10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 10-K

 


 

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

for the fiscal year ended December 31, 2006

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 Organization or Incorporation)   (IRS Employer Identification No.)

909 Lake Carolyn Parkway, Suite 1450

Irving, Texas 75039

  (972) 373-8800
(Address of Principal Executive Offices, including Zip Code)   (Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Class A Common Stock, $0.01 par value per share

  The Nasdaq Stock Market’s National Market

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

 


Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ¨    No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨    No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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

Large accelerated filer ¨    Accelerated filer x    Non-accelerated filer ¨

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 June 30, 2006, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $54,385,099.

As of January 31, 2007, the Registrant had outstanding:

14,319,310 shares of Class A Common Stock;

13,411,588 shares of Class B Common Stock; and

662,529 shares of Class C Common Stock.

Documents Incorporated By Reference

Portions of the Proxy Statement for the Registrant’s 2007 Annual Meeting of Stockholders will be filed with the Commission within 120 days after the close of the Registrant’s fiscal year and incorporated by reference in Part III.

 



Table of Contents

TABLE OF CONTENTS

 

     Page

PART I

  

ITEM 1.

   Business    3

ITEM 1A.

   Risk Factors    17

ITEM 1B.

   Unresolved Staff Comments    26

ITEM 2.

   Properties    27

ITEM 3.

   Legal Proceedings    30

ITEM 4.

   Submission of Matters to a Vote of Security Holders    30

PART II

  

ITEM 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    31

ITEM 6.

   Selected Financial Data    33

ITEM 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    34

ITEM 7A.

   Quantitative and Qualitative Disclosures About Market Risk    56

ITEM 8.

   Consolidated Financial Statements and Supplementary Data    57

ITEM 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    57

ITEM 9A.

   Controls and Procedures    57

ITEM 9B.

   Other Information    58

PART III

  

ITEM 10.

   Directors, Executive Officers and Corporate Governance    59

ITEM 11.

   Executive Compensation    59

ITEM 12.

   Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters    59

ITEM 13.

   Certain Relationships and Related Transactions, and Director Independence    59

ITEM 14.

   Principal Accountant Fees and Services    59

PART IV

  

ITEM 15.

   Exhibits and Financial Statement Schedules    60

Index to Consolidated Financial Statements

   F-1

Index to Exhibits

   E-1

 

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General

As used in this Annual Report on Form 10-K and unless the context indicates otherwise, “Nexstar” refers to Nexstar Broadcasting Group, Inc. and its consolidated subsidiaries; “Nexstar Broadcasting” refers to Nexstar Broadcasting, Inc., our indirect subsidiary, (formerly known as Nexstar Finance, Inc.); “Nexstar Finance Holdings” refers to Nexstar Finance Holdings, Inc., our wholly-owned subsidiary; “Nexstar Group” refers to our predecessor, Nexstar Broadcasting Group, L.L.C. but not its direct or indirect subsidiaries; “Mission” refers to Mission Broadcasting, Inc.; “ABRY” refers to Nexstar Broadcasting Group, Inc.’s principal stockholder, ABRY Partners, LLC and its affiliated funds; and all references to “we,” “our,” “ours,” and “us” refer to Nexstar.

Nexstar has time brokerage agreements, shared services agreements and joint sales agreements (which we generally refer to as local service agreements) relating to the television stations owned by Mission, but does not own any of the equity interests in Mission. For a description of the relationship between Nexstar and Mission, see Item 13. “Certain Relationships and Related Transactions, and Director Independence.”

In the context of describing ownership of television stations in a particular market, the term “duopoly” refers to owning or deriving the majority of the economic benefit, through local service agreements, from two or more stations in a particular market. For more information on how we derive economic benefit from a duopoly, see Item 1. “Business” and Item 13. “Certain Relationships and Related Transactions, and Director Independence.”

There are 210 generally recognized television markets, known as Designated Market Areas, or DMAs, in the United States. DMAs are ranked in size according to various factors based upon actual or potential audience. DMA rankings contained in this Annual Report on Form 10-K are from Investing in Television Market Report 2006 4th Edition, as published by BIA Financial Network, Inc.

Reference is made in this Annual Report on Form 10-K to the following trademarks/tradenames which are owned by the third parties referenced in parentheses: Seinfeld (Columbia Tristar Television Distribution, a unit of Sony Pictures) and Entertainment Tonight (Paramount Distribution, a division of Viacom Inc.).

Cautionary Note Regarding Forward-Looking Statements

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

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ from a projection or assumption in any of our forward-looking statements. Our future financial position and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties discussed under Item 1A. “Risk Factors” located elsewhere in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission (“SEC”). The forward-looking statements made in this Annual Report on Form 10-K are made only as of the date hereof, and we do not have or undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances unless otherwise required by law.

 

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Available Information

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

We make available, free of charge, through our investor relations web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements of changes in beneficial ownership of securities, and amendments to those reports and statements as soon as reasonably practicable after they are filed with the SEC. The address for our website is http://www.nexstar.tv.

 

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PART I

 

Item 1. Business

Overview

We are a television broadcasting company focused exclusively on the acquisition, development and operation of television stations in medium-sized markets in the United States, primarily markets that rank from 50 to 175, as reported by A.C. Nielsen Company. As of December 31, 2006, we owned and operated 32 stations, and provided sales or other services to an additional 17 stations that are owned by Mission and other entities. In 17 of the 29 markets that we serve, we own, operate, program or provide sales and other services to more than one station. We refer to these markets as duopoly markets. We have more than doubled the size of our portfolio since January 1, 2003, having acquired 18 stations and begun providing services to 11 additional stations. The stations that we own, operate, program or provide sales and other services to are in markets located in New York, Pennsylvania, Illinois, Indiana, Missouri, Texas, Louisiana, Arkansas, Alabama, Montana and Maryland. These stations are diverse in their network affiliations: 44 have primary affiliation agreements with one of the four major networks––12 with NBC, 14 with Fox, 9 with ABC, and 9 with CBS. Four of the remaining five stations have agreements with MyNetworkTV and one station has an agreement with The CW.

We believe that medium-sized markets offer significant advantages over large-sized markets, most of which result from a lower level of competition. First, because there are fewer well-capitalized acquirers with a medium-market focus, we have been successful in purchasing stations on more favorable terms than acquirers of large market stations. Second, in the majority of our markets only five or less local commercial television stations exist. As a result, we achieve lower programming costs than stations in larger markets because the supply of quality programming exceeds the demand.

The stations we own and operate or provide services to provide free over-the-air programming to our markets’ television viewing audiences. This programming includes (a) programs produced by networks with which the stations are affiliated; (b) programs that the stations produce; and (c) first-run and rerun syndicated programs that the stations acquire. Our primary source of revenue is the sale of commercial air time to local and national advertisers.

We seek to grow our revenue and broadcast cash flow by increasing the audience and revenue shares of the stations we own, operate, program or provide sales and other services to. We strive to increase the audience share of the stations by creating a strong local broadcasting presence based on highly rated local news, local sports coverage and active community sponsorship. We seek to improve revenue share by employing and supporting a high-quality local sales force that leverages the stations’ strong local brand and community presence with local advertisers. Additionally, we further improve broadcast cash flow by maintaining strict control over operating and programming costs. The benefits achieved through these initiatives are magnified in our duopoly markets by broadcasting the programming of multiple networks, capitalizing on multiple sales forces and achieving an increased level of operational efficiency. As a result of our operational enhancements, we expect revenue from the stations we have acquired or begun providing services to in the last four years to grow faster than that of our more mature stations.

We completed our initial public offering on November 28, 2003. Concurrent with our offering, we completed a corporate reorganization whereby our predecessor, Nexstar Broadcasting Group, L.L.C., and certain direct and indirect subsidiaries of Nexstar Broadcasting Group, L.L.C. merged with and into us. Nexstar Broadcasting Group, L.L.C. was organized as a limited liability company on December 12, 1996 in the State of Delaware and commenced operations on April 15, 1997.

Our principal offices are at 909 Lake Carolyn Parkway, Suite 1450, Irving, TX 75039. Our telephone number is (972) 373-8800 and our website is http://www.nexstar.tv.

 

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Operating Strategy

We seek to generate revenue and broadcast cash flow growth through the following strategies:

Develop Leading Local Franchises. Each of the stations that we own, operate, program, or provide sales and other services to create a highly recognizable local brand, primarily through the quality of local news programming and community presence. Based on internally generated analysis, we believe that in approximately two-thirds of our markets that feature local newscasts produced by Nexstar, we rank among the top two stations in local news viewership. Strong local news typically generates higher ratings among attractive demographic profiles and enhances audience loyalty, which may result in higher ratings for programs both preceding and following the news. High ratings and strong community identity make the stations that we own, operate, program, or provide sales and other services to more attractive to local advertisers. For the year ended December 31, 2006, we earned approximately one-quarter of our advertising revenue from spots aired during local news programming. Our stations and the stations we provide services to currently provide approximately 605 hours per week of local news programming. Extensive local sports coverage and active sponsorship of community events further differentiate us from our competitors and strengthen our community relationships and our local advertising appeal.

Emphasize Local Sales. We employ a high-quality local sales force in each of our markets to increase revenue from local advertisers by capitalizing on our investment in local programming. We believe that local advertising is attractive because our sales force is more effective with local advertisers, giving us a greater ability to influence this revenue source. Additionally, local advertising has historically been a more stable source of revenue than national advertising for television broadcasters. For the year ended December 31, 2006, revenue generated from local advertising represented 69.6% of our consolidated spot revenue (total of local and national advertising revenue, excluding political advertising revenue). In most of our markets we have increased the size and quality of our local sales force. We also invest in our sales efforts by implementing comprehensive training programs and employing a sophisticated inventory tracking system to help maximize advertising rates and the amount of inventory sold in each time period.

Operate Duopoly Markets. Owning or providing services to more than one station in a given market enables us to broaden our audience share, enhance our revenue share and achieve significant operating efficiencies. Duopoly markets broaden audience share by providing programming from multiple networks with different targeted demographics. These markets increase revenue share by capitalizing on multiple sales forces. Additionally, we achieve significant operating efficiencies by consolidating physical facilities, eliminating redundant management and leveraging capital expenditures between stations. We derived approximately 74.9% of our net broadcast revenue for the year ended December 31, 2006 from our duopoly markets.

Maintain Strict Cost Controls. We emphasize strict controls on operating and programming costs in order to increase broadcast cash flow. We continually seek to identify and implement cost savings at each of our stations and the stations we provide services to and our overall size benefits each station with respect to negotiating favorable terms with programming suppliers and other vendors. By leveraging our size and corporate management expertise, we are able to achieve economies of scale by providing programming, financial, sales and marketing support to our stations and the stations we provide services to. Due to the significant negotiating leverage afforded by limited competition in our markets, Nexstar and Mission on a combined basis reduced the cash broadcast payments as a percentage of net broadcast revenue for the years ended December 31, 2006, 2005 and 2004, as compared to the previous two years. Our and Mission’s cash broadcast payments were 3.4%, 4.7%, 4.6%, 6.3% and 6.2% of net broadcast revenue for the years ended December 31, 2006, 2005, 2004, 2003 and 2002, respectively.

Capitalize on Diverse Network Affiliations. We currently own, operate, program, or provide sales and other services to a balanced portfolio of television stations with diverse network affiliations, including NBC, CBS, ABC, Fox and MyNetworkTV affiliated stations which represented approximately 33.9%, 27.4%, 16.4%, 21.7% and 0.6%, respectively, of our 2006 net broadcast revenue. The networks provide these stations with quality

 

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programming and numerous sporting events such as NBA basketball, Major League baseball, NFL football, NCAA sports, PGA golf and the Olympic Games. Because network programming and ratings change frequently, the diversity of our station portfolio’s network affiliations reduces our reliance on the quality of programming from a single network.

Attract and Retain High Quality Management. We seek to attract and retain station general managers with proven track records in larger television markets by providing equity incentives not typically offered by other station operators in our markets. Our station general managers have been granted stock options and have an average of over 20 years of experience in the television broadcasting industry.

Acquisition Strategy

We selectively pursue acquisitions of television stations primarily in markets ranking from 50 to 175, where we believe we can improve revenue and cash flow through active management. Since January 1, 2003, we have more than doubled the number of stations that we own, operate and provide sales and other services to, having acquired 18 stations and contracted to provide services to 11 additional stations. When considering an acquisition, we evaluate the target audience share, revenue share, overall cost structure and proximity to our regional clusters. Additionally, we seek to acquire or enter into local service agreements with stations to create duopoly markets.

Relationship with Mission

Through various local service agreements with Mission, we currently provide sales, programming and other services to 15 television stations that are owned and operated by Mission. Mission is 100% owned by an independent third party. We do not own Mission or any of its television stations. In order for both us and Mission to comply with Federal Communications Commission (“FCC”) regulations, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations. However, 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 credit facility and (c) purchase options (which expire on various dates between 2008 and 2014) granted by Mission’s sole shareholder which will permit Nexstar to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent, we are deemed under accounting principles generally accepted in the United States of America (“U.S. GAAP”) to have a controlling financial interest in Mission. As a result of our controlling financial interest in Mission under U.S. GAAP and in order to present fairly our financial position, results of operations and cash flows, we consolidate the financial position, results of operations and cash flows of Mission with us as if Mission were a wholly-owned entity.

 

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The Stations

The following chart sets forth general information about the stations we owned, operated, programmed or provided sales and other services to as of December 31, 2006:

 

Market

Rank(1)

  

Market

   Station    Affiliation    Status(2)    

Commercial

Stations in

Market(3)

  

FCC License

Expiration
Date

 
8    Washington, DC/Hagerstown, MD(4)    WHAG    NBC    O&O     —        (5)
41    Harrisburg-Lancaster-Lebanon-York, PA    WLYH    The CW    O&O (6)   6    8/1/07  
53    Wilkes Barre-Scranton, PA    WBRE    NBC    O&O     7    8/1/07  
      WYOU    CBS    LSA        8/1/07  
57    Little Rock-Pine Bluff, AR    KARK    NBC    O&O     7      (5)
76    Springfield, MO    KOLR    CBS    LSA     6      (5)
      KSFX    Fox    O&O          (5)
78    Rochester, NY    WROC    CBS    O&O     4    6/1/07  
      WUHF    Fox    LSA        6/1/07  
81    Shreveport, LA    KTAL    NBC    O&O     6    8/1/14  
82    Champaign-Springfield-Decatur, IL    WCIA    CBS    O&O     6      (5)
      WCFN    MyNetworkTV    O&O          (5)
98    Johnstown-Altoona, PA    WTAJ    CBS    O&O     5    8/1/07  
101    Evansville, IN    WTVW    Fox    O&O     5      (5)
102   

Ft. Smith-Fayetteville-

Springdale-Rogers, AR

   KFTA
KNWA
   Fox/NBC
NBC
   O&O
O&O
 
 
  6     
 
(5)
(5)
106    Ft. Wayne, IN    WFFT    Fox    O&O     4      (5)
116    Peoria-Bloomington, IL    WMBD    CBS    O&O     5      (5)
      WYZZ    Fox    LSA          (5)
131    Amarillo, TX    KAMR    NBC    O&O     5      (5)
      KCIT    Fox    LSA          (5)
      KCPN-LP    MyNetworkTV    LSA          (5)
133    Rockford, IL    WQRF    Fox    O&O     4      (5)
      WTVO    ABC    LSA          (5)
135    Monroe, LA-El Dorado, AR    KARD    Fox    O&O     6      (5)
140    Beaumont-Port Arthur, TX    KBTV    NBC    O&O     4      (5)
142    Erie, PA    WJET    ABC    O&O     4    8/1/07  
      WFXP    Fox    LSA        8/1/07  
144    Joplin, MO-Pittsburg, KS    KSNF    NBC    O&O     4      (5)
      KODE    ABC    LSA          (5)
146    Wichita Falls, TX-Lawton, OK    KFDX    NBC    O&O     5      (5)
      KJTL    Fox    LSA          (5)
      KJBO-LP    MyNetworkTV    LSA          (5)
147    Lubbock, TX    KLBK    CBS    O&O     5      (5)
      KAMC    ABC    LSA          (5)
151    Terre Haute, IN    WTWO    NBC    O&O     3      (5)
      WFXW    Fox    LSA          (5)
159    Odessa-Midland, TX    KMID    ABC    O&O     6      (5)
164    Abilene-Sweetwater, TX    KTAB    CBS    O&O     5      (5)
      KRBC    NBC    LSA          (5)
169    Utica, NY    WFXV    Fox    O&O     4    6/1/07  
      WPNY-LP    MyNetworkTV    O&O        6/1/07  
      WUTR    ABC    LSA        6/1/07  
170    Billings, MT    KSVI    ABC    O&O     4      (5)
      KHMT    Fox    LSA          (5)
172    Dothan, AL    WDHN    ABC    O&O     3      (5)
197    San Angelo, TX    KSAN    NBC    LSA     4      (5)
      KLST    CBS    O&O          (5)
201    St. Joseph, MO    KQTV    ABC    O&O     1      (5)

(1) Market rank refers to ranking the size of the Designated Market Area (“DMA”) in which the station is located in relation to other DMAs. Source: Investing in Television Market Report 2006 4th Edition, as published by BIA Financial Network, Inc.
(2) O&O refers to stations that we own and operate. LSA, or local service agreement, is the general term we use to refer to a contract under which we provide services to a station owned and operated by an independent third party. Local service agreements include time brokerage agreements, shared services agreements, joint sales agreements and outsourcing agreements. For further information regarding the LSAs to which we are party, see Note 2 to our consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K.
(3) The term “commercial station” means a television broadcast station and excludes non-commercial stations, religious and Spanish-language stations, cable program services or networks. Source: Investing in Television Market Report 2006 4th Edition, as published by BIA Financial Network, Inc.
(4) Although WHAG is located within the Washington, DC DMA, its signal does not reach the entire Washington, DC metropolitan area. WHAG serves the Hagerstown, MD sub-market within the DMA.
(5) Application for renewal of license timely was submitted to the FCC. Under the FCC’s rules, a license expiration date automatically is extended pending review of and action on the renewal application by the FCC.
(6) Although Nexstar owns WLYH, this station is programmed by Clear Channel Communications pursuant to a time brokerage agreement.

 

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Industry Background

Commercial television broadcasting began in the United States on a regular basis in the 1940s. Currently a limited number of channels are available for over-the-air broadcasting in any one geographic area and a license to operate a television station must be granted by the FCC. All television stations in the country are grouped by A.C. Nielsen Company, a national audience measuring service, into 210 generally recognized television markets, known as designated market areas (“DMAs”), that are ranked in size according to various metrics based upon actual or potential audience. Each DMA is an exclusive geographic area consisting of all counties in which the home-market commercial stations receive the greatest percentage of total viewing hours. A.C. Nielsen periodically publishes data on estimated audiences for the television stations in the DMA. The estimates are expressed in terms of a “rating,” which is a station’s percentage of the total potential audience in the market, or a “share,” which is the station’s percentage of the audience actually watching television. A station’s rating in the market can be a factor in determining advertising rates.

Most television stations are affiliated with networks and receive a significant part of their programming, including prime-time hours, from networks. Whether or not a station is affiliated with one of the four major networks (NBC, ABC, CBS or Fox) has a significant impact on the composition of the station’s revenue, expenses and operations. Network programming, along with cash payments for some NBC, ABC and CBS affiliates, is provided to the affiliate by the network in exchange for the network’s retention of a substantial majority of the advertising time during network programs. The network then sells this advertising time and retains the revenue. The affiliate retains the revenue from the remaining advertising time it sells during network programs and from advertising time it sells during non-network programs.

Broadcast television stations compete for advertising revenue primarily with other commercial broadcast television stations and cable satellite television systems and, to a lesser extent, with newspapers and radio stations serving the same market. Non-commercial, religious and Spanish-language broadcasting stations in many markets also compete with commercial stations for viewers. In addition, the Internet and other leisure activities may draw viewers away from commercial television stations.

The television broadcast industry is in the midst of a transition to an advanced digital television (“DTV”) transmission system. DTV transmissions deliver improved video and audio signals including high definition television and have substantial multiplexing and data transmission capabilities. For each licensed television station, the FCC allocated a matching DTV channel for the transition period. Television broadcasters will be required to cease analog broadcasting by February 17, 2009 and return one of their channels to the FCC.

Advertising Sales

General

Television station revenue is primarily derived from the sale of local and national advertising. All network-affiliated stations are required to carry advertising sold by their networks which reduces the amount of advertising time available for sale by stations. Our and Mission’s stations sell the remaining advertising to be inserted in network programming and the advertising in non-network programming, retaining all of the revenue received from these sales. A national syndicated program distributor will often retain a portion of the available advertising time for programming it supplies in exchange for no fees or reduced fees charged to stations for such programming. These programming arrangements are referred to as barter programming.

Advertisers wishing to reach a national audience usually purchase time directly from the networks, or advertise nationwide on a case-by-case basis. National advertisers who wish to reach a particular region or local audience often buy advertising time directly from local stations through national advertising sales representative firms. Local businesses purchase advertising time directly from the stations’ local sales staff.

 

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Advertising rates are based upon a number of factors, including:

 

   

a program’s popularity among the viewers that an advertiser wishes to target;

 

   

the number of advertisers competing for the available time;

 

   

the size and the demographic composition of the market served by the station;

 

   

the availability of alternative advertising media in the market area;

 

   

the effectiveness of the station’s sales forces;

 

   

development of projects, features and programs that tie advertiser messages to programming; and

 

   

the level of spending commitment made by the advertiser.

Advertising rates are also determined by a station’s overall ability to attract viewers in its market area, as well as the station’s ability to attract viewers among particular demographic groups that an advertiser may be targeting. Advertising revenue is positively affected by strong local economies. Conversely, declines in advertising budgets of advertisers, 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.

Seasonality

Advertising revenue is positively affected by national and regional political election campaigns, and certain events such as the Olympic Games or the Super Bowl. 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 due to advertising placed by candidates for political offices and advertising aired during the Olympic Games.

Local Sales

Local advertising time is sold by each station’s local sales staff who call upon advertising agencies and local businesses, which typically include car dealerships, retail stores and restaurants. Compared to revenue from national advertising accounts, revenue from local advertising is generally more stable and more predictable. We seek to attract new advertisers to television and to increase the amount of advertising time sold to existing local advertisers by relying on experienced local sales forces with strong community ties, producing news and other programming with local advertising appeal and sponsoring or co-promoting local events and activities. We place a strong emphasis on the experience of our local sales staff and maintain an on-going training program for sales personnel.

National Sales

National advertising time is sold through national sales representative firms which call upon advertising agencies, whose clients typically include automobile manufacturers and dealer groups, telecommunications companies, fast food franchisers, and national retailers (some of which may advertise locally).

 

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Network Affiliations

Each station that we own and operate, program or provide sales and other services to is affiliated with a network pursuant to an affiliation agreement, as described below:

 

Station

  

Market

   Affiliation    Expiration

KQTV

   St. Joseph, MO    ABC    April 2007

KODE

   Joplin, MO-Pittsburg, KS    ABC    December 2007

WYOU

   Wilkes Barre-Scranton, PA    CBS    December 2007

WTVW

   Evansville, IN    Fox    April 2008

WQRF

   Rockford, IL    Fox    April 2008

KARD

   Monroe, LA-El Dorado, AR    Fox    April 2008

KSFX

   Springfield, MO    Fox    April 2008

WFXV

   Utica, NY    Fox    June 2008

WFFT

   Ft. Wayne, IN    Fox    December 2008

WBRE

   Wilkes Barre-Scranton, PA    NBC    December 2008

WTWO

   Terre Haute, IN    NBC    December 2008

KBTV

   Beaumont-Port Arthur, TX    NBC    December 2008

KFDX

   Wichita Falls, TX-Lawton, OK    NBC    December 2008

KSNF

   Joplin, MO-Pittsburg, KS    NBC    December 2008

KJBO-LP

   Wichita Falls, TX-Lawton, OK    MyNetworkTV    September 2009

WTAJ

   Johnstown-Altoona, PA    CBS    May 2010

KCIT

   Amarillo, TX    Fox    June 2010

WFXP

   Erie, PA    Fox    June 2010

KJTL

   Wichita Falls, TX-Lawton, OK    Fox    June 2010

WFXW

   Terre Haute, IN    Fox    June 2010

KHMT

   Billings, MT    Fox    June 2010

KFTA

   Ft. Smith-Fayetteville-Springdale-Rogers, AR    Fox/NBC    June 2010

KSAN

   San Angelo, TX    NBC    December 2010

KRBC

   Abilene-Sweetwater, TX    NBC    December 2010

WUTR

   Utica, NY    ABC    December 2010

WDHN

   Dothan, AL    ABC    December 2010

WJET

   Erie, PA    ABC    December 2010

KSVI

   Billings, MT    ABC    December 2010

KMID

   Odessa-Midland, TX    ABC    December 2010

WTVO

   Rockford, IL    ABC    December 2010

KAMC

   Lubbock, TX    ABC    December 2010

WPNY-LP

   Utica, NY    MyNetworkTV    August 2011

WCFN

   Champaign-Springfield-Decatur, IL    MyNetworkTV    August 2011

KCPN-LP

   Amarillo, TX    MyNetworkTV    August 2011

WUHF(1)

   Rochester, NY    Fox    March 2012

WYZZ(1)

   Peoria-Bloomington, IL    Fox    March 2012

KLST

   San Angelo, TX    CBS    August 2012

KTAB

   Abilene-Sweetwater, TX    CBS    December 2012

KNWA

   Ft. Smith-Fayetteville-Springdale-Rogers, AR    NBC    January 2013

WROC

   Rochester, NY    CBS    January 2013

KOLR

   Springfield, MO    CBS    June 2013

KLBK

   Lubbock, TX    CBS    July 2013

WCIA

   Champaign-Springfield-Decatur, IL    CBS    September 2013

WMBD

   Peoria-Bloomington, IL    CBS    September 2013

KAMR

   Amarillo, TX    NBC    December 2014

KTAL

   Shreveport, LA    NBC    December 2014

KARK

   Little Rock-Pine Bluff, AR    NBC    December 2014

WHAG

   Washington, DC/Hagerstown, MD (2)    NBC    December 2014

WLYH

   Harrisburg-Lancaster-Lebanon-York, PA    The CW    September 2016

(1)

This station is owned by a subsidiary of Sinclair Broadcasting Group, Inc. which maintains the network affiliation agreement with the Fox network.

(2) Although WHAG is located within the Washington, DC DMA, its signal does not reach the entire Washington, DC metropolitan area. WHAG serves the Hagerstown, MD sub-market within the DMA.

 

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Each affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the network with which it is affiliated. In exchange, the network has the right to sell a substantial majority of the advertising time during these broadcasts. In addition, some stations receive compensation from the network based on the hours of network programming they broadcast.

Competition

Competition in the television industry takes place on several levels: competition for audience, competition for programming and competition for advertising.

Audience. We compete for audience share specifically on the basis of program popularity. The popularity of a station’s programming has a direct effect on the adverting rates it can charge its advertisers. A portion of the daily programming on the stations that we own or provide services to is supplied by the network with which each station is affiliated. In those periods, the stations are dependent upon the performance of the network programs in attracting viewers. Stations program non-network time periods with a combination of self-produced news, public affairs and other entertainment programming, including movies and syndicated programs. The major television networks have also begun to sell their programming directly to the consumer via portal digital devices such as video Ipods and cell phones which presents an additional source of competition for television broadcaster audience share. Other sources of competition for audience include home entertainment systems, such as VCRs, DVDs and DVRs; video-on-demand and pay-per-view; the Internet; and television game devices.

Although the commercial television broadcast industry historically has been dominated by the ABC, NBC, CBS and Fox television networks, other newer television networks and the growth in popularity of subscription systems, such as local cable and direct broadcast satellite (“DBS”) systems which air exclusive programming not otherwise available in a market, have become significant competitors for the over-the-air television audience.

Programming. Competition for programming involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming. Stations compete against in-market broadcast station operators for exclusive access to off-network reruns (such as Seinfeld) and first-run product (such as Entertainment Tonight) in their respective markets. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations. Time Warner, Inc., General Electric Company, Viacom Inc., The News Corporation Limited and the Walt Disney Company each owns a television network and also owns or controls major production studios, which are the primary source of programming for the networks. It is uncertain whether in the future such programming, which is generally subject to short-term agreements between the studios and the networks, will be moved to the networks. Television broadcasters also compete for non-network programming unique to the markets they serve. As such, stations strive to provide exclusive news stories, unique features such as investigative reporting and coverage of community events and to secure broadcast rights for regional and local sporting events.

Advertising. Stations compete for advertising revenue with other television stations in their respective markets; and other advertising media such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, local cable systems, DBS systems and the Internet. Competition for advertising dollars in the broadcasting industry occurs primarily within individual markets. Generally, a television broadcast station in a particular market does not compete with stations in other market areas.

Additional Competitive Factors. Additional factors that are material to a television station’s competitive position include signal coverage and assigned channel. Television stations can be distinguished by the frequency on which they broadcast. Analog television stations that broadcast over the very high frequency or VHF band (channels 2-13) of the spectrum generally have some competitive advantage over analog television stations which broadcast over the ultra-high frequency or UHF band (channels above 13) of the spectrum because the former usually have better signal coverage and operate at a lower transmission costs. However, the improvement

 

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of UHF transmitters and receivers, the complete elimination from the marketplace of VHF-only receivers and the expansion of cable television systems have reduced the VHF signal advantage. In addition, any disparity between VHF and UHF is likely to diminish even further in the coming era of digital television.

The broadcasting industry is continually faced with technological change and innovation which increase the popularity of competing entertainment and communications media. Further advances in technology may increase competition for household audiences and advertisers. The increased use of digital technology by cable systems and DBS, along with video compression techniques, will reduce the bandwidth required for television signal transmission. These technological developments are applicable to all video delivery systems, including over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences. Reductions in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized “niche” programming. This ability to reach very narrowly defined audiences is expected to alter the competitive dynamics for advertising expenditures. We are unable to predict the effect that these or other technological changes will have on the broadcast television industry or on the future results of our operations or the operations of the stations we provide services to.

Federal Regulation

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

License Grant and Renewal. The Communications Act prohibits the operation of broadcast stations except under licenses issued by the FCC. Television broadcast licenses are granted for a maximum term of eight years and are subject to renewal upon application to the FCC. The FCC is required to grant an application for license renewal if during the preceding term the station served the public interest, the licensee did not commit any serious violations of the Communications Act or the FCC’s rules, and the licensee committed no other violations of the Communications Act or the FCC’s rules which, taken together, would constitute a pattern of abuse. A majority of renewal applications are routinely granted under this standard. If a licensee fails to meet this standard the FCC may still grant renewal on terms and conditions that it deems appropriate, including a monetary forfeiture or renewal for a term less than the normal eight-year period.

After a renewal application is filed, interested parties, including members of the public, may file petitions to deny a renewal application, to which the licensee/renewal applicant is entitled to respond. After reviewing the pleadings, if the FCC determines that there is a substantial and material question of fact whether grant of the renewal application would serve the public interest, the FCC is required to hold a trial-type hearing on the issues presented. If, after the hearing, the FCC determines that the renewal applicant has met the renewal standard the FCC will grant the renewal application. If the licensee/renewal applicant fails to meet the renewal standard or show that there are mitigating factors entitling it to renewal subject to appropriate sanctions, the FCC can deny the renewal application. In the vast majority of cases where a petition to deny is filed against a renewal application, the FCC ultimately grants the renewal without a hearing. No competing application for authority to operate a station and replace the incumbent licensee may be filed against a renewal application.

In addition to considering rule violations in connection with a license renewal application, the FCC may sanction a station licensee for failing to observe FCC rules and policies during the license term, including the imposition of a monetary forfeiture.

 

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The Communications Act prohibits the assignment or the transfer of control of a broadcast license without prior FCC approval.

Ownership Restrictions. The Communications Act limits the extent of non-U.S. ownership of companies that own U.S. broadcast stations. Under this restriction, a U.S. broadcast company such as ours may have no more than 25% non-U.S. ownership (by vote and by equity).

The FCC also has rules which establish limits on the ownership of broadcast stations. These ownership limits apply to attributable interests in a station licensee held by an individual, corporation, partnership or other entity. In the case of corporations, officers, directors and voting stock interests of 5% or more (20% or more in the case of qualified investment companies, such as insurance companies and bank trust departments) are considered attributable interests. For partnerships, all general partners and non-insulated limited partners are attributable. Limited liability companies are treated the same as partnerships. The FCC also considers attributable the holder of more than 33% of a licensee’s total assets (defined as total debt plus total equity), if that person or entity also provides over 15% of the station’s total weekly broadcast programming or has an attributable interest in another media entity in the same market which is subject to the FCC’s ownership rules, such as a radio or television station, cable television system or daily newspaper.

Local Ownership (Duopoly Rule). Under the current duopoly rule, a single entity is allowed to own or have attributable interests in two television stations in a market if (1) the two stations do not have overlapping service areas, or (2) after the combination there are at least eight independently owned and operating full-power television stations and one of the combining stations is not ranked among the top four stations in the DMA. The duopoly rule allows the FCC to consider waivers to permit the ownership of a second station only in cases where the second station has failed or is failing or unbuilt.

Under the duopoly rule, the FCC attributes toward the local television ownership limits another in-market station when one station owner programs a second in-market station pursuant to a time brokerage or local marketing agreement, if the programmer provides more than 15% of the second station’s weekly broadcast programming. However, local marketing agreements entered into prior to November 5, 1996 are exempt attributable interests until the FCC determines otherwise. This “grandfathered” period, when reviewed by the FCC, is subject to possible extension or termination.

In July 2006, the FCC initiated a proceeding with respect to its broadcast ownership rules, including the duopoly rule. Comments and reply comments have been submitted in the proceeding and the FCC currently is holding public hearings and conducting studies. The FCC is not anticipated to adopt new broadcast ownership rules until, at the earliest, the third quarter of 2007. In addition, the FCC has initiated proceedings to determine whether to make television joint sales agreements attributable interests under its ownership rules.

In certain markets, we and Mission own and operate both full-power and low-power television broadcast stations (in Utica, Nexstar owns and operates WFXV and WPNY-LP; in Wichita Falls, Mission owns and operates KJTL and KJBO-LP; and in Amarillo, Mission owns and operates KCIT and KCPN-LP). The FCC’s duopoly rules and policies regarding ownership of television stations in the same market apply only to full-power television stations and not low-power television stations such as WPNY-LP, KJBO-LP and KCPN-LP.

The only market in which we currently are permitted to own two stations under the duopoly rule is the Champaign-Springfield-Decatur, Illinois market. However, we also are permitted to own two stations in the Fort Smith-Fayetteville-Springdale-Rogers market pursuant to a waiver under the FCC’s rules permitting common ownership of a “satellite” television station in a market where a licensee also owns the “primary” station. In all of the markets where we have entered into local service agreements, except for two, we do not provide programming other than news (comprising less than 15% of the second station’s programming) to the second station and, therefore, we are not attributed with ownership of the second station. In the two markets where we

 

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provide more programming to the second station—WFXP in Erie, Pennsylvania and KHMT in Billings, Montana—the local marketing agreements were entered into prior to November 5, 1996. Therefore, we may continue to program these stations under the terms of these agreements until the rule is changed.

National Ownership. There is no nationwide limit on the number of television stations which a party may own. However, the FCC’s rules limit the percentage of U.S. television households which a party may reach through its attributable interests in television stations. This rule provides that when calculating a party’s nationwide aggregate audience coverage, the ownership of a UHF station is counted as 50% of a market’s percentage of total national audience. In 2004, Congress determined that one party may have an attributable interest in television stations which reach, in the aggregate, 39% of all U.S. television households; and the FCC thereafter modified its corresponding rule. The FCC currently is considering whether this act has any impact on the FCC’s authority to examine and modify the UHF discount.

The stations that Nexstar owns have a combined national audience reach of 5.7% of television households with the UHF discount.

Radio/Television Cross-Ownership Rule (One-to-a-Market Rule). In markets with at least 20 independently owned media outlets, ownership of one television station and up to seven radio stations, or two television stations (if allowed under the television duopoly rule) and six radio stations is permitted. If the number of independently owned media outlets is fewer than 20 but greater than or equal to 10, ownership of one television station (or two if allowed) and four radio stations is permitted. In markets with fewer than 10 independent media voices, ownership of one television station (or two if allowed) and one radio station is permitted. In calculating the number of independent media voices in a market, the FCC includes all radio and television stations, independently owned cable systems (counted as one voice), and independently owned daily newspapers which have circulation that exceeds 5% of the households in the market.

Local Television/Newspaper Cross-Ownership Rule. Under this rule, a party is prohibited from having an attributable interest in a television station and a daily newspaper if the television station’s Grade A analog (NTSC) signal contour encompasses the entire community in which the newspaper is published.

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

Cable “Must-Carry” or Retransmission Consent Rights. Every three years television broadcasters are required to make an election between “must-carry” or retransmission consent rights in connection with the carriage of their analog signal on cable television systems within their DMA. For a majority of our and Mission’s stations the most recent election was made October 1, 2005, and is effective for the three-year period that began January 1, 2006. The next election date is October 1, 2008, for the three-year period beginning January 1, 2009.

If a broadcaster chooses to exercise its must-carry rights, it may request cable system carriage on its over-the-air channel or another channel on which it was carried on the cable system as of a specified date. A cable system generally must carry the station’s signal in compliance with the station’s carriage request, and in a manner that makes the signal available to all cable subscribers. However, must-carry rights are not absolute, and whether a cable system is required to carry the station on its system, or in the specific manner requested, depends on variables such as the location, size and number of activated channels of the cable system and whether the station’s programming duplicates, or substantially duplicates the programming of another station carried on the cable system. If certain conditions are met, a cable system may decline to carry a television station that has elected must-carry status, although it is unusual for all the required conditions to exist.

If a broadcaster chooses to exercise its retransmission consent rights, a cable television system which is subject to that election may not carry the station’s signal without the station’s consent. This generally requires the cable system and television station operator to negotiate the terms under which the broadcaster will consent to the cable system’s carriage of its station’s signal.

 

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We and Mission have elected to exercise retransmission consent rights for all of our stations where we have a legal right to do so. We and Mission have negotiated retransmission consent agreements with substantially all of the cable systems which carry the stations’ signals.

Direct-to-Home Satellite Services and Carriage Rights. Direct broadcast satellite (“DBS”) providers are permitted to carry local channels, including “significantly viewed” out-of-market stations when local service is provided. Under certain circumstances, DBS providers also are permitted to provide network service from a station outside a local market for subscribers in the market who are “unserved” by a local station affiliated with the same network. In addition, DBS subscribers who were not receiving a digital signal as of December 8, 2004 may receive distant signals for digital television programming from their DBS provider if they are receiving the local analog signal of a network affiliate and the subscriber cannot receive a local digital signal of that network-affiliated station over-the-air.

Satellite carriers that provide any local-into-local service in a market must carry, upon request, all stations in that market that have elected mandatory carriage, and DBS operators are now carrying other local stations in local-into-local markets, including some noncommercial, independent and foreign language stations. However, satellite carriers are not required to carry duplicative network signals from a local market unless the stations are licensed to different communities in different states. Satellite carriers are required to carry all local television stations in a contiguous manner on their channel line-up and may not discriminate in their carriage of stations.

Commercial television stations make elections between retransmission consent and must-carry status for satellite services on the same schedule as cable elections, with the most recent elections made by October 1, 2005 for the three year period that began on January 1, 2006. DirecTV currently provides satellite carriage of our and Mission’s stations in the Champaign-Springfield-Decatur, Evansville, Ft. Smith-Fayetteville-Springdale-Rogers, Ft. Wayne, Harrisburg, Johnstown-Altoona, Little Rock-Pine Bluff, Peoria-Bloomington, Rochester, Rockford, Shreveport, Springfield and Wilkes Barre-Scranton markets. EchoStar currently provides satellite carriage of our and Mission’s stations in the Abilene-Sweetwater, Amarillo, Beaumont-Port Arthur, Billings, Champaign-Springfield-Decatur, Erie, Evansville, Fort Wayne, Ft. Smith-Fayetteville-Springdale-Rogers, Hagerstown, Harrisburg, Johnstown-Altoona, Joplin, MO-Pittsburg, KS, Little Rock-Pine Bluff, Lubbock, Monroe, LA-El Dorado, AR, Odessa-Midland, Peoria-Bloomington, Rochester, Rockford, San Angelo, Shreveport, Springfield, Terre Haute, Wichita Falls, TX-Lawton, OK and Wilkes Barre-Scranton markets. We and Mission have long-term carriage agreements with both DirecTV and EchoStar that provide for the carriage of the currently carried stations, as well as those subsequently added in new local-to-local markets, or those added by acquisition or other means.

Digital Television (“DTV”). The DTV transmission system delivers video and audio signals of higher quality (including high definition television) than the existing analog transmission system. DTV also has substantial capabilities for multiplexing (the broadcast of several programs concurrently) and data transmission. The introduction of digital television requires consumers to purchase new television sets that are capable of receiving and displaying the DTV signals, or adapters to receive DTV signals and convert them to analog signals for display on their existing receivers.

For the transition period, the FCC allotted each licensed television station a second channel for broadcast of a DTV channel signal. Stations may broadcast with both analog and DTV signals until February 17, 2009, when the FCC will reclaim one of the channels and each broadcaster will operate only on a single DTV channel. Stations are required to simulcast 100% of the analog programming on the first DTV channel.

All stations were required to construct full-power DTV facilities by July 1, 2006. Broadcasters that have not constructed full-power DTV stations were permitted to request extensions of time to construct such facilities. Broadcasters that did not meet the construction deadline and did not request extension of time from the FCC to construct their facilities may have lost interference protection for their signals outside their low-power coverage areas.

 

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Channels used for analog broadcasts range from 2 through 69. The FCC designated Channels 2 through 51 as the “core” channels for use by television broadcasters’ DTV stations after February 17, 2009. Nexstar has four stations with transitional DTV channel assignments outside the core. Mission has one station with its transitional DTV channel assignments outside the core. These stations will be required to change their DTV channels to in-core channels at the end of the transition.

Television station operators may use their DTV signals to provide ancillary services, such as computer software distribution, Internet, interactive materials, e-commerce, paging services, audio signals, subscription video, or data transmission services. To the extent a station provides such ancillary services it is subject to the same regulations as are applicable to other analogous services under the FCC’s rules and policies. Commercial television stations also are required to pay the FCC 5% of the gross revenue derived from all ancillary services provided over their DTV signals for which a station received a fee in exchange for the service or received compensation from a third party in exchange for transmission of material from that third party, not including commercial advertisements used to support broadcasting.

DTV Channel Election. On October 20, 2006, the FCC released an order establishing the permanent, post-transition DTV channels for all stations. Nexstar’s and Mission’s stations with in-core DTV transition channels have been assigned their transition channels for permanent operations. Nexstar’s and Mission’s stations with non-core DTV transition channels have been assigned in-core channels for their permanent operations.

DTV MVPD Carriage. Stations may choose must-carry status or retransmission consent for their analog signals, but may only elect retransmission consent for their digital signals. Stations also may not assert must-carry rights for their DTV signals in lieu of their analog signals. If a television station operates only as a DTV station, or returns its analog channel to the FCC and converts to digital-only operations, it may assert must-carry rights for a single DTV programming stream. Digital television signals carried on a cable system must be available to subscribers on the system’s basic service tier.

The exercise of must-carry rights by a digital-only television station for its DTV signal applies only to a single programming stream and other program-related content carried on that stream. If a television station is concurrently broadcasting more than one program stream on its DTV signal it may select which program stream is subject to its must-carry election. Cable systems and DBS providers are not required to carry Internet, e-commerce or other ancillary services provided over DTV signals if those services are not related to the station’s primary video programming carried on the cable system and if they are not provided to viewers for free.

With respect to direct-to-the-home satellite service providers, the FCC will address DTV carriage at a later time.

 

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Programming and Operation. The Communications Act requires broadcasters to serve “the public interest.” Since the late 1970s, the FCC gradually has relaxed or eliminated many of the more formalized procedures it had developed to promote the broadcast of certain types of programming responsive to the needs of a station’s community of license. However, television station licensees are still required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. The FCC may consider complaints from viewers concerning programming when it evaluates a station’s license renewal application, although viewer complaints also may be filed and considered by the FCC at any time. Stations also must follow various rules promulgated under the Communications Act that regulate, among other things:

 

   

political advertising (its price and availability);

 

   

sponsorship identification;

 

   

contest and lottery advertising;

 

   

obscene and indecent broadcasts;

 

   

technical operations, including limits on radio frequency radiation;

 

   

discrimination and equal employment opportunities;

 

   

closed captioning;

 

   

children’s programming;

 

   

program ratings guidelines; and

 

   

network affiliation agreements.

Employees

As of December 31, 2006, we had a total of 2,214 employees, comprised of 1,900 full-time and 314 part-time or temporary employees. As of December 31, 2006, 203 of our employees were covered by collective bargaining agreements. We believe that our employee relations are satisfactory, and we have not experienced any work stoppages at any of our facilities. However, we cannot assure you that our collective bargaining agreements will be renewed in the future, or that we will not experience a prolonged labor dispute, which could have a material adverse effect on our business, financial condition or results of operations.

 

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Item 1A. Risk Factors

You should carefully consider the following risk factors, which we believe are the most significant risks related to our business, as well as the other information contained in this document.

Risks Related to Our Operations

We and Mission have a history of net losses.

We and Mission had aggregate net losses of $9.0 million, $48.7 million and $20.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. We and Mission may not be able to achieve or maintain profitability.

Our substantial debt could limit our ability to grow and compete.

As of December 31, 2006, we and Mission had $681.1 million of debt, which represented 112.1% of our and Mission’s total combined capitalization. The companies’ high level of debt could have important consequences to our business. For example, it could:

 

   

limit our ability to borrow additional funds or obtain additional financing in the future;

 

   

limit our ability to pursue acquisition opportunities;

 

   

expose us to greater interest rate risk since the interest rate on borrowings under the senior credit facilities is variable;

 

   

limit our flexibility to plan for and react to changes in our business and our industry; and

 

   

impair our ability to withstand a general downturn in our business and place us at a disadvantage compared to our competitors that are less leveraged.

Refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” for disclosure of the approximate aggregate amount of principal indebtedness scheduled to mature.

We and Mission could also incur additional debt in the future. The terms of our and Mission’s senior credit facilities, as well as the indentures governing our publicly-held notes, limit, but do not prohibit us or Mission from incurring substantial amounts of additional debt. To the extent we or Mission incur additional debt we would become even more susceptible to the leverage-related risks described above.

The agreements governing our debt contain various covenants that limit our management’s discretion in the operation of our business.

Our senior credit facility and the indentures governing our publicly-held notes contain various covenants that restrict our ability to, among other things:

 

   

incur additional debt and issue preferred stock;

 

   

pay dividends and make other distributions;

 

   

make investments and other restricted payments;

 

   

merge, consolidate or transfer all or substantially all of our assets;

 

   

enter into sale and leaseback transactions;

 

   

create liens;

 

   

sell assets or stock of our subsidiaries; and

 

   

enter into transactions with affiliates.

 

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In addition, our senior credit facility requires us to maintain or meet certain financial ratios, including consolidated leverage ratios and interest coverage ratios. Future financing agreements may contain similar, or even more restrictive, provisions and covenants. As a result of these restrictions and covenants, our management’s ability to operate our business at its discretion is limited, and we may be unable to compete effectively, pursue acquisitions or take advantage of new business opportunities, any of which could harm our business. Mission’s senior credit facility contains similar terms and restrictions.

If we fail to comply with the restrictions in present or future financing agreements, a default may occur. A default could allow creditors to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. A default could also allow creditors to foreclose on any collateral securing such debt.

Mission may make decisions regarding the operation of its stations that could reduce the amount of cash we receive under our local service agreements.

Mission is 100% owned by an independent third party. Mission owns and operates 15 television stations. We have entered into local service agreements with Mission, pursuant to which we provide services to Mission’s stations. In return for the services we provide, we receive substantially all of the available cash, after payment of debt service costs, generated by Mission’s stations. We also guarantee all of the obligations incurred under Mission’s senior credit facility, which were incurred primarily in connection with Mission’s acquisition of its stations. The sole shareholder of Mission has granted to us a purchase option 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.

We do not own Mission or Mission’s television stations. However, as a result of our guarantee of the obligations incurred under Mission’s senior credit facility, our arrangements under the local service agreements and purchase option agreements with Mission, we are deemed under U.S. GAAP to have a controlling financial interest in Mission while complying with the FCC’s rules regarding ownership limits in television markets. In order for both us and Mission to comply with FCC regulations, Mission maintains complete responsibility for and control over the programming, finances, personnel and operations of its stations. As a result, Mission’s sole shareholder and officers can make decisions with which we disagree and which could reduce the cash flow generated by these stations and, as a consequence, the amounts we receive under our local service agreements with Mission. For instance, we may disagree with Mission’s programming decisions, which programming may prove unpopular and/or may generate less advertising revenue. Furthermore, subject to Mission’s agreement with its lenders, Mission’s sole shareholder could choose to pay himself a dividend.

The revenue generated by stations we operate or provide services to could decline substantially if they fail to maintain or renew their network affiliation agreements on favorable terms, or at all.

Due to the quality of the programming provided by the networks, stations that are affiliated with a network generally have higher ratings than unaffiliated independent stations in the same market. As a result, it is important for stations to maintain their network affiliations. All of the stations that we operate or provide services to have network affiliation agreements––12 stations have primary affiliation agreements with NBC, 9 with CBS, 9 with ABC, 14 with Fox, 4 with MyNetworkTV and 1 with The CW. Each of NBC, CBS and ABC generally provides affiliated stations with up to 22 hours of prime time programming per week, while each of Fox, MyNetworkTV and The CW provides affiliated stations with up to 15 hours of prime time programming per week. In return, affiliated stations broadcast the respective network’s commercials during the network programming. Under the affiliation agreements with NBC, CBS and ABC, most of the stations we operate or provide services to also receive compensation from these networks.

All of the network affiliation agreements of the stations that we own, operate, program or provide sales and other services to are scheduled to expire at various times beginning in April 2007 through September 2016,

 

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except for one network affiliation agreement which can be terminated upon 30 days prior written notice by the network. Network affiliation agreements are also subject to earlier termination by the networks under limited circumstances. For more information regarding these network affiliation agreements, see Item 1. “Business––Network Affiliations.”

On September 18, 2006, the former UPN and WB networks merged to form The CW. We and Mission operated three former UPN affiliated stations located in Wichita Falls, Texas; Champaign, Illinois; and Utica, New York. These three stations did not join The CW network, but instead became affiliates of MyNetworkTV, a new primetime programming network that began operating on September 5, 2006. Management believes the change in affiliation for these three stations did not have a material impact on our consolidated financial position and results of operations.

The FCC could decide not to grant renewal of the FCC license of any of the stations we operate or provide services to which would require that station to cease operations.

Television broadcast licenses are granted for a maximum term of eight years and are subject to renewal upon application to the FCC. The FCC is required to grant an application for license renewal if, during the preceding term, the station served the public interest, the licensee did not commit any serious violations of the Communications Act or the FCC’s rules, and the licensee committed no other violations of the Communications Act or the FCC’s rules which, taken together, would constitute a pattern of abuse. A majority of renewal applications are routinely granted under this standard. If a licensee fails to meet this standard the FCC may still grant renewal on terms and conditions that it deems appropriate, including a monetary forfeiture or renewal for a term less than the normal eight-year period.

On October 26, 2005, the Director of the Central Illinois Chapter of the Parents Television Council (“PTC”) submitted an informal objection to the application for renewal of license for Nexstar’s station WCIA in Champaign, Illinois, requesting the FCC withhold action on WCIA’s license renewal application until the FCC acts on the PTC’s complaint regarding an allegedly indecent broadcast on WCIA.

On January 3, 2006, Cable America Corporation submitted a petition to deny the applications for renewal of license for Nexstar’s station KSFX and Mission’s station KOLR, both licensed to Springfield, Missouri. Cable America alleged that Nexstar’s local service agreements with Mission give Nexstar improper control over Mission’s operations. Nexstar and Mission submitted a joint opposition to this petition to deny and Cable America submitted a reply. Cable America subsequently requested that the FCC dismiss its petition. However, the petition remains pending with the FCC.

On September 5, 2006, an affiliate of Equity Broadcasting Corporation (“Equity”) submitted a late-filed petition to deny the applications for renewal of license for stations KFTA and KNWA. The petition alleges that Nexstar’s current operations of KFTA and KNWA violate the FCC’s rules and policies with respect to satellite stations. Nexstar submitted an opposition to this petition and the affiliate of Equity submitted a reply. This matter remains pending with the FCC.

Nexstar and Mission began to submit renewal of license applications for their stations beginning in June 2004 and will continue to do so through April 2007. We and Mission expect the FCC to renew the licenses for our stations in due course.

 

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The loss of the services of our chief executive officer could disrupt management of our business and impair the execution of our business strategies.

We believe that our success depends upon our ability to retain the services of Perry A. Sook, our founder and President and Chief Executive Officer. Mr. Sook has been instrumental in determining our strategic direction and focus. The loss of Mr. Sook’s services could adversely affect our ability to manage effectively our overall operations and successfully execute current or future business strategies.

Our growth may be limited if we are unable to implement our acquisition strategy.

We intend to continue our growth by selectively pursuing acquisitions of television stations. The television broadcast industry is undergoing consolidation, which may reduce the number of acquisition targets and increase the purchase price of future acquisitions. Some of our competitors may have greater financial or management resources with which to pursue acquisition targets. Therefore, even if we are successful in identifying attractive acquisition targets, we may face considerable competition and our acquisition strategy may not be successful.

FCC rules and policies may also make it more difficult for us to acquire additional television stations. Television station acquisitions are subject to the approval of the FCC and, potentially, other regulatory authorities. The need for FCC and other regulatory approvals could restrict our ability to consummate future transactions if, for example, the FCC or other government agencies believe that a proposed transaction would result in excessive concentration in a market, even if the proposed combinations may otherwise comply with FCC ownership limitations.

Growing our business through acquisitions involves risks and if we are unable to manage effectively our rapid growth, our operating results will suffer.

We have experienced rapid growth. Since January 1, 2003, we have more than doubled the number of stations that we own, operate, program or provide sales and other services to, having acquired 18 stations and contracted to provide service to 11 additional stations. We will continue to actively pursue additional acquisition opportunities. To manage effectively our growth and address the increased reporting requirements and administrative demands that will result from future acquisitions, we will need, among other things, to continue to develop our financial and management controls and management information systems. We will also need to continue to identify, attract and retain highly skilled finance and management personnel. Failure to do any of these tasks in an efficient and timely manner could seriously harm our business.

There are other risks associated with growing our business through acquisitions. For example, with any past or future acquisition, there is the possibility that:

 

   

we may not be able to successfully reduce costs, increase advertising revenue or audience share or realize anticipated synergies and economies of scale with respect to any acquired station;

 

   

an acquisition may increase our leverage and debt service requirements or may result in our assuming unexpected liabilities;

 

   

our management may be reassigned from overseeing existing operations by the need to integrate the acquired business;

 

   

we may experience difficulties integrating operations and systems, as well as company policies and cultures;

 

   

we may fail to retain and assimilate employees of the acquired business; and

 

   

problems may arise in entering new markets in which we have little or no experience.

The occurrence of any of these events could have a material adverse effect on our operating results, particularly during the period immediately following any acquisition.

 

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FCC actions may restrict our ability to create duopolies under local service agreements, which would harm our existing operations and impair our acquisition strategy.

In some of our markets, we have created duopolies by entering into what we refer to as local service agreements. While these agreements take varying forms, a typical local service agreement is an agreement between two separately owned television stations serving the same market, whereby the owner of one station provides operational assistance to the other station, subject to ultimate editorial and other controls being exercised by the latter station’s owner. By operating or entering into local service agreements with more than one station in a market, we (and the other station) achieve significant operational efficiencies. We also broaden our audience reach and enhance our ability to capture more advertising spending in a given market.

While all of our existing local service agreements comply with FCC rules and policies, the FCC may not continue to permit local service agreements as a means of creating duopoly-type opportunities.

On August 2, 2004, the FCC initiated a rule making proceeding to determine whether to make TV joint sales agreements attributable under its ownership rules. Comments and reply comments were filed in this proceeding in the fourth quarter of 2004. The FCC has not yet issued a decision in this proceeding. However, if the FCC adopts a joint sales agreement attribution rule for television stations we will be required to comply with the rule.

Cable America Corporation and an affiliate of Equity separately have alleged that our local service agreements with Mission give Nexstar improper control over Mission’s operations. If the FCC challenges our existing arrangements with Mission (or our similar arrangements with Sinclair Broadcasting Group, Inc. (“Sinclair”)) based on these complaints and determines that our arrangements violate the FCC’s rules and policies, we may be required to terminate such arrangements and we could be subject to sanctions, fines and/or other penalties.

The FCC may decide to terminate “grandfathered” time brokerage agreements.

The FCC attributes time brokerage agreements and local marketing agreements (“TBAs”) to the programmer under its ownership limits if the programmer provides more than 15% of a station’s weekly broadcast programming. However, TBAs entered into prior to November 5, 1996 are exempt attributable interests for now.

The FCC will review these “grandfathered” TBAs in the future. During this review, the FCC may determine to terminate the “grandfathered” period and make all TBAs fully attributable to the programmer. If the FCC does so, we and Mission will be required to terminate the TBAs for stations WFXP and KHMT unless the FCC simultaneously changes its duopoly rules to allow ownership of two stations in the applicable markets.

Failure to construct full-power DTV facilities may lead to a loss of station coverage area or other FCC sanctions.

Television broadcasters are currently broadcasting both analog and DTV signals. On February 8, 2006, President Bush signed into law legislation that establishes February 17, 2009 as the deadline for television broadcasters to complete their transition to DTV-only operations and return their analog spectrum to the FCC.

Except for stations that have requested a waiver of the construction deadline, broadcast television stations are required to be broadcasting full-power DTV signals. As of December 31, 2006, Mission’s stations WUTR, WTVO and WYOU and Nexstar’s stations WBRE, WROC, KARK, KNWA, KFTA, WMBD, WTAJ and WLYH are broadcasting with full-power DTV signals. Nexstar’s station KSFX and Mission’s station KOLR initiated full-power DTV broadcasts on January 19, 2007 and Nexstar’s station KTAL initiated full-power DTV broadcasts on February 26, 2007. Nexstar’s and Mission’s remaining stations are broadcasting low-power DTV signals and have requested extensions of time to begin broadcasting full-power digital television signals. The FCC has not yet acted on these requests for extension of time. If the FCC denies the request for the extension of time, the stations may lose interference protection for their signal outside their low-power coverage area.

 

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The level of foreign investments held by our principal stockholder, ABRY Partners, LLC and its affiliated funds (“ABRY”), may limit additional foreign investments made in us.

The Communications Act limits the extent of non-U.S. ownership of companies that own U.S. broadcast stations. Under this restriction, a U.S. broadcast company such as ours may have no more than 25% non-U.S. ownership (by vote and by equity). Because our majority shareholder, ABRY has a substantial level of foreign investment, the amount of additional foreign investment that may be made in us is limited to approximately 12% of our total outstanding equity.

The interest of our principal stockholder, ABRY, in other media may limit our ability to acquire television stations in particular markets, restricting our ability to execute our acquisition strategy.

The number of television stations we may acquire in any market is limited by FCC rules and may vary depending upon whether the interests in other television stations or other media properties of persons affiliated with us are attributable under FCC rules. The broadcast or other media interest of our officers, directors and stockholders with 5% or greater voting power are generally attributable under the FCC’s rules, which may limit us from acquiring or owning television stations in particular markets while those officers, directors or stockholders are associated with us. In addition, the holder of otherwise non-attributable equity and/or debt in a licensee in excess of 33% of the total debt and equity of the licensee will be attributable where the holder is either a major program supplier to that licensee or the holder has an attributable interest in another broadcast station, cable system or daily newspaper in the same market.

ABRY, our principal stockholder, is one of the largest private firms specializing in media and broadcasting investments. As a result of ABRY’s interest in us, we could be prevented from acquiring broadcast companies in markets where ABRY has an attributable interest in television stations or other media, which could impair our ability to execute our acquisition strategy. Our certificate of incorporation allows ABRY and its affiliates to identify, pursue and consummate additional acquisitions of television stations or other broadcast-related businesses that may be complementary to our business and therefore such acquisitions opportunities may not be available to us.

We are controlled by one principal stockholder, ABRY, and its interests may differ from your interests.

As a result of ABRY’s controlling interest in us, ABRY is able to exercise a controlling influence over our business and affairs. ABRY is able to unilaterally determine the outcome of any matter submitted to a vote of our stockholders, including the election and removal of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. In addition, five of our directors are or were affiliated with ABRY. ABRY’s interests may differ from the interests of other security holders and ABRY could take actions or make decisions that are not in the best interests of our security holders. Furthermore, this concentration of ownership by ABRY may have the effect of impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer for our shares.

Our certificate of incorporation, bylaws, debt instruments and Delaware law contain anti-takeover protections that may discourage or prevent a takeover of us, even if an acquisition would be beneficial to our stockholders.

Provisions of our certificate of incorporation and bylaws, as well as provisions of the Delaware General Corporation Law, could delay or make it more difficult to remove incumbent directors or for a third party to acquire us, even if a takeover would benefit our stockholders. The provisions in our certificate of incorporation and bylaws:

 

   

authorize the issuance of “blank check” preferred stock by our board of directors without a stockholder vote;

 

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do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; and

 

   

set forth specific advance notice procedures for matters to be raised at stockholder meetings.

The Delaware General Corporation Law prohibits us from engaging in “business combinations” with “interested shareholders” (with some exceptions) unless such transaction is approved in a prescribed manner. The existence of this provision could have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for our common stock.

In addition, a change in control would be an event of default under our senior credit facility and trigger the rights of holders of our publicly-traded notes to cause us to repurchase such notes. These events would add to the cost of an acquisition, which could deter a third party from acquiring us.

We and Mission have a material amount of goodwill and intangible assets, therefore the Company could suffer losses due to future asset impairment charges.

As of December 31, 2006, approximately $519.5 million, or 71.7%, of our and Mission’s combined total assets consisted of goodwill and intangible assets, including FCC licenses and network affiliation agreements. We and Mission test goodwill and FCC licenses annually, and on an interim date if factors or indicators become apparent that would require an interim test of these assets, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” We and Mission test network affiliation agreements whenever circumstances or indicators become apparent the asset may not be recoverable through expected future cash flows. The methods used to evaluate the impairment of the Company’s goodwill and intangible assets would be affected by a significant reduction in operating results or cash flows at one or more of the Company’s television stations, or a forecast of such reductions, a significant adverse change in the advertising marketplaces in which the Company’s television stations operate, the loss of network affiliations, or by adverse changes to FCC ownership rules, among others, which may be beyond our or Mission’s control. If the carrying amount of goodwill and intangible assets is revised downward due to impairment, such non-cash charge could materially affect the Company’s consolidated financial position and results of operations.

Risks Related to Our Industry

Nexstar’s operating results are dependent on advertising revenue and as a result, Nexstar may be more vulnerable to economic downturns and other factors beyond Nexstar’s control than businesses not dependent on advertising.

Nexstar derives revenue primarily from the sale of advertising time. Nexstar’s ability to sell advertising time depends on numerous factors that may be beyond Nexstar’s control, including:

 

   

the health of the economy in the local markets where our stations are located and in the nation as a whole;

 

   

the popularity of our programming;

 

   

fluctuations in pricing for local and national advertising;

 

   

the activities of our competitors, including increased competition from other forms of advertising-based media, particularly newspapers, cable television, Internet and radio;

 

   

the decreased demand for political advertising in non-election years; and

 

   

changes in the makeup of the population in the areas where our stations are located.

 

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Because businesses generally reduce their advertising budgets during economic recessions or downturns, the reliance upon advertising revenue makes Nexstar’s operating results particularly susceptible to prevailing economic conditions. Our programming may not attract sufficient targeted viewership, and we may not achieve favorable ratings. Our ratings depend partly upon unpredictable and volatile factors beyond our control, such as viewer preferences, competing programming and the availability of other entertainment activities. A shift in viewer preferences could cause our programming not to gain popularity or to decline in popularity, which could cause our advertising revenue to decline. In addition, we and the programming providers upon which we rely may not be able to anticipate, and effectively react to, shifts in viewer tastes and interests in our markets.

Because a high percentage of our operating expenses are fixed, a relatively small decrease in advertising revenue could have a significant negative impact on our financial results.

Our business is characterized generally by high fixed costs, primarily for debt service, broadcast rights and personnel. Other than commissions paid to our sales staff and outside sales agencies, our expenses do not vary significantly with the increase or decrease in advertising revenue. As a result, a relatively small change in advertising prices could have a disproportionate effect on our financial results. Accordingly, a minor shortfall in expected revenue could have a significant negative impact on our financial results.

Preemption of regularly scheduled programming by network news coverage may affect our revenue and results of operations.

Nexstar may experience a loss of advertising revenue and incur additional broadcasting expenses due to preemption of our regularly scheduled programming by network coverage of a major global news event such as a war or terrorist attack. As a result, advertising may not be aired and the revenue for such advertising may be lost unless the station is able to run the advertising at agreed-upon times in the future. Advertisers may not agree to run such advertising in future time periods, and space may not be available for such advertising. The duration of such preemption of local programming cannot be predicted if it occurs. In addition, our stations and the stations we provide services to may incur additional expenses as a result of expanded news coverage of a war or terrorist attack. The loss of revenue and increased expenses could negatively affect our results of operations.

The industry-wide mandatory conversion to digital television will require us to make significant capital expenditures without assurance that we will remain competitive with other developing technologies.

The conversion from broadcasting in the analog broadcast format to the digital broadcast format is expensive. This conversion required an average initial capital expenditure of approximately $0.2 million per station for low-power transmission of digital signal programming, and we estimate that it will require an average additional capital expenditure of approximately $1.5 million per station (for 33 stations as of December 31, 2006) to modify our and Mission’s stations’ DTV transmitters for full-power digital signal transmission, including costs for the transmitter, transmission line, antenna and installation, and estimated costs for tower upgrades and/or modifications. Digital conversion expenditures were $14.3 million,$5.5 million and $0.3 million, respectively, for the years ended December 31, 2006, 2005 and 2004.

Since digital technology allows broadcasting of multiple channels within the additional allocated spectrum, this technology could expose us to additional competition from programming alternatives.

Technological advancements and the resulting increase in programming alternatives, such as cable television, DBS systems, pay-per-view, home video and entertainment systems, video-on-demand and the Internet have created new types of competition to television broadcast stations and will also increase competition for household audiences and advertisers.

 

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If direct broadcast satellite companies do not carry the stations that we own and operate or provide services to, we could lose audience share and revenue.

Direct broadcast satellite television companies are permitted to transmit local broadcast television signals to subscribers in local markets provided that they offer to carry all local stations in that market. However, satellite providers have limited satellite capacity to deliver local station signals in local markets. Satellite providers, such as DirecTV and EchoStar, carry our and Mission’s stations in only some of our markets and may choose not to carry local stations in any of our other markets. DirecTV currently provides satellite carriage of our and Mission’s stations in the Champaign-Springfield-Decatur, Evansville, Ft. Smith-Fayetteville-Springdale-Rogers, Ft. Wayne, Harrisburg, Johnstown-Altoona, Little Rock-Pine Bluff, Peoria-Bloomington, Rochester, Rockford, Shreveport, Springfield and Wilkes Barre-Scranton markets. EchoStar currently provides satellite carriage of our and Mission’s stations in the Abilene-Sweetwater, Amarillo, Beaumont-Port Arthur, Billings, Champaign-Springfield-Decatur, Erie, Evansville, Fort Wayne, Ft. Smith-Fayetteville-Springdale-Rogers, Hagerstown, Harrisburg, Johnstown-Altoona, Joplin, MO-Pittsburg, KS, Little Rock-Pine Bluff, Lubbock, Monroe, LA-El Dorado, AR, Odessa-Midland, Peoria-Bloomington, Rochester, Rockford, San Angelo, Shreveport, Springfield, Terre Haute, Wichita Falls, TX-Lawton, OK and Wilkes Barre-Scranton markets. In those markets in which the satellite providers do not carry local station signals, subscribers to those satellite services are unable to view local stations without making further arrangements, such as installing antennas and switches. Furthermore, when direct broadcast satellite companies do carry local television stations in a market, they are permitted to charge subscribers extra for such service. Some subscribers may choose not to pay extra to receive local television stations. In the event subscribers to satellite services do not receive the stations that we own and operate or provide services to, we could lose audience share which would adversely affect our revenue and earnings.

The FCC can sanction us for programming broadcast on our stations which it finds to be indecent.

In 2004 and 2006, the FCC imposed substantial fines on television broadcasters for the broadcast of indecent material in violation of the Communications Act and its rules. The FCC also revised its indecency review analysis to more strictly prohibit the use of certain language on broadcast television. Because our and Mission’s stations’ programming is in large part comprised of programming provided by the networks with which the stations are affiliated, we and Mission do not have full control over what is broadcast on our stations, and we and Mission may be subject to the imposition of fines if the FCC finds such programming to be indecent.

In addition, Congress recently increased the fines which may be imposed on a television broadcaster for an indecency violation to a maximum of $325 thousand per violation.

Intense competition in the television industry could limit our growth and impair our ability to become profitable.

As a television broadcasting company, we face a significant level of competition, both directly and indirectly. Generally we compete for our audience against all the other leisure activities in which one could choose to engage rather than watch television. Specifically, stations we own or provide services to compete for audience share, programming and advertising revenue with other television stations in their respective markets and with other advertising media, including newspapers, radio stations, cable television, DBS systems and the Internet.

The entertainment and television industries are highly competitive and are undergoing a period of consolidation. Many of our current and potential competitors have greater financial, marketing, programming and broadcasting resources than we do. The markets in which we operate are also in a constant state of change arising from, among other things, technological improvements and economic and regulatory developments. Technological innovation and the resulting proliferation of television entertainment, such as cable television, wireless cable, satellite-to-home distribution services, pay-per-view and home video and entertainment systems, have fractionalized television viewing audiences and have subjected free over-the-air television broadcast

 

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stations to increased competition. We may not be able to compete effectively or adjust our business plans to meet changing market conditions. We are unable to predict what form of competition will develop in the future, the extent of the competition or its possible effects on our businesses.

The FCC could implement legislation and/or regulations that might have a significant impact on the operations of the stations we own and the stations we provide services to or the television broadcasting industry as a whole.

The FCC’s ongoing rule making proceeding concerning implementation of the transition from analog to digital television broadcasts is likely to have a significant impact on the television industry and the operation of our stations and the stations we provide services to. The FCC has initiated proceedings to determine whether to make TV joint sales agreements attributable interests under its ownership rules; to determine whether it should establish formal rules under which broadcasters will be required to serve the local public interest; and to determine whether to modify or eliminate certain of its broadcast ownership rules, including the radio-television cross-ownership rule and the newspaper-television cross-ownership rule. A change to any of these rules may have significant impact on us and the stations we provide services to.

In addition, the FCC may decide to initiate other new rule making proceedings on its own or in response to requests from outside parties, any of which might have such an impact. Congress also may act to amend the Communications Act in a manner that could impact our stations and the stations we provide services to or the television broadcast industry in general.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

Nexstar owns and leases facilities in the following locations:

 

Station Metropolitan Area and Use

  

Owned or

Leased

  

Square

Footage/Acreage

Approximate Size

  

Expiration

of Lease

WBRE—Wilkes Barre-Scranton, PA

        

News Bureau/Office-Studio

   Leased    6,977 Sq. Ft.    11/30/09

Office-Studio

   100% Owned    0.80 Acres   

Office-Studio

   100% Owned    49,556 Sq. Ft.   

Office-Studio—Williamsport News Bureau

   Leased    460 Sq. Ft.    10/31/07

Office-Studio—Stroudsburg News Bureau

   Leased    320 Sq. Ft.    4/30/11

Office-Studio—Scranton News Bureau

   Leased    1,627 Sq. Ft.    11/30/09

Tower/Transmitter Site—Williamsport

   33% Owned    1.33 Acres   

Tower/Transmitter Site—Sharp Mountain

   33% Owned    0.23 Acres   

Tower/Transmitter Site—Blue Mountain

   100% Owned    0.998 Acres   

Tower/Transmitter Site—Penobscot Mountain

   100% Owned    20 Acres   

Tower/Transmitter Site—Pimple Hill

   Leased    400 Sq. Ft.    Month to Month

KARK—Little Rock-Pine Bluff, AR

        

Office-Studio

   Leased    34,835 Sq. Ft.    3/31/22

Tower/Transmitter Site

   100% Owned    40 Acres   

KTAL—Shreveport, LA

        

Office-Studio

   100% Owned    2 Acres   

Office-Studio

   100% Owned    16,000 Sq. Ft.   

Equipment Building—Texarkana

   100% Owned    0.0808 Acres   

Office-Studio—Texarkana

   Leased    2,147 Sq. Ft.    8/31/08

Tower/Transmitter Site

   100% Owned    109 Acres   

Tower/Transmitter Site

   100% Owned    2,284 Sq. Ft.   

WROC—Rochester, NY

        

Office-Studio

   100% Owned    3.9 Acres   

Office-Studio

   100% Owned    48,864 Sq. Ft.   

Tower/Transmitter Site

   100% Owned    0.24 Acres   

Tower/Transmitter Site

   100% Owned    2,400 Sq. Ft.   

Tower/Transmitter Site

   50% Owned    1.90 Acres   

WCIA/WCFN—Champaign-Springfield-Decatur, IL

        

Office-Studio

   100% Owned    20,000 Sq. Ft.   

Office-Studio

   100% Owned    1.5 Acres   

Office-Studio—Sales Bureau

   Leased    1,600 Sq. Ft.    1/31/12

Office-Studio—News Bureau

   Leased    350 Sq. Ft.    2/28/08

Office-Studio—Decatur News Bureau

   Leased    300 Sq. Ft.    5/31/07

Roof Top & Boiler Space—Danville Tower

   Leased    20 Sq. Ft.    11/30/07

Tower/Transmitter Site—WCIA Tower

   100% Owned    38.06 Acres   

Tower/Transmitter Site—Springfield Tower

   100% Owned    2.0 Acres   

Tower/Transmitter Site—Dewitt Tower

   100% Owned    1.0 Acres   

WMBD—Peoria-Bloomington, IL

        

Office-Studio

   100% Owned    0.556 Acres   

Office-Studio

   100% Owned    18,360 Sq. Ft.   

Building-Transmitter Site

   100% Owned    2,350 Sq. Ft.   

Building-Transmitter Site

   100% Owned    800 Sq. Ft.   

Tower/Transmitter Site

   100% Owned    34.93 Acres   

Tower/Transmitter Site

   100% Owned    1.0 Acres   

KBTV—Beaumont-Port Arthur, TX

        

Office-Studio

   Leased    8,000 Sq. Ft.    1/31/10

Office-Studio

   100% Owned    26,160 Sq. Ft.   

Tower/Transmitter Site

   100% Owned    1.2 Acres   

Tower/Transmitter Site

   100% Owned    40 Acres   

WTWO—Terre Haute, IN

        

Office-Studio

   100% Owned    4.774 Acres   

Office-Studio—Tower/Transmitter Site

   100% Owned    17,375 Sq. Ft.   

WJET—Erie, PA

        

Tower/Transmitter Site

   100% Owned    2 Sq. Ft.   

Office-Studio

   100% Owned    9.87 Acres   

Office-Studio

   100% Owned    15,533 Sq. Ft.   

KFDX—Wichita Falls, TX—Lawton, OK

        

Office-Studio-Tower/Transmitter Site

   100% Owned    28.06 Acres   

Office-Studio

   100% Owned    13,568 Sq. Ft.   

 

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Station Metropolitan Area and Use

  

Owned or

Leased

  

Square

Footage/Acreage

Approximate Size

  

Expiration

of Lease

KSNF—Joplin, MO-Pittsburg, KS

        

Office-Studio

   100% Owned    13.36 Acres   

Office-Studio

   100% Owned    13,169 Sq. Ft.   

Tower/Transmitter Site

   Leased    240 Sq. Ft.    9/30/08

KMID—Odessa-Midland, TX

        

Office-Studio

   100% Owned    1.127 Acres   

Office-Studio

   100% Owned    14,000 Sq. Ft.   

Tower/Transmitter Site

   100% Owned    69.87 Acres   

Tower/Transmitter Site

   100% Owned    0.322 Acres   

KTAB—Abilene-Sweetwater, TX

        

Office-Studio(1)

        

Tower/Transmitter Site

   100% Owned    25.55 Acres   

KQTV—St Joseph, MO

        

Office-Studio

   100% Owned    3 Acres   

Office-Studio

   100% Owned    15,100 Sq. Ft.   

Tower/Transmitter Site

   100% Owned    9,360 Sq. Ft.   

WDHN—Dothan, AL

        

Office-Studio- Tower/Transmitter Site

   100% Owned    10 Acres   

Office-Studio

   100% Owned    7,812 Sq. Ft.   

KLST—San Angelo, TX

        

Office-Studio

   100% Owned    7.31 Acres   

Tower/Transmitter Site

   100% Owned    8 Acres   

WHAG—Washington, DC/Hagerstown, MD

        

Office-Studio

   Leased    11,000 Sq. Ft.    6/30/09

Sales Office-Frederick

   Leased    1,200 Sq. Ft.    8/31/08

Tower/Transmitter Site

   Leased    11.2 Acres    5/12/21

WTVW—Evansville, IN

        

Office-Studio

   100% Owned    1.834 Acres    ––

Office-Studio

   100% Owned    14,280 Sq. Ft.    ––

Tower/Transmitter Site

   Leased    16.36 Acres    5/12/21

KSFX—Springfield, MO

        

Office-Studio(2)

        

Tower/Transmitter Site—Kimberling City

   100% Owned    .25 Acres   

Tower/Transmitter Site

   Leased    0.5 Acres    5/12/21

WFFT—Fort Wayne, IN

        

Office-Studio

   100% Owned    29.857 Acres   

Tower/Transmitter Site

   Leased    0.5 Acres    5/12/21

KAMR—Amarillo, TX

        

Office-Studio

   100% Owned    26,000 Sq. Ft.   

Tower/Transmitter Site

   Leased    110.2 Acres    5/12/21

Translator Site

   Leased    0.5 Acres    5/31/09

KARD—Monroe, LA

        

Office-Studio

   100% Owned    14,450 Sq. Ft.   

Tower/Transmitter Site

   Leased    26 Acres    5/12/21

Tower/Transmitter Site

   Leased    80 Sq. Ft.    Month to Month

KLBK—Lubbock, TX

        

Office-Studio

   100% Owned    11.5 Acres   

Tower/Transmitter Site

   Leased    0.5 Acres    5/12/21

WFXV—Utica, NY

        

Office-Studio(3)

        

Tower/Transmitter Site—Burlington Flats

   100% Owned    6.316 Acres   

Tower/Transmitter Site

   Leased    160 Sq. Ft.    9/1/14

Tower/Transmitter Site—Cassville

   Leased    96 Sq. Ft.    1/12/08

WPNY–LP—Utica, NY

        

Office-Studio(4)

        

 

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Station Metropolitan Area and Use

  

Owned or

Leased

  

Square

Footage/Acreage

Approximate Size

  

Expiration

of Lease

KSVI—Billings, MT

        

Office-Studio

   100% Owned    9,700 Sq. Ft.   

Tower/Transmitter Site

   Leased    10 Acres    5/12/21

Tower/Transmitter Site

   Leased    75 Sq. Ft.    6/30/11

Tower/Transmitter Site

   Leased    75 Sq. Ft.    1/17/11

Tower/Transmitter Site

   Leased    75 Sq. Ft.    12/31/22

Tower/Transmitter Site—Rapeljie

   Leased    1 Acre    2/1/11

Tower/Transmitter Site—Hardin

   Leased    1 Acre    12/1/14

Tower/Transmitter Site—Columbus

   Leased    75 Sq. Ft.    6/1/10

Tower/Transmitter Site—Sarpy

   Leased    75 Sq. Ft.    Month to Month

Tower/Transmitter Site—Rosebud

   Leased    1 Acre    Year to Year

Tower/Transmitter Site—Miles City

   Leased    .25 Acre    3/23/11

Tower/Transmitter Site—Sheridan, WY

   Leased    56 Sq. Ft.    12/31/10

Tower/Transmitter Site—McCullough Pks, WY

   Leased    75 Sq. Ft.    Month to Month

WQRF—Rockford, IL

        

Office-Studio(5)

        

Tower/Transmitter Site

   Leased    2,000 Sq. Ft.    5/12/21

KFTA/KNWA—Fort Smith-Fayetteville-Springdale-Rogers, AR

        

Office

   Leased    9,950 Sq. Ft.    Month to Month

Office

   Leased    900 Sq. Ft.    7/31/08

Office-Studio

   Leased    10,000 Sq. Ft.    7/31/14

Tower/Transmitter Site

   Leased    216 Sq. Ft.    Month to Month

Tower/Transmitter Site

   Leased    936 Sq. Ft.    7/31/25

Tower/Transmitter Site

   100% Owned    1.61 Acres   

Tower/Transmitter Site—Fort Smith

   Leased    1,925 Sq. Ft.    9/1/11

Microwave Relay Site

   100% Owned    166 Sq. Ft.   

Microwave Site

   Leased    216 Sq. Ft.    Month to Month

WTAJ–Altoona-Johnstown, PA

        

Office-Studio

   Leased    22,367 Sq. Ft.    5/31/09

Office-Ebensburg Bureau

   Leased    800 Sq. Ft.    2/28/08

Office-State College Bureau

   Leased    7,200 Sq. Ft.    Month to Month

Office-Dubois Bureau

   Leased    315 Sq. Ft.    5/31/07

Tower/Transmitter Site

   Owned    4,400 Sq. Ft.   

Corporate Office—Irving, TX

   Leased    12,008 Sq. Ft.    2/16/08

Corporate Office Offsite Storage—Dallas, TX

   Leased    300 Sq. Ft.    Month to Month

(1) The office space and studio used by KTAB are owned by KRBC.
(2) The office space and studio used by KSFX are owned by KOLR.
(3) The office space and studio used by WFXV are owned by WUTR.
(4) The office space and studio used by WPNY-LP are owned by WUTR.
(5) The office space and studio used by WQRF are owned by WTVO.

Mission owns and leases facilities in the following locations:

 

WYOU—Wilkes Barre-Scranton, PA

        

Office-Studio(1)

        

Tower/Transmitter Site—Penobscot Mountain

   100% Owned    120.33 Acres   

Tower/Transmitter Site—Bald Mountain

   100% Owned    7.2 Acres   

Tower/Transmitter Site—Williamsport

   33% Owned    1.35 Acres   

Tower/Transmitter Site—Sharp Mountain

   33% Owned    0.23 Acres   

Tower/Transmitter Site—Stroudsburg

   Leased    10,000 Sq. Ft.    Month to Month

WFXW—Terre Haute, IN

        

Office-Studio(2)

        

Tower/Transmitter Site

   100% Owned    1 Acre   

WFXP—Erie, PA

        

Office-Studio(3)

        

Tower/Transmitter Site

   Leased    1 Sq. Ft.    6/30/09

KJTL—Wichita Falls, TX—Lawton, OK

        

Office-Studio(4)

        

Tower/Transmitter Site

   Leased    40 Acres    1/30/15

 

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Station Metropolitan Area and Use

  

Owned or

Leased

  

Square

Footage/Acreage

Approximate Size

  

Expiration

of Lease

KJBO-LP—Wichita Falls, TX-Lawton, OK

        

Office-Studio(4)

   —      —      —  

Tower/Transmitter Site

   Leased    5 Acres    Year to Year

KODE—Joplin, MO-Pittsburg, KS

        

Office-Studio

   100% Owned    2.74 Acres    —  

Tower/Transmitter Site

   Leased    215 Sq. Ft.    5/1/27

KRBC—Abilene-Sweetwater, TX

        

Office-Studio

   100% Owned    5.42 Acres    —  

Office-Studio

   100% Owned    19,312 Sq. Ft.    —  

Tower/Transmitter Site

   100% Owned    12.78 Acres    —  

KSAN—San Angelo, TX

        

Office-Studio(5)

   —      —      —  

Tower/Transmitter Site

   Leased    10 Acres    5/15/09

Microwave Relay Station

   Leased    0.3 Acres    10/31/09

KOLR—Springfield, MO

        

Office-Studio

   100% Owned    30,000 Sq. Ft.    —  

Office-Studio

   100% Owned    7 Acres    —  

Tower/Transmitter Site

   Leased    0.5 Acres    5/12/21

KCIT/KCPN-LP—Amarillo, TX

        

Office-Studio(6)

   —      —      —  

Tower/Transmitter Site

   Leased    100 Acres    5/12/21

Tower/Transmitter Site—Parmer County, TX

   Leased    80 Sq. Ft.    Month to Month

Tower/Transmitter Site—Guyman, OK

   Leased    80 Sq. Ft.    Month to Month

Tower/Transmitter Site—Curry County, NM

   Leased    6 Acres    Month to Month

KAMC—Lubbock, TX

        

Office-Studio(7)

   —      —      —  

Tower/Transmitter Site

   Leased    40 Acres    5/12/21

Tower/Transmitter Site

   Leased    1,200 Sq. Ft.    Month to Month

KHMT—Billings, MT

        

Office-Studio(8)

   —      —      —  

Tower/Transmitter Site

   Leased    4 Acres    5/12/21

WUTR—Utica, NY

        

Office-Studio

   100% Owned    12,100 Sq. Ft.    —  

Tower/Transmitter Site

   100% Owned    21 Acres    —  

WTVO—Rockford, IL

        

Office-Studio-Tower/Transmitter Site

   100% Owned    20,000 Sq. Ft.    —  

Corporate Office-Brecksville, OH

   Leased    540 Sq. Ft.    10/14/07

(1) The office space and studio used by WYOU are owned by WBRE.
(2) The office space and studio used by WFXW are owned by WTWO.
(3) The office space and studio used by WFXP are owned by WJET.
(4) The office space and studio used by KJTL and KJBO-LP are owned by KFDX.
(5) The office space and studio used by KSAN are owned by KLST.
(6) The office space and studio used by KCIT/KCPN-LP are owned by KAMR.
(7) The office space and studio used by KAMC are owned by KLBK.
(8) The office space and studio used by KHMT are owned by KSVI.

 

Item 3. Legal Proceedings

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

 

Item 4. Submission of Matters to a Vote of Security Holders

We did not submit any matter to a vote of our shareholders during the fourth quarter of 2006.

 

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Table of Contents

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Prices; Record Holders and Dividends

Our Class A Common Stock trades on The Nasdaq Stock Market’s National Market (“Nasdaq”) under the symbol “NXST”.

The following table sets forth the high and low sales prices for our Class A Common Stock for the periods indicated, as reported by Nasdaq:

 

2006:

   High    Low

1st Quarter 2006

   $ 5.22    $ 3.93

2nd Quarter 2006

   $ 6.20    $ 3.94

3rd Quarter 2006

   $ 4.85    $ 3.80

4th Quarter 2006

   $ 5.20    $ 3.50

2005:

         

1st Quarter 2005

   $ 9.56    $ 6.86

2nd Quarter 2005

   $ 7.24    $ 4.52

3rd Quarter 2005

   $ 6.37    $ 4.65

4th Quarter 2005

   $ 5.89    $ 4.09

The following table summarizes the outstanding shares of common stock held by shareholders of record as of January 31, 2007:

 

Type

  

Shares

Outstanding

  

Shareholders

of Record

 

Common—Class A

   14,319,310    27 (1)

Common—Class B

   13,411,588    3  

Common—Class C

   662,529    1  

(1) The majority of these shares are held in nominee names by brokers and other institutions on behalf of approximately 1,000 shareholders.

We have not paid and do not expect to pay any dividends or distribution on our common stock for the foreseeable future. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business.

 

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Comparative Stock Performance Graph

The following graph compares the total return of our Class A Common Stock based on closing prices for the period from November 25, 2003, the date our Class A Common Stock was first traded on NASDAQ, through December 31, 2006 with (i) the NASDAQ Composite Index and (ii) a peer index consisting of the following pure play television companies: ACME Communications, Inc., Granite Broadcasting Corporation, Gray Television, Inc., Hearst Argyle Television, Inc., LIN TV Corp., Sinclair Broadcast Group, Inc. and Young Broadcasting Inc. (the “Television Index”). The graph assumes the investment of $100 in our Class A Common Stock and in each of the indices on November 25, 2003. The performance shown is not necessarily indicative of future performance.

LOGO

 

     11/25/03    12/31/03    12/31/04    12/31/05    12/31/06

Nexstar Broadcasting Group, Inc. (NXST)

   $ 100.00    $ 102.70    $ 69.06    $ 37.53    $ 34.83

NASDAQ Composite Index

   $ 100.00    $ 102.07    $ 110.65    $ 113.08    $ 124.69

Television Index (TV)

   $ 100.00    $ 114.16    $ 96.72    $ 75.75    $ 78.39

Securities Authorized for Issuance Under Equity Compensation Plans

For an overview of our option plans and grants, we refer you to Note 11 to the consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

 

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Table of Contents
Item 6. Selected Financial Data

The selected historical consolidated financial data presented below for the years ended December 31, 2006, 2005, 2004, 2003 and 2002 have been derived from our consolidated financial statements. The following financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes in Part IV, Item 15(a) of this Annual Report on Form 10-K.

 

     Fiscal year ended December 31,  
     2006     2005     2004     2003(1)     2002(1)  
     (in thousands, except per share/unit amounts)  

Statement of Operations Data:

          

Net revenue

   $ 265,169     $ 228,939     $ 249,531     $ 217,376     $ 210,205  

Operating expenses:

          

Direct operating expenses (exclusive of depreciation and amortization shown separately below)

     71,465       67,681       65,608       60,296       52,599  

Selling, general and administrative expenses (exclusive of depreciation and amortization shown separately below)

     85,293       75,863       76,603       77,594       66,460  

Amortization of broadcast rights

     19,701       22,257       24,805       25,894       24,689  

Depreciation and amortization

     42,221       43,244       44,412       45,401       44,841  

Merger related expenses

     —         —         456       11,754       —    

Loss on property held for sale

     —         616       —         —         —    

Loss on asset disposal, net

     639       668       582       17       1,669  
                                        

Income (loss) from operations

     45,850       18,610       37,065       (3,580 )     19,947  

Interest expense

     (51,783 )     (47,260 )     (52,265 )     (68,342 )     (67,419 )

Loss on extinguishment of debt

     —         (15,715 )     (8,704 )     (10,767 )     (227 )

Interest income

     760       213       113       606       152  

Other income (expenses), net

     —         380       5,077       3,365       (319 )
                                        

Loss from operations before income taxes

     (5,173 )     (43,772 )     (18,714 )     (78,718 )     (47,866 )

Income tax benefit (expense)

     (3,819 )     (4,958 )     (3,892 )     15,031       (7,757 )
                                        

Loss before cumulative effect of change in accounting principle and minority interest in consolidated entity

     (8,992 )     (48,730 )     (22,606 )     (63,687 )     (55,623 )

Cumulative effect of change in accounting principle, net of tax

     —         —         —         (8,898 )     (43,470 )

Minority interest of consolidated entity

     —         —         2,106       786       —    
                                        

Net loss

   $ (8,992 )   $ (48,730 )   $ (20,500 )   $ (71,799 )   $ (99,093 )
                                        

Other comprehensive loss:

          

Change in market value of derivative instrument

   $ —       $ —       $ —       $ —       $ 3,731  
                                        

Net loss and other comprehensive loss

   $ (8,992 )   $ (48,730 )   $ (20,500 )   $ (71,799 )   $ (95,362 )
                                        

Net loss

     (8,992 )     (48,730 )     (20,500 )     (71,799 )     (99,093 )

Accretion of preferred interests

     —         —         —         (15,319 )     (17,481 )
                                        

Net loss attributable to common shareholders and unitholders

   $ (8,992 )   $ (48,730 )   $ (20,500 )   $ (87,118 )   $ (116,574 )
                                        

 

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Table of Contents
     Fiscal year ended December 31,  
     2006     2005     2004     2003(1)     2002(1)  
     (in thousands, except per share/unit amounts)  

Basic and diluted loss per share/unit:

          

Net loss attributable to common shareholders

   $ (0.32 )   $ (1.72 )   $ (0.72 )   $ (5.59 )   $ —    

Net loss attributable to common unitholders

     —         —         —         —         (18.75 )

Cumulative effect of change in accounting principle

     —         —         —         (0.57 )     (6.99 )

Basic and diluted:

          

Weighted average number of shares outstanding

     28,376       28,363       28,363       15,576       —    

Weighted average number of units outstanding

     —         —         —         —         6,216  

Balance Sheet Data (end of period):

          

Cash and cash equivalents

   $ 11,179     $ 13,487     $ 18,505     $ 10,848     $ 29,201  

Working capital

     22,025       26,144       35,249       20,405       26,210  

Net intangible assets and goodwill

     519,450       494,231       519,626       523,589       418,493  

Total assets

     724,709       680,081       734,965       727,096       614,491  

Total debt

     681,135       646,505       629,898       598,938       471,280  

Total stockholder’s equity (deficit) or member’s interest (deficit)

     (73,290 )     (66,025 )     (17,295 )     3,205       (103,932 )

Cash Flow Data:

          

Net cash provided by (used for):

          

Operating activities

   $ 54,462     $ 14,350     $ 31,911     $ 3,686     $ 28,741  

Investing activities

     (79,272 )     (26,358 )     (44,605 )     (124,411 )     (20,312 )

Financing activities

     22,502       6,990       20,351       102,372       12,995  

Other Financial Data:

          

Capital expenditures, net of proceeds from asset sales

   $ 23,751     $ 13,891     $ 10,298     $ 10,294     $ 10,442  

Cash payments for broadcast rights

     8,284       9,704       10,520       12,395       11,932  

(1) On December 31, 2003, we completed the acquisition of all the direct and indirect subsidiaries of Quorum Broadcast Holdings, LLC (“Quorum”). Quorum owned and operated 11 television stations and provided sales or other services to an additional 5 stations. The Quorum acquisition was structured as a merger of Quorum’s direct subsidiaries with and into us. The merger constituted a tax-free reorganization and has been accounted for as a merger under common control in a manner similar to pooling of interests. Accordingly, our consolidated financial statements herein have been restated to include the financial results of all of the Quorum subsidiaries for all periods prior to 2004.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with Item 6. “Selected Financial Data” and the consolidated financial statements and related notes included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

As used in the report, unless the context indicates otherwise, “Nexstar” refers to Nexstar Broadcasting Group, Inc. and its consolidated subsidiaries Nexstar Finance Holdings, Inc. and Nexstar Broadcasting, Inc., and “Mission” refers to Mission Broadcasting, Inc. All references to “we,” “our,” and “us” refer to Nexstar. All references to the “Company” refer to Nexstar and Mission collectively.

As a result of our controlling financial interest in Mission under accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in order to present fairly our financial position, results of operations and cash flows, we consolidate the financial position, results of operations and cash flows of Mission as if it were a wholly-owned entity. We believe this presentation is meaningful for understanding our financial performance. As discussed in Note 2 to our consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K, we have considered the method of accounting under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation on Accounting Research Bulletin No. 51” (“FIN No. 46”) as revised in December 2003 (“FIN No. 46R”) and have determined that we are required to continue consolidating Mission’s financial position, results of operations and cash flows. Therefore, the following discussion of our financial position and results of operations includes Mission’s financial position and results of operations.

 

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Table of Contents

Executive Summary

2006 Highlights

 

   

Net revenue increased 15.8% during the year ended December 31, 2006 compared to the year ended December 31 2005, primarily from the increase in local, national and political advertising revenue and retransmission compensation. Gross local and national advertising revenue on a combined basis increased 6.4% during the year ended December 31, 2006. Gross political advertising revenue increased from $2.2 million for the year ended December 31, 2005 to $27.0 million for the year ended December 31, 2006 as the result of the typical cyclical nature of political advertising whereby advertising by candidates for political offices significantly increases in even-numbered election years. Total revenue from the retransmission consent agreements was approximately $13.7 million for the year ended December 31, 2006 (which included approximately $8.7 million of retransmission compensation and approximately $5.0 million of advertising revenue generated from the retransmission consent agreements), compared to $2.9 million for the year ended December 31, 2005.

 

   

During the year ended December 31, 2006, repayments totaling $15.5 million were made to the term loans under Nexstar’s and Mission’s senior secured credit facilities, of which $12.0 million were voluntary repayments and $3.5 million were scheduled term loan maturities.

 

   

On December 29, 2006, we completed our acquisition of WTAJ, the CBS affiliate in Johnstown-Altoona, Pennsylvania, and WLYH, The CW affiliate in Harrisburg-Lancaster-Lebanon-York, Pennsylvania, for total consideration of $55.1 million, exclusive of transaction costs.

 

   

Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method. Under that method, we are required to record compensation expense for all stock options granted, but not yet vested. We determine compensation expense based on the options’ fair value at their grant date using the Black-Scholes option pricing model. Because we have adopted a prospective transition method, results for prior periods have not been restated. Total compensation cost recognized for the year ended December 31, 2006 was approximately $1.6 million ($0.06 per basic and diluted share) and was included in selling, general and administrative expenses in our consolidated statement of operations.

Overview of Operations

We owned and operated 32 television stations as of December 31, 2006. Through various local service agreements, we programmed or provided sales and other services to 17 additional television stations, including 15 television stations owned and operated by Mission as of December 31, 2006. All of the stations that we program or provide sales and other services to, including Mission, are 100% owned by independent third parties.

The following table summarizes the various local service agreements we had in effect as of December 31, 2006 with Mission:

 

Service Agreements

  

Mission Stations

TBA Only(1)

   WFXP and KHMT

SSA & JSA(2)

   KJTL, KJBO-LP, KOLR, KCIT, KCPN-LP, KAMC, KRBC, KSAN, WUTR, WFXW, WYOU, KODE and WTVO

(1) We have a time brokerage agreement (“TBA”) with each of these stations which allows us 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) We have both a shared services agreement (“SSA”) and a joint sales agreement (“JSA”) with each of these stations. The SSA allows the sharing of services including news production, technical maintenance and security, in exchange for our right to receive certain payments from Mission as described in the SSAs. The JSAs permit us to sell and retain a percentage of the net revenue from the station’s advertising time in return for monthly payments to Mission of the remaining percentage of net revenue, as described in the JSAs.

 

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Our ability to receive cash from Mission is governed by these agreements. The arrangements under the SSAs and JSAs have had the effect of us receiving substantially all of the available cash, after debt service costs, generated by the stations listed above. The arrangements under the TBAs have also had the effect of us receiving substantially all of the available cash generated by the TBA stations listed above. We anticipate that, through these local service agreements, we will continue to receive substantially all of the available cash, after payments for debt service costs, generated by the stations listed above.

We also guarantee the obligations incurred under Mission’s senior secured credit facility. Similarly, Mission is a guarantor of our senior secured credit facility and the senior subordinated notes we have issued. In consideration of our guarantee of Mission’s senior credit facility, the sole shareholder of Mission has granted us a purchase option 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. These option agreements (which expire on various dates between 2008 and 2014) are freely exercisable or assignable by us without consent or approval by the sole shareholder of Mission.

We do not own Mission or Mission’s television stations. However, as a result of our guarantee of the obligations incurred under Mission’s senior credit facility, our arrangements under the local service agreements and purchase option agreements with Mission, we are deemed under U.S. GAAP to have a controlling financial interest in Mission while complying with the FCC’s rules regarding ownership limits in television markets. In order for both us and Mission to comply with FCC regulations, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations.

The operating revenue of our stations is derived primarily from broadcast advertising revenue, which 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 we employ in each market. Most advertising contracts are short-term and generally run for a few weeks. For the years ended December 31, 2006 and 2005, revenue generated from local advertising represented 69.6% and 68.6%, respectively, of our consolidated spot revenue (total of local and national advertising revenue, excluding political advertising revenue). The remaining advertising revenue represents inventory sold for national or political advertising. All national and political revenue is derived from advertisements placed through advertising agencies. The agencies receive a commission rate of 15.0% of the gross amount of advertising schedules placed by them. While the majority of local spot revenue is placed by local agencies, some advertisers place their schedules directly with the stations’ local sales staff, thereby eliminating the agency commission. Each station also has an agreement with a national representative firm that provides for sales representation outside the particular station’s market. Advertising schedules received through the national representative firm are for national or large regional accounts that advertise in several markets simultaneously. National commission rates vary within the industry and are governed by each station’s agreement.

Each of our stations and the stations we provide services to has a network affiliation agreement pursuant to which the network provides programming to the station during specified time periods, including prime time. Under the affiliation agreements with NBC, CBS and ABC, most of our stations and the stations we provide services to receive cash compensation for distributing the network’s programming over the air and for allowing the network to keep a portion of advertising inventory during those time periods. The affiliation agreements with Fox, MyNetworkTV and The CW do not provide for compensation. In recent years, in conjunction with the renewal of affiliation agreements with NBC, CBS and ABC, the amount of network compensation has been declining from year to year. We expect this trend to continue in the future, therefore, revenue associated with network compensation agreements is expected to decline in future years and may be eliminated all together at some point in time.

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 and/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

 

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practice is referred to as barter broadcast rights. The station records the estimated fair market value of the licenses, including any advertising inventory given to the program distributor, as a broadcast right asset and liability. Barter broadcast rights are recorded at management’s estimate of the value of the advertising time exchanged using historical advertising rates, which approximates the fair value of the program material received. The assets are amortized as a component of amortization of broadcast rights. Amortization is computed using the straight-line method based on the license period or usage, whichever yields the greater expense. The cash broadcast rights liabilities are reduced by monthly payments while the barter liability is amortized over the life of the contract as barter revenue.

Our primary operating expenses consist of commissions on advertising revenue, employee compensation and related benefits, newsgathering and programming costs. A large percentage of the costs involved in the operation of our stations and the stations we provide services to remain relatively fixed.

Seasonality

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 resulting from political advertising and advertising aired during the Olympic Games.

Industry Trends

The Television Bureau of Advertising forecasted U.S. television advertising revenue in 2006 to increase by approximately 6% to 8% compared to 2005 primarily due to higher political spending this year and advertising spending incurred in conjunction with the Olympic Games in 2006.

Our net revenue increased 15.8% to $265.2 million for the year ended December 31, 2006, compared to $228.9 million for the year ended December 31, 2005. Our net revenue was higher in 2006 than in 2005 due to several factors, including advertising revenue generated during the coverage of the Olympic Games and an increased demand for political advertising that was favorably affected by the volume of advertising time purchased by campaigns for elective offices and for political issues.

Political revenue was $27.0 million for the year ended December 31, 2006, a significant increase over the $2.2 million for the year ended December 31, 2005. The demand for political advertising is generally higher in even-numbered years, when congressional and presidential elections occur, than in odd-numbered years. During an election year, political revenue makes up a significant portion of the increase in revenue in that year. Since 2006 was an election year, a significant percentage of the Company’s revenue growth in 2006 was attributable to political revenue. However, even during an election year, political revenue is influenced by geography and the competitiveness of the election races. Conversely, given that 2007 is a non-election year, we expect nominal political advertising revenue to be reported in 2007 in relation to the amount of political advertising reported in 2006.

Automotive-related advertising, our largest advertising category, represented approximately 24% and 26% of our core local and national advertising revenue for the year ended December 31, 2006 and 2005, respectively. Our automotive-related advertising decreased approximately 4.3% for the year ended December 31, 2006 as compared to the same period in 2005, primarily due to a decline in demand for advertising from this business category. A significant change in this advertising revenue source could materially affect our future results of operations.

 

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Station Acquisitions

On April 1, 2004, Mission completed its acquisition of WUTR, the ABC affiliate in Utica, New York, for total consideration of $3.7 million, exclusive of transaction costs.

On April 6, 2004, Mission completed its acquisition of WFXW, the Fox affiliate in Terre Haute, Indiana, for total consideration of $3.0 million, exclusive of transaction costs. Pursuant to terms of the purchase agreement, Mission made a down payment of $1.5 million against the purchase price on May 9, 2003 and paid the remaining $1.5 million on April 6, 2004, exclusive of transaction costs. Prior to its acquisition of the station, Mission had been providing programming and selling advertising for WFXW under a TBA.

On November 30, 2004, we completed our acquisition of KLST, the CBS affiliate in San Angelo, Texas, for total consideration of $12.0 million, exclusive of transaction costs. Pursuant to the terms of the purchase agreement, we made a down payment of $1.7 million against the purchase price on May 21, 2004, and paid the remaining $10.3 million on November 30, 2004, exclusive of transaction costs. Prior to our acquisition of the station, we had been providing programming and selling advertising for KLST under a TBA.

On January 4, 2005, Mission completed its acquisition of WTVO, the ABC affiliate in Rockford, Illinois, for total consideration of $20.75 million, exclusive of transaction costs. Pursuant to the terms of the purchase agreement, Mission made an initial payment of $15.0 million against the purchase price on November 1, 2004 to acquire substantially all of the assets of WTVO, except for its FCC license and certain transmission equipment. Mission paid the remaining $5.75 million on January 4, 2005, exclusive of transaction costs, for the purchase of WTVO’s FCC license and certain transmission equipment. Prior to its acquisition of the station, Mission had been providing programming and selling advertising for WTVO under a TBA.

On January 7, 2005, we completed our acquisition of KFTA/KNWA, the NBC affiliate in Fort Smith-Fayetteville-Springdale-Rogers, Arkansas, for total consideration of $17.0 million, exclusive of transaction costs. Pursuant to terms of the purchase agreement, we made a down payment of $10.0 million against the purchase price on October 16, 2003 and paid $6.0 million on January 7, 2005, exclusive of transaction costs. The remaining $1.0 million relates to a non-compete agreement being paid to a principal of the seller over a four-year period. Prior to our acquisition of the station, we had been providing programming and selling advertising for KFTA/KNWA under a TBA.

On December 29, 2006, we completed our acquisition of WTAJ, the CBS affiliate in Johnstown-Altoona, Pennsylvania, and WLYH, The CW affiliate in Harrisburg-Lancaster-Lebanon-York, Pennsylvania, for total consideration of $55.1 million, exclusive of transaction costs.

Refinancing of Long-Term Debt Obligations

On April 1, 2005, we entered into a senior credit facility agreement which replaced our previous credit facility agreement. Our senior credit facility consists of a Term Loan B and a $82.5 million revolving loan (as revised on December 18, 2006). All borrowings outstanding under this credit facility are due to mature in 2012. The term loan, which matures in October 2012, is payable in consecutive quarterly installments amortized at 0.25% quarterly which commenced on December 30, 2005, with the remaining 93.25% due at maturity. Borrowings under the credit facility bear interest at either a base rate plus an applicable margin or, at our option, LIBOR plus an applicable margin. As a result of the 2005 refinancing, the applicable margin component of the revolving loan was decreased by 100 basis points, representing 1%. For a discussion of interest rates and financial covenant requirements of the credit facility, we refer you to Note 9 of our consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K.

Mission also entered into a senior credit facility agreement on April 1, 2005 which replaced its previous credit facility. Mission’s credit facility consists of a Term Loan B and a $15.0 million revolving loan (as revised

 

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on December 18, 2006). Terms of the Mission credit facility, including maturity and interest rates, are the same as the terms of our credit facility.

Also on April 1, 2005, we redeemed all our outstanding $160.0 million in aggregate principal amount of 12% senior subordinated notes (“12% Notes”) that were due to mature on April 1, 2008, at a price of $1,060 per $1,000 principal amount. Redemption of the 12% Notes was funded from proceeds obtained through a combination of an offering of senior subordinated notes (as discussed below) and senior secured credit facility financing. The aggregate redemption payment of $169.6 million plus accrued interest made on April 1, 2005 included a $9.6 million call premium related to the retirement of the notes. The redemption of the 12% Notes resulted in the recognition of a loss in the second quarter of 2005 consisting of $9.6 million in call premium and the write-off of approximately $3.6 million of previously capitalized debt financing costs and accelerated amortization of $3.4 million of unamortized discount on the notes. In conjunction with the redemption, we recorded a gain during the second quarter of 2005 of approximately $2.3 million from the write-off of a fair value hedge adjustment of the carrying amount of the 12% Notes pursuant to Statement of Financial Accounting Standards No. 133, “Accounting for Derivative and Hedging Activities” (“SFAS No. 133”), as amended.

Additionally, on April 1, 2005, we issued $75.0 million in the aggregate principal amount of 7% senior subordinated notes at a price of 98.01% (“7% Notes”) due 2014. The 7% Notes were issued as an add-on to the $125.0 million aggregate principal amount of our previously issued 7% Notes. The net proceeds from the offering, together with proceeds from our senior secured credit facility, were used to redeem the 12% Notes.

Recent Developments

On April 11, 2006, we and Mission filed an application with the FCC for consent to assignment of the license of KFTA Channel 24 (Ft. Smith, Arkansas) from us to Mission. Consideration for this transaction is $5.6 million. On August 28, 2006, Mission entered into an affiliation agreement with the Fox network which provides Fox programming to KFTA. On August 28, 2006, we and Mission entered into a time brokerage agreement whereby (a) Mission pays us $5 thousand per month for the right to broadcast Fox programming on KFTA during the Fox network programming time periods and (b) we pay Mission $20 thousand per month for the right to sell all advertising time on KFTA within the Fox network programming time periods. The time brokerage agreement between us and Mission will terminate effective with the assignment of KFTA’s FCC license to Mission. Upon completion of the assignment of KFTA’s license, Mission plans to enter into joint sales and shared services agreements with our station KNWA whereby KNWA will provide local news, sales and other non-programming services to KFTA. Our station KNWA Channel 51, licensed to Rogers, Arkansas, has renewed its affiliation agreement for KNWA to continue as the NBC affiliate in Ft. Smith-Fayetteville-Springdale-Rogers, Arkansas through 2014.

On May 22, 2006, two affiliates of Equity Broadcasting Corporation (“Equity”) filed a petition to deny against the KFTA assignment application alleging that we improperly control Mission and its stations. We and Mission submitted a joint opposition to Equity’s petition to deny. The FCC is currently considering the KFTA assignment application. On September 5, 2006, Equity submitted a petition to deny Nexstar’s applications for renewal of the KFTA and KNWA FCC licenses. Nexstar subsequently filed its response to the petition. Although Nexstar’s and Mission’s management believe that the petitions have no merit, it is not possible to predict what action the FCC will take on the petitions to deny, or when it will take such action.

 

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Historical Performance

Revenue

The following table sets forth the principal types of revenue earned by the Company’s stations for the periods indicated and each type of revenue (other than trade and barter) as a percentage of total gross revenue, as well as agency commissions:

 

     Year Ended December 31,
     2006    2005    2004
     Amount    %    Amount    %    Amount    %
     (in thousands, except percentages)

Local

   $ 164,077    58.8    $ 151,894    64.3    $ 149,647    57.6

National

     71,620    25.6      69,608    29.4      70,042    27.0

Political

     27,031    9.7      2,249    1.0      26,666    10.3

Retransmission compensation(1)

     8,696    3.1      2,860    1.2      1,067    0.4

Network compensation

     4,210    1.5      6,629    2.8      8,508    3.3

Other

     3,642    1.3      3,141    1.3      3,734    1.4
                                   

Total gross revenue

     279,276    100.0      236,381    100.0      259,664    100.0

Less: Agency commissions

     33,104    11.9      27,800    11.8      31,214    12.0
                                   

Net broadcast revenue

     246,172    88.1      208,581    88.2      228,450    88.0

Trade and barter revenue

     18,997         20,358         21,081   
                             

Net revenue

   $ 265,169       $ 228,939       $ 249,531   
                             

(1) Retransmission compensation consists of a per subscriber-based compensatory fee and excludes advertising revenue generated from retransmission consent agreements, which is included in gross local advertising revenue.

Results of Operations

The following table sets forth a summary of the Company’s operations for the periods indicated and their percentages of net revenue:

 

     Year Ended December 31,
     2006    2005    2004
     Amount    %    Amount    %    Amount    %
     (in thousands, except percentages)

Net revenue

   $ 265,169    100.0    $ 228,939    100.0    $ 249,531    100.0

Operating expenses:

                 

Corporate expenses

     14,588    5.5      11,667    5.1      11,434    4.6

Station direct operating expenses, net of trade

     64,358    24.3      60,362    26.4      57,990    23.2

Selling, general and administrative expenses

     70,705    26.7      64,196    28.0      65,169    26.1

Merger related expenses

     —      —        —      —        456    0.2

Loss on property held for sale

     —      —        616    0.3      —      —  

Loss on asset disposal, net

     639    0.2      668    0.3      582    0.2

Trade and barter expense

     18,717    7.1      19,766    8.6      20,965    8.4

Depreciation and amortization

     42,221    15.9      43,244    18.9      44,412    17.8

Amortization of broadcast rights, excluding barter

     8,091    3.1      9,810    4.3      11,458    4.6
                             

Income from operations

   $ 45,850       $ 18,610       $ 37,065   
                             

 

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Year Ended December 31, 2006 Compared to Year Ended December 31, 2005.

Revenue

Gross local advertising revenue was $164.1 million for the year ended December 31, 2006 compared to $151.9 million for the same period in 2005, an increase of $12.2 million, or 8.0%. Gross national advertising revenue was $71.6 million for the year ended December 31, 2006, compared to $69.6 million for the same period in 2005, an increase of $2.0 million, or 2.9%. The combined increase in gross local and national advertising revenue of $14.2 million was primarily the result of (1) an increase in revenue generated for the year ended December 31, 2006 compared to the year ended December 31, 2005 from the outsourcing agreement that commenced in September 2005 between Nexstar and WUHF, the Fox affiliate in Rochester, New York, owned by a subsidiary of Sinclair, (2) advertising revenue generated during the coverage of the Olympic Games that took place in February 2006, a portion of which was incremental to those time periods, (3) advertising revenue generated from the retransmission consent agreements which increased by approximately $5.0 million in 2006 compared to 2005, and (4) advertising revenue from new local customers which increased by approximately $3.5 million in 2006 compared to 2005. Advertising revenue from the Paid Programming, Furniture and Medical/Healthcare business categories, which increased by approximately $1.2 million, $1.0 million and $1.1 million during 2006 compared to the prior year, respectively, was offset by advertising revenue declines from the Automotive and Department and Retail Stores business categories, which decreased by approximately $2.5 million and $1.7 million during 2006 compared to the prior year, respectively.

Gross political advertising revenue was $27.0 million for the year ended December 31, 2006 compared to $2.2 million for the same period in 2005, an increase of $24.8 million. The increase in gross political revenue was attributed to statewide and/or local races (primarily in Pennsylvania, Missouri, Illinois, New York, Indiana and Texas) that occurred during the year ended December 31, 2006 as compared to nominal political advertising during the year ended December 31, 2005.

Retransmission compensation was $8.7 million for the year ended December 31, 2006 compared to $2.9 million for the same period in 2005, an increase of $5.8 million, or 204.1%. The increase in retransmission compensation was primarily the result of a significant increase in the number of retransmission consent agreements with compensation terms entered into with content distributors, the majority of which were completed in late 2005.

Operating Expenses

Corporate expenses, related to costs associated with the centralized management of Nexstar’s and Mission’s stations, were $14.6 million for the year ended December 31, 2006 compared to $11.7 million for the year ended December 31, 2005, an increase of $2.9 million, or 25.0%. The increase during the year ended December 31, 2006 was primarily attributed to higher compensation costs associated with Nexstar’s stock-based compensation expense of $1.6 million that was not previously expensed prior to our adoption of SFAS 123(R) in 2006 and a higher amount of incentive compensation in recognition of operating performance in 2006, partially offset by a decrease in professional services fees incurred during 2006.

Station direct operating expenses, consisting primarily of news, engineering and programming, net of trade, and selling, general and administrative expenses were $135.1 million for the year ended December 31, 2006 compared to $124.6 million for the same period in 2005, an increase of $10.5 million, or 8.4%. The increase in station direct operating expenses, net of trade, and selling, general and administrative expenses for the year ended December 31, 2006 was primarily attributed to (1) an increase in outside services related to the payments made to Sinclair for the WUHF outsourcing agreement that commenced in September 2005, (2) an increase in sales commissions associated with the increase in our local, national and political advertising revenue, (3) an increase in programming costs and music licenses associated with WUHF, and (4) an increase in news department costs, including the expansion of newcasts.

 

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Loss on property held for sale, which represented a write-down of vacated buildings at two of our television stations, was $0.6 million for the year ended December 31, 2005.

Amortization of broadcast rights, excluding barter, was $8.1 million for the year ended December 31, 2006 compared to $9.8 million for the same period in 2005, a decrease of $1.7 million, or 17.5%. The decrease was primarily attributed to broadcast rights being replaced with negotiated lower cost of broadcast programming and a decline in write downs of broadcast programming during 2006 compared to the same period last year.

Amortization of intangible assets was $24.1 million for the year ended December 31, 2006 compared to $26.5 million for the same period in 2005, a decrease of $2.4 million, or 9.0%. The decrease was primarily related to intangible assets at certain stations becoming fully amortized.

Depreciation of property and equipment was $18.1 million for the year ended December 31, 2006 compared to $16.7 million for the same period in 2005, an increase of $1.4 million, or 8.1%. The increase was primarily attributed to accelerating the depreciation of certain assets due to our and Mission’s reassessment of their estimated remaining useful lives. The increase in depreciation was partially offset by assets at certain stations becoming fully depreciated during late 2005 or in 2006.

Income from Operations

Income from operations was $45.9 million for the year ended December 31, 2006 compared to $18.6 million for the same period in 2005, an increase of $27.3 million, or 146.4%. The increase in income from operations for the year ended December 31, 2006 was primarily attributable to the increase in net revenue, particularly in local and political advertising revenue, partially offset by an increase in station direct operating expenses, net of trade, and selling, general and administrative expenses as described above.

Interest Expense

Interest expense, including amortization of debt financing costs, was $51.8 million for the year ended December 31, 2006 compared to $47.3 million for the same period in 2005, an increase of $4.5 million, or 9.6%. The increase in interest expense was primarily attributed to the issuance of $75.0 million of 7% Notes in April 2005, and higher interest rates in 2006 under our and Mission’s senior credit facilities, partially offset by the redemption of the 12% Notes in April 2005 and a decrease in the amount of term loan debt outstanding in 2006 under our and Mission’s senior credit facilities.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $15.7 million for the year ended December 31, 2005 consisted of $9.6 million in call premium related to the redemption of the 12% Notes in April 2005, accelerated amortization of $3.4 million of unamortized discount on the 12% Notes, the write-off of approximately $3.6 million of certain debt financing costs previously capitalized on the 12% Notes, the write-off of $0.4 million of previously capitalized debt financing costs and $1.0 million of transaction costs related to the refinancing of the senior secured credit facilities for Nexstar and Mission in April 2005, net of a gain of $2.3 million from the write-off of a SFAS No. 133 fair value hedge adjustment of the carrying amount of the 12% Notes.

Income Taxes

Income taxes decreased by $1.1 million, or 23.0% for the year ended December 31, 2006 compared to the same period in 2005. The decrease in income taxes was primarily due to a $0.5 million reduction in our net deferred tax liabilities position resulting from enactment of the new Texas Margin Tax in the second quarter of 2006 and the recognition of a $0.5 million benefit from a prior year tax position in the third quarter of 2006. Our provision for income taxes is primarily created by an increase in the deferred tax liabilities position during the

 

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year arising from the amortizing of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. This expense has no impact on our cash flows. No tax benefit was recorded with respect to the losses for 2006 and 2005, as the utilization of such losses is not likely to be realized in the foreseeable future.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004.

Revenue

Gross local advertising revenue was $151.9 million for the year ended December 31, 2005 compared to $149.6 million for the same period in 2004, an increase of $2.3 million, or 1.5%. Acquisitions that occurred in 2004 and 2005 and stations for which a local service arrangement was entered into after January 1, 2004 had an increase of $3.3 million. On a same station basis, gross local advertising revenue for the year ended December 31, 2005 was $130.0 million, compared to $131.0 million for the year ended December 31, 2004, a decrease of $1.0 million, or 0.8%. The decrease in gross local advertising revenue was primarily the result of a decline in demand for advertising from the automotive and telecommunications business categories during 2005 compared to 2004.

Gross national advertising revenue was $69.6 million for the year ended December 31, 2005 compared to $70.0 million for the same period in 2004, a decrease of $0.4 million, or 0.6%. Acquisitions that occurred in 2004 and 2005 and stations for which a local service arrangement was entered into after January 1, 2004 had an increase of $0.4 million. On a same station basis, gross national advertising revenue for the year ended December 31, 2005 was $62.2 million, compared to $63.0 million for the year ended December 31, 2004, a decrease of $0.8 million, or 1.3%. The decrease in gross national advertising revenue was primarily the result of a decline in demand for advertising from the automotive, telecommunications, department and retail stores, fast food/restaurants and medical/healthcare business categories during 2005 compared to 2004.

Gross political advertising revenue was $2.2 million for the year ended December 31, 2005 compared to $26.7 million for the same period in 2004, a decrease of $24.5 million, or 91.6%. Acquisitions that occurred in 2004 and 2005 and stations for which a local service arrangement was entered into after January 1, 2004 had a decrease of $1.4 million. On a same station basis, gross political advertising revenue for the year ended December 31, 2005 was $2.0 million, compared to $25.1 million for the year ended December 31, 2004, a decrease of $23.1 million, or 92.0%. The decrease in gross political advertising revenue was attributed to presidential and/or statewide races in Pennsylvania, Illinois, Indiana and Missouri that occurred during 2004 as compared to nominal political advertising during 2005.

Operating Expenses

Corporate expenses, related to costs associated with the centralized management of Nexstar’s and Mission’s stations, were $11.7 million for the year ended December 31, 2005 compared to $10.9 million for the same period in 2004, an increase of $0.8 million, or 6.6%. The increase during 2005 was primarily attributed to higher payroll-related costs associated with an increase in corporate personnel necessary to effectively support our growing television station portfolio, along with an increase in regulatory compliance and financial reporting costs, partially offset by a lower amount of bonuses accrued in 2005.

Station direct operating expenses, consisting primarily of news, engineering and programming, net of trade, and selling, general and administrative expenses were $124.6 million for year ended December 31, 2005 compared to $123.2 million for the same period in 2004, an increase of $1.4 million, or 1.1%. Acquisitions that occurred in 2004 and 2005 and stations for which a local service arrangement was entered into after January 1, 2004 had an increase of $2.3 million. On a same station basis, station direct operating expenses, net of trade, and selling, general and administrative expenses were $105.9 million for the year ended December 31, 2005, compared to $106.8 million for the year ended December 31, 2004, a decrease of $0.9 million, or 0.9%.

 

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Merger related expenses were $0.5 million for the year ended December 31, 2004. Merger related expenses included costs to acquire the Quorum stations (accounted for as a merger under common control in a manner similar to pooling of interests) such as severance costs and termination of contracts, among others, for Quorum’s traffic systems, A.C. Nielsen rating services and website management.

Loss on property held for sale, which represented a write-down of vacated buildings at two of our television stations during the second quarter of 2005, was $0.6 million for the year ended December 31, 2005.

Amortization of broadcast rights, excluding barter, was $9.8 million for the year ended December 31, 2005 compared to $11.5 million for the same period in 2004, a decrease of $1.7 million, or 14.4%. The decrease was primarily attributed to negotiated lower cost of broadcast programming, partially offset by the amortization of broadcast rights from newly acquired or initially consolidated television stations WUTR, KLST and WTVO.

Amortization of intangible assets was $26.5 million for each of the years ended December 31, 2005 and 2004.

Depreciation of property and equipment was $16.7 million for the year ended December 31, 2005 compared to $17.9 million for the same period in 2004, a decrease of $1.2 million, or 6.8%. The decrease was primarily attributed to assets at certain stations becoming fully depreciated during the fourth quarter of 2004.

Income from Operations

Income from operations was $18.6 million for the year ended December 31, 2005 compared to $37.1 million for the same period in 2004, a decrease of $18.5 million, or 49.8%. Acquisitions that occurred in 2004 and 2005 and stations for which a local service arrangement was entered into after January 1, 2004 had a decrease of $3.0 million. On a same station basis, income from operations for the year ended December 31, 2005 was $20.3 million, compared to $35.8 million for the year ended December 31, 2004, a decrease of $15.5 million, or 43.4%. The decrease in income from operations for 2005 was primarily attributable to the decrease in total net revenue, particularly in political advertising revenue and to a lesser extent automotive-related advertising revenue.

Interest Expense

Interest expense, including amortization of debt financing costs, was $47.3 million for the year ended December 31, 2005 compared to $52.3 million for the same period in 2004, a decrease of $5.0 million, or 9.6%. The decrease in interest expense was primarily attributed to the redemption of our 12% Notes in April 2005, partially offset by the issuance of the 7% Notes in April 2005, and higher interest rates and a greater amount of debt outstanding in 2005 on our and Mission’s senior credit facilities.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $15.7 million for the year ended December 31, 2005 consisted of $9.6 million in call premium related to the redemption of the 12% Notes in April 2005, accelerated amortization of $3.4 million of unamortized discount on the 12% Notes, the write-off of approximately $3.6 million of certain debt financing costs previously capitalized on the 12% Notes, the write-off of $0.4 million of previously capitalized debt financing costs and $1.0 million of transaction costs related to the refinancing of the senior secured credit facilities for Nexstar and Mission in April 2005, net of a gain of $2.3 million during the second quarter of 2005 from the write-off of a SFAS No. 133 fair value hedge adjustment of the carrying amount of the 12% Notes.

Loss on extinguishment of debt of $8.7 million for the year ended December 31, 2004 consisted of $5.9 million in call premium and accelerated amortization related to the January 2004 redemption of $37.0 million principal amount at maturity of senior discount notes (“16% Notes”) of Nexstar Finance Holdings, Inc. (“Nexstar

 

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Finance Holdings”), a wholly owned subsidiary of Nexstar, the write-off of $0.9 million of certain debt financing costs previously capitalized on the 16% Notes and the write-off of $1.4 million of previously capitalized debt financing costs and $0.5 million of transaction costs related to the amending of the senior secured credit facilities for Nexstar and Mission in August 2004.

Other Income, Net

Other income was $0.4 million for the year ended December 31, 2005 as compared to $5.1 million for the same period in 2004. During 2004, we had an interest rate swap agreement that was terminated on December 31, 2004. The marking-to-market of the interest rate swap agreement resulted in recognition of $2.6 million in other income for the year ended December 31, 2004. The change in market values was due to a fluctuation in market interest rates. The termination of the swap agreement on December 31, 2004 resulted in the recognition of $0.7 million in other income for the year ended December 31, 2004. Other income for the year ended December 31, 2004 included a $1.8 million gain related to a settlement concerning the terminated sale of our television station WTVW, the Fox affiliate in Evansville, Indiana.

Income Taxes

Income taxes for the year ended December 31, 2005 were $5.0 million compared to $3.9 million for the same period in 2004, an increase of $1.1 million, or 27.4%. Our provision for income taxes is primarily created by an increase in the deferred tax liabilities position during the year arising from the amortizing of goodwill and other indefinite-lived intangible assets for income tax purposes which are not amortized for financial reporting purposes. This expense has no impact on our cash flows. Based primarily on our recent history of net operating losses, we do not consider the realization of our net deferred tax assets to be more likely than not. Accordingly, we have provided a full valuation allowance for net deferred tax assets excluding deferred tax liabilities attributable to goodwill and indefinite-lived intangible assets. No tax benefit was recorded with respect to the losses for 2005 and 2004, as the utilization of such losses is not likely to be realized in the foreseeable future.

Minority Interest in Consolidated Entity

The minority interest in consolidated entity of $2.1 million for the year ended December 31, 2004 related to the recognition of $2.1 million of expenses in the stations WFXW, KFTA/KNWA, KLST and WTVO prior to the consummation of their acquisitions as a result of the application of FIN No. 46R.

Liquidity and Capital Resources

We and Mission are highly leveraged, which makes the Company vulnerable to changes in general economic conditions. Our and Mission’s ability to meet the future cash requirements described below depends on our and Mission’s 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 and Mission’s control. Based on current operations and anticipated future growth, we believe that our and Mission’s available cash, anticipated cash flow from operations and available borrowings under the Nexstar and Mission senior credit facilities will be sufficient to fund working capital, capital expenditure requirements, interest payments and scheduled debt principal payments for at least the next twelve months. In order to meet future cash needs we may, from time to time, borrow under credit facilities or issue other long- or short-term debt or equity, if the market and the terms of our existing debt arrangements permit, and Mission may, from time to time, borrow under its available credit facility. We will continue to evaluate the best use of Nexstar’s operating cash flow among its capital expenditures, acquisitions and debt reduction.

 

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Overview

The following tables present summarized financial information management believes is helpful in evaluating the Company’s liquidity and capital resources:

 

     Year Ended December 31,  
     2006     2005     2004  
     (in thousands)  

Net cash provided by operating activities

   $ 54,462     $ 14,350     $ 31,911  

Net cash used for investing activities

     (79,272 )     (26,358 )     (44,605 )

Net cash provided by financing activities

     22,502       6,990       20,351  
                        

Net increase (decrease) in cash and cash equivalents

   $ (2,308 )   $ (5,018 )   $ 7,657  
                        

Cash paid for interest

   $ 38,182     $ 44,947     $ 36,422  

Cash paid (refunded) for income taxes, net

   $ 36     $ (59 )   $ 818  

 

     December 31,
     2006    2005
     (in thousands)

Cash and cash equivalents

   $ 11,179    $ 13,487

Long-term debt including current portion

   $ 681,135    $ 646,505

Unused commitments under senior secured credit facilities(1)

   $ 59,500    $ 97,500

(1) Based on covenant calculations, as of December 31, 2006, all $59.5 million of total unused revolving loan commitments under the Nexstar and Mission credit facilities were available for borrowing.

Cash Flows—Operating Activities

The comparative net cash flows provided by operating activities increased by $40.1 million during the year ended December 31, 2006 compared to the same period in 2005. The increase was primarily due to better operating results as reflected in the $24.0 million decrease in net loss (excluding loss on extinguishment of debt), an increase of $1.9 million resulting from the timing of payments for accounts payable and accrued expenses, an increase of $2.4 million in cash flows from interest payable (due to the redemption of the 12% Notes in April 2005, partially offset by the issuance of $75.0 million of 7% Notes in April 2005) and a decrease of $16.0 million in cash payments associated with the extinguishment of debt in April 2005, partially offset by a decrease of $3.2 million resulting from the timing of collections of accounts receivable.

Cash paid for interest decreased by $6.8 million during the year ended December 31, 2006 compared to the same period in 2005. Cash payments of interest for the year ended December 31, 2005 included $9.6 million for our 12% Notes, along with the original $6.4 million discount related to the 12% Notes. The decrease in cash paid for interest for the year ended December 31, 2006 compared to the same period in 2005 was partially offset by an increase in cash payments of interest on our and Mission’s bank debt. Cash payments of interest on our and Mission’s senior credit facilities were $24.2 million for the year ended December 31, 2006, compared to $17.6 million for the year ended December 31, 2005, an increase of $6.6 million due primarily to higher interest rates in 2006 on the respective credit facilities.

The comparative net cash flows provided by operating activities decreased by $17.6 million during the year ended December 31, 2005 compared to the same period in 2004. The decrease was primarily due to a further decline in operating results as reflected in the $21.2 million increase in net loss (excluding loss on extinguishment of debt) and a decrease of $6.3 million in cash flows from interest payable, partially offset by an increase of $4.8 million resulting from the timing of collections of accounts receivable and an increase of $8.9 million resulting from the timing of payments for accounts payable and accrued expenses. Also contributing to the decline was the increase in cash payments associated with debt extinguishments, which were $16.0 million for the year ended December 31, 2005, compared to the $5.9 million for the same period in 2004.

 

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Cash paid for interest increased by $8.5 million during the year ended December 31, 2005 compared to the same period in 2004. Cash payments of interest for the year ended December 31, 2005 included $9.6 million for our 12% Notes and $11.4 million for our 7% Notes, along with the original $6.4 million discount related to the 12% Notes. Cash payments for interest for the year ended December 31, 2004 included $19.2 million for our 12% Notes and $4.7 million for our 7% Notes. Cash payments of interest on our and Mission’s senior credit facilities increased from $12.5 million for the year ended December 31, 2004 to $17.6 million for the year ended December 31, 2005 due to higher interest rates and a greater amount of debt outstanding in 2005 on the respective credit facilities.

Nexstar and its subsidiaries file a consolidated federal income tax return. Mission files its own separate federal income tax return. Additionally, Nexstar and Mission file their own state and local tax returns as are required. Due to our and Mission’s recent history of net operating losses, we and Mission currently do not pay any federal income taxes. These net operating losses may be carried forward, subject to expiration and certain limitations, and used to reduce taxable earnings in future years. Through the use of available loss carryforwards, it is possible that we and Mission may not pay significant amounts of federal income taxes in the foreseeable future.

Cash Flows—Investing Activities

The comparative net cash used for investing activities increased by $52.9 million during the year ended December 31, 2006 compared to the same period in 2005. Cash flows from investing activities for 2005 and 2006 consisted primarily of cash used for capital additions and station acquisitions. The increase was due to increases in purchases of property and equipment and acquisition-related payments.

The comparative net cash used for investing activities decreased by $18.2 million during the year ended December 31, 2005 compared to the same period in 2004 as a result of a decrease in acquisition related payments. Cash flows from investing activities for 2004 and 2005 consisted primarily of cash used for capital additions and station acquisitions.

Capital expenditures were $24.4 million for the year ended December 31, 2006 compared to $14.0 million for the year ended December 31, 2005. The increase was primarily attributable to digital conversion expenditures, which increased from $5.5 million for the year ended December 31, 2005 to $14.3 million for the same period in 2006. We project that 2007 full-year capital expenditures will be approximately $14.5 million.

Capital expenditures were $14.0 million for the year ended December 31, 2005, compared to $10.6 million for the year ended December 31, 2004. The increase was primarily attributable to digital conversion expenditures, which increased from $0.3 million for the year ended December 31, 2004 to $5.5 million for the same period in 2005.

Cash used for station acquisitions was $55.5 million for the year ended December 31, 2006, $12.5 million for the year ended December 31, 2005 and $35.1 million for the year ended December 31, 2004.

Acquisition-related payments for the year ended December 31, 2006 consisted of $55.1 million total consideration, exclusive of transaction costs, for our acquisition of WTAJ and WLYH.

Acquisition-related payments for the year ended December 31, 2005 included the remaining payments of $5.75 million and $6.0 million, exclusive of transaction costs, for Mission’s acquisition of WTVO and our acquisition of KFTA/KNWA, respectively.

Acquisition-related payments for the year ended December 31, 2004 included the $3.7 million purchase price, exclusive of transaction costs, of Mission’s acquisition of WUTR, the remaining $1.5 million payment, exclusive of transaction costs, for Mission’s acquisition of WFXW, the $12.0 million purchase price, exclusive

 

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of transaction costs, of our acquisition of KLST, the initial $15.0 million payment, exclusive of transaction costs, for Mission’s acquisition of WTVO and the payment of $0.9 million by Mission for the accounts receivable of WTVO as of November 1, 2004.

Cash Flows—Financing Activities

The comparative net cash provided by financing activities increased by $15.5 million during the year ended December 31, 2006 compared to the same period in 2005, primarily due to the $37.0 million increase in proceeds from revolving loan borrowings under our and Mission’s senior secured credit facilities and by payments of debt financing costs of $3.4 million made in connection with the April 2005 refinancing of our and Mission’s long-term debt obligations. During the year ended December 31, 2006, there were $38.0 million of revolving loan borrowings (related to the WTAJ and WLYH acquisition) compared to $1.0 million for the year ended December 31, 2005. The increase was partially offset by the amount of net proceeds received from refinancing our and Mission’s long-term debt obligations in April 2005 and an increase in repayments during 2006 under our and Mission’s senior secured credit facilities.

The comparative net cash provided by financing activities decreased by $13.4 million during the year ended December 31, 2005 compared to the same period in 2004. The decrease was primarily due to a decrease in the amount of net proceeds received from our and Mission’s long-term debt financing activities in the current year as compared to the net amounts received from the prior year’s financing activities. The decrease was partially offset by an increase in payments of debt financing costs of $3.0 million made in connection with the April 1, 2005 refinancing of our and Mission’s long-term debt obligations and the October 2005 amendment of our senior secured credit facility agreement as compared to the payments made in connection with the August 2004 amending of our and Mission’s senior secured credit facilities.

The April 2005 refinancing of our and Mission’s long-term debt obligations provided the Company net cash proceeds of $19.0 million, before the payment of transaction fees and expenses, consisting of gross proceeds obtained under senior credit facility term loans and our issuance of 7% Notes of $427.4 million and the repayments of previous senior credit facility term and revolving borrowings and our 12% Notes of $408.4 million.

The August 2004 amending of our and Mission’s senior secured credit facilities provided the Company net cash proceeds of $1.0 million, before the payment of transaction fees and expenses, consisting of gross proceeds obtained under senior credit facility term loans of $235.0 million and the repayments of previous senior credit facility term and revolving borrowings of $234.0 million.

During the year ended December 31, 2006, there were $15.5 million of repayments under our and Mission’s senior secured credit facilities, consisting of scheduled term loan maturities of $3.5 million and voluntary repayments of $12.0 million of term loans.

During the year ended December 31, 2005, there were $1.5 million of scheduled term loan maturities, $6.5 million of voluntary repayments of term loans, $1.0 million of revolving loan repayments and $1.0 million of revolving loan borrowings under our and Mission’s senior secured credit facilities.

During the year ended December 31, 2004, there were $2.2 million of scheduled term loan maturities, $12.0 million of revolving loan repayments and $63.5 million of revolving loan borrowings under our and Mission’s senior secured credit facilities, along with the repayment of our 16% senior discount notes of $28.9 million.

Although the Nexstar and Mission senior credit facilities now allow for the payment of cash dividends to common stockholders, we and Mission do not currently intend to declare or pay a cash dividend.

 

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Future Sources of Financing and Debt Service Requirements

As of December 31, 2006, Nexstar and Mission had total combined debt of $681.1 million, which represented 112.1% of Nexstar and Mission’s combined capitalization. Our and Mission’s high level of debt requires that a substantial portion of cash flow be dedicated to pay principal and interest on debt which will reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.

The following table summarizes the approximate aggregate amount of principal indebtedness scheduled to mature for the periods referenced as of December 31, 2006:

 

     Total    2007    2008-2009    2010-2011    Thereafter
          (in thousands)     

Nexstar senior credit facility

   $ 199,603    $ 1,758    $ 3,516    $ 3,516    $ 190,813

Mission senior credit facility

     170,541      1,727      3,454      3,454      161,906

7% senior subordinated notes due 2014

     200,000      —        —        —        200,000

11.375% senior discount notes due 2013(1)

     130,000      —        46,906      —        83,094
                                  
   $ 700,144    $ 3,485    $ 53,876    $ 6,970    $ 635,813
                                  

(1) On April 1, 2008, Nexstar is required to redeem a principal amount of notes outstanding sufficient to ensure that the notes will not be “applicable high yield discount obligations” within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986.

We make semiannual interest payments on our 7% Notes of $7.0 million on January 15th and July 15th of each year. The 11.375% senior discount notes (“11.375% Notes”) will not begin to accrue cash interest until April 1, 2008. Commencing October 1, 2008 we will make semiannual interest payments on our 11.375% Notes on April 1st and October 1st of each year. Interest payments on our and Mission’s senior credit facilities are generally paid every one to three months and are payable based on the type of interest rate selected.

The terms of the Nexstar and Mission senior credit facilities, as well as the indentures governing our publicly-held notes, limit, but do not prohibit us or Mission from incurring substantial amounts of additional debt in the future.

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

Debt Covenants

Our bank credit facility agreement contains covenants which require us to comply with certain financial ratios, including: (a) maximum total and senior leverage ratios, (b) a minimum interest coverage ratio, and (c) a minimum fixed charge coverage ratio. The covenants, which are formally calculated on a quarterly basis, are based on the combined results of Nexstar Broadcasting and Mission. The senior subordinated notes and senior discount notes contain restrictive covenants customary for borrowing arrangements of this type. Mission’s bank credit facility agreement does not contain financial covenant ratio requirements, but does provide for default in the event Nexstar does not comply with all covenants contained in its credit agreement.

As of December 31, 2006, we were in compliance with all covenants contained in the credit agreements governing our senior secured credit facility and the indentures governing the publicly-held notes. We anticipate compliance with all the covenants through December 31, 2007. For a discussion of the financial ratio requirements of these covenants, we refer you to Note 9 of our consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K.

 

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Use of Derivative Financial Instruments

Interest Rate Swap and Collar Agreements

In the past, we used interest rate swap and collar agreements to reduce our exposure to fluctuations in interest rates on our variable rate debt or to hedge fair value changes in the bench mark interest rate on our fixed rate senior notes. As of December 31, 2006, all of our interest rate swap and collar agreements had either been terminated or expired, and we currently hold no derivative financial instruments.

Cash Requirements for Digital Television (“DTV”) Conversion

Television broadcasting in the United States is moving from an analog transmission system to a digital transmission system. The conversion from broadcasting in the analog broadcast format to the digital broadcast format is expensive. The Company’s conversion to a low-power DTV signal required an average initial capital expenditure of approximately $0.2 million per station. All of the television stations that we and Mission own and operate are broadcasting at least a low-power digital television signal.

Except for stations that have requested waiver of the construction deadline, broadcast television stations are required to be broadcasting a full-power DTV signal. As of December 31, 2006, Mission’s stations WUTR, WTVO and WYOU and Nexstar’s stations WBRE, WROC, KARK, KNWA, KFTA, WMBD, WTAJ and WLYH are broadcasting with full-power DTV signals. Nexstar’s station KSFX and Mission’s station KOLR initiated full-power DTV broadcasts on January 19, 2007 and Nexstar’s station KTAL initiated full-power DTV broadcasts on February 26, 2007. Nexstar’s and Mission’s remaining stations are broadcasting low-power DTV signals and have requested extension of time to begin broadcasting full-power digital television signals. The FCC has not yet acted on these requests for extension of time. If the FCC denies the request for the extension of time, the stations may lose interference protection for their signal outside their low-power coverage area.

DTV conversion expenditures were $14.3 million, $5.5 million and $0.3 million, respectively, for the years ended December 31, 2006, 2005 and 2004. We estimate that it will require an average capital expenditure of approximately $1.5 million per station (for 33 stations as of December 31, 2006) to modify our and Mission’s remaining stations’ DTV transmitting equipment for full-power DTV operations, including costs for the transmitter, transmission line, antenna and installation, and estimated costs for tower upgrades and/or modifications. We anticipate these expenditures will be funded through available cash on hand and cash generated from operations as incurred in future years.

No Off-Balance Sheet Arrangements

At December 31, 2006, 2005 and 2004, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. All of our arrangements with Mission are on-balance sheet arrangements. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

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Contractual Obligations

The following summarizes Nexstar’s and Mission’s contractual obligations at December 31, 2006, and the effect such obligations are expected to have on the Company’s liquidity and cash flow in future periods:

 

     Total    2007    2008-2009    2010-2011    Thereafter
          (dollars in thousands)     

Nexstar senior credit facility

   $ 199,603    $ 1,758    $ 3,516    $ 3,516    $ 190,813

Mission senior credit facility

     170,541      1,727      3,454      3,454      161,906

7% senior subordinated notes due 2014

     200,000      ––      ––      ––      200,000

11.375% senior discount notes due 2013

     130,000      ––      46,906      ––      83,094

Cash interest on debt

     287,518      40,812      88,500      92,323      65,883

Broadcast rights current cash commitments (1)

     11,153      6,341      3,118      1,326      368

Broadcast rights future cash commitments

     18,162      2,019      10,060      5,698      385

Executive employee contracts (2)

     17,473      6,398      7,998      3,077      —  

Operating lease obligations

     58,692      3,854      6,956      6,538      41,344
                                  

Total contractual cash obligations

   $ 1,093,142    $ 62,909    $ 170,508    $ 115,932    $ 743,793
                                  

(1) Excludes broadcast rights barter payable commitments recorded on the financial statements at December 31, 2006 in the amount of $14.7 million.
(2) Includes the employment contracts for all corporate executive employees and general managers of our stations.

Critical Accounting Policies and Estimates

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

For an overview of our significant accounting policies, we refer you to Note 2 of our consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K. We believe the following critical accounting policies are those that are the most important to the presentation of our consolidated financial statements, affect our more significant estimates and assumptions, and require the most subjective or complex judgments by management.

Consolidation of Mission and Variable Interest Entities

Our consolidated financial statements include the accounts of independently-owned Mission and certain other entities where it has been determined that the Company is the primary beneficiary of a variable interest entity (“VIE”) in accordance with FIN No. 46. Under U.S. GAAP, a company must consolidate an entity when it has a “controlling financial interest” resulting from ownership of a majority of the entity’s voting rights. FIN No. 46R expands the definition of controlling financial interest to include factors other than equity ownership and voting rights.

In applying FIN No. 46R, we must base our decision to consolidate an entity on quantitative and qualitative factors that indicate whether or not we are absorbing a majority of the entity’s economic risks or receiving a majority of the entity’s economic rewards. Our evaluation of the “risks and rewards” model must be an ongoing process and may alter as facts and circumstances change.

 

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Mission is included in our consolidated financial statements because we believe we have a controlling financial interest in Mission as a result of local service agreements we have with each of Mission’s stations, our guarantee of the obligations incurred under Mission’s senior credit facility and purchase options (which expire on various dates between 2008 and 2014) granted by Mission’s sole shareholder which will permit us to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent.

In addition, generally in connection with acquisitions, the Company enters into time brokerage agreements (“TBA”) and begins programming and selling advertising for a station before receiving FCC consent to the transfer of the station’s ownership and broadcast license. We include a station programmed under a TBA in our consolidated financial statements because we believe that we have a controlling financial interest in the station as a result of the Company assuming the credit risk of advertising revenue it sells on the station, its obligation to pay for substantially all the station’s reasonable operating expenses, as required under the TBA agreement, and in connection with our entry into a purchase agreement, that the sale of the station and transfer of the station’s broadcast license will occur within a reasonable period of time.

Valuation of Intangible Assets

The process of establishing the value of intangible assets and performing our annual impairment testing of goodwill and broadcast licenses (“FCC licenses”) requires us to make a significant number of assumptions and estimates in determining a fair value based on the present value of projected future cash flows (“discounted cash flows analysis”). To assist in this process, we utilize the services of appraisal and valuation consulting firms. The assumptions and estimates required for the discounted cash flows analysis included market revenue share, future market revenue growth, operating profit margins, cash flow multiples, weighted-average cost of capital and our ability to renew affiliation contracts, among others.

The value of FCC licenses is determined assuming a hypothetical independent start-up station whose only intangible asset is the FCC license. The value of network affiliation agreements is determined as the difference between the value derived for the hypothetical independent start-up station and the value derived assuming that the start-up station has a network affiliation.

We test the impairment of goodwill and FCC licenses annually or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment tests consist of a comparison of the assets’ fair value, based on a discounted cash flows analysis, to their carrying amount on a market-by-market basis. The projected future cash flows used to test FCC licenses exclude network compensation payments. Our estimate of future cash flows may be significantly impacted due to an adverse change in the advertising marketplace or other economic factors affecting our industry at the time the impairment tests are performed. Nexstar and Mission completed the annual test of impairment for goodwill and FCC licenses as of December 31, 2006, 2005 and 2004, which resulted in no impairment being recognized in 2006, 2005 and 2004.

We test network affiliation agreements for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. The process we use for determining the recoverability of network affiliation agreements is subjective and requires us to make estimates and judgments about the cash flows attributable to the network affiliation agreements over their estimated remaining useful lives. An impairment in the carrying amount of a network affiliation agreement is recognized when the expected future operating cash flow derived from the operation to which the asset relates to is less than its carrying value.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate the collectibility of our accounts receivable based on a

 

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combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, we record a specific reserve to reduce the amounts recorded to what we believe will be collected. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required. Allowance for doubtful accounts were $1.1 million and $0.9 million at December 31, 2006 and 2005, respectively.

Broadcast Rights Carrying Amount

Broadcast rights are stated at the lower of unamortized cost or net realizable value. Cash broadcast rights are initially recorded at the amount paid or payable to program distributors for the limited right to broadcast the distributors’ programming. Barter broadcast rights are recorded at our estimate of the value of the advertising time exchanged, which approximates the fair value of the programming received. The value of the advertising time exchanged is estimated by applying average historical rates for specific time periods. Amortization of broadcast rights is computed using the straight-line method based on the license period or programming usage, whichever yields the greater expense. The current portion of broadcast rights represents those rights available for broadcast which will be amortized in the succeeding year. When projected future net revenue associated with a program is less than the current carrying amount of the program broadcast rights, for example, due to poor ratings, we write-down the unamortized cost of the broadcast rights to equal the amount of projected future net revenue. If the expected broadcast period was shortened or cancelled we would be required to write-off the remaining value of the related broadcast rights to operations on an accelerated basis or possibly immediately. As of December 31, 2006, the amounts of current broadcast rights and non-current broadcast rights were $14.7 million and $9.9 million, respectively.

Trade and Barter Transactions

We trade certain advertising time for various goods and services. These transactions are recorded at the estimated fair value of the goods or services received. We barter advertising time for certain program material. These transactions, except those involving exchange of advertising time for network programming, are recorded at management’s estimate of the value of the advertising time exchanged, which approximates the fair value of the program material received. The value of advertising time exchanged is estimated by applying average historical advertising rates for specific time periods. We recorded barter revenue of $11.6 million, $12.4 million and $13.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. Trade revenue of $7.4 million, $7.9 million and $7.7 million was recorded for the years ended December 31, 2006, 2005 and 2004, respectively. We incurred trade and barter expense of $18.7 million, $19.8 million and $21.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Valuation Allowance for Deferred Tax Assets

We record a valuation allowance to reduce our deferred tax assets to the amount that is likely to be realized. While we have considered future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period such a determination was made.

Derivatives

All of Nexstar’s interest rate swap and collar agreements were terminated or expired through 2004. As of December 31, 2006 and 2005, we held no derivative financial instruments.

We may use derivative financial instruments for purposes other than trading, such as for hedging long-term variable rate debt to reduce our exposure to fluctuations in interest rates, as dictated by our credit agreement and for hedging fair value changes attributable to changes in the benchmark interest rate on fixed rate debt. All

 

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derivatives are recognized on our balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction, based on criteria established by SFAS No. 133. We assess, both at their inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash flows of hedged items. We assess hedge ineffectiveness on a quarterly basis and record the gain or loss related to the ineffective portion to current earnings. If we determine that a cash flow hedge is no longer probable of occurring, we discontinue hedge accounting for the affected portion of the forecasted transaction, and any unrealized gain or loss on the contract is recognized in current earnings. The change in market values of derivative instruments and the marking-to-market of those interest rate swap agreements resulted in recognition of $2.6 million in other income for the year ended December 31, 2004. The change in market values was due to a fluctuation in market interest rates. The termination of the swap agreement on December 31, 2004 resulted in the recognition of $0.7 million in other income for the year ended December 31, 2004.

Stock Option Expense Recognition

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value. We recognize the expense related to our stock options over the period that the employee is required to provide services, and only to the extent the awards vest. Therefore, we apply an estimated forfeiture rate assumption to adjust compensation cost for the effect of those employees that are not expected to complete the requisite service period and will forfeit nonvested options. We base the forfeiture rate assumption on Nexstar’s historical experience of award forfeitures, and as necessary, adjusted for certain events that are not expected to recur during the expected term of the option.

We determine the fair value of employee stock options at the date of grant using the Black-Scholes option pricing model. Our valuation of employee stock options relies on assumptions of factors we are required to input into the Black-Scholes model. These assumptions are highly subjective and involve an estimate of future uncertain events. The option pricing model requires us to input factors for expected stock price volatility and the expected term until exercise of the option award. Due to our limited history of publicly traded shares, we combine our historical stock price data and volatilities of peer companies in the television broadcasting industry when determining expected volatility. Based on a lack of historical option exercise experience, we use the weighted-average of the holding periods for all options granted to determine the expected term assumption. Utilizing historical exercise and post-vesting cancellation experience of Nexstar’s stock option awards, the expected term is the average interval between the grant and exercise or post-vesting cancellation dates.

Claims and Loss Contingencies

In the normal course of business, we are party to various claims and legal proceedings. We record a liability for these matters when an adverse outcome is probable and the amount of loss is reasonably estimated. We consider a combination of factors when estimating probable losses, including judgments about potential actions by counterparties.

Recent Accounting Pronouncements

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 provides a fair value measurement option for certain hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. Under SFAS No. 155, an entity must irrevocably elect, on an instrument-by-instrument basis, to apply fair value accounting to a hybrid financial instrument in its entirety in lieu of separately accounting for the instrument as a host contract and derivative instrument. Additionally, SFAS No. 155 clarifies that both interest-only and principal-only strips are not subject to the

 

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provision of SFAS No. 133 and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding versus those that are embedded derivatives. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, which for the Company is January 1, 2007. The Company does not intend to issue or acquire the types of hybrid financial instruments included in the scope of SFAS No. 155 and does not expect the adoption of this Statement to have a material impact on the Company’s consolidated financial statements.

In April 2006, the FASB issued FASB Staff Position (“FSP”) FIN 46R-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (“FSP FIN No. 46R-6”). This FSP addresses how a reporting enterprise should determine the variability to be considered in applying FIN No. 46R by clarifying that the variability considered be based on an analysis of the design of the entity. The variability that is considered in applying FIN No. 46R affects the determination of (a) whether an entity is a VIE, (b) which interests are “variable interests” in the entity, (c) if necessary, any calculation of the entity’s expected losses and residual returns, and (d) which party, if any, is the primary beneficiary of the VIE. The Company is required to apply the guidance in this FSP prospectively to all entities (including newly created entities) with which it first becomes involved and to all entities previously required to be analyzed under FIN No. 46R when a “reconsideration event” has occurred, beginning July 1, 2006. The Company adopted FSP FIN No. 46R-6 in the third quarter 2006. The adoption of FSP FIN No. 46R-6 did not have a material impact on the Company’s consolidated financial position or results of operations.

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements for tax positions taken or expected to be taken in a tax return. FIN No. 48 requires that a tax position meet a “more-likely-than-not” threshold for the benefit of an uncertain tax position to be recognized in the financial statements. Under the Interpretation, this threshold is met if it is determined that the tax position will be sustained, based on its technical merits, upon examination by a taxing authority that has full knowledge of all relevant information. A tax position that meets the threshold is measured as the largest amount of benefit that is greater than 50 percent likely of being recognized upon ultimate settlement. This Interpretation also provides guidance for presentation and disclosure of the tax benefit and other related matters in the financial statements. FIN No. 48 is effective for fiscal years beginning after December 15, 2006, which is the Company’s fiscal year beginning January 1, 2007. Any cumulative effect of the change in accounting principle resulting from the adoption of this Interpretation will be recorded as an adjustment to the opening accumulated deficit balance. Management is currently evaluating the impact the adoption of FIN No. 48 will have on the Company’s consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), which addresses how companies should determine fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Under SFAS No. 157, the definition of fair value retains the “exchange price” notion in earlier definitions of fair value, but clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, which is the Company’s 2008 fiscal year. The Company will adopt this Statement in the first quarter 2008. Management is currently evaluating the impact of adopting SFAS No. 157, but does not presently anticipate it will have a material effect on its consolidated financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”),

 

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which provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. Under the provisions of SAB No. 108, financial statement misstatements are to be quantified and evaluated for materiality using both a balance sheet and income statement approach. SAB No. 108 is effective for the first annual period ending after November 15, 2006, which is the Company’s 2006 fiscal year. The Company has adopted the guidance expressed in SAB No. 108 as of year ended December 31, 2006 and its adoption did not have an impact on its financial position or results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB No. 115” (“SFAS No. 159”), which provides a fair value measurement option for eligible financial assets and liabilities. Under SFAS No. 159, an entity is permitted to elect to apply fair value accounting to a single eligible item, subject to certain exceptions, without electing it for other identical items and include unrealized gains and losses in earnings. The fair value option established by this Statement is irrevocable, unless a new election date occurs. This standard reduces the complexity in accounting for financial instruments and mitigates volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007 which for the Company is January 1, 2008. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157. The Company will adopt the provisions of this Statement beginning in fiscal 2008. Management is currently evaluating the impact the adoption of SFAS No. 159 will have on the Company’s consolidated financial statements, but does not presently anticipate it will have a material effect on its consolidated financial position or results of operations.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

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

All Term Loan B borrowings at December 31, 2006 under the senior credit facilities bear interest at 7.11%, which represented the base rate, or LIBOR, plus the applicable margin, as defined. All revolving loan borrowings at December 31, 2006 under the senior credit facilities bear interest at 8.25%, which represented the base rate, or prime, plus the applicable margin, as defined. Interest is payable in accordance with the credit agreements.

The following table estimates the changes to cash flow from operations as of December 31, 2006 if interest rates were to fluctuate by 100 or 50 basis points, or BPS (where 100 basis points represents one percentage point), for a twelve-month period:

 

    

Interest rate

decrease

  

No change to

interest rate

  

Interest rate

increase

     100 BPS    50 BPS       50 BPS    100 BPS
     (in thousands)

Senior credit facilities

   $ 23,049    $ 24,900    $ 26,750    $ 28,601    $ 30,452

Our 7% Notes and 11.375% Notes are fixed rate debt obligations and therefore do not result in a change in our cash flow from operations. As of December 31, 2006, we have no financial instruments in place to hedge against changes in the benchmark interest rates on this fixed rate debt.

The fair value of long-term fixed interest rate debt is also subject to interest rate risk. Generally, the fair value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Company’s total long-term debt at December 31, 2006 was approximately $674.5 million, which was approximately $6.6 million less than its carrying value. Fair values are determined from quoted market prices where available or based on estimates made by investment banking firms.

 

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In the past, we have used derivative instruments to manage our exposures to interest rate risks. As of December 31, 2006, we had no derivative financial instruments. Our objective for holding derivatives is to minimize these risks using the most effective methods to eliminate or reduce the impacts of these exposures. We used interest rate swap arrangements, not designated as hedging instruments under SFAS No. 133, in connection with our variable rate senior credit facilities. We do not use derivative financial instruments for speculative or trading purposes.

Given the interest rates that were in effect at December 31, 2005, as of that date, we estimated that our cash flows from operations would have increased by approximately $3.5 million and $1.7 million, respectively, for a 100 BPS and 50 BPS interest rate decrease, and decreased by approximately $1.7 million and $3.5 million, respectively, for a 50 BPS and 100 BPS interest rate increase. The estimated fair value of the Company’s total long-term debt at December 31, 2005 was approximately $628.1 million, which was approximately $18.4 million less than its carrying value.

Impact of Inflation

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

 

Item 8. Consolidated Financial Statements and Supplementary Data

Our Financial Statements are filed with this report. The Financial Statements and Supplementary Data are included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Executive Officer along with our Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report of the effectiveness of the design and operation of Nexstar’s disclosure controls and procedures.

Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures (i) were effective in recording, processing, summarizing and reporting material information required to be included in our periodic filings under the Securities and Exchange Act of 1934 within the time periods specified in the SEC’s rules and forms; and (ii) include controls and other procedures designed to ensure that information required to be disclosed in our reports filed with the SEC was accumulated and communicated to management, including our President and Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the quarterly period as of the end of the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Nexstar’s internal control over financial reporting.

 

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Management’s Report on Internal Control over Financial Reporting

Nexstar’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Nexstar’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management assessed the effectiveness of Nexstar’s internal control over financial reporting as of December 31, 2006 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on management’s assessment, we have concluded that, as of December 31, 2006, Nexstar’s internal control over financial reporting was effective based on those criteria. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 excluded WTAJ, because it was acquired by the Company in December 2006 in a purchase business combination. WTAJ is a television station of the Company whose total assets and total net revenues represent approximately 8% of consolidated total assets and less than 1% of consolidated net revenues, respectively, of the Company as of and for the year ended December 31, 2006.

Management’s assessment of the effectiveness of Nexstar’s internal control over financial reporting as of December 31, 2006, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on pages F-2 and F-3 included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

 

Item 9B. Other Information

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

Information concerning directors that is required by this Item 10 will be set forth in the Proxy Statement to be provided to stockholders in connection with our 2007 Annual Meeting of Stockholders (the “Proxy Statement”) under the headings “Directors and Nominees for Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated herein by reference.

 

Item 11. Executive Compensation

Information required by the Item 11 will be set forth in the Proxy Statement under the headings “Compensation of Executive Officers” and “Director Compensation,” which information is incorporated herein by reference. Information specified in Items 402(k) and 402(l) of Regulation S-K and set forth in the Proxy Statement is incorporated by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters

Information required by this Item 12 will be set forth in the Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management,” and “Compensation of Executive Officers,” which information is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information required by this Item 13 will be set forth in the Proxy Statement under the heading “Certain Relationships and Related Transactions,” which information is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services

Information required by this Item 14 will be set forth in the Proxy Statement under the heading “Ratification of the Selection of Independent Registered Public Accounting Firm,” which information is incorporated herein by reference.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules

(a) Documents filed as part of this report:

(1) Financial Statements. The following financial statements of Nexstar Broadcasting Group, Inc. have been included on pages F-1 through F-63 of this Annual Report on Form 10-K:

 

   

See the Index to Consolidated Financial Statements on page F-1 for a list of financial statements filed with this report.

The audited financial statements of Mission Broadcasting, Inc. as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 as filed in Mission Broadcasting, Inc.’s Annual Report on Form 10-K are incorporated by reference in this report.

(2) Financial Statement Schedules. The schedule of Valuation and Qualifying Accounts appears in Note 19 to the financial statements filed as part of this report.

(3) Exhibits. The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index beginning on page E-1 of this Annual Report on Form 10-K.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

NEXSTAR BROADCASTING GROUP, INC.
By:   /S/    PERRY A. SOOK        
  Perry A. Sook
Its:   President and Chief Executive Officer
By:   /S/    MATTHEW E. DEVINE        
  Matthew E. Devine
Its:   Chief Financial Officer

Dated: March 14, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 14, 2007.

 

Name

  

Title

/S/    PERRY A. SOOK        

Perry A. Sook

   President, Chief Executive Officer and Director

/S/    JAY M. GROSSMAN        

Jay M. Grossman

   Director

/S/    ROYCE YUDKOFF        

Royce Yudkoff

   Director

/S/    BLAKE R. BATTAGLIA        

Blake R. Battaglia

   Director

/S/     ERIK BROOKS        

Erik Brooks

   Director

/S/    BRENT STONE        

Brent Stone

   Director

/S/    GEOFF ARMSTRONG        

Geoff Armstrong

   Director

/S/    I. MARTIN POMPADUR        

I. Martin Pompadur

   Director

/S/    MICHAEL DONOVAN        

Michael Donovan

   Director

/S/    LISBETH MCNABB        

Lisbeth McNabb

   Director

 

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NEXSTAR BROADCASTING GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets at December 31, 2006 and 2005

   F-4

Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004

   F-5

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004

  

F-6

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

   F-7

Notes to Consolidated Financial Statements

   F-8


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Nexstar Broadcasting Group, Inc.:

We have completed integrated audits of Nexstar Broadcasting Group Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Nexstar Broadcasting Group, Inc. and its subsidiaries (the “Company”) at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation in 2006.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Controls over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting

 

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Table of Contents

includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded WTAJ from its assessment of internal control over financial reporting as of December 31, 2006 because it was acquired by the Company in a purchase business combination during 2006. We have also excluded WTAJ from our audit of internal control over financial reporting. WTAJ is a television station of the Company whose total assets and total net revenues represent approximately 8% and less than 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2006.

PricewaterhouseCoopers LLP

Dallas, Texas

March 14, 2007

 

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NEXSTAR BROADCASTING GROUP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2006 and 2005

(in thousands, except share information)

 

     2006     2005  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 11,179     $ 13,487  

Accounts receivable, net of allowance for doubtful accounts of $1,061 and $863, respectively

     48,539       46,706  

Current portion of broadcast rights

     14,740       12,574  

Taxes receivable

     247       —    

Prepaid expenses and other current assets

     2,261       1,980  

Deferred tax asset

     157       —    

Property held for sale

     —         516  
                

Total current assets

     77,123       75,263  

Property and equipment, net

     110,903       98,156  

Broadcast rights

     9,869       3,704  

Goodwill

     149,396       146,258  

FCC licenses

     163,795       138,437  

Other intangible assets, net

     206,259       209,536  

Other noncurrent assets

     7,364       8,727  
                

Total assets

   $ 724,709     $ 680,081  
                
LIABILITIES AND STOCKHOLDERS’ DEFICIT     

Current liabilities:

    

Current portion of debt

   $ 3,485     $ 3,485  

Current portion of broadcast rights payable

     15,099       13,169  

Accounts payable

     10,040       9,176  

Accrued expenses

     14,231       12,115  

Taxes payable

     —         249  

Interest payable

     6,657       6,556  

Deferred revenue

     5,586       4,369  
                

Total current liabilities

     55,098       49,119  

Debt

     677,650       643,020  

Broadcast rights payable

     10,807       4,639  

Deferred tax liabilities

     38,697       34,256  

Deferred revenue

     2,965       3,207  

Deferred gain on sale of assets

     5,804       6,240  

Other liabilities

     6,978       5,625  
                

Total liabilities

     797,999       746,106  
                

Commitments and contingencies

    

Stockholders’ deficit:

    

Preferred stock—$0.01 par value, authorized 200,000 shares; no shares issued and outstanding at December 31, 2006 and 2005, respectively

     —         —    

Common stock:

    

Class A Common—$0.01 par value, authorized 100,000,000 shares; issued and outstanding 14,316,810 and 14,289,310 at December 31, 2006 and 2005, respectively

     143       143  

Class B Common—$0.01 par value, authorized 20,000,000 shares; issued and outstanding 13,411,588 at both December 31, 2006 and 2005, respectively

     134       134  

Class C Common—$0.01 par value, authorized 5,000,000 shares; issued and outstanding 662,529 at both December 31, 2006 and 2005, respectively

     7       7  

Additional paid-in capital

     394,120       392,393  

Accumulated deficit

     (467,694 )     (458,702 )
                

Total stockholders’ deficit

     (73,290 )     (66,025 )
                

Total liabilities and stockholders’ deficit

   $ 724,709     $ 680,081  
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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NEXSTAR BROADCASTING GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2006, 2005 and 2004

(in thousands, except per share amounts)

 

     2006     2005     2004  

Net revenue

   $ 265,169     $ 228,939     $ 249,531  
                        

Operating expenses:

      

Direct operating expenses (exclusive of depreciation and amortization shown separately below)

     71,465       67,681       65,608  

Selling, general, and administrative expenses (exclusive of depreciation and amortization shown separately below)

     85,293       75,863       76,603  

Amortization of broadcast rights

     19,701       22,257       24,805  

Amortization of intangible assets

     24,135       26,511       26,463  

Depreciation

     18,086       16,733       17,949  

Merger related expenses

     —         —         456  

Loss on property held for sale

     —         616       —    

Loss on asset disposal, net

     639       668       582  
                        

Total operating expenses

     219,319       210,329       212,466  
                        

Income from operations

     45,850       18,610       37,065  

Interest expense, including amortization of debt financing costs

     (51,783 )     (47,260 )     (52,265 )

Loss on extinguishment of debt

     —         (15,715 )     (8,704 )

Interest income

     760       213       113  

Other income, net

     —         380       5,077  
                        

Loss before income taxes

     (5,173 )     (43,772 )     (18,714 )

Income tax expense

     (3,819 )     (4,958 )     (3,892 )
                        

Loss before minority interest in consolidated entity

     (8,992 )     (48,730 )     (22,606 )

Minority interest in consolidated entity

     —         —         2,106  
                        

Net loss

   $ (8,992 )   $ (48,730 )   $ (20,500 )
                        

Net loss per common share:

      

Basic and diluted

   $ (0.32 )   $ (1.72 )   $ (0.72 )

Weighted average number of common shares outstanding:

      

Basic and diluted

     28,376       28,363       28,363  

The accompanying notes are an integral part of these consolidated financial statements.

 

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NEXSTAR BROADCASTING GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the Years Ended December 31, 2006, 2005 and 2004

(in thousands, except share information)

 

    Common Stock     Additional
Paid-In
Capital
 

Accumulated

Deficit

   

Total

Stockholders’

Equity
(Deficit)

 
    Class A   Class B   Class C        
    Shares   Amount   Shares   Amount   Shares     Amount        

Balance at January 1, 2004

  13,589,289   $ 136   13,411,588   $ 134   1,362,529     $ 14     $ 392,393   $ (389,472 )   $ 3,205  

Issuance of common shares in connection with acquisition of Quorum

  21     —     —       —     —         —         —       —         —    

Exchange of Class C common shares for Class A common shares

  700,000     7   —       —     (700,000 )     (7 )     —       —         —    

Net loss

  —       —     —       —     —         —         —       (20,500 )     (20,500 )
                                                       

Balance at December 31, 2004

  14,289,310     143   13,411,588     134   662,529       7       392,393     (409,972 )     (17,295 )

Net loss

  —       —     —       —     —         —         —       (48,730 )     (48,730 )
                                                       

Balance at December 31, 2005

  14,289,310     143   13,411,588     134   662,529       7       392,393     (458,702 )     (66,025 )

Stock-based compensation expense

  —       —     —       —     —         —         1,727     —         1,727  

Issuance of common shares related to restricted stock award

  27,500     —     —       —     —         —         —       —         —    

Net loss

  —       —     —       —     —         —         —       (8,992 )     (8,992 )
                                                       

Balance at December 31, 2006

  14,316,810   $ 143   13,411,588   $ 134   662,529     $ 7     $ 394,120   $ (467,694 )   $ (73,290 )
                                                       

The accompanying notes are an integral part of these consolidated financial statements.

 

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NEXSTAR BROADCASTING GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2006, 2005 and 2004

(in thousands)

 

     2006     2005     2004  

Cash flows from operating activities:

      

Net loss

   $ (8,992 )   $ (48,730 )   $ (20,500 )

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

      

Deferred income taxes

     4,284       4,887       3,651  

Provision for bad debts

     963       1,151       1,751  

Depreciation of property and equipment

     18,086       16,733       17,949  

Amortization of intangible assets

     24,135       26,511       26,463  

Amortization of debt financing costs

     1,414       1,320       2,363  

Amortization of broadcast rights, excluding barter

     8,091       9,810       11,458  

Payments for broadcast rights

     (8,284 )     (9,704 )     (10,520 )

Loss on asset disposal, net

     639       668       582  

Loss on property held for sale

     —         616       —    

Loss on extinguishment of debt

     —         15,715       8,704  

Deferred gain recognition

     (436 )     (436 )     (436 )

Amortization of debt discount

     12,115       11,028       10,283  

Stock-based compensation expense

     1,727       —         —    

Effect of accounting for derivative instruments

     —         (197 )     (4,055 )

Call premium and interest paid in connection with repayments of senior discount and senior subordinated notes

     —         (15,981 )     (5,934 )

Minority interest in consolidated entity

     —         —         (2,106 )

Changes in operating assets and liabilities, net of acquisitions:

      

Accounts receivable

     (2,681 )     567       (4,243 )

Prepaid expenses and other current assets

     (251 )     603       (605 )

Taxes receivable

     (247 )     —         —    

Other noncurrent assets

     (463 )     (455 )     (763 )

Accounts payable and accrued expenses

     2,665       736       (8,130 )

Taxes payable

     (249 )     160       (103 )

Interest payable

     101       (2,310 )     4,026  

Deferred revenue

     975       1,290       1,291  

Other noncurrent liabilities

     870       368       785  
                        

Net cash provided by operating activities

     54,462       14,350       31,911  
                        

Cash flows from investing activities:

      

Additions to property and equipment

     (24,354 )     (14,016 )     (10,552 )

Proceeds from sale of assets

     603       125       254  

Acquisition of broadcast properties and related transaction costs

     (55,521 )     (12,467 )     (35,107 )

Change in restricted cash

     —         —         800  
                        

Net cash used for investing activities

     (79,272 )     (26,358 )     (44,605 )
                        

Cash flows from financing activities:

      

Proceeds from debt issuance

     —         427,375       235,000  

Repayment of long-term debt

     (15,485 )     (263,696 )     (248,175 )

Proceeds from revolver draws

     38,000       1,000       63,500  

Repayment of senior discount notes

     —         —         (28,862 )

Repayment of senior subordinated notes

     —         (153,619 )     —    

Payments for debt financing costs

     (13 )     (4,070 )     (1,112 )
                        

Net cash provided by financing activities

     22,502       6,990       20,351  
                        

Net increase (decrease) in cash and cash equivalents

     (2,308 )     (5,018 )     7,657  

Cash and cash equivalents at beginning of year

     13,487       18,505       10,848  
                        

Cash and cash equivalents at end of year

   $ 11,179     $ 13,487     $ 18,505  
                        

Supplemental schedule of cash flow information:

      

Cash paid for interest

   $ 38,182     $ 44,947     $ 36,422  
                        

Cash paid (refunded) for income taxes, net

   $ 36     $ (59 )   $ 818  
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business Operations

As of December 31, 2006, Nexstar Broadcasting Group, Inc. (“Nexstar”) owned, operated, programmed or provided sales and other services to 49 television stations, all of which were affiliated with the NBC, ABC, CBS, Fox, MyNetworkTV or The CW television networks, in markets located in New York, Pennsylvania, Illinois, Indiana, Missouri, Texas, Louisiana, Arkansas, Alabama, Montana and Maryland. Through various local service agreements, Nexstar provided sales, programming and other services to stations 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.

On September 18, 2006, the former UPN and WB networks merged to form The CW. The Company (as defined below) operated three former UPN affiliated stations located in Wichita Falls, Texas; Champaign, Illinois; and Utica, New York. These three stations did not join The CW network, but instead became affiliates of MyNetworkTV, a new primetime programming network that began operating on September 5, 2006. Management believes the change in affiliation for these three stations did not have a material impact on the Company’s consolidated financial position and results of operations.

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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Nexstar and its subsidiaries. Also included in the financial statements are the accounts of independently-owned Mission Broadcasting, Inc. (“Mission”) (Nexstar and Mission are collectively referred to as “the Company”) and may include certain other entities when it is determined that the Company is the primary beneficiary of a variable interest entity (“VIE”) in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest Entities, an interpretation on Accounting Research Bulletin No. 51” (“FIN No. 46R”).

All intercompany account balances and transactions have been eliminated in consolidation.

Mission

Mission is included in these consolidated financial statements because Nexstar is deemed to have a controlling financial interest in Mission for financial reporting purposes in accordance with FIN No. 46R 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 credit facility and (c) purchase options (which expire on various dates between 2008 and 2014) granted by Mission’s sole shareholder which will permit Nexstar to acquire the assets and assume the liabilities of each Mission station, subject to Federal Communications Commission (“FCC”) consent. As of December 31, 2006, the assets of Mission consisted of current assets of $4.4 million (excluding broadcast rights), broadcast rights of $5.0 million, FCC licenses of $28.7 million, goodwill of $16.7 million, other intangible assets of $42.2 million, property and equipment of $20.4 million and other noncurrent assets of $0.3 million. Substantially all of Mission’s assets, except for its FCC licenses, collateralize its secured debt obligation.

 

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Table of Contents

NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

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 December 31, 2006:

 

Service Agreements

  

Mission Stations

TBA Only(1)

   WFXP and KHMT

SSA & JSA(2)

   KJTL, KJBO-LP, KOLR, KCIT, KCPN-LP, KAMC, KRBC, KSAN, WUTR, WFXW, WYOU, KODE and WTVO

(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. The SSA allows the sharing of services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments from Mission as described in the SSAs. The JSAs permit Nexstar to sell and retain a percentage of the net revenue from the station’s advertising time in return for monthly payments to Mission of the remaining percentage of net revenue, as described in the JSAs.

Nexstar’s ability to receive cash from Mission is governed by these agreements. The arrangements under the SSAs and JSAs have had the effect of Nexstar receiving substantially all of the available cash, after debt service costs, generated by the stations listed above. The arrangements under the TBAs have also had the effect of Nexstar receiving substantially all of the available cash generated by the TBA stations listed above. Nexstar anticipates that, through these local service agreements, it will continue to receive substantially all of the available cash, after payments for debt service costs, generated by the stations listed above.

Nexstar also guarantees the obligations incurred under Mission’s senior secured credit facility (see Note 9). Mission is a guarantor of Nexstar’s senior secured credit facility and the senior subordinated notes issued by Nexstar (see Note 9). In consideration of Nexstar’s guarantee of Mission’s senior credit facility, the sole shareholder of Mission has granted Nexstar a purchase option 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. These option agreements (which expire on various dates between 2008 and 2014) are freely exercisable or assignable by Nexstar without consent or approval by the sole shareholder of Mission.

Nexstar does not own Mission or Mission’s television stations; however, Nexstar is deemed to have a controlling financial interest in them under accounting principles generally accepted in the United States of America (“U.S. GAAP”) while complying with the FCC’s rules regarding ownership limits in television markets. In order for both Nexstar and Mission to comply with FCC regulations, Mission maintains complete responsibility for and control over programming, finances, personnel and operations of its stations.

Variable Interest Entities

The Company, generally in connection with pending acquisitions subject to FCC consent, will enter into TBAs with non-owned stations. As a result of the TBA, the Company may determine that the station is a VIE and that the Company is the primary beneficiary of the variable interest. Under the terms of these agreements, the Company makes specific periodic payments to the station’s owner-operator in exchange for the right to provide programming and sell advertising on a portion of the station’s broadcast time. Nevertheless, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

broadcast on the station. The Company will continue to provide programming and sell advertising under a TBA until the termination of such agreement, which typically occurs on consummation of the acquisition of the station. The Company also may determine that a station is a VIE, in connection with other types of local service agreements entered into with stations in markets in which the Company owns and operates a station.

VIEs included in the accompanying consolidated financial statements as a result of TBAs entered into in connection with station acquisitions are discussed below. The Company discontinued its consolidation of these stations as VIEs upon consummation of each acquisition.

On May 9, 2003, Mission entered into a purchase agreement to acquire substantially all the assets of WFXW (formerly WBAK), the Fox affiliate in Terre Haute, Indiana, and simultaneously entered into a TBA with Bahakel Communications and certain of its subsidiaries relating to WFXW. As a result of the TBA, Mission determined that it was the primary beneficiary of WFXW. Mission consummated the acquisition of WFXW on April 6, 2004. Mission consolidated the financial statements of WFXW from May 9, 2003 to April 6, 2004, when operations under the TBA were terminated upon Mission’s purchase of the station. The net revenue of WFXW derived from operations during the TBA period and included in the consolidated statements of operations was $0.3 million for the year ended December 31, 2004.

On October 13, 2003, Nexstar entered into a purchase agreement to acquire substantially all of the assets of KFTA/KNWA, the NBC affiliate in Fort Smith-Fayetteville-Springdale-Rogers, Arkansas, from JDG Television, Inc. (“JDG TV”). Operations under a TBA between Nexstar and JDG TV commenced on October 16, 2003. As a result of the TBA, Nexstar determined that it was the primary beneficiary of KFTA/KNWA. Nexstar consummated the acquisition of KFTA/KNWA on January 7, 2005. Nexstar consolidated the financial statements of KFTA/KNWA from October 16, 2003 to January 7, 2005, when operations under the TBA were terminated upon Nexstar’s purchase of the station. The net revenue of KFTA/KNWA derived from operations during the TBA period and included in the consolidated statements of operations was $5.8 million for the year ended December 31, 2004.

On May 21, 2004, Nexstar entered into a purchase agreement to acquire substantially all of the assets of KLST, the CBS affiliate in San Angelo, Texas, from Jewell Television Corporation (“Jewell”). Operations under a TBA between Nexstar and Jewell commenced on June 1, 2004. As a result of the TBA, Nexstar determined that it was the primary beneficiary of KLST. Nexstar consummated the acquisition of KLST on November 30, 2004. Nexstar consolidated the financial statements of KLST from June 1, 2004 to November 30, 2004, when operations under the TBA were terminated upon Nexstar’s purchase of the station. The net revenue of KLST derived from operations during the TBA period and included in the consolidated statements of operations was $2.7 million for the year ended December 31, 2004.

On October 4, 2004, Mission entered into a purchase agreement to acquire substantially all of the assets of WTVO, the ABC affiliate in Rockford, Illinois, from Young Broadcasting, Inc. (“Young”) and Winnebago Television Corporation (“Winnebago”). Operations under a TBA between Mission and Young and Winnebago commenced on November 1, 2004. As a result of the TBA, Mission determined that it was the primary beneficiary of WTVO. Mission consummated the acquisition of WTVO on January 4, 2005. Mission consolidated the financial statements of WTVO from November 1, 2004 to January 4, 2005, when operations under the TBA were terminated upon Mission’s purchase of the station. The net revenue of WTVO derived from operations during the TBA period and included in the consolidated statement of operations was $1.1 million for the year ended December 31, 2004.

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

VIEs in connection with other types of local service agreements entered into with stations in markets in which the Company owns and operates a station are discussed below.

Nexstar has determined that it has a variable interest in KTVE, the NBC affiliate in El Dorado, Arkansas, which is owned by Piedmont Television of Monroe/El Dorado LLC (“Piedmont”), as a result of a JSA and SSA entered into with Piedmont. As successor to a JSA and SSA entered into effective March 21, 2001 by Quorum Broadcasting of Louisiana, Inc., Nexstar, (a) under the JSA, permits Piedmont to sell to advertisers all of the time available for commercial advertisements on KARD, the Nexstar television station in the related market in return for a monthly fee paid to Nexstar and (b) under the SSA, shares with Piedmont the costs of certain services and procurements, which they individually require in connection with the ownership and operation of their respective television stations. The terms of the JSA and SSA with Piedmont are 10 years and may be extended automatically for two additional 10-year terms unless the agreements are otherwise terminated. Nexstar has evaluated its arrangement with Piedmont and has determined that it is not the primary beneficiary of the variable interest, and therefore, has not consolidated KTVE under FIN No. 46R. Nexstar received payments from Piedmont under the JSA of approximately $1.1 million, $1.0 million and $1.4 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Nexstar has determined that it has a variable interest in WYZZ, the Fox affiliate in Peoria, Illinois, which is owned by a subsidiary of Sinclair Broadcast Group, Inc. (“Sinclair”), as a result of an outsourcing agreement it entered into effective December 1, 2001. Under the outsourcing agreement, Nexstar provides certain non-programming related engineering, production, sales and administrative services for WYZZ through WMBD, the Nexstar television station in the market. During the term of the outsourcing agreement, Nexstar is obligated to pay Sinclair a monthly fee based on the combined operating cash flow of WMBD and WYZZ, as defined in the agreement. The outsourcing agreement expires in December 2008, but at any time it may be canceled by either party upon 180 days written notice. Nexstar has evaluated its arrangement with Sinclair and has determined that it is not the primary beneficiary of the variable interest, and therefore, has not consolidated WYZZ under FIN No. 46R. Nexstar made payments to Sinclair under the outsourcing agreement of $1.4 million, $1.3 million and $1.6 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Nexstar has determined that it has a variable interest in WUHF, the Fox affiliate in Rochester, New York, which is owned by a subsidiary of Sinclair, as a result of an outsourcing agreement it entered into effective September 1, 2005. Under the outsourcing agreement, Nexstar provides certain non-programming related engineering, production, sales and administrative services for WUHF through WROC, the Nexstar television station in the market. During the term of the outsourcing agreement, Nexstar is obligated to pay Sinclair a monthly fee based on the combined operating cash flow of WROC and WUHF, as defined in the agreement. The outsourcing agreement expires in December 2012, but at any time it may be canceled by either party upon 180 days written notice. Nexstar has evaluated its arrangement with Sinclair and has determined that it is not the primary beneficiary of the variable interest, and therefore, has not consolidated WUHF under FIN No. 46R. Nexstar made payments to Sinclair under the outsourcing agreement of $3.8 million and $0.8 million for the years ended December 31, 2006 and 2005, respectively.

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 service agreements consist of the fees paid to Sinclair. Additionally, Nexstar indemnifies the owners of KTVE, 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.

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

Basis of Presentation

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation.

Local Service Agreements

The Company enters into local service agreements with stations generally in connection with pending acquisitions subject to FCC approval or in markets in which the Company owns and operates a station. Local service agreement is a general term used to refer 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 the station. Local service agreements include time brokerage agreements (“TBA”), shared service agreements (“SSA”), joint sales agreements (“JSA”) and outsourcing agreements.

Under the terms of a TBA, the Company makes specific periodic payments to the other station’s owner-operator in exchange for the right to provide programming and sell advertising on a portion of the other station’s broadcast time. Under the terms of an SSA, the Company’s station in the market bears the costs of certain services and procurements performed on behalf of another station, in exchange for the Company’s right to receive specific periodic payments. Under the terms of a JSA, the Company makes specific periodic payments to the station’s owner-operator in exchange for the right to sell advertising during a portion of the station’s broadcast time. Under TBAs, the Company retains all of the advertising revenue it generates, and under JSAs it retains a percentage of the advertising revenue it generates.

Under an outsourcing agreement, the Company’s station provides or is provided various non-programming related services to or by another station.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and the disclosure for contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The more significant estimates made by management include those relating to the allowance for doubtful accounts, trade and barter transactions, the recoverability of broadcast rights and the carrying amounts, recoverability and useful lives of intangible assets. Actual results may vary from estimates used.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable consist primarily of billings to its customers for advertising spots aired and also includes amounts billed for production and other similar activities. Trade receivables normally have

 

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Table of Contents

NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

terms of 30 days and the Company has no interest provision for customer accounts that are past due. The Company maintains an allowance for estimated losses resulting from the inability of customers to make required payments. Management evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations, an allowance is recorded to reduce their receivable amount to an amount estimated to be collected. The Company recorded bad debt expense of $1.0 million, $1.2 million and $1.8 million for the years ended December 31, 2006, 2005 and 2004, respectively, which was included in selling, general and administrative expenses in the Company’s consolidated statement of operations.

Concentration of Credit Risk

Financial instruments which potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash deposits are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits; however, the Company believes these deposits are maintained with financial institutions of reputable credit and are not subject to any unusual credit risk. A significant portion of the Company’s accounts receivable are due from local and national advertising agencies. The Company does not require collateral from its customers, but maintains reserves for potential credit losses. Management believes that the allowance for doubtful accounts is adequate, but if the financial condition of the Company’s customers were to deteriorate, additional allowances may be required. The Company has not experienced significant losses related to receivables from individual customers or by geographical area.

Revenue Recognition

The Company’s revenue is primarily derived from the sale of television advertising. Total revenue includes cash and barter advertising revenue, net of agency commissions, retransmission compensation, network compensation and other broadcast related revenues.

 

   

Advertising revenue is recognized, net of agency commissions, in the period during which the time spots are aired.

 

   

Network compensation is either recognized when the Company’s station broadcasts specific network programming based upon a negotiated hourly-rate, or on a straight-line basis based upon the total negotiated compensation to be received by the Company over the term of the agreement.

 

   

Retransmission compensation is recognized based on the number of subscribers over the contract period.

 

   

Other revenues, which may include revenue from the production of client advertising spots and other similar activities from time to time, are recognized in the period during which the services are provided.

The Company barters advertising time for certain program material. These transactions, except those involving exchange of advertising time for network programming, are recorded at management’s estimate of the value of the advertising time exchanged, which approximates the fair value of the program material received. The value of advertising time exchanged is estimated by applying average historical advertising rates for specific time periods. Revenue from barter transactions is recognized as the related advertisement spots are broadcast. The Company recorded $11.6 million, $12.4 million and $13.4 million of barter revenue for the years ended December 31, 2006, 2005 and 2004, respectively.

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

Barter expense is recognized at the time program broadcast rights assets are used. The Company recorded $11.6 million, $12.4 million and $13.4 million of barter expense for the years ended December 31, 2006, 2005 and 2004, respectively, which was included in amortization of broadcast rights in the Company’s consolidated statement of operations.

The Company trades certain advertising time for various goods and services. These transactions are recorded at the estimated fair value of the goods or services received. Revenue from trade transactions is recognized when the related advertisement spots are broadcast. The Company recorded $7.4 million, $7.9 million and $7.7 million of trade revenue for the years ended December 31, 2006, 2005 and 2004, respectively.

Trade expense is recognized when services or merchandise received are used. The Company recorded $7.1 million, $7.3 million and $7.6 million of trade expense for the years ended December 31, 2006, 2005 and 2004, respectively, which was included in direct operating expenses in the Company’s consolidated statement of operations.

Broadcast Rights and Broadcast Rights Payable

The Company records rights to programs, primarily in the form of syndicated programs and feature movie packages obtained under license agreements for the limited right to broadcast the suppliers’ programming when the following criteria are met: 1) the cost of each program is known or reasonably determinable, 2) the license period must have begun, 3) the program material has been accepted in accordance with the license agreement, and 4) the programming is available for use. Broadcast rights are initially recorded at the amount paid or payable to program suppliers; or, in the case of barter transactions, 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. Broadcast rights are stated at the lower of unamortized cost or net realizable value. The current portion of broadcast rights represents those rights available for broadcast which will be amortized in the succeeding year. Amortization of broadcast rights is computed using the straight-line method based on the license period or programming usage, whichever yields the greater expense. Broadcast rights liabilities are reduced by monthly payments to program suppliers; or, in the case of barter transactions, are amortized over the life of the associated programming license contract as a component of trade and barter revenue. When projected future net revenue associated with a program is less than the current carrying amount of the program broadcast rights, for example, due to poor ratings, the Company write-downs the unamortized cost of the broadcast rights to equal the amount of projected future net revenue. If the expected broadcast period was shortened or cancelled, the Company would be required to write-off the remaining value of the related broadcast rights on an accelerated basis or possibly immediately. Such reductions in unamortized costs is included in amortization of broadcast rights in the consolidated statement of operations.

Property and Equipment

Property and equipment is stated at cost or estimated fair value at the date of acquisition for trade transactions. The cost and related accumulated depreciation applicable to assets sold or retired are removed from the accounts and the gain or loss on disposition is recognized. Major renewals and betterments are capitalized and ordinary repairs and maintenance are charged to expense in the period incurred. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets ranging from 3 to 39 years (see Note 6).

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

Network Affiliation Agreements

Network affiliation agreements are stated at estimated fair value at the date of acquisition using a discounted cash flow method. Amortization is computed on a straight-line basis over the estimated useful life of 15 years.

Each of the Company’s stations has a network affiliation agreement pursuant to which the broadcasting network provides programming to the station during specified time periods, including prime time. Under the affiliation agreements with NBC, CBS and ABC, most of the Company’s stations receive compensation for distributing the network’s programming over the air and for allowing the network to keep a portion of advertising inventory during those time periods. The affiliation agreements with Fox, MyNetworkTV and The CW do not provide for compensation.

Intangible Assets

Intangible assets consist primarily of goodwill, broadcast licenses (“FCC licenses”) and network affiliation agreements that are stated at estimated fair value at the at the date of acquisition using a discounted cash flow method. The Company’s goodwill and FCC licenses are considered to be indefinite-lived intangible assets and are not amortized but instead are tested for impairment annually or whenever events or changes in circumstances indicate that such assets might be impaired. Network affiliation agreements are subject to amortization computed on a straight-line basis over the estimated useful life of 15 years. An impairment assessment of the Company’s intangible assets could be triggered by a significant reduction in operating results or cash flows at one or more of the Company’s television stations, or a forecast of such reductions, a significant adverse change in the advertising marketplaces in which the Company’s television stations operate, the loss of network affiliations, or by adverse changes to FCC ownership rules, among others.

The impairment test for goodwill utilizes a two-step fair value approach. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the combined stations in a market (“reporting unit”) to its carrying amount. The fair value of a reporting unit is determined using a discounted cash flows analysis. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing an assumed purchase price allocation, using the reporting unit fair value (as determined in Step 1) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.

The impairment test for FCC licenses consists of a market-by-market comparison of the carrying amount of FCC licenses with their fair value, using a discounted cash flows analysis.

The Company completed the annual tests of impairment for goodwill and FCC licenses as of December 31, 2006, 2005 and 2004, which resulted in no impairment being recognized for the Company in 2006, 2005 and 2004.

The Company tests network affiliation agreements whenever events or changes in circumstances indicate that their carrying amount may not be recoverable, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. An impairment in the carrying amount of a network affiliation agreement is recognized when the expected future operating cash flow derived from the operation to which the asset relates to is less than its carrying value.

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

Debt Financing Costs

Debt financing costs represent direct costs incurred to obtain long-term financing and are amortized to interest expense over the term of the related debt. Previously capitalized debt financing costs are expensed and included in loss on extinguishment of debt if the Company determines that there has been a substantial modification of the related debt. As of December 31, 2006 and 2005, debt financing costs of $6.8 million and $8.2 million, respectively, were included in other noncurrent assets.

Derivatives and Hedging Activities

The Company may use derivative financial instruments, including interest rate swaps and collateral agreements, as a means of reducing its exposure to fluctuations in interest rates. As of December 31, 2006 and 2005, the Company held no derivative financial instruments.

In 2004, Nexstar used interest rate swap and collar agreements to reduce its cash flow exposure to fluctuations in interest rates on its variable rate debt or to hedge fair value changes attributable to changes in the benchmark interest rate on its fixed rate debt. All derivatives were recognized on the consolidated balance sheets at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction, based upon criteria established by FASB Statement of Financial Accounting Standards No. 133, “Accounting for Derivative and Hedging Activities” (“SFAS No. 133”), as amended. The gains and losses on derivative instruments classified as cash flow hedges that are reported in other comprehensive income are reclassified into earnings in the periods in which earnings are affected by movements in the variable rates on the debt agreements.

Comprehensive Income (Loss)

The Company reports comprehensive income or loss and its components in accordance with FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” (“SFAS No. 130”). Comprehensive loss includes, in addition to net loss, items of other comprehensive income (loss) representing certain changes in equity that are excluded from net loss and instead are recorded as a separate component of stockholders’ equity (deficit). During the years ended December 31, 2006, 2005 and 2004, the Company had no items of other comprehensive income (loss) and, therefore, comprehensive income (loss) does not differ from reported net loss.

Advertising Expense

The cost of advertising is expensed as incurred. The Company incurred advertising costs in the amount of $2.5 million, $2.5 million and $2.4 million for the years ended December 31, 2006, 2005 and 2004, respectively, which were included in selling, general and administrative expenses in the Company’s consolidated statement of operations.

Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, broadcast rights payable, accounts payable and accrued expenses approximates fair value due to their short-term nature. The fair value of derivative financial instruments is obtained from financial institution quotes. The interest rates on the Company’s term loan

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

and revolving credit facilities are adjusted regularly to reflect current market rates. Accordingly, the carrying amount of the Company’s term loan and revolving credit facilities approximates its fair value. See Note 9 for the fair value of the Company’s debt.

Stock-Based Compensation

Nexstar maintains stock-based employee compensation plans which are described more fully in Note 11. On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which requires companies to expense the fair value of employee stock options and other forms of stock-based employee compensation in the financial statements (see “Adoption of SFAS No. 123(R)”).

Prior to January 1, 2006, the Company had accounted for Nexstar’s stock-based employee compensation plan using the intrinsic value method of expense recognition prescribed by Accounting Principle Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations, which was permitted as an alternative to the fair value recognition provisions of FASB Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under the intrinsic value method compensation expense was not recognized for stock options granted with an exercise price greater than or equal to the fair market value of Nexstar’s common stock on the date of the grant. The Company did not recognize compensation cost for employee stock options for the years ended December 31, 2005 and 2004, as all options granted under Nexstar’s stock-based employee compensation plan had an exercise price greater than or equal to the market price of Nexstar’s common stock on the date of grant. The Company had applied the disclosure only provisions of SFAS No. 123 and made pro forma disclosure as if the fair value of stock options had been expensed under the accounting prescribed by SFAS No. 123.

The following table illustrates the pro forma effect on the net loss and net loss per share for the years ended December 31, 2005 and 2004 if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

 

    Years ended December 31,  
                  2005                                 2004                
    (in thousands, except per share amounts)  

Net loss, as reported

  $ (48,730 )   $ (20,500 )

Deduct:

   

Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effect

    (1,404 )     (1,049 )
               

Pro forma net loss

  $ (50,134 )   $ (21,549 )
               

Basic and diluted net loss per common share, as reported

  $ (1.72 )   $ (0.72 )

Basic and diluted net loss per common share, pro forma

  $ (1.77 )   $ (0.76 )

Adoption of SFAS No. 123(R)

On January 1, 2006, the Company adopted SFAS No. 123(R) which requires companies to expense the fair value of employee stock options and other forms of stock-based employee compensation in the financial statements over the period that an employee provides service in exchange for the award. Under SFAS 123(R), the Company measures compensation cost related to stock options based on the grant-date fair value of the award

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

using the Black-Scholes option-pricing model and recognizes it ratably, less estimated forfeitures, over the vesting term of the award. The Company elected to use the modified prospective transition method and has recognized compensation expense for (i) all stock options granted after December 31, 2005 based on the requirements of SFAS No. 123(R), and (ii) the unvested portion of stock options granted prior to January 1, 2006 based on the fair values previously calculated for SFAS No. 123 pro forma disclosure purposes. Accordingly, because the Company applied a prospective transition method, prior period financial statements have not been adjusted to reflect compensation expense under the fair-value recognition provisions of this Statement. At December 31, 2005, the aggregate value of the unvested portion of previously issued stock options was approximately $6.1 million. Compensation cost related to these stock options is being recognized as expense ratably over the remaining vesting period of the awards which become fully-vested in 2010.

The weighted-average assumptions used in the Black-Scholes calculation for option grants during the years ended December 31, 2006, 2005 and 2004 were as follows:

 

     2006    2005    2004

Expected volatility

     45.10%      43.46%      38.4%

Risk-free interest rates

     4.51%      4.37%      3.41%

Expected term

     6.15 years      5.0 years      5.0 years

Dividend yields

     0%      0%      0%

Fair value per share of options granted

   $ 2.43    $ 1.95    $ 3.66

Upon adopting SFAS No. 123(R), the Company refined its techniques for developing the assumptions it uses to measure the fair value of its stock options based on the guidance contained in SEC Staff Accounting Bulletin No. 107. The expected volatility assumption used for stock option grants in 2006 is based on a combination of the historical market prices of Nexstar’s common stock and volatilities of peer companies in the television broadcasting industry over the expected term of the granted option. The Company utilized peer company data due to Nexstar’s limited history of publicly traded shares. During the year ended December 31, 2006, the expected term assumption represents the weighted-average period of time that options granted are expected to be outstanding, giving consideration to vesting periods and historical exercise and post-vesting cancellation experience. Prior to adopting SFAS No. 123(R), expected volatility was based solely on the historical market prices of Nexstar’s common stock and expected term equaled the vesting period of the stock option. The risk-free interest rates used are based on the daily U.S. Treasury yield curve rate in effect at the time of the grant having a period commensurate with the expected term assumption.

The weighted-average fair value per option granted during the years ended December 31, 2006, 2005 and 2004, calculated using the Black-Scholes option-pricing model, were $2.43, $1.95 and $3.66, respectively.

As a result of adopting SFAS No. 123(R), Nexstar recorded $1.6 million ($0.06 per basic and diluted share) of compensation expense for the year ended December 31, 2006, which was included in selling, general and administrative expenses in the Company’s consolidated statement of operations. The Company does not currently recognize a tax benefit resulting from compensation costs expensed in the financial statements because the Company provides a valuation allowance against the deferred tax asset resulting from this type of temporary difference since it expects that it will not have sufficient future taxable income to realize such benefit. Accordingly, the adoption of SFAS No. 123(R) has had no impact on income tax expense reported in the financial statements. The ongoing impact of adopting SFAS No. 123(R) will depend on, among other factors, the market price of Nexstar’s common stock, the terms, number and timing of future stock option award grants.

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

Income Taxes

The Company accounts for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. A valuation allowance is applied against net deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company establishes tax contingency reserves (“tax reserves”) based on management’s periodic reviews of its tax return positions. Based on these reviews, tax reserves are adjusted due to changes in facts and circumstances, such as the progress of federal and state audits, case law, emerging legislation and expiration of applicable statute of limitations. Any tax benefit from a favorable settlement of tax audits would be recorded upon final resolution of the audit or expiration of the statute of limitations. The Company’s effective tax rate includes the impact of tax reserves and changes to the reserves, including related interest, as considered appropriate by management. See Note 12 for further discussion of the Company’s tax reserves. Nexstar and its subsidiaries file a consolidated federal income tax return. Mission files its own separate federal income tax return.

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 and the unvested portion of restricted stock granted to employees. For the years ended December 31, 2006, 2005 and 2004 there was no difference between basic and diluted net loss per share since the effect of potential common shares were anti-dilutive, and therefore excluded from the computation of diluted net loss per share.

The following table summarizes information about anti-dilutive potential common shares (not presented in thousands):

 

     Years Ended December 31,
     2006    2005    2004
     (weighted-average shares outstanding)

Stock options excluded as the exercise price of the options was greater than the average market price of the common stock

   2,159,767    2,059,087    1,349,399
              

In-the-money stock options excluded as the Company had a net loss during the period

   772,726    42,191    55,642
              

Unvested restricted stock

   17,106    —      —  
              

Recent Accounting Pronouncements

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Hybrid Financial Instruments—an amendment to of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 provides a fair value measurement option for certain hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. Under SFAS No. 155, an entity must irrevocably elect, on an instrument-by-instrument basis, to apply fair value accounting to a hybrid financial instrument in its

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

entirety in lieu of separately accounting for the instrument as a host contract and derivative instrument. Additionally, SFAS No. 155 clarifies that both interest-only and principal-only strips are not subject to the provision of SFAS No. 133 and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding versus those that are embedded derivatives. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, which for the Company is January 1, 2007. The Company does not intend to issue or acquire the types of hybrid financial instruments included in the scope of SFAS No. 155 and does not expect the adoption of this Statement to have a material impact on the Company’s consolidated financial statements.

In April 2006, the FASB issued FASB Staff Position (“FSP”) FIN 46R-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (“FSP FIN No. 46R-6”). This FSP addresses how a reporting enterprise should determine the variability to be considered in applying FIN No. 46R by clarifying that the variability considered be based on an analysis of the design of the entity. The variability that is considered in applying FIN No. 46R affects the determination of (a) whether an entity is a VIE, (b) which interests are “variable interests” in the entity, (c) if necessary, any calculation of the entity’s expected losses and residual returns, and (d) which party, if any, is the primary beneficiary of the VIE. The Company is required to apply the guidance in this FSP prospectively to all entities (including newly created entities) with which it first becomes involved and to all entities previously required to be analyzed under FIN No. 46R when a “reconsideration event” has occurred, beginning July 1, 2006. The Company adopted FSP FIN No. 46R-6 in the third quarter 2006. The adoption of FSP FIN No. 46R-6 did not have a material impact on the Company’s consolidated financial position or results of operations.

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements for tax positions taken or expected to be taken in a tax return. FIN No. 48 requires that a tax position meet a “more-likely-than-not” threshold for the benefit of an uncertain tax position to be recognized in the financial statements. Under the Interpretation, this threshold is met if it is determined that the tax position will be sustained, based on its technical merits, upon examination by a taxing authority that has full knowledge of all relevant information. A tax position that meets the threshold is measured as the largest amount of benefit that is greater than 50 percent likely of being recognized upon ultimate settlement. This Interpretation also provides guidance for presentation and disclosure of the tax benefit and other related matters in the financial statements. FIN No. 48 is effective for fiscal years beginning after December 15, 2006, which is the Company’s fiscal year beginning January 1, 2007. Any cumulative effect of the change in accounting principle resulting from the adoption of this Interpretation will be recorded as an adjustment to the opening accumulated deficit balance. Management is currently evaluating the impact the adoption of FIN No. 48 will have on the Company’s consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), which addresses how companies should determine fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Under SFAS No. 157, the definition of fair value retains the “exchange price” notion in earlier definitions of fair value, but clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. SFAS No. 157 is effective for financial statements issued for fiscal years

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

 

beginning after November 15, 2007, and interim periods within those fiscal years, which is the Company’s 2008 fiscal year. The Company will adopt this Statement in the first quarter 2008. Management is currently evaluating the impact of adopting SFAS No. 157, but does not presently anticipate it will have a material effect on its consolidated financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), which provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. Under the provisions of SAB No. 108, financial statement misstatements are to be quantified and evaluated for materiality using both a balance sheet and income statement approach. SAB No. 108 is effective for the first annual period ending after November 15, 2006, which is the Company’s 2006 fiscal year. The Company has adopted the guidance expressed in SAB No. 108 as of year ended December 31, 2006 and its adoption did not have a material effect on its financial position or results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB No. 115” (“SFAS No. 159”), which provides a fair value measurement option for eligible financial assets and liabilities. Under SFAS No. 159, an entity is permitted to elect to apply fair value accounting to a single eligible item, subject to certain exceptions, without electing it for other identical items and include unrealized gains and losses in earnings. The fair value option established by this Statement is irrevocable, unless a new election date occurs. This standard reduces the complexity in accounting for financial instruments and mitigates volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007 which for the Company is January 1, 2008. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157. The Company will adopt the provisions of this Statement beginning in fiscal 2008. Management is currently evaluating the impact the adoption of SFAS No. 159 will have on the Company’s consolidated financial statements, but does not presently anticipate it will have a material effect on its consolidated financial position or results of operations.

 

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NEXSTAR BROADCASTING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

3. Acquisitions

During 2004, 2005 and 2006, the Company consummated the acquisitions listed below. These acquisitions have been accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair value on the acquisition date. The excess of the purchase price over the fair values assigned to the net assets acquired was recorded as goodwill. The consolidated financial statements include the operating results of each business from the earlier of the TBA commencement date if required by FIN No. 46R or the date of acquisition.

 

Station

 

Network

Affiliation

 

Market

  Date Acquired   Acquired By

WUTR

  ABC   Utica, New York   April 1, 2004   Mission

WFXW (1)

  Fox   Terre Haute, Indiana   April 6, 2004   Mission

KLST (2)

  CBS   San Angelo, Texas   November 30, 2004   Nexstar

WTVO (3)

  ABC   Rockford, Illinois   January 4, 2005   Mission

KFTA/KNWA (4)

  NBC   Fort Smith-Fayetteville-Springdale-Rogers, Arkansas   January 7, 2005   Nexstar

WTAJ

  CBS   Johnstown-Altoona, Pennsylvania   December 29, 2006   Nexstar

WLYH

  The CW   Harrisburg-Lancaster-Lebanon-York, Pennsylvania   December 29, 2006   Nexstar

(1) Mission commenced operations under a TBA on May 9, 2003 which terminated on the date of acquisition.
(2) Nexstar commenced operations under a TBA on June 1, 2004 which terminated on the date of acquisition.
(3) Mission commenced operations under a TBA on November 1, 2004 which terminated on the date of acquisition.
(4) Nexstar commenced operations under a TBA on October 16, 2003 which terminated on the date of acquisition.

WUTR

On December 17, 2003, Mission entered into a purchase agreement with a subsidiary of Clear Channel Communications, which owned WUTR, the ABC affiliate in Utica, New York. On April 1, 2004, Mission completed the acquisition of WUTR for total consideration of $3.7 million, exclusive of transaction costs.

The following table summarizes the estimated fair values of the assets acquired at the date of acquisition. Mission estimated these fair values, including certain acquired intangible assets, with the assistance of a third-party valuation (in thousands).

 

Property and equipment

   $ 2,040

Intangible assets