection rules, such changes likely would affect the Company’s ability to sustain its current level of retransmission consent revenues or grow such revenues in the future and could have an adverse effect on the Company’s business, financial condition and results of operations. The Company cannot predict the resolution of the proposals or their impact to its business.

12.
Commitments and Contingencies
 
Guarantee of Mission Debt
 
Nexstar and its subsidiaries guarantee full payment of all obligations incurred under Mission’s senior secured credit facility. In the event that Mission is unable to repay amounts due, Nexstar will be obligated to repay such amounts. The maximum potential amount of future payments that Nexstar would be required to make under this guarantee would be generally limited to the amount of borrowings outstanding. As of September 30, 2011, Mission had a maximum commitment of $48.5 million under its senior secured credit facility, of which $38.5 million of debt was outstanding.

Indemnification Obligations
 
In connection with certain agreements into which the Company enters 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 third 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 immaterial 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 its 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, results of operations or cash flows.

On July 25, 2011, Nexstar filed a federal civil antitrust lawsuit in the Northern District of Indiana against Granite Broadcasting Corporation (“Granite”) and certain subsidiaries to remedy the anticompetitive impact that has and will be caused by exclusive affiliate agreements Granite has executed with three of the four major television networks (and five of the six national networks) in the Fort Wayne, Indiana Designated Market Area. 

 
15

 

13.
Condensed Consolidating Financial Information
 
The following condensed consolidating financial information presents the financial position, results of operations and cash flows of the Company, including each of its 100%, directly or indirectly, owned subsidiaries. This information is presented in lieu of separate financial statements and other related disclosures pursuant to Regulation S-X Rule 3-10 of the Securities Exchange Act of 1934, as amended, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or being Registered.”
 
The Nexstar column presents the parent company’s financial information (not including any subsidiaries). The Nexstar Holdings column presents its financial information (not including any subsidiaries). The Nexstar Broadcasting column presents its financial information. The Mission column presents the financial information of Mission, an entity which Nexstar Broadcasting is required to consolidate as a variable interest entity (see Note 2). Neither Mission nor Nexstar Broadcasting has any subsidiaries.

Prior periods have been reclassified to conform to current presentation.

The Company and its subsidiaries have the following notes outstanding:
 
1. Nexstar Holdings had the 11.375% Notes outstanding as of December 31, 2010. The 11.375% Notes were fully and unconditionally guaranteed by Nexstar, subject to certain customary release provisions, but not guaranteed by any other entities. The 11.375% Notes were redeemed in full in May 2011.
 
2. Nexstar Broadcasting has the following notes outstanding: 
 
(a)  
7% Notes. The 7% Notes are fully and unconditionally guaranteed by Nexstar and Mission, subject to certain customary release provisions. These notes are not guaranteed by any other entities.
 
(b)  
7% PIK Notes. The 7% PIK Notes are fully and unconditionally guaranteed by Nexstar and Mission, subject to certain customary release provisions. These notes are not guaranteed by any other entities.
 
(c)  
8.875% Notes. The 8.875% Notes are co-issued by Nexstar Broadcasting and Mission, jointly and severally, and fully and unconditionally guaranteed by Nexstar and all of Nexstar Broadcasting’s and Mission’s future 100% owned domestic subsidiaries, subject to certain customary release provisions. The net proceeds to Mission and Nexstar from the sale of the 8.875% Notes were $316.8 million, net of $8.2 million original issuance discount. Mission received $131.9 million of the net proceeds and $184.9 million was received by Nexstar Broadcasting. As the obligations under the 8.875% Notes are joint and several to Nexstar Broadcasting and Mission, each entity reflects the full amount of the 8.875% Notes and related accrued interest in their separate financial statements. Further, the portions of the net proceeds and related accrued interest attributable to the respective co-issuer are reflected as a reduction to equity (due from affiliate) in their separate financial statements given the contractual relationships between the entities.

 
16

 

CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2011
(in thousands)
 
   
Nexstar
   
Nexstar
Broadcasting
   
Mission
   
Nexstar
Holdings
   
Eliminations
   
Consolidated
Company
 
ASSETS
                                   
Current assets:
                                   
Cash and cash equivalents
  $     $ 6,318     $ 1,496     $     $     $ 7,814  
Due from Mission
          3,050                   (3,050 )      
Other current assets
          77,297       5,626                   82,923  
Total current assets
          86,665       7,122             (3,050 )     90,737  
Amounts due from subsidiary eliminated upon consolidation
    9,778                         (9,778 )      
Amounts due from parents eliminated upon consolidation
          5,462                   (5,462 )      
Property and equipment, net
          117,979       23,821                   141,800  
Goodwill
          90,955       18,729                   109,684  
FCC licenses
          115,467       20,698                   136,165  
Other intangible assets, net
          68,229       16,546                   84,775  
Other noncurrent assets
          16,225       3,287                   19,512  
Total assets
  $ 9,778     $ 500,982     $ 90,203     $     $ (18,290 )   $ 582,673  
LIABILITIES AND
STOCKHOLDERS’ DEFICIT
                                               
Current liabilities:
                                               
Current portion of debt
  $     $ 1,110     $ 390     $     $     $ 1,500  
Due to Nexstar Broadcasting
                3,050             (3,050 )      
Other current liabilities
          57,901       18,352             (13,220 )     63,033  
Total current liabilities
          59,011       21,792             (16,270 )     64,533  
Debt
          583,269       356,245             (318,122 )     621,392  
Deficiencies in subsidiaries eliminated upon consolidation
    222,385                   207,143       (429,528 )      
Amounts due to subsidiary eliminated upon consolidation
                      15,240       (15,240 )      
Other noncurrent liabilities
    (3 )     65,845       17,871       2             83,715  
Total liabilities
    222,382       708,125       395,908       222,385       (779,160 )     769,640  
Stockholders’ deficit:
                                               
Common stock
    288                               288  
Other stockholders’ deficit
    (212,892 )     (207,143 )     (305,705 )     (222,385 )     760,870       (187,255 )
Total stockholders’ deficit
    (212,604 )     (207,143 )     (305,705 )     (222,385 )     760,870       (186,967 )
Total liabilities and stockholders’ deficit
  $ 9,778     $ 500,982     $ 90,203     $     $ (18,290 )   $ 582,673  


 
17

 

CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2010
(in thousands)
 
   
Nexstar
   
Nexstar
Broadcasting
   
Mission
   
Nexstar
Holdings
   
Eliminations
   
Consolidated
Company
 
ASSETS
                                   
Current assets:
                                   
Cash and cash equivalents
  $     $ 22,409     $ 1,249     $     $     $ 23,658  
Due from Mission
          8,423                   (8,423 )      
Other current assets
          78,613       4,945                   83,558  
Total current assets
          109,445       6,194             (8,423 )     107,216  
Amounts due from subsidiary eliminated upon consolidation
    6,425                         (6,425 )      
Amounts due from parents eliminated upon consolidation
          6,929                   (6,929 )      
Property and equipment, net
          111,368       25,668                   137,036  
Goodwill
          90,330       18,729                   109,059  
FCC licenses
          106,789       20,698                   127,487  
Other intangible assets, net
          82,125       20,369                   102,494  
Other noncurrent assets
          15,395       3,340       509             19,244  
Total assets
  $ 6,425     $ 522,381     $ 94,998     $ 509     $ (21,777 )   $ 602,536  
LIABILITIES AND
STOCKHOLDERS’ DEFICIT
                                               
Current liabilities:
                                               
Current portion of debt
  $     $ 610     $ 390     $     $     $ 1,000  
Due to Nexstar Broadcasting
                8,423             (8,423 )      
Other current liabilities
          46,425       10,872       1,306       (6,009 )     52,594  
Total current liabilities
          47,035       19,685       1,306       (14,432 )     53,594  
Debt
          557,778       355,851       45,907       (317,436 )     642,100  
Deficiencies in subsidiaries eliminated upon consolidation
    206,961                   146,901       (353,862 )      
Amounts due to subsidiary eliminated upon consolidation
                      13,354       (13,354 )      
Other noncurrent liabilities
    (3 )     64,469       17,539       2             82,007  
Total liabilities
    206,958       669,282       393,075       207,470       (699,084 )     777,701  
Stockholders’ deficit:
                                               
Common stock
    284                               284  
Other stockholders’ deficit
    (200,817 )     (146,901 )     (298,077 )     (206,961 )     677,307       (175,449 )
Total stockholders’ deficit
    (200,533 )     (146,901 )     (298,077 )     (206,961 )     677,307       (175,165 )
Total liabilities and stockholders’ deficit
  $ 6,425     $ 522,381     $ 94,998     $ 509     $ (21,777 )   $ 602,536  


 
18

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2011
(in thousands)
 
   
Nexstar
   
Nexstar
Broadcasting
   
Mission
   
Nexstar
Holdings
   
Eliminations
   
Consolidated
Company
 
Net broadcast revenue (including trade and barter)
  $     $ 71,784     $ 3,055     $     $     $ 74,839  
Revenue between consolidated entities
          1,785       6,469             (8,254 )      
Net revenue
          73,569       9,524             (8,254 )     74,839  
Operating expenses:
                                               
Direct operating expenses, excluding depreciation and amortization
          19,441       1,385                   20,826  
Selling, general, and administrative expenses, excluding depreciation and amortization
          25,802       544                   26,346  
Local service agreement fees between consolidated entities
          6,469       1,785             (8,254 )      
Amortization of broadcast rights
          5,633       1,017                   6,650  
Amortization of intangible assets
          5,942       1,271                   7,213  
Depreciation
          4,919       699                   5,618  
(Gain) loss on asset disposal, net
          (55 )     (27 )                 (82 )
Total operating expenses
          68,151       6,674             (8,254 )     66,571  
Income from operations
          5,418       2,850                   8,268  
Interest expense, net
          (9,385 )     (3,684 )                 (13,069 )
Loss on extinguishment of debt
                                   
Equity in loss of subsidiaries
    (5,112 )                 (5,112 )     10,224        
Loss before income taxes
    (5,112 )     (3,967 )     (834 )     (5,112 )     10,224       (4,801 )
Income tax expense
          (1,145 )     (313 )                 (1,458 )
Net loss
  $ (5,112 )   $ (5,112 )   $ (1,147 )   $ (5,112 )   $ 10,224     $ (6,259 )

 
19

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2010
(in thousands)
 
   
Nexstar
   
Nexstar
Broadcasting
   
Mission
   
Nexstar
Holdings
   
Eliminations
   
Consolidated
Company
 
Net broadcast revenue (including trade and barter)
  $     $ 70,731     $ 2,395     $     $     $ 73,126  
Revenue between consolidated entities
          1,785       6,813             (8,598 )      
Net revenue
          72,516       9,208             (8,598 )     73,126  
Operating expenses:
                                               
Direct operating expenses, excluding depreciation and amortization
          18,357       1,312                   19,669  
Selling, general, and administrative expenses, excluding depreciation and amortization
          23,378       608                   23,986  
Local service agreement fees between consolidated entities
          6,813       1,785             (8,598 )      
Amortization of broadcast rights
          4,481       940                   5,421  
Amortization of intangible assets
          4,645       1,287                   5,932  
Depreciation
          4,511       741                   5,252  
Loss (gain) on asset disposal, net
          8       2                   10  
Total operating expenses
          62,193       6,675             (8,598 )     60,270  
Income from operations
          10,323       2,533                   12,856  
Interest expense, net
          (9,167 )     (3,662 )     (1,480 )           (14,309 )
Loss on extinguishment of debt
          (65 )                       (65 )
Equity in loss of subsidiaries
    (1,561 )                 (81 )     1,642        
(Loss) income before income taxes
    (1,561 )     1,091       (1,129 )     (1,561 )     1,642       (1,518 )
Income tax expense
          (1,172 )     (305 )                 (1,477 )
Net loss
  $ (1,561 )   $ (81 )   $ (1,434 )   $ (1,561 )   $ 1,642     $ (2,995 )

 
20

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2011
(in thousands)
 
   
Nexstar